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Hello Sir, I have doubt regarding goodwill arising on consolidation. I did not get the fact that why did they not deduct the Tinsel Co. share capital of $5m to arrive at the goodwill amount.
Tinsel Co has 5 million $1 issued ordinary shares. At 1 May 20X0 Fairy Co purchased 60% of Tinsel
Co’s $1 ordinary shares for $4,000,000. At that date Tinsel Co had net assets with a fair value of
$4,750,000 and a share price of $1.10. Fairy Co valued the non-controlling interest in Tinsel Co at
acquisition as $2,200,000.
What is the total goodwill on acquisition at 1 May 20X0?
A $1,150,000
B $1,750,000
C $ 750,000
D $1,450,000Answer: Fair value of consideration 4,000
Plus fair value of NCI at acquisition 2,200
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed (4,750)
Goodwill 1,450Another Question:
Manchester has 10 million $1 issued ordinary shares. At 1 May 20X9 Bristol purchased 70% of
Manchester’s $1 ordinary shares for $8,000,000. At that date Manchester had net assets with a fair
value of $8,750,000 and its share price was $1.20. The non-controlling interest is valued using the
share price at the date of acquisition.
What was the total goodwill arising on acquisition at 1 May 20X9?
A $4,400,000
B $350,000
C $750,000
D $2,850,000Answer: Fair value of consideration transferred 8,000
Plus fair value of NCI at acquisition ($1.20 ? 3,000,000) 3,600
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed (8,750)
Goodwill 2,850How do you tackle these type of question when the NCI should be valued using the share price? And how do we get the $3m value as given in the answer.
I have watched all of your lectures but still I wasn’t able to solve these questions.
Thank you very much!
Have a good day:)1. We normall subtract the share capital plus retained earnings at the date of acquisition, because this is always equal to the book value of the net assets.
Here the actual value of the net assets is 4,750,000 and this is what we therefore subtract to get the goodwill (and if we were continuing to produce a full consolidated SOFP we would include the net assets at that amount – the fair value adjustment that I refer to in the lectures).2. It is simply following the instructions in the question. Bristol bought 70% x 10M = 7M shares, and therefore the NCI own the remaining 30% x 10M = 3M shares.
The question says that the NCI is to be valued at the share price at the date of acquisition, which is given as $1.20. Therefore the value is 3M shares x $1.20.It sounded so simple and easy! Thank you very much Sir for being so precise and clear:)
Have a good day ahead:)
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