groups: goodwill on acquisition - please explain the difference in these calculations

lisnic

ok the example for calculating the goodwill was this:

Pltd acquired 100% issued share capital of Sltd

the balance sheets were as follows: (ive only included the relevant parts)

Pltd

investment in s ltd 10,000

Sltd

share capital 5,000
retained earnings 5,000

then the example showed calculate goodwill as:

cost of investment in Sltd 10,000
less: share of net assets acquired (5,000)
goodwill 5,000

now i get this but then there was an activity (acquired 600 £1 shares for 4000, capital and reserves were

share capital 1000
retained earnings 5000

so i applied the same theory and got

cost of investment 4000
less: share of net assets acquired (600)
goodwill 3400

then as they only acquired 60% i did 3400 * 60% and got 2040 which is what i said was the goodwill

now the answer says (with no explanation why its different to example as per usual!) was

cost of investment 4000
share of net assets acquired 6000 * 60% (3600)
goodwill 400

can someone please explain why in this activity retained earnings have been included but in the example they have not?

Thanks

A-Vic

Where is this from? is it a book or exam paper?

lisnic

its the bpp course companion a vic

crispy

Hello,

The first example looks wrong - unless the retained earnings at aquisition were NIL.

To calculate goodwill:

Determine parent holding in subsid. (%)

A: Cost of Investment: £ XX

B:Share of Net Assets Aquired:
Share Captial £ XX
Ret. Earnings (At aquisition): £ xx
Revaluation to fair value: £ xx
Total: £ xx

C. Group Share £xx(% of

Goodwill = A - C

lisnic

hi crispy

in the first example the retained earnings were

Pltd 35,000 and sltd 5,000

all i could think was that it was to do with 100% being acquired in the first example and not in second

thanks for your explanation of how properly to work it out! id appreciate it if you could let me know now you have retained earnings figure if this is def an error

crispy

Hello,

The goodwill is basically just the difference between how much you paid and what you got for it. Take an example, parent acquires 80% of subsid. for £ 500, at time of acquisition subsid. has share capital £ 100, Ret. Earnings £ 200, and an asset was revalued to £ 100 above it's Net Book Value. Goodwill as below: -

Cost of Acquisition................. 500
Share of Net Assets Acquired:
Share Capital .......100
Ret Earnings ........200
Revaluation .........100
Total...................400
Group Share (80%)................(320)
Goodwill................................180

(above numbers aren't realistic - I just made up to show example)

For Goodwill - Include Retained Earnings at aquisition
For Consolidated Ret. Earnings figure on balance sheet - Include post aquisition retained earnings

dobbieobby

I just LOVE it when the books are wrong. I've got the BPP personal Tax books and one of the past exams shows different figures in the answers to the question.
It makes learning so much easier doesnt it? (ah, sarcasm, the lowest form of wit :-) )

A-Vic

Looks like you got your answer - i have the same problems with certin kaplin books this year

Steve Collings

Hi,

I have worked this again and I agree with your BPP book.

The question says that at the date of acquisition, the net assets of S were as follows:

Share capital = £1,000
Retained earnings = £5,000

P acquired 600 £1 shares, so 600 / 1,000 = 60% - (S has acquired 60% of P) for a consideration of £4,000. We can now work out the goodwill:

Cost of investment = £4,000

From this we have to deduct our share of the net assets which we have purchased. The net asset consist of the share cap and retained earnings above, so:

Share capital £1,000 + Retained earnings of £5,000 = £6,000. Our share of this is 60%, so 60% x £6,000 = £3,600. As we purchased £3,600 worth of net assets from our subsidiary for £4,000 then this gives rise to positive goodwill of (£3,600 - £4,000) £400.

I think were you went wrong originally was that you multiplied the positive goodwill calculated in your answer by 60%.
The parent has purchased 60% of the net assets for a price of £4,000 so you only pro-rate the net assets in accordance with the actual purchase rather than reducing your goodwill.

p.s. I don't understand why the first example doesn't include retained earnings unless the Q says the balance on retained earnings at the acquisition date was nil.

salih

Can one of you guys please help me on these two quesiton (URGENT) 1) Wyvern plc invested £260,000 in 150,000 ordinary shares of £1 each in sidbury limited. At the date of accquistion the equity of sidbury limited comprised £200,000 in share capital and £120.000 in retained earnings. What is the value of goodwill at the date of accquistion ? The answer is £20,000 but i have no idea how it got that.

2) At 31 March 20X1 the equity of teme limited comprises £100,000 in share capital and £80,000 in retained earnings. The parent company, Severn Plc, currently owns 60,000 of £1 ordinary shares in Teme Limited. What is the value of the non-controlling interest at 31 march 20X1? The answer is £72,000 once again have no idea, both these question are from the osborne book.

It would really help if someone can help me out and explain how to get these anwers.

coojee

salih wrote: »

Can one of you guys please help me on these two quesiton (URGENT) 1) Wyvern plc invested £260,000 in 150,000 ordinary shares of £1 each in sidbury limited. At the date of accquistion the equity of sidbury limited comprised £200,000 in share capital and £120.000 in retained earnings. What is the value of goodwill at the date of accquistion ? The answer is £20,000 but i have no idea how it got that.

2) At 31 March 20X1 the equity of teme limited comprises £100,000 in share capital and £80,000 in retained earnings. The parent company, Severn Plc, currently owns 60,000 of £1 ordinary shares in Teme Limited. What is the value of the non-controlling interest at 31 march 20X1? The answer is £72,000 once again have no idea, both these question are from the osborne book.

It would really help if someone can help me out and explain how to get these anwers.

1. Using Crispy's workings above:
Cost of investment = £260,000
Share of net assets acquired:
Shares 150,000
Retained earnings (75% x 120,000) = 90,000
Total share: 240,000
Goodwill 260k - 240k = £20,000

2. Value of the subsid at the year end is 100,000 + 80,000 = 180,000 of which 40% belongs to the NCI so 40% x 180k = £72,000

Always work out what percentage the parent's holding is first. In the first one Wyvern owns 150,000 of the 200,000 issued shares so they have a 75% holding. In the second one they own 60,000 of the 100,000 issued shares so they have a 60% holding which means that the NCI is 40%