Question

The accountant of Patrick Ltd needs to prepare consolidated financial statements for Patrick Ltd at the end of financial year. Following information was available on 30 June 2020:

1)    Patrick Ltd acquired 100 per cent interest in Sand Ltd for $790,000 on 1 July 2015. All assets and liabilities were fairly valued on the acquisition date. At the date of acquisition, the equity of Sand Ltd included:

Share capital                                 $320,000

Reserve                                         $160,000

Retained earnings                         $170,000

The balance of the investment account was $790,000 as shown in the Statement of Financial Position of Patrick Ltd on 30 June 2020.

2)    The directors of Patrick Ltd believed that goodwill acquired was impaired by 15 per cent for the year ended 30 June 2020.

3)    On 3 March 2020, Patrick Ltd sold inventory to Sand Ltd at a value of $164,000.

4)    The above inventory had a cost of $117,000 for Patrick Ltd to produce. All inventories remained unsold in Sand Ltd on 30 June 2020. Patrick Ltd and Sand Ltd adopt the perpetual inventory system for inventory accounting. The income tax rate is 30%.

Required: (Narrations are required in this question)      

a)     Determine the amount of goodwill acquired.

b)    Prepare relevant consolidation journal entries on 30 June 2020.

c)     Explain accounting for goodwill acquired in a business combination.

Answer 1

Required a)

The Amount of goodwill acquired = Amount invested - Fair Value of the net assets of Sand on the date of Acquisition

= 790,000 - (320,000+160,000+170,000)

= 140,000

Required b)

Consolidation journal entries would be:

Date	Accounts and explanation	Debit	Credit
June 30, 2020	Sales	$   164,000
	Cost of Goods sold		$   164,000
	(to record eliminating journal entry for inter company sale - purchase)
June 30, 2020	Cost of Goods sold	$     47,000
	Inventory		$     47,000
	(to record eliminating journal entry for inter company profit in ending inventory)
June 30, 2020	Equity in earnings	$     21,000
	Investment in Subsidiary		$     21,000
	(to record Impairment of goodwill @ 15%)
June 30, 2020	Share Capital - Subsidiary	$   320,000
	Reserve - Subsidiary	$   160,000
	Retained Earnings - Subsidiary	$   170,000
	Goodwill	$   119,000
	Investment		$   769,000
	(to record eleminating journal entry)

Required c

A Business combaination is of two types:

• Merger = Only one legal entity survives
• Acquisition = Both acquirer and acquiree survives as seperate legal entities but their acoounts are consolidated.

In cse of a merger, the goodwill acquired is recorded in the books of acquirer at the time of merger. However, in case of Acquisition, no goodwill is recorded in the books of parents and every year a journal entry is passed in the consolidation worksheet to recognize the goodwill in the consolidated balancesheet.

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