Ryan Limited acquired 80% of the shares in Tully Limited for $165 000. At acquisition date, share capital in Tully was $120 000 and reserves amounted to $40 000. All assets and liabilities of Tully were recorded at fair value at acquisition date except machinery which was recorded at $20 000 below fair value. The fair value of the NCI at the date of Ryan's acquisition was $40 000 and the full goodwill method is adopted by the group. If the company tax rate was 30%, the total amount of goodwill recorded in relation to this business combination amounts to:
A) $5 000
B) $31 000
C) $26 000
D) $25 000

Question

Quizplus · Accepted Answer

The total amount of goodwill is calculated by first adjusting the net assets of Tully Limited to reflect the fair value adjustments, then comparing the total investment (including the fair value of the non-controlling interest (NCI)) against the adjusted net assets. The adjustment for machinery increases Tully's net assets by $20,000 less tax (30% of $20,000 = $6,000), so the net adjustment is $14,000. Tully's adjusted net assets are $120,000 + $40,000 + $14,000 = $174,000. The total investment by Ryan Limited and the fair value of NCI is $165,000 + $40,000 = $205,000. The goodwill is the difference between the total investment and the adjusted net assets: $205,000 - $174,000 = $31,000.

Ryan Limited Acquired 80% of the Shares in Tully Limited