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CMA Intermediate · Financial Accounting · Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

A partnership firm is sold to Sundaram Ltd. for a purchase consideration of ₹12,00,000. The net assets taken over by the company, at agreed values, are ₹10,50,000 (assets taken less liabilities taken). In the books of Sundaram Ltd., the difference is recorded as:

The excess of purchase consideration (₹12,00,000) over net assets acquired (₹10,50,000) is ₹1,50,000, which is recorded as goodwill in the company's books. Capital reserve would arise only if net assets were more than the consideration paid.

  1. ACapital reserve of ₹1,50,000
  2. BGoodwill of ₹1,50,000Correct
  3. CGoodwill of ₹12,00,000
  4. DSecurities premium of ₹1,50,000

Explanation

Purchase consideration ₹12,00,000 exceeds net assets ₹10,50,000 by ₹1,50,000. When consideration exceeds net assets taken over, the excess is debited to Goodwill. Capital reserve arises only when net assets exceed consideration.

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