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P co acquired 80% S co on 1 october 20X5. At this date, some of S co’s inventory had a carrying amout of £600000 but a fair value of £800000. By 31 december 20X5, 70% of this inventory had been sold by S co.
Individual statements of financial position at 31 december 20X5 for both companies show the following:
inventories $’000
p co: 3250
s co : 1940answer is 5250000 (3250+1940+(800-600*30%)
my question is why does we not take 1940*80%*3/12 because we have acquired only 80% and from 1 october – 31 december which is 3 months
When we consolidate we add across 100% of the assets and liabilities of the subsidiary to highlight the control we have, we therefore do not take 80% of the assets or liabilities.
We do not pro-rate the assets or liabilities acquired as we are looking at the value of them at the reporting date, i.e. at a point in time, and so need to look at their worth at that date. We only pro-rate the revenue and costs in the SPL as they have accrued during the year, so we show how much of them we have controlled by pro-rating.
Thanks
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