Forrest Ltd acquired 100% of the share capital of Desert Ltd when the carrying value of Desert Ltd's equipment was $75 000. The fair value of the equipment on acquisition date was $90 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that must be recognised on consolidation?
A) $15 000
B) $10 500
C) $3 500
D) $90 000

Question

Quizplus · Accepted Answer

The business combination valuation reserve is calculated as the fair value of the identifiable assets acquired minus their carrying value minus any liabilities assumed. In this case, the only identifiable asset is the equipment, and there is no mention of any liabilities assumed. Therefore, the valuation reserve is calculated as:
Fair value of equipment - Carrying value of equipment
= $90,000 - $75,000
= $15,000
However, the tax rate needs to be taken into account. When an asset is revalued, the increase in value is not tax deductible, so the tax effect needs to be considered. In this case, the tax rate is 30%, so the tax effect would be:
$15,000 x 0.3 = $4,500
Therefore, the net amount of the valuation reserve would be:
$15,000 - $4,500 = $10,500
So, the correct answer is B.

Forrest Ltd Acquired 100% of the Share Capital of Desert