Question

(1).Which of the following expenditures incurred in the operation of a business is not required to be capitalized?

A. Cost of replacing an old shingle roof with a new tile roof.

B. Cost of changing from one heating system to another.

C. Cost of replacing an old truck used for business delivery.

D. Cost of replacing small tools.

(2) Mr. B paid the following amounts in the current year in connection with his business property:

New motor purchased in December for a truck that extended its useful life by 3 years

$ 600

Replacement parts to maintain machinery

in efficient operating condition

3,000

Labor to maintain the above equipment

1,800

Cost of replacing gravel driveway with

heavy-duty concrete

12,000

Cost of repainting factory building

1,400

What is Mr. B's allowable deduction for repairs and maintenance expense on his current year Schedule C, Form 1040?

A. $2,400

B. $6,200

C. $6,800

D. $18,800

(3) Mr. March, a medical equipment manufacturer, paid and incurred the following expenses during the current year:

Raw materials

$60,000

Direct labor

50,000

Materials and supplies

50,000

Freight-in on raw materials

1,000

Freight on shipments of finished goods

1,000

Allocable overhead expenses for production

10,000

Cost of inventory donated to charity

1,000

Fair market value of inventory donated

3,000

Beginning inventory

20,000

Ending inventory

30,000

The inventory donated to charity was included in the beginning inventory and is not eligible for special treatment under Sec. 170(e)(3). What was the amount of Mr. March's cost of goods sold for the current year?

A. $161,000

B. $160,000

C. $159,000

D. $158,000

(4) Mr. M, a cash-basis sole proprietor, secured two business loans from two different banks. The following information pertains to the loans. Assume all costs have been paid by M.

Loan 1

Loan 2

Date of loan

1/1/Yr 1

1/1/Yr 3

Term

10 years

10 years

Loan origination fee

$1,000

$2,000

Mortgage commission

250

500

Abstract fees

150

300

Recording fees

100

200

Interest for Year 3

5,000

7,000

On December 31, Year 3, Mr. M paid off Loan 1 and had to pay a prepayment penalty of $1,500. What deductions can Mr. M take in Year 3 with respect to these loans?

Interest Expense

Other Costs

A.

$14,500

$500

B.

$14,000

$2,500

C.

$13,500

$3,000

D.

$12,000

$4,500

Answer 1

A	B	C	D	E	F	G	H	I	J
2		1)
3		As per IRS following are cases in which case expenditures can be capitalized.
4		a) Fixing defect or flaw
5		b) Enlargement or expansion
6		c) Increasing capacity or efficiency.
7		d) Rebuilding of property after the end of economic life
8		e) Replacement of major component
9		f) Adapt the property to different use
10
11		A) Replacing the old shingle roof with a new tile can be done to fix the defect.
12		Thus it can be capitalized.
13
14		B) Changing one heating system to other may improve the efficiency.
15		Thus it can be capitalized.
16
17		C) Replacing the old truck will improve the efficiency/
18		Thus it can be capitalized.
19
20		D) Cost of replacing the small tools donot fall in any of the above category.
21		Hence it should not be capitalized.
22
23		Thus the option (D) is the correct answer.
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