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Opentution notes – Chapter 25- Example 2 (EXTRACT ONLY)
Hartsop, a public limited company, operates in the retail sector.
On 1 January 2019, Hartsop acquired 70% of the equity interest of Skiddaw for a cash consideration of
$1,340 million At 1 January 2019, the identifiable net assets of Skiddaw had a fair value of $1,850 million,
and retained eamings were $450 million. The excess in fair value is due to an item of property, plant and
equipment that has a remaining useful life of 10 years.
The draft statements of financial position at
31 December 2020 are as follows(extract) :Assets:
Non Current Assets:
Hartsop($m) Skiddaw($m)
PPE 1560 1250Sir,the answer in the notes says that while calculating the NET ASSETS OF SUBSIDIARY(W2), the fair value adjustment required is the FV-PPE and it is shown as 400 and I’m confused as to how its 400 because FV-PPE (1850-1250) would give an answer of 600!
Could please explain how’s it 400 because i might be wrong here!
Many thanks Chris. God bless you!
Hi,
You are correct to use the FV of net assets figure of 1,850 but the book value of the net assets at acquisition is 1,450, thus giving the 400 FV adjustment for PPE.
Where does the 1,450 come from I hear you ask? The share capital is 1,000 and retained earnings are 450, totalling the 1,450.
Hope that clears it up for you and let me know if it doesn’t.
Thanks,
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