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Amortization and Excess Earnings

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

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.