Question

Answer given. Please explain the calculation

On January 1, 2021, Eisman Company purchased 100% of the common stock Kandler Enterprises for $600,000. This transaction is a “nontaxable” acquisition under the Internal Revenue Code. On the date of acquisition, Kandler had common stock of $200,000 and retained earnings of $280,000. The fair values of Kandler’s net assets equal their respective book values except for equipment that is undervalued by $30,000 and an unrecorded brand name valued at $45,000. Assume that the tax bases of Kandler’s pre-acquisition identifiable net assets equal their book values. Kohler’s tax effective tax rate is 30%.

1) What is the amount of deferred taxes that result from this combination? Answer =  $13,500 deferred tax liability

2) What is the amount of goodwill recorded in connection with this combination? Answer = $58,500

Answer 1

	Computation of Tax
		Tax base	Accounts base	Taxable temporary difference
	Undervaluation of equipment	0	$30,000	NA	(Nil, since, Kandler enterprises is non taxable acquisition, hence, deferred tax assets can't be created )
	Unrecorded brand value	$0	$45,000	$45,000
1)	Taxable temporary difference	$45,000
	Rate of effective tax	30%
		$13,500	Deferred tax liability
2)	Common stock	$200,000
	Retained earnings	$280,000
	Net assets	$480,000	(By Accounting Equation: Assets = Liabilities + Stockholders' equity, Stockholder's equity = Assets - Liabilitity)
	Add: Fair value adjustments	75000	(45,000+30,000)
	Less: Deferred tax liability	$13,500	(calculated above)
	Identifibale Net Assets	$541,500	(480,000+75000-13500)
	Consideration paid	$600,000
	Goodwill	$58,500	(600,000-541,500)