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Entity C acquired eighty per cent of the issued equity shares of entity D by paying cash of $3.00 per share plus exchanging three shares in entity C for every five shares acquired in entity D. At that date, entity D had issued equity capital of two hundred and fifty thousand shares. At the date of acquisition, the fair value of an equity share in entity C was $3.50 and the fair value of an equity share in entity D was $2.00. The nominal value per share of both entities was $1.00 per share.
What was the fair value of consideration paid by entity C to gain control of entity D?GoodDay Sir, Kindly explain me this question and how did we solve it as I did not understand the concept of it
C is buying 80% x 250,000 = 200,000 shares in C.
For every share in C, they are paying $3 plus giving them shares.
They are giving 3 shares in C worth 3 x $3.50 = $10.50 for every 5 shares in D. Therefore every share in D is effectively costing $10.50/5 = $2.10 in shares.
Therefore the total consideration is $2.10 + $3 = $5.10 per share and is therefore 200,000 x $5.10 = $1,020,000.
(It is questionable whether this can actually be asked in Paper F3, but better to be safe 🙂 )
This question was in one of the Acca approved exam kit and I dint understand the question thank you for your help. Sir kindly can you explain to me what ‘fair value of an equity share in entity C was $3.50 ‘ means?
Also Sir I want to ask
If P sells goods to S we will deduct PURP from Group retained earning and Inventory on consolidated SOFP…right sir?
and if S sells goods to P… we will deduct PURP from NCI and also from inventory in consolidated SOFP…as per your lectures
but sir in the text book that i am using , when S sells goods to ‘P’ PURP is deducted from Net Assets of Subsidiary at reporting date and inventory…Kindly Sir explain this i am having problem in from where to deduct PURP in both cases
On 1 July 20X4 Lion paid $20 million to acquire seventy per cent of the issued equity capital of Tiger. For the year ended 31 December 20X4, Tiger had earned profit after tax of $2 million. Tiger had retained earnings of $10 million at 1 January 20X4. At the date of acquisition, Tiger had issued equity capital of $8 million and the fair value of the non-controlling interest at that date was $6 million.
Based upon the available information, what was goodwill on acquisition of Tiger for inclusion in the Lion consolidated financial statements for the year ended 31 December 20X4?SOLUTION:
$7,000
Consideration paid 20M
FV of NCI at acquisition 6M
FV of net assets acquired:
Equity share capital 8M
Retained earnings to I Jan X4 10M
Retained earnings to acquisition (6/12 × 2,000,000) 1M
––––––
(19,000)
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Goodwill on acquisition 7,000Sir I Understood all the question except for one part… we calculate goodwill by …Consideration paid + f.V of NCI – Net assests of S at Aquisition date (i.e share capital + R.E At date of acquisition)
BUT however in this question retained earning at acquisition and reporting date is deducted when only at acquisition date should have been deducted.. why so?? kindly sir
Sorry and Thank you In advance for asking too many questions and for your invaluable help as a tutor.
1. I know that one of the ACCA approved exam kits has this question in, but it is still questionable whether it can actually be asked in the exam (The exam/revision kits are certainly not perfect :-))
2. Fair value simply means the ‘true’ value (i.e. the value on the stock exchange).
3. The company that has recorded the profit is the company that sold the goods to the other company. Therefore when consolidating we subtract the PURP from the profits of the company that did the selling and subtract it also from the groups inventory. That is exactly what I say in the lecture 🙂
(The subsidiaries own financial statements (and the holding companies financial statements) are not affected at all – they are two separate companies. Only the consolidated statements are affected.4. The date of acquisition was 1 july which was half way through a year. Therefore the retained earnings at the date of acquisition were the figure at the start of the year (10M) plus half of the earnings during the year (1/2 x 2M).
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