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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Sundaram Ltd absorbs Kaveri Ltd in an amalgamation in the nature of merger. Kaveri Ltd's equity share capital is ₹8,00,000. Sundaram Ltd issues its own equity shares with a total face value of ₹10,00,000 to Kaveri's shareholders, and there is no other consideration. How is the ₹2,00,000 difference treated in Sundaram Ltd's books?

The ₹2,00,000 excess is deducted from the transferee's reserves. In an amalgamation in the nature of merger, the pooling of interests method is used, so no goodwill or capital reserve is created. The difference between the share capital issued and the transferor's share capital is adjusted in reserves.

  1. ARecognised as goodwill of ₹2,00,000 on the asset side
  2. BCredited to capital reserve as ₹2,00,000
  3. CDeducted from the reserves of Sundaram Ltd by ₹2,00,000Correct
  4. DCharged to the statement of profit and loss as an expense of the year

Explanation

In a merger the pooling of interests method applies. The consideration (₹10,00,000) exceeds the transferor's share capital (₹8,00,000), so the excess of ₹2,00,000 is deducted from the reserves. Goodwill and capital reserve arise only under the purchase method.

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