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 $900,000 for Oxford, which has the following accounts:

	Fair Value			Tax Basis
Accounts receivable	$	160,000		$	160,000
Inventory		218,000			218,000
Land		111,000			111,000
Buildings		224,250			165,000
Equipment		235,250			175,000
Liabilities		(264,000	)		(264,000	)

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 30 percent effective tax rate.

Answer 1

Answer:

1.

Calculation of Deffered tax liability:

Description	Fair value	Tax basis	Difference
Accounts receivable	$ 1,60,000	$ 1,60,000	0
Inventory	$ 2,18,000	$ 2,18,000	0
Land	$ 1,11,000	$ 1,11,000	0
Buildings	$ 2,24,250	$ 1,65,000	$ 59,250
Equipment	$ 2,35,250	$ 1,75,000	$ 60,250
Liabilities	($ 2,64,000)	($ 2,64,000)	0
Net assets	$ 6,84,500	$ 5,65,000	$ 1,19,500
Total difference			$ 1,19,500
Tax rate			30%
Deferred tax liability	= $ 1,19,500*30% =$ 1,19,500*30/100 = $ 35,850		$ 35,850

2.

Oxford corporation's accounts will be consolidated as follows:

3

Description	Fair value
Accounts receivable	$ 1,60,000
Inventory	$ 2,18,000
Land	$ 1,11,000
Buildings	$ 2,24,250
Equipment	$ 2,35,250
Liabilities	($ 2,64,000)
Net assets	$ 6,84,500

3.

Calculation of goodwill:

Description	Amount	Amount
Consideration paid to acquire		$900,000
Value of assets taken over	$ 9,48,500
Liabilities	($ 2,64,000)
Deferred tax liability	($ 35,850)
Net assets taken over		$ 6,48,650
Good will	=$ 900,000 - $ 6,48,650 =$ 2,51,350	$ 2,51,350