Leader Limited acquired 100% of the share capital of Follower Limited. Follower had issued share capital of $100 000. The book values of Follower Limited's assets were: Land $50 000, Equipment $60 000. The fair values of these assets were: Land $90 000, Equipment $70 000. The tax rate is 30%. The fair value of the identifiable net assets is:
A) $135 000;
B) $110 000;
C) $160 000;
D) $100 000.

Question

Quizplus · Accepted Answer

The fair value of the identifiable net assets is calculated as the fair value of the assets minus any liabilities. Here, the fair value of the land is $90,000 and the equipment is $70,000, totaling $160,000. Since there are no liabilities mentioned, the fair value of the identifiable net assets is $160,000. However, the tax effect on the revaluation surplus (difference between fair value and book value) needs to be considered. The revaluation surplus is $50,000 ($160,000 - $110,000), and the deferred tax liability is 30% of $50,000, which is $15,000. Therefore, the fair value of the identifiable net assets is $160,000 - $15,000 = $145,000. However, since $145,000 is not an option, the closest correct answer considering the tax effect is $135,000.

Leader Limited Acquired 100% of the Share Capital of Follower