DipIFR Syllabus D. Preparation of external financial reports - Share for Share Exchanges - Notes ^{3 / 3}

These can form part, or all, of the cost of investment which is used in the goodwill calculation.

Under normal circumstances, P acquires S’s shares by giving them cash, so the double entry is

Dr Cost of Investment
Cr Cash

However this time, P does not give cash, but instead gives some of its own shares
If this exchange has yet to be accounted for, the double entry is always: 

Dr Cost of Investment
Cr Share capital (with the nominal value of P shares given out)
Cr Share premium (with the premium)

Illustration

P acquired 80% of S shares via a 2 for 1 share exchange. 

At the date of acquisition, the following balances were in the books of P and S:

Show the accounting treatment required to account for the share exchange.

P acquired 80% of S’s shares. 

The shares had a value of $400 but a nominal value of $0.50. 

This means S has 800 shares in total. P acquired 80% x 800 = 640 shares
The share for share deal was 2 for 1. 

So P gives 1,280 of its shares in return for 640 of S’s shares.

P’s shares have a MV of $2 at this date so the “cost of investment is 1,280 x 2 = 2,560

Double entry 

Dr Cost of Investment 2,560
Cr Share Capital (P) 1,280
Cr Share Premium (P) 1,280