Reference no: EM13828275

Tax effects of business combinations (taxable, market value differs from book value)

Assume that on January 1, 2013, an investor company acquired 100% of the outstanding voting common stock of an investee company in exchange for $150,000. The transaction is a taxable asset acquisition under the Internal Revenue Code. The following financial statement information is for the investor company and the investee company on January 1, 2013, prepared immediately before this transaction.

Book Values

Investor Investee

Current assets ................................................. $150,000 $ 80,000

Noncurrent assets ..............................................225,000100,000

Total assets.................................................... $375,000$180,000

Liabilities...................................................... $150,000 $ 80,000

Common stock ($1 par) .......................................... 20,000 10,000

Additional paid-in capital .........................................130,000 80,000

Retained earnings ..............................................75,000 10,000

Total liabilities & equity ........................................... $375,000$180,000

Assume that the fair values of the investee's net assets approximated the recorded book values of the investee's net assets, except the fair value of the investee's identifiable noncurrent assets is $20,000 higher than book value. In addition, the investee's pre-transaction tax bases in its individual net assets approximate their reported book values. This difference relates entirely to tax-deductible items. Assume the marginal tax rate is 40% for the investor and investee. What amount of goodwill should be reported in the investor's consolidated balance sheet prepared immediately after this business combination? Please explain your answer and show work?

a. $22,000

b. $30,000

c. $38,000

d. $50,000