When Wayne Ltd acquired 100% of the share capital of Carol Ltd, the carrying amount of Carol Ltd's machinery was $200 000. The fair value of the machinery on acquisition date was $160 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that will be recognised on consolidation?
A) $40 000
B) $12 000
C) $28 000
D) $160 000

Question

Quizplus · Accepted Answer

The business combination valuation reserve is the difference between the fair value of the net identifiable assets acquired and the consideration paid for those assets. In this case, the fair value of the machinery is $160,000, but the carrying amount on Carol Ltd.'s books is $200,000. This means there is a difference of $40,000. However, we need to take into account the tax rate of 30%, which means we can only recognise 70% of this difference in the business combination valuation reserve. Therefore, the amount that will be recognised on consolidation is $28,000 (i.e. $40,000 x 70%).

When Wayne Ltd Acquired 100% of the Share Capital of Carol