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Solve the following problems. It will be helpful for the graded
comprehensive problem found in Unit 3. Record your answers in your
learning journal.
1. On January 1, 2007 A acquired a 20% shareholding in B at a
cost of $40,000. On January 1, 2009, A acquired a further 40%
shareholding in B at a cost of $150,000. At this time it was
determined that the fair value of A’s 20% shareholding in B was
$50,000. Between January 1, 2007 and January 1, 2009 B made
a profit of $30,000.
Required:
a. Calculate the cost of investment that will be used in computing
goodwill
b. Calculate the goodwill arising on this transaction
c. Calculate the gain arising that will be recognized in the income
statement assuming that A’s 20% shareholding did NOT allow
it to exercise significant influence over B
d. Calculate the gain arising that will be recognized in the income
statement assuming that A’s 20% shareholding did allow it to
exercise significant influence over B
Expert Answer
- Calculate the cost of investment that will be used in computing goodwill
Solution:
Cost of Acquisition = $40,000
Add: Share in Profits = $6,000 ($30,000 * 20%)
Carrying Value = $46,000
- Calculate the goodwill arising on this transaction
Solution:
Fair value of A’s holding = $50,000
Carrying Value = $46,000
Goodwill = $6,000
- Calculate the gain arising that will be recognized in the income statement assuming that A’s 20% shareholding did NOT allow it to exercise significant influence over B
Solution:
It is important to note that a step acquisition will reduce the NCI’s holding in cases where the initial investment gave the parent a controlling share-holding (usually more than 50%), so that the acquiree has already been consolidated as a subsidiary.
As a result, there is no change in the subsidiary status of the acquiree when the acquirer subsequently purchases additional shares. There is simply a change in the proportion of ownership between the parent and NCI at the step acquisition.
In effect, the parent is purchasing shares from the NCI. This type of transaction represents a transaction between shareholders, and therefore no gain or loss arises, with no impact on profit.
