Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the effect of recognizing the deferred tax in accounting for the acquisition?

Question

Quizplus · Accepted Answer

The difference between the fair value and the tax value of Bello's assets ($950,000 - $700,000 = $250,000) will result in a deferred tax liability due to the temporary difference. This increases liabilities. The increase in the fair value of assets over their carrying value also increases the amount of goodwill recognized in the acquisition. Therefore, recognizing the deferred tax increases both liabilities and goodwill.