Question

Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for

$180 000. Share capital was $100 000 and reserves amounted to $50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $10 000 below fair value. The fair value of the NCI at the date of Jiminez’s acquisition was $35 000. If the company tax rate was 30%, and the full goodwill method was adopted, the NCI share of equity at the date of acquisition was:

Answer 1

To calculate the NCI share of equity at the date of acquisition using the full goodwill method, the fair value of the subsidiary is determined by the sum of Jiminez Limited's purchase consideration and the fair value of the NCI. After adjusting for the building valuation error and deferred tax, the NCI share of equity is calculated as 20% of the adjusted total fair value.

Step-by-step explanation:

The Non-Controlling Interest (NCI) share of equity at the date of acquisition can be calculated following the full goodwill method. First, we identify the total fair value of the subsidiary by adding the fair value of NCI to the purchase consideration of the parent:

• Fair value of NCI: $35,000
• Purchase consideration: $180,000
• Total fair value of subsidiary: $35,000 + $180,000 = $215,000

Next, we adjust for the building's fair value being $10,000 below stated value and correct it by recognizing a deferred tax. Since taxes are 30%, the deferred tax liability would be $3,000 (0.30 x $10,000). We adjust the fair value of the subsidiary accordingly, adding this tax effect back:

• Adjusted fair value of subsidiary: $215,000 + $3,000 = $218,000

The NCI percentage is 20% (100% - 80%). Now, we use it to calculate the NCI share:

• NCI share of equity = 20% x $218,000 = $43,600