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Hi Sir, i came across this question in Kaplan exam kit.
Really acquired 75% of the equity share capital of Hard on 1 January 20X9 when Hard had retained losses of $112,000. On 31 December 20X9, Really acquired 30% of the equity share capital of Work when Work had retained earnings of $280,000. The summarised statements of financial position for the year?ended 31 December 20X9 were as follows:
Really Hard
Retained earnings 2,464k usd 1,204k usd375) What is the amount for retained earnings to be included in the consolidated statement of
financial position?Answer given:
Reserves of Really 2,464,000
Post?acquisition reserves –
($112,000 + 1,204,000) × 75%= 987,000 i.e. from retained loss to retained earnings2,464,000 + 987,000 = 3,451,000 usd.
Since “Hard” had pre-acquisitioned retained losses, am i correct if i do this way:
75% X (1,204k usd – ( – $112,000) ? From what i understand is the retained earnings of “Really” in “Hard” is 75% X ( Retained earnings in “Hard” – pre-acquistioned Retained earnings of “Hard”. Since :Hard had only retained losses, therefore the pre-acquisitioned retained earnings need to be in negative.As at 1 January 20X9 there were retained losses of $112,000. As at 31 December 20X9 there were retained earnings of $1,204,000.
For a retained loss of 112,000 to have turned into a retained profit of 1,204,000, the profit for the year must have been 112,000 + 1,204,000 = 1,324,000. How you show it in your own workings is irrelevant, because your workings are not looked at in Paper FA – it is only the answer that is marked.
390) Hi Sir,
Plank acquired 60% of the issued equity share capital of Splinter on 1 January
20X2. On that date, Plank paid $3 cash per share acquired and also issued two shares
(nominal value $1 per share) in exchange for each Splinter share acquired. At the date of
acquisition, Splinter had ten million equity shares of $1 nominal value in issue, plus a share
premium account balance of $10 million and had retained earnings of $50 million. The fair
value of the non-controlling interest in Splinter at the date of acquisition was $14 million.
The fair value of an equity share in Plank and Splinter were $4.50 and $1.50 respectively at
1 January 20X2.What was goodwill on acquisition of Splinter for inclusion in the consolidated financial
statements of Plank for the year ended 31 December 20X2?this is a question from Kaplan exam kit. and it has been asked in “Sylabbus-Is this there?” tread in open tuition before.
“It is a bit unclear as to whether or not consideration in the form of cash plus shares is in the syllabus for F3 or not (it certainly is for later exams).
However it is easily deal with anyway. Plant bought 60% x 10M = 6M shares.
They paid cash of 6M x $3 = $18M, and in addition gave 2 x 6M = 12M shares which were worth 12M x $4.50 = $54M.
So total consideration = 18 + 54 = $72M.”Is 72M usd is the final answer? Because the answer given is 16M usd,
$72M is not the final answer because it is the total consideration as you quoted above.
The question asks for the goodwill on acquisition!!
The goodwill arising on consolidation is (72 + 14) – (10 + 10 + 50) = $16M
Hi Sir,
24. Venus Co acquired 75% of Mercury Co’s 100,000 $1 ordinary share capital on 1 November 2011. The consideration consisted of $2 cash per share and 1 share in Venus Co for every 1 share acquired in Mercury Co.
Venus Co shares have a nominal value of $1 and a fair value of $1.75. The fair value of the non-controlling interest was $82,000 and the fair value of net assets acquired was $215,500.
What should be recorded as goodwill on acquisition of Venus Co in the consolidated financial statements?$63,375
$147,750
$91,500
$16,500The answer given is $147,750.
In your lecture, you mentioned need to deduct the share capital of subsidiary. May i know why in this case we do not need to deduct the share capital of Mercury, which in this case is (100k shares X 1usd = 100k usd)? therefore the answer i get is 47750 usd.
I do not say that at all in the lecture.
Think through the logic of it. To get the goodwill we first take the total consideration (150,000 + 131,250) plus the fair value of the NCI (82,000). This gives the total value being placed on the business ($363,250). The fair value of the assets being acquired is $215,500. Therefore the value being places on the goodwill is 363,250 – 215,500 = $147,750.
Hi Sir,
Please correct me if I am wrong. In the FA lecture notes, Example 2 at page 106, you did deduct the share capital of S (20k usd) for calculating the Goodwill arising on consolidation.
We subtract from the total value of the business (consideration + fair value of the NCI), the fair value of the assets being acquired. Unless the question tells you a fair value (or mentions a fair value adjustment) then we use the value of the assets that would have appeared in the SOFP at the date of acquisition, which has always to be equal to the share capital plus retained earnings at the date of acquisition.
The example in the notes that you refer to does not give a fair value of the net assets at the date of acquisition and therefore it has to be the share capital + retained earnings.
Your previous example number 24 does give the fair value of the assets at the date of acquisition, and so we use that fair value.
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