Unity Limited acquired 100% of the share capital of Bellvista Limited. Bellvista had issued share capital of $200 000. The book values of Bellvista Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. The tax rate is 30%. The fair value of the identifiable net assets is:
A) $270 000.
B) $220 000.
C) $320 000.
D) $200 000.

Question

Quizplus · Accepted Answer

The fair value of the identifiable net assets is calculated by adjusting the book values of the assets to their fair values. The buildings' book value is $100,000, adjusted to a fair value of $180,000, an increase of $80,000. The machinery's book value is $120,000, adjusted to a fair value of $140,000, an increase of $20,000. Therefore, the total fair value of the identifiable net assets is $200,000 (original book value of assets) + $80,000 (increase for buildings) + $20,000 (increase for machinery) = $300,000. However, considering the tax impact on the revaluation (which I mistakenly overlooked in the calculation), the correct approach would involve calculating the net increase after tax adjustments, if applicable, to the revaluation surplus. Given the information provided, the tax impact is not directly factored into the calculation of fair value of the identifiable net assets for the purpose of acquisition accounting, thus making the initial calculation without tax adjustments the relevant method. Therefore, the fair value of the identifiable net assets is the sum of the adjusted fair values of the buildings and machinery, which is $180,000 + $140,000 = $320,000. My initial response contained an error in the calculation and interpretation of how tax impacts the fair value of identifiable net assets in this context. The correct answer should reflect the sum of the fair values of the assets without subtracting tax effects for the purpose of this calculation.

Unity Limited Acquired 100% of the Share Capital of Bellvista