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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Alpha Ltd acquires the business of Beta Ltd under the purchase method. The assets and liabilities taken over are: fixed assets ₹7,00,000, inventory ₹4,00,000, debtors ₹3,00,000, creditors ₹2,00,000 and 10% debentures ₹3,00,000 (Alpha Ltd issues its own debentures in exchange). Alpha Ltd discharges the purchase consideration by issuing 60,000 equity shares of ₹10 each at ₹15 per share and paying ₹1,00,000 in cash. What is the result in Alpha Ltd's books?

Goodwill of ₹1,00,000 arises. The purchase consideration is ₹9,00,000 for shares issued at ₹15 plus ₹1,00,000 cash, totalling ₹10,00,000. Net assets taken over are ₹9,00,000 after deducting creditors and debentures. Consideration exceeding net assets is recorded as goodwill.

  1. AGoodwill of ₹1,00,000Correct
  2. BCapital reserve of ₹1,00,000
  3. CCapital reserve of ₹2,00,000
  4. DNo goodwill or capital reserve (nil)

Explanation

Purchase consideration = 60,000 × ₹15 = ₹9,00,000 + ₹1,00,000 cash = ₹10,00,000. Net assets taken over = 7 + 4 + 3 − 2 − 3 = ₹9,00,000. Consideration exceeds net assets by ₹1,00,000, so goodwill arises. Ignoring the cash component gives nil, which is wrong because cash paid is part of the consideration.

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