A Limited acquired B Limited for $110 000. At acquisition date the fair value of the B Limited's Land asset was $40 000 and the book value was $30 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of land?

Question

Quizplus · Accepted Answer

According to the tax effect accounting, the difference between the fair value and book value of the land asset represents a taxable temporary difference. As a result, a deferred tax liability needs to be recognized to account for the future tax consequences when the asset is disposed of. The deferred tax liability is calculated by multiplying the tax rate with the temporary difference, which in this case is $10 000 ($40 000 - $30 000). Therefore, the appropriate adjustment to recognize the tax effect is to credit deferred tax liability for $3 000 (30% of $10 000). Option B is the correct answer.

A Limited Acquired B Limited for $110 000