Question

How do we account for an investment when we pay more than the fair value of the investee’s net assets?

Answer 1

In case of Investment in a company where the amount of payment made by the investor is more than the investee's net assets, it is recorded as a part of Goodwill. This Goodwill is to be shown as a part of Investor's Intangible asset which is paid to the investee due to the brand value enjoyed the Investee.

The Accounting entry in case of Investor:

Sundry assets a/c ..........Dr

Goodwill a/c.....................Dr

To Bank a/c

To Business Purchase a/c

( Being purchase consideration is more than fair value of the net asset acquired).

Where the amount of purchase consideration is less than the fair value of net assets acquired, it is treated as a part of Capital reserve.

Answer: Hence, When we pay more than the fair value of the Investee's net assets, it is treated as a part of Goodwill for the investor being the extra amount paid is due to the goodwill/ brand value of the investee.