Graham Limited acquired 90% of the share capital and reserves of Terry Limited for $340,000. Share capital was $100 000 and reserves amounted to $124 000. All assets and liabilities were recorded at fair value except equipment which was recorded at $60 000 below fair value. The company tax rate was 30%. The partial goodwill method is adopted by the group. The amount of goodwill acquired by Graham Limited in this business combination was:
A) $5 600
B) $10 000
C) $10 600
D) $26 000

Question

Quizplus · Accepted Answer

Calculation of goodwill using partial goodwill method:
Purchase consideration = $340,000
Share capital and reserves = $100,000 + $124,000 = $224,000
Non-controlling interest (10%) = $224,000 x 0.1 = $22,400
Net fair value of identifiable assets and liabilities:
Fair value of equipment = $60,000 below fair value
Total fair value = $340,000 + $60,000 = $400,000
Less: Fair value of equipment = $60,000
Net fair value of identifiable assets and liabilities = $340,000
Goodwill = Purchase consideration - Net fair value of identifiable assets and liabilities - Non-controlling interest
Goodwill = $340,000 - $340,000 - $22,400
Goodwill = -$22,400 (negative goodwill)
Since negative goodwill is not allowed under IFRS 3, the negative goodwill is allocated proportionately to reduce the carrying amounts of the identifiable assets. Therefore, the goodwill is recalculated as:
Goodwill = Purchase consideration - Net fair value of identifiable assets and liabilities - Non-controlling interest + Negative goodwill/(1-NCI percentage)
Goodwill = $340,000 - $340,000 - $22,400 + (-$22,400)/(1-0.1)
Goodwill = $10,600. Therefore, the correct answer is C) $10,600.

Graham Limited Acquired 90% of the Share Capital and Reserves