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The subsidiary was the defendant in a court case. Fair value of the potential liability at date of acquisition was $500 and the case was settled out of court for $800 at reporting date. How will it affect pre and post aquisition retained earnings?and how is the inventory above its carrying amount treated in consolidated SOFP. Thank you
If fair value as at date of acquisition was $500 then that’s the figure that features in working W2 Goodwill
There is a post-acquisition adjustment of $300 that will feature as a deduction against post-acquisition profits
Inventory above its carrying value? May I assume that by this you mean that the fair value of inventory at date of acquisition was above its carrying value?
Now the question “How is such inventory treated in the statement of financial position?”
Normally, it wouldn’t affect the statement of financial position because inventory as at date of acquisition will typically have been sold by the time the year end comes around
I suppose that you could claim that it does have an affect on the statement of financial position because, for the post acquisition trading results, the cost of sales will be increased by the amount of the excess of fair value over carrying value as at date of acquisition so post acquisition profits will reduce as a result of that adjustment
But that would be unusual in an F7 Financial Reporting exam
OK?
dear sir , how to find out retained earning at aquisition if they give the information like this “retained earning at the reporting date is $70m and the Profit after tax is $80000 of the subsidiary and aquired before 6 moths ”
thank u in advanceIf retained earnings at reporting date were $70 million and the profit for the year just ended up to the reporting date were $80,000, that means that the profits brought forward at the end of the previous accounting year end must have been $69,920,000
As at date of acquisition, so long as profits accrue evenly throughout the year of acquisition, then the element of this year’s profits that were earned per-acquisition must be 6/12 * $80,000 = $40,000
So retained earnings as at date of acquisition must have been $69,920,000 + $40,000 = $69,960,000
Better?
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