57. Mike Saxon is negotiating the purchase of a business. The final purchase pri

Question

57. Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1.2 million to $1.5 million. If a value of $1.2 million is used for a warehouse, the remainder of the purchase price, $800,000 , will be allocated to goodwill. If $1.5 million is allocated to the warehouse, goodwill be $500,000. Mike wants to know what affect each alternative will have on cost recovery and amortization during the first year. Under the agreement, Mike will take over the business on January 1 of next year. Write a letter to Mike in which you present your calculations and recommendation. Also, prepare a memo for the tax files. Mikes address is 200 Rolling Hills Drive, Shavertown, PA 18708.

Explanation / Answer

Alternative 1

Ware house

1,200,000 x 2.46(table 8-8)

29,532

Good will

800,000/15 years

53333

Total recovery

$82865

Alternative 2

Ware house

1,500,000 x 2.46(table 8-8)

36915

Good will

500,000/15 years

33333

Total recovery

$70248

Additional deductions in the first year under alterntiave 1

82,865-70248= 12617

Ware house

1,200,000 x 2.46(table 8-8)

29,532

Good will

800,000/15 years

53333

Total recovery

$82865

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