Question

After several profitable years running her business, Ingrid decided to acquire the assets of a small...

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 $336,000. Ingrid allocated $56,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis.

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 $13,000. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

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Answer #1

A) ingrid could deduct $2,489 amortization expense on the goodwill in year 1 and $3733 of amortization expense on the goodwill in years 2 and 3, computed as follow:

Description

amount

explanation

1)basis of goodwill

$56000

given

2)recovery period

180

15 years

3)monthly amortization

311.11

1/2

4)month in year 1

8

May through December

5)year 1 straight line amortization

2488.88

3 × 4

6)month in year 2 and 3

12

January through December

7)year 2 and 3 straight line amortization

3733.32

3 ×6

B) ingrid's amortization for the phone list for year 1 is $1733, years 2 and 3 is $2600, computed as follow:

Description

phone list

1)basis of phone list

13000

2)recovery period in months

60(5 × 12)

3)monthly amortization

216.67

4)month in year 1

8

5)year 1 straight line amortization

1733.36

6)months in year 2 and 3

12

7)yeat 2 and 3 straight line amortization

2600.04

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