ACCT 330 Exam 2 with complete Solution

are ordinary business expenses deducted or capitalized? - ANSWER deducted are costs of improvements that increase value of the property deducted or capitalized? - ANSWER capitalized are repair/maintenance expenses deducted or capitalized? - ANSWER deducted who decides what is a repair and capital improvement? - ANSWER IRS how are capitalized costs recovered? - ANSWER depreciation, amortization, or depletion what is the tax basis? - ANSWER unrecovered dollars represented by an asset; initial basis is the COST what is the adjusted tax basis? - ANSWER the initial basis reduced by the depreciation, depletion, amortization deductions what is leverage? - ANSWER use of borrowed funds to purchase assets -included in cost basis -interest paid is deductible COGS equation - ANSWER beginning inv - capitalized cost = GAS - ending inv = COGS are tax costs greater or less than book costs initially? - ANSWER greater -temporary unfavorable book/tax difference -reverses through COGS does MACRS make the recovery period shorter or longer than useful life? - ANSWER shorter -reduces after tax cost of asset to incentivize firms what does the 3, 5, 7, and 10 year recovery properties depreciate by? - ANSWER 200% declining balance what does the 15 and 20 year properties depreciate by? - ANSWER 150% declining balance what does the 25, 27.5, 39, and 50 year properties depreciate by? - ANSWER straight line does the half year depreciation apply to personalty or realty? - ANSWER personalty (3,5,7, 10, 15, 20 year properties) what is the half year depreciation convention? - ANSWER one half year of depreciation is allowed for year which property is placed in service and year it's disposed of what does the midquarter convention apply to? - ANSWER personalty- if 40%+ personalty acquired is placed in service in 4th quarter is treated as placed in service at midpoint of quarter does the one half month convention apply to personalty or realty? - ANSWER realty what is the one half month convention? - ANSWER one half month of depreciation is allowed for month which property is placed in service and disposed of -applies to 25, 27.5, 39, and 50 year property what is the limited amount of expense according to Section 179 on qualifying property? - ANSWER 1.05M in 2021 what is the qualifying property in section 179? - ANSWER depreciable personalty and off the shelf software what is the threshold for the section 179? - ANSWER 2.62M in 2021 what is bonus depreciation? - ANSWER 100% bonus depreciation allows expensing of 100% of cost of qualifying property (depreciable personalty, computer software, leasehold improvements) put in service between 9/17-1/23 what recovery method is used for intangible assets? - ANSWER amortized- over straight line method what are organizational costs? - ANSWER legal, accounting, filing fees to form an entity what are start up costs? - ANSWER costs of investigating a new business and expenses BEFORE the business is operational what cost recovery rule is applied to organization and start up costs? - ANSWER first 5k is deductible reduced by amount in cost excess of 50k -nondeductible costs are capitalized/amortized over 15 years how are leasehold improvements recovered? - ANSWER cost of acquiring lease- amortized physical improvements to leased property- depreciated over MACRS period how do firms account for acquisitions intangibles - ANSWER lump sums -identifiable assets use FMV -residual cost goes to purchased goodwill how long is the amortization period of acquisition intangibles and purchased goodwill? - ANSWER 15 years is the cost of goodwill amortized for tax, book, or both? - ANSWER ONLY tax -results in favorable book/tax difference how is the depletion deduction calculated? - ANSWER greater of cost of depletion or percentage depletion cost of depletion - ANSWER = unrecovered basis * (units of production sold/estimated total units in ground) percentage depletion - ANSWER = statutory % of gross income from mine/well what is the formula for realized gain or loss? - ANSWER = amount realized on disposition - adjusted tax basis on property are realized G/L recognized normally? - ANSWER recognized unless specific exception are unrealized G/L recognized? - ANSWER neither realized or recognized what is the equation for the amount realized? - ANSWER = cash received + FMV of property received + debt relief - selling costs what does the installment sale method entail? - ANSWER permits deferral of gain recognition until cash is recognized which creates temporary book-tax difference what is the gain recognized in an installment sale? - ANSWER = cash received * GP % (GP% = gain realized / contract price) what does the installment sale not apply to? - ANSWER sale of publicly traded stock or sale of inventory are related party losses recognized? - ANSWER no, not allowed or recognized what does a sale or exchange of capital asset result in? - ANSWER capital gain or loss what does a disposition of capital asset other than sale or exchange result? - ANSWER ordinary gain or loss what is a capital asset? - ANSWER all assets except for: -inventory, AR, supplies, real property used in business, depreciable/amortizable personalty used in business