A B C D E

1
DEFERRED TAXES AND ACCELERATED DEPRECIATION
An Example
2 2006 P&L for tax purposes 2006 P&L for reporting purposes
3 Sales 1000 Sales 1000
4 Costs 500 Costs 500
5 Depreciation 300 Depreciation 250
6 PBT 200 PBT 250
7 Taxes (40%) 80 Taxes (40%) 100
8 PAT 120 PAT 150
9
10 Cash flow
11 PAT 120 #VALUE!
12 Add back depreciation 300 #VALUE!
13 Cash flow 420 #VALUE!
14
15 Balance Sheet
16 2005 2006
17 Assets
18 Cash 0 420 #VALUE!
19 Other current assets 0 0 #VALUE!
20
21 FA at cost 500 500
22 Accumulated depreciation 0 250 #VALUE!
23 Net fixed assets 500 250
24 Total assets 500 670
25
26 Liabilities and equity
27 Current liabilities 0 0
28 Deferred taxes 0 20 #VALUE!
29 Debt 0 0
30 Equity
31 Stock 200 200
32 Accumulated retained 300 450 #VALUE!
33 Total liabilities and equity 500 670
34
35 Assumptions:
The PLUG! Without this, the asset side of
36 1. All COGS in cash the balance sheet grows by 420 - 200= 220,
37 2. All Sales in cash whereas the liabilities/equity side grows by
38 3. No new assets purchased 180.
39 4. No debt repaid or taken out
40 5. No dividends paid or stock sold or repurchased
 F

2
3
4
5
6
7
8
9
10
11
12
13
14
15
Cash balances
16
grow by the cash
17 flow (determined
18 by the tax P&L)
19
20
Depreciation is
21
reported
22 from the shareholder
23 P&L
24
25
26
27
28
29 Accumulated retained
earnings grow by the
30
PAT from the
31 shareholder P&L
32
33
34
35
36
37
38
39
40
 A B C D E

1
DEFERRED TAXES AND ACCELERATED DEPRECIATION
The next year--asset is fully depreciated
2 2007 P&L for tax purposes 2007 P&L for reporting purposes
3 Sales 1000 Sales 1000
4 Costs 500 Costs 500
5 Depreciation 200 Depreciation 250
6 PBT 300 PBT 250
7 Taxes (40%) 120 Taxes (40%) 100
8 PAT 180 PAT 150
9
10 Cash flow
11 PAT 180 #VALUE!
12 Add back depreciation 200 #VALUE!
13 Cash flow 380 #VALUE!
14
15 Balance Sheet
16 2007 2007
17 Assets
18 Cash 420 800 #VALUE!
19 Other current assets 0 0 #VALUE!
20
21 FA at cost 500 500
22 Accumulated depreciation 250 500 #VALUE!
23 Net fixed assets 250 0
24 Total assets 670 800
25
26 Liabilities and equity
27 Current liabilities 0 0
28 Deferred taxes 20 0 #VALUE!
29 Debt 0 0
30 Equity
31 Stock 200 200
32 Accumulated retained 450 600 #VALUE!
33 Total liabilities and equity 670 800
34
Accumulated depreciation is zero in
35
2007--the firm's actual taxes paid are
36 higher by $20 than taxes reported to
37 shareholders.
38
 F

