Goodwill 3

[Vivienne]

Extract of statement of financial position as at 30 june 2004

INVESTMENTS

Cherep 743,000
Lombe 400,000
Alvin 160,000


EQUITY(shares of $1 each)

Cherep 800,000
Lombe 500,000
Alvin 300,000


RETAINED EARNINGS

Cherep 1050,000
Lombe 850,000
Alvin 450,000


Many years ago, Cherep bought 350,000 shares in Lombe at 1.70 per share when the retained earnings in Lombe were 250,000

Cherep and Lombe bought shares in Alvin on the same day 2 years ago at $2 per share.

Cherep also invested 68,000 on an original painting by a local artist.

Alvin owned shares in the country's national telephone company

There were no other investments held by any of the 3 companies.

Alvins retained earnings two years ago were 270,000

REQUIRED:

Calculate the goodwill figure that will go to the consolidated statement of financial position of the group as at 30 june 2004.

all figures in $

[narh07]

Extract of statement of financial position as at 30 june 2004

INVESTMENTS

Cherep 743,000
Lombe 400,000
Alvin 160,000


EQUITY(shares of $1 each)

Cherep 800,000
Lombe 500,000
Alvin 450,000


RETAINED EARNINGS

Cherep 1050,000
Lombe 850,000
Alvin 450,000


Many years ago, Cherep bought 350,000 shares in Lombe at 1.70 per share when the retained earnings in Lombe were 250,000

Cherep and Lombe bought shares in Alvin on the same day 2 years ago at $2 per share.

Cherep also invested 68,000 on an original painting by a local artist.

Alvin owned shares in the country's national telephone company

There were no other investments held by any of the 3 companies.

Alvins retained earnings two years ago were 270,000

REQUIRED:

Calculate the goodwill figure that will go to the consolidated statement of financial position of the group as at 30 june 2004.

all figures in $

This was how I analyzed it. This is a mixed Group where C owns share in L and A, and L also having shares in A. The next step is to calculate the net Assets of Both L and A at Acquisition.
L A
Ord Share 500,000 450,000
Reserves(Acq) 250,000 270,000
Total 750,000 720,000

Cost of Investment
L total Cost of Investment (743,000) was made up of Cost of Investment in L, Investment in Painting and Investment in A. This Implies that Cost of Investment in A amounted to 80,000(ie 743-595-68).Note that COI in L was 350,000 x 1.7.
This means that C own 70% of L and also owns 8.88% of A. Since A shares cost $2 at acquisition and L’s investment amounted to 400,000, L acquired 200,000 shares in A representing 44.44% of A’s share.
As C controls L, C can count on all 44.44% shares L has in A plus its own 8.88%. In all the group controls 53.32%. However, the effective interest of the Group would be 39.90%.
In summary, the Group Cost of Investment in A would be (400,000x70%) + 80,000 = 360,000.
L A
Cost of Investment 595,000 360,000
FV of Share of NA in L (750x70%) 525,000
FV of Share of NA in A (720x39.90%) 287,280

Goodwill 70,000 72,720

Goodwill figure that will go to the consolidated statement of financial position of the group as at 30 June 2004 = $142,720

Comments and suggestions are welcome.

[Vivienne]

The percentage holding of Cherep in Lombe is clear because we have been given the number of shares.
To find the holding percentage of Cherep in Alvin we have to use the investments that have been given and the information as much as possible.

I would start by giving a clue on Cherep in Alvin
We are told that Cherep has 743,000 in its investment.
therefore

743,000
(595,000) investment in Lombe
(68,000) investment Cherep owns in the painting of local artist

The remaining balance after we subtract these is 80,000 and since we are told that there were no other investment held by the 3 companies,it means that 80,000 is what Cherep invested in Alvin.
Using the information given again we are told that this amount was at $2 per share so to find the number of shares we have to divide this 80,000/2 which is 40,000.
This means that out of the 300,000 shares which Alvin has,Cherep owns 40,000
therefore to find the percentage holding its just 40,000/300,000=13.3%

I think from this explanation its easy now to find the percentage holding of Lombe in Alvin and ultimately find the goodwill

For those that saw the question when it was posted it has since been ammended pls check it again

[narh07]

Then I guess my computation was correct. The only difference is that when I answered the question, A's equity was 450,000 (before the amendment to 300,000).
Vivie, can you please review the rest of my workings and comment? (Assume A's equity still stands at 450,000)

[Alvin Davis]

While I was in traffic this evening, I was looking at the question and I have to agree with Narh. But I, think that viv was on the right track, but had an oversight when calculating Cherep's ownership in Alvin. Where did the 300,000 shares come from Viv ? (referring to 40, 000/300,000 = 13.3%). It should have been 450k shares as Narh pointed out. Anyway, I'm still gonna work out the goodwill computation. Great job on this one guys.

