On January 1, 2016, Piston, Inc.acquired Spur Corp.While recording the acquisition, Piston established a deferred tax liability.It is most likely that this account was created because
A)The transaction was a tax-free exchange to Piston.
B)Piston had not paid all of the income taxes due the government when acquiring Spur.
C)The transaction was a tax-free exchange to Spur.
D)Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.

Question

On January 1, 2016, Piston, Inc.acquired Spur Corp.While recording the acquisition, Piston established a deferred tax liability.It is most likely that this account was created because
A)​The transaction was a tax-free exchange to Piston.
B)​Piston had not paid all of the income taxes due the government when acquiring Spur.
C)​The transaction was a tax-free exchange to Spur.
D)​Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.

Quizplus · Accepted Answer

It is most likely that the deferred tax liability account was created because the transaction was a tax-free exchange to Piston. In a tax-free exchange, the tax liability of the acquired company is carried forward to the acquiring company, which creates a deferred tax liability for the difference between the tax basis of the assets and liabilities of the acquired company and their fair value at the time of the acquisition. Therefore, Piston created a deferred tax liability account to recognize the future tax consequences of the tax-free exchange.