Question

On June 1 of year 1, Riverside Corp. (RC), a calendar-year taxpayer, acquired the assets of another business in a taxable acquisition. When the purchase price was allocated to the assets purchased, RC determined it had purchased $1,629,000 of goodwill for both book and tax purposes. At the end of year 1, RC determined that the goodwill had not been impaired during the year. In year 2, however, RC concluded that $485,000 of the goodwill had been impaired and wrote down the goodwill by $485,000 for book purposes.
Required:
a. What book-tax difference associated with its goodwill should RC report in year 1? Is it favorable or unfavorable? Is it permanent or temporary?
b. What book-tax difference associated with its goodwill should RC report in year 2? Is it favorable or unfavorable? Is it permanent or temporary?

Answer 1

Answer:

a. $63,350 temporary and favorable difference.

b. $376,400 temporary and unfavorable difference.

Explanation:

According to Federal tax codes, Goodwill is amortized for 180 months (15 years) on a straight line basis.

a. Company was purchased on June 1 which means that for year 1, 7 months would have gone by at year end.

Amortization = 1,629,000 * 7/180

= $‭63,350‬

Riverside will not deduct this from Goodwill in the books however.

In Year 1 therefore, the book-tax difference will be a favorable and temporary difference of $63,350

b. Amortization = 1,629,000 * 12/180

= $‭108,600‬

Riverside wrote down Goodwill by $485,000 for book purposes.

Temporary tax difference = 485,000 - 108,600

= $376,400

This is unfavorable.