ED DEPRECIATION
1
epreciated
2
3
4
5
6
7
8
9
10
11
12
13 Cash balances
14 grow by the cash
15 flow (determined
16 by the tax P&L)
17
18
19
Depreciation is
20
reported
21 from the
22 shareholder
23 P&L
24
25
26
27
28
29 Accumulated
retained earnings
30
grow by the PAT
31 from the
32 shareholder P&L
33
34
35
36
37
38
 A B C D E
1 TAXES PAYABLE
2 2003 Profit & Loss
3 Sales 1000
4 Costs 500
5 Depreciation 300
6 PBT 200
7 Taxes (40%) 80
8 PAT 120
9
10 Cash flow
11 PAT 120
12 Add back depreciation 300
13 Increase in taxes payable 20
14 Cash flow 440
15
16 Balance Sheet
17 2002 2003
18 Assets
19 Cash 0 440 #VALUE!
20 Other current assets 0 0 #VALUE!
21
22 FA at cost 500 500
23 Accumulated depreciation 0 300 #VALUE!
24 Net fixed assets 500 200
25 Total assets 500 640
26
27 Liabilities and equity
28 Current liabilities 0 0
29 Taxes payable 0 20 #VALUE!
30 Debt 0 0
31 Equity
32 Stock 200 200
33 Accumulated retained 300 420 #VALUE!
34 Total liabilities and equity 500 640
35
36
37 Assumptions:
Taxes payable are the difference between
38 1. All COGS in cash taxes reported in the P&L and taxes
39 2. All Sales in cash actually paid.
40 3. No new assets purchased
41 4. No debt repaid or taken out
42 5. No dividends paid or stock sold or repurchased
 F G H
LE 1
2
3 Actual taxes paid 60
4
5
6
7
8
9
10
11 #VALUE!
12 #VALUE!
13
14 #VALUE!
15
16 Cash balances grow by
the cash flow
17
18
19
20
Depreciation is reported
21
from the shareholder P&L
22
23
24
25
26
27
28
29
30 Accumulated retained
earnings grow by the PAT
31
from the shareholder P&L
32 (there are no dividends)
33
34
35
36
37
38
39
40
41
42
 A B C D E
1 GOODWILL ACCOUNTING
2 Company A Company B
3 Assets Assets
4 Cash 10,000 Cash 500
5 Current assets 12,000 Current assets 1,000
6
7 Plant property and equipment Plant property and equipment
8 At cost 10,000 At cost 1,600
9 Accumulated depreciation -3,000 Accumulated depreciation -250
10 Net PP&E 7,000 Net PP&E 1,350
11 Total Assets 29,000 Total Assets 2,850
12
13 Liabilities and equity Liabilities and equity
14 Current liabilities 10,000 Current liabilities 800
15 Debt 3,000 Debt 1,000
16 Equity Equity
17 Common stock 2,000 Common stock 1,000
18 Accumulated retained earnings 14,000 Accumulated retained earnings 50
19 Total liabilities 29,000 Total liabilities 2,850
20
21

22 Company A buys assets of Company B and assumes B's debt.

Price = Book value of equity
23 Purchase price 1,050
24
25 Assets
26 Cash 9,450 ###
27 Current assets 13,000 ###
28
29 Plant property and equipment
30 At cost 11,350 ###
31 Accumulated depreciation -3,000 ###
32 Net PP&E 8,350 ###
33 Total Assets 30,800 ###
34
35 Liabilities and equity
36 Current liabilities 10,800 ###
37 Debt 4,000 ###
38 Equity
39 Common stock 2,000 ###
40 Accumulated retained earnings 14,000 ###
41 Total liabilities 30,800 ###
 A B C D E
1 GOODWILL ACCOUNTING
2 Company A Company B
3 Assets Assets
4 Cash 10,000 Cash 500
5 Current assets 12,000 Current assets 1,000
6
7 Plant property and equipment Plant property and equipment
8 At cost 10,000 At cost 1,600
9 Accumulated depreciation -3,000 Accumulated depreciation -250
10 Net PP&E 7,000 Net PP&E 1,350
11 Total Assets 29,000 Total Assets 2,850
12
13 Liabilities and equity Liabilities and equity
14 Current liabilities 10,000 Current liabilities 800
15 Debt 3,000 Debt 1,000
16 Equity Equity
17 Common stock 2,000 Common stock 1,000
18 Accumulated retained earnings 14,000 Accumulated retained earnings 50
19 Total liabilities 29,000 Total liabilities 2,850
20
21

22
Company A buys assets of Company B and assumes B's debt. Price >
Book value of equity
23 Purchase price 2,000
24
25 Assets
26 Cash 8,500 ###
27 Current assets 13,000 ###
Assumption: The book
28 value of B's assets is an
29 Plant property and equipment accurate reflection of
30 At cost 11,350 ### their market value.
31 Accumulated depreciation -3,000 ###
32 Net PP&E 8,350 ###
33 Goodwill 950 ###
34
35 Total Assets 30,800 ###
36
37 Liabilities and equity
38 Current liabilities 10,800 ###
39 Debt 4,000 ###
40 Equity
41 Common stock 2,000 ###
42 Accumulated retained earnings 14,000 ###
43 Total liabilities 30,800 ###
 A B C D
1 COMPUTING THE FIXED ASSET ACCOUNTS
Total on post-
2 Post-acquistion acquisition balance
Pre-acquistion fair-market value sheet
3 Fixed assets at cost
4 A 10,000 10,000
5 B (revalued) 1,600 1,500 11,500
6 Accumulated depreciation
7 A -3,000 -3,000
8 B (set to zero) -250 0 -3,000
9 Net fixed assets
10 A 7,000 7,000
11 B 1,350 1,500 8,500
12
13
14 COMPUTING THE GOODWILL
15 Acquisition price 2,000
16 Book value of B's equity 1,050
17
18 B's current assets
19 Fair-market value 1,200
20 Book value 1,000
21 Excess 200 #VALUE!
22
23 B's fixed assets
24 Fair-market value 1,500
25 Book value 1,350
26 Excess 150 #VALUE!
27
28 Goodwill 600 #VALUE!
 E
COUNTS 1

