Assignment on Assets and Liabilities
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
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