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Dear Tutor,
as per Answer from December 2013 exam:Immediate cash consideration (6,000 x 2 (i.e. shares of 50 cents) x 75% x $1·50) 13,500
Contingent consideration 1,800
Non-controlling interest (12,000 x 25% x $1·20) 3,600
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18,900
Net assets (equity) of Southstar at 30 September 2013 18,000
Add back: post-acquisition losses (4,600 x 6/12) 2,300
Fair value adjustment for property 2,000
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Net assets at date of acquisition (22,300)
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Bargain purchase/negative goodwill – credited directly to profit or loss (3,400)My question is:
Why for the calculation of the goodwill they add back the post acquisition losses?
In my calculation I have deducted the pre-acquisition losses (18,000-2,300+2000).
Can you please clarify?
Many thanksHi,
If memory serves me right then we are given the retained earnings at the reporting date and need to work backwards to get the retained earnings at the acquisition date. The lossed will have reduced the retained earnings from the acquisition date to the reporting date, so therefore to work backwards from the reporting date we will need to add the losses back.
Thanks
Thanks. Actually the question provide the yearly statements of profit or loss and other comprehensive income, so it is quite straight forward to get pre/post acquisition profit or loss.
I have actually found the same treatment in December 2014 exam(Plastik/Subtrack):
In the goodwill calculation the post acquisition profit is added back while the question provide us with the yearly Statements of profit or loss and other comprehensive income for the year ended 30 September 2014, which makes the calculation of pre-acquisition profit quite easy.
For the all the other past exams, the treatment is different (calculation of pre acquistion profit or loss).I would be grateful, if you can have a look at it!
Thanks!Hi,
It is much more straight forward to work backwards and it looks like that in your calculation you have deducted the losses, which is incorrect. Losses will have reduced the year-end retained earnings from what they were at acquisition so we need to get to a higher retained earnings figure at acquisition than at the reporting date, so therefore the losses are added back.
In the Dec’14 exam the subsidiary made profits and not losses, so we would need to deduct these profit when working backwards to get the retained earnings at acquisition.
Hope that clears it up for you.
Thanks
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