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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Bharat Components Ltd. (transferee) already holds 20,000 of the 1,00,000 equity shares of Rs 10 each of Chhabra Castings Ltd. (transferor); this investment is in Bharat's books at cost of Rs 3,00,000. Chhabra is absorbed in an amalgamation in the nature of purchase. Net assets of Chhabra are taken over at agreed value of Rs 16,00,000. The other shareholders (80,000 shares) receive one equity share of Rs 10 in Bharat, issued at Rs 15, for each share held. What amount of goodwill or capital reserve arises in Bharat's books?

A capital reserve of Rs 1,00,000 arises. The shares issued to outsiders are worth Rs 12,00,000, and the existing investment of Rs 3,00,000 in the transferor is treated as part of the consideration, making Rs 15,00,000. This is Rs 1,00,000 below the net assets of Rs 16,00,000.

  1. ACapital reserve of Rs 1,00,000Correct
  2. BGoodwill of Rs 1,00,000
  3. CCapital reserve of Rs 4,00,000
  4. DCapital reserve of Rs 80,000

Explanation

Consideration to outsiders = 80,000 x 15 = Rs 12,00,000. The existing investment of Rs 3,00,000 is cancelled and treated as part of the consideration, giving a total of Rs 15,00,000. Against net assets of Rs 16,00,000, the shortfall is Rs 1,00,000, a capital reserve. Rs 4,00,000 wrongly ignores the investment; Rs 80,000 wrongly uses a proportionate 80% of net assets.

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