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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Sundaram Textiles Ltd is absorbed by Kaveri Fabrics Ltd in an amalgamation in the nature of merger, and all AS 14 conditions are met. The pooling of interests method is used. Sundaram Textiles has equity share capital of ₹12,00,000. Kaveri Fabrics discharges the whole consideration by issuing equity shares with a total face value of ₹9,00,000. How should the difference between the two amounts be treated in the books of Kaveri Fabrics?

Under the pooling of interests method, the transferee compares the transferor's share capital with the face value of shares it issues. Here ₹12,00,000 exceeds ₹9,00,000, so the ₹3,00,000 difference is added to the reserves. No goodwill is recognised, because goodwill arises only under the purchase method.

  1. AReserves are increased by ₹3,00,000Correct
  2. BReserves are reduced by ₹3,00,000
  3. CGoodwill of ₹3,00,000 is recognised
  4. DNo adjustment is made because the difference is nil

Explanation

Under pooling of interests, the share capital of the transferor (₹12,00,000) is compared with the face value of shares issued (₹9,00,000). Because the capital taken over exceeds the shares issued, the excess of ₹3,00,000 is added to reserves. Goodwill arises only under the purchase method, so option C is wrong.

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