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REG Practice Questions: Calculate Tax Amortization for Intangible Assets
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on how to calculate the tax amortization for intangible assets. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-practice-questions-explained-calculate-tax-amortization-for-intangible-assets/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:50 Question 1: Calculating the total amortization expense for a year 03:39 Question 2: Calculating the amortization for goodwill 05:15 Question 3: True and false statements about the amortization of intangible assets 08:07 Question 4: Determining which assets qualify under 197, then calculating the total amortization for the year 10:09 Question 5: Requirements under Section 197 12:03 Pillar Topics
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Hi, I'm Logan. In today's video, we're going to be covering how to calculate tax amortization for intangible assets
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but we're going to be doing it in the Super Fast CPA way, which is going straight into some questions to learn the material
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If you don't know much about our strategies or if this is the first video you're seeing from us
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make sure to go to superfastcpa.com to learn more about our strategies and especially sign up for our free one-hour training webinar
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where we go over the six key ingredients to passing the CPA exam. Again, it's one hour, it's free
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and it will save you months and months of struggling with your studying. Before we get into the questions, one more thing I want to say about this video
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I will only be going over five questions in this video, but Super Fast CPA members will have access to the full 10 questions that I'll do in the full video
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All right, with that said, let's dive into the questions to learn how to calculate tax amortization for intangible assets
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All right, here's the first question. Quantum Dynamics, a calendar year taxpayer, acquired the business assets of Velocity Enterprises on July 1st of the current year
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The assets included a patent valued at $900,000. The patent had a remaining legal life of 17 years, but Quantum Dynamics expects it to be valuable
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for only eight more years due to anticipated technological advances. In the same transaction, Quantum Dynamics also acquired a customer list valued at $600,000
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Quantum Dynamics has made no elections to use the alternative depreciation system
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What is the total amortization expense quantum dynamics can claim on these intangible assets for
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the current tax year? Right. So if you don't know much about intangible assets under tax law, you might be thinking that we'll just amortize it over these years, over eight years. This one doesn't even have an expected amortization period. So you might not really know where to go from this. But that's why we do the questions first to learn what we're supposed to learn. So take a second, read the question, pause the video if you need to just to make sure that you understand what it's asking. And when you're ready, come back and we'll unpause the video. And we'll go into the answer
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All right, so here's the answer, $50,000. So let's learn how this works
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The patent and customer list acquired by quantum dynamics are both Section 197 intangibles
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Okay, so under tax, there's Section 197. According to the Internal Revenue Code, Section 197, intangible assets are amortized
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on a straight line basis over a 15-year period regardless of their actual useful life
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First, we have to determine the annual amortization for each asset, so for the patent it would be $900,000 divided by 15 years
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So that'd be $60,000 a year. For the customer list annual amortization, it's $600,000 divided by 15 years
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equaling $40,000 a year. So a total of $100,000 of amortization in future years
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But in this year, as you'll see here, they got it in July
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So they only have half of the year to amortize these intangible assets
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So we take half of $60,000 and half of $40,000. So we get $30,000,000, and $50,000
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So that's the total amortization expense that can. can be taken for these assets. So the big thing that you need to pull from that is that
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assets that qualify under Section 197 as intangible assets when it comes to taxes are
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amortized over 15 years, regardless of how useful they think they'll be or how long they think
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they'll be useful. So that makes it pretty straightforward. And as you'll see as we go through
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this video, this is a pretty straightforward concept once you understand what counts as a Section
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197 intangible asset for taxes and now you understand those kinds of assets are amortized over 15 years that the gist of most of the stuff we going to learn here So let go ahead and go to the next question to learn more
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Orion LLC, a calendar year taxpayer, completed the acquisition of Zodiac Enterprises on October 1st, year one
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The acquisitions allocated purchase price was $800,000, of which $120,000, which attributed to Goodwill
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and $50,000 to an existing trademark with a 10-year remaining legal life
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Orion LLC also paid $30,000 for a demographic study related to the target market of Zodiac's product line
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Orion LLC began using the acquired assets in its business operations immediately upon acquisition
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For the year one corporate tax return, what amount can Orion claim the amortemization expense for the goodwill
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Okay, so with all that said, you always got to pay attention to the last part of the question
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It's just asking what can we do for the amortization of the goodwill
