Question

Problem 5-35 (LO 5-2) On July 1 of year 1, Riverside Corp. (RC), a calendar-year taxpayer, acquired the assets of another business in a taxable acquisition. When the purchase price was allocated to the assets purchased, RC determined it had purchased $1,200,000 of goodwill for both book and tax purposes. At the end of year 1, RC determined that the goodwill had not been impaired during the year. In year 2, however, RC concluded that $200,000 of the goodwill had been impaired and wrote down the goodwill by $200,000 for book purposes.

Answer 1

Solution:

a:

Book-tax difference	$ 40,000
Is it favorable or unfavorable?	Favorable
Is it permanent or temporary?	Temporary

According to Tax authorities  RC should amortize $1,200,000 of goodwill over a period of 15 years. The depreciation method to be used will be straight-line method.

Amortization amount for year 1 will be for half the year i.e. 6 months. Now 15 years = 15 x 12 = 180 months.

Amount = (1,200,000/180) x 6 = $ 40,000. This amount is for tax purposes.

As determined by RC there is no deduction for book purposes . Thus the difference is 40,000 - 0 = $40,000. This is a favorable difference as no deduction has been made for book purpose and also it is temporary.

b.)

Book-tax difference	$ 120,000
Is it favorable or unfavorable?	Unfavorable
Is it permanent or temporary?	Temporary

For tax purposes,  Amortization amount for year 2 = 1,200,000/15 years = $80,000.

Amount for book purpose = 200,000 (given)

Difference = 200,000 - 80,000 = 120,000

This amount is unfavorable as amortization for book purpose is greater than the amount for tax purposes. The difference is temporary.