Question: Fontana Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2013, these licensing

Fontana Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2013, these licensing agreements have a fair value of $750,000 and represent Fontana's sole asset. Although Fontana currently has no liabilities, because of recent operating losses, the company has a $120,000 net operating loss (NOL) carry forward. On January 1, 2013, Catalan, Inc., acquired all of Fontana's voting stock for $900,000. Catalan expects to extract operating synergies by integrating Fontana's software into its own products. Catalan also hopes that Fontana will be able to receive a future tax reduction from its
NOL. Assume an applicable federal income tax rate of 35 percent.
a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the
NOL carry forward, how much should Catalan recognize from the acquisition?
b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carry forward, how much should Catalan recognize from the acquisition?

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