On October 1 of the current year, Lee Corporation enters negotiations with Kay Corporation to acquire a patent. The patent has 10 years remaining on its legal life. a. If Lee Corporation purchases the patent for $36,000, how much amortization expense may Lee Corporation deduct in the current year? b. Assume that Lee Corporation purchases all of the assets of Kay Corporation for $510,000. All of the identifiable assets of Kay Corporation had a fair market value of $420,000, including the patent, which has a fair market value of $36,000. Also, a covenant not to compete for 3 years costing $72,000 is included in the purchase agreement. How much amortization expense may Lee Corporation deduct in the current year?
> Lyle contracts to sell his ranch to Marley, who is to take possession on June 1. Lyle delays the transfer until August 1. Marley incurs expenses in providing for cattle that he bought for the ranch. When they made the contract, Lyle had no reason to know
> Greg contracts to build a storage shed for Haney. Haney pays Greg in advance, but Greg completes only half the work. Haney pays Ipswich $500 to finish the shed. If Haney sues Greg, what would be the measure of recovery?
> Ready Foods contracts to buy two hundred carloads of frozen pizzas from Speedy Distributors. Before Ready or Speedy starts performing, can the parties call off the deal? What if Speedy has already shipped the pizzas? Explain your answers.
> My-T Quality Goods, Inc., and Nu! Sales Corporation orally agree to a deal. My-T’s president has the essential terms written up on company letterhead stationery, and the memo is filed in My-T’s office. If Nu! Sales later refuses to complete the transacti
> In selling a house, Matt tells Ann that the wiring, fixtures, and appliances are of a certain quality. Matt knows nothing about the quality, but it is not as specified. Ann buys the house. On learning the true quality, Ann confronts Matt. He says he wasn
> Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a passenger caused by the airline’s negligence. If the cause of an accident is found to be the airline’s negligence, can it use the clause as a defense to liability? Why or
> Applied Products, Inc., does business with Beltway Distributors, Inc., online. Under the Uniform Electronic Transactions Act, what determines the effect of the electronic documents evidencing the parties’ deal? Is a party’s “signature” necessary? Explain
> Kerin sends a letter to Joli telling her that he has a book to sell at a certain price. Joli signs and returns the letter. When Kerin delivers the book, Joli sends it back, claiming that they do not have a contract. Kerin claims they do. What standard de
> Delta Tools, Inc., markets a product that under some circumstances is capable of seriously injuring consumers. Does Delta have an ethical duty to remove this product from the market, even if the injuries result only from misuse? Why or why not?
> Acme Corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differences among its employees. Does this raise an ethical conflict between Acme and its employees? Between Acme and its shareh
> Without permission, Ben downloads consumer credit files from a computer belonging to Consumer Credit Agency. He then sells the data to Dawn. Has Ben committed a crime? If so, what is it?
> Global Products develops, patents, and markets software. World Copies, Inc., sells Global’s software without the maker’s permission. Is this patent infringement? If so, how might Global save the cost of suing World for infringement and at the same time p
> While he was in high school, Joel Gibb downloaded numerous songs to his smartphone from an unlicensed file-sharing service. He used portions of the copyrighted songs when he recorded his own band and posted videos on YouTube and Facebook. He also used Bi
> John and Andrew Doney invented a hard-bearing device for balancing rotors. Although they obtained a patent for their invention from the U.S. Patent and Trademark Office, it was never used as an automobile wheel balancer. Sometime later, Exetron Corp. pro
> Has the taxpayer in each of the following situations received taxable income? If so, when should the income be recognized? Explain. a. Charlotte is a lawyer who specializes in drafting wills. She wants to give her husband a new gazebo for Christmas.
> Determine the amount of income that must be recognized in each of the following cases: a. Ramona is a production supervisor for White Company. During the current year, her division had no accidents, and White rewarded the achievement with a $200 cash aw
> Pablo wins a new automobile on a television game show. The car has a listed sticker price of $31,500. A dealer advertises the same car for $30,000. How much income does Pablo have from the receipt of the car? Explain.
> Devi is the chief executive officer of Nishida Limited. Devi owns 20% of the common stock of Nishida. During the current year, Devi’s salary is $60,000 and he receives a $30,000 bonus. Nishida has taxable income of $200,000 and pays $80,000 in cash di
> What is the purpose of the exemption deduction?
