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- October 12, 2017 at 1:26 pm #410553AnonymousInactive
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Hi to all !
Please can any one solve the below question:
P acquired 75% of the ordinary shares in S on 1st April 2016. P has prepared a consolidated statement of financial position at 31 March 2017, which shows goodwill of $200,000 and consolidated reserves of $400,000. However this consolidation statement of financial position has ignored the fair value of an item of plant held by S which at the acquisition date of acquisition was $120,000 in excess of its carrying amount . The assets has a remaining life of five years.
After Adjusting for the above fair value, what amounts should be shown for goodwill and retained earnings in P consolidated statement of financial position as at 31 March 2017?
The Answer is:
Goodwill : $110,000 ; Reserves $382,000
Please can you explain the steps in arriving the answer in steps.
Thanks very much for your support and feedback in Advance 🙂
October 12, 2017 at 6:58 pm #410658Whatever the post-acquisition retained earnings in S were, as a result of the depreciation on the fair value adjustment (1/5 x $120,000 = $24,000) that figure for the S post-acq retained earnings will fall by $24,000 and P’s share of S post-acquisition retained earnings will also fall by the P percentage of that $24,000
So the consolidated retained earnings in the question amounting to $400,000 will fall by 75% x $24,000 down to $382,000
Now for the goodwill (I’m going to use ‘pretend’ figures and I’m going to assume that you left off the vital piece of information on purpose! What (I believe) you have omitted to tell me is that the nci is valued on a proportionate basis
Assume the following:
Cost for P’s acquisition was $2,600
NCI is valued on proportionate basis of 25% of S fair valued net assets
S share capital was $2,000
S retained earnings were $1,200So the original goodwill calculation was as follows:
P cost $2,600
NCI value 25% x ($2,000 + $1,200) = $800
Total S ‘worth’ $3,400S net assets:
Shares $$2,000
Retained earnings $1,200
Total $3,200Goodwill $200
After amendment, this calculation reads:
P cost $2,600
NCI value 25% x ($2,000 + $1,200 + $120) = $830
Total S ‘worth’ $3,430S net assets:
Shares $$2,000
Retained earnings $1,200
Fair value adjustment $120
Total $3,320Goodwill $110
OK?
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