Solutions for Questions and Problems – Chapter 7
159
CHAPTER 7
ACCOUNTING PERIODS AND METHODS AND DEPRECIATION
Group 1 - Multiple Choice Questions
1. C
2.
3.
4.
5.
6.
D
D
D
B
C
7. A
(1/12 of $150,000) x 2
(Section 7.1)
(Section 7.1)
(Section 7.1)
(Section 7.2)
(Section 7.2)
($100,000 x 1.364%)
(Sections 7.3, 7.4)
(Sections 7.4, 7.6)
8. C
9.
10.
11.
12.
13.
14.
15.
B
C
A
C
C
D
D
(20% x $35,000)
(Sections 7.4, 7.5)
($14,000 x 7.14%) (Section 7.4)
(Section 7.4)
(Section 7.4)
(Section 7.5)
(Section 7.6)
(Section 7.8)
(Section 7.8)
16.
17.
18.
19.
D
A
C
C
(Section 7.9)
(Section 7.9)
(Section 7.9)
(40% + 35%)
(Section 7.9)
Group 2 - Problems
1.
a.
b.
2.
Sales income
Expenses:
Other than rent and interest
Rent ($12,000 x 1/6)
Interest
Net Income
(Section 7.2)
3.
4.
$11,000 = ($300,000 / 12 x 2 x (35% maximum rate + 1%)) – $7,000.
May 15, 2008. (Section 7.1)
Income:
Other than rental
Rental
Expenses:
Other than rental
Rental ($12,000 / 6)
Net Income
(Section 7.2)
a.
b.
c.
d.
e.
$65,000
–40,000
–2,000
–0
$23,000
$220,000
21,000
–170,000
–2,000
$ 69,000
Even though the contribution is paid in cash in 2008, it is deductible in 2007 if it is designated as a
contribution for 2007.
If an election has been made, the increase in value of savings bonds is included in income each year
even though no cash is received.
The half-year prepayment of interest for 2008 is not allowed as a deduction on her 2007 tax return.
All of the standard business expenses which have already been invoiced and are paid at year end are
deductible in 2007.
Even though the work was performed in 2007, the income is not recognized until it is received in
cash in 2008. (Section 7.2)
159
160
Chapter 7 – Accounting Periods and Methods and Depreciation
5.
Land is not allowed to be depreciated. It is held on the taxpayer’s books at its cost basis. Land is
considered to be an asset that is not subject to obsolescence. (Section 7.3)
6.
Yes, the tax law allows a taxpayer to take tax depreciation on a residential rental building no matter what
happens to its value in the market. Even if the value of the building doubles or triples, the depreciation is
allowed and remains the same regardless of fluctuations up and down in value. The term depreciation
does not necessarily mean physical deterioration or loss of value of the asset, though this is usually true
of the asset. The depreciation of computers, office furniture, automobiles, etc. often follows the decline in
value of the assets reasonably well. (Section 7.3 and following sections)
7.
a.
b.
c.
8.
$5,067 = ($39,080 – 1,080)/60 months x 8 months.
$3,908 = $39,080 x 10%. The taxpayer must use the annual percentage rates from the optional
straight-line table (Table 3).
$7,816 = $39,080 x 20% (Table 2). (Section 7.4)
Election to expense
Depreciation on automobile:
$21,500 x 20% = $4,300, but limited to $3,060
Total depreciation
$ 6,500
3,060
$ 9,560
For 2007, the automobile is five-year recovery property; however, the depreciation deduction is subject
to the annual automobile depreciation expense limitations. (Sections 7.4, 7.5, 7.7)
9.
a.
b.
$20,762 = ($800,000 x 1.364%) + ($500,000 x 1.97%.)
$47,268 = ($800,000 x 3.636%) + ($500,000 x 3.636%.) (Section 7.4)
10.
a.
b.
$2,295 = ($3,060 x 75%); limit is less than MACRS of $5,250 = ($35,000 x 20% x 75%).
$3,675 = $4,900 x 75%; limit is less than actual of $8,400 = ($35,000 x 75% x 32%).
(Sections 7.4, 7.6, 7.7)
11. $540 = ($3,000 x 20%) x (80% + 10%). The total depreciation on the computer must be divided
between the business use, $480, (80%/90% x $540); and the investment use, $60, (10%/90% x $540).
(Sections 7.4, 7.6)
12. See Form 4562 on pages 163 and 164. (Sections 7.4, 7.6, 7.7)
13. a.
b.
c.
d.
e.
f.
5 years
7 years
5 years
27.5 years
39 years
No life, no depreciation allowed. (Section 7.4)
14. When a taxpayer acquires more than 40% of its MACRS depreciable property (other than real estate)
during the last quarter of the year, the taxpayer must use the mid-quarter convention in calculating
depreciation rather than the mid-year convention. There are separate MACRS percentage tables for the
mid-quarter depreciation convention. This treatment requires all assets purchased in any quarter of the
year to be treated as purchased at the middle of that quarter. (Section 7.4)
Solutions for Questions and Problems – Chapter 7
15. a.
b.
c.
d.
161
2.273% x $200,000 = $4,546
32% x $3,000 = $960
10% x $4,000 = $400
17.49% x $10,000 = $1,749 (Section 7.4)
16. Tom should expense the machine under the Section 179 election to expense. Under the election to
expense he can write off the entire cost of the machine in 2007 and bring his taxable income down to
$75,000. If Tom does not elect to expense the machine, he must depreciate it over a life of 7 years, and
will get only a small immediate tax benefit for the purchase. (Section 7.5)
17. See the answer to Problem 12. (Sections 7.4, 7.6, 7.7)
18. Even though a car has a 5 year life under MACRS, the depreciation allowed for the car is limited to
the amounts allowed under the luxury auto rules. The car is allowed $3,060, $4,900 and $2,850 of
depreciation in the first three years and then $1,775 a year thereafter. The car will be fully depreciated
in 14 years using this schedule:
Year 1
$3,060
Year 2
$4,900
Year 3
$2,850
Years 4-13
$1,775
Year 14
$1,440
Total
$30,000 (Section 7.7)
19. a.
b.
