Parent Corporation Purchases a Machine (A Five-Year Property)for $20,000

question 52

Essay

Parent Corporation purchases a machine (a five-year property)for $20,000. It claims $4,000 of depreciation under the MACRS rules in the first year it owns the property. At the close of business on the last day of the first year, Parent sells the machine to a 100%-owned corporation (Subsidiary)for $18,000. Subsidiary immediately commences depreciating the machine as a five-year property using the regular MACRS rules. What depreciation can be claimed by Subsidiary Corporation in the first year it uses the machine?

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Definitions:

Undervalued Inventory

Inventory that is reported at a value lower than its actual market value, potentially affecting financial statements and tax liabilities.

Cost Method

An accounting method used to value an investment, based on the cost to acquire it, without considering its fair market value changes.

Voting Shares

Shares that grant the holder the right to vote on corporate matters, typically related to company governance.

Bonds Payable

Long-term liabilities on a company's balance sheet, representing the amount owed to bondholders by the issuer.