On January 1, Year 5, AB Company (AB) purchased 80% of the outstanding common shares of Dandy Limited (Dandy) for $8,000. On that date, Dandy’s shareholders’ equity consisted of common shares of $1,000 and retained earnings of $6,000. In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy’s assets and liabilities were equal to their carrying amounts and tax base except for the following:
Dandy has recorded deferred income taxes on its separate-entity balance sheet on all temporary differences. Dandy had a loss carry-forward of $800 as at December 31, Year 4. This carry-forward can be applied against taxable income in the future. Dandy did not previously recognize the benefit of the carry-forward because it was not sure whether it would earn $800 in taxable income in the future. Now that AB controls Dandy, AB is sure that Dandy will be able to utilize the loss carry-forwards because AB will transfer income-earning assets to Dandy if necessary to generate taxable income in Dandy. AB plans to utilize these loss carry-forwards as soon as possible.
Both companies use the straight-line method for amortizing their property, plant, and equipment and pay taxes at a rate of 40%. Dandy’s equipment had a remaining useful life of 10 years at the date of acquisition.
Dandy reported income before application of any loss carry-forwards as follows for the first three years after being acquired by AB:
Year Net income
Year 5............ $ 0
Year 6............ 100
Year 7............ 200
(a) Calculate goodwill at the date of acquisition. Be sure to consider the deferred tax implications on the acquisition differential.
(b) Calculate non-controlling interest at the date of acquisition.
(c) Prepare a schedule to show the amortization of the acquisition differential for the three-year period ending December 31, Year 7. Assume that the good-will impairment loss was $300 in Year 6, the deferred income tax liability is amortized at the same rate as the equipment, and the loss carry-forwards are applied against income as the income is earned.
(d) Explain why the acquisition differential related to the equipment gives rise to a deferred income tax liability.

  • CreatedJune 08, 2015
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