John Ltd acquired 100% of the issued shares of David Ltd for $80,000 (David Ltd.’s owner’s equity at the time of purchasing was $100,000 made up of share capital of $80,000 and retained earnings of $20,000). One of the liabilities of David Ltd was $18,000 for the dividend payable but not yet paid, and our accountant informed me that the shares were acquired based on Ex-dividend. In addition, one of the areas of discussion during the negotiation process was the current court case that David Ltd was involved in. No monetary amount was disclosed, but the company’s lawyers had placed a $6000 amount on the probable payout to settle the case.

Having prepared the acquisition analysis as part of preparing the consolidated financial statements for John Ltd,

Require:

Explain how the unrecorded contingent liability of $6,000 by the subsidiary David Ltd affects the group’s goodwill? The goodwill for John Ltd should be $20, 000 (being 80,000 minus 100,000). Is this correct? Will the dividend payable by the subsidiary entity David Ltd impact the acquisition analysis? Explain?