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On 1 May 20X5, Diamond Co acquired 75% of the ordinary share capital of Sapphire Co through initial cash payment and agreement to pay contingent consideration to the shareholders of Sapphire Co. The fair value of the contingent consideration was assessed to be $350,000 by Diamond Co on this date.
Diamond Co calculates the non-controlling interest using the fair value at the date of acquisition, which was estimated to be $150,000. The goodwill arising on this acquisition was calculated to be $400,000.
The following figures for Diamond Co are relevant:
$’000
Ordinary shares of $1 at acquisition 600
Retained earnings at 1st January 20X5 350
Profit for the year ended 31st December 20X5 140The profits for Sapphire Co have accrued evenly throughout the year.
What was the amount of cash consideration paid by Diamond Co for the investment in Sapphire Co?
I’m not sure how to work out the Pre-Acquisition retained earnings. The answer given is $396,667.
Hi,
If the acquisition date is 1 May then we will add 4 months of the profit for the year to the opening retained earnings balance. So we will add 5/12 of 140 to the 350 figures given in the question.
This is quite a common scenario in the exam so please keep an eye out for it.
Thanks
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