Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for $180 000. Share capital was $100 000 and reserves amounted to $50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $10 000 below fair value. If the company tax rate was 30%, and the partial goodwill method was adopted, the NCI share of equity at the date of acquisition was:
27)4 Identify how the existence of an NCI affects the consolidation process, particularly in the measurement of goodwill.
A) $30 000
B) $31 400
C) $32 000
D) $36 000.

Question

Quizplus · Accepted Answer

The purchase consideration can be calculated as:

Purchase consideration = ($100,000 + $50,000 - $10,000) x 80% = $120,000

Goodwill can be calculated as:

Goodwill = Purchase consideration - Fair value of net assets 
= $120,000 - ($100,000 + $50,000 - $10,000) 
= $80,000

Under the partial goodwill method, goodwill is split between the controlling interest and the NCI based on their proportionate share of the fair value of net assets at the date of acquisition.

The fair value of net assets can be calculated as:

Fair value of net assets = ($100,000 + $50,000 - $10,000) x 100% 
= $140,000

The NCI share of equity can be calculated as:

NCI share of equity = Fair value of net assets x NCI percentage 
= $140,000 x 20% 
= $28,000

However, since partial goodwill method is adopted, only the proportionate share of goodwill is included in the calculation of NCI share of equity. Therefore,

NCI share of equity = Goodwill x NCI percentage 
= $80,000 x 20% 
= $16,000

Adding this to the NCI's share of Mustang Limited's equity before the acquisition ($10,000 x 20% = $2,000) gives a total NCI share of equity of $18,000.

Finally, the total purchase consideration of $120,000 is subject to a tax rate of 30%:

Purchase price after tax = Purchase price before tax x (1 - tax rate) 
= $120,000 x (1 - 0.3) 
= $84,000

The NCI share of this purchase price is:

NCI share of purchase price after tax = Purchase price after tax x NCI percentage 
= $84,000 x 20% 
= $16,800

Adding this to the NCI's share of equity gives a total NCI interest of $34,800.

Therefore, the answer is B) $31,400.

Jiminez Limited Acquired 80% of the Share Capital and Reserves