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:
$$\begin{array} { l r }
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Suppose that Rose paid $850 000 for the shares in Jeanie, which of the following correctly describes the accounting procedures that will arise as a result of the business combination? Assume that the difference between the fair value of the consideration paid for Jeannie shares and the fair value of the net assets is due to the directors of Rose having overestimated the fair value of Jeannie assets.

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:
$$\begin{array} { l r } 
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Suppose that Rose paid $850 000 for the shares in Jeanie, which of the following correctly describes the accounting procedures that will arise as a result of the business combination? Assume that the difference between the fair value of the consideration paid for Jeannie shares and the fair value of the net assets is due to the directors of Rose having overestimated the fair value of Jeannie assets.

Quizplus · Accepted Answer

When the fair value of the net assets acquired is less than the consideration paid, the excess is recognized as goodwill. In this case, the consideration paid was $850,000 while the net assets acquired were worth $800,000. Therefore, the excess of $50,000 will be recognized as goodwill. As per the given options, only option A correctly describes the accounting treatment of recognizing goodwill on the consolidation worksheet. Option B is incorrect because the goodwill is recognized at the group level, not in the individual company's ledger. Option C is incorrect because there is no indication of impairment at the acquisition date. Option D is incorrect because an accounting entry for goodwill is required.

Rose Ltd Acquired All the Equity of Jeannie Ltd on 1