sunday morning fsa fun

Assume Company P acquires Company T for $100 million. The fair market value of Company T’s net tangible assets is $75 million. The only differences in fair market value of the assets and liabilities is in property, plant, and equipment (PP&E), which has a book value of $20 million and a fair market value of $25 million. No other intangible assets are identified. The PP&E has a remaining useful life of ten years. Company P has a company policy of amortizing all intangible assets over 20 years. The acquisition takes place on October 1, 2006, and is accounted for using the purchase method according to U.S. GAAP. Company P has a 31st December fiscal year end. The combined amount of incremental amortization of intangible assets and depreciation of PP&E attributable to the write-up of assets under the purchase method that should be taken by Company P in 2006 is closest to: A) $375,000. B) $500,000. C) $125,000. D) $1,500,000.

A?

C

I got C too. Under US GAAP you can’t amortize goodwill. For this problem, you are left with the increase in depreciation. Originally you were depreciating the PPE with a depreciable base of $20 million, now your depreciable base is $25 million. $5,000,000/10 = $500,000 increase in annual depreciation The acquisition takes place on Oct. 1st and fiscal year end is on Dec. 31st so there is only 25% (3/12) of additional depreciation from the increased depreciable base. $500,000 * .25 = $125,000

Does the intagible asset have to be goodwill?

mwvt9 Wrote: ------------------------------------------------------- > Does the intagible asset have to be goodwill? Since the types of intangible assets are not mentioned, I would presume it to be goodwill.

Im gonna go with B on this one. you are writing up your PP&E by 5 million. Therefore, your d&a expense will also increase to the tune of 500k b/c you have 10 yrs remaining.

you guys are impressive. The correct answer was C) $125,000. Goodwill is not permitted to be amortized under U.S. GAAP. The company policy is irrelevant here. The fair value increment of PP&E of $5 million should be amortized over its remaining useful life of ten years. This results in annual amortization of $500,000. Pro-rated for three months beginning from October 1st, the amount of amortization in 2004 is $500,000 × 0.25 = $125,000.

i forgot to pro-rate it as well.

crapper…i missed the Oct part

I got C as well. It said there was no intangible assets so that just extra info. Niblita75 expained it well enough.

Well done.

I am trying to get through all of the other material and learn this from John Harris