$85,000 = $40,000 + $45,000
$1,889 deductible for 2007. $85,000/(15 x 12) x 4 months = $1,889. (Section 7.8)
20. The purchased goodwill and going-concern value should be amortized over 15 years at $300 a month as
a Section 197 intangible asset. (Section 7.8)
21. a.
b.
c.
d.
36% = 20% + (80% x 20%)
60% = 30% + 30%
60% = 30% + 30%
$0 Brian owns more than 50% of JBC Corporation, directly or indirectly. (Section 7.9)
22. Section 267(a) is not reproduced here. (Section 7.9)
Group 3 - Comprehensive Problems
1.
See pages 165 through 168.
2.
See pages 169 through 174.
162
Chapter 7 – Accounting Periods and Methods and Depreciation
Group 4 - Cumulative Software Problem
The solution to the Cumulative Software Problem is posted on the Internet site for the text at
http://www.thomsonedu.com/taxation/whittenburg.
Solutions for Questions and Problems – Chapter 7
Problem 12
Form
Depreciation and Amortization
4562
©
f
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0
See separate instructions.
©
Attachment
Sequence No.
Attach to your tax return.
Business or activity to which this form relates
Name(s) shown on return
Palo Fiero
1
2
3
4
5
2007
(Including Information on Listed Property)
Department of the Treasury
Internal Revenue Service
Part I
OMB No. 1545-0172
67
Identifying number
Manufacturing
Election To Expense Certain Property Under Section 179
Note: If you have any listed property, complete Part V before you complete Part I.
Maximum amount. See the instructions for a higher limit for certain businesses
Total cost of section 179 property placed in service (see instructions)
Threshold cost of section 179 property before reduction in limitation
Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing
separately, see instructions
(a) Description of property
6
(b) Cost (business use only)
1
2
3
4
$125,000
$500,000
5
(c) Elected cost
7
7 Listed property. Enter the amount from line 29
8
8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7
9
9 Tentative deduction. Enter the smaller of line 5 or line 8
10
10 Carryover of disallowed deduction from line 13 of your 2006 Form 4562
11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11
12
13 Carryover of disallowed deduction to 2008. Add lines 9 and 10, less line 12 © 13
Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II
14
15
16
Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
Special allowance for qualified New York Liberty or Gulf Opportunity Zone property (other than listed
property) and cellulosic biomass ethanol plant property placed in service during the tax year (see
instructions)
14
Property subject to section 168(f)(1) election
15
Other depreciation (including ACRS)
16
Part III
17
18
MACRS Depreciation (Do not include listed property.) (See instructions.)
Section A
17
MACRS deductions for assets placed in service in tax years beginning before 2007
If you are electing to group any assets placed in service during the tax year into one or more
©
general asset accounts, check here
Section B—Assets Placed in Service During 2007 Tax Year Using the General Depreciation System
(a) Classification of property
19a
b
c
d
e
f
g
3-year
5-year
7-year
10-year
15-year
20-year
25-year
(b) Month and
year placed in
service
(c) Basis for depreciation
(business/investment use
only—see instructions)
property
property
property
property
property
property
property
3,500
39,500
5 yrs
7 yrs
165,000
25 yrs.
27.5 yrs.
27.5 yrs.
39 yrs.
h Residential rental
property
03/23/07
(d) Recovery
period
(e) Convention
HY
HY
MM
MM
MM
MM
(f) Method
200 DB
200 DB
S/L
S/L
S/L
S/L
S/L
(g) Depreciation deduction
700
5,645
3,354
i Nonresidential real
property
Section C—Assets Placed in Service During 2007 Tax Year Using the Alternative Depreciation System
S/L
20a Class life
b 12-year
12 yrs.
S/L
c 40-year
40 yrs.
MM
S/L
Part IV
21
22
23
Summary (see instructions)
21
Listed property. Enter amount from line 28
Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.
Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr. 22
For assets shown above and placed in service during the current year,
enter the portion of the basis attributable to section 263A costs
23
For Paperwork Reduction Act Notice, see separate instructions.
Cat. No. 12906N
2,754
12,453
Form
4562
(2007)
163
164
Chapter 7 – Accounting Periods and Methods and Depreciation
Problem 12, cont.
Page 2
Listed Property (Include automobiles, certain other vehicles, cellular telephones, certain computers, and
property used for entertainment, recreation, or amusement.)
Form 4562 (2007)
Part V
f
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ar
2
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0
Note: For any vehicle for which you are using the standard mileage rate or deducting lease expense, complete only
24a, 24b, columns (a) through (c) of Section A, all of Section B, and Section C if applicable.
Section A—Depreciation and Other Information (Caution: See the instructions for limits for passenger automobiles.)
24a Do you have evidence to support the business/investment use claimed?
Yes No 24b If “Yes,” is the evidence written?
Yes No
(a)
Type of property (list
vehicles first)
25
26
28
29
(c)
Business/
investment
use
percentage
(d)
Cost or other
basis
(e)
(f)
Basis for depreciation
Recovery
(business/investment
period
use only)
(g)
Method/
Convention
(h)
Depreciation
deduction
Special allowance for qualified New York Liberty or Gulf Opportunity Zone property placed in service during the tax
year and used more than 50% in a qualified business use (see instructions)
25
Property used more than 50% in a qualified business use:
%
%
%
Property used 50% or less in a qualified business use:
%
S/L –
%
S/L –
%
S/L –
28
Add amounts in column (h), lines 25 through 27. Enter here and on line 21, page 1
Add amounts in column (i), line 26. Enter here and on line 7, page 1
Passenger
automobile
27
(b)
Date placed in
service
05/31/07
90
35,000
31,500
5 yrs
200DB
(i)
Elected
section 179
cost
2,754
2,754
29
Section B—Information on Use of Vehicles
Complete this section for vehicles used by a sole proprietor, partner, or other “more than 5% owner,” or related person.
