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Comprehensive Illustrations solution - consolidation

Comprehensive Illustrations solution - consolidation -...

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Comprehensive Illustration 1 (H & S) Statement of Financial Position before acquisition: H Limited S Limited $m $m Tangible non-current assets 500 350 Investment in S Limited 525 Current assets Cash 805 500 Accounts Receivable 700 420 Inventories 200 100 Total assets 2,730 1,370 Share Capital ($1 each) 800 300 Share Premium 190 - Retained Profits: At acquisition 450 400 After acquisition 400 300 Total equity 1,840 1,000 Current liabilities Accounts payable 890 370 Total equity and liabilities 2,730 1,370 H Limited acquired 70% the shares in S Limited by an exchange of one share in H for every two (2) shares in S, plus $0.5 per acquired S share in cash. The market price of each H’s share at the date of acquisition was $4, and the market price of each S’s share at the date of acquisition was $2.5. At the date of acquisition, the fair values of S’s assets were equal to their carrying amounts. S Ltd declared and paid $80m dividends from current year profits. H Ltd account for the dividend received as dividend income in its statement of income. Required: (i) Calculate the goodwill arising on acquisition of S Limited using: (a) Fair value approach (b) Net asset approach
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(ii) Prepare the consolidated journal entries, using fair value approach to determine goodwill arising on acquisition. (iii) Prepare the consolidation statement of financial position for H Group after acquisition. Comprehensive Illustrative 1 (H & S) (i) (a) Goodwill in S: Fair value approach $m $m Cost of investment: Shares issued (210/2 x $4) 420 Cash (210 x $0.5) 105 Total consideration 525 Equity shares of S 300 Pre-acquisition reserves 400 700 x 70% 490 Parent’s share of goodwill 35 Fair value of NCI at date of acquisition 90 shares at $2.5 225 NCI share of Shoulder’s net asset at date of acquisition 700 x 30% 210 NCI share of goodwill 15 Total goodwill 50 OR $m $m Cost of investment: Shares issued (210/2 x $4) 420 Cash (310 x $0.5) 105 Total consideration 525 Fair value of NCI at date of acquisition 80 shares at $2.5 225 750 Equity shares of Shoulder 300 Pre-acquisition reserves 400 700 Total goodwill 50 (ii) Consolidated journal entries Debit (m) Credit(m) Share Capital - S 300 Retained Earnings - S 400 (b) Net asset approach
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Goodwill arising on consolidation 50 Investment in S 525 NCI 225 (W1 – Elimination of investment in S) Dividend Income - H 56 NCI 24 Dividend declared and paid – S 80 (W2 – Elimination of inter-company dividend) Retained profits – after acquisition 114 NCI (300+80) x 30% 114
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