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 $366,000. Ingrid allocated $61,000 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 $15,500. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

Answer 1

A) ingrid could deduct $2,711 amortization expense on the goodwill in year 1 and $4067 of amortization expense on the goodwill in years 2 and 3, computed as follow:

Description	amount	explanatiom
1)basis of goodwill	$61000	given
2)recovery period	180	15 years
3)monthly amortization	338.89	1/2
4)month in year 1	8	May through december
5)year 1 straight line amortization	2711.11	3 × 4
6)month in year 2 and 3	12	january through december
7)year 2 and 3 straight line amortizatiom	4066.68	3 ×6

B) ingrid's amortization for the phone list for year 1 is $2067, years 2 and 3 is $3100, computed as follow:

Description	phone list
1)basis of phone list	15500
2)recovery period in months	60(5 × 12)
3)monthly amortization	258.33
4)month in year 1	8
5)year 1 straight line amortizatiom	2066.67
6)months in year 2 and 3	12
7)yeat 2 and 3 straight line amortization	3099.96

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