Your client, Lewison International, has informed you that it has reached an agreement with Herro Company to

Question:

Your client, Lewison International, has informed you that it has reached an agreement with Herro Company to acquire all of Herro’s assets. This transaction will be accomplished through the issue of Lewison’s common stock.

After your examination of the financial statements and the acquisition agreement, you have discovered the following important facts.

The Lewison common stock issued has a fair value of $800,000. The fair value of Herro’s assets, net of all liabilities, is $700,000. All asset book values equal their fair values except for one machine valued at $200,000. This machine was originally purchased two years ago by Herro for $180,000. This machine has been depreciated using the straight-line method with an assumed useful life of 10 years and no salvage value. The acquisition is to be considered a tax-free exchange for tax purposes.

Assuming a 30% tax rate, what amounts will be recorded for the machine, deferred tax liability, and goodwill?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...