Question

The balance sheets for Pip Ltd. and Squeak Inc. are shown as at January 1, 2019, the day that Pip acquired 100% of the outstanding shares of Squeak. At that date the fair value of the inventory and plant were respectively, $2,000 and $7,000 higher for Pip and $1,000 and $5,000 higher for Squeak, then their carrying amounts.

	Pip Ltd.			Speak Inc.
Cash & A/R	$	50,000		$	26,000
Inventory		30,000			7,000
Plant		70,000			30,000
	$	140,000		$	63,000
Liabilities	$	80,000		$	33,000
Common shares		25,000			12,500
Retained earnings		35,000			17,500
	$	140,000		$	63,000

At what amount will the inventory and plant appear on the consolidated balance sheet prepared on January 1, 2019?

Multiple Choice

a. Inventory - $39,000; Plant - $107,000

b. Inventory - $37,000; Plant - $112,000

c. Inventory - $38,000; Plant - $105,000

d. Inventory - $40,000; Plant - $100,000

Answer 1

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ANSWER- CORRECT ANSWER IS OPTION (b) i.e. INVENTORY - $ 37000; Plant - $ 112000

​​​​​​Explanation-

CONSERVATISM CONCEPT - The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible. It is applicable on Valuation of inventory also.

At the Valuation of inventory , those Value consider for inventory which is lower between

Cost price

oR

Fair price ( Net Realizable value , market value)

Fair value is not taken in this case, cost Value considered because it is lower than fair price.

so cost price is lower than fair Value so cost price Will be considered. Inventory for consolidated statement is

Pip Ltd. 30000

+ Squeak Inc + 7000

$  37000 TOTAL INVENTORY amount will the inventory and appear on the consolidated balance sheet

In plant's case fair value should be considered

Fair value pip Ltd's plant (70000+7000) = $ 77000

Fair value squeak inc's (30000+5000) = $ 35000

Total Value of PLANT SHOWN IN CONSOLIDATED STATEMENT = ( 77000 + 35000 ) = $ 112000

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