Question

Power Corporation acquired 100 percent of Strip Corporation in a nontaxable transaction. The following selected information is available for Strip Corporation at the acquisition date: Accounts receivable, net Land Equipment Bond payable Strip Corporation Book Values Fair Values $ 30,000 $ 28,000 10,000 40,000 20,000 15,000 120,000 115,000 Tax Basis $ 30,000 10,000 5,000 120,000 Strip Corporation has never recorded an allowance for doubtful accounts; however, upon review of the accounts receivable detail, Power has determined that approximately $2,000 of the receivables are uncollectible. Several years ago, Strip purchased a small plot of land for an expanded parking area that has never been developed. An outside party has recently offered to purchase the land for $40,000. Power estimated the value of the equipment acquired with Strip to be $15,000. Strip issued $120,000 in bonds (at par) two years ago. Since that time, interest rates have changed, which has been reflected in the fair value of those bonds at the date of acquisition. The current and future tax rate for Power Strip Consolidated is 40 percent. Required: Compute the amounts to be included in the consolidated balance sheet as deferred tax asset, net or deferred tax liability, net resulting from the Strip acquisition. Total deferred tax assets acquired Total deferred tax liabilities acquired Deferred tax liability, net on the balance sheet

Answer 1

3 Account Receivable 4 Land 5 Equipment 6 Bond Payable Strip corporation Book value Fair Value Tax Basis $ 30,000.00 $ 28,000.00 $ 30,000.00 $ 10,000.00 $ 40,000.00 $ 10.000.00 $ 20,000.00 $ 15,000.00 $ 5,000.00 $120,000.00 $115,000.00 $120,000.00 7 40% 8 Tax Rate 9 10 Account Receivable to be recorded in books of account at Fair Value 11 Land to be recorded in books of account at Fair Value 12 Equipment to be recorded in books of account at Fair Value 13 Bond Payable to be recorded in books of account at Fair Value 16 17 Account Receivable Calculation of timing difference As per Books of Account As per tax Difference $ 28,000.00 $ 30,000.00 S (2.000.00) appreciation in value of land do not impact taxes S 40,000.00 $ 10,000.00 and net income $ 15,000.00 $ 5,000.00 $ 10.000.00 S 115,000.00 $120,000.00 S (5,000.00) 18 Land 19 Equipment 20 Bond Payable 21 22 Negative figure will create Deferred tax assets 23 Positive figure will create Deferred tax Liability 24 25 Total Deferred Tax Assets Required 26 Total Deferred Tax Liability Required 27 Deferred tax liability net on balance sheet (2000 + 5000) * 0.4 -10000) * 0.4 uolos (2.800 4.000 1,200