Question

On January 1, 2017, 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, 2017, how much amortization expense should it report?

Answer 1

Bumper Corp. should report an amortization expense of $80,000 on their income statement for the year ended December 31, 2017.

Step-by-step explanation:

Amortization expense refers to the systematic allocation of the cost of an intangible asset over its useful life. In this case, Bumper Corp. acquires a customer list for $400,000 which will generate value for at least 5 years. To calculate the annual amortization expense, we divide the initial cost of $400,000 by the estimated useful life of 5 years, resulting in an annual expense of $80,000.

However, since Bumper plans to sell the customer list at the end of 3 years for $62,500, we need to take this into account. We calculate the remaining book value after 3 years as follows: Initial cost ($400,000) - Accumulated amortization ($80,000 x 3) - Estimated resale value ($62,500). The remaining book value is $117,500.

Therefore, on Bumper's income statement for the year ended December 31, 2017, the amortization expense should be $80,000.