C i. Secure·https://newconnect.mheducat Chapter 7 Homework Help Sa Saved 3 Firen
ID: 2538614 • Letter: C
Question
C i. Secure·https://newconnect.mheducat Chapter 7 Homework Help Sa Saved 3 Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2018, these licensing agreements have a fair value of $830,000 and represent Firenze's sole asset Although Firenze currently has no liabilities, the company has a $155,000 net operating loss (NOL) carryforward 15 because of recent operating losses. On January 1, 2018, Parma, Inc.,acquired all of Firenze's voting stock for $1,080,000. Parma expects to extract operating synergies by integrating Firenze's software into its own products. Parma also its NOL Assume an applicable federal income tax rate of 35 percent hopes that Firenze ill be able to receive a future tax reduction fom a If there is a greater than 50 percent chance that the subsidliany will be able to utilize the NOL carryforward, how much goodwi b. f there is a less than So percent chance that the subsidiany should Parma recognize from the acquisition? will be able to utllize the NOL carryforward, how much goodwill should Parma recognize from the acquisition? GoodwillExplanation / Answer
Fair Value of Licensing agreements : $830,000
Net operating loss ( NOL - carry forward): $155,000
Since NOL is also taken over, the acquiring company will create a deferred tax Asset (DTA) on that loss @ 35% which is (155000*35%) = 54250
Note: (DTA is created as the loss will be utilized in setting off future profits thus reducing income tax liability)
Solution to Part A:
Since its likely that company will be able to utilize the loss to set off against profits, DTA is recognized
Total FV of assets taken over : (830000+54250) = 884250
Consideration paid : 1080,000
Hence goodwill is excess consideration paid over FV i.e. (1080,000-884,250) = 195750
Solution to Part B:
Since its not likely that company will be able to utilize the loss to set off against profits, DTA is not recognized
Total FV of assets taken over : 830000
Consideration paid : 1080,000
Hence goodwill is excess consideration paid over FV i.e. (1080,000-830000) = 250,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.