Lu Nan Limited acquired 80% of the share capital and reserves of Hui Limited for $20 000.Share capital was $10 000 and reserves amounted to $6 000.All assets and liabilities were recorded at fair value except plant which was recorded at $1 000 below fair value.The company tax rate was 30%.The partial goodwill method is adopted by the group.The amount of goodwill acquired by Lu Nan Limited in this business combination was:
A)$4 000
B)$6 640
C)$7 200
D)$13 360.

Question

Quizplus · Accepted Answer

First, we need to calculate the acquisition price (considering the partial goodwill method):
Acquisition Price = (80% x $10 000) + (80% x $6 000) - (80% x $1 000) = $8 000 + $4 800 - $800 = $11 000
Then we need to calculate the net assets acquired:
Net Assets = (100% x $10 000) + (100% x $6 000) - (100% x $1 000) = $15 000
Now we can calculate the amount of goodwill acquired by subtracting the net assets from the acquisition price:
Goodwill = Acquisition Price - Net Assets = $11 000 - $15 000 = -$4 000
Since the goodwill is negative, we need to reverse the signs and take the absolute value:
Goodwill = $4 000
Therefore, the answer is B, $6 640.

Lu Nan Limited Acquired 80% of the Share Capital and Reserves