Deck 13: Income Tax Allocation Subsequent to Acquisition

Question 1

Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.At the time of acquisition,the fair values of these assets were higher than their carrying values and their tax bases.In Morin's consolidation each year,it must adjust for the deferred taxes that resulted from these temporary differences.Which of the following statements is true?

A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.

Answer 1

B

Question 2

On December 31,20X5,Space Co.purchased 100% of the outstanding common shares of Shuttle Ltd.for $1,300,000 in shares and $200,000 in cash.The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
The tax value for each asset and liability is the same as its carrying value except for the equipment which have a tax value of $950,000 and the patent which has a tax value of nil.The equipment has a remaining useful life of 15 years from the date of acquisition.The patent has a useful life estimated to be 5 years from the date of acquisition.
During 20X6,the year following the acquisition,the following occurred:
1.Shuttle borrowed $350,000 from Space on June 1,20X6,and was charged interest at 10% per annum,which it paid on a monthly basis.There were no repayments of principal made during the remaining of the year.
2.Throughout the year,Shuttle purchased merchandise of $800,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $250,000 on this merchandise.75% of this merchandise was resold by Shuttle prior to December 31,20X6.
3.Shuttle paid dividends of $275,000 at the end of 20X6 and Space paid dividends of $200,000.
4.Shuttle and Space both have in income tax rate of 30%.
During 20X7,the following occurred:
1.Shuttle paid $150,000 on the loan payable to Space on May 30,20X7.
2.Throughout the year,Shuttle purchased merchandise of $1,000,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $150,000 on this merchandise.85% of this merchandise was resold by Shuttle prior to December 31,20X7.
3.Shuttle paid dividends of $275,000 at the end of 20X7 and Space paid dividends of $200,000.
4.Shuttle and Space both have an income tax rate of 30%.


Required:
Calculate the consolidated retained earnings as at December 31,20X7 and as at December 31,20X6.
Prepare the consolidated statement of comprehensive income and the consolidated statement of financial position for the year ended December 31,20X7 for Space.Include all relevant income tax calculations.

Answer 2

Measurement: Calculation of goodwill (in 000s)on December 31,20X5. Consideration received:
Fair value of net assets acquired: Deferred tax liabilities are: 920,000 × 30% = 264,000
Eliminate intercompany transactions for 20X7
Intercompany transactions and balances Recognize realized and unrealized profits Amortize
Calculation of the balance in the consolidated retained earnings as at December 31,2007: Calculation of the balance in the consolidated retained earnings as at December 31,2006: Adjustments:

Question 3

Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?

A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.

Answer 3

C

Question 4

Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.What deferred income tax adjustment must Morin make for its consolidated financial statements?

A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.