Question

After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $360,000. Ingrid allocated $60,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3?

b. In lieu of the original facts, assume that Ingrid purchased only a phone list with a useful life of 5 years for $15,000. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

Answer 1

a.Goodwill to be amortized=$60,000

Amortization period=15 years=180 months

It was purchased in May, so for 1st year it has to be amortized for 8 months till December. Amount=$(60,000*8/180)=$2,667

Amortization in years 2 and 3=$(60,000*12/180)=$4,000 for each of 2nd and 3rd year

b.Price of phone list=$15,000

Amortization period=5 years=60 months

It was purchased in May, so for 1st year it has to be amortized for 8 months till December. Amount=$(15,000*8/60)=$2,000

Amortization in years 2 and 3=$(15,000*12/60)=$3,000 for each of 2nd and 3rd year