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Hi Mike,
Please find a problem with solution below.. My question is… why is the depreciation calculated on the revaluation amount of 250,000 ONLY, and not on say the carrying amount of the building?
Thanks for your work.
Ismael
————————Witch acquired 70% of the 200,000 equity shares of Wizard, its only subsidiary, on 1 April 20X8 when the retained earnings of Wizard were $450,000. The carrying amounts of Wizard’s net assets at the date of acquisition were equal to their fair values apart from a building which had a carrying amount of $600,000 and a fair value of $850,000. The remaining useful life of the building at the acquisition date was 40 years.
Witch measures non-controlling interest at fair value, based on share price. The market value of Wizard shares at the date of acquisition was $1.75.
At 31 March 20X9 the retained earnings of Wizard were $750,000. At what amount should the non-controlling interest appear in the consolidated statement of financial position of Witch at 31 March 20X9?
Solution: $193,125
Fair value at acquisition (200,000 × 30% × $1.75) 105,000
Share of post-acquisition retained earnings ((750 – 450) × 30%) 90,000
Depreciation on fair value adjustment ((250 / 40) × 30%) (1,875)
Therefore the solution given at the back…. 193,125
“My question is… why is the depreciation calculated on the revaluation amount of 250,000 ONLY, and not on say the carrying amount of the building?”
and the answer shows:
“Depreciation on fair value adjustment ((250 / 40) × 30%) (1,875)”
The carrying value of the building as at date of acquisition was $600,000 and a fair value as at that date of $850,000
IF there had been no revaluation, the Wizard financial statements would have shown depreciation on that $600,000
But there was a revaluation of $250,000 on which no depreciation would have been charged by Wizard because that extra $250,000 is not reflected within the Wizard financial statements. But the $600,000 IS
So those financial statements of Wizard already reflect depreciation on a $600,000 building but not (until we adjust it) on the extra $250,000
OK?
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