Chapter 9 Property Acquisition and Cost Recovery

1.
[LO 1] Explain the reasoning why the tax laws require
the cost of certain assets to be capitalized and recovered over time rather
than immediately expensed.

2.
[LO 1] Explain
the differences and similarities between personal property, real property,
intangible property, and natural resources.
Also, provide an example of each type of asset.

3.
[LO 1] Explain the similarities and dissimilarities between
depreciation, amortization, and depletion.
Describe the cost recovery method used for each of the four asset types
(personal property, real property, intangible property, and natural resources).

4.
[LO 1] Is an asset’s initial or cost basis simply its
purchase price? Explain.

5.
[LO 1] Compare and contrast the basis of property
acquired via purchase, conversion from personal use to business or rental use,
a nontaxable exchange, gift, and inheritance.

6.
[LO 1] Explain why the expenses incurred to get an asset
in place and operable should be included in the asset’s basis.

7.
[LO 1] Graber Corporation runs a long-haul trucking
business. Graber incurs the following
expenses: replacement tires, oil changes, and a transmission overhaul. Which of these expenditures may be deducted
currently and which must be capitalized?
Explain.

8.
[LO 2] MACRS
depreciation requires the use of a recovery period, method, and convention to
depreciate tangible personal property assets.
Briefly explain why each is important to the calculation.

9.
[LO 2] Can a taxpayer with very little current year income
choose to not claim any depreciation expense for the current year and thus save
depreciation deductions for the future when the taxpayer expects to be more
profitable?

10.
[LO 2] [Planning] What depreciation methods are
available for tangible personal property?
Explain the characteristics of a business likely to adopt each method.

11.
[LO 2] If a business places several different assets in
service during the year, must it use the same depreciation method for all
assets? If not, what restrictions apply
to the business’s choices of depreciation methods?

12.
[LO 2] Describe how you would determine the MACRS
recovery period for an asset if you did not already know it.

13.
[LO 2] [Research] Compare and contrast the recovery periods
used by MACRS and those used under generally accepted accounting principles
(GAAP).

14.
[LO 2] What are the two depreciation conventions that
apply to tangible personal property under MACRS? Explain why Congress provides two methods.

15.
[LO 2] A business buys two identical tangible personal
property assets for the same identical price.
It buys one at the beginning of the year and one at the end of
year. Under what conditions would the
taxpayer’s depreciation on each asset be exactly the same? Under what conditions would it be
different?

16.
[LO 2] AAA, Inc., acquired a machine in year 1. In May of year 3, it sold the asset. Can AAA find its year 3 depreciation
percentage for the machine on the MACRS table?
If not, what adjustment must AAA make to its full year depreciation
percentage to determine its year 3 depreciation?

17.
[LO 2] There are two recovery period classifications
for real property. What reasons might
Congress have to allow residential real estate a shorter recovery period than
nonresidential real property?

18.
[LO 2] Discuss why Congress has instructed taxpayers
that real property be depreciated using the mid-month convention as opposed to
the half-year or mid-quarter conventions used for tangible personal property.