If a contingent liability of a subsidiary is recognised in a business combination, on consolidation the groupwill record:a) a deferred tax liability.b) a deferred tax asset.c) a reduction in goodwill.d) none of the above
Question
If a contingent liability of a subsidiary is recognised in a business combination, on consolidation the groupwill record:a) a deferred tax liability.b) a deferred tax asset.c) a reduction in goodwill.d) none of the above
Solution
The correct answer is d) none of the above.
Here's why:
A contingent liability is a potential liability that may occur in the future, such as a lawsuit, judgment, or claim. In a business combination, if a subsidiary has a contingent liability, it is recognized at its fair value at the acquisition date.
a) A deferred tax liability is an account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This has no direct relation to the contingent liability of a subsidiary in a business combination.
b) A deferred tax asset is an item on the balance sheet that results from overpayment or advance payment of taxes. It is the opposite of a deferred tax liability. This also has no direct relation to the contingent liability of a subsidiary in a business combination.
c) Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The recognition of a contingent liability does not reduce goodwill.
Therefore, none of the options given are correct.
Similar Questions
If the carrying amount of an identifiable non-current asset of a subsidiary in a business combination is increased to fair value, on consolidation the group will record: a. A current tax liability. b. A deferred tax asset. c. A gain on bargain purchase. d. None of the above.
On consolidation, a group can only offset current tax assets against current tax liabilities when the group: a. has adopted tax consolidation. b. has no partly owned subsidiaries. c. operated wholly within Australia. d. all of the above.
On consolidation, adjustment to deferred tax assets and liabilities is required for: a. unrealised intragroup profits b. unrealised intragroup losses c. fair value adjustments d. all of the above
Where the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired, the item must be recognised in the consolidation worksheet as:
Which of following statements is not correct in relation to the consolidation process?Group of answer choicesTo avoid double counting of the group's equity, the equity of the subsidiary at the acquisition date needs to be eliminated from the records of the subsidiary.Subsequent to the acquisition date, any intragroup transactions within the group needs to be adjusted and eliminated.The fair value adjustments of assets that were not previously recorded by the subsidiary are recognised in the business combination valuation entries.Consolidated financial statements should offset the carrying amount of the parent's investment in the subsidiary.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.