Deferred Tax Effects
On January 1, 2012, Pruitt Company issued 25,500 shares of its common stock in exchange for 85% of the outstanding common stock of Shah Company. Pruitt”s common stock had a fair value of $28 per share at that time (par value of $2 per share). Pruitt Company uses the cost method to account for its investment in Shah Company and files a consolidated income tax return. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.
|
Book Value/ |
|||
|
Item |
Tax Basis |
Fair Value |
Excess |
|
Receivables (net) |
$125,000 |
$ 125,000 |
$ 0 |
|
Inventory |
167,000 |
195,000 |
28,000 |
|
Land |
86,500 |
120,000 |
33,500 |
|
Plant assets (net) |
467,000 |
567,000 |
100,000 |
|
Patents |
95,000 |
200,000 |
105,000 |
|
Total |
$940,500 |
$1,207,000 |
$266,500 |
|
Current liabilities |
$ 89,500 |
$89,500 |
$ 0 |
|
Bonds payable |
300,000 |
360,000 |
60,000 |
|
Common stock |
120,000 |
||
|
Other contributed capital |
164,000 |
||
|
Retained earnings |
267,000 |
||
|
Total |
$940,500 |
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Additional Information:
- Pruitt”s income tax rate is 35%.
- Shah”s beginning inventory was all sold during 2012.
- Useful lives for depreciation and amortization purposes are:
|
Plant assets |
10 years |
|
Patents |
8 years |
|
Bond premium |
10 years |
- Pruitt uses the straight line method for all depreciation and amortization purposes.
Required:
- Prepare the stock acquisition entry on Pruitt Company”s books.
- Prepare the eliminating entries for a consolidated statements workpaper on January 1, 2012, immediately after acquisition.