Lu Nan Limited acquired 70% of the share capital and reserves of Hui Limited for $36 000. Share capital was $18 000 and reserves amounted to $10 800. All assets and liabilities were recorded at fair value except plant which was recorded at $2500 below fair value. The company tax rate was 30%. The partial goodwill method is adopted by the group. The amount of goodwill acquired by Lu Nan Limited in this business combination was:

A) $8 640
B) $9 165
C) $10 800
D) $14 615.

Question

Lu Nan Limited acquired 70% of the share capital and reserves of Hui Limited for $36 000. Share capital was $18 000 and reserves amounted to $10 800. All assets and liabilities were recorded at fair value except plant which was recorded at $2500 below fair value. The company tax rate was 30%. The partial goodwill method is adopted by the group. The amount of goodwill acquired by Lu Nan Limited in this business combination was:

A) $8 640
B) $9 165
C) $10 800
D) $14 615.

Quizplus · Accepted Answer

Calculation of goodwill: 
Consideration transferred = $36,000 
(70% of share capital + reserves = 70% x ($18,000 + $10,800))

Net Assets at Fair Value: 
Share Capital = $18,000 
Reserves = $10,800 
Plant = $2,500 (below fair value) 
Total = $26,300

Minority interest = 30% x $26,300 = $7,890 
Total cost of investment = $36,000

Goodwill = $36,000 - ($26,300 - $2,500) - $7,890 = $14,615.

Therefore, the correct answer is option D.

Lu Nan Limited Acquired 70% of the Share Capital and Reserves