If you provided vehicles to your employees, first answer the questions in Section C to see if you meet an exception to completing this section for those vehicles.
(f)
(e)
(d)
(c)
(b)
(a)
Total business/investment miles driven
Vehicle 6
Vehicle 5
Vehicle 4
Vehicle 3
Vehicle 2
Vehicle 1
during the year (do not include commuting
miles)
31 Total commuting miles driven during the year
32 Total other personal (noncommuting)
miles driven
33 Total miles driven during the year. Add
lines 30 through 32
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
34 Was the vehicle available for personal
use during off-duty hours?
35 Was the vehicle used primarily by a
more than 5% owner or related person?
36 Is another vehicle available for personal
use?
Section C—Questions for Employers Who Provide Vehicles for Use by Their Employees
Answer these questions to determine if you meet an exception to completing Section B for vehicles used by employees who are
not more than 5% owners or related persons (see instructions).
Yes
No
37 Do you maintain a written policy statement that prohibits all personal use of vehicles, including commuting,
30
38
39
40
41
by your employees?
Do you maintain a written policy statement that prohibits personal use of vehicles, except commuting, by your employees?
See the instructions for vehicles used by corporate officers, directors, or 1% or more owners
Do you treat all use of vehicles by employees as personal use?
Do you provide more than five vehicles to your employees, obtain information from your employees about
the use of the vehicles, and retain the information received?
Do you meet the requirements concerning qualified automobile demonstration use? (See instructions.)
Note: If your answer to 37, 38, 39, 40, or 41 is “Yes,” do not complete Section B for the covered vehicles.
Part VI
Amortization
(a)
Description of costs
(b)
Date amortization
begins
(c)
Amortizable
amount
42
Amortization of costs that begins during your 2007 tax year (see instructions):
43
44
Amortization of costs that began before your 2007 tax year
Total. Add amounts in column (f). See the instructions for where to report
(d)
Code
section
(e)
Amortization
period or
percentage
(f)
Amortization for
this year
43
44
Form
4562
(2007)
Solutions for Questions and Problems – Chapter 7
Comprehensive Problem 1
©
Department of the Treasury
(99)
Internal Revenue Service
©
C
E
F
G
H
f
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Attach to Form 1040, 1040NR, or 1041.
©
See Instructions for Schedule C (Form 1040).
Sherry Hopson
Retail Family Clothing Store
Business name. If no separate business name, leave blank.
Family Clothing Store
4321 Circle Drive
Business address (including suite or room no.)
City, town or post office, state, and ZIP code
Houston, TX 77001
(1)
Cash
(2) x Accrual
(3)
Other (specify)
Accounting method:
09
123 45 6789
©4 4 8 1 4 0
D Employer ID number (EIN), if any
9 5 1 2 3 4 3 2 1
B Enter code from pages C-8, 9, & 10
©
©
Did you “materially participate” in the operation of this business during 2007? If “No,” see page C-3 for limit on losses
If you started or acquired this business during 2007, check here
Income
1
2
Gross receipts or sales. Caution. If this income was reported to you on Form W-2 and the “Statutory
©
employee” box on that form was checked, see page C-3 and check here
Returns and allowances
3
4
Subtract line 2 from line 1
Cost of goods sold (from line 42 on page 2)
3
4
5
Gross profit. Subtract line 4 from line 3
5
6
7
Other income, including federal and state gasoline or fuel tax credit or refund (see page C-3)
Gross income. Add lines 5 and 6
Part II
2
©
6
7
Expenses. Enter expenses for business use of your home only on line 30.
8
8
Advertising
9
Car and truck expenses (see
page C-4)
9
10
11
Commissions and fees
10
Contract labor (see page C-4)
11
12
Depletion
12
13
Depreciation and section 179
expense
deduction
(not
included in Part III) (see
page C-4)
13
14
Employee benefit programs
(other than on line 19)
14
15
Insurance (other than health)
15
16
Interest:
a Mortgage (paid to banks, etc.)
b Other
17
Legal and professional
services
2,100
20 Rent or lease (see page C-5):
a Vehicles, machinery, and equipment
7,686
1,500
16a
18
x
Yes
No
©
350,000
4,500
345,500
221,500
124,000
124,000
750
19
20a
20b
b Other business property
16b
17
18 Office expense
19 Pension and profit-sharing plans
21 Repairs and maintenance
22 Supplies (not included in Part III)
21
22
23 Taxes and licenses
23
24 Travel, meals, and entertainment:
a Travel
24a
b Deductible meals and
entertainment (see page C-6)
24b
25 Utilities
25
26 Wages (less employment credits)
26
27 Other expenses (from line 48 on
page 2)
27
9,000
2,600
1,850
38,000
900
©
28
28
Total expenses before expenses for business use of home. Add lines 8 through 27 in columns
29
Tentative profit (loss). Subtract line 28 from line 7
29
30
Expenses for business use of your home. Attach Form 8829
30
31
Net profit or (loss). Subtract line 30 from line 29.
● If a profit, enter on both Form 1040, line 12, and Schedule SE, line 2, or on Form 1040NR,
line 13 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3.
● If a loss, you must go to line 32.
32
Attachment
Sequence No.