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So you honestly could probably do this question just based off of the previous question
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So all we have to look at is the Goodwill, which was $120,000
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So pause the video, think about it, and do the calculation. I bet you could get the correct answer
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And when you're ready, come back, I'm going to look at the answer. So $2,000
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So this $120,000 is going to be amortized over 15 years, and they got it in October
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So that's going to leave October, November, December, three months of the. year to amortize. So 120,000, divide 180 months. So that's $666.67 per month that they're going to
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amortize. But you just times that by three for three months and you get basically $2,000
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So that one's pretty straightforward. We just needed to calculate the amortization for the
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goodwill. All right, let's go to the next question. Okay, here's the next question. Which of the following
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statements is not true regarding the amortization of intangible assets under U.S. tax law
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intangible assets acquired in connection with the acquisition of a business are generally amortized
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over 15-year period. That seems right. We just learned about that. Section 197 intangibles are
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eligible for amortization, which includes goodwill, going concern value and certain other intangibles
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Okay. That sounds pretty good too. The amortization period for an intangible asset begins the month
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after the asset is acquired or the business starts, whichever is later. Okay. We haven't
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From what we've seen, it seems like it starts in the month of. So not sure about this month after, but we haven't really learned a ton about that yet
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So let's go ahead and read this next one. If an intangible asset has an indefinite life and is not subject to amortization
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it must be tested annually for impairment. Okay. So we haven't covered these two yet
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So think about it. Think if you can guess which one is correct
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But the most important thing when you're going through the questions first approach is
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this is your learning material. So even if we don't know this, it's okay. We're just going to look at the answer and see what we're supposed to learn
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So when you're ready, come back, and we're going to look at the answer here
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Okay, so the amortization period begins the month after. So that was wrong
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So let's read through these intangible assets acquired in connection with a business acquisition
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are typically amortized evenly over a 15 year period. Yep, that was right
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We knew that. Goodwill, going concern. Yep, over 15 years. The amortization period for an intangible asset under Section 197 actually begins in the month the asset is acquired or the business begins, not the month after
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So that was and then that was what I was pointing out there is we hadn specifically looked at that yet but it was so it starts in the month that it was acquired or the month that the business began whichever was the latest one And then this is true So this is another thing
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we could learn. Intangible assets that are not subject to amortization because they have an indefinite
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useful life are not amortized, but must be reviewed at least annually for impairment. So there are
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some intangible assets, and you may learn a little bit more about this as you study this more
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Some things like patents have, sometimes we'll have, will be able to be renewed as much as for as long as the people who own the patent want
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So as long as they keep renewing it, it will last forever. And so therefore there's no amortization because until they decide to stop renewing it, the asset or the patent in this case will last forever
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So that's why indefinite useful life assets are not considered Section 197 intangible
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so they don't have a 15-year amortization period. They don't have an amortization period
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All right. We learned a few more things there. Let's go to the next question. Okay, here's the next question
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On June 1st, year three, a calendar year taxpayer established Quantum Solutions Corp
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and purchased a business for a total purchase price allocation as follows
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Advanced software algorithms for $300,000, an assembled workforce for $120,000, customer relationships for $180,000, and Goodwill for $360,000
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We need to determine the intention. assets that are eligible for amortization under section 197 and calculate the total
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amortization deduction for Quantum Solutions Corp for year three. Okay, so we have to figure out
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how much is, which of these qualify for the amortization, and then figure out the amortization
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for the year. Started June 1st, so this is going to be partial year amortization. So we're four
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questions in. Again, this is a pretty straightforward topic, so you probably already know how to do this
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So pause the video, work through it on your own, and when you're ready, come back, and we'll
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will look at the correct answer. Okay. 32,667. So again, this is for these intangible assets
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but the workforce, which, you know, again, is the workers of the other company. Obviously, that's
