Oliveira Limited estimated that the net present value of future cash flows from Equipment acquired in a business combination is $15 000. The cost of replacing the Equipment is estimated to be $18 000. The Equipment has been independently appraised at a value of $14 000. A similar item of Equipment cost the acquirer $19 000 the previous year. The fair value at which the Equipment will be recognised when recording the business combination is:
A) $14 000
B) $15 000
C) $18 000
D) $19 000.

Question

Quizplus · Accepted Answer

The fair value recognized when recording the business combination should be based on the independently appraised value of the Equipment, which is $14 000. The estimated net present value of future cash flows and the cost of replacing the Equipment are not relevant in determining its fair value. The cost of acquiring a similar item of Equipment the previous year is also not indicative of the fair value at the time of the current business combination. Therefore, the correct answer is A) $14 000.

Oliveira Limited Estimated That the Net Present Value of Future