57. LO.2, 7, 10 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 $1.2 million to $1.5 million. If a value of $1.2 million is used for the warehouse, the remainder of the purchase price,

$800,000, will be allocated to goodwill. If $1.5 million 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.