Computational Exercises
Chapter 7
19. LO.1 Last year, Jane identified $50,000 as a nonbusiness bad debt. In that tax year, before considering the tax implications of the nonbusiness bad debt, Jane had $100,000 of taxable income, of which $5,000 consisted of short-term capital gains.
This year, Jane collected $10,000 of the amount she had previously identified as a bad debt. Determine Jane’s tax treatment of the $10,000 received in the current tax year.
20. LO.1 Bob owns a collection agency. He purchases uncollected accounts receivable from other businesses at 60% of their face value and then attempts to collect these accounts. During the current year, Bob collected $60,000 on an account with a face value of $80,000. Determine the amount of Bob’s bad debt deduction.
21. LO.2 On May 9, 2014, Calvin acquired 250 shares of stock in Aero Corporation, a new startup company, for $68,750. Calvin acquired the stock directly from
Aero, and it is classified as § 1244 stock (at the time Calvin acquired his stock, the corporation had $900,000 of paid-in capital). On January 15, 2016, Calvin sold all of his Aero stock for $7,000. Assuming that Calvin is single, determine his tax consequences as a result of this sale.
22. LO.4 Mary’s diamond ring was stolen in 2015. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Mary filed an insurance claim for the stolen ring, but the claim was denied. Because the insurance claim was denied, Mary took a casualty loss for the stolen ring on her 2015 tax return. In 2015, Mary had AGI of $40,000. In 2016, the insurance company had a “change of heart” and sent Mary a check for $5,000 for the stolen ring. Determine the proper tax treatment of the $5,000 Mary received from the insurance company in 2016.
23. LO.4 Determine the treatment of a loss on rental property under the following facts:
Basis $650,000
FMV before the loss 800,000
FMV after the loss 200,000
24. LO.4 Belinda was involved in a boating accident in 2016. Her speedboat, which was used only for personal use and had a fair market value of $28,000 and an adjusted basis of $14,000, was completely destroyed. She received $10,000 from her insurance company. Her AGI for 2016 is $37,000. What is Belinda’s casualty loss deduction (after any limitations)?
25. LO.4 During the year, Tucker had the following personal casualty gains and losses (after deducting the $100 floor):
Asset Holding Period Gain or (Loss)
Asset 1 18 months ($1,200)
Asset 2 2 months 750
Asset 3 3 years 1,500
What are the tax consequences of these items to Tucker?
26. LO.5 Sandstorm Corporation decides to develop a new line of paints. The project begins in 2016. Sandstorm incurs the following expenses in 2016 in connection with the project:
Salaries $85,000
Materials 30,000
Depreciation on equipment 12,500
The benefits from the project will be realized starting in July 2017. If Sandstorm Corporation chooses to defer and amortize its research and experimental expenditures over a period of 60 months, what are its related deductions in 2016 and 2017?
27. LO.6 In 2016, Loftis, Inc., a calendar year taxpayer, has QPAI of $4.5 million and taxable income of $3.1 million. Because Loftis outsources much of its work to independent contractors, its W–2 wage base, which for Loftis is related entirely to production activities, is $214,000. What is Loftis, Inc.’s DPAD for 2016?
Chapter 8
21. LO.2 Euclid acquires a 7-year class asset on May 9, 2016, for $80,000. Euclid does not elect immediate expensing under § 179. She does not claim any available additional first-year depreciation. Calculate Euclid’s cost recovery deduction for
2016 and 2017.
22. LO.2 Hamlet acquires a 7-year class asset on November 23, 2016, for $100,000.
Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Hamlet’s cost recovery deductions for 2016 and 2017.
23. LO.2 Lopez acquired a building on June 1, 2011, for $1 million. Calculate Lopez’s cost recovery deduction for 2016 if the building is:
a. Classified as residential rental real estate.
b. Classified as nonresidential real estate.
24. LO.2 Andre acquired a computer on March 3, 2016, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation.
Calculate Andre’s cost recovery deduction for the computer in 2016 and 2017.
25. LO.2 Diana acquires, for $65,000, and places in service a 5-year class asset on
December 19, 2016. It is the only asset that Diana acquires during 2016.
Diana does not elect immediate expensing under § 179. She elects additional first-year deprecation. Calculate Diana’s total cost recovery deduction for 2016.
26. LO.3 McKenzie purchased qualifying equipment for his business that cost $212,000 in 2016. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. Calculate McKenzie’s § 179 expense deduction for
2016 and any carryover to 2017.
27. LO.4 On April 5, 2016, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and
30% for personal use in each tax year.
Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Assume the following luxury automobile limitations: year 1: $3,160; year 2: $5,100. Compute the total depreciation allowed for 2016 and 2017.
28. LO.7 On September 30, 2016, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 is allocated to goodwill. Calculate
Priscilla’s 2016 § 197 amortization deduction.
29. LO.8 On March 25, 2016, Parscale Company purchases the rights to a mineral interest for $8 million. At that time, the remaining recoverable units in the mineral interest are estimated to be 500,000 tons. If 80,000 tons are mined and 75,000 tons are sold this year, calculate Parscale’s cost depletion for 2016.
30. LO.8 Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Calculate Jebali’s depletion allowance for the current year.
