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On 1 May, 2009 Panda purchased 80% of Sloth’s 120 million $1 equity shares. The acquisition was through a share exchange of three shares
in Panda for every five shares in Sloth. The market prices of shares in Panda and Sloth at 1 May, 2009 were $6 and $3.20 respectively.
Panda Sloth
Retained earnings at 1 November, 2008 40 152
Profit/ (loss) for the year ended 31 October, 2009 47.2 21
Dividend for year end 31 October, 2009 – (8)
The fair values of Sloth’s net assets at date of acquisition were equal to their carrying amounts with the exception of an item of plant which
had a carrying value of $12 million and a fair value of $17 million.
In addition, Sloth owns, but has not previously recognised, a domain name with a value of $20 million Panda has credited the whole of
the dividend it received from Sloth to investment income.
The non-controlling interest in Sloth is to be valued at fair value as at date of acquisition. For this purpose, the Sloth share price at that date can be taken to be indicative of the fair value of the non-controlling interest’s investment.
The goodwill in Sloth has not suffered any impairment
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in this question i have understand everything and i am able to calculate G/W correctly also except;
Panda has credited the whole of the dividend it received from Sloth to investment income. what does this means sir; this is what is confusing me. Pls help.It has received a dividend from its new subsidiary and has credited it in full to investment income. But that dividend relates to the full year so only part of it is post acquisition so only part of it should go to investment income and the rest to the goodwill calculation as pre-acquisition
Good day sir. Please pertaining to treatment of Dividend in this question. It was not pro-rated in the calculation of goodwill as pre-acquisition just like you mentioned above.
If it is, In my W2, I used 6/12 * 8000 = 4000. Should it be an addition or a deduction from the calculation of FV of SNA acquired. And also were and how will the post acquisition figure be treated.Thank you
If it is applicable to pro-rate a dividend because it is paid by the subsidiary in the year of acquisition subsequent to acquisition, then you would account for it in the parent’s records by Dr Cash Cr Investment in Subsidiary
At the same time, this will decrease the retained earnings figure as at date of acquisition of the subsidiary
The dual affect of this is that, in working W2 Goodwill, cost of investment will fall by the amount of the pre-acquisition element of the subsidiary’s dividend and, at the same time, the retained earnings of the subsidiary will fall by that same amount
So, in answer to your specific question, it should reduce the retained earnings figure (and therefore also net assets) in the goodwill calculation. As for the post-acquisition element, that will be shown in the parent’s records as Dr Cash, Cr Investment income and the investment income dividend from subsidiary will be ignored when preparing the consolidated statement of profit or loss
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