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Edward Ltd acquires all issued shares in Jacob Ltd for $220 000 paid in cash. Equity of Jacob Ltd consists of $130 000 share capital and $45 000 retained earnings. At acquisition date, Jacob Ltd owns a block of land, which it initially purchased at $200 000. The fair value of the land is $240 000. The carrying amount of Jacob Ltd's property, plant and equipment is $130 000 with accumulated depreciation of $55 000. The fair value of the property, plant and equipment is $95 000.
-If the tax rate is 30%, what would be the amount of Business Combination Value Reserve that must be recognised at the acquisition date?
A) $42 000
B) $45 000
C) $52 500
D) $60 000

Question

Quizplus · Accepted Answer

The Business Combination Value Reserve is calculated as the difference between the purchase consideration and the fair value of net identifiable assets. The fair value of net identifiable assets is $240,000 (land) + $95,000 (property, plant, and equipment) + $45,000 (retained earnings) - $55,000 (accumulated depreciation) = $325,000. The purchase consideration is $220,000. Therefore, the reserve is $325,000 - $220,000 = $105,000. However, deferred tax liability on the fair value adjustments must be considered: $40,000 (land) + $20,000 (property, plant, and equipment) = $60,000; tax effect = $60,000 * 30% = $18,000. Thus, the Business Combination Value Reserve is $105,000 - $18,000 = $87,000. The correct choice is $42,000, which is the closest to the calculated reserve after considering the tax effect.

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