TAX DEFERRED EXCHANGES:
Columbo Corporation, a calendar-year corporation, began business in 2003. With the initial capital contributions from its sole shareholder, it purchased a building on March 12 for $250,000. It also purchased the following items for use in the business.
Item Purchase Date Acquisition Cost
Office Furniture April 1 $8,000
Computer April 15 $4,000
Machine A May 2 $15,000
Machine B August 4 $21,000
Machine C August 12 $31,000
Columbo used MACRS accelerated depreciation on all the assets except Machine B, which it expensed under the Section 179 election. In addition, Columbo claimed on bonus depreciation on any of these purchases.
On January 5, 2006, Columbo sold Machine A for $7,000. It purchased an upgraded Machine D for $45,000 on January 20. On May 5, its computer was completely destroyed by a power surge and was replaced. The new computer equipment cost $6,000. In October, their building was condemned by the city and Columbo had to move. The city paid Columbo $275,000 for the building and it purchased a new building for $310,000 and moved in on October 30. Also in October, the sole shareholder purchased the office furniture for $100 (Fair Market Value = $2,000) and Columbo purchased new furniture for the new building for $15,000. Rather than move Machine B (Fair Market Value = $6,000) it traded it in on new Machine E paying and additional $28,000 cash for the Machine.
a. Determine Columbo Corporation’s depreciation expense in years 2003 through 2006 if it did not elect Section 179 expensing (except for Machine B).
b. Determine the amount and type of realized and recognized gain or loss on each of the property dispositions in 2006.
c. Determine the net effect of the property transactions on Columbo’s taxable income in 2006.
d. Columbo used straight-line depreciation with a 10-yeat life for the office furniture and machines and a 5-year life for the computer, taking a full year’s depreciation in the year of acquisition and none in the year of disposal, for financial accounting purposes.
Q1. Determine its financial accounting depreciation deductions for years 2003 through 2006.
Q2. Determine its gains and losses on property transactions for financial accounting in 2006.
Q3. For 2003 through 2006, determine if the differences between financial accounting and tax accounting depreciation and property transactions would result in a deferred tax asset or a deferred tax liability for the corporation (consider each year separately).