P 10-14

[Tax] Allocate fair value/book value differentials in a taxable purchase combination Pop Corporation acquired all the stock of Son Corporation on January 1, 2016, for $280,000 cash, when the book values and fair values of Son’s assets and liabilities were as follows (in thousands):

Book Values

(Tax Bases) Fair Values Current assets $100 $100 Land 20 60 Buildings—net 80 110 Equipment—net 60 70 Total Assets $260 $340 Liabilities $ 90 $ 90 Capital stock 150 Retained earnings 20 Total Equities $260 Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation 383 Son’s buildings have a remaining life of 10 years, and the equipment has a useful life of 2 years from the date of the combination. During 2016, Son had income of $50,000 and paid dividends of

$20,000. Pop and Son are subject to a 35 percent tax rate.

REQuIRED 1. Prepare a schedule to allocate the excess fair value over book value to Son’s assets, liabilities, deferred taxes, and goodwill at January 1, 2016, assuming the purchase was a taxable transaction.

2. Prepare a schedule to allocate the excess fair value over book value to Son’s assets, liabilities, deferred taxes, and goodwill at January 1, 2016, assuming the purchase was a tax-free reorganization.

3. Compute Pop’s income from Son for 2016 under both options.