3
4
5 #VALUE!
6
7
8 #VALUE!
9
10
11 #VALUE!
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
 A B C D
1 GOODWILL ACCOUNTING
2 Company A Company B
3 Assets Assets
4 Cash 10,000 Cash
5 Current assets 12,000 Current assets
6
7 Plant property and equipment Plant property and equipment
8 At cost 10,000 At cost
9 Accumulated depreciation -3,000 Accumulated depreciation
10 Net PP&E 7,000 Net PP&E
11 Total Assets 29,000 Total Assets
12
13 Liabilities and equity Liabilities and equity
14 Current liabilities 10,000 Current liabilities
15 Debt 3,000 Debt
16 Equity Equity
17 Common stock 2,000 Common stock
18 Accumulated retained earnings 14,000 Accumulated retained earnings
19 Total liabilities 29,000 Total liabilities
20
21

22
Company A buys assets of Company B and assumes B's debt.
Price > Book value of equity
23 B's assets are revalued
24 Purchase price 2,000
25
26 Revaluation of B's assets
27 Current assets worth 1,200
28 Fixed assets worth 1,500
29
30 Assets
31 Cash 8,500 ### Goodwill =
32 Current assets 13,200 ### + Excess of purchase price over
33 B's BV of equity
34 Plant property and equipment - Excess of revaluation of B's
35 At cost 11,500 ### assets over their BV
36 Accumulated depreciation -3,000 ###
37 Net PP&E 8,500 ###
38 Goodwill 600 ###
39
40 Total Assets 30,800 ###
41
42 Liabilities and equity
43 Current liabilities 10,800 ###
44 Debt 4,000 ###
45 Equity
46 Common stock 2,000 ###
47 Accumulated retained earnings 14,000 ###
 A B C D
48 Total liabilities 30,800 ###
 E
1
2
3
4 500
5 1,000
6
7
8 1,600
9 -250
10 1,350
11 2,850
12
13
14 800
15 1,000
16
17 1,000
18 50
19 2,850
20
21
. 22

23
24
25
26
27
28
29
30
ill = 31
ss of purchase32price over
of equity 33
ss of revaluation
34 of B's
over their BV 35
36
37
38
39
40
41
42
43
44
45
46
47
 A B C D E F G
1 MINORITY INTEREST
2 Company A Company B
3 Profit and loss Profit and loss
4 Sales 1000 Sales 100
5 COGS 500 COGS 55
6 Depreciation 100 Depreciation 8
7 Interest 50 Interest 2
8 PBT 350 PBT 35
9 Taxes 140 Taxes 14
10 PAT 210 PAT 21
11 Retained 210 Retained 21
12
13 Assets Liabilities Assets
14 Cash 100 CL 300 Cash 10
15 CA 500 Debt 500 CA 50
16 NFA 1000 Equity 800 NFA 100
17 Total assets 1600 Total liabilities 1600 Total assets 160
18
19
20 Consolidation--100% ownership
21 Profit and loss Assets Liabilities
22 Sales 1100 Cash 110 CL 330
23 COGS 555 CA 550 Debt 520
24 Depreciation 108 NFA 1100 Equity 910
25 Interest 52 Total assets 1760 Total liabilities 1760
26 PBT 385
27 Taxes 154
28 PAT 231
29 Retained 231 #VALUE!
30
31 Consolidation--90% ownership
32 Profit and loss Assets Liabilities
33 Sales 1100 Cash 110 CL 330
34 COGS 555 CA 550 Debt 520
35 Depreciation 108 NFA 1100 Minority interest 11
36 Interest 52 Equity 899
37 PBT 385 Total assets 1760 Total liabilities 1760
38 Taxes 154
39 PAT 231 #VALUE!
40 Minority interest 2.1 #VALUE!
41 Retained 228.9 #VALUE!
 H I
1
Company
2 B
3
4
5
6
7
8
9
10
11
12
13 Liabilities
14 CL 30
15 Debt 20
16 Equity 110
17 Total liabilities 160
18
19
20
21
22 #VALUE!
23 #VALUE!
24 #VALUE!
25 #VALUE!
26
27
28
29
30
31
32
33
34
35 #VALUE!
36 #VALUE!
37
38
39
40
41