In an 80% Purchase Accounted for as a Tax-Free Exchange

question 7

Multiple Choice

In an 80% purchase accounted for as a tax-free exchange, the excess of cost over book value is $200,000. The equipment's book value for tax purposes is $100,000 and its fair value is $150,000. All other identifiable assets and liabilities have fair values equal to their book values. The tax rate is 30%. What is the total deferred tax liability that should be recognized on the consolidated balance sheet on the date of purchase?

• A) $12,000
• B) $60,000
• C) $72,857
• D) $85,714

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Definitions:

Projection

a defense mechanism where individuals attribute their own undesirable feelings, thoughts, or motivations to someone or something else.

Intellectual Inferior

The perceived or actual condition of having lower mental capacity or cognitive abilities compared to a standard or to others.

Reality Principle

in psychoanalytic theory, is the ability of the mind to assess the external world and act upon it accordingly, as opposed to acting on the pleasure principle.

Conscience

An inner sense of what is right and wrong in one's conduct and motives, urging one towards right action.