Peter Corporation purchases the following assets during the current year.  Identify which assets are not subject to cost-recovery using depreciation, and state why that is so.

 

1. Land

 

Land is not depreciable because it does not have a definite life.  The investment in land is recovered when it is disposed of in a taxable transaction.

 

 

1. Copyright

 

A copyright is an intangible asset.  Therefore, it does not depreciate.  Rather, intangible assets with limited useful lives are amortized over its useful life.  A copyright is amortized over 50 years plus the author’s life.

 

 

1. Building

 

A building is tangible property that is subject to wear, tear, and obsolescence.  Therefore, buildings are depreciable property.

 

 

1. Goodwill

 

Goodwill is an intangible asset.  Intangible assets do not depreciate, they are amortized over the useful life of the asset.  Prior to August 9, 1994, goodwill was deemed not to have a useful life and could not be amortized.  The investment in goodwill was recovered when the business creating the goodwill was disposed of in a taxable transaction.  Goodwill purchased after August 9, 1994, can be amortized over 15 years.

 

 

1. Inventory for sale in its store

 

Inventory is held for resale, it does not depreciate in value.  Rather, the cost of the inventory is deducted against the sales price when the inventory is sold.

 

 

1. 500 shares of Excellent common stock

 

Stock does not depreciate because it does not have a definite useful life.  The investment in stock is recovered when the stock is sold.

 

 

1. A house to be rented out

 

A rental house is depreciable real property.  It is subject to wear, tear, and obsolescence, and therefore, has a definite useful life.

 

 

1. Equipment for use in its business

 

Equipment is tangible personal property.  It is subject to wear, tear, and obsolescence, and therefore, has a definite useful life.

 

 

1. An interest in an oil well

 

An interest in an oil well does not depreciate; it is an intangible asset that has a definite useful life.  The cost of an oil well is recovered through depletion.

 

 

1. A car that will be used 60% for business and 40% for personal use

 

A car is tangible personal property.  It is subject to wear, tear, and obsolescence and therefore, has a definite useful life.  However, to deduct depreciation, there must be a business purpose for the asset.  Therefore, only the 60% business use portion is subject to depreciation.  The personal use portion is not depreciable