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When acquired its shares in Spiro the FV of Spiro’s net assets equalled their book values with the following
inventories 20 lower (sold during 20×4)
At acquisition date it is recognized as a negative figure so because it mentions lower is why it is recognized as negative amount at date of acquisition but coming to at date of reporting it will be nil and post acqusition period as positive figure such as post acqusition figuires will increase?.If it would say higher we would recognise it as negative figure at date of reporting and decrease post acquisition figure is not it?
“When acquired its shares in Spiro the FV of Spiro’s net assets equalled their book values with the following”
This doesn’t make sense!
I think that you mean:
“When acquired its shares in Spiro the FV of Spiro’s net assets equalled their book values with the exception of the following:”
If the fair value of assets at date of acquisition is $10,000 lower than their book value, then we need to decrease the value of those assets as at date of acquisition
That inventory has now been sold so the assets as at reporting date are now fairly valued – so why do you want to make an adjustment to the value of the assets at reporting date
The way we arrive at the value of net assets in a consolidation question, and therefore also the way we arrive at post-acquisition retained earnings, is to deduct form “today’s” retained earnings the equivalent figure from “yesterday”
“Today’s” figure is correctly stated – all that inventory has been sold and there are no further adjustments to make to “today’s” figure with reference to that adjustment
“Yesterday’s” figure for retained earnings will have been adjusted when you made the goodwill calculation – the figure would have been decreased because the inventory had been overvalued (a decrease in closing inventory at date of acquisition = a decrease in retained earnings at date of acquisition)
So, let’s say we have retained earnings today of $50,000 and at date of acquisition those retained earnings, pre-adjustment, were $37,000
That gives us a post-acquisition, pre-adjustment figure for retained earnings of $13,000
But the inventory at date of acquisition was $10,000 overvalued so the retained earnings at date of acquisition should be only $27,000
And that means that the post-acquisition retained earnings are $23,000
OK?
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