Distinguish between acquired and self-generated goodwill.

Distinguish between acquired and self-generated goodwill. State how goodwill of either sort should be treated in the balance sheet. (5 marks)

(b) Deluxe Ltd. made the following acquisitions during the year ended 30 September 2000:

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1. Purchase of the assets of a local trader. The purchase consideration, settled in cash S.1.310,000 and the balance sheet of the sole trader showed net assets totaling Sh.982,000. However it is estimated that the leasehold is undervalued by Sh.190,000 and that the fair value of the fixture and fittings is approximately 75% of the net book value of Sh.240,000 shown in the balance sheet.

2. Purchase of the entire share capital of Planet Ltd. for Sh.560,000 on 31 May 2000. Planet has net assets of Sh.320,000 at 1 October 1999 and had retained profits of Sh.360,000 for the year ended 30 September 2000.

3. Purchase of an unicorporated business for Sh.700,000. The net assets of the business were worth Sh.840,000 at purchase. However the business had been loss making in recent years and there were net current liabilities of Sh.400,000 at acquisition.

At 1.10.99, Deluxe Ltd. had the following reserves:

Retained profits Sh.8,620,000

Share premium account: Sh.6,000,000

The retained profit for the year ended 30 September 2000 was Sh.1,360,000.

Required:

Calculate the goodwill arising on each acquisition. (9 marks)

Assuming that goodwill is written off directly to reserves, draw up the reserves note for the individual financial statements of Deluxe Ltd. (6 marks)