Question

In early January, Burger Mania acquired 100% of the common stock of the Crispy Taco restaurant chain. The purchase price allocation included the following items: $6 million, patent; $4 million, trademark considered to have an indefinite useful life; and $6 million, goodwill. Burger Mania's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Burger Mania's income statement for the first year ended December 31 related to these items? (Enter your answer in dollars, not in millions (i.e. 5 should be entered as 5,000,000).)

Answer 1

The impairment expense that would appear in Burger Mania's income statement for the year ended December 31st is $1,200,000

Step-by-step explanation:

The patient of $6 million is meant to be amortized as it has a five-year service life.

The trademark of $4 million has indefinite useful life, hence could not be amortized.

The $6 million goodwill is meant to be tested for impairment annually,however there no further details provided in the question to enhance the impairment testing,as a result it is left at its value of $6 million with no amortization or impairment recorded against it.

Impairment expense=patient value/service life

patient's value is $6,000,000

patient service life is 5 years

impairment expense on patient =$6000,000/5 years

impairment expense on patient=$1,200,000

Answer 2

The amortization expense is $1,200,000.

Step-by-step explanation:

There are three intangible assets involved: patent, trademark, and goodwill.

Goodwill is not amortized but is tested for impairment each year. Moreover, Burger Mania's policy is to amortize intangible assets with finite useful lives only. This means that trademark is also not amortized as it is considered to have an indefinite useful life. Hence, only patent has to be amortized.

Burger Mania's amortization method is the straight-line method, no residual value, and a five-year service life. Hence,

Amortization expense = Asset value / Useful life

= $6,000,000 / 5 years

= $1,200,000

Hence, amortization expense worth $1,200,000 shall appear in Burger Mania's income statement for the first year ended December 31.