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Chapter 17

Example 3

Fair value of assets

On 1 October 20X6, Paren secured 80% of Sujay’s 20,000 ordinary $1
shares.

At the date of acquisition the balance on Sujay’s retained earnings was
$24,000, and Sujay earned profit of a further $12,000 during the year to 30
September 20X7.

At the date of acquisition, the fair value of Sujay’s property, plant and
equipment was equal to its carrying amount with the exception of Sujay’s
plant which had a fair value of $6,000 above its carrying amount. At that date
the plant had a remaining life of four years. Sujay uses straight-line
depreciation for plant assuming a nil residual value.

Also at the date of acquisition, Paren valued Sujay’s customer relationships
as an intangible asset at a fair value of $4,500. Sujay has not accounted for
this asset. Trading relationships with Sujay’s customers last on average for
six years.

Required:

Prepare the working (W2) for Sujay’s net assets for inclusion within the
preparation of Paren’s consolidated statement of financial position as at
30 September 20X7.

Solution

Acquisition Reporting Post-
date acquisition
$ $ $

Share capital 20,000 20,000
Retained earnings 24,000 36,000 12,000
Fair value: plant 6,000 6,000
Depreciation: ¼ × 6,000 (1,500) (1,500)
Fair value: customer list 4,500 4,500
1
Amortisation: / 6 × 4,500 (750) (750)
———— ———— ————
54,500 64,250 9,750
———— ———— ————

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