Question

On 1 July 2014 Padma Ltd acquires 25 per cent of the issued capital of Jamuna Ltd for a cash consideration of $360 000. At the date of acquisition, the shareholders’ equity of Jamuna Ltd is: Share capital $450 000 Retained earnings $300 000 Total shareholders’ equity 750 000 Additional information • On the date of acquisition, buildings have a carrying amount in the accounts of Jamuna Ltd of $240 000 and a market value of $300 000. The buildings have an estimated useful life of 10 years after 1 July 2014. • For the year ending 30 June 2015 Jamuna Ltd records an after-tax profit of $90 000, from which it pays a dividend of $30 000. • For the year ending 30 June 2016 Jamuna Ltd records an after-tax profit of $300 000, from which it pays a dividend of $150 000. • Assume a tax rate of 30% is assumed Required Apply equity method of accounting to: (a) Calculate the amount of goodwill at the date of acquisition (b) Prepare the journal entries for the year ending 30 June 2015 (c) Prepare the journal entries for the year ending 30 June 2016

Answer 1

Answer:

a. The computation of goodwill at acquisition date may be done in two ways.

Cash Consideration............................................................................................................................... $ 360,000

Divide by % share acquired............................................................................................................... 25%

Total Cost................................................................................................................................................... $1,440,000

Less:

Net Assets............................................................................................................................................. ( 750,000)

Increase in market value of buildings ($300K - $240K)................................................. ( 60,000)

Goodwill................................................................................................................................ $ 630,000

.

Alternative:

Cash Consideration............................................................................................................................... $ 360,000

Less:

Share in net assets (25% x $750,000)................................................................................... ( 187,500 )

Share in excess of market value of building [25% x ($300K - $240K).................. ( 15,000 )

Padma Ltd's share in goodwill.......................................................................................................... 157,500

Divide by: % acquired............................................................................................................................ 25%

Goodwill................................................................................................................................ $ 630,000

.

b and c. At each year-end, Padma, the acquiring entity records an increase in its investment in associate account amounting to the share in net income after tax less the share in the additional after-tax depreciation expense pertaining to the increase in market value of the building.

For 2015:

Share in after tax net income (25% x $90,000) --------------------------------------------------------- $ 22,500

Less: Share in Additional Depreciation Expense after tax

Additional Depreciation Expense [($300K-240K)/10 years] --- $ 6,000

Tax on additional depreciation (30% x $ 6,000) ----------------- ( 1,800 )

Additonal depreciation net of tax ------------------------------------ $ 4,200

% of investment --------------------------------------------------------- 25% ------------------ ( 1,050 )

Share in net income of associate $ 21,450

.

Padma Ltd also records the cash dividends received from Jamuna Ltd, computed as follows:

Dividends paid by Jamuna ----------------- $ 30,000

% of investment ------------------------------ 25%

Share in dividends --------------------------- $ 7,500*

.

*This is computed gross of tax since it is not clear in the problem that tax rate applicable for dividends is different than the corporate tax rate on net income and if the dividends paid by Jamuna Ltd is already net of taxes.

You may do the same steps for 2016.