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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Gupta Traders Ltd. is absorbed by Mehra Enterprises Ltd. in an amalgamation in the nature of purchase, accounted for under the purchase method. Mehra takes over the assets of Gupta at agreed values of Rs 12,00,000 and its liabilities of Rs 3,00,000. Mehra discharges the purchase consideration by issuing 80,000 equity shares of Rs 10 each at Rs 12 per share and paying Rs 40,000 in cash. What amount of goodwill or capital reserve arises in Mehra's books?

Goodwill of Rs 1,00,000 arises. Net assets acquired are Rs 9,00,000 (assets 12,00,000 less liabilities 3,00,000), while the consideration is Rs 10,00,000, being shares at issue value of Rs 9,60,000 plus Rs 40,000 cash. Consideration exceeding net assets is recorded as goodwill.

  1. AGoodwill of Rs 1,00,000Correct
  2. BGoodwill of Rs 60,000
  3. CCapital reserve of Rs 60,000
  4. DGoodwill of Rs 1,40,000

Explanation

Net assets taken over = 12,00,000 - 3,00,000 = Rs 9,00,000. Consideration = 80,000 x 12 = 9,60,000 plus cash 40,000 = Rs 10,00,000. Consideration exceeds net assets by Rs 1,00,000, which is goodwill. Rs 60,000 results from leaving out the cash paid.

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