Fair value depreciation adjustments

KKrutish5y ago

I came across a question where they have added the fair value depreciation adjustment to the post aquisiition reserve instead of adding it Here is the relevant part of the question On 1 April 2004 Penfold aquired the business 80%. The finanicial year end is 30 September 2004 Penfold sold an item of plant to Superted on 1 April 2004 for $25 million when its carrying amount was $20 million.It had a remaining useful life of 5 years at this date. I tried calculating the fair value adjustment first and since it is greater than the carrying amount there has been an increase in the fair value adjustment by $5 million. I then did this 5 million*6/12*1/5=0.1 million I then deducted 0.1 from the reporting column for the fair value at net assets But the correct answer in the exam kit has added 0.1 to the reporting column instead I don't know why they have added it like this because the kaplan textbook says to deduct fair value depreciation adjustments at reporting date

P2-D2Tutor5y ago#1

Hi, This is not a fair value adjustment and is a PPE PURP and they are adjusting for the difference in deprecation following the sale of PPE between group companies. Prior to the sale the PPE would have been depreciated at $4m per annum ($20m/5 years). Following the sale the depreciation will not be at $5m per annum ($25m/5 years). As the group accounts are prepared on the single entity concept we need to get the depreciation back to the $4m as that is what was charged previously when the asset would have been originally purchased. The difference is the $1m and that is what they are adjusting for by adding it back to the profit/retained earning. Thanks

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