Mitzy's Muffins Ltd.purchased a commercial baking system for $150,000 at the beginning of 20X1.The estimated economic life of the system is 10 years and Mitzy's uses straight-line amortization.At the beginning of 20X3,Delicious Bakeries Ltd.acquired Mitzi's in a business combination.At the time of acquisition,Mitzi's baking system had a fair value of $140,000.At the end of 20X3,how much amortization expense should Mitzi report?

Question

Quizplus · Accepted Answer

The book value of the baking system at the time of acquisition was $112,500 as it would have been amortized over two years. The fair value of the baking system at the time of acquisition was $140,000. Therefore, there is a difference of $27,500 between the book value and the fair value, which represents the amount of goodwill. Mitzy's should continue to amortize the baking system based on its original cost of $150,000 over its remaining useful life of eight years. Therefore, the annual amortization expense is $15,000 ($150,000/10 years).