Consolidation of Entities

CONSOLIDATION OF ENTITIES 1
CONSOLIDATION
OF ENTITIES

CONSOLIDATION OF ENTITIES 2
Question 1:
To: Z
From: X
Re: Accounting of goodwill
Date: July 5, 2019
Question presented: goodwill and how the same is calculated and reported in the financial
statements
Goodwill is defined as the reputation of the company in the market. This is the reputation of
the company that it has in the market. This is hence, considered to be an asset since this is
something from which the economic benefits would flow into the entity in the near future.
This is something the company would be able to get encashed if it wants to purchase goods
on credit. This is reported under the head of “Intangible Assets” in the financial statements
(Corporate finance institute, 2019). This is developed with time by the company and can be
purchased from the market when it takes over another company or when it mergers with
another company. This is an asset which is tested for impairment each year and impairment
loss is recorded when the carrying value of the asset is more than the fair value of the asset.
These requirements have been laid down under the AASB 101 preparation and presentation
of the financial statements. The testing of impairment of goodwill depends upon the
judgement and the prediction of the management and the same have to be renewed and
revised with each passing year. The expertise of the management plays a vital role in the
calculation of the fair value of the goodwill. Then the auditors step in to check the
appropriateness of the policies and the procedures that have been adopted by the
management. Sometimes, there are negative goodwill which is due to the impairment (ACCA
Global, 2019). When one company takes over the other, goodwill is calculated, it is the

CONSOLIDATION OF ENTITIES 3
difference between the net fair value of the identifiable assets of the company and the
purchase consideration at which the target company has been acquired by the acquiring
company.
Question 2:
Acquisition analysis:
At July 1, 2014
Fair value of identifiable
assets and liabilities of
Slang Ltd 2,80,800.00
4,200.00 Inventories
2,100.00 Plant and equipment
3,300.00 Patent and Goodwill
2,90,400.00
Consideration transferred 2,88,000.00
(Cash+market value
of shares- dividend
payable)
Gain on bargain
purchase 2,400.00
Goodwill adjustment 7,200.00
Business combination valuation entries:
Patent 15,000.00