Help... consolidated financial statements question

Paisley

Wyvern plc invested £260,000 in 150,000 ordinary shares of £1 each in Sidbury Ltd. At the date of acquisition the equity of Sidbury Ltd comprised of £200,000 in share capital and £120,000 in retained earnings.

What is the value of goodwill at the date of acquisition?


I have the answer and it looks straight forward, but I'm struggling to get to it. Any help would be appreciated.

Thanks in advance

Steve Collings

Hi Paisley

The first thing you need to work out is how much of the subsidiary does the parent own. W purchased 150,000 shares in S when S's share capital was £200, so £150 / £200 x 100 = a 75% holding in S. We can now work out the goodwill in S as follows:

Cost of investment (by W in S) = £260k

For £260k W has bought 75% of the net assets of S, therefore:

Share capital : £200
Retained earnings: £120
Total net assets: £320 x 75% = £240

Cost of investment = £260 less net assets acquired of £240k = Goodwill of £20k.

Hope that helps.

Regards
Steve

Paisley

Hi Steve

Thanks for your fast response. Now it makes more sense!