Social security number (SSN)
Principal business or profession, including product or service (see page C-2 of the instructions)
Part I
1
2007
(Sole Proprietorship)
Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.
Name of proprietor
A
OMB No. 1545-0074
Profit or Loss From Business
SCHEDULE C
(Form 1040)
If you have a loss, check the box that describes your investment in this activity (see page C-6).
● If you checked 32a, enter the loss on both Form 1040, line 12, and Schedule SE, line 2, or on
Form 1040NR, line 13 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041,
line 3.
● If you checked 32b, you must attach Form 6198. Your loss may be limited.
For Paperwork Reduction Act Notice, see page C-8 of the instructions.
Cat. No. 11334P
64,386
59,614
%
31
%
32a
All investment is at risk.
32b
Some investment is not
at risk.
59,614
Schedule C (Form 1040) 2007
165
166
Chapter 7 – Accounting Periods and Methods and Depreciation
Comprehensive Problem 1, cont.
Schedule C (Form 1040) 2007
Part III
Page
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33
Method(s) used to
value closing inventory:
34
Was there any change in determining quantities, costs, or valuations between opening and closing inventory?
If “Yes,” attach explanation
a
x
Cost
b
Lower of cost or market
c
Other (attach explanation)
35
Inventory at beginning of year. If different from last year’s closing inventory, attach explanation
35
36
Purchases less cost of items withdrawn for personal use
36
37
Cost of labor. Do not include any amounts paid to yourself
37
38
Materials and supplies
38
39
Other costs
40
Add lines 35 through 39
41
Inventory at end of year
42
Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on page 1, line 4
Yes
x
No
82,500
210,000
39
292,500
71,000
221,500
40
41
42
Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on
line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 on page
C-4 to find out if you must file Form 4562.
Part IV
©
/
/
43
When did you place your vehicle in service for business purposes? (month, day, year)
44
Of the total number of miles you drove your vehicle during 2007, enter the number of miles you used your vehicle for:
a
2
Cost of Goods Sold (see page C-7)
Business
b Commuting (see instructions)
c Other
45
Do you (or your spouse) have another vehicle available for personal use?
Yes
No
46
Was your vehicle available for personal use during off-duty hours?
Yes
No
47a
Do you have evidence to support your deduction?
Yes
No
Yes
No
b If “Yes,” is the evidence written?
Part V
48
Other Expenses. List below business expenses not included on lines 8–26 or line 30.
Total other expenses. Enter here and on page 1, line 27
48
Printed on recycled paper
Schedule C (Form 1040) 2007
Solutions for Questions and Problems – Chapter 7
Comprehensive Problem 1, cont.
Form
Depreciation and Amortization
4562
©
f
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a
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0
See separate instructions.
Name(s) shown on return
©
Attachment
Sequence No.
Attach to your tax return.
Business or activity to which this form relates
Sherry Hopson
1
2
3
4
5
2007
(Including Information on Listed Property)
Department of the Treasury
Internal Revenue Service
Part I
OMB No. 1545-0172
67
Identifying number
Retail family clothing store
123-45-6789
Election To Expense Certain Property Under Section 179
Note: If you have any listed property, complete Part V before you complete Part I.
Maximum amount. See the instructions for a higher limit for certain businesses
Total cost of section 179 property placed in service (see instructions)
Threshold cost of section 179 property before reduction in limitation
Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing
separately, see instructions
(a) Description of property
6
(b) Cost (business use only)
1
2
3
4
$125,000
$500,000
5
(c) Elected cost
7
7 Listed property. Enter the amount from line 29
8
8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7
9
9 Tentative deduction. Enter the smaller of line 5 or line 8
10
10 Carryover of disallowed deduction from line 13 of your 2006 Form 4562
11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11
12
13 Carryover of disallowed deduction to 2008. Add lines 9 and 10, less line 12 © 13
Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II
14
15
16
Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
Special allowance for qualified New York Liberty or Gulf Opportunity Zone property (other than listed
property) and cellulosic biomass ethanol plant property placed in service during the tax year (see
instructions)
14
Property subject to section 168(f)(1) election
15
Other depreciation (including ACRS)
16
Part III
17
18
MACRS Depreciation (Do not include listed property.) (See instructions.)
Section A
17
MACRS deductions for assets placed in service in tax years beginning before 2007
If you are electing to group any assets placed in service during the tax year into one or more
©
general asset accounts, check here
Section B—Assets Placed in Service During 2007 Tax Year Using the General Depreciation System
(a) Classification of property
19a
b
c
d
e
f
g
3-year
5-year
7-year
10-year
15-year
20-year
25-year
(b) Month and
year placed in
service
(c) Basis for depreciation
(business/investment use
only—see instructions)
property
property
property
property
property
property
property
37,000
2,000
h Residential rental
property
(d) Recovery
period
(e) Convention
5 yrs
7 yrs
HY
HY
200 DB
200 DB
MM
MM
MM
MM
S/L
S/L
S/L
S/L
S/L
25 yrs.
27.5 yrs.
27.5 yrs.
39 yrs.
(f) Method
(g) Depreciation deduction
7,400
286
i Nonresidential real
property
Section C—Assets Placed in Service During 2007 Tax Year Using the Alternative Depreciation System
S/L
20a Class life
b 12-year
12 yrs.
S/L
c 40-year
40 yrs.
MM
S/L
Part IV
21
22
23
Summary (see instructions)
21
Listed property. Enter amount from line 28
Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.
Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr. 22
For assets shown above and placed in service during the current year,
enter the portion of the basis attributable to section 263A costs
23
For Paperwork Reduction Act Notice, see separate instructions.
Cat. No. 12906N
7,686
Form
4562
(2007)
167
168
Chapter 7 – Accounting Periods and Methods and Depreciation
Comprehensive Problem 1, cont.
