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.
B) The additional value of PP&E will be amortized over 10 years: (25-20) / 10 = 0.5 The mention of intangibles is just there to mislead you. The company doesn’t have any intangibles, and the only intangible that wil be created by the acquisition is Goodwill. And goodwill will not be amortized.
Crap, acquisition occured on Oct 1st 0.5 X (3/12) = 0.125 The correct answer is D)