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: | ($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 | $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 | |
Accounts receivable | 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 | |
Retained earnings | 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 |
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ADV.FIN.ACCT. CONNECT+PROCTORIO PLUS
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