Century Company acquires the assets and liabilities of Horizon Company in a nontaxable acquisition. The acquisition results in recognition of a deferred tax liability. Which of the following is a possible explanation for this deferred tax liability?

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Quizplus · Accepted Answer

The deferred tax liability could arise because the book value of Horizon's buildings was less than their market value. When assets are revalued upwards in an acquisition, this creates a temporary difference between the accounting (book) value and the tax base of the assets, leading to a deferred tax liability. This is because the future depreciation expense for tax purposes will be lower than the depreciation expense reported in the financial statements, resulting in higher taxable income in the future compared to book income.

Century Company Acquires the Assets and Liabilities of Horizon Company