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Patula Co acquired 80% of Sanka Co on 1 October 2005. At this date, some of Sanka Co’s Inventory had a carrying amount of $600,000 but a fair value of $800,000. By 31 December 2005, 70% of this inventory had been sold by Sanka Co.
Individual statememts of financial position at 31 December 2005 for both companies show the following:
Patula Co. Sanka Co
Inventories. $3,250,000 $1,940,000
What will be the total inventories figure in the consolidate SFP of patula Co as at 31 Dec. 2005?
Answer $5,250,000
3,250,000 + 1,940,000 + 200*30% .I don’t know why mid year calculation was not included which is from 1 October 2005 to 31 December 2005 . Also inventory of the remaining 30% why being added instead of being deducted as that of PURP calculations ?
So there’s a fair value adjustment as at date of acquisition of $200,000 and by year end 70% has been sold so there’s a fair value adjustment as at the year end of $60,000 (ie 30% * $200,000)
Inventory is calAculates as at a moment in time.
Inventory is NOT something that is time apportioned … Inventory does not change in carrying value on a straight line basis through the year
Imagine if it did! After 20 years it would be enormous and after 50 years, inventory value would be MASSIVE!
The fair value calculation as at date of acquisition was $200,000
The equivalent figure at the year end was 30% of $200,000 (ie $60,000)
Inventory is a funny thing! That $200,000 fair value adjustment as at date of acquisition means that pre-tax profits need to be increased by that $200,000
But that also means that the opening cost of sales figure for the post-acquisition period starts off $200,000 higher thus potentially reducing post-acquisition profits by $200,000
But it’s not all bad news because the closing inventory is also higher by our 30% of $200,000
Does that do it for you?
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