DC Company Purchased 100% of the Outstanding Common Shares of FA

question 38

Multiple Choice

DC Company purchased 100% of the outstanding common shares of FA Company on December 31, 20X3, for $170,000. At that date, FA had $100,000 of outstanding common shares and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no residual value. Inventory turns over four times a year.
- What adjustment should be made to the consolidated financial statements for the year ended December 31, 20X4, with respect to the $10,000 fair value adjustment to inventory?

• A)An adjustment should be made through opening retained earnings.
• B)An adjustment should be made to cost of sales.
• C)No adjustment is required as an adjustment would have already been made to inventory at the time of sale.
• D)No adjustment is required as an adjustment would have already been made to cost of sales at the time of sale.

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Definitions:

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