Cost of Acquisition for Parent Ltd at the Date of Acquisition:
The cost of acquisition includes the fair value of the consideration transferred, fair value of previously held equity interests, and the fair value of any contingent consideration. In this case:
Cost of Acquisition=Fair Value of Shares Issued+Fair Value of Cash Paid+Consulting and Brokerage Fees+Value of Share Price GuaranteeCost of Acquisition=Fair Value of Shares Issued+Fair Value of Cash Paid+Consulting and Brokerage Fees+Value of Share Price Guarantee
Fair Value of Shares Issued=Number of Shares Issued×Market Price per ShareMarket Price per ShareFair Value of Shares Issued=Market Price per ShareNumber of Shares Issued×Market Price per Share
Fair Value of Cash Paid=Cash AmountFair Value of Cash Paid=Cash Amount
Consulting and Brokerage Fees=$50,000Consulting and Brokerage Fees=$50,000
Value of Share Price Guarantee=Probability of Share Price Falling×Maximum Amount PayableValue of Share Price Guarantee=Probability of Share Price Falling×Maximum Amount Payable =0.5×($40−$36)×Number of Shares Issued=0.5×($40−$36)×Number of Shares Issued
Cost of Acquisition=Number of Shares Issued×$40$40+$31,944+$50,000+(0.5×($40−$36)×Number of Shares Issued)Cost of Acquisition=$40Number of Shares Issued×$40+$31,944+$50,000+(0.5×($40−$36)×Number of Shares Issued)
Given that the shareholders receive one share in Parent Ltd for every four shares held, the number of shares issued (\text{Number of Shares Issued}) can be calculated based on the number of shares held by Subsidiary Ltd shareholders.
2. Goodwill Calculation:
Goodwill=Consideration Transferred−Net Assets AcquiredGoodwill=Consideration Transferred−Net Assets Acquired
Consideration Transferred=Cost of AcquisitionConsideration Transferred=Cost of Acquisition
Net Assets Acquired=Fair Value of Identifiable Assets−Fair Value of LiabilitiesNet Assets Acquired=Fair Value of Identifiable Assets−Fair Value of Liabilities
Fair Value of Identifiable Assets=Sum of Fair Values of Land, Buildings, Equipment, Machinery, Furniture, Cash, Accounts Receivable, Dividend Receivable, Loan Receivable from Subsidiary, Inventories, Investment in SubsidiaryFair Value of Identifiable Assets=Sum of Fair Values of Land, Buildings, Equipment, Machinery, Furniture, Cash, Accounts Receivable, Dividend Receivable, Loan Receivable from Subsidiary, Inventories, Investment in Subsidiary
Fair Value of Liabilities=Sum of Current Liabilities, Dividend Payable, Loan Payable to ParentFair Value of Liabilities=Sum of Current Liabilities, Dividend Payable, Loan Payable to Parent
The acquirer should report goodwill in the financial statements under the “Goodwill” account.