Question

Mama Limited acquired 100% of the share capital of Blue Limited for $237 500. Blue had total shareholder’s equity of $200 000. The book values of Blue’s assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $120 000, machinery $125 000. The tax rate is 30%. The acquisition analysis will determine:

a Gain on bargain purchase of $12 500. a Gain on bargain purchase of $37 500. a Goodwill of $37 500. a Goodwill of $20 000.

Answer 1

Answer: Goodwill of $37500 will be determined.

Reason: Goodwill on the acquisition of 100% share capital will be = Consideration Paid by Mama Limited Iess Net Assets

Net assets can be calculated in two ways:

Assets Route = Identifiable Assets at fair value (Except fictitious assets) - Liability (short + long term)

Liability Route = Shareholder's Equity ( Share capital + Reserve)

Here it's not possible to apply the assets route due to lack of information but the liability route is clearly given. So Goodwill will be created by =

The consideration paid by Mama Ltd. - Shareholder's Equity of Blue = $237500 - $200000 = $37500