Skip to content

CMA Intermediate · Financial Accounting · Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

Meera Ltd. purchases the business of a firm. Agreed values: fixed assets ₹8,00,000, stock ₹2,00,000, debtors ₹1,50,000 (cash and bank not taken), creditors taken ₹1,00,000. Purchase consideration is ₹10,00,000 paid by issuing ₹10 shares at ₹10 par. Meera Ltd. also pays ₹20,000 as preliminary expenses of the company, and ₹10,000 as legal fees for the acquisition, which are written off. Goodwill/capital reserve recognised on acquisition is:

Net assets taken over are ₹10,50,000 (₹11,50,000 assets less ₹1,00,000 creditors) against consideration of ₹10,00,000. Net assets exceed consideration by ₹50,000, so capital reserve of ₹50,000 arises. The preliminary and legal expenses do not affect this figure.

  1. ACapital reserve ₹50,000Correct
  2. BGoodwill ₹50,000
  3. CGoodwill ₹80,000
  4. DCapital reserve ₹1,00,000

Explanation

Assets taken = 8,00,000 + 2,00,000 + 1,50,000 = 11,50,000. Less creditors 1,00,000 = net assets 10,50,000. Consideration 10,00,000 is lower by 50,000, giving capital reserve ₹50,000. Preliminary and legal expenses are not part of the consideration.

Did you get it right without looking?

One question tells you little. A timed set on Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company shows your real accuracy, how long you take and where you lose marks.

Practise Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a CompanyFree diagnostic mock

More Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company questions