Advanced Financial Accounting (324028) 2018/2019
Exercise Tutorial Business Combinations
April 2019
Prof. Dr. Leo G. van der Tas
On 1 January 2018, Copa Ltd acquired 80% of the shares of Cabana Ltd for an initial amount of
€125,000 plus an office building. The office building had a carrying amount of €10,000 and a fair
value of €15,000. In addition Copa Ltd will pay another € 20,000 on 31 December 2019 if Cabana
Ltd meets certain EBITDA targets in the year ending 31 December 2018. Copa expects the
chance of those targets to be met by Cabana to be 60%. At 1 January 2018 the equity of Cabana
Ltd consisted of (in €):
Share Capital 40,000
General Reserves 50,000
Retained Earnings 30,000
At this date, the identifiable assets and liabilities of Cabana Ltd were recorded at fair value except
for the following assets and liabilities:
Carrying amount Fair value
Storage facility (cost €80,000) 65,000 75,000
Land 80,000 90,000
Inventory 45,000 50,000
Loan (liability) 50,000 55,000
The storage facility has a further 5-year life.
Copa Ltd uses the full goodwill method. The fair value of the non-controlling interest (NCI) at 1
January 2018 was €30,000
The tax rate is 25%. The market interest rate on a loan to Copa Ltd at 1 January 2018 would
amount to 6%. The market interest rate on a loan to Cabana Ltd would amount to 7%.
A. What is the amount of goodwill Copa Ltd records in its consolidated financial
statements as a result of the acquisition of Cabana Ltd? What is the amount of the
control premium? Add your calculations.
At 1/1/18:
Net fair value of identifiable assets
and liabilities of Cabana Ltd = (€40,000 + €50,000 + €30,000) (equity)
+ €10,000 (1 – 25%) (storage facility)
+ €10,000 (1 – 25%) (land)
+ €5,000 (1 – 25%) (inventory)
-€5,000 (1-25%) (loan)
= €135,000
(a) Consideration transferred = €125,000 +€ 15,000 + (60%*€20,000)/(1.06^2)
= €150,680
(b) Non-controlling interest = €30,000
Aggregate of (a) and (b) = €180,680
Goodwill = €45,680
Goodwill of Cabana Ltd (excl control premium):
Fair value of Cabana Ltd (excl control premium)
1
Exercise Tutorial Business Combinations
April 2019
Prof. Dr. Leo G. van der Tas
On 1 January 2018, Copa Ltd acquired 80% of the shares of Cabana Ltd for an initial amount of
€125,000 plus an office building. The office building had a carrying amount of €10,000 and a fair
value of €15,000. In addition Copa Ltd will pay another € 20,000 on 31 December 2019 if Cabana
Ltd meets certain EBITDA targets in the year ending 31 December 2018. Copa expects the
chance of those targets to be met by Cabana to be 60%. At 1 January 2018 the equity of Cabana
Ltd consisted of (in €):
Share Capital 40,000
General Reserves 50,000
Retained Earnings 30,000
At this date, the identifiable assets and liabilities of Cabana Ltd were recorded at fair value except
for the following assets and liabilities:
Carrying amount Fair value
Storage facility (cost €80,000) 65,000 75,000
Land 80,000 90,000
Inventory 45,000 50,000
Loan (liability) 50,000 55,000
The storage facility has a further 5-year life.
Copa Ltd uses the full goodwill method. The fair value of the non-controlling interest (NCI) at 1
January 2018 was €30,000
The tax rate is 25%. The market interest rate on a loan to Copa Ltd at 1 January 2018 would
amount to 6%. The market interest rate on a loan to Cabana Ltd would amount to 7%.
A. What is the amount of goodwill Copa Ltd records in its consolidated financial
statements as a result of the acquisition of Cabana Ltd? What is the amount of the
control premium? Add your calculations.
At 1/1/18:
Net fair value of identifiable assets
and liabilities of Cabana Ltd = (€40,000 + €50,000 + €30,000) (equity)
+ €10,000 (1 – 25%) (storage facility)
+ €10,000 (1 – 25%) (land)
+ €5,000 (1 – 25%) (inventory)
-€5,000 (1-25%) (loan)
= €135,000
(a) Consideration transferred = €125,000 +€ 15,000 + (60%*€20,000)/(1.06^2)
= €150,680
(b) Non-controlling interest = €30,000
Aggregate of (a) and (b) = €180,680
Goodwill = €45,680
Goodwill of Cabana Ltd (excl control premium):
Fair value of Cabana Ltd (excl control premium)
1
