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Hello
Need your help to deal with the following adjustment regarding a consolidation question( Plateau- dec 2007)
-At the date of acquisition the fair values of Savannah’s assets were equal to their
carrying amounts with the exception of Savannah’s land which had a fair value of
$500,000 below its carrying amount; it was written down by this amount shortly
after acquisition and has not changed in value since then.1. In the answer, at acquisition the net assets of Savannah was reduced by $500K, no adjustment was made for the net asset at reporting date and the post- acquisition was increased by $500K.
2. Why the post acquisition was increased by $500K?
Hi,
The fair value is less than the carrying amount, so it is impaired. This therefore means we need to reduce the value of the assets at the acquisition date.
The adjustment is not required at the reporting date as it says that it was written down shortly after acquisition, so the impairment has been recorded in the individual accounts and so no adjustment required in the group accounts.
Thanks
Thanks for your answer.
But why the post acquisition was increased by $500K?
Hi,
The adjustment was a reduction to retained earnings that is now no longer there, so the retained earnings have increase from -$500k to nil.
Thanks
“The adjustment was a reduction to retained earnings that is now no longer there”
What do you mean by this sentence?
Thanks.
Hi,
The fair value was less than the book value, so we have reduced retained earnings, and as the adjustment was processed in the individual accounts just after the acquisition then the adjustment is not required at the reporting date in the group accounts if it has been processed in the individual accounts.
Thanks
Hello Chris.
Thank you for your answer.
According to me, the post acquisition need to be reduce by $500K as at acquisition, the net assets of the subsidiary were overstated by this amount. Therefore the post acquisition figures should also be reduced by $500K to adjust this overstatement in net assets.
Please locate where I am getting things wrong? I’ve still not understood why the post acquisition figures were increased by $500K.
Thanks.
Hi,
If you are a diver at 500 metres below sea level and you finish your dive and return to the surface. By how much has your depth changed? Has it been an increase or decrease?
It is a 500 metre increase, so similar to what is happening in the question. The fair value is the diver 500 metres below sea level at the acquisition date and then at the reporting date the diver is at sea level.
Thanks
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