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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Anand Ltd absorbs Bhanu Ltd in a purchase-type amalgamation. Bhanu's net assets at agreed values are Rs 10,00,000. Anand agrees to discharge consideration of Rs 12,50,000. Bhanu's books hold a Statutory Reserve of Rs 1,00,000 that the statute requires to be maintained, and Anand decides to record it. Which statement is correct?

Goodwill is Rs 2,50,000, being consideration of Rs 12,50,000 over net assets of Rs 10,00,000. The statutory reserve of Rs 1,00,000 is recorded, with an equal debit to Amalgamation Adjustment Account.

  1. AGoodwill of Rs 2,50,000 arises and a Statutory Reserve of Rs 1,00,000 is recorded, with the debit going to Amalgamation Adjustment AccountCorrect
  2. BGoodwill of Rs 1,50,000 arises and no reserve is recorded
  3. CCapital reserve of Rs 2,50,000 arises
  4. DGoodwill of Rs 2,50,000 arises and Statutory Reserve is not recorded

Explanation

Consideration exceeds net assets by Rs 2,50,000, which is goodwill. Under the purchase method, statutory reserves are retained to the extent required, and the corresponding debit is shown in Amalgamation Adjustment Account, which is a disclosed item until the reserve is no longer required.

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