> How much income should the taxpayer recognize in each of the following situations? Explain. a. Julius owns a 25% interest in the Flyer Company, which is organized as a partnership. During the current year, he is paid $14,000 by Flyer as a distribution of
> Reddy owns common stock with a market value of $30,000. The stock pays a cash dividend of $1,200 per year (a 4% annual yield). Reddy is considering selling the stock, which she purchased 13 years ago for $10,000, and using the proceeds to purchase stoc
> The Rosco Partnership purchases a rental property in 2012 at a cost of $150,000. From 2012 through 2017, Rosco deducts $14,000 in depreciation on the rental. The partnership sells the rental property in 2017 for $160,000 and pays $9,000 in expenses rel
> Ratliff Development Corporation purchases a tract of land in 2016 at a cost of $120,000 and subdivides the land into 30 building lots. The cost of subdividing is $6,000. In 2016, Ratliff installs roads and utilities at a cost of $36,000 and pays proper
> Hank retires this year after working 30 years for Local Company. Per the terms of his employment contract, Hank is to receive a pension of $600 per month for the rest of his life. During the current year, he receives 7 pension payments from Local. At
> What incentive does a taxpayer have to disguise a property settlement as an alimony payment?
> Duc has been employed by Longbow Corporation for 25 years. During that time, he bought an annuity at a cost of $50 per month ($15,000 total cost). The annuity will pay him $200 per month after he reaches age 65. When Duc dies, his wife, Annika, will cont
> Minnie owns a qualified annuity that cost $78,000. The annuity is to pay Minnie $650 per month for life after she reaches age 65. Minnie turns 65 on September 28, 2017, and receives her first payment on November 1, 2017. a. How much gross income does M
> Partha owns a qualified annuity that cost $52,000. Under the contract, when he reaches age 65, he will receive $500 per month until he dies. Partha turns 65 on June 1, 2017 and receives his first payment on June 3, 2017. How much gross income will Par
> What is an arm's-length transaction? What is its significance to income taxation?
> The chapter stated that the ability-to-pay concept is fundamental to the operation of the income tax system. What is the ability-to-pay concept, and what two basic aspects of the income tax system are derived from the concept? What might the tax system
> Determine whether any income must be recognized in each of the following situations, as well as who must report income, how much that taxpayer should report, and when that taxpayer will report the income: a. Patz Corporation owns a gourmet restaurant. T
> This chapter compared the operation of the income tax system with the operation of other systems we have devised to govern our everyday lives. Choose an example of a system you deal with in your everyday life, and explain part of its operation in terms
> The capital recovery concept is both an income concept and a deduction concept. Explain how the application of the concept differs for income items and deduction items.
> The legislative grace concept is both an income concept and a deduction concept. Explain how the application of the concept differs for income items and deduction items.
> What is a capital expenditure?
> You are the resident tax expert for Wetzel’s Pretzels, an international producer of junk food. The controller has come to you with the company's capital expenditures budget for next year. The budget shows that Wetzel’s Pretzels plans to spend $1,000,000
> Joan is interested in buying a special diagnostic machine for use in her medical practice. The machine will cost her $16,000 and will have a $2,000 salvage value at the end of its 8-year life. Joan would like to know the actual cost of the machine afte
> Firefly, Inc., acquires business equipment in July 2017 for $2,045,000. Assume that Firefly elects not to claim bonus depreciation. a. What is Firefly's maximum Section 179 deduction for 2017? Explain. b. What happens to any portion of the annual limit
> A taxpayer purchases $507,000-worth of property that qualifies for the Section 179 deduction during the current year. The taxpayer would like to deduct the greatest depreciation expense possible (including the Section 179 deduction) on the property. In
> For each of the following expenditures incurred during the current year, indicate whether it should be treated as a repair expense or capitalized and depreciated using MACRS: a. Replacement of the roof on an apartment building b. Replacement of the conde
> Explain how the business purpose concept provides the basis for determining which expenses are deductible.
> In each of the following cases, determine who is taxed on the income: a. Camille owns several rental properties that produce $3,000 in income each month. Because of the age of the properties, Camille is concerned about her potential liability from accide
> State whether each of the following expenditures incurred during the current year should be treated as a repair expense or capitalized and depreciated using MACRS: a. Replacement of the carpeting in a rental apartment b. Replacement of the drill bit on a
> Peter Corporation purchases the following assets during the current year. Identify which assets are not subject to cost recovery using depreciation, and state why that is so. a. Land b. Copyright c. Building d. Goodwill e. Inventory for sale in its stor
> Kris starts a new business in 2017. She purchases 7-year MACRS property costing $12,000. Her business income before any cost-recovery deductions is $8,000. Kris does not want to claim bonus depreciation. a. What is the maximum cost-recovery deduction
> Larry purchases machinery for his business (7-year MACRS property) on April 1, at a cost of $547,000. On June 1, he spends $84,000 for equipment (5-year MACRS property). Larry does not want to claim bonus depreciation. a. What is the maximum deduction
> The Browser Company purchases a computer in December 2017 for $12,000. This is the only depreciable personal property acquired during the year. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim th
> The Browser Company purchases a computer in August 2017 for $12,000. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim the maximum depreciation. In May 2020, the company sells the computer. Calcu
> Assume that in problem 37, the United Express Company sells a truck that cost $50,000 in 2017 for $15,000 in June 2020. Assume that none of the truck was expensed in 2017. Compute the adjusted basis of the truck and the gain or loss from the sale. Data
> On April 18, 2017, Petros buys all the assets of Brigid's Muffler Shop. Included in the purchase price of $295,000 is a payment of $20,000 to Brigid not to open a competing shop in the state for a period of 5 years. Brigid's assets at the date of sale
> On June 2, 2017, Lokar Corporation purchases a patent for $68,000 from the inventor of a new extrusion process. The patent has 12 years remaining on its legal life. Also, Lokar purchases substantially all of the assets of Barrios Corporation for $750,0
> How does the legislative grace concept help identify amounts that qualify for deduction?
