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Week 7 Homework Assignment: 1. What is MACRS and how can we have a difference between Financial Accounting Depreciation and Tax Depreciation MACRS? Is there such a thing as legally having two sets of books for a Company? MACRS (Modified Accelerated Cost Recovery System) is a method of depreciation for property. Using this method the cost of an asset is deducted over a period of time (shorter than the estimated useful life of the asset). Recovery periods are the same for new and used property. Salvage values are ignored using MACRS. 2. Discuss each of the following parts of a property transaction when something is sold (investments, real property, equipment……). Explain how you calculate a. and b. before you calculate c. a. b. c. d. Amount Realized Basis Realized Gain or loss Recognized Gain or loss $x,xxx.xx ($x,xxx.xx) $xxx.xx $xxx.xx Amount realized is the gain from the sale of an asset. It includes all forms of compensation - cash and the value of the good or property received as payment of any liability that the buyer assumes from the transaction. Transaction cost is not part of the amount realized. (Amount paid + mortgage) Basis is the time transactions are recorded. Realized gain or loss is the gain or loss from the sale of an asset a price higher or lower than the original cost. 3. What kinds of property is included in calculating Capital Gains and Losses? 4. How do we determine what is a Long-Term Capital Gain or Loss from a Short-term Capital Gain or Loss? 5. Are there any special tax rates that apply for Long-term capital gains versus Short Term capital gains? What are Ordinary Gains and how are they taxed? Give some examples of things that are considered ordinary gains.. 6. How do we offset Capital gains and losses each year? Bracketing is a process for doing this. What is included in the bracketing process? HINT: Long-Term Capital Gains/LTCG Long-Term Capital Losses/LTCL Short-Term Capital Gains/STCG Short-Term Capital Losses/STCL With the following information, do the bracketing as you explained above and determine what type of gain or loss you would have. Sold piece of investment land held for two years for a gain of Sold stock in a company held for three months for a loss of Sold stock in a company held for five years for a loss Sold piece of investment land held for seven months for a gain of $5,000 ($2,000) ($3,000) $1,000 7. What is the maximum amount of Capital losses that can be taken by an individual taxpayer per year? (Hint: Include any offsetting amounts of STCLs that are used). 8. Describe depreciation RECAPTURE, the purpose of it. There are two code sections/property types that this applies to. When does Recapture apply? 9. What is Like-Kind Exchanges and describe how it works and why it is so attractive to property owners? 10. Describe in detail what is found in each major section on the Schedule A, Itemized deductions and any limitations that may apply to each of them. Week 7 Homework Assignment: 1. What is MACRS and how can we have a difference between Financial Accounting Depreciation and Tax Depreciation MACRS? Is there such a thing as legally having two sets of books for a Company? 2. Discuss each of the following parts of a property transaction when something is sold (investments, real property, equipment……). Explain how you calculate a. and b. before you calculate c. 3. What kinds of property is included in calculating Capital Gains and Losses? 4. How do we determine what is a Long-Term Capital Gain or Loss from a Short-term Capital Gain or Loss? 5. Are there any special tax rates that apply for Long-term capital gains versus Short Term capital gains? What are Ordinary Gains and how are they taxed? Give some examples of things that are considered ordinary gains.. 6. How do we offset Capital gains and losses each year? Bracketing is a process for doing this. What is included in the bracketing process? HINT: Long-Term Capital Gains/LTCG Long-Term Capital Losses/LTCL Short-Term Capital Gains/STCG Short-Term Capital Losses/STCL With the following information, do the bracketing as you explained above and determine what type of gain or loss you would have. Sold piece of investment land held for two years for a gain of Sold stock in a company held for three months for a loss of Sold stock in a company held for five years for a loss Sold piece of investment land held for seven months for a gain of $5,000 ($2,000) ($3,000) $1,000 7. What is the maximum amount of Capital losses that can be taken by an individual taxpayer per year? (Hint: Include any offsetting amounts of STCLs that are used). 8. Describe depreciation RECAPTURE, the purpose of it. There are two code sections/property types that this applies to. When does Recapture apply? 9. What is Like-Kind Exchanges and describe how it works and why it is so attractive to property owners? 10. Describe in detail what is found in each major section on the Schedule A, Itemized deductions and any limitations that may apply to each of them.
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Explanation & Answer

Attached.

Solutions to Week 7 Homework Assignment:

Answer Q1

MACRS is Modified Accelerated Cost Recovery System and is a method used to figure
out the percentage or fraction of the assent a company can write off when filling out its
income tax forms.

Accounting Depreciation vs Tax Depreciation
a) Accounting Depreciation

b) Tax Depreciation

Prepared by the company for accounting Prepared for income tax purposes
purposes
preparation
Based on accounting principles and Based on regulations of the Internal revenue
concepts

service rules
Depreciation methods

The company can select one out of the It used accelerated depreciation calculation
many methods

methods
Accuracy

Accounting depreciation methods is ore It is calculated under a ridged set of rules and
accurate

ids thus less accurate

Yes. A company keeps both the books: Financial accounting depreciation for preparing its
financial statements and tax depreciation for preparing its tax returns.

Answer Q2
Property, plant and equipment represents fixed assets of the business. Generally from the
accounting equation, A=C+L, sale of fixed assets would result in the reduction in the net
value of the fixed assets though it may result in increment in cash value in hand or in the
bank.
When property, plant or machinery is sold, the final value of the property’s accumulated
depreciation is subtracted from its initial purchase cost so as to determine its book value.
Gains or losses on income from the sales of...

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