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CA Intermediate · Advanced Accounting · AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

On 1 April 2025, Arjun Ltd acquired 30% of the equity shares of Bhavya Ltd for ₹90,00,000. On that date Bhavya Ltd's net worth (share capital plus reserves) was ₹2,50,00,000. What amount of goodwill or capital reserve is embedded in the carrying amount of the investment at acquisition?

Goodwill of ₹15,00,000 is embedded in the investment. The share of net worth acquired is 30% of ₹2,50,00,000, which is ₹75,00,000, while the cost paid was ₹90,00,000. The excess of cost over share of net worth is goodwill, identified but not separately recognised.

  1. ACapital reserve of ₹15,00,000
  2. BGoodwill of ₹15,00,000Correct
  3. CGoodwill of ₹75,00,000
  4. DCapital reserve of ₹75,00,000

Explanation

Arjun's share of net worth = 30% × 2,50,00,000 = ₹75,00,000. Cost ₹90,00,000 minus ₹75,00,000 = ₹15,00,000 excess, which is goodwill included in the carrying amount of the investment. Capital reserve would arise only if cost were lower than the share of net worth.

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