1. avatar says

    Dear sir,

    When you calculate goodwill, why is the share capital of S, retained earnings and extra fair value on NCA the net assets of S? Why is the NCA, CA and CL not considered?

    Really confused about this, hope you will enlighten me!

    Lastly, the calculation of retained earnings, why is the company P not entitled to the retained profits of $6000 (pre-acquisition profits) when they acquired company S? \

    Many thanks!

    • Profile photo of John Moffat says

      The definition of net assets is non-current assets + current assets – current liabilities – non-current liabilities. The net assets are always equal to the total capital i.e. share capital plus reserves (in this case retained earnings).

      Company P is entitled to their share of pre-acquisition profits – that was part of the reason for the amount that they paid for their shares. The net assets at the date of acquisition would be equal to the total capital at the date of acquisition – i.e. share capital plus retained earnings at the date of acquisition.

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