Has any goodwill been acquired and, if so, how much? And discuss the potential for including associated legal fees

Question: ABC Ltd acquires 100 per cent of RedCarpet Ltd on 1 July 2021. ABC Ltd pays the shareholders of RedCarpet Ltd the following consideration:

There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd.

On 1 July 2021 RedCarpetLtd's statement of financial position shows total assets of $300 000 and liabilities of $150 000. The fair value of the assets is $400 000.

Required:
Has any goodwill been acquired and, if so, how much? And discuss the potential for including associated legal fees into the cost of acquiring RedCarpet using appropriate accounting standard.

ANSWER:
The required estimation of goodwill has been shown below-

Table 3: Estimation of the amount of goodwill paid

From the above table (Table 3) it can be identified that the acquirer firm, that is ABC Ltd, has recognised the goodwill for acquiring the targeted firm, that is RedCarpet Ltd. In this process, the estimated value of the goodwill of the firm has been determined to be $60,000. This is because goodwill generally highlights the total amount of extra payments made compared to the value of the net value of the total assets of a business organisation.

The AASB 138 mainly deals with the accounting process of the intangible assets of the organisations. In this process, it is needed to highlight that as per this accounting standard ‘cost' of an intangible asset generally includes the purchase price and costs associated with acquiring the assets in the condition of ready to use. The purchase price mainly includes the taxes, legal fees and deduction of discounts (Aasb.gov.au, 2021). Thus, it is required to highlight that the associated legal fees need to be considered or recognised into the cost of acquiring the stated business as per the AASB 138.

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