Osborne 8.2

jewels.p

The Takeover plc. invested £305,000 in 800,000 ordinary share of 10 pence each in the Subsidiary Co Ltd. The Subsidiary Co Ltd's issued share capital and reserves at the date of acquisition were £100,000 in shares and £200,000 in reserves

What is the value for goodwill arising on the acquisition?
a. £20,000
b. £5,000
c. £65,000
d. £6,500

I thought it was b. £5,000 cause I took the amount invested away from the total value of the company being bought but the answer is c. £65,000

WHAT?

sdv

Figure out what percentage of the Subsidiary's company shares has Takeover plc acquired.

then

workout the value of subsidiary's shares acquired at the date of acquisation. Take that value away from the investment value. That is the value of goodwill paid.

The KEY is to figure out the Value of 800,000 shares at the date of acquisation.

good luck!

Steve Collings

Hi,

I don't have the Osbourne books (or any study books for that matter!!) but I have worked the question for you and will show you how the answer is arrived at. I am working in £,000's here.

The first thing to do is to work out what %age we have bought of the subsidiary. In this case, the share capital of our subsidiary is £100 and we have bought 800 of these shares for a consideration of £305.

The cost of the investment = £305.
The net assets of the subsidiary at acquisition consist of:
- share capital £100
- retained earnings £200

Therefore:

Cost of investment =...................£305

Less net assets
acquired (i.e. what we have 'bought'):
80% x £100 =............................(£80)
80% x £200 =...........................(£160)

Goodwill on acquisition of our subsdry £65

Best wishes
Steve

jewels.p

Thanks SDV and Steve

I was taking it to be 100%. (as you probably guessed by the way I worked it out)