Johnson Limited estimated the net present value of future cash flows from specialised Plant acquired under a business combination to be $30 000. A replacement cost for the Plant is estimated to be $33 000. The Plant has been independently appraised at a value of $31 000. A similar item of Plant cost the acquirer $29 000 the previous year. What is the fair value for recognition of the Plant under a business combination?
A) $29 000
B) $30 000
C) $33 000
D) $31 000.

Question

Quizplus · Accepted Answer

The fair value of the Plant, which is the amount that would be agreed upon in an arm's length transaction between knowledgeable, willing parties, should be based on the independent appraisal value of $31 000 as it is the most reliable and objective estimate. The estimated replacement cost and previous acquisition cost do not provide sufficient evidence to support a different fair value estimate. Therefore, the fair value for recognition of the Plant under a business combination is $31 000.

Johnson Limited Estimated the Net Present Value of Future Cash