Goodwill Arising on Consolidation
When a company X Ltd wishes to purchase shares in a company Y Ltd it must it must pay the previous owners of those shares. The most obvious form of payment would be in cash. Suppose X Ltd purchases all 40000$ 1 shares in Y Ltd and pays 60000$ cash to the previous share holders in consideration. The entries in X Ltd’s books would be:
Debit – Investment in Y Ltd at cost 60000$
Credit – Bank 60000$
However, the previous shareholders might be prepared to asset some other firm of consideration. For example they might accept an agreed number of shares in X Ltd. X Ltd would then issue new shares in the agreed number and allot them to the former shareholders of s Y Ltd. This kind of deal might be attractive to X Ltd since it avoids the need for a heavy cash outlay. The former shareholders of Y Ltd would return and indirect interests in that company’s profitability via their new holding in its parent company.