Question

King's Road recently acquired all of Oxford Corporation's stock and is now consolidating the financial data of this new subsidiary. King's Road paid a total of $940,000 for Oxford, which has the following accounts:

	Fair Value			Tax Basis
Accounts receivable	$	112,000		$	112,000
Inventory		209,000			209,000
Land		108,000			108,000
Buildings		208,500			155,000
Equipment		293,750			232,000
Liabilities		(243,000	)		(243,000	)

A.What amount of deferred tax liability arises in the acquisition?

B.hat amounts will be used to consolidate Oxford with King's Road at the date of acquisition?

C.On a consolidated balance sheet prepared immediately after this takeover, how much goodwill should King's Road recognize? Assume a 30 percent effective tax rate.

A.

What amount of deferred tax liability arises in the acquisition?

	Deferred tax liability

B.

What amounts will be used to consolidate Oxford with King's Road at the date of acquisition? (Credit balances should be indicated with minus sign.)

	Assigned to specific accounts Acquisition consideration

C.

On a consolidated balance sheet prepared immediately after this takeover, how much goodwill should King's Road recognize? Assume a 40 percent effective tax rate.

	Goodwill

Answer 1

SOLUTION

(A) The assets and liabilities of Oxford (the subsidiary) will be consolidated at their individual net fair values ($688,250). However, both the buildings and equipment have a tax basis that is lower than fair value. Thus, for tax purposes, future depreciation expense will be lower on the tax return so that taxable income will exceed book income. The higher taxable income (anticipated in the future) creates a deferred tax liability at the time the combination is created.

	Tax Basis ($)	Fair Value ($)	Temporary difference ($)
Buildings	155,000	208,500	53,500
Equipments	232,000	293,750	61,750
Total temporary difference			115,250
Tax rate			40%
Deferred tax liability			46,100

(B&C)

	Amount ($)
Accounts receivable	112,000
Inventory	209,000
Land	108,000
Buildings	208,500
Equipment	293,750
Liabilities	(243,000)
Deferred tax liability	(46,100)
Assigned to specific accounts	642,150
Acquisition consideration	940,000
Excess assigned to goodwill	297,850