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CMA Final · Corporate Financial Reporting · Accounting for Business Combination and Restructuring

Dev Ltd and its sister company Eka Ltd are under common control. Eka Ltd is merged into Dev Ltd. Eka Ltd's balance sheet shows General Reserve ₹5,00,000, Revaluation Reserve ₹2,00,000 and Capital Reserve ₹1,00,000. Dev Ltd issues shares of nominal value ₹7,00,000 for Eka's share capital of ₹10,00,000 and also pays ₹1,00,000 cash. Which statement is correct for Dev Ltd's books after the merger?

The reserves keep their identity: General Reserve ₹5,00,000, Revaluation Reserve ₹2,00,000 and Capital Reserve ₹1,00,000 carry over, and a new capital reserve of ₹2,00,000 is shown separately. This is share capital of ₹10,00,000 less shares of ₹7,00,000 and cash of ₹1,00,000.

  1. AGeneral Reserve ₹5,00,000, Revaluation Reserve ₹2,00,000, Capital Reserve ₹1,00,000, plus a separately presented capital reserve of ₹2,00,000Correct
  2. BAll reserves are merged into a single Capital Reserve of ₹8,00,000
  3. CReserves are eliminated and ₹2,00,000 goodwill is recognised
  4. DGeneral Reserve ₹5,00,000 and Revaluation Reserve ₹2,00,000 are retained, the Capital Reserve is cancelled, and the difference of ₹3,00,000 is capital reserve

Explanation

Identity of reserves is preserved, so each carries over in the same form. The difference is share capital issued plus cash, 7,00,000 + 1,00,000 = 8,00,000, against the transferor's capital of 10,00,000, giving ₹2,00,000 to capital reserve, shown separately. Ignoring the cash gives ₹3,00,000, which is wrong.

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