Assume that on October 1st Lee Corporation purchases all of the assets of Kay Corporation for $510,000. All of the identifiable assets of Kay Corporation have a fair market value of $420,000, including the patent, which has a fair market value of $36,000. Also, a covenant not to compete for 3 years costing $72,000 is included in the purchase agreement. Required:
a. If lee Corporation purchases the patent for $36,000, how much amortization expense may Lee Corporation deduct in the current year?
b. Assume that Lee Corporation purchases all of the assets of Kay Corporation for $510,000. All of the identifiable assets of Kay Corporation have a fair market value of $420,000, including the patent, which has a fair market value of $36,000. Also, a covenant not to compete for 3 years costing $72,000 is included in the purchase agreement. How much amortization expense may Lee Corporation deduct in the current year?

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

a) Assume Remaining life = 10 years

Corporation purchases the patent = $36,000

Current Amortization Value (October to December)

= (Purchase Value of Patent ÷ Remaining Life) × number of months ÷ total number of months in a year

= ($36,000 ÷ 10) × 3 months  ÷ 12 months

= $3,600 × 3 months  ÷ 12 months

= $900

Lee Corporation deducted $900 amortization expenses in the current year.

b).Goodwill

= Assets Purchasing Value of Kay Corporation -  Assets Purchasing Fair Market Value of Kay Corporation

= $510,000 - $420,000

= $90,000

Assume amortization period is = 15 years as it is for trade or business

Current Amortization Value (October to December)

= (Goodwill + Fair Market Value of Patent + Costing of 3 Years ÷ Amortization Period)  × number of months ÷ total number of months in a year

= ($90,000 + $36,000 + $72,000 ÷ 15) ×  3 months  ÷ 12 months

= $13,200 × 3 months  ÷ 12 months  

= $3,300

Lee Corporation deducted $3,300 amortization expenses in the current year.