Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r }
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $850 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following is the correct substitution elimination entry as at 30 June 20X4?

Question

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } 
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $850 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following is the correct substitution elimination entry as at 30 June 20X4?

Quizplus · Accepted Answer

The correct substitution elimination entry is:Dr. Capital $500,000Dr. Reserves $100,000Dr. Retained profits $150,000Dr. Goodwill $100,000Cr. Investment $850,000This entry eliminates the investment account and recognizes the fair value of Jeannie's net assets at the date of acquisition. The goodwill of $100,000 represents the excess of the purchase price over the fair value of Jeannie's net assets.

Rose Ltd Acquired All the Equity of Jeannie Ltd on 1