On January 2, 2017, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2017?
A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.

Question

On January 2, 2017, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. ​
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2017?
A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.

Quizplus · Accepted Answer

The patent has a remaining life of 7 years, therefore amortization expenses for the patent will be $140,000/7 = $20,000 per year. The covenant not to compete has a remaining life of 10 years, therefore amortization expenses for the covenant will be $60,000/10 = $6,000 per year. The excess of purchase price over identifiable assets is $100,000 and should be amortized over 15 years (as this is the residual life of the intangibles).
Therefore, the total amortization deduction for 2017 will be $20,000 + $6,000 + ($100,000/15) = $20,000 + $6,000 + $6,667 = $32,667. Therefore, the correct answer is (C).

On January 2, 2017, Fran Acquires a Business from Chuck