Chapter 10, Problem 10.13Q

To determine

Consolidation income tax issues:the legal structure of an acquisition can result in a taxable or non-taxable transactions. In taxable transaction, the assets acquired and liabilities assumed will have 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 transaction.

Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.

how does the unrealized profits on intercompany transfers affect the amount reported as income tax in consolidated financial statements.