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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Jaya Ltd acquires the business of Kiran Ltd in an amalgamation in the nature of purchase. Kiran Ltd's books show a 'Profit and Loss Account' credit balance of Rs 4,00,000 and 'Investment Allowance Reserve' of Rs 2,00,000 (statutory, to be maintained). Which statement correctly reflects the AS 14 treatment in Jaya Ltd's books?

Under the purchase method, reserves of the transferor company are generally not carried over, so the Rs 4,00,000 profit and loss balance is not recorded. Only the statutory Investment Allowance Reserve is recorded, with an equal debit to Amalgamation Adjustment Account until the statutory requirement lapses.

  1. AThe Profit and Loss balance is not carried over; the statutory Investment Allowance Reserve is recorded with a corresponding debit to Amalgamation Adjustment AccountCorrect
  2. BBoth balances are carried over at book value and credited to the same reserve heads
  3. CThe Profit and Loss balance is carried over as Jaya Ltd's reserves, and the statutory reserve is ignored
  4. DBoth balances are added to Capital Reserve

Explanation

In the purchase method, the transferor's reserves and surplus are not incorporated, except statutory reserves that must be kept, which are recorded with a matching debit to Amalgamation Adjustment Account. Profit and loss balance is not carried forward.

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