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On January 18th of the current year, J Inc. acquired 85% of the shares of K...

On January 18th of the current year, J Inc. acquired 85% of the shares of K Inc. from an arm’s length person. At that time, K Inc. owned two non-depreciable capital assets: Land (Value $250,000; Adjusted cost base $320,000) and Investment in X Inc. (Value $40,000; Adjusted cost base $35,000). What is the amount of the reduction required to the adjusted cost base of the assets?

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Answer #1

Reduction required to the cost base of assests are-

Land : Increase the value by $70,000,

Investment: Decrease the value by $5000.

Reason : when there is acquisition of a company, The assest and liabilities in case of a merger by way of acquisition are taken in the books of new company at market value and hence the new companies books will reflect the true value of assests and the reduction or increase of assest and liabilities will be transferred to goodwill or capital reserve account based on the value .If the amount is positive i.e favourable then goodwill account and vice versa

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