Inventory was acquired as part of a business combination at the end of 20X1. The inventory was sold in 20X2. How should the fair value increment for the inventory at acquisition be treated for consolidation at the end of 20X2?
A)It should be added to inventory.
B)It should be added to sales.
C)It should be added to the cost of goods sold.
D)It should be added to retained earnings.

Question

Quizplus · Accepted Answer

The fair value increment for inventory at acquisition should be added to the cost of goods sold, as it represents the additional cost incurred to acquire and sell the inventory. This will ensure that the cost of goods sold reflects the true cost of the inventory sold during the period. Adding it to inventory (choice A) would overstate the value of inventory on the balance sheet, while adding it to sales (choice B) would overstate the revenue generated from the sale of inventory. Adding it to retained earnings (choice D) would not be appropriate, as this represents the accumulation of profits over time and does not directly relate to the treatment of inventory.

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