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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Mehta Ltd. purchased 70% of the equity shares of Nanda Ltd. for ₹9,00,000. On the date of acquisition, Nanda's share capital was ₹6,00,000 and its reserves were ₹4,00,000. What amount should be shown in Mehta's consolidated financial statements in respect of the acquisition?

The consolidated statements show goodwill of ₹2,00,000. The cost of investment is ₹9,00,000 against Mehta's 70% share of Nanda's net worth at acquisition, which is 70% of ₹10,00,000, or ₹7,00,000. The excess cost over this share is goodwill.

  1. AGoodwill of ₹2,00,000Correct
  2. BGoodwill of ₹3,00,000
  3. CCapital reserve of ₹1,00,000
  4. DGoodwill of ₹4,80,000

Explanation

Net worth of Nanda at acquisition = 6,00,000 + 4,00,000 = ₹10,00,000. Mehta's 70% share is ₹7,00,000. Cost of investment ₹9,00,000 minus ₹7,00,000 gives goodwill of ₹2,00,000. Deducting only share capital (9,00,000 − 6,00,000) gives ₹3,00,000, which ignores pre-acquisition reserves. Comparing the cost with the whole net worth gives ₹1,00,000, which ignores the 70% holding.

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