Question
k. ii. For tax purposes, goodwill is allowed to be amortized annually and is, therefore, a deductible expense in a companys tax return.ZAGG amortizes goodwill
k. ii. For tax purposes, goodwill is allowed to be amortized annually and is, therefore, a deductible expense in a companys tax return.ZAGG amortizes goodwill over a period of 15 years. Note 8 reports a deferred income tax asset of $1,801,000 related to goodwill at December 31, 2012. Explain how goodwill created a deferred income tax asset for ZAGG. Show how ZAGG arrived at this number. You may assume a 35% federal statutory tax rate and a 3% blended state statutory tax rate and that ZAGG began amortizing goodwill for tax purposes starting in July, 2011. [Hint: determine the net (i.e., after amortization) value of goodwill for tax purposes to compare to the net book value of goodwill].
-227- ZAGG INC AND SUBISDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXCERPTS) (Dollars, units, & shares in thousands, except per share data) (7) GOODWILL & INTANGIBLE ASSETS Impairment of Goodwill and Intangible Assets For the year ended December 31, 2012, the Company recorded an impairment of goodwill in the amount of $5,441 for its iFrogz reporting unit within the iFrogz operating segment when it was determined that the carrying value of goodwill exceeded its fair value, which was determined during an impairment analysis performed during the fourth quarter of 2012. In conjunction with the impairment test, the Company considered factors such as the overall decline in the market price of the company's stock and decline in market capitalization for a sustained period as indicators for potential goodwill impairment. In determining the amount of impairment within the analysis, we considered both the income approach, utilizing a discounted cash flow analysis, and market approach, which considers what other purchasers and sellers in the market have paid for companies reasonably similar to the reporting unit. The goodwill impairment of $5,441 is included as a component of impairment of goodwil and intangibles in the consolidated statement of operations The changes in the carrying amount of goodwill for the year ended December 31, 2012 and 2011, are as follows: 2012 2011 Balance as of January 1 6,925 S 6,925 (5,441) Gross goodwill Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss 6,925 Balance as of December 31 6,925 Gross goodwill Accumulated impairment losses 6,925 (5,441) 1,484 S 6,925 Net goodwill as of December 31 -227- ZAGG INC AND SUBISDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXCERPTS) (Dollars, units, & shares in thousands, except per share data) (7) GOODWILL & INTANGIBLE ASSETS Impairment of Goodwill and Intangible Assets For the year ended December 31, 2012, the Company recorded an impairment of goodwill in the amount of $5,441 for its iFrogz reporting unit within the iFrogz operating segment when it was determined that the carrying value of goodwill exceeded its fair value, which was determined during an impairment analysis performed during the fourth quarter of 2012. In conjunction with the impairment test, the Company considered factors such as the overall decline in the market price of the company's stock and decline in market capitalization for a sustained period as indicators for potential goodwill impairment. In determining the amount of impairment within the analysis, we considered both the income approach, utilizing a discounted cash flow analysis, and market approach, which considers what other purchasers and sellers in the market have paid for companies reasonably similar to the reporting unit. The goodwill impairment of $5,441 is included as a component of impairment of goodwil and intangibles in the consolidated statement of operations The changes in the carrying amount of goodwill for the year ended December 31, 2012 and 2011, are as follows: 2012 2011 Balance as of January 1 6,925 S 6,925 (5,441) Gross goodwill Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss 6,925 Balance as of December 31 6,925 Gross goodwill Accumulated impairment losses 6,925 (5,441) 1,484 S 6,925 Net goodwill as of December 31
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