> How is the wherewithal-to-pay concept different from the ability-to-pay concept?
> Isidro purchases an interest in an oil-producing property for $100,000 on November 3. His geologist estimates 15,000 barrels of oil are recoverable. The entity sells 1,000 barrels for $20,000 during November and December of the year of acquisition. As
> On July 4 of the current year, Lawrence invests $240,000 in a mineral property. He estimates that he will recover 800,000 units of the mineral from the deposit. During the current year, Lawrence recovers and sells 100,000 units of the mineral for $3.50
> On May 15, 2016, Lurlene buys a used automobile for $17,000. She drives it, 9,000 miles for business and 3,000 miles for personal trips during the year. What is Lurlene’s maximum cost recovery for 2016?
> On June 1, 2016, Kirsten buys an automobile for $60,000. Her mileage log for the year reveals the following: 20,000 miles for business purposes; 7,000 miles for personal reasons; and 3,000 miles commuting to and from work. What is Kirsten's maximum cos
> On March 1, 2017, Babar Inc., pays $1,200,000 for a store building, moves into the building and begins business on April 1. Babar properly allocates $1,000,000 of its cost to the building and $200,000 to the land. On May 21, 2017, it installs $533,000-
> Anton purchases a building on May 4, 2000, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2017, for $270,000. What is his gain or loss on the sale if he uses the regular MACRS system
> Refer to problem 52. Guadalupe sells the building on October 26, 2017. What is her 2017 depreciation deduction if she purchased the building on a. June 30, 1992? b. June 30, 1994? Data from Problem 52: Guadalupe purchases an office building to use in
> Guadalupe purchases an office building to use in her business at a cost of $520,000. She properly allocates $20,000 of the cost to the land and $500,000 to the building. Assuming that Guadalupe would like to deduct the maximum depreciation on the build
> Stan purchases machinery costing $100,000 for use in his business in 2017. The machinery is 7-year MACRS property and has an ADS life of 12 years. Complete a depreciation schedule using the regular MACRS method and ADS (straight-line method) depreciati
> Determine whether Frank or Dorothy, Frank’s friend, is taxed on the income of each of the following situations: a. Frank owns 8% bonds with a $10,000 face value. The bonds pay interest annually on June 30. On September 30, Frank makes a bona fide gift
> In July 2017, Surecut Sawmills buys office furniture for $570,000. Assume that Surecut elects not to claim bonus depreciation. a. Compare cost-recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the equipment
> Why does the doctrine of constructive receipt apply only to cash basis taxpayers?
> In June 2017, Copper Kettle, Inc., purchases duplicating equipment for $541,000. a. Compare cost recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the equipment. b. Explain why Copper Kettle, Inc., would
> The Gladys Corporation buys office equipment costing $658,000 on May 12, 2017. In 2020, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000 on December 27, 2020. a. What is Gladys Corporation's gai
> Harold purchases the following business assets on the dates indicated: Date Recovery Asset Purchased Cost Period Photocopy equipment 2/14/17 $ 50,000 5 Dump
> Chen Corporation purchases the following business assets during the current year: Assuming that Chen elects not to claim bonus depreciation, what is the maximum current year cost-recovery deduction on the assets purchased? (Hint: Maximize the Section 17
> Baker, Inc., purchases office furniture (7-year MACRS property) costing $521,000 and a computer system (5-year MACRS property) costing $521,000 in 2017. Assuming that Baker elects not to claim bonus depreciation, what is the maximum cost-recovery deduct
> Rograin Corporation purchases turning lathes costing $1,073,000 and buses costing $975,000 in June of the current year. The lathes are 7-year MACRS property, and the buses are 5-year MACRS property. Rograin does not want to claim bonus depreciation. a.