Part V
Sherry Hopson
123-45-6789
Page 2
Listed Property (Include automobiles, certain other vehicles, cellular telephones, certain computers, and
property used for entertainment, recreation, or amusement.)
Form 4562 (2007)
f
o
s
a
7
t
0
f
0
a
2
r
/
D
0
2
60 /
Note: For any vehicle for which you are using the standard mileage rate or deducting lease expense, complete only
24a, 24b, columns (a) through (c) of Section A, all of Section B, and Section C if applicable.
Section A—Depreciation and Other Information (Caution: See the instructions for limits for passenger automobiles.)
24a Do you have evidence to support the business/investment use claimed?
Yes No 24b If “Yes,” is the evidence written?
Yes No
(a)
Type of property (list
vehicles first)
25
26
27
28
29
(b)
Date placed in
service
(c)
Business/
investment
use
percentage
(d)
Cost or other
basis
(e)
(f)
Basis for depreciation
Recovery
(business/investment
period
use only)
(g)
Method/
Convention
(h)
Depreciation
deduction
(i)
Elected
section 179
cost
Special allowance for qualified New York Liberty or Gulf Opportunity Zone property placed in service during the tax
year and used more than 50% in a qualified business use (see instructions)
25
Property used more than 50% in a qualified business use:
%
%
%
Property used 50% or less in a qualified business use:
%
S/L –
%
S/L –
%
S/L –
28
Add amounts in column (h), lines 25 through 27. Enter here and on line 21, page 1
Add amounts in column (i), line 26. Enter here and on line 7, page 1
29
Section B—Information on Use of Vehicles
Complete this section for vehicles used by a sole proprietor, partner, or other “more than 5% owner,” or related person.
If you provided vehicles to your employees, first answer the questions in Section C to see if you meet an exception to completing this section for those vehicles.
(f)
(e)
(d)
(c)
(b)
(a)
Total business/investment miles driven
Vehicle 6
Vehicle 5
Vehicle 4
Vehicle 3
Vehicle 2
Vehicle 1
during the year (do not include commuting
miles)
31 Total commuting miles driven during the year
32 Total other personal (noncommuting)
miles driven
33 Total miles driven during the year. Add
lines 30 through 32
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
34 Was the vehicle available for personal
use during off-duty hours?
35 Was the vehicle used primarily by a
more than 5% owner or related person?
36 Is another vehicle available for personal
use?
Section C—Questions for Employers Who Provide Vehicles for Use by Their Employees
Answer these questions to determine if you meet an exception to completing Section B for vehicles used by employees who are
not more than 5% owners or related persons (see instructions).
Yes
No
37 Do you maintain a written policy statement that prohibits all personal use of vehicles, including commuting,
30
38
39
40
41
by your employees?
Do you maintain a written policy statement that prohibits personal use of vehicles, except commuting, by your employees?
See the instructions for vehicles used by corporate officers, directors, or 1% or more owners
Do you treat all use of vehicles by employees as personal use?
Do you provide more than five vehicles to your employees, obtain information from your employees about
the use of the vehicles, and retain the information received?
Do you meet the requirements concerning qualified automobile demonstration use? (See instructions.)
Note: If your answer to 37, 38, 39, 40, or 41 is “Yes,” do not complete Section B for the covered vehicles.
Part VI
Amortization
(a)
Description of costs
(b)
Date amortization
begins
(c)
Amortizable
amount
42
Amortization of costs that begins during your 2007 tax year (see instructions):
43
44
Amortization of costs that began before your 2007 tax year
Total. Add amounts in column (f). See the instructions for where to report
(d)
Code
section
(e)
Amortization
period or
percentage
(f)
Amortization for
this year
43
44
Form
4562
(2007)
Solutions for Questions and Problems – Chapter 7
Form
Comprehensive Problem 2
1040
Department of the Treasury—Internal Revenue Service
U.S. Individual Income Tax Return
2007
For the year Jan. 1–Dec. 31, 2007, or other tax year beginning
Label
(See
instructions
on page 16.)
Use the IRS
label.
Otherwise,
please print
or type.
Your first name and initial
L
A
B
E
L
H
E
R
E
(99)
IRS Use Only—Do not write or staple in this space.
, 2007, ending
, 20
OMB No. 1545-0074
Your social security number
Last name
Larry
Williams
Last name
Lisa
Williams
Home address (number and street). If you have a P.O. box, see page 16.
Apt. no.
638 Arctic Way
City, town or post office, state, and ZIP code. If you have a foreign address, see page 16.
Fairbanks, AK 99701
998 09 8526
445 81 1423
If a joint return, spouse’s first name and initial
Spouse’s social security number
You must enter
your SSN(s) above.
¶
f
o
sa
%
7
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0
f
0
a
2
r
/
D
8
0
60 /
¶
Checking a box below will not
change your tax or refund.
Presidential
Election Campaign © Check here if you, or your spouse if filing jointly, want $3 to go to this fund (see page 16) ©
Spouse
You
Filing Status
Check only
one box.
Exemptions
1
Single
x
2
4
Married filing jointly (even if only one had income)
3
x
x
Married filing separately. Enter spouse’s SSN above
and full name here. ©
x
5
6a
Yourself. If someone can claim you as a dependent, do not check box 6a
b
Spouse
(3) Dependent’s
(4) if qualifying
c Dependents:
(2) Dependent’s
(1) First name
If more than four
dependents, see
page 19.
relationship to
you
social security number
Last name
child for child tax
credit (see page 19)
d Total number of exemptions claimed
Income
Attach Form(s)
W-2 here. Also
attach Forms
W-2G and
1099-R if tax
was withheld.
If you did not
get a W-2,
see page 23.
