a
Introduction:
Consolidation income tax issues: The legal structure of acquisition can result in a taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this, many acquisitions are structured to avoid classification as taxable transactions.
Any difference arising out of fair market value and tax basis should be recorded as
When companies in the consolidated group file separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
The computation of tax bases of the assets and liabilities of P and S, where differential from the amounts recorded in the respective accounting records.
a
Answer to Problem 10.28P
P | S | |
Tax bases of assets | $373,000 | $50,500 |
Tax bases of liabilities | $368,000 | $53,000 |
Explanation of Solution
Computation of tax bases of assets and liabilities:
P | S | |
Tax bases of assets: | ||
Total Assets | $383,000 | $53,000 |
Add: Provision for Doubtful Debts | $5,000 | $2,500 |
Less: Accumulated | ($15,000) | ($5,000) |
Tax bases of assets | $373,000 | $50,500 |
Tax bases of liabilities: | ||
Total Liabilities | $383,000 | $53,000 |
Less: Accrued Vacations Payable | ($15,000) | |
Tax bases of liabilities | $368,000 | $53,000 |
Working notes:
Computation of provision for doubtful debts:
P | S | |
$8,000 | $1,000 | |
Tax rate % | 40 | 40 |
Provision for doubtful debts accrued | $20,000 | $2,500 |
Less: Accounts payable | ($15,000) | |
Provision for doubtful debts | $5,000 | $2,500 |
Computation of accumulated depreciation:
P | S | |
$6,000 | $2,000 | |
Tax rate % | 40 | 40 |
Depreciation as per income tax | $55,000 | $15,000 |
Accumulated depreciation | 40,000 | 10,000 |
Depreciation as per income tax | $15,000 | $5,000 |
b
Introduction:
Consolidation income tax issues: The legal structure of acquisition can result in a taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this, many acquisitions are structured to avoid classification as a taxable transaction.
Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.
When companies in the consolidated group file separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
The fair value of deferred tax asset and liability for S
b
Answer to Problem 10.28P
S | |
Deferred tax assets | $1,000 |
Deferred tax liability | -$2,000 |
Explanation of Solution
Computation of tax bases of assets and liabilities:
S | |
Deferred tax asset: | |
Provision for doubtful debts | $2,500 |
Deferred tax asset | 1,000 |
Deferred tax liabilities: | |
Accumulated depreciation as per books records | $10,000 |
Less: Depreciation as per tax records | $15,000 |
Differences | $5,000 |
Differed tax liability | ($2,000) |
c
Introduction:
Consolidation income tax issues: The legal structure of acquisition can result in a taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this, many acquisitions are structured to avoid classification as a taxable transaction.
Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.
When companies in the consolidated group file separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
The consolidation entries needed to prepare the worksheet for P and S at the acquisition date
c
Explanation of Solution
Consolidation entry:
Debit $ | Credit $ | |
Cash | 8,000 | |
12,000 | ||
Deferred tax asset | 1,000 | |
Inventory | 10,000 | |
Equipment | 40,000 | |
Patient | 20,000 | |
2,000 | ||
Accounts payable | 13,000 | |
Deferred tax liability | 2,000 | |
Long term debt | 8,000 | |
| 10,000 | |
Investment in S | 60,000 | |
(Being assets and liabilities recognized at fair value in P on acquisition) |
Computation of Goodwill
Investment in S | $60,000 | |
Less: Net assets: | ||
Cash | $8,000 | |
Accounts receivable net | $12,000 | |
Inventory | $10,000 | |
Deferred tax assets | $1,000 | |
Equipment | $30,000 | |
Patient | $20,000 | |
Liabilities: | ||
Accounts payable | ($13,000) | |
Deferred tax liability | ($2,000) | |
Long term debt | ($8,000) | |
($58,000) | ||
Goodwill | $2,000 |
d
Introduction:
Consolidation income tax issues: The legal structure of acquisition can result in a taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this, many acquisitions are structured to avoid classification as a taxable transaction.
Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.
When companies in the consolidated group file separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
The consolidation worksheet for P and S at the date of acquisition
d
Answer to Problem 10.28P
Consolidated balance sheet total $416,000
Explanation of Solution
Consolidation worksheet:
P $ | S $ | Debit$ | Credit$ | Consolidation $ | |
Assets: | |||||
Cash | 30,000 | 8,000 | 38,000 | ||
Accounts receivable | 50,000 | 12,000 | 62,000 | ||
Deferred tax assets | 8,000 | 1,000 | 9,000 | ||
Investment in S | 60,000 | 60,000 | 0 | ||
Inventory | 75,000 | 10,000 | 85,000 | ||
Equipment | 160,000 | 40,000 | 200,000 | ||
Patient | 20,000 | 20,000 | |||
Goodwill on consolidation | 2,000 | 2,000 | |||
Total Assets | 383,000 | 33,000 | 416,000 | ||
Liabilities: | |||||
Accounts payable | 62,000 | 13,000 | 75,000 | ||
Accrued vacation payable | 15,000 | 15,000 | |||
Deferred tax liabilities | 6,000 | 2,000 | 8,000 | ||
Long term debts | 100,000 | 8,000 | 108,000 | ||
Retained earnings | 50,000 | 10,000 | 60,000 | ||
Common stock | 150,000 | 150,000 | |||
Total liabilities | 383,000 | 33,000 | 416,000 |
Want to see more full solutions like this?
