Consolidation

I assume that the date at which this fair value surplus was identified was at date of acquisition

The double entry required as at that date of acquisition is:

Dr Assets (inventory) $200,000
Cr Cost of Control Account $200,000

and the balancing figure in the Cost of Control Account(were you to do the exercise in T account format) would be Goodwill

Now, as at the year end, we have this exercise to carry out in order to calculate Cost of Sales:

Opening inventory (as now adjusted for the $200,000 fair value adjustment)

+ Purchases

– Closing inventory (but this figure does NOT include that $200,000 adjustment)

The adjustment at date of acquisition has the effect of reducing the value attributable to goodwill on acquisition (because the fair value of assets acquired has been increased)

So now let’s put some numbers to the cost of sales calculation

Let’s say that, before any adjustments, opening inventory at date of acquisition was $500,000, purchases was $2,600,000 and closing inventory was $350,000

So before the adjustment, cost of sales would be $2,750,000

Now let’s make that adjustment so opening inventory will move to $700,000 and cost of sales moves to $2,950,000

That means that the profit for the year has been reduced by that $200,000 adjustment because cost of sales has been increased by that amount

In a consolidation question / answer in the exam, you need to increase “Fair value of SNA as at date of acquisition (by $200,000)”

That will automatically reduce the goodwill figure

And when preparing the statement of profit or loss, you need to remember to increase the figure for cost of sales given in the question by $200,000

OK?