Deferred Tax Effects On January 1, 2005, 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 at fair values follows: LO7
Book Value/
Item Tax Basis Receivables (net) $125,000 Inventory 167,000 Land Plant Assets (net) 467,000 Patents Total $940,500 Current Liabilities $ 89,500 Bonds Payable 300,000 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. Shah’s beginning inventory was all sold during 2005.
Fair Value $ 125,000 195,000 120,000 567,000 200,000 $1,207,000 $ 89,500 360,000 3. Useful lives for depreciation and amortization purposes are:
Plant Assets Patents Bond Premium 10 years 8 years 10 years Excess see 28,000 33,500 100,000 105,000 $266,500 beatin 60,000 4. Pruitt uses the straightline method for all depreciation and amortization purposes.
Required:
A. Prepare the stock acquisition entry on Pruitt Company’s books.
B. Prepare the eliminating entries for a consolidated statements workpaper on January 1, 2005, immediately after acquisition.