Depreciation

In the working W2 Goodwill, we need to include the extra $20,000 fair value adjustment. That's as at the date of acquisition and is necessary in order that we arrive at a correct goodwill value Later (let's say 3 years later) we need to calculate working W3 Consolidated Retained Earnings. It's not likely (in the exam it's VERY rare) that the subsidiary has reflected fair values in the subsidiary financial statements so those subsidiary records still carry the TNCA at $100,000 less 3 years' depreciation of $30,000 In working W3 (this is my way of dealing with the issue) we need the "today" value of that TNCA fair value adjustment and that is $20,000 less 3 years notional extra depreciation on that fair value increase = $3,000 So $17,000 is added into the Retained Earnings as at today in the top half of working W3 The equivalent value of those fair valued assets as at date of acquisition was $20,000 and that figure is added to the pre-acquisition retained earnings in the bottom half of working W3 And that's all there is to it, really BPP and Kaplan both arrive at the same value but they short-cut the procedure by merely including as a DEDUCTION the $3,000 extra depreciation in their working to arrive at Consolidated Retained Earnings Whichever way you find easier, that's fine

Thank you so much.

You're welcome