D&D only, nontaxable exchange, tax loss carryover. On December 31, 20X5, Bryant Company exchanged 10,000 of its $10 par value shares for a 90% interest in Joshua Company. The purchase was recorded at the $80 per share fair value of Bryant shares. Joshua Company had the following balance sheet on the date of the purchase:
|
Assets |
Liabilities and Equity |
||
|
Cash |
$100,000 |
Current liabilities |
$130,000 |
|
Accounts receivable |
200,000 |
Deferred rental income |
120,000 |
|
Inventory |
150,000 |
Bonds payable |
250,000 |
|
Investment in marketable securities |
150,000 |
Common stock ($10 par) |
100,000 |
|
Depreciable fixed assets |
400,000 |
Paid in capital in excess of par |
150,000 |
|
Retained earnings |
250,000 |
||
|
Total assets |
$1,000,000 |
Total liabilities and equity |
$1,000,000 |
It was determined that the following fair values differed from book values for the assets of Joshua Company:
|
Inventory |
$200,000 |
|
Depreciable fixed assets (net) |
500,000 |
|
Investment in marketable securities |
170,000 |
The purchase is a tax free exchange to the seller, which means Bryant Company will use the book value of Joshua’s assets for tax purposes. Joshua Company has $200,000 of tax loss carryovers. Bryant will be able to utilize $40,000 of the losses to offset taxes to be paid in 20X6. The balance of the tax loss carryover will not be used within a year but is considered fully realizable in the future. The tax rate for both firms is 30%.
Required
Record the investment and prepare a determination and distribution of excess schedule. Suggestion: Asset adjustments should be accompanied by the appropriate deferred tax liability.