Question

Question 2 Week 8 (7 marks)

The P Ltd acquires all issued capital of the S Ltd for a consideration of $1,000,000 cash and 800,000 shares each
valued at $1.50. The summary statement of the financial position of the subsidiary company immediately
following the acquisition is:
Fair value of assets acquired $2,640,000
Fair value of liabilities acquired $720,000
Total shareholders’ equity of the subsidiary company $800,000
Retained earnings of the subsidiary company $1,120,000
Required:
(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: See explanation

Step-by-step explanation:

a. Pass the necessary journal entry to record the acquisition.

Check the attachment. Note that common shares was calculated as:

= $800,000 × 1.5

= $1,200,000

b. Determine the amount of goodwill (or bargain purchase) arising out of the acquisition.

Fair value of assets acquired = $2,640,000

Less: fair value of liabilities = (720,000)

Net asset of S. LTD = 1,920,000

Purchase consideration = 1,000,000 + 1,200,000 = 2,200,000

Goodwill on acquisition will be:

= $2,200,000 - $1,920,000

= $280,000

c. Pass the necessary consolidation entry to eliminate the subsidiary by the parent company

Check the attachment

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.

Fair value of assets acquired = $2,640,000

Less: fair value of liabilities = (720,000)

Net asset of S. Ltd = 1,920,000

Purchase consideration = (1,000,000 + 400,000) × 1.5 = 1,600,000

Bargain purchase on the acquisition will be:

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

= $320,000