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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Kiran Ltd takes over Lotus Ltd in an amalgamation in the nature of purchase. The net assets taken over at agreed values are Rs 9,00,000 and the purchase consideration is Rs 9,50,000. Kiran Ltd separately pays Rs 20,000 as legal and stamp costs of the amalgamation. Which treatment is correct under AS 14?

Goodwill of Rs 50,000 arises because the Rs 9,50,000 consideration exceeds the Rs 9,00,000 net assets. The Rs 20,000 legal and stamp costs are not part of the consideration and are charged to the profit and loss account in the year.

  1. AGoodwill of Rs 50,000 is recognised and Rs 20,000 is charged to the profit and loss accountCorrect
  2. BGoodwill of Rs 70,000 is recognised by capitalising the Rs 20,000
  3. CGoodwill of Rs 30,000 is recognised after setting off the Rs 20,000
  4. DCapital reserve of Rs 50,000 is recognised and Rs 20,000 is charged to the profit and loss account

Explanation

Consideration of Rs 9,50,000 exceeds net assets of Rs 9,00,000 by Rs 50,000, which is goodwill. Expenses of the amalgamation are not part of the purchase consideration and are charged to the profit and loss account of the year. Adding them to goodwill (Rs 70,000) or deducting them (Rs 30,000) is wrong. Capital reserve arises only when net assets exceed consideration.

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