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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Sagar Textiles Ltd absorbs Tara Fabrics Ltd in an amalgamation that satisfies all the conditions of an amalgamation in the nature of merger, and the pooling of interests method is used. The equity share capital of Tara Fabrics Ltd is ₹10,00,000. As purchase consideration, Sagar Textiles issues 1,20,000 fully paid equity shares of ₹10 each at par to Tara's shareholders. How should Sagar Textiles treat the ₹2,00,000 difference between the share capital issued and Tara's share capital?

The ₹2,00,000 excess of share capital issued over the transferor's share capital is adjusted against the transferee's reserves. Under the pooling of interests method, AS 14 does not recognise goodwill or a charge to profit and loss, and the transferor's assets and reserves are carried forward at book values.

  1. AAdjust it against the reserves of the transferee companyCorrect
  2. BCredit it to Capital Reserve
  3. CRecognise it as Goodwill on amalgamation
  4. DCharge it to the Statement of Profit and Loss of the year

Explanation

Under the pooling of interests method, the share capital issued (₹12,00,000) exceeds the transferor's share capital (₹10,00,000) by ₹2,00,000. AS 14 requires this excess to be adjusted against reserves. Goodwill arises only under the purchase method, and the pooling method does not take the difference to the Statement of Profit and Loss.

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