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
Required:
(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.

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Fair value $950 Carrying value $700 Tax base $600 Equipment