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Dear Tutors,
I have a question regarding “Activity 3: Fair Values” in Chapter 8.
In this exercise, an acquisition happens mid-year, on 1.04.X4, with the Parent acquiring 80% of the Target.
At the date of acquisition, in appraising the target balance sheet, PP&E fair value (10 year useful life) exceeds their carrying amount by 1200, and Inventory by 300 (all inventory is sold before the year end).In calculating the Group retained earnings on 31.12.X4, we account for the change in PPE as 80%*1200/10*9/12, basically reducing the retained earnings for the increased depreciation.
In calculating the impact of inventories though, retained earnings change only by 300*80%. Why don’t we account for the 9/12 in this case?
Another question is: it is stated that Target’s total comprehensive income is 2000. Does this include already all fair value adjustments?
Thanks a lot in advance for your replies, really appreciated!
GusHi Gus,
The depreciation is an annual charge and so if there is a mid-year acquisition then we can only charge the amount related to the period from when we had control. So, in this instance we need to pro-rate by the 9/12.
The inventory is telling us the value at one point in time (at acquisition) and the reporting date, which is what happened in the 9-month period. Given this then there is no requirement to pro-rate the figures.
Any figures given from the subsidiary accounts will not have group adjustment put through and so the TCI figure does not already include the FV adjustments.
Thanks
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