Question

Problem 1 Your client. Lewison International, has informed you that it has reached an agreement with Hette Company to acquire all of Herro's, assets. This transaction will be accomplished through the issue of Lewison's common stock. After your examination of the financial statements and the acquisition agreement, you have discovered the following important facts. The Lewison common stock issued has a fair value of $650,000. The fair value of Herro's assets, net of all liabilities, is $700,000. All asset book values equal their fair values except for a machine and a building. The machine is valued at $150,000 and was originally purchased three years ago by Herro for $171,500. This machine has been depreciated using the sum-of-the-years' digit wethod with an assumed useful life of 7 years and a salvage value of $17,150. On the other hand, the building is valued at $190,000 and was originally purchased five years ago by Herre for $165,000. This machine has been depreciated using the double-dedining balance method with an assumed useful life of 11 years and a salvage value of $19,800. The acquisition is to be considered a tax-free exchange for tax purposes. Assuming a 25% tax rate, what amounts will be recorded for the machine, building, deferred tax liability, deferred tax asset, and goodwill and/or gains on acquisition?

Answer 1

Answer :

					Fair Value	DTA/(DTL)
					IN EXCESS	Tax saving on dta
Given the fair value of asset (Excluding Machine and Building)				360000		@25%
Book value Given the fair value of building				360000	0	0
				190000
Book value	165000
Useful life	11
Depreciation rate	1/11	0.18
wdv for 5 years	165000*(0.82)*0.82*0.82*0.82*0.82			61172.07	128827.93	-32207
Given fair value of machine				150000
Book value	171500
Useful life 7
Depreciation	36750	WDA		134750	15250	-3812.5
					DTA	-36019.5
Gain on Acquisition
Fair value of Asset		700000
(-) Common stock issued		-650000
(-) Differed tax liability		-36019	13981