Question

The P Ltd acquires all issued capital of the S Ltd for a consideration of $1,000,000 cash and 800,000 shares eachvalued at $1.50. The summary statement of the financial position of the subsidiary company immediatelyfollowing the acquisition is:Fair value of assets acquired $2,640,000Fair value of liabilities acquired $720,000Total shareholders’ equity of the subsidiary company $800,000Retained earnings of the subsidiary company $1,120,000Required:(a) Pass the necessary journal entry to record the acquisition (2 marks)(b) Determine the amount of goodwill (or bargain purchase) arising out of the acquisition (2 marks)(c) Pass the necessary consolidation entry to eliminate the subsidiary by the parent company (2 marks)(d) Determine the amount of goodwill (or bargain purchase) arising out of the acquisition if the purchase consideration paid was $1,000,000 cash and 400,000 shares each valued at $1.50 (1 marks)

Answer 1

Answer and Explanation:

a. The Journal entry is shown below:-

Investment Dr, $2,200,000

To Cash $1,000,000

To Common Shares $1,200,000 (800,000 × $1.50)

(Being the acquisition is recorded)

b. The computation of amount of goodwill is shown below:-

Net assets = Fair value of assets - Fair value of liabilities

= $2,640,000 - $720,000

= $1,920,000

Amount of goodwill = Purchase consideration - Net assets

= $1,920,000 - ($1,000,000 + $1,200,000)

= $280,000

c. The Journal entry is shown below:-

Purchase of assets Dr, $2,640,000

Goodwill Dr, $280,000

To Purchase of liabilities $720,000

To Investment $2,200,000

(Being consolidation entry is recorded)

d. The computation of amount of goodwill is shown below:-

Net assets = Fair value of assets - Fair value of liabilities

= $2,640,000 - $720,000

= $1,920,000

Amount of goodwill = Net assets - Purchase consideration

= $1,920,000 - ($1,000,000 + $400,000 × $1.50)

= $1,920,000 - $1,600,000

= $320,000