Perez Co. plans to acquire Roo Co. Roo has substantial depreciable assets that have fair values in excess of their book values. Considering only the income tax impact, which of the following statements is true?
A)Perez would prefer to purchase Roo's assets and Roo would prefer to sell its shares to Perez.
B)Perez would prefer to purchase Roo's shares and Roo would prefer to sell its assets to Perez.
C)Both Perez and Roo would prefer Perez to purchase Roo's shares.
D)Both Perez and Roo would prefer Perez to purchase Roo's assets.

Question

Quizplus · Accepted Answer

Perez would prefer to purchase Roo's assets because it can then step up the basis of the acquired assets to their fair value, leading to higher depreciation deductions for tax purposes. Roo would prefer to sell its shares to avoid recapture of depreciation on the assets, which could lead to a higher tax liability.

Perez Co Plans to Acquire Roo Co