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On 01 July 20X4 Lion paid $20m to acquire 70% of of the issued share capital of Tiger. For the year ended 31 December 20X4, Tiger had earned profit after tax of $2m. Tiger had retained earnings of $10m at 01 January 20X4. At the date of acquisition, Tiger had issued equity capital of $8m and the fair value of the non-controlling interest at that date was $6m.
What was the goodwill on acquisition of Tiger for inclusion in the Lion consolidated statements for Y/E 31 December 20X4?
Could you explain how answer is $7m?
Consideration paid $20m + FV of NCI at acquisition $6m – equity $8m – retained earnings to acquisition $1m (6/12 x $2m) – retained earnings $10m = $7m
Why has answer taken full value of retained earnings including the value of retained earnings from Jan to July? Should this not be half?
For the calculation of the goodwill be need to know the retained earnings at the date of acquisition. They were 10M at 1 Jan X4 and during the period to 1 July they will have increased by 1/2 of the profits for the year to 31 Dec X4 which is 1/2 x 2M.
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