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HIJ acquired all shares and half of the loan stock in KLM, whose net assets were revalued by £120,000 from £340,000 at the time. Goodwill arising was £24,000, and leverage in KLM was 25%. Calculate the investment in KLM in HIJ’s books.

Answer :

HIJ acquired all shares and half of the loan stock in KLM whose net assets were revalued by 120,000 from 340,000 at the time. Goodwill arising was 24,000, and leverage in KLM was 25%.

We need to calculate the investment in KLM in HIJ’s books.The formula for calculating investment in KLM in HIJ’s books is given as follows:Investment in KLM in HIJ's Books = Cost of Acquisition + Goodwill - (KLM's Net Assets × Percentage of KLM's Leverage)

we need to determine the Cost of Acquisition. It can be calculated as follows:Cost of Acquisition = (Total Shares × Share Price) + (Total Loan Stock × Loan Stock Price)Cost of Acquisition = (All shares × Share price) + (1/2 Loan Stock × Loan Stock Price)Cost of Acquisition = (All shares × 340,000) + (1/2 × 120,000)Cost of Acquisition = 340,000 × 1 + 120,000 × 0.5Cost of Acquisition = 400,000Now.

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