Gargantua Ltd paid $1 000 000 for 75 per cent of the voting shares of Dwarf Ltd, and evaluated Dwarf's assets to be worth $1 500 000 and its liabilities $300 000. What was the goodwill on consolidation at the date of acquisition?

Question

Quizplus · Accepted Answer

Goodwill on consolidation is calculated as the difference between the purchase consideration and the net assets acquired at the date of acquisition. Net assets are calculated as assets minus liabilities. In this case, Dwarf Ltd's net assets are $1,500,000 (assets) - $300,000 (liabilities) = $1,200,000. Gargantua Ltd acquired 75% of Dwarf, so the value of the net assets attributable to Gargantua Ltd is 75% of $1,200,000 = $900,000. The purchase consideration is $1,000,000. Therefore, goodwill on consolidation is $1,000,000 (purchase consideration) - $900,000 (value of net assets acquired) = $100,000.

Gargantua Ltd Paid $1 000 000 for 75 Per Cent