Goodwill Arising on Consolidation
In the group accounts we have looked at so far the cost of shares acquired by the parent company has always been equal to the nominal value of those shares. This is seldom the case in practice and we must now consider some more complicated examples. To begin with, we will examine the entries made by the parent company on its own balance sheet when it acquired shares.
Suppose when a the directors of XYZ company agree to pay for 120000$ for a 100% investment in ABC limited they must believe that, in addition to its tangible assets 80000$, ABC limited must also have intangible assets worth 40000$. This amount of 40000$ paid over and above the value of the tangible assets acquired is called goodwill arising on consolidation (sometimes it called premium on acquisition).
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