Consolidations – share exchange (moved from other forum)

[anniebabe]

Hello I am working through Kaplan text, page 460/461
Test your understanding 3 – Cost of Investment

P acquired 60% of S on 1 July 20X7 when the retained earnings of S were $5800. P paid $5000 in cash. P also issued 2 $1 shares for every 5 acquired in S and agreed to pay a further $2000 in 3 years time.
The market value of Ps shares at 1 July 20X7 was $1.80. P has only recorded the cash paid in respect of the investment in S. Current interest rates are 6%
The P group uses the fair value method to value the nci. At the date of acquisition the FV of the nci was $5750.

My question is this :-

It is my understanding that Share Capital/Premium was only – ever of the parent but in the answer they have added another figure to the SC/SP
I am presuming this is to do with the 2/5 issue, but confused how they have worked it out.
The Share Capital figure in the question is $6000 (P) and $5000 (S) Share Premium $4000 (P).
the answer consolidation says Share capital is (6000+1200) and Share premium is (4000+960)
Sorry if this is a silly question, but I have had a block with this, if anyone can answer.
Thank you.
Right I have worked out the calculation
5000 x 2/5 x 60% = 1200

Share Capital 1200
Share Premium 1200 x 0.80 = 960

But not totally sure why I have done it
Can anyone explain
Bit confused with the share exchanges

Thanks

[MikeLittle]

60% of 5,000 shares acquired = 3,000 shares acquired

For every 5 acquired, we issue 2 new ones of our own

So we issue 3,000 / 5 x 2 = 1,200 new shares issued

These new shares are worth $1.80 market value (only $1 nominal value)

So 80 cents per share is premium above nominal value

1,200 x $1 is the increase in share capital and

1,200 x 80 cents is share premium

There is a worked past exam example of this in the free course notes and all the past exam examples of it are in the mini-exercises at the end of the course notes

You MUST get on top of this mini topic – it’s almost guaranteed to come up in the exam!

Need any more help? Post again on this page – I rarely look in the general forum. 🙂

[anniebabe]

thanks Mike, will have a look at this again this afternoon 🙂

[MikeLittle]

Ok, let me know how you go on!

[abdirahmangubani@gmail.com]

send this work please

[P2-D2]

Hi,

What do you mean by your post? It isn’t quite clear. If you want it answered then you need to have made an attempt at answering it yourself first to that I can point out where you have gone wrong in your calculations.

Thanks

[Manveer]

The cash paid $5000 is included in total cost of investment right? Then this figure is used to calculate goodwill. Am I right? Iam trying to figure out where I’ve gone wrong because my balance sheet is not balancing. Yes I have incorporated share capital of $1200 and share premium of $960.

[Manveer]

Sorry, I forgot to include deferred consideration of $1679 in liabilities. Ignore my previous query, thanks.

[Author]

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