Question

On January 1, 2014, Bumper Corp. acquires a customer list for 400,000. Bumper estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Bumper plans to sell the customer list to another company for 62,500. On Bumper's income statement for the year ended December 31, 2014, how much amortization expense should it report?

Answer 1

Bumper Corp. should report an amortization expense of $67,500 for the customer list on its income statement for the year ended December 31, 2014, calculated by spreading the cost less the residual value over the asset's useful life.

Step-by-step explanation:

The amortization of an intangible asset like a customer list is the process of gradually writing off the cost of the asset over its useful life. To calculate the amortization expense for Bumper Corp.'s customer list on the income statement for the year ended December 31, 2014, we must consider the initial cost of the asset, the residual value at the end of its use, and the asset's useful life.

The initial cost of the customer list is $400,000, and Bumper Corp. estimates a residual value of $62,500 after 3 years. The useful life of the customer list is projected at 5 years. The yearly amortization expense can be calculated by subtracting the residual value from the cost and then dividing by the useful life. So, ($400,000 - $62,500) / 5 years = $67,500 per year.

Therefore, for the year ended December 31, 2014, Bumper Corp. should report an amortization expense of $67,500 for the customer list on its income statement.