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Hi,
The question below that i need help with is from BPP exam kit. I am also going to type the answer which does not make sense to me. First question is should inventories not be valued at lower of cost and NRV (fair value less costs to sell) in this case cost (as fv of inventories is higher than cost) ? Contingent liability is deducted from net assets upon acquisition. Why would we deduct the fair value gain on inventory and add the contingent liability?Question: 11.16
MN acquired 70% of PQ’s equity shares on 1 January 20X0. At that date, the fair value of
PQ’s net assets was the same as their carrying amount with the following exceptions:
• Inventory was found to have a fair value of $20,000 higher than its carrying amount — this inventory was sold in the year ended 31 December 20X0
• A contingent liability with a fair value of $18,000 was disclosed in PQ’s financial
statements — this liability was settled in the year ended 31 December 20X0
For the year ended 31 December 20X0, the profit for the year of MN and PQ amounted to $750,000 and $410,000 respectively.
What is the consolidated profit for the year that should be included in the MN group’s consolidated statement of profit or loss for the year ended 31 December 20X0?Answer:
The correct answer is: $1,158,000
This is calculated as follows:MN — profit for the year 750,000
PQ — profit for the year 410,000
Fair value adjustments — movements in the year:
Inventories — sold in year (20,000)
Contingent liability — settled in the year 18,000
Consolidated profit for the year 1,158,000Hi,
The best way to solve the question would be via the workings and here the net asset working. I’d not approach it in the manner in which it has been laid out.
To answer your first question then we include all assets and liabilities at fair value on consolidation so that the group accounts reflect the value paid on acquisition by the parent.
For the second question the asset has fallen from 20,000 to nil, and a reduction in an asset is a loss. The contingent liability has fallen from 18,000 to nil, and a reduction in a liability is a gain.
Thanks
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