Generally Accepted Accounting Principles and Tax Basis

Why? The owners capitalized and amortized 50 percent of the purchase price ($12 million) simply because the tax rules allowed it; therefore the

1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:

In 2013 Marianne sold land, building and equipment with a combined basis of $150,000 to an unrelated third party and in return received an installment note of $80,000 per year for five years. Of the $250,000 gain on sale, $150,000 was classified as Section 1245 gain and the remaining $100,000 was Section 1231 gain. In 2013, Marianne had a capital loss carryover of $60,000, $50,000 of which she used to offset her Section 1231 gain; she recognized no Section 1245 gain. The following year she recognized $40,000 of 1245 gain and $10,000 of Section 1231 gain which she promptly offset with the last $10,000 of the capital loss carryover. In 2015, she recognized $50,000 Section 1245 gain and no Section 1231 gain.

5) Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2014. The equipment was seven-year recovery property, and Herelt used the half-year convention to compute MACRS depreciation. Compute Herelt’s MACRS depreciation for 2016 if it disposes of the equipment on February 9, 2016. (part c)

4. In 2013, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold?

Jefferson Animal Rescue is a private not-for-profit clinic and shelter for abandoned domesticated animals, chiefly dogs and cats. At the end of 2011, the organization had the following account balances:

Caitlin and Wally formed the C&W Partnership on September 20, 2012. Caitlin contributed cash of $195,000, and Wally contributed office furniture with a FMV of $66,000. He bought the furniture for $60,000 on January 5, 2012, and placed it in service on that date. Wally will not elect Sec. 179 expensing on the furniture and elected out of bonus depreciation. He also contributed and office building and land with a combined FMV of $129,000. The land’s FMV is $9,000. Wally bought the land in 2005 for $8,000 and had the building constructed for $100,000. The building was placed in service in June 2008.

7. The company uses the straight line method of depreciation for all its assets. The buildings have an estimated useful life of 20 years with zero

ACTG 351 HW #1 Answers 1. Curtiss Construction Company, Inc. entered into a fixed-price contract with Axelrod Associates on July 1, 2011, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,000,000. The building was completed on December 31, 2013. Accumulated contract costs incurred, estimated costs to complete the contract, accumulated billings to Axelrod and cash collections from Axelrod under the contract are as follows: 12/31/2011 $350,000 3,150,000 720,000 600,000 12/31/2012 $2,500,000 1,700,000 2,170,000 1,800,000 12/31/2013 $4,250,000 0 3,600,000 3,600,000

*Note: the building and the equipment fall into the modified accelerated cost recovery system (MACRS) five-year class for tax depreciation purposes; in reality, the building has to be depreciated over a longer period than the equipment

American Eagle Outfitters Inc. uses straight-line method to find depreciation of plant and property. The estimated useful lives of its buildings is at 25 years while its leasehold improvements and fixtures and equipment have estimated useful lives of lesser of 10 years or the term of the lease and 5 years, respectively. The cost of property and equipment for the fiscal year ending February 1, 2014 was $1,594,360,000 and its book value was $632,986,000. For the fiscal year ending January 31, 2015, the cost was $1,684,709,000 and the book value was $694,856,000. The depreciation expense trend for the past three years was generally upwards. While depreciation expense decreased by $5,995,000 from fiscal year 2013 to fiscal year 2014, it increased by $15,768,000 from fiscal year 2014 to fiscal year 2015.

r expenses | 22 000 | 27 000 | 1 | 100 | 100 | 10 | 52 650 | | | | 2 | 1000 | 100 | 11 | | | | | 4 | 2750 |   |   | | | | |   |   |   |   | |   | 87 000 | 80 500 |   |   |   |   | 152 950 | Profit before tax | 21 000 | 6 500 |   |   |   |   | 15 350 | Tax expense | 7 200 | 2 000 |   |   | 240 | 1 | 7880 | | | | 8 | 60 | 300 | 2 | | | | | 10 | 30 | 300 | 9 | | | | | 11 | 30 | 600 | 11 | | | | |   |   |   |   | | Profit | 13 800 | 4 500 |   |   |   |   | 7470 | Retained earnings (1/7/09) | 16 000 | 35 500 | 1 | 140 | 300 | 2 | 20455 | | | | 2 | 1000 | 50 | 10 | | | | | 5 | 29400 |   |   | | | | | 8 | 140 |   |   | | | | | 10 | 700 |   |   | | | | | 10 | 15 |   |   | | | | |   |   |   |   | | | | |   |   |   |   | | | | |   |   |   |   | | | | |   |   |   |   | | Transfer from BCV reserve | -- | -- |   |   | 700 | 1 |   | | | | 5 | 700 |   |   | |   | 29 800 | 34 000 |   |   |   |   | 27 925 | Dividend paid | 4 000 | 2 000 |   |   | 2000 | 6 | 4 000 | Dividend declared | 10 000 | 3 000 |   |   | 3000 | 7 | 10 000 |   | 14 000 | 5 000 |   |   |   |   | |

|Aug 4 |Land and building were purchased for $400,000. Of this amount, $60,000 applied to the land and $340,000 to|

a) Firstly, we need to match its depreciation to revenue still being earned from the theater, small stores, and apartment buildings, until the building gets razed. This demonstrates that Archer Company’s intentions when purchasing the land and buildings, was to raze the old building and construct a combined hotel and

The use of accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes results in