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 $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?

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