Paranich Co. acquired Crowley Co. in a business combination at December 31, 20X4. Crowley has a capital asset that it has been amortizing at a rate of $10,000 per year. At the time of the acquisition, the asset had a book value of $70,000 and a fair value of $77,000. The asset has a remaining life of seven years. With respect to this asset, how much amortization expense should Paranich report on its December 31, 20X5, consolidated financial statements?
A)$ 1,000
B)$ 7,700
C)$10,000
D)$11,000

Question

Quizplus · Accepted Answer

Paranich should report amortization expense based on the fair value of the asset at the time of acquisition, which is $77,000, over its remaining useful life of 7 years. This results in an annual amortization expense of $11,000 ($77,000 / 7 years).