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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Neelam Ltd acquires Pearl Ltd in an amalgamation in the nature of purchase. Neelam Ltd pays ₹4,00,000 in cash and issues 20,000 equity shares of ₹10 each, whose fair value is ₹25 per share. A further ₹1,50,000 is payable after one year if Pearl's business meets a profit target. This payment is probable and can be reasonably estimated. Neelam Ltd also pays ₹30,000 as legal costs of the amalgamation. What is the purchase consideration under AS 14?

The purchase consideration is ₹10,50,000. It comprises ₹4,00,000 in cash, ₹5,00,000 for the shares at their fair value of ₹25 each, and the ₹1,50,000 contingent payment, which is included because it is probable and reasonably estimable. The ₹30,000 legal costs are expenses and are excluded.

  1. A₹10,50,000Correct
  2. B₹9,00,000
  3. C₹10,80,000
  4. D₹7,50,000

Explanation

Consideration includes cash, shares at fair value, and contingent payment when it is probable and can be estimated. Total = 4,00,000 + (20,000 × 25 = 5,00,000) + 1,50,000 = 10,50,000. Leaving out the contingent amount gives ₹9,00,000, which is wrong because payment is probable. Legal costs are not part of consideration, so ₹10,80,000 is wrong.

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