AIT707 – Advanced Accounting
Assignment #1 – Marking Key
Question #1 – Chapter 4 Discussion Question
Maximum 10 marks
(1,1,1) (a) VALUE OF GOODWILL -
Under all theories of consolidation
except for the entity theory, only the portion of Leafs’
goodwill purchased by Maple is reported on the consolidated balance sheet.
Given a purchase price of $600,000, Maple paid
$324,000 for its share of Leafs’ goodwill as shown in the first column of Exhibit I.
Putting a value on 100% of Leafs’ goodwill is
not an easy matter
as there are different ways of determining this value.
(1,1) OPTION 1 (WITH DISCUSSION) - First, one could assume
a linear relationship
between the amount paid for 60% and the
value of 100% of the subsidiary.
In this case, if 60% of the shares were worth $600,000, then 100% of the shares should have been
In turn, 100% of goodwill would be valued at $540,000
as indicated in the second column of Exhibit I.
(1,1) OPTION 2 (WITH DISCUSSION) - Secondly, one could listen to the argument made by the management of Maple and assume
was not a linear relationship
between the amount paid for 60% and the value of 100% of the subsidiary.
stated that it was willing to pay a
premium of $120,000
over and above the market price of the shares in order to gain control over
Maple and the premium would be $120,000 regardless of the percentage of shares acquired.
If this were the case, the total value of
Leafs would be $920,000 of which $460,000
would be allocated to goodwill as indicated in the third column of Exhibit I.
Other options ______________________________________________________
(1,1) (b) VALUATION OF NONCONTROLLING INTEREST - The value assigned to goodwill will affect the value reported for
under the entity theory
When goodwill is valued at $540,000
, noncontrolling interest is reported at $400,000
as indicated in the fourth column in Exhibit II.
When goodwill is valued at $460,000
, noncontrolling interest is reported at $320,000
indicated in the fifth column in Exhibit II.
Other results based on above other options_________________________________
(1,1,1) c) REVALUATION OF NET ASSETS - The subsidiary’s assets and liabilities are brought on to the consolidated balance sheet
at fair values only at the date of acquisition
These fair values
become the historical values
for reporting purposes subsequent
to the date of acquisition.
That is, the subsidiary’s assets and liabilities are
not revalued to fair value
on each reporting date
subsequent to the date of acquisition.
(1) d) THEORY - The
entity theory presents the fair value
of the net assets of the subsidiary including goodwill at the date of
(1,1) PROS -