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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Meera Textiles Ltd took over Sagar Fabrics Ltd under the purchase method. The agreed values of Sagar's items taken over were: fixed assets ₹8,00,000, inventory ₹2,50,000, debtors ₹1,50,000, creditors ₹1,80,000 and bank loan ₹70,000. Meera Textiles discharged the consideration by issuing 40,000 equity shares of ₹10 each at ₹15 per share and paying ₹1,50,000 in cash. What amount of goodwill or capital reserve arises on amalgamation?

This item is invalid as written because its explanation contradicts its key.

  1. AGoodwill ₹50,000Correct
  2. BCapital reserve ₹50,000
  3. CGoodwill ₹1,25,000
  4. DGoodwill ₹2,00,000

Explanation

Purchase consideration = 40,000 × ₹15 = ₹6,00,000 plus cash ₹1,50,000 = ₹7,50,000. Net assets = (8,00,000 + 2,50,000 + 1,50,000) − (1,80,000 + 70,000) = ₹9,50,000. Consideration ₹7,50,000 is less than net assets ₹9,50,000, so capital reserve of ₹2,00,000 arises, which makes the given key wrong; recompute: this means the answer is capital reserve of ₹2,00,000.

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