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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Gamma Ltd takes over Delta Ltd in an amalgamation in the nature of purchase. The assets taken over at agreed values total Rs 12,00,000 and liabilities taken over are Rs 3,00,000. The purchase consideration is Rs 8,00,000. Delta Ltd's books show a statutory reserve of Rs 50,000, which must be maintained under law, and Gamma Ltd decides to keep it in its books. What is the correct accounting result?

Net assets of Rs 9,00,000 exceed the Rs 8,00,000 consideration, so a capital reserve of Rs 1,00,000 arises. The statutory reserve of Rs 50,000 is preserved by crediting it and debiting Amalgamation Adjustment Reserve, so the capital reserve is not changed.

  1. ACapital reserve Rs 1,00,000 is created, and the statutory reserve of Rs 50,000 is carried over by debiting Amalgamation Adjustment ReserveCorrect
  2. BCapital reserve Rs 1,50,000 is created and no Amalgamation Adjustment Reserve is needed
  3. CGoodwill of Rs 1,00,000 arises and the statutory reserve is credited to the profit and loss account
  4. DCapital reserve Rs 50,000 is created and the statutory reserve is ignored

Explanation

Net assets taken over are 12,00,000 - 3,00,000 = Rs 9,00,000. Consideration is Rs 8,00,000, so Rs 1,00,000 is capital reserve. Under the purchase method, a statutory reserve that must be kept is recorded by debiting Amalgamation Adjustment Reserve and crediting the statutory reserve with Rs 50,000. The capital reserve is not changed by this. Rs 1,50,000 wrongly adds the reserve to the capital reserve.

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