ACC/307 ACC307 ACC 307 WEEK 8 HOMEWORK 1

Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $10,000 to repair the roof (does not extend the roof life), $5,000 to make the interior suitable for her finished goods, and $300 in legal fees.

What is Emily’s cost basis in the new building?

Parley needs a new truck to help him expand Parley’s Plumbing Palace. Business has been booming and Parley would like to accelerate his tax deductions as much as possible (ignore §179 expense and bonus depreciation for this problem). On April 1, Parley purchased a new delivery van for $25,000. (Use MACRSTable 1 and Table 2.)

Option 1

It is now September 26 and Parley, already in need of another vehicle, has found a deal on buying a truck for $22,000 (all fees included). The dealer tells him if he doesn’t buy the truck, it will be gone tomorrow.

Option 2

There is an auction scheduled for October 5 where Parley believes he can get a similar truck for $21,500, but there is also a $500 auction fee.

a.

Which option allows Parley to generate more depreciation expense deductions this year (the vehicles are not considered to be luxury autos)?

Option 1

b.

Assume the original facts, except that the delivery van was placed in service one day earlier on March 31 rather than April 1. Which option generates more depreciation expense?

Option 2

Acorn Construction (calendar year-end C-corporation) has had rapid expansion during the last half of the current year due to the housing market's recovery. The company has record income and would like to maximize its cost recovery deduction for the current year. (Use MACRS Table 2,) 

Asset

Placed in Service

Basis

  New equipment and tools

    August 20

$

800,000  

  Used light duty trucks

    October 17

1,200,000  

  Used machinery

    November 6

525,000  

  Total

$

2,525,000  

a.

What is Acorn’s maximum cost recovery deduction in the current year assuming that bonus depreciation and 2014 §179 limits are extended to 2015?

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including amortization) this year in the following alternative scenarios:

a.

She incurred start-up costs of $2,000.

b.

She incurred start-up costs of $45,000.

c.

She incurred start-up costs of $53,500.

d.

She incurred start-up costs of $63,000.(Leave no answer blank. Enter zero if applicable.)

e.

How would you answer parts (a) through (d) if she formed a partnership or a corporation and she incurred the same amount of organizational expenditures rather than start-up costs (how much of the organizational expenditures would be immediately deductible)?(Leave no answer blank. Enter zero if applicable.)

Amount of Organization Expenditures Immediately Expensed

(a)

$2,000

(b)

$5,000

(c)

$1,500

(d)

$0

Dennis contributed business assets to a new business in exchange for stock in the company. The exchange did not qualify as a nontaxable exchange. The fair market value of these assets was $287,000 on the contribution date. Dennis’s original basis in the assets he contributed was $143,000, and the accumulated depreciation on the assets was $78,000.

a.

What is the business’s basis in the assets it received from Dennis?

b.

What would be the business’s basis if the transaction qualified as a nontaxable exchange?