Inventory was acquired as part of a business combination at the end of 2012. The inventory was sold in 2013. How should the fair value adjustment for the inventory at acquisition be treated for consolidation at the end of 2013?
A)It should be added to sales.
B)It should be added to the cost of goods sold.
C)It should be added to retained earnings.
D)It should be added to inventory.

Question

Quizplus · Accepted Answer

The fair value adjustment for inventory at acquisition should be added to the cost of goods sold. This is because the adjustment reflects the cost of acquiring the inventory, and therefore should be included in the calculation of the cost of goods sold when the inventory is sold. Adding it to sales would overstate revenue, adding it to retained earnings or inventory would not properly reflect the true cost of goods sold.

Inventory Was Acquired as Part of a Business Combination at the End