I Have a Question That Might Be Sounded Weird

[Fundamental learner]

The question is: Why will the balance sheet still balance(I mean assets=liabilites+equity) after goodwill has been acquired? Both the parent financial position and the consolidated financial position?

Say, if a company(parent company) uses its assets(bank or cash) to acquire partly ownership(more than 50% of voting power) of the subsidiary, then item 'the investment in subsidiary' and 'goodwill' would be presented(assets, in this case, would be increased)on balance sheet, and mean while the accordant assets that are used to the acquisition decreased, in that case, the balance sheet still balances. But if the company uses part of its assets(for example, current assets) and the exchange of capital shares(for example, equity) to acquire partly ownership(more than 50% voting power) of the subsidiary, how does the balance sheet of the parent company still balance? How does the consolidated financial position still balance? I don't get it.

I don't know whether I have stated my question clearly. It is highly appreciated if you could answer my questions. Thank you in advance.

Maybe it's the fundamental problem about the accounting equation: assets=liabilities+euity. I just don't get it when it applies to the occurance of goodwill.

[Acid]

Hi fundamental learner,

I cant understand your question , can you please write a bit more clearly or support with an example?

Thanks

[Fundamental learner]

Hi fundamental learner,

I cant understand your question , can you please write a bit more clearly or support with an example?

Thanks

Dear Acid, I have revised my post so as to make it clearer. I apologize for the your not being understanding my question.

[Acid]

. But if the company uses part of its assets(for example, current assets) and the exchange of capital shares(for example, equity) to acquire partly ownership(more than 50% voting power) of the subsidiary, how does the balance sheet of the parent company still balance? How does the consolidated financial position still balance? I don't get it.

Hi F.L,

Your question is , If current assets are used to purchase a subsidary e.g. a 50% subsidiary then how will the individual and CSFP balance .

If company P ( parent ) buys company S via exchange of current assets ( say debtors ) for shares in S then P will exchange debtors worth $1000 for $800 Equity and $200 Goodwill.

Now Goodwill will be shown as asset and the pre acquisition reserves will be capitalised and so does the S Net assets added to P CSFP.

I will get back to you later on this one again.

[Hamdy Hafez]

Hi F.L,


I will get back to you later on this one again.

May be me too

see you soon

[Veda]

Hi Fundamental learner,

Me too couldn't understand your querry.

Let us take an example. P Co pays $5,000 as purchase consideration to buy 75% shares in S Co. The net identifiable assets is $3,500 and the fair value of 25% non-controlling interest is 1,500.

Therefore the amount of goodwill is:

Purchase consideration $5,000
Fair value of non-controlling interest $1,500
$6,500
Less: Net assets acquired $3,500
Goodwill $3,000

The goodwill will be recorded at $3,000.

[gbwango]

Goodwill is actually the difference between what you pay to acquire ownership of a subsidiary and the net assets you acquire i.e. You acquire shares worth £1000- capital but you actually pay £1200 the difference £200 is goodwill.

Net Assets ( A-L) + goodwill = Capital
£1000 + 200 = £1200

the cost of the investment is recorded as your capital ad therefore to balance the eqn u need to have goodwill.

hope this helps.