Peace Corporation acquired 100 percent of Harmony Inc in anontaxable transaction on December 31, 20X1. The following balancesheet information is available immediately following thetransaction:
Peace Corporation
Harmony Inc
BookValue FairValues BookValue FairValues Cash $ 30,000 $ 30,000 $ 8,000 $ 8,000 Accounts Receivable,net 50,000 50,000 12,000 12,000 Inventory 75,000 82,000 7,000 10,000 Deferred Tax Asset 8,000 1,000 ? Investment inHarmony 60,000 60,000 Equipment, net 160,000 195,000 25,000 40,000 Patent 0 20,000 TotalAssets $ 383,000 $ 53,000 Accounts Payable $ 62,000 $ 62,000 $ 13,000 $ 13,000 Accrued VacationPayable 15,000 15,000 Deferred TaxLiability 6,000 2,000 ? Long-Term Debt 100,000 110,000 8,000 8,000 Common Stock 150,000 20,000 Retained Earnings 50,000 10,000 TotalLiabilities and Equity $ 383,000 $ 53,000
AdditionalInformation
1. The current and future effective tax rate for both Peace andHarmony is 40 percent.
2. The recorded deferred tax asset for Peace relates to the booktaxdifferences arising from the allowance for doubtful Accounts andthe Accrued vacation payable. The expenses associated with each ofthese amounts will not be deductible for tax purposes until therelated accounts receivable are written off or until the employeevacation is actually paid out.
3. The recorded deferred tax asset for Harmony is related solely tothe booktax difference arising from the allowance for doubtfulaccounts.
4. The recorded deferred tax liability in both Peace and Harmonyrelates solely to the booktax differences arising from thedepreciation of their respective equipment.
5. Accumulated depreciation on the financial accounting records ofPeace and Harmony is $40,000 and $10,000, respectively.
6. The Harmony patent was identified by Peace in the due diligenceprocess and has not previously been recorded in the accountingrecords of Harmony.
7. The book and tax bases of all other assets and liabilities ofPeace and Harmony are the same.
Required:
a. Compute the tax bases of the assets and liabilities for Peaceand Harmony, where different from the amounts recorded in therespective accounting records.
b. Compute the fair value of the deferred tax assets and deferredtax liabilities for Harmony.
c. Prepare all of the consolidation entries needed to prepare theworksheet for Peace and Harmony at the date of acquisition.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.)
d. Prepare the consolidation worksheet for Peace and Harmony at thedate of acquisition. (Values in the first two columns (the"parent" and "subsidiary" balances) that are to be deducted shouldbe indicated with a minus sign, while all values in the"Consolidation Entries" columns should be entered as positivevalues. For accounts where multiple adjusting entries are required,combine all debit entries into one amount and enter this amount inthe debit column of the worksheet. Similarly, combine all creditentries into one amount and enter this amount in the credit columnof the worksheet.)
Peace Corporation acquired 100 percent of Harmony Inc in anontaxable transaction on December 31, 20X1. The following balancesheet information is available immediately following thetransaction: |
Peace Corporation | Harmony Inc | |||||||||||
| BookValue | FairValues | BookValue | FairValues | |||||||||
| Cash | $ | 30,000 | $ | 30,000 | $ | 8,000 | $ | 8,000 | ||||
| Accounts Receivable,net | 50,000 | 50,000 | 12,000 | 12,000 | ||||||||
| Inventory | 75,000 | 82,000 | 7,000 | 10,000 | ||||||||
| Deferred Tax Asset | 8,000 | 1,000 | ? | |||||||||
| Investment inHarmony | 60,000 | 60,000 | ||||||||||
| Equipment, net | 160,000 | 195,000 | 25,000 | 40,000 | ||||||||
| Patent | 0 | 20,000 | ||||||||||
| TotalAssets | $ | 383,000 | $ | 53,000 | ||||||||
| Accounts Payable | $ | 62,000 | $ | 62,000 | $ | 13,000 | $ | 13,000 | ||||
| Accrued VacationPayable | 15,000 | 15,000 | ||||||||||
| Deferred TaxLiability | 6,000 | 2,000 | ? | |||||||||
| Long-Term Debt | 100,000 | 110,000 | 8,000 | 8,000 | ||||||||
| Common Stock | 150,000 | 20,000 | ||||||||||
| Retained Earnings | 50,000 | 10,000 | ||||||||||
| TotalLiabilities and Equity | $ | 383,000 | $ | 53,000 | ||||||||
| AdditionalInformation |
| 1. | The current and future effective tax rate for both Peace andHarmony is 40 percent. |
| 2. | The recorded deferred tax asset for Peace relates to the booktaxdifferences arising from the allowance for doubtful Accounts andthe Accrued vacation payable. The expenses associated with each ofthese amounts will not be deductible for tax purposes until therelated accounts receivable are written off or until the employeevacation is actually paid out. |
| 3. | The recorded deferred tax asset for Harmony is related solely tothe booktax difference arising from the allowance for doubtfulaccounts. |
| 4. | The recorded deferred tax liability in both Peace and Harmonyrelates solely to the booktax differences arising from thedepreciation of their respective equipment. |
| 5. | Accumulated depreciation on the financial accounting records ofPeace and Harmony is $40,000 and $10,000, respectively. |
| 6. | The Harmony patent was identified by Peace in the due diligenceprocess and has not previously been recorded in the accountingrecords of Harmony. |
| 7. | The book and tax bases of all other assets and liabilities ofPeace and Harmony are the same. |
| Required: |
| a. | Compute the tax bases of the assets and liabilities for Peaceand Harmony, where different from the amounts recorded in therespective accounting records. |
| b. | Compute the fair value of the deferred tax assets and deferredtax liabilities for Harmony. |
| c. | Prepare all of the consolidation entries needed to prepare theworksheet for Peace and Harmony at the date of acquisition.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.) |
| d. | Prepare the consolidation worksheet for Peace and Harmony at thedate of acquisition. (Values in the first two columns (the"parent" and "subsidiary" balances) that are to be deducted shouldbe indicated with a minus sign, while all values in the"Consolidation Entries" columns should be entered as positivevalues. For accounts where multiple adjusting entries are required,combine all debit entries into one amount and enter this amount inthe debit column of the worksheet. Similarly, combine all creditentries into one amount and enter this amount in the credit columnof the worksheet.) |
