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CA Intermediate · Advanced Accounting · Amalgamation of Companies

On 1 April, Vivek Industries Ltd absorbed Wadia Plastics Ltd under the purchase method and recorded goodwill of ₹7,50,000. The useful life of the goodwill cannot be reasonably estimated, and the company has no justification for a period longer than that normally allowed by AS 14. The company decides to amortise the goodwill on a straight-line basis over the longest period permitted in these circumstances. What is the annual amortisation charge?

The annual charge is ₹1,50,000. When the useful life of amalgamation goodwill cannot be reasonably estimated, AS 14 requires amortisation within five years unless a longer period is justified. Spreading ₹7,50,000 straight-line over the five-year maximum gives ₹1,50,000 per year.

  1. A₹75,000
  2. B₹1,87,500
  3. C₹7,50,000
  4. D₹1,50,000Correct

Explanation

When the useful life of goodwill arising on amalgamation cannot be reasonably estimated, AS 14 requires it to be amortised over a period not exceeding five years, unless a longer period can be justified. Straight-line over 5 years gives 7,50,000 ÷ 5 = ₹1,50,000 a year. Using 10 years gives ₹75,000, which exceeds the permitted period, and 4 years gives ₹1,87,500, which is not the longest period.

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