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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Sahyadri Ltd took over Godavari Ltd in an amalgamation in the nature of purchase. It took over assets at agreed values of ₹10,00,000 and liabilities of ₹4,00,000. The purchase consideration comprised ₹1,00,000 in cash and 40,000 equity shares of ₹10 each issued at par. Godavari Ltd had a statutory reserve of ₹1,20,000, and the statutory requirements mean that it must be maintained in Sahyadri Ltd's books. Which of the following is the correct treatment in Sahyadri Ltd's books?

Net assets of ₹6,00,000 exceed the consideration of ₹5,00,000, so capital reserve of ₹1,00,000 arises. The statutory reserve of ₹1,20,000 is recorded by debiting Amalgamation Adjustment Reserve, since purchase-method reserves are not otherwise incorporated. Netting this against capital reserve is not the prescribed treatment.

  1. ACapital reserve ₹1,00,000 is credited; statutory reserve ₹1,20,000 is created by debiting Amalgamation Adjustment ReserveCorrect
  2. BGoodwill ₹1,00,000 is recognised; statutory reserve ₹1,20,000 is created by debiting Amalgamation Adjustment Reserve
  3. CCapital reserve ₹2,20,000 is credited; no separate statutory reserve is recorded
  4. DCapital reserve ₹1,00,000 is credited; statutory reserve ₹1,20,000 is created by debiting capital reserve

Explanation

Net assets taken over = 10,00,000 − 4,00,000 = 6,00,000. Consideration = 1,00,000 + 4,00,000 = 5,00,000. Since net assets exceed consideration, capital reserve of ₹1,00,000 arises, not goodwill. Under the purchase method, the statutory reserve is recorded by debiting Amalgamation Adjustment Reserve, which is shown as a separate item and reversed when the reserve loses its statutory requirement.

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