Semester 2 Week 7 Tutorial 6 Flashcards
Outline the difference between individual accounts and group accounts.
Individual accounts show the position of a single company only, whereas group accounts show the position of that company and all its subsidiaries.
Why are group accounts required?
Group accounts are required to show the true financial position of a group. The individual accounts would only show the position of the top company in the group, which may not give a very useful view of the company; particularly if the top company only really holds investments. For this reason group accounts are required to give a true and fair view.
Outline what is meant by the single entity approach.
The single entity approach means that we treat the group accounts as if it was just one single company.
Danzig Plc. acquires Riga Ltd on 1 March 20X5 for £14,000,000 in cash. At the point of acquisition Riga has share capital of £4,000,000 and retained earnings of £6,000,000.
a. How would this transaction be recorded in the individual accounts of Danzig?
b. Calculate the goodwill on acquisition.
c. Now imagine that Danzig had acquired Riga for £14,000,000 in cash when Riga had net assets of £10,000,000. What would the goodwill be in this case?
Danzig and Riga
a. Danizig would record a payment of £14,000,000 cash and an investment of £14,000,000.
b. Goodwill = £14,000,000 – (£4,000,000 + £6,000,000) = £4,000,000
c. The answer would be exactly the same. Remember total equity (in this case £4,000,000 + £6,000,000) should always equal net assets according to the accounting equation.
Goodwill = £15,000,000 – (£8,000,000 + £2,000,000) = £5,000,000
Add the two financial statements together and adjust.
It is now 30 June 20X9, Brunswick has retained earnings of £13,000,000 and total net assets of £20,000,000. What would the goodwill be in the Hudson Group accounts?
Unless there has been an impairment the goodwill will remain at £3,500,000. Goodwill is always calculated at acquisition; therefore what the net assets of Brunswick are now is not relevant.
In your own words briefly describe what goodwill is.
Goodwill represents the value of a business over and above its represented assets. This would include, for example, the value of the brand, the customer reputation. The trading history etc.
