Question

In January 1, 2014 James Company has acquired 85% of LuLu Company for                      $2,125,000 on the date of the acquisition the subsidiary had retained earnings $650,000 and a capital of $1,100,000.

Separate balance sheet as of 1 January 2014 for James and its Subsidiary.

Description	Parents	Subsidiary
Cash	60,000	35,000
Receivable	35,000	40,000
Land	1,550,000	550,000
Property	1,500,000	1,200,000
Investment in Subsidiary	2,125,000	-
Total asset	5,270,000	1,825,000
Account payable	50,000	60,000
Other liabilities	67,000	15,000
Capital stock	3,900,000	1,100,000
Retained earnings	1,253,000	650,000
Total equity and liabilities	5,270,000	1,825,000

Q-Is there any Goodwill raised from the business combination? If yes compute the amount of Goodwill.

Answer 1

Total Net Assets of Lulu Company at the date of acquisition = Share capital + Retained earnings

Total Net Assets of Lulu Company at the date of acquisition = 1,100,000 + 650,000 = $1,750,000

Proportionate share of Total Net Assets of Lulu Company acquired by James Company = 85% * $1,750,000 = $1,487,500

Total Purcase consideration paid for acquisition of Lulu Company = $2,125,000

Since, total purchase consideration is more than the proportionate share of net assets acquired by James Company, there is goodwill.

Amount of goodwill = Total purchase consideration - proportionate share of net assets acquired by James Company

Goodwill = $2,125,000 - $1,487,500 = $637,500