Oliveira Limited estimated that the net present value of future cash flows from equipment acquired in a business combination is $15 000. The cost of replacing the equipment is estimated to be $18 000. The equipment has been independently appraised at a value of $14 000. A similar item of equipment cost the acquirer $19 000 last year. The value at which the equipment will be recognised when recording the business combination is:
A) $14 000.
B) $15 000.
C) $18 000.
D) $19 000.

Question

Quizplus · Accepted Answer

The value at which the equipment will be recognised in a business combination is the fair value at the acquisition date, which is $14 000 according to the independent appraisal. The estimated cost of replacing the equipment and the historical cost of a similar item of equipment are not relevant for determining the fair value of the equipment at the acquisition date. The net present value of future cash flows is relevant in determining the goodwill arising from the business combination, but not the fair value of the equipment. Therefore, the best choice is A) $14 000.

Oliveira Limited Estimated That the Net Present Value of Future