Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of $320 000. At acquisition date, the net fair value of Jane Ltd’s assets, liabilities and contingent liabilities was $250 000 including goodwill with a carrying amount of $20 000. The company tax rate is 30%. The amount of Goodwill arising on acquisition is:
Question
Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of 250 000 including goodwill with a carrying amount of $20 000. The company tax rate is 30%. The amount of Goodwill arising on acquisition is:
Solution
The amount of Goodwill arising on acquisition is $70,000.
Here are the steps to understand this:
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Purchase Consideration: Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of $320,000. This is the total amount paid to acquire Jane Limited.
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Net Fair Value of Jane Ltd’s Assets, Liabilities and Contingent Liabilities: At the acquisition date, the net fair value of Jane Ltd’s assets, liabilities and contingent liabilities was 20,000.
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Calculation of Goodwill: Goodwill is calculated as the excess of the purchase consideration over the net fair value of the identifiable assets acquired and liabilities assumed. In this case, the purchase consideration is 250,000. Therefore, the goodwill arising on acquisition is 250,000 = $70,000.
Note: The company tax rate and the carrying amount of goodwill in Jane Ltd's books are not relevant for the calculation of goodwill arising on acquisition.
Therefore, the amount of Goodwill arising on acquisition is $70,000.
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