Yo Ltd. purchased a commercial food preparation system for $150,000 at the beginning of 2012. The estimated economic life of the system is 10 years and Yo uses straight-line amortization. At the beginning of 2014, Tilbury Ltd. acquired Yo in a business combination. At the time of acquisition, Yo's food preparation system had a fair value of $140,000. At the end of 2014, how much amortization expense should Yo report?

Question

Quizplus · Accepted Answer

Since Yo uses straight-line amortization, the annual amortization expense is calculated by dividing the cost of the system by its estimated economic life. Therefore, the annual amortization expense is:

$150,000 / 10 years = $15,000 per year

At the time of acquisition, the fair value of the system was $140,000, which means that the carrying value of the system was reduced to $140,000. However, the annual amortization expense should still be based on the original cost of $150,000.

Therefore, the amortization expense for 2014 is $15,000, regardless of the change in fair value due to the business combination. Option C is the correct answer.

Yo Ltd Purchased a Commercial Food Preparation System for $150,000 at at the Beginning