Question

Question 2 (10 marks) The Parent company acquires all issued capital of the subsidiary company for a consideration of $1000000 cash and 800000 shares each valued at $1.25. The summary statement of financial position of the subsidiary company immediately following the acquisition is: Fair value of assets acquired Fair value of liabilities acquired Total shareholders’ equity of the subsidiary company Retained earnings of the subsidiary company Required: $2640000 $720000 $800000 $1120000 (i) Pass the necessary journal entry to record the acquisition (3 marks) (ii) Determine the amount of goodwill (or bargain purchase) arising out of the acquisition. (2 marks) (iii) Pass the necessary consolidation entry to eliminate the subsidiary by the parent company. (3 marks) (iii) Determine the amount of goodwill (or bargain purchase) arising out of the acquisition if the purchase consideration paid was $1000000 cash and 400000 shares each valued at $1.25. (2 marks)

Answer 1

Given:

Fair Value of Assets: 2,640,000	Amount Paid as consideration : Cash $1,000,000, Shares 800,000 x $1.25 per share
Fair Value of Liabilities: 720,000
Retained Earnings of subsidiary co.:1,1200,000
Total shareholders Equity of subsidiary co.:800,000

In the books of Parent Company

S.no.	Particulars	Dr.($)	Cr.($)
1	Business Purchase(WN1.)A/c                                Dr.	2,000,000
	To Liquidator of Subsidiary co. A/c		2,000,000
	(Being Absorption of subsidiary commenced)
2	Total Assets A/c                    Dr.	2,640,000
	Goodwill A/c (Bal. fig.)                         Dr.	80,000
	To Business Purchase A/c(WN1)		2,000,000
	To Total Liabilities A/c		720,000
	(Being Assets and Liabilities taken over)

WN1..- Total Purchase Consideration is Cash- $1,000,000 and Shares of Parent Co. 800,000 shares @ $1.25 per share/

Total Consideration = $1,000,000 + (800,000 shares x 1.25 )=$2,000,000

ii) Goodwill amount - $80,000

iii)Ceteris Paribus

In any case Goodwill / Capital Reseve shall be = (Total Assets Acquired -Total Liabilities ) - Business purchase consideration

=( $2,640,000-$7,20,000) - { $1,000,000+ 400,000 x $ 1.25)

= 420,000

In this Case Capital Reserve arises of Amount $ 420,000