Nuworth Co. acquired Wellam Co. in a business combination at December 31, 2012. Wellam has a capital asset that it has been amortizing at a rate of $20,000 per year. At the time of the acquisition, the asset had a book value of $140,000 and a fair value of $154,000. The asset has a remaining life of 7 years. With respect to this asset, how much amortization expense should Nuworth report on its December 31, 2013 consolidated financial statements?
A)$ 2,000
B)$ 5,400
C)$20,000
D)$22,000

Question

Quizplus · Accepted Answer

Nuworth should report amortization based on the fair value of the asset at the time of acquisition, which is $154,000, over its remaining useful life of 7 years. This results in an annual amortization expense of $154,000 / 7 = $22,000.