A)Determine BC’s taxable income. Use MACRS cost recovery (depreciation/amortization). Ignore Bonus Depreciation and Section 179 Expensing for this problem. (Keep in mind that in the “real-world,” Bonus Depreciation and Section 179 can produce significant tax savings and is seldom (if ever) ignored or overlooked!)

B)Prepare a chart (table) that shows the cost recovery deductions over the life of the individual capitalized assets.Bruckner Corporation (BC) was formed on February 3, 2014 for the purpose of selling college textbooks in retail locations in South Florida. It has decided to use the calendar year for its accounting period and will use the modified-cash method of accounting for tax purposes.

In January 2014, the Incorporators of BC hired attorneys to assist them with corporate filings and CPAs to determine accounting systems/processes necessary to begin the business. For those services they paid $8,500.

On February 7, 2014, BC rented three stores from which to sell their products. It entered into three (3) separate five (5) year commercial leases. Each lease required that in addition to rent, BC must pay $3,000 during this year as a security deposit to held against any damages caused by BC, and is fully refundable if not ultimately applied at the end of the lease term. BC did not have to make its first rent payments until April 1, 2014.

To equip the stores, BC arranged for a loan from the bank for $250,000, due in 5 years and calling for interest to be paid annually at a rate of ten percent (10%). On March 1st, 2014 BC received the loan proceeds and purchased the following items:

1)Shelving units to display the books$75,000

2)Office Furniture$50,000

3)Computers & Software$25,000

4)Leasehold Improvements$100,000

BC began operations on April 1st, 2014. During its first year of operation, BC incurred the following cash inflows and (outflows):

1)Gross Receipts from sales$500,000

2)Loan Proceeds from bank$250,000

3)Book Purchases($425,000)

4)Loan interest($25,000)

5)Payroll($125,000)

6)Liability Insurance($18,000)

7)Key-Person Life Insurance($1,500)

8)Rent (ALL payments($63,000)

9)Utilities($9,000)

10)Advertising (post 4/1/14)($12,000)

11)Entertainment($2,500)

12)Licenses & Permits($1,250)

13)Code Enforcement Violations($750)

14)Communications($6,000)

15)Supplies($4,200)

As of December 31, 2014, the following information is provided:

-$25,000 of the sales receipts on hand has not yet been deposited into the bank. It was deposited on January 3, 2015.

-Management had decided to prepay the 1st year’s interest on the loan (due February 28, 2015) on December 2, 2014

-Management purchased a three year (3) Liability Insurance policy on March 1, 2014. The premium covered the thirty-six month (36) period from March 1, 2014 through February 28, 2017.

-Books unsold and on the shelves $175,000 (BC’s cost).

-BC purchased the Key-Person Life Insurance policy on June 15, 2014 to protect the company against losses if their manager dies.

 

 

 

 

 

 

Required:

A)Determine BC’s taxable income. Use MACRS cost recovery (depreciation/amortization). Ignore Bonus Depreciation and Section 179 Expensing for this problem. (Keep in mind that in the “real-world,” Bonus Depreciation and Section 179 can produce significant tax savings and is seldom (if ever) ignored or overlooked!)

B)Prepare a chart (table) that shows the cost recovery deductions over the life of the individual capitalized assets.