Question

Timmy paid $800,000 cash for all of the assets of Bob’s Chicken Fried Steak Shack, Inc. (Bob’s). Timmy did not buy the stock of Bob’s; rather he bought all of Bob’s assets from Bob.

Here is a list of the physical assets that Timmy got for his $800,000, showing the stand-alone FMV of each category:***

• Land & Building, $350,000
• Furniture & Equipment, $160,000
• Inventory, $15,000

Bob’s latest property tax appraisal from Dallas County showed the land value at $150,000, the building at $100,000, the furniture and equipment at $75,000.

1. What is Timmy’s depreciable basis in the building?
2. What is Timmy’s depreciable basis in the furniture and equipment?
3. What amount will Timmy eventually record as COGS with respect to the purchased inventory?
4. How much, if any, goodwill did Timmy purchase?

Address each item separately. (Each part must be correctly answered to earn a point for this item (3).)

*** These FMVs are as agreed and stated in the negotiated Purchase Agreement.

Answer 1

The depreciable basis is equal to the asset's purchase price, minus any discounts, and plus any sales taxes, delivery charges, and installation fees. In the above case FMC of respective assets would be depreciable basis.

Also we can only depreciate only buildings and land is never depreciable.

Depreciation basis in building

FMV of Land & Building of $ 350,000 will be segregated in the ratio of 150,000 and 100,000 between land and building respectively.

So Depreciable basis in building = 350000 x 100000 / 250000 = 140,000

Depreciable basis in Furniture & Equipment = FMV as agreed in purchase agreement = $ 160,000

COGS with respect to purchased inventory = FMV of Inventory = $ 15,000

Timmy purchased goodwill as follows

800,000 - 350,000 - 160,000 - 15,000 = 275,000