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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Kaveri Ltd takes over Lohit Ltd in an amalgamation in the nature of purchase. Kaveri issues 40,000 equity shares of ₹10 each, valued at ₹15 per share, and pays ₹1,00,000 in cash to Lohit's shareholders. The fair value of net identifiable assets taken over is ₹6,20,000. How should the difference be treated in Kaveri's books?

Goodwill of ₹80,000 arises. The purchase consideration is ₹7,00,000 (shares worth ₹6,00,000 plus ₹1,00,000 cash), which exceeds the ₹6,20,000 fair value of net identifiable assets. Consideration above net assets is recorded as goodwill under the purchase method.

  1. AGoodwill of ₹80,000Correct
  2. BCapital reserve of ₹80,000
  3. CCapital reserve of ₹20,000
  4. DGoodwill of ₹1,80,000

Explanation

Purchase consideration = 40,000 × 15 = ₹6,00,000 in shares plus ₹1,00,000 cash = ₹7,00,000. This exceeds net assets of ₹6,20,000 by ₹80,000, which is goodwill. Capital reserve of ₹20,000 would come from leaving out the cash, and a capital reserve of ₹80,000 reverses the direction of the difference.

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