Question

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:

  1. Assume that abc paid $1,350 for all the shares. Calculate what Parent paid for ‘goodwill’. Show calculations.

  2. Assume that abc paid $1,350 for all the shares. Record the journal entry for the purchase of Subsidiary shares.

  3. Assume that abc paid $1,000 for 100% of the shares. Discuss any issues that arise from paying this amount.

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Answer #1
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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