Accountancy
On December 31, 2020, abc Company purchased all shares (100%) of Subsidiary Company from the current owners of Subsidiary’s shares. Subsidiary’s balance sheet and other information follows:
Current assets $300
Net buildings and equipment $650
Land $150
Total assets $1,100
Current liabilities $100
Long-term liabilities $300
Common shares $250
Retained earnings $450
Total liabilities and equity $1,100
On December 31, 2020, the fair values of Subsidiary’s assets and liabilities follow:
Current assets $350
Net buildings and equipment $800
Land $260
Total assets $1,100
Current liabilities $110
Required:
Assume that abc paid $1,350 for all the shares. Calculate what Parent paid for ‘goodwill’. Show calculations.
Assume that abc paid $1,350 for all the shares. Record the journal entry for the purchase of Subsidiary shares.
Assume that abc paid $1,000 for 100% of the shares. Discuss any issues that arise from paying this amount.
Homework Answers
| a) | Cost of Control | ||||
| Investment in subsidiary | $ 1,350.00 | ||||
| Less: | Common Shares | $ 250.00 | |||
| Less: | Retained Earnings | $ 450.00 | |||
| Less: | Revaluation Reserve | $ 300.00 | $ 1,000.00 | ||
| Goodwill | $ 350.00 | ||||
| b) | Journal Entry | ||||
| Particulars | Debit | Credit | |||
| Investment in Subsidiary | $ 1,350.00 | ||||
| To Cash | $ 1,350.00 | ||||
| c) | Cost of Control | ||||
| Investment in subsidiary | $ 1,000.00 | ||||
| Less: | Common Shares | $ 250.00 | |||
| Less: | Retained Earnings | $ 450.00 | |||
| Less: | Revaluation Reserve | $ 300.00 | $ 1,000.00 | ||
| $ - | |||||
| This will lead to no creation of goodwill or capital reserve. | |||||
Workings:
| Computation of Revaluation Reserve | |||
| Increase in value of Current Assets | $ 50.00 | ||
| Increase in value of Net Buildings and Equipment | $ 150.00 | ||
| Increase in value of Land | $ 110.00 | ||
| Increase in value of Current Liabilities | $ -10.00 | ||
| Revaluation reserve | $ 300.00 | ||
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