9 using an example explain how the business

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9. Using an example, explain how the business combination valuation entries affect the pre- acquisition entries. Assume at acquisition date, the subsidiary has land recorded at a carrying amount of $10 000 and having a fair value of $15 000. The tax rate is 30%. At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax liability of $1 500 and a BCVR of $3 500. This BCVR is pre-acquisition equity. Hence in the pre- acquisition entry, if prepared at acquisition date, there would be a debit adjustment to BCVR to eliminate the balance of pre-acquisition equity. In subsequent periods, if the land is sold, in the BCVR entries, on sale of the land, there would be a credit adjustment to “Transfer from BCVR”, as the reserve is transferred to retained earnings. In preparing the pre-acquisition entries in the year of sale, the initial entry carried forward from the previous period will still include the BCVR relating to land. A further entry is then required debiting the “Transfer from BCVR” account – hence eliminating pre-acquisition equity – and crediting the BCVR account as this account no longer exists.
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10. Why are some adjustment entries in the previous period’s consolidation worksheet also made in the current period’s worksheet? The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not affect the underlying financial statements or the accounts of the parent or the subsidiary. Hence, if last year’s profits required to be adjusted on consolidation, then potentially retained earnings needs to be adjusted in the current period. Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in the consolidation worksheet for each year that the land remains in the subsidiary. The entry does not change from year to year. Again the reason is that the adjustment to the carrying amount of the land is only made in a worksheet and not in the actual records of the subsidiary itself.
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