HELP!!!!!!!!!!!!!!!!!!!!!

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi All

I'm really struggling to work out one of the student activities in the osbourne book for DFS.

The question reads: Takeover plc invested £305,000in 800,000 ordinary shares of 10p 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 (£300,000 in total)

What is the value for goodwill arising the acquisition?
a 20000
b 5000
c 65000
d 6500

The answer is £65000 and I really don't understand how to get to that answer.

Any help will be appreciated. I really struggle with these parent and subsidiary accounts for some reason.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HELP!!!!!!!!!!!!!!!!!!!!!

    The key to this question is to (a) identify the %age of the shareholding acquired by Takeover in Subsidiary and (b) apply that %age to the value of the net assets at the acquisition date, then deduct the "total purchase" from the "consideration" to arrive at the goodwill figure.

    So:

    Takeover has acquired 80% shareholding in Subsidiary:
    (£100,000 share capital divided by £80,000* x 100 [*800,000 shares invested x 0.10p]).

    Therefore:

    Cost of investment (Consideration) = £305,000
    Less net assets at acquisition:
    Share capital at acquisition = £100,000
    Reserves at acquisition = £200,000

    The total of the share capital and reserves at the date of acquisition = £300k, however, Takeover has only acquired 80% of the share capital - so 80% x £300,000 = £240,000. If you take off the £240,000 from the cost of the investment of £305,000 this gives you the £65,000 goodwill.

    Kind regards
    Steve

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HELP!!!!!!!!!!!!!!!!!!!!!

    Thanks very much Steve, that makes sense now!

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