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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Mehta Ltd acquired 80% of the equity shares of Nair Ltd on 1 April. On that date Nair Ltd's paid-up equity share capital was Rs 10,00,000 and its reserves were Rs 4,00,000. Mehta Ltd paid Rs 12,00,000 for the investment. What is the amount of goodwill on consolidation?

Goodwill is Rs 80,000. The parent's share of the subsidiary's net assets at acquisition is 80% of Rs 14,00,000, which is Rs 11,20,000. Since the cost of investment is Rs 12,00,000, the excess of Rs 80,000 is goodwill arising on consolidation.

  1. ARs 80,000Correct
  2. BRs 2,00,000
  3. CRs 1,20,000
  4. DRs 40,000

Explanation

Mehta Ltd's share of Nair Ltd's net assets at acquisition = 80% x (10,00,000 + 4,00,000) = Rs 11,20,000. Goodwill = cost 12,00,000 - 11,20,000 = Rs 80,000. Rs 2,00,000 results from deducting only the share capital portion (80% x 10,00,000 = 8,00,000) and ignoring reserves, giving 4,00,000, which is not an option; Rs 1,20,000 is wrong as it uses 100% of net assets differently.

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