Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1,200,000 to $1,500,000. If a value of $1,200,000 is used for the warehouse, the remainder of the purchase price, $800,000, will be allocated to goodwill. If $1,500,000 is allocated to the warehouse, goodwill will be $500,000.
Mike wants to know what effect each alternative will have on cost recovery and amortization during the first year. Under the agreement, Mike will take over the business on January 1 of next year. Write a letter to Mike in which you present your calculations and recommendation. Also prepare a memo for the tax files. Mike's address is 200 Rolling Hills Drive, Shavertown, PA 18708.