Goodwill on consolidation ?

Can you check that my understanding in the below example is correct?

Didn't find your answer?

Parent buys 60% of subsidiary with net assets of £80m for £100m.

Double entry in parents books:

Dr Investment 100m

Cr Cash 100m

Double entry in subsidiary books:

Dr Cash 100m

Cr Equity 100m

Can you check that the below is correct on consolidation:

Dr Goodwill 20m

Dr Equity 80m (is this Dr going to the Subsidiary's Equity account??)

Cr Investment 100m

Can some check the consolidation entries are correct to recognise GW and that the entry Dr Equity 80m is going to the subsidiary equity account?

Thank you

Replies (17)

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By paul.benny
05th Feb 2024 14:35

As you've asked us to mark your homework rather than doing it for you - and said thank you, I'll offer an answer.

Your entries imply that Parent subscribed for shares in Subsid - if it bought from an existing holder, there will be no entries in books of Subsid.

It's usual to make consolidation entries in a separate (notional) consolidation entry and certainly not in the books of the subsid.

Your goodwill amount is correct if under FRS102. If under IFRS you need to recognise identifiable intangibles that form part of that amount - eg customer list.

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Replying to paul.benny:
By Ruddles
05th Feb 2024 14:59

Is the goodwill figure correct, given that £100k was paid for only 60% of the sub?

EDIT - yes, I think it is!

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Replying to paul.benny:
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By ap_terminator
05th Feb 2024 15:44

Thank you.

So the Dr Equity 80m entry wouldn't be in the subsidiary equity account but in a separate consolidation account reported under equity in the parents balance sheet, is that correct?

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Replying to ap_terminator:
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By paul.benny
05th Feb 2024 15:54

Almost, but not quite

Your third journals eliminate Subsid equity. Total equity reported in the Consolidated statements is the equity of Parent plus post-acquisition retained earnings of Subsids.

And although Bobbo makes a good point below, I don't think there may be a misreading of the OP. You haven't provided the full BS of Subsid.

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Replying to paul.benny:
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By ap_terminator
05th Feb 2024 16:50

Sorry, I'm just trying to understand the double entries for Goodwill rather than produce the entire consolidation which is why I have omitted other info.

I'm confused with the Dr Equity 80m entry as the 80m never existed in the Parent's Equity accounts, or am I missing something?

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Replying to ap_terminator:
By Ruddles
05th Feb 2024 17:00

You are missing the fact that the £80m represents the net assets of the subsidiary, which need to be reflected on the parent’s B/S

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Replying to Ruddles:
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By paul.benny
05th Feb 2024 17:47

Or to be precise, in the consolidated balance sheet.

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Replying to paul.benny:
By Ruddles
05th Feb 2024 18:25

That’s not being precise, it’s being correct :-)

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Replying to Ruddles:
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By ap_terminator
06th Feb 2024 15:43

So when you record 80m of the net assets of the sub in the consolidated BS, the other side would be a Debit entry to Equity of 80m in the consolidated BS?

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Replying to ap_terminator:
By Ruddles
06th Feb 2024 16:52

ap_terminator wrote:

So when you record 80m of the net assets of the sub in the consolidated BS, the other side would be a Debit entry to Equity of 80m in the consolidated BS?


Well, given that the recording of net assets is likely to be a debit, it doesn't seem likely that there would also be a debit to equity. If my understanding (which is very rusty) is correct, journal entry should be (assuming no movement in subsidiary's B/S):

Cr investment £100m
Dr goodwill £52m
Dr assets/liabilities (ie breakdown of sub B/S) £80m
Cr Reserves (amount attributable to MI) £32m

This also assumes that £80m reflects the FV of the sub's net assets

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Replying to Ruddles:
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By ap_terminator
06th Feb 2024 22:29

This is helpful, thank you.

I see where I'm wrong now, my GW amount is incorrect and I was ignoring NCI.

If I make it simpler and say its a 100% acquisition with no FV adjustments, then the double entry is:

Cr Investment 100
Dr GW 20
Dr Assets/Liabilities 80 (BS of sub)

Can you explain why "Dr Assets/Liabilities 80" is the same as" Dr Equity 80", or is it not the same?

If I say that assets of the sub are 120m and liabilities are 40m, doesn't that mean Equity is a Cr of 80m?

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Replying to ap_terminator:
By Ruddles
07th Feb 2024 15:14

The misunderstanding is, I suspect, due to the different stages at which we are proposing to make the adjustments. My journals simply outline what would be required to get to the consolidated balance sheet from scratch. Assuming, though, that you have already undertaken stage 1, ie combine the two balance sheets, line by line, then yes the adjusting entry would be:

Dr goodwill £20m
Dr equity/reserves £80m
Cr investment in sub £100m

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By Bobbo
05th Feb 2024 14:52

If parent only owns 60% of subsidiary then surely goodwill should be based upon consideration less 60% of the £80m net assets i.e. £48m?

Do not forget fair value adjustments on consolidation.

Also do not forget non-controlling interest, as someone owns the other 40% of the subsidiary.

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Replying to Bobbo:
John Toon
By John Toon
06th Feb 2024 12:25

Agree entirely with this. The numbers stated are only part of the calc -what about the FV adjustments etc???

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John Toon
By John Toon
06th Feb 2024 17:21

Loving this exam style question!

You've got the double entry in the parent company right. Everything else is wrong.

Goodwill calc will be as follows:
Consideration - 60% of (Net assets acquired +/- FV adjustments)

Minority interest calc is essentially the inverse of the above:
40% of (net assets +/- FV adjs)

On consolidation you whip out the investment figure, stick in goodwill (amortised under FRS 102, not under IFRS), put in the FV adjustments and balance off with MI in equity

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Replying to johnt27:
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By ap_terminator
06th Feb 2024 23:01

Glad you're loving it, copied it straight from the textbook!!!

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Replying to johnt27:
Melchett
By thestudyman
08th Feb 2024 07:49

johnt27 wrote:
On consolidation you whip out the investment figure, stick in goodwill

Oooh I did not know accountants can be so naughty!

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