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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Neelkamal Ltd amalgamates Padma Ltd in a transaction in the nature of purchase. Padma's balance sheet carries a statutory reserve of ₹1,50,000 which, under the relevant statute, must be maintained for a stipulated period. Neelkamal agrees to preserve it. Which accounting treatment is correct in Neelkamal's books under AS 14?

Neelkamal should credit the statutory reserve with ₹1,50,000 and debit Amalgamation Adjustment Reserve with the same amount. AS 14 requires statutory reserves of the transferor to be preserved in the purchase method through this adjustment reserve, which is reversed once the reserve is no longer required.

  1. ACredit statutory reserve ₹1,50,000 and debit Amalgamation Adjustment Reserve ₹1,50,000Correct
  2. BCredit statutory reserve ₹1,50,000 and debit goodwill ₹1,50,000
  3. CCredit statutory reserve ₹1,50,000 and credit capital reserve ₹1,50,000
  4. DDo not record the statutory reserve because reserves are never carried over in the purchase method

Explanation

AS 14 says that where statutory reserves of the transferor must be preserved, the transferee records them by crediting the statutory reserve and debiting an Amalgamation Adjustment Reserve in its books. The latter is later reversed when the statutory reserve ceases to be required. Debiting goodwill would distort the consideration-versus-net-assets computation, and ignoring the reserve breaches the statutory requirement.

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