1. Target sells assets not desired by Acquirer before entering into a reorganiza
ID: 2537968 • Letter: 1
Question
1. Target sells assets not desired by Acquirer before entering into a reorganization transaction with Acquirer. In which reorganization will the step transaction doctrine not apply to the sale by Target?
a."Type C" reorganization.
b."Type A" reorganization.
c."Type B" reorganization.
d.Only "Type A" and "Type C".
2. South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?
a.$182,000
b.$175,000
c.$168,000
d.$7,000
Explanation / Answer
1. "Type B" reorganization the step transaction doctrine not apply to the sale by Target. under this type of reorganization the acquire not intend to sale Assets because the acquire will gets control of the target corp through stock transation only through which atleast 80 % stock hold by acquire before any kind of reorganization it is called as sale of organization by target .
2. Total Provision for income Tax expenses for Year 2 = 35 % of (Book Income - exceeds tax depreciation) + deferred tax liability for the exceeds tax depreciation i.e. 35 % of $ 20,000.
= 35% of ($ 500,000 - $ 20,000) + 35% of $ 20,000
=35% of $ 480,000 + $ 7000
= $ 168,000 + $ 7,000
= $ 175,000 (Answer is Option B)
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