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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

On the date of acquisition, Vikram Ltd bought 80% of the equity shares of Anand Ltd for ₹14,00,000. On that date Anand Ltd's equity share capital was ₹10,00,000, its general reserve was ₹2,00,000 and its profit and loss account balance was ₹1,00,000 (credit). Assuming book values equal fair values, what is the goodwill arising on consolidation?

Goodwill is ₹3,60,000. Anand's net worth at acquisition is share capital plus all pre-acquisition reserves and profits, totalling ₹13,00,000. Vikram's 80% share is ₹10,40,000. Subtracting this from the cost of investment of ₹14,00,000 leaves goodwill of ₹3,60,000. Counting only share capital overstates goodwill.

  1. A₹2,80,000Correct
  2. B₹6,00,000
  3. C₹3,60,000
  4. DNil

Explanation

Net assets of Anand at acquisition = 10,00,000 + 2,00,000 + 1,00,000 = 13,00,000. Hmm, the parent's share is 80% × 13,00,000 = ₹10,40,000. Goodwill = cost 14,00,000 − 10,40,000 = ₹3,60,000. Using share capital alone (80% × 10,00,000 = 8,00,000) gives ₹6,00,000, which ignores pre-acquisition reserves.

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