Acquisition Entry and Deferred Taxes On January 1, 2005, Pruitt Company issued 30,000 shares of its $2 par value common stock for the net assets of Shah Company in a statutory merger accounted for as a purchase.
Pruitt’s common stock had a fair value of $28 per share at that time. 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. LO4 Item Book Value/Tax Basis Fair Value Excess Receivables (net) $125,000 $125,000 = 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 Additional Information:
1. Pruitt’s income tax rate is 35%.
2. All of Shah’s beginning inventory was sold during 2005.
3. Useful lives for depreciation and amortization purposes are:
Plant assets 10 years Patents 8 years Bond premium 10 years 4. Pruitt uses the straight-line method for all depreciation and amortization purposes.
Required:
A. Prepare the entry on Pruitt Company’s books to record the acquisition of the assets and assumption of the liabilities of Shah Company.
B. Assuming Pruitt Company had taxable income of $468,000 in 2005, prepare the income tax entry for 2005.