On January 1, 2017, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2018, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000, and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2019, the goodwill was not further impaired. In 2020, additional goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill in 2018, 2019, and 2020? Are the differences favorable or unfavorable? Are the differences permanent or temporary?
What will be an ideal response?
2018: $32,000 unfavorable, temporary book-tax difference; 2019: $18,000 favorable, temporary book-tax difference; 2020: $0 book-tax difference.
| Description | Amounts | Explanation | |||
| (1) | Goodwill initially recorded on acquisition in 2017 | $ | 270,000 | ||
| (2) | Annual goodwill amortization expense for tax | $ | 18,000 | (1)/15 years. | |
| (3) | Goodwill impairment recorded in 2018 | 50,000 | |||
| 2018 unfavorable book-tax difference | 32,000 | (2) - (3). | |||
| (4) | Goodwill impairment in 2019 | 0 | |||
| 2019 favorable book-tax difference | (18,000 | ) | (2) - (4). | ||
| (5) | Goodwill impairment in 2020 | 18,000 | |||
| 2020 book-tax difference | 0 | (2) - (5) There is no book-tax difference in 2019 because the amortization for tax purposes was equal to impairment expense. | |||
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