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not an intangible asset. Those are people. So that doesn't count as a 197 intangible. So everything
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else added up together is $840,000. And then we divide that by $15, and we get $56,000 a year for the amortization
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but then we only are able to take seven months of amortization because it started in June
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So, you know, seven twelfths or seven months multiplied by the $56,000 or divided by this $56, however you want to look at it
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equals the roughly $32,666.66 or and $67. So, again, pretty straightforward once you understand what counts as an intangible asset under Section 197
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So you just have to add up the basis, figure out if there's partial year amortization
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and then figure out what the amortization is for the current year that it's asking
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So let's go ahead and go to the next question. Okay, here's the next question. Which of the following assets would not meet the requirements to be considered a Section 197 intangible
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Okay, we've learned quite a few things from the other questions. So we might be able to, or you probably will be able to figure out which one of these is not an intangible asset
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So let's go ahead and read through them. The formula for a patent and drug. So again, that's a patent from another firm. The cost associated with a
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transfer of a lease agreement when a retail business is purchased Oh retail business Okay So potentially because again that was from an acquisition The expense is incurred for a marketing campaign developed by an advertising firm for its new product line That sounds a little fishy because it just sounds like that normal business not from an acquisition
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And the value of a customer list acquired from the purchase of a business. So think about it
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I probably really already gave you a hint, but when you're ready, come back and we'll look at the answer
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Okay, here's the answer. Yep, just like I was saying, that seemed a little fishy
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So this pretty much says everything that we've already read before. So section 197, it's a patent, so it has a finite useful life. And again, it's an intangible. And since it can be bought or sold independently, and it's used in the conduct of a business and it was acquired from another business, it can be an intangible asset under 197. B is considered a section 197 intangible asset because lease agreements are explicitly listed under section 197 as an intangible asset. We haven't gone over what's like explicitly listed necessarily
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lease agreements is one of those things that is listed there. The value of a customer list is
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typically a section 197 intangible because it is an asset that has value, can be sold independently
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and is used in a business to generate income. So a similar thing to the patent. And then finally
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this one is not correct because marketing expenses for an advertising campaign are not capitalized
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costs. It's not from purchasing another business. It's just the general course of business
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essentially. So of course, that one's not going to be amortized there. Okay, before we go any
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further, let's do another part of the process, which is pillar topics. Again, if you're not
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familiar with our strategies, we do the questions as our main learning tool. And a part of this is
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called pillar topics, where after you've done the questions, you will naturally glean, okay
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these are the things that I need to learn that I need to know based off of these questions for the
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exam. And so the pillar topics, again, is just the things that you learned, the things that
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are obviously important from the questions that you've done. So let's go ahead and do the
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other topics. So section 197 intent is 15 years for intangibles. Typically from acquisition of
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another business includes things like Goodwill customer lists. That's, I mean, that's the really
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big gist there is that things like Goodwill, customer lists, things like that that are not
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tangible assets that are acquired from another business typically are counted as intangible assets
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under Section 197 and have a 15 year amortization period. And that's pretty much the gist of it
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Again, you could get more in depth if you want for your pillar topics or maybe there's a
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pillar topic in there that you thought of that you think would be really important. So go
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ahead and do that yourself. But that's the idea behind pillar topics. You're just pulling out
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the basic information, the concepts that you apparently need to know based off of the questions
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All right, that's the end of this video. Again, I'm only doing five questions in this video
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whereas Super Fast CPA members will have access to the full video where I go over 10 questions
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If you liked this video, make sure to like it, leave a comment, and especially share with people
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you know who are studying for the CPA exam. Also, if you want to learn more about our stress
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Don't forget to go to superfastcpa.com and watch our free one-hour webinar training
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where we teach the six key ingredients to passing the CPA exam. It will save you months and months of struggling with your process
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Again, I'm Logan. Thanks for watching, and I'll see you in the next one
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