Enclose, but do
not attach, any
payment. Also,
please use
Form 1040-V.
Adjusted
Gross
Income
7
7
Wages, salaries, tips, etc. Attach Form(s) W-2
8a Taxable interest. Attach Schedule B if required
8a
Add numbers on
lines above ©
2
2
150,000
500
9a
9b
b Qualified dividends (see page 23)
10
Taxable refunds, credits, or offsets of state and local income taxes (see page 24)
10
11
Alimony received
11
12
Business income or (loss). Attach Schedule C or C-EZ
12
13
Capital gain or (loss). Attach Schedule D if required. If not required, check here ©
13
14
14
15a
Other gains or (losses). Attach Form 4797
15a
IRA distributions
16a
Pensions and annuities
17
Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E
17
18
19
Farm income or (loss). Attach Schedule F
Unemployment compensation
20a
Social security benefits
18
19
b Taxable amount (see page 25)
b Taxable amount (see page 26)
20a
21
22
b Taxable amount (see page 27)
Other income. List type and amount (see page 29)
Add the amounts in the far right column for lines 7 through 21. This is your total income ©
23
Educator expenses (see page XX)
24
Certain business expenses of reservists, performing artists, and
fee-basis government officials. Attach Form 2106 or 2106-EZ
25
26
27
Health savings account deduction. Attach Form 8889
24
25
Moving expenses. Attach Form 3903
26
One-half of self-employment tax. Attach Schedule SE
28
Self-employed SEP, SIMPLE, and qualified plans
27
28
29
Self-employed health insurance deduction (see page 29)
29
Penalty on early withdrawal of savings
31a
Alimony paid
30
31a
©
32
IRA deduction (see page 31)
33
Student loan interest deduction (see page 33)
32
33
34
Tuition and fees deduction. Attach Form 8917
34
35
36
37
Domestic production activities deduction. Attach Form 8903
35
Add lines 23 through 31a and 32 through 35
Subtract line 36 from line 22. This is your adjusted gross income
For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 80.
0
15b
16b
20b
21
22
150,500
23
30
b Recipient’s SSN
Boxes checked
on 6a and 6b
No. of children
on 6c who:
● lived with you
● did not live with
you due to divorce
or separation
(see page 20)
Dependents on 6c
not entered above
8b
b Tax-exempt interest. Do not include on line 8a
9a Ordinary dividends. Attach Schedule B if required
16a
x
Head of household (with qualifying person). (See page 17.) If
the qualifying person is a child but not your dependent, enter
this child’s name here. ©
Qualifying widow(er) with dependent child (see page 17)
360
8,000
36
©
Cat. No. 11320B
37
8,360
142,140
Form
1040
(2007)
169
170
Chapter 7 – Accounting Periods and Methods and Depreciation
Comprehensive Problem 2, cont.
Form 1040 (2007)
Tax
and
Credits
Page
38
Amount from line 37 (adjusted gross income)
39a
Check
if:
$
f
o
sa
7
t
0
f
0
a
2
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/
D
8
/6 0
0
You were born before January 2, 1943,
Spouse was born before January 2, 1943,
Blind.
Blind.
%
Total boxes
checked © 39a
b If your spouse itemizes on a separate return or you were a dual-status alien, see page 34 and check here
Standard
Deduction
for—
©39b
40
Itemized deductions (from Schedule A) or your standard deduction (see left margin)
40
41
Subtract line 40 from line 38
41
42
If line 38 is $117,300 or less, multiply $3,400 by the total number of exemptions claimed on line
6d. If line 38 is over $117,300, see the worksheet on page XX
43
Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0-
44
45
Tax (see page 36). Check if any tax is from: a
Form(s) 8814 b
Alternative minimum tax (see page 39). Attach Form 6251
● All others:
46
Add lines 44 and 45
Single or
Married filing
separately,
$5,350
47
48
Credit for child and dependent care expenses. Attach Form 2441
47
Credit for the elderly or the disabled. Attach Schedule R
48
49
Education credits. Attach Form 8863
49
Married filing
jointly or
Qualifying
widow(er),
$10,700
50
Residential energy credits. Attach Form 5695
50
51
Foreign tax credit. Attach Form 1116 if required
51
52
53
Child tax credit (see page XX). Attach Form 8901 if required
Retirement savings contributions credit. Attach Form 8880
52
53
Head of
household,
$7,850
54
55
56
57
54
Credits from: a
Form 8859 c
Form 8396 b
Form 8839
55
Other credits: a
Form 3800 b
Form 8801 c
Form
Add lines 47 through 55. These are your total credits
Subtract line 56 from line 46. If line 56 is more than line 46, enter -0-
58
Self-employment tax. Attach Schedule SE
59
Unreported social security and Medicare tax from: a
60
61
62
63
Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required
Advance earned income credit payments from Form(s) W-2, box 9
Household employment taxes. Attach Schedule H
Add lines 57 through 62. This is your total tax
64
Federal income tax withheld from Forms W-2 and 1099
65
2007 estimated tax payments and amount applied from 2006 return
65
Earned income credit (EIC)
Nontaxable combat pay election © 66b
Excess social security and tier 1 RRTA tax withheld (see page 60)
66a
68
69
Additional child tax credit. Attach Form 8812
Amount paid with request for extension to file (see page 60)
70
71
72
70
Payments from: a
Form 2439 b
Form 4136 c
Form 8885
71
Refundable credit for prior year minimum tax from Form 8801, line 27
Add lines 64, 65, 66a, and 67 through 71. These are your total payments
73
74a
If line 72 is more than line 63, subtract line 63 from line 72. This is the amount you overpaid
Amount of line 73 you want refunded to you. If Form 8888 is attached, check here ©
● People who
checked any
box on line
39a or 39b or
who can be
claimed as a
dependent,
see page 34.