Chapter 7
19. LO.1 Last year, Jane identified $50,000 as a nonbusiness bad debt. In that tax year, before considering the tax implications of the nonbusiness bad debt, Jane had $100,000 of taxable income, of which $5,000 consisted of short-term capital gains.
This year, Jane collected $10,000 of the amount she had previously identified as a bad debt. Determine Jane’s tax treatment of the $10,000 received in the current tax year.
20. LO.1 Bob owns a collection agency. He purchases uncollected accounts receivable from other businesses at 60% of their face value and then attempts to collect these accounts. During the current year, Bob collected $60,000 on an account with a face value of $80,000. Determine the amount of Bob’s bad debt deduction.
21. LO.2 On May 9, 2014, Calvin acquired 250 shares of stock in Aero Corporation, a new startup company, for $68,750. Calvin acquired the stock directly from
Aero, and it is classified as § 1244 stock (at the time Calvin acquired his stock, the corporation had $900,000 of paid-in capital). On January 15, 2016, Calvin sold all of his Aero stock for $7,000. Assuming that Calvin is single, determine his tax consequences as a result of this sale.
22. LO.4 Mary’s diamond ring was stolen in 2015. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Mary filed an insurance claim for the stolen ring, but the claim was denied. Because the insurance claim was denied, Mary took a casualty loss for the stolen ring on her 2015 tax return. In 2015, Mary had AGI of $40,000. In 2016, the insurance company had a “change of heart” and sent Mary a check for $5,000 for the stolen ring. Determine the proper tax treatment of the $5,000 Mary received from the insurance company in 2016.
23. LO.4 Determine the treatment of a loss on rental property under the following facts:
Basis $650,000
FMV before the loss 800,000
FMV after the loss 200,000
24. LO.4 Belinda was involved in a boating accident in 2016. Her speedboat, which was used only for personal use and had a fair market value of $28,000 and an adjusted basis of $14,000, was completely destroyed. She received $10,000 from her insurance company. Her AGI for 2016 is $37,000. What is Belinda’s casualty loss deduction (after any limitations)?
25. LO.4 During the year, Tucker had the following personal casualty gains and losses (after deducting the $100 floor):
Asset Holding Period Gain or (Loss)
Asset 1 18 months ($1,200)
Asset 2 2 months 750
Asset 3 3 years 1,500
What are the tax consequences of these items to Tucker?
26. LO.5 Sandstorm Corporation decides to develop a new line of paints. The project begins in 2016. Sandstorm incurs the following expenses in 2016 in connection with the project:
Salaries $85,000
Materials 30,000
Depreciation on equipment 12,500
The benefits from the project will be realized starting in July 2017. If Sandstorm Corporation chooses to defer and amortize its research and experimental expenditures over a period of 60 months, what are its related deductions in 2016 and 2017?
27. LO.6 In 2016, Loftis, Inc., a calendar year taxpayer, has QPAI of $4.5 million and taxable income of $3.1 million. Because Loftis outsources much of its work to independent contractors, its W–2 wage base, which for Loftis is related entirely to production activities, is $214,000. What is Loftis, Inc.’s DPAD for 2016?
Chapter 8
21. LO.2 Euclid acquires a 7-year class asset on May 9, 2016, for $80,000. Euclid does not elect immediate expensing under § 179. She does not claim any available additional first-year depreciation. Calculate Euclid’s cost recovery deduction for
2016 and 2017.
22. LO.2 Hamlet acquires a 7-year class asset on November 23, 2016, for $100,000.
Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Hamlet’s cost recovery deductions for 2016 and 2017.
23. LO.2 Lopez acquired a building on June 1, 2011, for $1 million. Calculate Lopez’s cost recovery deduction for 2016 if the building is:
a. Classified as residential rental real estate.
b. Classified as nonresidential real estate.
24. LO.2 Andre acquired a computer on March 3, 2016, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation.
Calculate Andre’s cost recovery deduction for the computer in 2016 and 2017.
25. LO.2 Diana acquires, for $65,000, and places in service a 5-year class asset on
December 19, 2016. It is the only asset that Diana acquires during 2016.
Diana does not elect immediate expensing under § 179. She elects additional first-year deprecation. Calculate Diana’s total cost recovery deduction for 2016.
26. LO.3 McKenzie purchased qualifying equipment for his business that cost $212,000 in 2016. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. Calculate McKenzie’s § 179 expense deduction for
2016 and any carryover to 2017.
27. LO.4 On April 5, 2016, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and
30% for personal use in each tax year.
Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Assume the following luxury automobile limitations: year 1: $3,160; year 2: $5,100. Compute the total depreciation allowed for 2016 and 2017.
28. LO.7 On September 30, 2016, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 is allocated to goodwill. Calculate
Priscilla’s 2016 § 197 amortization deduction.
29. LO.8 On March 25, 2016, Parscale Company purchases the rights to a mineral interest for $8 million. At that time, the remaining recoverable units in the mineral interest are estimated to be 500,000 tons. If 80,000 tons are mined and 75,000 tons are sold this year, calculate Parscale’s cost depletion for 2016.
30. LO.8 Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Calculate Jebali’s depletion allowance for the current year.