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Hi tutor,
I saw a question in F3 BPP Revision kit Qn 26.1 as follow :
On 1 Jan 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date Beta Co’s retained earnings amounted to $90,000 and the fair values of Beta Co’s assets at acquisition were equal to their book values.
3 years later on 31 Dec 20X2, the SOFP of the 2 companies were :Alpha Co
Sundry net assets $230,000
Shares in Beta $180,000Ordinary shares $200,000
Retained earnings $210,000Beta Co
Sundry net assets $260,000Ordinary shares $100,000
Retained earnings $160,000My question is : Why did the investment in subsidiary drop from $270,000 on 1 Jan 20X0 to $180,000 on 31 Dec 20X2?
Why this drop in investment affect the goodwill calculation?This is very poor of BPP – that cost of the shares in Alpha’s SOFP should be 270,000. They will certainly not drop in value in Paper F3.
However, this mistake of BPP’s does not affect the calculation of the goodwill, and the answer is correct. The value that was placed on Beta was the 270,000 plus the fair value of the NCI, so a total of 312,000.
The value of the net assets in Beta was equal to the share capital plus the pre-acquisition retained earnings, so a total of 190,000.
So the goodwill is the difference of 122,000.
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