Water Limited acquired Boy Limited for a purchase consideration of $110 000. At acquisition date the fair value of the Boy Limited's Land asset was $80 000 and the carrying amount was $60 000. 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

The difference between the fair value and the carrying amount of the land asset is $20,000 (80,000 - 60,000). Since the fair value of the land is higher than its carrying amount, Water Limited needs to recognize a deferred tax liability for the future tax consequence of the taxable temporary difference. The tax rate is 30% so the adjustment will be $6,000 (20,000 x 30%). Therefore, the appropriate adjustment is to credit (CR) the Deferred Tax Liability account with $6,000.

Water Limited Acquired Boy Limited for a Purchase Consideration of $110