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Dear Mike,
I am confused in calculating depreciation in this following point while doing consolidation. Please can you explain it to me. Thank you.Satago had plant in its Statement of Financial Position at the date of acquisition with a carrying value of $100,000 but a fair value of $120,000. The plant had a remaining life of 10 years at acquisition. Depreciation is charged to cost of sales.
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
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