ch1_issues

Auditing and Assurance Services (12th Edition)

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UNDERSTANDING THE ISSUES 1. (a) Horizontal combination—both are marine engine manufacturers (b) Vertical combination—manufacturer buys distribution outlets (c) Conglomerate—unrelated businesses 2. By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain. However, if the seller were to accept common stock of another corporation instead, the seller could construct the transaction as a tax-free reorganization. The seller could then account for the transaction as a tax-free exchange. The seller would not pay taxes until the shares received were sold. 3. Identifiable assets (fair value) . ..... $600,000 Deferred tax liability ($200,000 × 40%). ..................... (80,000 ) Net assets . ................................... $520,000 Goodwill Price paid . .................................... $850,000 Net assets . ................................... (520,000 ) Goodwill . ...................................... $330,000 4. (a) The net assets and goodwill will be recorded at their full fair value on the books of the parent on the date of acquisition. (b) The net assets will be “marked up” to fair value, and goodwill will be recorded at the end of the fiscal year when the consolidated financial statements are prepared through the use of a consolidated worksheet. 5.
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This document was uploaded on 09/18/2010.

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ch1_issues - UNDERSTANDING THE ISSUES 1. (a) Horizontal...

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