When using consolidation method, if the fair value of the inventory of the target is greater than its book value, do you adjust it up before adding to the parent balance sheet? Then do you adjust COGS up too? Do you guys have any summary about adjusting the financial statements before calculating something, I’m so lost in that category and know that it’s so important for the exam. Thanks guys!
Good question. Any asset where FV is greater than BV you will write up when consolidating. This reduces the amount of goodwill you assign and also will lower net income as depreciation expense is increased. Not sure about the COGs though, but I don’t think you increase that. Any others care to comment?
In most problems that have been encountered - they tell you clearly (to avoid these issues) that the increase in fair value can be attributed to PP&E.
You don’t include a company’s past income (prior to acquisition). If you buy a company, you only benefit from what is on their balance sheet (which is a claim to assets that can generate income in the future). So, dont worry about restating COGS. Purchase price allocation involves allocating the price paid to all assets based on their FMV at the date of acquisition. So, yes to the inventory question.