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I came across a question where they have added the fair value depreciation adjustment to the post aquisiition reserve instead of adding it
Here is the relevant part of the question
On 1 April 2004 Penfold aquired the business 80%. The finanicial year end is 30 September 2004
Penfold sold an item of plant to Superted on 1 April 2004 for $25 million when its carrying amount was $20 million.It had a remaining useful life of 5 years at this date.I tried calculating the fair value adjustment first and since it is greater than the carrying amount there has been an increase in the fair value adjustment by $5 million.
I then did this 5 million*6/12*1/5=0.1 millionI then deducted 0.1 from the reporting column for the fair value at net assets
But the correct answer in the exam kit has added 0.1 to the reporting column instead
I don’t know why they have added it like this because the kaplan textbook says to deduct fair value depreciation adjustments at reporting date
Hi,
This is not a fair value adjustment and is a PPE PURP and they are adjusting for the difference in deprecation following the sale of PPE between group companies.
Prior to the sale the PPE would have been depreciated at $4m per annum ($20m/5 years). Following the sale the depreciation will not be at $5m per annum ($25m/5 years). As the group accounts are prepared on the single entity concept we need to get the depreciation back to the $4m as that is what was charged previously when the asset would have been originally purchased.
The difference is the $1m and that is what they are adjusting for by adding it back to the profit/retained earning.
Thanks
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