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“Penketh’s group policy is to revalue land to market value at the end of each accounting period. Prior to its acquisition, Sphere’s land had been valued at historical cost, but it has adopted the group policy since its acquisition. In addition to the fair value increase in Sphere’s land of $2 million (see note (i)), it had increased by a further $1 million since the acquisition.”
Well when consolidating the examiner deducted 2m from the b/f 3m value in the comprehensive income account of sphere co.Why he did that?
I think that maybe it’s the last phrase of the first sentence that is really important!
“policy is to revalue land to market value at the end of each accounting period”
That means that Sphere has revalued its land AT THE END of the accounting period
At the start of the year Sphere’s land was, say $50 million. At the end of the year that figure has risen to $53 million so $3 million has been taken to comprehensive income
But in note (i) in the question we are told that the land in Sphere had a fair value of $2 in excess of carrying value ie (in my figures) it had a fair value @ DOA of $52 million
So $2 million of that $3 million in comprehensive income relates to the pre-acquisition period and is part of the calculation of goodwill.
Only the post-acquisition increase should be in the consolidated comprehensive income
OK?
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