Reference no: EM132967717
Question - Peace Corporation acquired 100 percent of Soft Inc. in a nontaxable transaction on December 31, 20X1. The following balance sheet information is available immediately following the transaction:
Peace Corporation Soft Inc. Book Value Fair Values Book Value Fair Values
Cash $31,000 $31,000 $13,000 $13,000
Accounts Receivable, net 51,000 51,000 12,000 12,000
Inventory 78,000 85,000 5,000 10,000
Deferred Tax Asset 9,000 4,000 ?
Investment in Soft 88,000 88,000
Equipment, net 175,000 210,000 34,000 47,500
Patent 0 21,000
Total Assets $432,000 $68,000
Accounts Payable $52,000 $52,000 $10,000 $10,000
Accrued Vacation Payable 13,000 13,000
Deferred Tax Liability 4,000 4,000 ?
Long-Term Debt 105,000 115,000 6,000 6,000
Common Stock 130,000 9,000
Retained Earnings 128,000 39,000
Total Liabilities and Equity $432,000 $68,000
Additional Information
-The current and future effective tax rate for both Peace and Soft is 40 percent.
-The recorded deferred tax asset for Peace relates to the book-tax differences arising from the allowance for doubtful Accounts and the Accrued vacation payable. The expenses associated with each of these amounts will not be deductible for tax purposes until the related accounts receivable are written off or until the employee vacation is actually paid out.
-The recorded deferred tax asset for Soft is related solely to the book-tax difference arising from the allowance for doubtful accounts.
-The recorded deferred tax liability in both Peace and Soft relates solely to the book-tax differences arising from the depreciation of their respective equipment.
-Accumulated depreciation on the financial accounting records of Peace and Soft is $45,000 and $18,000, respectively.
-The Soft patent was identified by Peace in the due diligence process and has not previously been recorded in the accounting records of Soft.
-The book and tax bases of all other assets and liabilities of Peace and Soft are the same.
Required -
a. Compute the tax bases of the assets and liabilities for Peace and Soft, where different from the amounts recorded in the respective accounting records.
b. Compute the fair value of the deferred tax assets and deferred tax liabilities for Soft.