On 1 January 2014, Cowboys Ltd acquired all the issued shares in Tate Ltd. At that date, the plant of Tate Ltd had a fair value of $20 000 more than its carrying amount and an estimated useful life of 5 years. Tate Ltd depreciates the plant on a straight-line basis. The plant was sold to external parties on 31 December 2014. The business combination valuation entries in relation to the plant as at 30 June 2015 will include:
I. Adjustments to the plant account to recognise the fair value adjustment at acquisition date
II. Adjustments to the current depreciation expense
III. Adjustments to retained earnings (opening balance)
IV. Transfers from business combination valuation reserve to retained earnings

Question

Quizplus · Accepted Answer

Since the plant was sold on 31 December 2014, there is no need for adjustments to the plant account (I) as it no longer exists. However, adjustments to the current depreciation expense (II) and retained earnings (III) are necessary to reflect the fair value adjustment and depreciation up to the sale date. Transfers from the business combination valuation reserve to retained earnings (IV) are also required to account for the realized gain from the sale.

On 1 January 2014, Cowboys Ltd Acquired All the Issued