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Dear Sir,
I have a doubt with this question.On 1 April 20X0 Picant acquired 75% of Sander’s equity shares by means of a share exchange and an additional amount payable on 1 April 20X1 that was contingent upon the post-acquisition performance of
Sander. At the date of acquisition Picant assessed the fair value of this contingent consideration at $4.2 million but by 31 March 20X1 it was clear that the amount to be paid would be only $2.7 million.How should Picant account for this $1.5 million adjustment in its financial statements as at 31 March 20X1?
A Debit current liabilities/Credit goodwill
B Debit retained earnings/Credit current liabilities
C Debit goodwill/Credit current liabilities
D Debit current liabilities/Credit retained earningsThe Answer in the BPP revision kit says D. I know that the Current Liabilities would be reduced by the amount no longer to be paid, but why an increase in Retained Earnings? And why won’t Goodwill be reduced…. doesn’t it rely on the cost of parents investment?
I’d be glad if you could answer this question
Thanks!
As at the date of acquisition, the contingent liability was valued at $4,200,000 … so there’s no change to the goodwill calculation because, as at the date of acquisition …
Post-acquisition events show that the estimated valuation of $4,200,000 was too high and that the figure should be only $2,700,000
OK, debit Contingent Liability $1,500,000
Now, where are you going to post the debit?
There’s only one place it can go!
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