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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Parent Ltd acquired 80% of Sub Ltd on 1 April for Rs 15,00,000. On that date Sub's equity share capital was Rs 10,00,000 and its reserves were Rs 5,00,000. For Parent's investment, the amount of goodwill (+) or capital reserve (-) on consolidation is:

Goodwill is the excess of the cost of investment over the parent's share of the subsidiary's equity at acquisition. Parent's share is 80% of Rs 15,00,000, i.e. Rs 12,00,000, so goodwill is Rs 3,00,000.

  1. AGoodwill Rs 3,00,000Correct
  2. BCapital reserve Rs 3,00,000
  3. CGoodwill Rs 1,00,000
  4. DNil

Explanation

Parent's share of net worth at acquisition = 80% x 15,00,000 = Rs 12,00,000. Cost 15,00,000 minus 12,00,000 = Rs 3,00,000 goodwill. Capital reserve would arise only if cost were lower than share of net assets.

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