Peabody Company acquires all of the assets and liabilities of Shea Company in a nontaxable acquisition at the beginning of 2021, reporting the acquisition as a merger. The tax basis of Shea's plant assets was $10 million. Their date-of-acquisition fair values totaled $14 million. The plant assets have an average remaining life, as of the date of acquisition, of 25 years. During 2021, Peabody reports income before depreciation on Shea's plant assets of $4 million. Assume a tax rate of 30%.
Required
a. At what value does Peabody report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain.
b. Prepare Peabody's journal entry to record income taxes for 2021. Report taxes owed as taxes payable.

Question

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The Answer of Peabody Company acquires all of the assets and liabilities of Shea Company in a nontaxable acquisition at the beginning of 2021, reporting the acquisition as a merger. The tax basis of Shea's plant assets was $10 million. Their date-of-acquisition fair values totaled $14 million. The plant assets have an average remaining life, as of the date of acquisition, of 25 years. During 2021, Peabody reports income before depreciation on Shea's plant assets of $4 million. Assume a tax rate of 30%.
Required
a. At what value does Peabody report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain.
b. Prepare Peabody's journal entry to record income taxes for 2021. Report taxes owed as taxes payable.

Peabody Company Acquires All of the Assets and Liabilities of Shea