# amortization

In the following problem company is acquiring other company. Fair market value of pp&e is #25 million and book value is \$20 million and remaining life is 10 years. In the solution the difference of \$5Million is amoritized over 10 years. What exactly happens when they amorize? Is there \$500,000 (\$g5mil/10) amortization expense in income statement every year? Is amortization expense exactly same as how depreciation is treated? Is good will amorized in internation standard? ------------------------- Assume Company P acquires Company T for \$100 million. The fair market value of Company Ts 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) \$1,500,000. D) \$125,000. Your answer: A was incorrect. The correct answer was D) \$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.

This an old chestnut… can’t find the link but: 5m/10 then divide that by 4 is the answer. Forget goodwill, that cannot be amortised Adjust depn to take into account the 25% of 2006 remaining

allépourpêcher , Thanks for reply. I found couple of threads on same question. I want to make sure my understanding is correct. Here is what I understood 1. Amortization is done on excess price of PPE (book and market). So, there is amorization expense on income statement which is good for tax saving just like depreciation. 2. In addition to amortization, depreciation expense also applied on PP&E (\$20 Mill in this case) and it becomes expense in income statment. 3. Good will can’t be amortized in GAAP and can be amortized in international standard 4. Other than good will any other intangibles like patents can be amortized. in GAAP Am I correct? Appreciate for reviewing. Chinni