Chapter 10 Solutions
ADVANCED FINANCIAL ACCT.(LL)-W/CONNECT
- Assuming X and Y Corporation entered into a merger resulting to Y corporation being dissolved. X had inventories of goods amounting to P1,000,000.00 and Y had P600,000.00. Assume that there is available input tax unused by X and Y. Requirement: How will the inventories be treated in relation to business taxation?arrow_forwardHow does the amortization of tax-deductible goodwill affect the computation of a parent company’s income taxes?a. It is a deductible expense only if the parent owns at least 80 percent of subsidiary’s voting stock.b. It is deductible only as impairments are recognized.c. It is a deductible item over a 15-year period.d. It is deductible only if a consolidated tax return is filed.arrow_forwardChoose the correct. How does the amortization of tax-deductible goodwill affect the computation of a parent company’s income taxes?a. It is a deductible expense only if the parent owns at least 80 percent of subsidiary’s voting stock.b. It is deductible only as impairments are recognized.c. It is a deductible item over a 15-year period.d. It is deductible only if a consolidated tax return is filed.arrow_forward
- Plumas, Inc., owns 85 percent of Santa Cruz Corporation. Both companies have been profitable for many years. During the current year, the parent sold for $100,000 merchandise costing $70,000 to the subsidiary, which still held 20 percent of this merchandise at the end of the year. Assume that the tax rate is 25 percent and that separate tax returns are filed. What deferred income tax asset amount is created?a. –0–b. $300c. $1,500d. $7,500arrow_forwardIn its first year, Firm KZ recognized $427,300 ordinary business income and a $13,590 loss on the sale of an investment asset. In its second year, Firm KZ recognized $500,800 ordinary business income, a $19,300 Section 1231 gain, and a $7,400 Section 1231 loss on two sales of operating assets. * I only need Requirement D to be solved. Required: d. Compute KZ's deferred tax asset or liability (identify which) on its balance sheet on the last day of the second year.arrow_forwardP Corporation acquires all of S Corporation's stock at the close of business on December 31 of Year 1. The corporations, which file on the calendar year, begin filing a consolidated tax return for Year 2. The corporations report the following taxable incomes (losses), before any net operating loss (NOL) deduction, for Years 1 through 5: Taxable Income Before NOL deduction Group Member Year 1 Year 2 Year 3 Year 4 Year 5P $97,000 $128,000 $70,000 $(12,000) $97,000S (62,000) (20,000) 24,000 39,000 49,000Consolidated taxable income (before NOL deduction) N/A $108,000 $94,000 $27,000 $146,000N/A = Not applicable P and S have no NOLs before Year 1. Ignore the Sec. 382 loss limitation that might apply to P's acquisition of S, assume that the acquisition does not qualify as a reverse acquisition, and assume that Year…arrow_forward
- Corporation P owns 93 percent of the outstanding stock of Corporation T. This year, the corporation’s records provide the following information: Corporation P Corporation T Ordinary operating income (loss) $ 500,000 $ (200,000) Capital gain (loss) (8,300) 6,000 Section 1231 gain (loss) (1,000) 5,000 Required: Compute each corporation’s taxable income if each files a separate tax return. Compute consolidated taxable income if Corporation P and Corporation T file a consolidated tax return. My solutions: 1. Corporation P: $499,000 and Corporation T: ($189,000), 2. $310,000 I missed this problem on my homework. Could you please explain how to get the correct answer?arrow_forwardA. At the end of the first year of operations, an entity had taxable temporary differences totaling P1,000,000. Of this total, P500,000 relates to current items. The entity also had deductible temporary differences totaling P3,000,000, P250,000 of which relates to current items. Pretax financial income for the current year was P10,000,000. The tax rate is 25%. 1. What amount should be reported as current tax expense for current year?2. What is the net deferred tax expense or benefit for the current year?arrow_forwardONLY SOLVE PART D And E Panther Corporation reported taxable income of $750,000 from operations this year. During the year, the company made a distribution of land to its sole shareholder, Sam Panetto. The land’s fair market value was $100,000 and its tax and E&P basis to Panther was $167,000. Sam assumed a mortgage attached to the land of $20,000. The company had accumulated E&P of $1,000,000 at the beginning of the year. The federal tax rate is 21%. a. Compute Panther’s total taxable income and federal income tax. b. Compute Panther’s current E&P. c. Compute Panther’s accumulated E&P at the beginning of next year. d. What amount of dividend income does Sam report as a result of the distribution. e. What is Sam’s tax basis in the land he received from Tiger?arrow_forward
- Pear, Inc. generates a $100,000 net operating loss in 2022. Plum, Inc. generates $500,000 of taxable income. Compute the 2022 tax if Pear and Plum do/do not file a consolidated return. Multiple choice question. $84,000 if consolidated; $84,000 if not consolidated $105,000 if consolidated; $105,000 if not consolidated $84,000 if consolidated; $105,000 if not consolidated. $105,000 if consolidated; $84,000 if not consolidatedarrow_forwardChoose the correct. Baratheon Company purchases all of Tyrell Company for $450,000 in cash. On that date, the subsidiary has net assets with a $454,000 fair value but a $310,000 book value and tax basis. The tax rate is 40 percent. Neither company has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?a. $53,600b. $123,600c. $23,600d. $39,600arrow_forwardAssume that Puritan Corp. operates in an industry for which NOL carryback is allowed. Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: 2020 $ 353,000 2021 (596,000 ) 2022 708,000 Puritan's tax rate is 37% for all years. Puritan elected a loss carryback.As of December 31, 2021. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback. What did Puritan report on December 31, 2021, as the deferred tax asset for the NOL carryforward?arrow_forward