Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Fair values in acquisition accounting
- This topic has 1 reply, 2 voices, and was last updated 6 years ago by MikeLittle.
- AuthorPosts
- January 10, 2018 at 12:57 pm #428201
An asset is recorded in S Co’s books at its historical cost of $4000. On 1 January 20X5 P Co bought 80% of S Co’s equity. It’s directors attributed a fair value of $3000 to the asset as at that date. It had been depreciated for two years out of an expected life of four years on a straight line basis. There was no expected residual value. On 30th June 20X5 the asset was sold for $2,600. What is the profit or loss on disposal of this asset to be recorded in S Co’s accounts and in P Co’s consolidated accounts for the year ended 31 December 20X5?
I don’t know why the depreciation calculated is for 11/2 years yet it was sold in 20X5. Please assist me understand why.
January 10, 2018 at 1:47 pm #428209I’m not 100% clear on the time line here … at what date was the asset carried at $4,000 having been depreciated for two years? Was that as at 31 December, 20X4?
In addition, you write “It’s directors attributed a fair value of $3000 …” I’m not clear whose directors we are referring to! Is it the S Co directors, therefore requiring an impairment in the S records? (This seems to be the more UNlikely supposition!)
Or is it the P directors therefore requiring adjustments for the purposes of the consolidation but, crucially, not requiring adjustment in the S Co records (This seems to be the more likely supposition!)
If these are correct suppositions on my part, then S Co will continue to depreciate the asset at the rate of $2,000 per annum so that, as at 30 June, 20X5, S will have further depreciated the asset by $1,000 and it now has a carrying value of $3,000
On 30 June, the asset is sold for $2,600 so, in S Co’s records, there will be recorded a loss of $400 ($3,000 – $2,600)
However, for the purposes of the consolidation that asset will be revalued down to $3,000 requiring adjustment to the pre-acquisition figures (Dr pre-acquisition Retained Earnings $1,000 and Cr Asset Account $1,000)
At the date of acquisition, the asset now has an estimated remaining useful life of 2 years requiring depreciation of $1,500 per annum with effect from 1 January, 20X5
For the six months to June 20X5, the revalued fair valued asset will be depreciated by half a year at the rate of $1,500 for a full year
So, for the sake of the consolidation, that asset as at date of disposal is now written down to $2,250 ($3,000 – $750) and is sold for $2,600 giving a gain on disposal of $350
You haven’t given me the source of the question so I’m not able to comment on the derivation of the 1.5 years to which you refer but hopefully my explanation has cleared up your concerns
OK?
- AuthorPosts
- The topic ‘Fair values in acquisition accounting’ is closed to new replies.