Allen Co is a public limited company with a reporting date of 30 June 2017. Allen Co

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Question:

Allen Co is a public limited company with a reporting date of 30 June 2017.

Allen Co acquired 40% of the equity of Beaumont Co for a cost of $100 million on 1 July 20X5. achieving significant influence. On 1 July 20X6, Allen Co acquired a further 20% of the equity for $62 million and obtained control of Beaumont Co. The $62 million paid included $2 million of legal fees which were capitalised as part of the cost of the investment.

The net assets of Beaumont Co had a carrying amount of $230 million and $250 million on 1 July 20X5 and 1 July 20X6 respectively. The increase in net assets was due to retained profits only. No fair value adjustments were required to the net assets at either date.

The fair value of the original 40% equity interest at 1 July 20X6 is deemed to be $115 million. This amount is also the fair value of the non-controlling interest at 1 July 20X6.

In calculating goodwill related to Beaumont Co for the Allen Co Group financial statements. The finance director included both the new 20% investment and the previously held 40% investment at their respective costs of $62 million and $100 million. The accounting entries relating to this good will have not yet been made.

The finance director believes an adjustment to equity may be required in the group accounts in relation to the increase in shareholding. She thinks this is calculated as the fair value of the 40% investment at the date control is achieved less the original cost of the 40% investment. The finance director is awaiting clarification before accounting for any such adjustment.

The directors of Allen Co elected to measure the non-controlling interest in Beaumont Co at fair value at acquisition Goodwill in Beaumont Co is not impaired at the reporting date.

Required:

1) Explain, with suitable workings, how the goodwill in Beaumont Co should have been calculated and discuss, with suitable workings, whether an adjustment to equity is required in relation to the increase in shareholding in the consolidated financial statements for the year ended 30 June 20X7.