# Has any goodwill been acquired, and, if so, how much?

Home, - Discuss the potential for the cost of acquiring Red-X

Question 1: ABC Ltd has the following land and buildings in its financial statements as at 30 June 2022:

 Residential land, at cost 2,260,000 Factory land, at valuation 2020 2,034,000 Buildings, at valuation 2020 1,808,000 Accumulated depreciation -226,000

At 30 June 2022, the balance of the revaluation surplus is \$904 000, of which \$678 000 relates to the factory land and \$226 000 to the buildings. On this same date, independent valuations of the land and buildings are obtained. In relation to the above assets, the assessed fair values at 30 June 2022 are:

 Residential land, previously recorded at cost 2 486 000 Factory land, previously revalued in 2020 1 582 000 Buildings, previously revalued in 2020 2 034 000

Required:
Provide the journal entries to account for the revaluation on 30 June 2022. ABC Ltd classifies the residential land and the factory land as different classes of assets.

 Sr no Particulars Debit Credit 1 Residential Land Dr 226000 To revaluation suplus (Recording of revaluation surplus on residential building) 2 Revaluation surplus Dr 452000 To Factory Land 452000 (Recording of revaluation of factory building) 3 Building Dr 226000 Accumulated depreciation Dr 226000 To revaluation surplus 452000 (Recording of revaluation) Revaluation surplus on residential building = fair value - carrying value 1582000 =(2486000-2260000) = 226000 Revaluation surplus on factory land = fair value - carrying value =(1582000-2034000) = 452000 Revaluation surplus on Building = fair value - carrying value =(2034000-1582000) = 452000

Journal Entries

Sr no                    Particulars                                Debit (\$ in Lakhs)                                 Credit (\$ in Lakhs)

1                       Residential land                              2

Revaluation surplus                                                 2

(To Record revaluation surplus)

2                      Revaluation surplus                            4

Factory Land                                                         4

(To record revaluation surplus)

3                     Building A/c                                   2

Accumulated Depreciation                       2

Revaluation surplus                                                    4

(To record revaluation surplus)

Computation of Revaluation Surplus

Residential building= \$2200000.000000-\$2000000.0000000= \$2000000.0000000

Factory Land = \$1400000.00000-\$1800000.000000= -\$400000.000000

Building = \$1800000.00000000 - \$1400000.000000 = \$400000.00000000

Question 2: XYZ Ltd acquires 100 per cent of Red-X Ltd on 1 July 2021. XYZ Ltd pays the shareholders of Red-X Ltd the following consideration:

 Cash 79 100 Plant and equipment fair value \$282 500; carrying amount in the books of ABC Ltd \$192 100 Land fair value \$339 000; carrying amount in the books of ABC Ltd \$226 000

There are also legal fees of \$214 700 involved in acquiring Red-X Ltd.
On 1 July 2021, Red-X Ltd's statement of financial position shows total assets of \$339 000 and liabilities of \$339 000. The fair value of the assets is \$904 000.

Required:
Has any goodwill been acquired, and, if so, how much? And discuss the potential for including associated legal fees into the cost of acquiring Red-X using appropriate accounting standards.

Calculation of purchase consideration paid

 Particulars Amount (in \$) Cash 79100 Plant and equipment 282500 Land 339000 Total purchase consideration paid 700600

Calculation of net assets of the entity

 Particulars Amount (in \$) Fair value of assets 904000 Less: value of liabilities 339000 Net asset value 565000

Calculation of goodwill

 Particulars Amount (in \$) Total purchase consideration paid 700600 Less: Net asset value 565000 Goodwill 135600

In this scenario the cost incurred as the legal expense while acquiring the other entity are not clubbed in the calculation of the total purchase consideration paid (Gao, et al. 2019). It isconsidered as an acquisition expense and should be written off to the profit and loss account according to the AASB 3 Paragraph 53.

Given:

Cash=                                                                                                  \$70000.0000

Fair Value of Plant and Machinery =                                                 \$250000.0000

Fair value of Land = \$300000.0000

Legal Fees=                                                                                       \$190000.0000

Purchase consideration= \$\$70000.0000000+\$250000.00000000+\$190000.0000000+ \$\$300000.0000000=\$810000.0000000

Net Asset Value of Red- X=  \$800000.0000000-\$300000.000000= \$500000.0000

Goodwill =\$810000.0000000-\$500000.000000= \$310000.000000

Legal expenses are referred to as those expenses which are basically incurred by entities to transfer the ownership of asset from one person or company to another. Hence, it is generally included in the total cost of acquiring the asset. In the above described scenario as well, legal cost are included in the total expense of acquisition