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 at acquisition date?

Question

Quizplus · Accepted Answer

The appropriate adjustment to recognize the tax effect of the business combination revaluation of land at acquisition date is as follows:
I. No adjustment is needed as the difference between the fair value and carrying amount of the land is already recognized as a part of the purchase price allocation.
II. This adjustment is required to recognize the deferred tax liability that arises due to the revaluation of the land. The deferred tax liability is calculated as (fair value - carrying amount) x tax rate, which in this case would be (80,000 - 60,000) x 30% = $6,000.
III. No adjustment is needed for this.
IV. This adjustment is not applicable for tax effect recognition.

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