> Dikembe purchases 1,000 breeding hogs for $1,084,000 in April 2017. a. What is his maximum 2017 cost-recovery deduction for the hogs? b. Dikembe's farming operation incurs a net loss this year and probably will next year before taking the cost recover
> The United Express Company begins business in August 2017 by purchasing the assets listed in the table below. If United Express elects not to claim bonus depreciation, calculate the maximum MACRS depreciation on the assets. Asset Trucks Tractor unit
> In each of the following cases determine who is taxed on the income: a. For $200, Lee purchases an old car that is badly in need of repair. He works on the car for 3 months and spends $300 on parts to restore it. Lee's son Jason needs $2,000 to pay his
> Determine the correct IRS percentage table, recovery period, and applicable convention for each of the following assets: a. Helicopter b. 68-unit apartment building c. The new Wings Field baseball stadium in Buffalo d. Automobile e. Commercial office bui
> For each asset in problem 34, determine the correct IRS percentage table, recovery period, and applicable convention. a. Pool table b. Safe c. Photocopying machines d. Pickup truck e. Electronic video games f. Brewing tanks for the bar's microbrewery
> What is capital gain income? How is it different from ordinary income?
> Who is responsible for collecting sales and excise taxes? Who actually pays the tax?
> Determine the class life, MACRS recovery period, and ADS recovery period of each of the following assets acquired for a sports bar: a. Pool table b. Safe c. Photocopying machines d. Pickup truck e. Electronic video games f. Brewing tanks for the bar's
> Determine the class life, MACRS recovery period, and ADS recovery period of each of the following assets: a. Barge b. Computer c. Automobile d. Breeding sheep e. Breeding horses f. Barn g. Office furniture h. Land improvements
> In each of the following situations, determine the depreciable basis of each asset. a. Melissa purchases furniture and fixtures from the estate of the owner of a business for $45,000. She plans to use these assets in her business. b. Quang purchased a c
> In each of the following situations, determine the depreciable basis of the asset: a. Rudy inherits his father's pickup truck. The truck is immediately placed in service in Rudy's delivery business. The fair market value of the truck at the date of Rud
> Jennifer owns a 40% interest in the Thomas Partnership. She also owns and operates an architectural consulting business. During the current year, the partnership purchases $516,000-worth of property qualifying under Section 179 and elects to expense $5
> Brad is a shareholder and full-time employee of an S corporation. During 2017, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In addition, Brad owns a limited partnership interest from
> How much taxable should each of the following taxpayers report? a. Kimo builds custom surfboards. During the current year, his total revenues are $90,000, and he incurs $30,000 in expenses. Included in the $30,000 is a $10,000 payment to Kimo’s five-
> During 2017, Belk Corporation purchases $70,000-worth of equipment for use in its business. Belk's current taxable income before considering the Section 179 deduction is $26,000. Assume that Belk elects not to claim bonus depreciation. a. What is Belk's
> In 2017, Theo purchases $16,000 of Section 179 property for use in his delivery business. During 2017, he has $12,000 in taxable income from his business. Assume that Theo elects not to claim bonus depreciation. a. What is Theo's maximum Section 179 de
> In 2017, Terrell, Inc., purchases machinery costing $2,058,000. Its 2017 taxable income before considering the Section 179 deduction is $490,000. Assume that Terrell elects not to claim bonus depreciation. a. What is Terrell's maximum Section 179 deduc
> Jason is transferred to another city to work and is unable to sell his house. He rents out the house until it is sold. Determine the possible tax consequences of each issue that you identify.
> What is the effect of the capital recovery concept on income recognition?
> GM Corporation purchases equipment costing $18,000 and wants to claim the maximum deduction possible for this expenditure. Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.
> During 2017, Schottenheim Corporation buys laptop computers and desktop computers to use in its general sales offices. Schottenheim buys laptops for $42,000 on March 29, additional laptops for $18,000 on September 26, and the desktop computers for $540,
> Gates, Inc., purchases a painting by a 16th-century Italian artist and displays it in the corporate headquarters. Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.
> Bailey Construction Company purchases a bulldozer on December 20, 2017. An ice storm delays delivery until December 24. Because of the holidays, the equipment is not used until January 2. Identify the tax issue(s) posed by the facts presented. Identif
> Your client, Stone Mining Company, comes to you with a tax planning idea. This year's mining revenues are disappointing, but the company is very optimistic that next year's mining revenues will increase dramatically. To avoid concern among shareholders
> In December, Hilga sells her German language translation business to Chia-Ching. The sales agreement includes a provision that for an extra $6,000, Hilga will not open another German language translation business in the area for two years. Chia-Ching p
> How is the taxation of an alimony payment different from the taxation of a child support payment?
> Your client purchases land that has been severely eroded. He plans to fill the holes caused by the erosion with waste material. Prepare a memorandum discussing any cost recovery deductions that can be claimed on this property.
> Search the Internet for articles relating to the amortization of intangible assets. Trace the process you used to find the article (search engine or tax directory used). Summarize the information found in your research.
> Articles on tax topics are often useful in understanding the income tax law. CPA firms and other organizations publish tax articles on the Internet. Using a search engine or one of the tax directory sites provided in Exhibit 16-6, find an article that d
