On January 1, 2009, Pruitt Company issued 30,000 shares of its $2 par value common stock for the net assets of Shah Company in a statutory merger accounted for as a purchase. Pruitt's common stock had a fair value of $28 per share at that time. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows:
Item Book Value/Tax Basis Fair Value Excess
Receivables (net) $125,000 $ 125,000 $ -0-
Inventory 167,000 195,000 28,000
Land 86,500 120,000 33,500
Plant assets (net) 467,000 567,000 100,000
Patents 95,000 200,000 105,000
Total $940,500 $1,207,000 $266,500
Current liabilities $ 89,500 $ 89,500 $-0-
Bonds payable 300,000 360,000 60,000
Common stock 120,000
Other contributed capital 164,000
Retained earnings 267,000
Total $940,500
Additional Information:
1. Pruitt's income tax rate is 35%.
2. Shah's beginning inventory was all sold during 2009.
3. Useful lives for depreciation and amortization purposes are:
Plant assets 10 years
Patents 8 years
Bond premium 10 years
4. Pruitt uses the straight-line method for all depreciation and amortization purposes.
Required:
A. Prepare the entry on Pruitt Company's books to record the acquisition of the assets and assumption of the liabilities of Shah Company.
B. Assuming Pruitt Company had taxable income of $468,000 in 2009, prepare the income tax entry for 2009