Sippy Ltd acquired 100% of the share capital of Downs Ltd when the carrying value of Downs Ltd's plant and machinery was $100 000. The fair value of the plant on acquisition date was $150 000. 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) $35 000
C) $50 000
D) $150 000

Question

Quizplus · Accepted Answer

When Sippy Ltd acquired Downs Ltd, there was a difference between the carrying value ($100 000) of the plant and machinery and the fair value ($150 000) on acquisition date. This difference of $50 000 is called a "bargain purchase" or "negative goodwill".

To account for this, Sippy Ltd will record a gain on bargain purchase of $50 000 in its books. However, in accordance with accounting standards, the gain cannot be recognised as income. Instead, it must be recognised as a business combination valuation reserve (BCVR) on the consolidated statement of financial position.

The amount of the BCVR is equal to the gain on bargain purchase, which in this case is $50 000. Therefore, the correct answer is B ($35 000 after applying the 30% tax rate).

Sippy Ltd Acquired 100% of the Share Capital of Downs