Rose Ltd acquired on a cum div. basis all of shares in Petal Ltd for $140 000. At the date of acquisition, Trout Ltd had recorded a dividend payable of $40 000 and a total shareholders' equity of $110 000. Assuming all the identifiable assets in Petal Ltd were recorded at fair value at acquisition date, the consolidation worksheet entries will have to recognise:
A) a goodwill of $140 000.
B) a goodwill of $40 000.
C) a goodwill of $10 000.
D) a gain on bargain purchase of $10 000.

Question

Quizplus · Accepted Answer

Since the acquisition was made on a cum div. basis, Rose Ltd would not have recorded the dividend payable of $40 000. Therefore, the net assets acquired would only be $110 000. However, Rose Ltd acquired Petal Ltd for $140 000, resulting in a gain on bargain purchase of $10 000 (i.e. $140,000 - $110,000). Hence, the consolidation worksheet entries will recognise a gain on bargain purchase of $10,000, rather than a goodwill.

Rose Ltd Acquired on a Cum Div