Question

6. 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 a basis of $1,300,000 in 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 they required RC to write down the goodwill by $200,000 for book purposes. What book-tax difference associated with its goodwill should RC report in year 1? (Enter a favorable difference as a positive and an unfavorable as a negative)

7. 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 a basis of $1,300,000 in 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 they required RC to write down the goodwill by $200,000 for book purposes. What book-tax difference associated with its goodwill should RC report in year 2? (Enter a favorable difference as a positive and an unfavorable as a negative)

Answer 1

6.

Book-tax difference	$ 43,333
Favorable or Unfavorable	Favorable

According to Tax authorities, RC should amortize $1,300,000 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 6 months.

Now ,15 years = 15 x 12 = 180 months.

Amount = (1,300,000/180) x 6 = $ 43,333.

This amount is for tax purposes.

As determined by RC there is no deduction for book purposes . Thus the difference is $ 43,333 - 0 = $ 43,333. This is a favorable difference as no deduction has been made for book purpose.

7.

Book-tax difference	$ 113,333
Favorable or Unfavorable	Unfavorable

For tax purposes,  Amortization amount for year 2 = (1,300,000/180) * 12 = $86,667.

Amount for book purpose = 200,000 (given)

Difference = 200,000 - $86,667 = $113,333

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