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

Kaveri Ltd (transferee) absorbs Godavari Ltd, a common control entity. Godavari's General Reserve is Rs 6,00,000, Revaluation Reserve is Rs 2,00,000 and share capital is Rs 10,00,000. Kaveri issues shares of nominal value Rs 7,00,000 and pays Rs 1,00,000 cash. What is correct for the reserves and the balancing difference?

Reserves keep their identity, so the General Reserve and Revaluation Reserve carry over unchanged. Consideration is Rs 7,00,000 shares plus Rs 1,00,000 cash, totalling Rs 8,00,000. Against share capital of Rs 10,00,000, the Rs 2,00,000 difference goes to a separately presented capital reserve.

  1. AGeneral Reserve of Rs 6,00,000 and Revaluation Reserve of Rs 2,00,000 are preserved; Rs 2,00,000 goes to a separately presented capital reserveCorrect
  2. BAll reserves are merged into securities premium; Rs 2,00,000 goes to goodwill
  3. CGeneral Reserve and Revaluation Reserve are preserved; Rs 3,00,000 goes to capital reserve
  4. DReserves are preserved, but the Rs 2,00,000 difference is debited to the General Reserve

Explanation

Reserve identity is preserved, so the General Reserve and Revaluation Reserve carry over in the same form. Share capital issued plus cash is Rs 7,00,000 + Rs 1,00,000 = Rs 8,00,000. Against Godavari's share capital of Rs 10,00,000 the difference is Rs 2,00,000, credited to capital reserve and shown separately. Rs 3,00,000 results from ignoring the cash paid.

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