Question

Bud purchased a business in 2018 for $ 5,000,000. $ 1,000,000 of this amount was for tangible property (equipment, computers, furniture, etc.). The rest of the purchase price represented intangible assets (goodwill, customer lists, location, etc.). Bud opened the business on 4/30/18

a. How much will Bud deduct as amortization expense in 2018?

b. How much will Bud deduct as amortization expense in 2019?

Answer 1

The journal entry at the time of purchase shall be:-

Tangible property. Debit. $1,000,000

Goodwill etc. Debit. $4,000,000

Cash/Bank. Credit. $5,000,000

Now the goodwill and other intagible assets have to be amortized in 5 years in straight line method.

So, amortization expense for 2018= $4,000,000*8/12= $5,333,333 if the accounting year is january - December

And amortization expense for 2019 = $8000,000 i.e for 12 months

Note:- In some countries, goodwill in 2018 shall be amprtized irrespective of the no of months used, in that case amortization expense in 2018 shall also be $800,000