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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Rohan Ltd absorbs Sagar Ltd under the purchase method. The assets taken over are fixed assets ₹12,00,000, inventory ₹4,00,000, debtors ₹3,00,000 and cash ₹1,00,000. Rohan Ltd also takes over trade creditors of ₹2,00,000 and 10% debentures of ₹3,00,000. All values equal fair values. The purchase consideration is ₹12,00,000. What is the result on amalgamation?

The amalgamation gives a capital reserve of ₹3,00,000. Net assets taken over are ₹20,00,000 of assets less ₹5,00,000 of creditors and debentures, which is ₹15,00,000. As the purchase consideration of ₹12,00,000 is lower than net assets, the excess is a capital reserve under the purchase method.

  1. ACapital reserve of ₹3,00,000Correct
  2. BGoodwill of ₹3,00,000
  3. CCapital reserve of ₹6,00,000
  4. DGoodwill of ₹2,00,000

Explanation

Assets taken over total ₹20,00,000. Liabilities taken over are ₹2,00,000 + ₹3,00,000 = ₹5,00,000, so net assets are ₹15,00,000. Consideration of ₹12,00,000 is less than net assets, so the difference of ₹3,00,000 is capital reserve. Forgetting the debentures gives net assets of ₹18,00,000 and a wrong reserve of ₹6,00,000.

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