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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

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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
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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