Fernando decided he was tired of working for a living and wanted to own his own
ID: 2709232 • Letter: F
Question
Fernando decided he was tired of working for a living and wanted to own his own business and be his own boss from now on.He had saved some money from his current job and began looking for a business to buy.He worked with an accountant and a lawyer he knew to investigate whether owning a bowling alley might be both profitable and fun.After a year-long search, during which he actually worked at a bowling alley to see how the business worked, Fernando decided that after having paid his accountant/lawyer $7,500 in 2012 for the work searching for a bowling alley, and having learned how the business actually worked, he would give up the bowling alley idea and would prefer to buy an ice cream business.His brother happened to know a friend who was selling his business which included a truck, a building where the ice cream was made, the manufacturing equipment, some intangibles including a customer list (the business not only has an ice cream truck, but sells direct to grocery stores the ice cream that is manufactured in the building), the goodwill of the business and a covenant not to compete from the current owner for 3 years.Below are the values that the current owner and Fernando have separately decided the items are worth.The only thing they agree on is the total purchase price of $2,000,000.Finally, the close the deal on August 1, 2012.Your first task is to advise Fernando on the best tax answer for him regarding the purchase allocation.Your next task is to determine all of the tax consequences to Fernando of the transactions described in this problem for 2012, including all calculations to show what will be included on his return.
Item
Seller Valuation
Buyer Valuation
Ice Cream Truck
4,000
3,000
Manufacturing Equipment (used)
750,000
850,000
Building
200,000
150,000
Land
300,000
100,000
Customer List
250,000
300,000
Covenant
10,000
250,000
Goodwill
486,000
347,000
Total
2,000,000
2,000,000
Item
Seller Valuation
Buyer Valuation
Ice Cream Truck
4,000
3,000
Manufacturing Equipment (used)
750,000
850,000
Building
200,000
150,000
Land
300,000
100,000
Customer List
250,000
300,000
Covenant
10,000
250,000
Goodwill
486,000
347,000
Total
2,000,000
2,000,000
Explanation / Answer
As per transactions made by Fernando, the items on which valuation is incred are Ice Cream truck, Manufcaturing equipment, building, Land, Customer list, Covenant, Goodwill. The vauation is done on the basis of seller.
TAX INCURED = [0.10*{Total of Seller Valuation}]
= [0.10*2000000] = Rs. 200000/=
The tax incured as per the valuation done by the buyer is as follows,
TAX INCURED = [0.10*{Total of Buyer Valuation}]
= [0.10*2000000] = Rs. 200000/=
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