Other
Taxes
Payments
If you have a 66a
qualifying
b
child, attach
Schedule EIC. 67
68
Refund
Direct deposit?
See page 61
and fill in 74b,
74c, and 74d,
or Form 8888.
©
©
b
d
75
76
77
Amount
You Owe
Form 4972 c
Form(s) 8889
Form 4137
44
b
c Type:
46
56
©
5,671
57
58
59
Form 8919
60
61
62
©
63
©
72
5,671
10,000
64
©
42
43
45
©
Routing number
92,300
49,840
6,800
43,040
5,671
5,671
67
69
Checking
10,000
4,329
4,329
73
74a
Savings
Account number
Amount of line 73 you want applied to your 2008 estimated tax ©
75
Amount you owe. Subtract line 72 from line 63. For details on how to pay, see page 62
Estimated tax penalty (see page 62)
77
©
76
Third Party
Designee
Do you want to allow another person to discuss this return with the IRS (see page 63)?
Sign
Here
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and
belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Joint return?
See page 17.
Keep a copy
for your
records.
Paid
Preparer’s
Use Only
©
2
142,140
38
Designee’s
©
name
Phone
©
no.
Your signature
Date
Spouse’s signature. If a joint return, both must sign.
Preparer’s
signature
©
Firm’s name (or
yours if self-employed),
address, and ZIP code
Date
(
)
Your occupation
No
Daytime phone number
Company President
Spouse’s occupation
Homemaker
Date
©
Yes. Complete the following.
Personal identification
©
number (PIN)
(
Check if
self-employed
)
Preparer’s SSN or PTIN
EIN
Phone no.
(
)
Form
1040
(2007)
Solutions for Questions and Problems – Chapter 7
Comprehensive Problem 2, cont.
SCHEDULES A&B
©
1
2
3
4
5
©
Attachment
Sequence No.
See Instructions for Schedules A&B (Form 1040).
998 09 8526
Caution. Do not include expenses reimbursed or paid by others.
1
Medical and dental expenses (see page A-1)
2
Enter amount from Form 1040, line 38
3
Multiply line 2 by 7.5% (.075)
Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-
7,000
10,661
142,140
6
7
8
State and local (check only one box):
a
Income taxes, or
b
General sales taxes
Real estate taxes (see page A-5)
Personal property taxes
Other taxes. List type and amount ©
9
Add lines 5 through 8
x
4
0
9
7,300
15
35,000
19
50,000
1,700
5,600
5
6
7
8
Interest
You Paid
10
11
Home mortgage interest and points reported to you on Form 1098
Home mortgage interest not reported to you on Form 1098. If paid
to the person from whom you bought the home, see page A-6
and show that person’s name, identifying no., and address ©
12
Points not reported to you on Form 1098. See page A-6
for special rules
Qualified mortgage insurance premiums (See page A-7)
Investment interest. Attach Form 4952 if required. (See
page A-7.)
Add lines 10 through 14
(See
page A-5.)
Note.
Personal
interest is
not
deductible.
10
35,000
11
13
14
15
Gifts to
Charity
16
If you made a
gift and got a
benefit for it,
see page A-7.
17
18
19
Casualty and
Theft Losses 20
Job Expenses 21
and Certain
Miscellaneous
22
Deductions
(See
page A-9.)
07
Your social security number
Larry and Lisa Williams
(See
page A-2.)
f
o
sa
7
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0
f
0
%
a
2
r
/
D
7
/6 0
0
Attach to Form 1040.
Name(s) shown on Form 1040
Taxes You
Paid
2007
(Schedule B is on back)
Department of the Treasury
Internal Revenue Service
(99)
Medical
and
Dental
Expenses
OMB No. 1545-0074
Schedule A—Itemized Deductions
(Form 1040)
23
24
25
26
27
Gifts by cash or check. If you made any gift of $250 or
more, see page A-8
Other than by cash or check. If any gift of $250 or more,
see page A-8. You must attach Form 8283 if over $500
Carryover from prior year
Add lines 16 through 18
12
13
14
16
17
18
10,000
40,000
Casualty or theft loss(es). Attach Form 4684. (See page A-9.)
Unreimbursed employee expenses—job travel, union
dues, job education, etc. Attach Form 2106 or 2106-EZ
if required. (See page A-9.) ©
Tax preparation fees
Other expenses—investment, safe deposit box, etc. List
type and amount ©
21
22
Safe Deposit Box Rental
23
24
Add lines 21 through 23
Enter amount from Form 1040, line 38 25
26
Multiply line 25 by 2% (.02)
Subtract line 26 from line 24. If line 26 is more than line 24, enter -0-
142,140
20
750
300
1,050
2,843
27
Other
28
Miscellaneous
Deductions
Other—from list on page A-9. List type and amount
29
Total
Itemized
Deductions
Is Form 1040, line 38, over $156,400 (over $78,200 if married filing separately)?
No. Your deduction is not limited. Add the amounts in the far right column
for lines 4 through 28. Also, enter this amount on Form 1040, line 40.
©
Yes. Your deduction may be limited. See page A-10 for the amount to enter.
If you elect to itemize deductions even though they are less than your standard deduction, check here ©
30
0
©
28
%
x
For Paperwork Reduction Act Notice, see Form 1040 instructions.
Cat. No. 11330X
* Itemized Deductions of $92,300 Limited per IRC Sec. 68; reduced by $2,045.
29
92,300
Schedule A (Form 1040) 2007
171
172
Chapter 7 – Accounting Periods and Methods and Depreciation
Comprehensive Problem 2, cont.
OMB No. 1545-0074
Schedules A&B (Form 1040) 2007
Name(s) shown on Form 1040. Do not enter name and social security number if shown on other side.
