What is the goodwill arising on acquisition?

Company Pogba acquired 100% of the 100,000 £1 shares in Company Drogba for £1,250,000. When the retained earnings were £650,000, the revaluation reserve was £275,000, and the general reserve was £75,000. The building which is carried at £425,000 was shown to have a fair value of £375,000 at the date of acquisition.

The goodwill arising on acquisition is D £275,000.

Calculation of Goodwill:

Step 1: Calculate the net assets of Company Drogba

Net assets = Retained Earnings + Revaluation Reserve + General Reserve

Net assets = £650,000 + £275,000 + £75,000 = £1,000,000

Step 2: Calculate the premium paid by Company Pogba

Premium = Acquisition Cost - Net Assets

Premium = £1,250,000 - £1,000,000 = £250,000

Step 3: Goodwill

Goodwill arising on acquisition = Fair Value of building - Carrying Amount of building

Goodwill = £375,000 - £425,000 = £-50,000

Since the calculated goodwill is negative, it means that no goodwill arises on this acquisition.