Petro Ltd acquired 60% of Carlos Ltd’s 500,000 R1 equity shares on 1st January 2019 for a consideration of R5 cash per share. At the date of acquisition, net assets and liabilities in Carlos Ltd were valued at R1,600,000 and the fair value of the non-controlling interest was R800,000.
Required:
1. Determine the acquisition date.
2. Calculate goodwill or gain on bargain purchase if any using Proportionate of Net Assets Method
3. Calculate goodwill or gain on bargain purchase if any using Fair Value Method
1. The acquisition date is 1st January 2019.
2. Proportionate of Net Assets Method:
a) Total net assets and liabilities of Carlos Ltd at the date of acquisition = R1,600,000
b) Total consideration paid by Petro Ltd for the 60% ownership = 60% of (500,000 shares * R5 per share) = R1,500,000
c) Proportionate share of net assets acquired by Petro Ltd = 60% of R1,600,000 = R960,000
d) Goodwill or gain on bargain purchase = Consideration paid - Proportionate share of net assets acquired = R1,500,000 - R960,000 = R540,000
Therefore, there is goodwill of R540,000 using the Proportionate of Net Assets Method.
3. Fair Value Method:
a) Fair value of non-controlling interest = R800,000
b) Fair value of net assets acquired by Petro Ltd = Total net assets and liabilities - Fair value of non-controlling interest = R1,600,000 - R800,000 = R800,000
c) Consideration paid = 60% of (500,000 shares * R5 per share) = R1,500,000
d) Goodwill or gain on bargain purchase = Consideration paid - Fair value of net assets acquired = R1,500,000 - R800,000 = R700,000
Therefore, there is goodwill of R700,000 using the Fair Value Method.
1. The acquisition date is 1st January 2019.
2. To calculate goodwill or gain on bargain purchase using the Proportionate of Net Assets Method, we need to determine the proportionate value of the net assets acquired.
60% of Carlos Ltd's equity shares is 60% of 500,000 shares, which equals 300,000 shares.
The net assets of Carlos Ltd on the acquisition date were valued at R1,600,000.
Therefore, the proportionate value of net assets acquired by Petro Ltd is:
(300,000 shares / 500,000 shares) * R1,600,000 = R960,000
The consideration paid by Petro Ltd for the 60% of equity shares was R5 per share, and since they acquired 300,000 shares, the total consideration paid is:
R5 * 300,000 shares = R1,500,000
To calculate the goodwill or gain on bargain purchase, we subtract the proportionate value of net assets acquired from the consideration paid:
Goodwill or Gain on Bargain Purchase = Consideration paid - Proportionate value of net assets acquired
Goodwill or Gain on Bargain Purchase = R1,500,000 - R960,000
Goodwill or Gain on Bargain Purchase = R540,000
Therefore, using the Proportionate of Net Assets Method, the goodwill is R540,000.
3. To calculate goodwill or gain on bargain purchase using the Fair Value Method, we need to determine the fair value of the non-controlling interest.
The fair value of the non-controlling interest is given as R800,000.
To calculate the goodwill or gain on bargain purchase, we subtract the fair value of the non-controlling interest from the proportionate value of net assets acquired:
Goodwill or Gain on Bargain Purchase = Proportionate value of net assets acquired - Fair value of non-controlling interest
Goodwill or Gain on Bargain Purchase = R960,000 - R800,000
Goodwill or Gain on Bargain Purchase = R160,000
Therefore, using the Fair Value Method, the goodwill is R160,000.