instructions: explain the financial reporting adjustment required for the year ended 31 december 2020 in respect of the issues identified in Larsen's handover notes(exhibit 3). Include journal entries for each adjustment

 

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3: Handover notes for Jenson, group financial controller - prepared by Larsen (1) Business combination - Desco Pesco acquired all the ordinary shares of Desco on 1 January 2020 at a fair value of consideration transferred of £1,200,000, which consists of a cash payment of £1,000,000 paid on the acquisition date and the remaining £210,000 payable on 1 January 2021. I have recorded the cash payment but not the deferred payment. I have also recognised the assets acquired and liabilities assumed of Desco as well as a purchased goodwill of £250,000 arising from the business combination, calculated based on the cash payment as a fair value of consideration paid. However, I have not made a fair value adjustment of £115,000, attributable to a non-depreciable property, as the fair valuation exercise has only been completed in September 2020. (2) Goodwill and intangibles I observed the following pertaining to Mesco. Mesco has been in business for more than 3 years and I estimated that its market value of net assets should be at least £300,000 higher than its carrying amount. Accordingly, I have recognised £300,000 as goodwill in the books of Mesco and created a revaluation surplus in equity on 1 January 2020. I amortised the goodwill on a straight-line basis over a 10-year period based on which, the first year's amortisation has been included in the administrative expenses. I also reviewed the fair value of an acquired brand of Mesco in the draft consolidated financial statements at 31 December 2020. Accordingly, I revalued the brand by recognising a revaluation surplus of £50,000, an estimated value by a qualified consultant. 3: Handover notes for Jenson, group financial controller - prepared by Larsen (1) Business combination - Desco Pesco acquired all the ordinary shares of Desco on 1 January 2020 at a fair value of consideration transferred of £1,200,000, which consists of a cash payment of £1,000,000 paid on the acquisition date and the remaining £210,000 payable on 1 January 2021. I have recorded the cash payment but not the deferred payment. I have also recognised the assets acquired and liabilities assumed of Desco as well as a purchased goodwill of £250,000 arising from the business combination, calculated based on the cash payment as a fair value of consideration paid. However, I have not made a fair value adjustment of £115,000, attributable to a non-depreciable property, as the fair valuation exercise has only been completed in September 2020. (2) Goodwill and intangibles I observed the following pertaining to Mesco. Mesco has been in business for more than 3 years and I estimated that its market value of net assets should be at least £300,000 higher than its carrying amount. Accordingly, I have recognised £300,000 as goodwill in the books of Mesco and created a revaluation surplus in equity on 1 January 2020. I amortised the goodwill on a straight-line basis over a 10-year period based on which, the first year's amortisation has been included in the administrative expenses. I also reviewed the fair value of an acquired brand of Mesco in the draft consolidated financial statements at 31 December 2020. Accordingly, I revalued the brand by recognising a revaluation surplus of £50,000, an estimated value by a qualified consultant.

Answer rating: 100% (QA)

3 Inventory I noted that there was an overstatement of inventory in the draft financial statements of Mesco by E20000 as at 31 December 2020 I have therefore made the necessary adjustment in the finan... View the full answer