Allocate fair value/book value differentials in a taxable purchase combination
Par Corporation acquired all the stock of Sad Corporation on January 1, 2011, for $280,000 cash, when the book values and fair values of Sad’s assets and liabilities were as follows (in thousands):
|
Book Values (Tax Bases) |
Fair Values |
|
|
Current assets |
$100 |
$100 |
|
Land |
20 |
60 |
|
Buildings—net |
80 |
110 |
|
Equipment—net |
60 |
70 |
|
Assets |
$260 |
$340 |
|
Liabilities |
$ 90 |
$ 90 |
|
Capital stock |
150 |
|
|
Retained earnings |
20 |
|
|
Equities |
$260 |
Sad’s buildings have a remaining life of 10 years, and the equipment has a useful life of 2 years from the date of the combination. During 2011, Sad had income of $50,000 and paid dividends of $20,000. Par and Sad are subject to a 35 percent tax rate.
REQUIRED
1. Prepare a schedule to allocate the excess fair value over book value to Sad’s assets, liabilities, deferred taxes, and goodwill at January 1, 2011, assuming the purchase was a taxable transaction.
2. Prepare a schedule to allocate the excess fair value over book value to Sad’s assets, liabilities, deferred taxes, and goodwill at January 1, 2011, assuming the purchase was a tax free reorganization.
3. Compute Par’s income from Sad for 2011 under both options.