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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

On the date of acquisition, Rohan Ltd bought 75% of the equity shares of Mohan Ltd for ₹9,00,000. On that date Mohan Ltd's equity share capital was ₹8,00,000, its general reserve was ₹1,00,000 and its profit and loss account (credit balance) was ₹2,00,000. The amount arising on consolidation of this investment is:

The consolidation produces goodwill of ₹75,000. The parent's share of the subsidiary's net worth at acquisition is 75% of ₹11,00,000, which is ₹8,25,000, and the cost of ₹9,00,000 exceeds this by ₹75,000. Reserves and profit balances at the acquisition date are included in net worth.

  1. AGoodwill ₹75,000Correct
  2. BCapital reserve ₹75,000
  3. CGoodwill ₹1,50,000
  4. DCapital reserve ₹2,00,000

Explanation

Net worth on the acquisition date = ₹8,00,000 + ₹1,00,000 + ₹2,00,000 = ₹11,00,000. Rohan's share is 75% × ₹11,00,000 = ₹8,25,000. Cost of investment ₹9,00,000 − ₹8,25,000 = ₹75,000 of goodwill. Leaving out the profit and loss balance would wrongly give goodwill of ₹1,50,000.

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