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 $1,080,000 for Oxford, which has the following accounts:

	Fair Value			Tax Basis
Accounts receivable	$	148,000		$	148,000
Inventory		189,000			189,000
Land		182,000			182,000
Buildings		245,500			198,000
Equipment		259,250			194,000
Liabilities		(230,000	)		(230,000	)

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

A.

	Tax Basis ($)	Fair Value ($)	Temporary difference ($)
Buildings	198,000	245500	47,500
Equipment	194000	259250	65250
Total temporary difference			112,750
Tax rate			30%
Deferred tax liability			33,825

(B&C)

	Amount ($)
Accounts receivable	148,000
Inventory	189,000
Land	182,000
Buildings	245500
Equipment	259,250
Liabilities	(230,000)
Deferred tax liability	(33,825)
Assigned to specific accounts	759,925
Acquisition consideration	1,080,000
Excess assigned to goodwill	320,075