[Vivienne]

Yes guys,

I changed the equity of Alvin to 300,000 because when i was going through the question myself i realised that i had picked the retained earnings figure on the equity as well. for those that used the 450,000 thats alright.but those that havent yet tackled the question please use the ammended figure of 300,000.hence i will put two answers that is on 300,000 and on the 450,000.

[Vivienne]

First to Nahr

I went through the question and if we use 450,000 then the goodwill of cherep in Alvin and Lombe in Alvin will be negative figures.so maybe allow me to use the ammended 300,000 and you will stil get some sence out of it..Your answer was correct up to the percentage holding part and the goodwill of Cherep in Lombe.

Here is the answer for everyone that has attempted to check their work

All workings in '000

Cherep - Lombe

Cost of investment 595
net assets in Lombe:
share capital 500
retained earnings 250
the total is 750 X70% =525
595-525=70


Cherep in Alvin

Cost of investment 80
net assets in Alvin:
sharecapital 300
retained earnings 270
the total is 570 X13.3%=76

80-76=4

Lombe in Alvin

Cost 400
net assets in Alvin:
sharecapital 300
retained earnings 270
the total is 570X66.7% 380

400-380=20

It is this 20 that we split between the minority and the group.remember at the time Lombe was buying Alvin,Cherep had a control of 70% and 30% belonged to the minority
so we remove 30% from 20
which is 20X30% =6
This means that 6 belong to the minority and our goodwill is 14

add them up 70+4+14=88
This is our total goodwill that goes to the group accounts

The summary for the 3 types of goodwill is thus

When Parent buys existing group

i)remove the cost of investment in the subsubsidiary from the net assets of the subsidiary when calculating the goodwill
ii)for the goodwill between the subsidiary and subsubsidiary use the effective interest of the parent in the subsubsidiary


When parent buys a subsidiary first and later buys the subsidiary

i)Parent -Subsidiary normal way
ii)Parent -Subsidiary normal way
iii)Subsidiary -Subsubsidiary
Calculate normal way and then remove the minority interest between Parent and Subsidiary

I hope this is clear but if not please bring out the questions we are all learning. i must admit i have also learnt a lot from these questions.Meanwhile am still waiting for someone to answer my question under the IAS 21 thread.

[narh07]

Vivie, I have looked at your answer for about 2 hours now, trying to understand why you chose to calculate the goodwill separately. I think you are missing the fact that Goodwill must be calculated in the eyes of the group and not individually. Even if you choose to look at it that way, you cannot calculate the goodwill on the acquisition of Alvin by Cherep as the amount(13.3%)would only be looked at as an ordinary investment. Alvin only became a member because of Lombe's acquisition of its shares. Therefore, Goodwill on the acquisition of 'A' must be looked at in the eyes of the group:that is, the cost of Investment to the Group less the Group's Share of the Fair value of Net Assets of Alvin(this would be the effective interest). I would suggest you review this area carefully as it could be very confusing.

[Vivienne]

Thanks narh for your comments. looking at the points that you have raised you are missing one point that Cherep and Lombe acquired shares in Alvin at the same time, this is a very important statement.go back to the question again. i agree with you that the only time when you remove the cost of investment of the subsubsidiary is when the parent buys an existing group in this case if Cherep had bought Lombe after it had already acquired Alvin.goodwill in this case is calculated as one as you have to remove the cost of investment of the subsubsidiary and then use the effective interest as well. but this is not the scenario here, looking at the notes in the question again we are told that Cherep and Lombe bought shares in Alvin at the same time therefore there was no existing group between Lombe and Alvin before .Alvin did not only become a member because of Lombe's acquisition of its shares as you are stating.we are told that Cherep and Lombe Acquired shares in Alvin at the same time.so Cherep also acquired shares in Alvin.go to goodwill 1 and 2 and check the different scenarios and you will see the differences.and again look at the question because it was ammended.

if you still have doubts please put it across remember we are all learning

[mattoz22]

Hi Vivie. I just enjoyed working through your example and it made sense from what i understand to date. Thanks for the practice! Matt