ExpertHard1 markMultiple Choice
CPA · Question 6 · Area 1: Financial Reporting
On January 1, Year 1, Acquirer Inc. purchased 100% of Target Corp. for $1,000,000. Target's equity consisted of $200,000 Capital Stock and $600,000 Retained Earnings. The fair value of Target's identifiable net assets was $900,000. The difference between fair value and book value was due to a patent with a 10-year remaining life. What is the annual amortization expense adjustment required for the consolidation worksheet for Year 1?
On January 1, Year 1, Acquirer Inc. purchased 100% of Target Corp. for $1,000,000. Target's equity consisted of $200,000 Capital Stock and $600,000 Retained Earnings. The fair value of Target's identifiable net assets was $900,000. The difference between fair value and book value was due to a patent with a 10-year remaining life. What is the annual amortization expense adjustment required for the consolidation worksheet for Year 1?
Answer options:
A.
$10,000
B.
$20,000
C.
$100,000
D.
$0
How to approach this question
1. Calculate Book Value of Net Assets (Stock + RE). 2. Compare to Fair Value of Net Assets. 3. The difference is allocated to the specific asset (Patent). 4. Calculate amortization on this difference.
Full Answer
A.$10,000✓ Correct
A
Book Value of Target = $200k + $600k = $800k. Fair Value = $900k. Difference = $100k allocated to Patent. This $100k step-up must be amortized over the 10-year life. Annual adjustment = $100,000 / 10 = $10,000.
Common mistakes
Calculating goodwill instead of the asset step-up; amortizing goodwill (which is not amortized).
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