Peace Corporation acquired 100 percent of Soft Inc. in a nontaxable transaction on December 31, 20X1. The
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Question:
Peace Corporation acquired 100 percent of Soft Inc. in a nontaxable transaction on December 31, 20X1. The following balance sheet information is available immediately following the transaction:
Peace Corporation | Soft Inc. | |||||||||||||||||
Book Value | Fair Values | Book Value | Fair Values | |||||||||||||||
Cash | $ | 38,000 | $ | 38,000 | $ | 15,000 | $ | 15,000 | ||||||||||
Accounts Receivable, net | 52,000 | 52,000 | 15,000 | 15,000 | ||||||||||||||
Inventory | 77,000 | 84,000 | 7,000 | 11,000 | ||||||||||||||
Deferred Tax Asset | 9,000 | 3,000 | ? | |||||||||||||||
Investment in Soft | 86,000 | 86,000 | ||||||||||||||||
Equipment, net | 180,000 | 215,000 | 32,000 | 45,000 | ||||||||||||||
Patent | 0 | 23,000 | ||||||||||||||||
Total Assets | $ | 442,000 | $ | 72,000 | ||||||||||||||
Accounts Payable | $ | 53,000 | $ | 53,000 | $ | 14,000 | $ | 14,000 | ||||||||||
Accrued Vacation Payable | 13,000 | 13,000 | ||||||||||||||||
Deferred Tax Liability | 5,000 | 3,000 | ? | |||||||||||||||
Long-Term Debt | 110,000 | 120,000 | 9,000 | 9,000 | ||||||||||||||
Common Stock | 140,000 | 10,000 | ||||||||||||||||
Retained Earnings | 121,000 | 36,000 | ||||||||||||||||
Total Liabilities and Equity | $ | 442,000 | $ | 72,000 | ||||||||||||||
Additional Information
- The current and future effective tax rate for both Peace and Soft is 40 percent.
- The recorded deferred tax asset for Peace relates to the book-tax differences arising from the allowance for doubtful Accounts and the Accrued vacation payable. The expenses associated with each of these amounts will not be deductible for tax purposes until the related accounts receivable are written off or until the employee vacation is actually paid out.
- The recorded deferred tax asset for Soft is related solely to the book-tax difference arising from the allowance for doubtful accounts.
- The recorded deferred tax liability in both Peace and Soft relates solely to the book-tax differences arising from the depreciation of their respective equipment.
- Accumulated depreciation on the financial accounting records of Peace and Soft is $41,000 and $14,000, respectively.
- The Soft patent was identified by Peace in the due diligence process and has not previously been recorded in the accounting records of Soft.
- The book and tax bases of all other assets and liabilities of Peace and Soft are the same.
Required:
a. Compute the tax bases of the assets and liabilities for Peace and Soft, which were different from the amounts recorded in the respective accounting records.
Related Book For
Fundamentals of Advanced Accounting
ISBN: 978-0077862237
6th edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
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