Question

Porpoise acquires 100% of Sunfish in a tax-free business combination. The applicable income tax rate is 30%. Based on the following information about the assets and liabilities of Sunfish, what amount should Porpoise record as a deferred tax balance for this acquisition for purposes of consolidation on the date of acquisition? Enter a minus sign to denote a credit (e.g.-200).

	Old book basis	Old tax basis	Fair value
Cash	$200,000	$200,000	$200,000
Equipment, net of depreciation	1,000,000	500,000	750,000
Patents	0	0	2,060,350
Accounts payable	(300,000)	(300,000)	(300,000)
Deferred income taxes payable	(150,000)	NA	?
Notes payable	(200,000)	(200,000)	(230,000)

Answer 1

	Old book basis	Old tax basis	Fair value
Cash	$           200,000	$200,000	$                   200,000
Equipment, net of depreciation	$        1,000,000	500,000	$                   750,000
Patents	$                    -	0	$                2,060,350
Accounts payable	$          (300,000)	-300,000	$                  (300,000)
Deferred income taxes payable	$          (150,000)	NA	$                   684,105
Notes payable	$          (200,000)	-200,000	$                  (230,000)
when the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability.
	Carrying Amount	Tax Basis	Temporary difference
Equipment, net of depreciation	$                750,000	500,000	$                          250,000
Patents	$            2,060,350	0	$                       2,060,350
			$                       2,310,350
Notes payable	$             (230,000)	-200,000	$                          (30,000)
			$                       2,280,350
Deferred Tax Liability @ 30%			$                          684,105