Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r }
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $850 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following correctly describes the accounting procedures that will arise as a result of the business combination?

Question

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } 
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $850 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following correctly describes the accounting procedures that will arise as a result of the business combination?

Quizplus · Accepted Answer

According to IFRS 3 Business Combinations, goodwill is recognized as the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities, and contingent liabilities. In this scenario, the cost of the business combination is $850,000 and the acquirer's interest in the net fair value of the identifiable assets and liabilities is $700,000 ($750,000 total equity and reserves - $50,000 liabilities). Therefore, the goodwill recognized would be $150,000 ($850,000 - $700,000). Since Jeannie made profits in the 20X3-4 financial year, the value of goodwill will not decrease and so the goodwill asset recorded on the consolidation worksheet prepared as at 30 June 20X4 will be $100,000 ($150,000 - $75,000). Therefore, choice A is the correct answer. Choice B is incorrect because goodwill is not recorded directly in the acquirer's ledger. Choice C is incorrect because it assumes that Jeannie's profits will reduce the value of goodwill, which is not necessarily true.

Rose Ltd Acquired All the Equity of Jeannie Ltd on 1