Petro Ltd acquired 60% of Carlos Ltd’s 500,000 R1 equity shares on 1st January 2019 for a consideration of R5 cash per share. At the date of acquisition, net assets and liabilities in Carlos Ltd were valued at R1,600,000 and the fair value of the non-controlling interest was R800,000.

Question

Required:
1. Determine the acquisition date.
2. Calculate goodwill or gain on bargain purchase if any using Proportionate of Net Assets Method
3. Calculate goodwill or gain on bargain purchase if any using Fair Value Method

Answer 1

1. The acquisition date is 1st January 2019.

2. Proportionate of Net Assets Method:
a) Total net assets and liabilities of Carlos Ltd at the date of acquisition = R1,600,000
b) Total consideration paid by Petro Ltd for the 60% ownership = 60% of (500,000 shares * R5 per share) = R1,500,000
c) Proportionate share of net assets acquired by Petro Ltd = 60% of R1,600,000 = R960,000
d) Goodwill or gain on bargain purchase = Consideration paid - Proportionate share of net assets acquired = R1,500,000 - R960,000 = R540,000

Therefore, there is goodwill of R540,000 using the Proportionate of Net Assets Method.

3. Fair Value Method:
a) Fair value of non-controlling interest = R800,000
b) Fair value of net assets acquired by Petro Ltd = Total net assets and liabilities - Fair value of non-controlling interest = R1,600,000 - R800,000 = R800,000
c) Consideration paid = 60% of (500,000 shares * R5 per share) = R1,500,000
d) Goodwill or gain on bargain purchase = Consideration paid - Fair value of net assets acquired = R1,500,000 - R800,000 = R700,000

Therefore, there is goodwill of R700,000 using the Fair Value Method.