Larry and Lisa Williams
1
f
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ar f / 2 0
D
7
/6 0
0
Attachment
Sequence No.
08
Amount
List name of payer. If any interest is from a seller-financed mortgage and the
buyer used the property as a personal residence, see page B-1 and list this
interest first. Also, show that buyer’s social security number and address ©
Alaska National Bank
(See page B-1
and the
instructions for
Form 1040,
line 8a.)
2
998 09 8526
Schedule B—Interest and Ordinary Dividends
Part I
Interest
Page
Your social security number
500
1
Note. If you
received a Form
1099-INT, Form
1099-OID, or
substitute
statement from
a brokerage firm,
list the firm’s
name as the
payer and enter
the total interest
shown on that
form.
Part II
Ordinary
Dividends
Add the amounts on line 1
Excludable interest on series EE and I U.S. savings bonds issued after 1989.
Attach Form 8815
4 Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a ©
Note. If line 4 is over $1,500, you must complete Part III.
2
3
5
List name of payer
500
2
3
4
500
Amount
©
(See page B-1
and the
instructions for
Form 1040,
line 9a.)
Note. If you
received a Form
1099-DIV or
substitute
statement from
a brokerage firm,
list the firm’s
name as the
payer and enter
the ordinary
dividends shown
on that form.
5
6 Add the amounts on line 5. Enter the total here and on Form 1040, line 9a
Note. If line 6 is over $1,500, you must complete Part III.
Part III
Foreign
Accounts
and Trusts
(See
page B-2.)
©
6
You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; or (b) had
a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
7a At any time during 2007, did you have an interest in or a signature or other authority over a financial
account in a foreign country, such as a bank account, securities account, or other financial account?
See page B-2 for exceptions and filing requirements for Form TD F 90-22.1
b If “Yes,” enter the name of the foreign country ©
8 During 2007, did you receive a distribution from, or were you the grantor of, or transferor to, a
foreign trust? If “Yes,” you may have to file Form 3520. See page B-2
For Paperwork Reduction Act Notice, see Form 1040 instructions.
Printed on recycled paper
Yes No
x
x
Schedule B (Form 1040) 2007
Solutions for Questions and Problems – Chapter 7
Comprehensive Problem 2, cont.
SCHEDULE D
(Form 1040)
©
Name(s) shown on return
Larry and Lisa Williams
1
3
4
5
6
7
10
11
12
13
14
15
Attachment
Sequence No.
998 09 8526
(b) Date
acquired
(Mo., day, yr.)
(c) Date sold
(Mo., day, yr.)
(d) Sales price
(see page D-6 of
the instructions)
(e) Cost or other basis
(see page D-7 of
the instructions)
Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)
7
Land
12
Your social security number
4
(f) Gain or (loss)
Subtract (e) from (d)
5
6
(
)
Long-Term Capital Gains and Losses—Assets Held More Than One Year
(a) Description of property
(Example: 100 sh. XYZ Co.)
9
See Instructions for Schedule D (Form 1040).
Enter your short-term totals, if any, from Schedule D-1,
2
line 2
Total short-term sales price amounts. Add lines 1 and 2 in
3
column (d)
Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824
Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from
Schedule(s) K-1
Short-term capital loss carryover. Enter the amount, if any, from line 10 of your Capital Loss
Carryover Worksheet on page D-7 of the instructions
Part II
8
©
Use Schedule D-1 to list additional transactions for lines 1 and 8.
Short-Term Capital Gains and Losses—Assets Held One Year or Less
(a) Description of property
(Example: 100 sh. XYZ Co.)
2
©
2007
f
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0
f
0
a
2
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/
D
8
/6 0
0
Attach to Form 1040 or Form 1040NR.
Department of the Treasury
Internal Revenue Service
(99)
Part I
OMB No. 1545-0074
Capital Gains and Losses
(b) Date
acquired
(Mo., day, yr.)
(c) Date sold
(Mo., day, yr.)
07/01/02 07/01/07
Enter your long-term totals, if any, from Schedule D-1,
line 9
(d) Sales price
(see page D-6 of
the instructions)
75,000
(e) Cost or other basis
(see page D-7 of
the instructions)
(f) Gain or (loss)
Subtract (e) from (d)
160,000
Related Party
Loss Disallowed
9
Total long-term sales price amounts. Add lines 8 and 9 in
10
column (d)
Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or
(loss) from Forms 4684, 6781, and 8824
Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from
Schedule(s) K-1
75,000
Capital gain distributions. See page D-2 of the instructions
Long-term capital loss carryover. Enter the amount, if any, from line 15 of your Capital Loss
Carryover Worksheet on page D-7 of the instructions
Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f). Then go to
Part III on the back
For Paperwork Reduction Act Notice, see Form 1040 or Form 1040NR instructions.
Cat. No. 11338H
11
12
13
14
15
(
)
0
Schedule D (Form 1040) 2007
173
174
Chapter 7 – Accounting Periods and Methods and Depreciation
Solutions for Questions and Problems – Chapter 7
175
Key Number Tax Return Summary
Chapter 7
Comprehensive Problem 1
Schedule C, Gross Income (Line 7)
124,000
Form 4562, Depreciation on 7-Year Property (Line 19c)
286
Schedule C, Depreciation (Line 13)
7,686
Schedule C, Total Expenses (Line 28)
64,386
Schedule C, Net Profit or (Loss) (Line 31)
59,614
Comprehensive Problem 2
Adjusted Gross Income (Line 37)
142,140
Deductions (Line 40)
92,300
Exemptions (Line 42)
6,800
Tax Liability (Line 63)
5,671
Tax Overpaid (Line 73)
4,329
176
Chapter 7 – Accounting Periods and Methods and Depreciation