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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Mehta Textiles Ltd. acquired 80% of the equity shares of Sagar Fabrics Ltd. on 1 April for ₹5,00,000. On that date, Sagar Fabrics Ltd. had equity share capital of ₹4,00,000, general reserve of ₹1,00,000 and a credit balance in the statement of profit and loss of ₹50,000. Under AS 21, the amount to be shown in the consolidated financial statements on this acquisition is:

Goodwill of ₹60,000 arises. The parent's share of the subsidiary's net worth on the acquisition date is 80% of ₹5,50,000, which is ₹4,40,000, comprising capital, general reserve and profit balance. The cost of investment of ₹5,00,000 exceeds it by ₹60,000, which is recognised as goodwill.

  1. AGoodwill of ₹60,000Correct
  2. BGoodwill of ₹1,00,000
  3. CCapital reserve of ₹50,000
  4. DGoodwill of ₹1,10,000

Explanation

Net worth of the subsidiary on acquisition = 4,00,000 + 1,00,000 + 50,000 = 5,50,000. Parent's share at 80% = 4,40,000. Cost of investment 5,00,000 exceeds this by 60,000, which is goodwill. Option B wrongly compares the cost with share capital alone. Option C compares the cost with 100% of net worth, ignoring the 80% holding.

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