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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Mehta Textiles Ltd is absorbed by Kapoor Industries Ltd in an amalgamation that satisfies every condition of an amalgamation in the nature of merger under AS 14, and the pooling of interests method is used. On the date of amalgamation, Mehta Textiles Ltd's balance sheet shows a General Reserve of ₹3,00,000. How should Kapoor Industries Ltd deal with this reserve in its books?

Kapoor Industries Ltd should incorporate the ₹3,00,000 General Reserve in its books as General Reserve. In the pooling of interests method used for a merger, the transferor's reserves keep their identity and are carried forward in the same form, not converted into capital reserve or set against goodwill.

  1. ACredit it to Capital Reserve, because it is a pre-amalgamation reserve
  2. BIncorporate it in the same form (as General Reserve) in its own booksCorrect
  3. CAdjust it against the goodwill arising on amalgamation
  4. DIgnore it and treat it as a part of the purchase consideration

Explanation

Under the pooling of interests method, the identity of the transferor's reserves is preserved. The General Reserve is therefore recorded in the transferee's books in the same form in which it appeared in the transferor's books. Transferring it to Capital Reserve or setting it against goodwill is the purchase method approach and is wrong here.

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