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    Amortization and Excess Earnings

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    Question 1:
    Breaker Company purchased a new piece of equipment on July 1, 2010 at a cost of $300,000.
    The equipment has an estimated useful life of 5 years and an estimated residual value of $25,000. The current year end is 12/31/10. Breaker records depreciation to the nearest month.
    The equipment is a Class 8 asset with a maximum CCA rate of 20%. Answer the following, being
    sure to show all calculations.

    a. What is straight-line amortization for 2011?

    b. What is CCA depreciation for 2011?

    c. What is double declining-balance depreciation for 2011?

    d. If Breaker expensed the total cost of the equipment at 7/1/10, what was the effect on 2010 and
    2011 income before taxes, assuming Breaker uses straight-line amortization? (i.e the amount
    overstated or understated each year)

    e. If, at the end of 2012, before depreciation for the year is recorded Breaker Company decides the equipment still has five more years of life beyond 12/31/12, with a residual value of $25,000, what is straight-line depreciation for 2012?
    (Assume straight-line used in all years.)

    Question 2:

    Jeremiah Inc. is being targeted for acquisition by Argo Corporation. As an analyst for Argo, you are asked to determine the goodwill that, pending various assumptions, may be inherent in this potential transaction. The available information relating to Jeremiah includes the following:

    Current net assets: $5.1 million.
    Expected return on net asset for industry: 10%
    Reported net income for the previous six consecutive years:

    Year Amount Year Amount
    2005 $710,000 2008 $745,000
    2006 $680,000 2009 $815,000
    2007 $980,000 2010 $835,000

    The earnings for 2007 included a $200,000 gain from the sale of a discontinued part of its business.

    Answer the following questions, but show all your calculations (If your answer is correct, but you have not correctly shown how you arrived at the answer, the credits will not be valid)

    a. Estimated goodwill by capitalizing average excess earnings at 14% is
    a. $1,791,667
    b. $760,833
    c. $2,029,762
    d. $1,654,331

    b. Assuming that excess earnings are expected to continue for 8 years, and ignoring the
    time value of money, estimated goodwill is
    a. $2,273,000
    b. $2,006,667
    c. $1,854,333
    d. $1,531,733

    c. Assuming that excess earnings are expected to continue for 8 years, and average excess
    earnings are discounted at 11%, estimated goodwill is (use interest table)
    a. $1,784,331
    b. $1,661,432
    c. $1,462,356
    d. $1,290,818

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    Solution Preview

    Running head: ACCOUNTING


    Question 1
    Straight line amortization
    Straight line depreciation = Cost of asset - Salvage value
    Asset useful life
    Straight line amortization = 300000 - 25000
    Straight line depreciation = $ 55000
    CCA depreciation
    CCA = d * Cost of asset
    where: d is the depreciation rate
    CCA for ...

    Solution Summary

    Amortization and excess earnings are examined.