In this workout we're told that Tortola have bought Tobago and we're asked to calculate the consolidated goodwill Well let's remind ourselves of the formula for consolidated goodwill We start off with investor goodwill and you then add on investee goodwill and then we look for any transaction effects And the first transaction effect is to actually zero out the investee goodwill that you just added We then replace that with deal goodwill and that will get us to consolidated goodwill So working backwards, we need to now calculate deal goodwill And that's going to be the difference between the equity purchase price and shareholders' equity at fair value at the deal date So let's get into that calculation Firstly the equity purchase price? Well Tortola has spent 8,640 buying Tobago I now want to calculate the shareholders' equity at fair value and the difference between that and the equity purchase price will be goodwill We start off with shareholders' equity on the balance sheet Not quite fair yet but we'll start with that figure So that is 7,080 Next up, I ask myself, is that book value correct and do we need to change it to get to fair value? And I notice that we had brands on the balance sheet at deal date of 1,200 And then you've got an uplift to the fair value of brands up to 4,000 So that difference isn't being shown at the moment, let's include that now So we take the 4,000 minus off the 1,200 and we've not stepped up the brands to fair value An increase of 2,800 The last thing we need to do, is we need to take out Tobago's existing goodwill, we need to get rid of that So I go up to Tobago's goodwill and I times that by minus 1 (we don't want to include that) So that will now get me to shareholders' equity at fair value, which comes in at 5,680 So my deal goodwill is now the difference between the equity purchase price and the shareholders' equity at fair value 2,960 What I now need to do is finish up with my consolidated goodwill So we start with the investor's goodwill (that was Tortola) 5,640 We then add on the investee's existing goodwill 4,200 And then we subtract off that same figure, so we need to zero that out We've replaced that with the deal goodwill, so my consolidated goodwill, the sum of the items above, 8,600 Now you might be forgiven for thinking; "hang on? We took out the existing investee goodwill here and we seem to have done it again here"? Aren't we double counting it? Well what happens is, as we took it out of the shareholders' equity the shareholders' equity at fair value reduced And that thus increases the deal goodwill So watch what happens, if I were to exclude this 4,200 here, if I was to exclude that That will actually make the deal goodwill go down Let's keep an eye on this deal goodwill, I'm going to delete the investee's goodwill and watch what happens It does go down! So by including the investee's goodwill up in this calculation here, we are actually putting it into the deal goodwill item here Let's reverse those changes out and we get back to our original answer, 8,600