On January 2,2016,Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 7-year remaining life,a covenant not to compete for 10 years,and goodwill.

Of the purchase price,$140,000 was paid for the patent and $60,000 for the covenant.The amount of the excess of the purchase price over the identifiable assets was $100,000.What is the amount of the amortization deduction for 2016?
A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.

Question

On January 2,2016,Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 7-year remaining life,a covenant not to compete for 10 years,and goodwill.
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Of the purchase price,$140,000 was paid for the patent and $60,000 for the covenant.The amount of the excess of the purchase price over the identifiable assets was $100,000.What is the amount of the amortization deduction for 2016?
A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.

Quizplus · Accepted Answer

The patent has a 7-year remaining life, which means it will be amortized over 7 years using the straight-line method. The annual amortization expense for the patent would be $140,000/7 = $20,000.

The covenant not to compete has a 10-year life, which means it will be amortized over 10 years using the straight-line method. The annual amortization expense for the covenant would be $60,000/10 = $6,000.

The excess of the purchase price over the identifiable assets is $100,000, which represents the goodwill. Goodwill is not amortized for tax purposes.

Therefore, the total amortization deduction for 2016 would be $20,000 + $6,000 = $26,000. However, since goodwill is not amortized, the correct answer is (C) $20,000.

On January 2,2016,Fran Acquires a Business from Chuck