Question

Problem 1: Goodwill and R.E. Calculations PRT acquired 100% of SUB’s ordinary shares on 1 January 2011 for $1,136,000 when SUB’s retained earnings were $260,000. At 1 January 2011 the fair value of the net assets of SUB exceeded their carrying value by $110,000. The remaining useful life of these assets was 11 years from acquisition. SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31 December 2013. The equity of SUB as at 31 December 2013: $000 Ordinary share capital 430 Share premium 86 Retained earnings 324 840 The retained earnings of PRT were $2,100,000 at 31 December 2013. Required: Calculate the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for: (i) Goodwill (ii) Group retained earnings

Answer 1

For Goodwill:

Goodwill in business is created when an acquiring entity (here PRT ) purchases another entity (here SUB) for more than the fair market value of its assets(here $ 110,000). As per accounting standards, goodwill should be carried as an asset and evaluated yearly for any possible goodwill impairment charge. if Impairment loss(here 20% of $110,000 i.e. $ 2200) occurs then such loss will be charged directly as an expense or written off until the asset of goodwill is completely removed from the balance sheet.

According to GAAP or IFRS Goodwill is no longer allowed to be amortised.

Every year Impairment test is conducted and goodwill is adjusted accordingly or amount is charged to profit or loss as expenses as the case may be. In present case as goodwill exist therefore impairment loss shall be adjusted from such goodwill amount.

Accordingly the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill shall be:

S.no	Particulars	Amount (in $ 000)
a	Goodwill as on 1/1/2011	110
b	Impairment loss as on 31/12/13 (20% of $110000)	2.2
c	Balance as on 31/12/13 (a-b)	107.8

(ii) Group retained earnings :

As SUB is 100% Subsidiary of PRT as on 31/12/13 so all the Retained Earning of SUB shall be included in consolidated statement of PRT along with PRT own Retained Earnings.

Accordingly the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Group retained earnings is as follows:

S.no	Particulars	Amount (in $ 000)
a	Retained Earning of PRT as on 31/12/13	2100
b	Retained Earning of SUB as on 31/12/13	324.840
c	Balance as on 31/12/13 (a+b)	2424.84