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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Desai Ltd is absorbed by Joshi Ltd in an amalgamation in the nature of purchase. Desai Ltd's books show an Investment Allowance Reserve of ₹3,00,000, which must be maintained under statutory requirements. Joshi Ltd takes over net assets (excluding this reserve, which is not a liability) valued at ₹14,00,000 and discharges a purchase consideration of ₹15,00,000. How should Joshi Ltd record the position?

Joshi Ltd records goodwill of ₹1,00,000, being ₹15,00,000 consideration less ₹14,00,000 net assets. It also credits the statutory Investment Allowance Reserve of ₹3,00,000 and debits the same amount to Amalgamation Adjustment Account, so that goodwill is not distorted.

  1. AGoodwill ₹1,00,000; Investment Allowance Reserve credited ₹3,00,000 with an equal debit to Amalgamation Adjustment AccountCorrect
  2. BGoodwill ₹4,00,000; no Amalgamation Adjustment Account
  3. CCapital Reserve ₹1,00,000; Investment Allowance Reserve ignored
  4. DGoodwill ₹1,00,000; Investment Allowance Reserve credited ₹3,00,000 with an equal debit to Goodwill

Explanation

Goodwill = consideration 15,00,000 − net assets 14,00,000 = ₹1,00,000. Under the purchase method, statutory reserves of the transferor must still be recorded in the transferee's books, so the reserve is credited and an equal amount is debited to Amalgamation Adjustment Account. It does not affect goodwill, so debiting goodwill is wrong.

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