QUESTION TWO (30 MARKS)
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
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.
1. Determine the acquisition date:
The acquisition date is given as January 1, 2019.
2. Calculate goodwill or gain on bargain purchase using the Proportionate of Net Assets Method:
Step 1: Calculate the fair value of the net assets:
Net assets of Carlos Ltd at the date of acquisition = R1,600,000
Step 2: Calculate the non-controlling interest (NCI):
NCI = Fair value of NCI - Proportionate share of net assets
Given: Fair value of NCI = R800,000 and Petro Ltd acquired 60% of shares
NCI = R800,000 - (40% x R1,600,000) = R800,000 - R640,000 = R160,000
Step 3: Calculate goodwill or gain on bargain purchase:
Goodwill or gain on bargain purchase = (Consideration paid - Fair value of net assets) - NCI
Consideration paid = R5 x 500,000 shares = R2,500,000
Goodwill or gain on bargain purchase = (R2,500,000 - R1,600,000) - R160,000 = R740,000
Therefore, using the Proportionate of Net Assets Method, the goodwill is R740,000.
3. Calculate goodwill or gain on bargain purchase using the Fair Value Method:
Step 1: Calculate the fair value of the net assets:
Net assets of Carlos Ltd at the date of acquisition = R1,600,000
Step 2: Calculate the fair value of the acquired assets and liabilities:
Fair value of the acquired assets = R1,600,000
Fair value of the acquired liabilities = R1,600,000
Step 3: Calculate the non-controlling interest (NCI):
NCI = Fair value of NCI - Proportionate share of fair value of net assets
Given: Fair value of NCI = R800,000 and Petro Ltd acquired 60% of shares
NCI = R800,000 - (40% x R1,600,000) = R800,000 - R640,000 = R160,000
Step 4: Calculate goodwill or gain on bargain purchase:
Goodwill or gain on bargain purchase = (Consideration paid - Fair value of net assets) - NCI
Consideration paid = R5 x 500,000 shares = R2,500,000
Goodwill or gain on bargain purchase = (R2,500,000 - R1,600,000) - R160,000 = R740,000
Therefore, using the Fair Value Method, the goodwill is R740,000.
To answer these questions, we need to understand the concepts of acquisition date, goodwill, and the two methods used to calculate goodwill or gain on bargain purchase - Proportionate of Net Assets Method and Fair Value Method. Let's go through each step to find the answers.
1. Determining the acquisition date:
The question states that Petro Ltd acquired 60% of Carlos Ltd's equity shares on 1st January 2019. Therefore, the acquisition date is 1st January 2019.
2. Calculating goodwill or gain on bargain purchase using Proportionate of Net Assets Method:
The Proportionate of Net Assets Method is used to calculate goodwill or gain on bargain purchase by comparing the purchase price to the fair value of the acquired company's identifiable net assets.
First, we need to calculate the fair value of Carlos Ltd's net assets acquired by Petro Ltd. The net assets' fair value is given as R1,600,000. Petro Ltd acquired 60% of Carlos Ltd's equity shares, which means they have control over 60% of the net assets' fair value.
Fair value of net assets acquired by Petro Ltd = 60% * R1,600,000 = R960,000
Next, we subtract the fair value of net assets acquired from the purchase consideration.
Goodwill (or gain on bargain purchase) = Purchase consideration - Fair value of net assets acquired
= (R5 * 500,000) - R960,000
= R2,500,000 - R960,000
= R1,540,000
Therefore, the goodwill (or gain on bargain purchase) using the Proportionate of Net Assets Method is R1,540,000.
3. Calculating goodwill or gain on bargain purchase using Fair Value Method:
The Fair Value Method calculates goodwill or gain on bargain purchase by comparing the purchase price to the fair value of the acquired company as a whole.
The fair value of the non-controlling interest is given as R800,000. Since Petro Ltd acquired 60% of Carlos Ltd's equity shares, the fair value of Petro Ltd's share is 60% of the fair value of the company as a whole.
Fair value of Petro Ltd's share = 60% * (Total fair value - Fair value of non-controlling interest)
= 60% * (Total fair value - R800,000)
Now, let's substitute the given total fair value and calculate Petro Ltd's share fair value.
Petro Ltd's share fair value = 60% * (Total fair value - R800,000)
Next, we need to subtract the share fair value from the purchase consideration.
Goodwill (or gain on bargain purchase) = Purchase consideration - Petro Ltd's share fair value
Therefore, to calculate the goodwill or gain on bargain purchase using the Fair Value Method, we need the total fair value. Unfortunately, the question does not provide this information. Once we have the total fair value, we can proceed with the calculation.
In conclusion, using the Proportionate of Net Assets Method, the goodwill (or gain on bargain purchase) is R1,540,000. However, we cannot calculate the goodwill (or gain on bargain purchase) using the Fair Value Method without the total fair value information.