# Assignment on Assets and Liabilities

Topics: Depreciation, Costs, Asset Pages: 9 (637 words) Published: April 17, 2015
﻿While completing undergraduate school work in information systems, Dallin Bourne and Michael Banks decided to start a business called ISys Answers which was a technology support company. During year 1, they bought the following assets and incurred the following fees at start-up:

Year 1 Assets
Purchase Date
Basis
Computers (5-year)
October 30, Y1
\$15,000
Office equipment (7-year)
October 30, Y1
\$10,000
Furniture (7-year)
October 30, Y1
\$3,000
Start-up costs
October 30, Y1
\$17,000
In April of year 2, they decided to purchase a customer list from a company started by fellow information systems students preparing to graduate who provided virtually the same services. The customer list cost \$10,000 and the sale was completed on April 30th. During their summer break, Dallin and Michael passed on internship opportunities in an attempt to really grow their business into something they could do full time after graduation. In the summer, they purchased a small van (for transportation, not considered a luxury auto) and a pinball machine (to help attract new employees). They bought the van on June 15, Y2 for \$15,000 and spent \$3,000 getting it ready to put into service. The pinball machine cost \$4,000 and was placed in service on July 1, Y2. Year 2 Assets

Purchase Date
Basis
Van
June 15, Y2
\$18,000
Pinball Machine (7-year)
July 1, Y2
\$4,000
Customer List
April 30, Y2
\$10,000
Assume that ISys Answers does not elect any §179 expense or bonus depreciation. a. What are the maximum cost recovery deductions for ISys Answers (excluding §179 expensing) for 2010 and 2011?

b. What is ISys Answers’ basis in each of its assets at the end of 2011?

a.  ISys Answers’ Y1 cost recovery deductions are \$6,414, including the expensing of the start-up costs.  ISys Answers’ Y2 cost recovery deductions are \$14,754.  Y1 Cost Recovery
Asset
Original
Basis
Expense
Remaining
Basis

Quarter

Rate
Depreciation
Expense
Computer Equipment
\$15,000

\$15,000
4th
5.00%
\$750
Office Equipment
\$10,000

\$10,000
4th
3.57%
\$357
Furniture
\$3,000

\$3,000
4th
3.57%
\$107
Start-up costs
\$17,000
\$5,000
\$12,000

N/A
See below
\$200
Start-up immediate expense

\$5,000
Total Cost Recovery Expense

\$6,414

Start-up costs Y1
Description
Amount
Explanation
(1) Maximum immediate expense
\$5,000
§195
(2) Total start-up costs
\$17,000
Given in problem
(3) Phase-out threshold
50,000
§195
(4) Immediate expense phase-out
\$0
(2) – (3)
(5) Allowable immediate expense
\$5,000
(1) – (4)
(6) Remaining start-up costs
\$12,000
(2) – (5)
(7) Recovery period in months
180
15 years §195
(8) Monthly straight-line amortization
66.67
(6) / (7)
(9) ISys’ business months during year 1
x    3
October  through December
Year 1 straight-line amortization for start-up costs

\$200

(8) x (9)

Y2 Cost Recovery
Asset
Original
Basis
Expense
Remaining
Basis

Quarter

Rate
Depreciation
Expense
Computer Equipment
\$15,000

\$15,000
4th
38.00%
\$5,700
Office Equipment
\$10,000

\$10,000
4th
27.55%
\$2,755
Furniture
\$3,000

\$3,000
4th
27.55%
\$827
Start-up costs
\$17,000
\$5,000
\$12,000
N/A
\$66.67 x 12
\$800
Delivery van
\$18,000

HY
20.00%
\$3,600
Pinball machine
\$4,000

HY
14.29%
\$572
Customer List
\$10,000

N/A
See below
\$500

Total Cost Recovery Expense

\$14,754

Description
Amount
Explanation
(1) Customer list (section 197 intangible)
\$10,000
Given in problem
(2) Recovery period in months
180
Section 197
(3) Monthly straight-line amortization
55.56
(1) / (2)
(4) April through December
x    9

Year 1 straight-line amortization for customer list

\$500

(3) x (4)
ISys Answers’ basis is as follows:
Asset
Original
Basis
Expense
Year 1
Cost Recovery

Year 2 Cost Recovery
2014 Ending Basis
Computer Equipment

\$15,000
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