Question

King's Road recently acquired all of Oxford Corporation's stock and is now consolidating the financial data of this new subsidiary. King's Road paid a total of $1,020,000 for Oxford, which has the following accounts:

	Fair Value			Tax Basis
Accounts receivable	$	210,000		$	210,000
Inventory		192,000			192,000
Land		175,000			175,000
Buildings		187,000			142,000
Equipment		222,750			154,000
Liabilities		(223,000	)		(223,000	)

1. What amount of deferred tax liability arises in the acquisition?

2. What amounts will be used to consolidate Oxford with King's Road at the date of acquisition?

3. On a consolidated balance sheet prepared immediately after this takeover, how much goodwill should King's Road recognize? Assume a 40 percent effective tax rate.

Answer 1

a.

Deferred tax liability arises from temporary differences. DTL is symbol of taxes payable in the future and the taxes that are currently due. Temporary differences are capable of reversal in the future.

Differences in

Building = 187,000 – 142,000 = 45,000

Equipment = 222,750 – 154,000 = 68,750

Net assets difference = 113,750

Deferred tax liability = difference between fair value and tax value as above X 40% = 113,750*40% = 45,500

b.Amounts to be used to consolidate at time of acquisition

Accounts receivable	210,000
Inventory	192,000
Land	175,000
Building	187,000
Equipment	222,750
Total assets	986,750
Less: liabilities	223,000
Net assets	763,750

c.

Computation of goodwill to be recognized on consolidated balance sheet.

Particulars	Amount ($)
Amount paid to acquire company	1020,000
Value of assets taken over                           986,750
Less: liability                                                   223,000
Less: deferred tax liability                             45,500
Net assets taken over	718,250
Goodwill	301,750

Hence, goodwill to be recognized would be $ 301,750

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