Question

Ch10-P77 While completing undergraduate school work in information systems, Dallin Bourne and Michael Banks decided to start a technology support company called eSys Answers. During year 1, they bought the following assets and incurred the following start-up fees: Year 1 Assets Computers (5-year) Office equipment (7-year) Furniture (7-year) Start-up costs Purchase Date October 30, Y1 October 30, Y1 October 30, Y1 October 30, Y1 Basis $15,000 $10,000 $3,000 $17.000 In April of year 2, they decided to purchase a customer list from a company providing virtually the same services, started by fellow information systems students preparing to graduate. 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.

Answer 1

I B C D E F G 1 Ans: 2 Requirement a) Amount Asset Expense Workings Basis SO 5 Computer Equipment 6 Office Equipment 7 Furniture 8 Start-up costs 9 Start-up immediate expense $5,000 $195 $17.000 Given 50,000 $195 SO(Total start-up costs) - (Phase-out threshold) $5,000 (Maximum immediate expense) - (Immediate expense phase-out) $12,000 (Total start-up costs) — (Allowable immediate expense) 180.00 15 years, $195 66.67 (Remaining start-up costs) (Recovery period in months) 3 3 month October to December) 12 Y2 Cost Recovery Yl Cost Recovery Start-up costs Y1 Original Remaining Depreciation Description Quarter Rate Basis Expense $15,000 $0 $15,000 4th 5.00% $750 Maximum immediate expense $10,000 $10.000 4th 3.57.% $357 Total start-up costs $3.000 $0 $3.000 4th 3.57% $107 Phase-out threshold $17,000 $5,000 $12,000 N/A Y1 $200(Refer start-up costs Y1) Immediate expense phase-out $5,000 Allowable immediate expense Total Cost Recovery Expense $6,414 Remaining start-up costs Recovery period in months Monthly straight-line amortization Remaining eSys' business months during year 1 Depreciation Quarter Rate Expense $15.000 sol $15.000 4th T28.000 $5,700 Year 1 straight-line amortization for startup costs $10.000 SO $10,000 4th 27.55.% $2.755 $3.000 $3,000 4th 27.55.% $827 $17,000 $5,000 $12,000 NA (66.67*12) $800 $18,000 20.00% $3,600 Description $4.000 HY 14.29% $572 Customer list (section 197 intangible) 10,000 N/A Y2 $500 (Refer customer list Y2) Recovery period in months Total Cost Recover/ Expense $14.753 Monthly straight-line amortization eSys' business months during year 2 Year 1 straight-line amortization for customer list Original Basis Expense Basis $200 Monthly straight-line amortization) x (eSys' business months during year 1) || Asset 14 Computer Equipment 15 Office Equipment 16 Furniture 17 Stan -up costs 18 Delivery van 19 Pinball machine 20 Customer List SO HY Customer List Y2 Amount Explanation 10,000 Given 180 Section 197 55.56 (Customer list ) / (Recovery period in months) 9 9 months (April through December) $500 (Monthly straight-line amortization) x (eSys' business months during year 2) 23 Requirement b) Adjusted Basis Asset Original Basis Expense $0 $5. Year 1 Year 2 Cost 2012 Ending Cost Recovery Basis Recovery $750 $5,700 $8.550 $2.755 $6,888 $107 $827 $2.066 $8001 $11,000 $3,600 $14.400 $572 $3,428 $500 $9,500 $1.4141 $14,753 $55,833 26 Computer Equipment 27 Office Equipment 28 Furniture 29 Start-up costs 30 Delivery van 31 Pinball machine 32 Customer List 33 Totals 000 $15.000 $10.000 $3.000 $17,000 $18.000 $4,000 $10,000 $77,000 SON SO SO so

к А 1 Ans: 2 Requirement a) Start-up costs Y1 Description Amount Workings Asset 5 Computer Equipment 6 Office Equipment 7 Furniture 8 Start-up costs 9 Start-up immediate expense Original Basis 15000 10000 3000 17000 Yi Cost Recovery Remaining Expense Basis 10 =B5-C5 =B6-C6 =B7-C7 5000 =B8-C8 Depreciation Quarter Rate Expense 4th 0.05 =B5*F5 4th 0.0357 =B6*F6 4th 0.0357 =B7*F7 N/A 200 5000 Total Cost Recovery Expense =SUM(G5-G9) Y1 Maximum immediate expense Total start-up costs Phase-out threshold (Refer start-up costs Y1) Immediate expense phase-out Allowable immediate expense Remaining start-up costs Recovery period in months Monthly straight-line amortization eSys' business months during year 1 5000 $195 17000 Given 50000 $195 (Total start-up costs) - (Phase-out threshold) =J5-38 (Maximum immediate expense) - (Immediate expense phase-out) =J6-9 (Total start-up costs) — (Allowable immediate expense) 180 15 years, $195 =J10/J11 (Remaining start-up costs) (Recovery period in months) 3 month (October to December) Y2 Cost Recovery Asset 0.38 Year 1 straight-line amortization for startup costs =J12*J13 Monthly straight-line amortization) x (eSys' business months during year 14 Computer Equipment 15 Office Equipment 16 Furniture 17 Stan -up costs 18 Delivery van 19 Pinball machine 20 Customer List Remaining Original Basis Expense Basis 15000 =B14-C14 10000 =B15-C15 3000 =B16-C16 17000 5000 =B17-C17 18000 4000 10000 Depreciation Rate Quarter Expense 4th =B14*F14 4th 0.2755 =B15*F15 4th 0.2755 =B16*F16 (66.67*12) =J1212 10.2 =B18*F18 0.1429 =B19*F19 Y2 500 Total Cost Recover/ Expense =SUM(G14:G20) |HY N/A (Refer customer list Y2) Description Customer list (section 197 intangible) Recovery period in months Monthly straight-line amortization eSys' business months during year 2 Year 1 straight-line amortization for customer list Customer List Y2 Amount Explanation 10000 Given 180 Section 197 =J19/J20 (Customer list ) / (Recovery period in months) 9 months (April through December) =J21*J22 Monthly straight-line amortization) x (eSys' business months during year 23 Requirement b) 24 Adjusted Basis Asset Year 1 Original Year 2 Cost 2012 Ending Expense Cost Basis Recovery Basis Recovery 15000 Jo =G5 =G14 =B26-(C26+D26+E26) 10000 =G6 =G15 =B27-(C27+D27+E27) 3000 =G7 =B28-(C28+D28+E28) 17000 5000 =G8 =G17 =B29-(C29+D29+E29) 18000 0 0 =G18 =B30-(C30+D30+E30) 4000 =G19 =B31-(C31+D31+E31) 10000 O TO =B32-C32+D32+E32) =SUMB26-B32) =SUMD26:D32) =SUM(E26-E32) =SUM(F26:F32) 26 Computer Equipment 27 Office Equipment 28 Furniture 29 Start-up costs 30 Delivery van 31 Pinball machine 32 Customer List 33 Totals =G16 =G20