Question

On 1 January 20X0, Zed Ltd acquired 90 % of the share capital of Ned Ltd for $900 000 cash. At that date, the equity section of Ned Ltd’s balance sheet was as follows: $ Share capital 700 000 Retained profits 50 000 Asset revaluation reserve 100 000 Assume all assets and liabilities were recorded at their fair values, except for a piece of equipment recorded at $50 000 but Zed Ltd considers it to have a fair value of $100 000. This equipment is not revalued by Ned Ltd. What was the difference on acquisition under the partial method? Select one: $50 000 goodwill. $90 000 bargain purchase. Nil $90 000 goodwill.

Answer 1

Solution:

When purchase price is higher than the Fair value of company * (% of share purchase) then Goodwill generated.

When purchase price is lower than the Fair value of company * (% of share purchase) then bargain purchase generated.

Here,

Particulars	Amount in $
Share Capital	700,000
Retained profit	50,000
Asset Revaluation reserve	100,000
Add: Upwards in Fair value	50,000
(Fair value - recorded Value)
(100,000 - 50,000)
Total	900,000
90% value of Zed Ltd.	810,000
(90% of 900,000)
Purchase Price	900,000
Goodwill	90,000
(Purchase Price - Value of purchase)

Goodwill of $90,000 is correct