Tax effects of business combinations (taxable, market value differs from book value) Assume that on January 1, 2013, an investor company acquired 100% of the outstanding voting common stock of an investee company in exchange for $75,000. The transaction is a taxable asset acquisition under the Internal Revenue Code. The following financial statement information is for the investor company and the investee company on January 1, 2013, prepared immediately before this transaction. Current assets Noncurrent assets Total assets Liabilities Common stock ($1 par) Additional paid-in capital Retained earnings Total liabilities & equity Book Values Investor Investee $75,000 $40,000 112,500 50,000 $187,500 $90,000 $75,000 $40,000 10,000 5,000 65,000 40,000 37,500 5,000 $187,500 $90,000 Assume that the fair values of the investee's net assets approximated the recorded book values of the investee's net assets, except the fair value of the investee's identifiable noncurrent assets is $10,000 higher than book value. In addition, the investee's pre-transaction tax bases in its individual net assets approximate their reported book values. This difference relates entirely to tax-deductible items. Assume the marginal tax rate is 40% for the investor and investee. What amount of goodwill should be reported in the investor's consolidated balance sheet prepared immediately after this business combination? O$11,000 O$19,000 Ⓒ$15,000✔ O$25,000
Tax effects of business combinations (taxable, market value differs from book value) Assume that on January 1, 2013, an investor company acquired 100% of the outstanding voting common stock of an investee company in exchange for $75,000. The transaction is a taxable asset acquisition under the Internal Revenue Code. The following financial statement information is for the investor company and the investee company on January 1, 2013, prepared immediately before this transaction. Current assets Noncurrent assets Total assets Liabilities Common stock ($1 par) Additional paid-in capital Retained earnings Total liabilities & equity Book Values Investor Investee $75,000 $40,000 112,500 50,000 $187,500 $90,000 $75,000 $40,000 10,000 5,000 65,000 40,000 37,500 5,000 $187,500 $90,000 Assume that the fair values of the investee's net assets approximated the recorded book values of the investee's net assets, except the fair value of the investee's identifiable noncurrent assets is $10,000 higher than book value. In addition, the investee's pre-transaction tax bases in its individual net assets approximate their reported book values. This difference relates entirely to tax-deductible items. Assume the marginal tax rate is 40% for the investor and investee. What amount of goodwill should be reported in the investor's consolidated balance sheet prepared immediately after this business combination? O$11,000 O$19,000 Ⓒ$15,000✔ O$25,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Tax effects of business combinations (taxable, market value differs from book value)
Assume that on January 1, 2013, an investor company acquired 100% of the outstanding voting common stock of an investee company in exchange for $75,000. The transaction is a taxable asset acquisition under
the Internal Revenue Code. The following financial statement information is for the investor company and the investee company on January 1, 2013, prepared immediately before this transaction.
Book Values
Current assets
Noncurrent assets.
Investor Investee
$75,000 $40,000
112,500 50,000
Total assets
$187,500 $90,000
Liabilities
$75,000 $40,000
Common stock ($1 par)
10,000 5,000
65,000
Additional paid-in capital
40,000
Retained earnings
37,500 5,000
Total liabilities & equity $187,500 $90,000
Assume that the fair values of the investee's net assets approximated the recorded book values of the investee's net assets, except the fair value of the investee's identifiable noncurrent assets is $10,000 higher
than book value. In addition, the investee's pre-transaction tax bases in its individual net assets approximate their reported book values. This difference relates entirely to tax-deductible items. Assume the
marginal tax rate is 40% for the investor and investee. What amount of goodwill should be reported in the investor's consolidated balance sheet prepared immediately after this business combination?
O$11,000
O$19,000
Ⓒ$15,000✔
O$25,000
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