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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 40% of the equity of Bhavani Ltd for Rs 6,00,000 when Bhavani's net worth (equity share capital plus reserves) was Rs 12,50,000, and there was no difference between book and fair values. What amount of goodwill (capital reserve) is embedded in the carrying amount of the investment at acquisition?

Goodwill of Rs 1,00,000 is embedded in the investment. The investor's share of the associate's net worth is 40% of Rs 12,50,000, which is Rs 5,00,000, and the cost of Rs 6,00,000 exceeds it by Rs 1,00,000. AS 23 includes this goodwill in the carrying amount.

  1. AGoodwill Rs 1,00,000Correct
  2. BCapital reserve Rs 1,00,000
  3. CGoodwill Rs 6,00,000
  4. DGoodwill Rs 5,00,000

Explanation

Share of net worth = 40% x 12,50,000 = Rs 5,00,000. Cost Rs 6,00,000 exceeds this by Rs 1,00,000, which is goodwill included in the carrying amount of the investment. The option of capital reserve reverses the sign.

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