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Hi,
I’m working on the Q32 of the exam Sep/Dec 2017. As I read the note 2:” On 1 October 20X4, the fair values of Streamer Co’s net assets were equal to their carrying amounts with the exception of some inventory which had cost $3m but had fair value of $3.6m. On 30 September 20X5, 10% of these goods remained in the inventories of Streamer Co.” As I check the answer, $0.6m – $0.06m= $0.54m was deducted from RE of Streamer Co but I don’t understand the treatment. Can you please explain to me this treatment?
Best regards.Hi,
Yes, the best way to look at it is through the use of the net assets working. At the acquisition date the fair value was $0.6 million higher (3.6 – 3.0) and so this would be added to the net assets at acquisition column.
At the reporting date there is only 10% of the adjustment left, so we would adjust the reporting date column by $0.06 million, again adding it to the net assets at that date.
The difference between the two is a reduction in the net assets, which is a reduction in the profits of $0.54 million.
Hope that clears it up.
Thanks
Thank you very much for the answer. I have understood as the rise of COGS as the fair value is higher than cost and results in the reduction in RE
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