Practice questions chapter 7 F7 QUESTION 8

Let’s sort this little matter out first!

You write:

“In every other question the solution was to ADD the calculated depreciation amount to post acq. retained earnings.”

There are 8 questions in this section.

Questions 2, 3, 4 and 7 there is no depreciation adjustment because the fair value adjusted asset was land

Questions 1 and 5 the depreciation on the fair value asset adjustment is DEDUCTED in arriving at post acquisition retained (as it is also in question 8)

So that leaves us with just question 6 which I suppose we could refer to as “In every other question …”

In question 6 the depreciation on the fair value adjustment is ADDED to arrive at post acquisition retained earnings because the fair value of the asset at date of acquisition was LOWER than its book value (in all other examples the fair value of the asset was greater than its book value)

OK?

The profit made since the date of acquisition was $92,500 – $79,000 = $13,500

But we need to deduct the extra depreciation on the fair value adjustment from that ($500)

So 6 months’ adjusted profits are $13,000 and 40% of that is $5,200