Chapter 10, Problem 10.28P

a

To determine

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 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 computation of tax bases of the assets and liabilities of P and S, where differential from the amounts recorded in the respective accounting records.

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 Depreciation	($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
Deferred tax assets	$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
Deferred tax liability	$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

To determine

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

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

To determine

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

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
Goodwill on consolidation	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

To determine

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

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