Question
On 01/10/2019, the Parent purchased all the share capital of the Subsidiary for £1,000,000. On the acquisition date, the Subsidiary had share capital of £200,000 and retained earnings of £510,000 (this means that the Subsidiary’s net assets at the acquisition date were £200,000 plus £510,000, that is £710,000)
The two companies’ statements of financial position for the year ended 30/06/2020 are shown below.
a) Calculate the goodwill to be included in the consolidated statement of financial position
b) Calculate the retained earnings to be included in the consolidated statement of financial position
c) Prepare the consolidated statement of financial position
Answer
a) The goodwill is calculated as the amount paid for the shares in the subsidiary (£1,000,000) less the fair value of the subsidiary’s identifiable net assets at the date of acquisition. The subsidiary’s net assets at the date of acquisition is the same as its equity at that date, i.e. £200,000 plus £510,000 = £710,000.
The goodwill is therefore £1,000,000 less £710,000 or £290,000
b) The retained earnings are the parent’s retained earnings at the year end plus the parent’s share (which in this case is 100%) of the retained earnings of the subsidiary since the date of acquisition; i.e its retained earnings at the end of the year of £755,000 less the retained earnings at the date of acquisition of £510,000.
The retained earnings are therefore £1,153,000 + £755,000 – £510,000 = £1,398,000
c) The consolidated statement of financial position (including calculations) are as below.
