QUESTION TWO (30 MARKS)

Question

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.
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. To calculate goodwill or gain on bargain purchase using the Proportionate of Net Assets Method, we need to determine the fair value of the acquired net assets and liabilities of Carlos Ltd.

Fair value of acquired net assets and liabilities:
Net assets and liabilities in Carlos Ltd = R1,600,000
Fair value of non-controlling interest = R800,000

Fair value of acquired net assets and liabilities = R1,600,000 + R800,000 = R2,400,000

We also need to determine the fair value of Petro Ltd's share of the net assets and liabilities.

Percentage of net assets acquired:
60% of 500,000 shares = 300,000 shares

Fair value of Petro Ltd's share of the net assets and liabilities = (300,000 / 500,000) * R2,400,000 = R1,440,000

Goodwill or gain on bargain purchase = Consideration paid - Fair value of Petro Ltd's share of the net assets and liabilities
= (500,000 shares * R5 per share) - R1,440,000
= R2,500,000 - R1,440,000
= R1,060,000

Therefore, the goodwill is R1,060,000 using the Proportionate of Net Assets Method.

3. To calculate goodwill or gain on bargain purchase using the Fair Value Method, we need to determine the fair value of the acquired equity shares.

Fair value of acquired equity shares = 500,000 shares * R5 per share = R2,500,000

Fair value of acquired net assets and liabilities = R2,400,000 (as calculated in the previous question)

Goodwill or gain on bargain purchase = Fair value of acquired equity shares - Fair value of acquired net assets and liabilities
= R2,500,000 - R2,400,000
= R100,000

Therefore, the goodwill is R100,000 using the Fair Value Method.