Breeze Limited acquired Zephyr Limited for a purchase consideration of $140 000. At acquisition date the fair value of Zephyr Limited's furniture asset was $40 000 and the carrying amount was $35 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of furniture at acquisition date?

A) DR Deferred tax asset $3 500
B) CR Deferred tax asset $3 500
C) DR Deferred tax liability $3 500
D) CR Deferred tax liability $3 500

Question

Sanjay Jaglan · Accepted Answer

Final Answer : D, Explanation :  The correct adjustment is to credit a deferred tax liability for $3,500, which represents the tax effect of the revaluation of the furniture from its carrying amount to its fair value. This is calculated as the difference between the fair value and the carrying amount ($40,000 - $35,000 = $5,000) multiplied by the tax rate (30%), resulting in a deferred tax liability of $1,500.

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