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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Under the purchase method, Eshan Ltd absorbs Farhan Ltd. Farhan Ltd has statutory reserve of Rs 3,00,000 (created under a statute) and a general reserve of Rs 5,00,000. Purchase consideration is Rs 22,00,000 and net assets (excluding the reserves, at agreed values) taken over are Rs 20,00,000. Eshan Ltd decides to maintain the statutory reserve in its books. What is the correct treatment?

In a purchase-type amalgamation, the transferor's general reserve is not carried forward, but a statutory reserve that must be maintained is recorded by crediting it and debiting Amalgamation Adjustment Account for Rs 3,00,000. Goodwill remains Rs 2,00,000 (22,00,000 less 20,00,000).

  1. ACredit statutory reserve Rs 3,00,000 by debiting Amalgamation Adjustment Account; goodwill is Rs 2,00,000Correct
  2. BCredit statutory reserve and general reserve both by Rs 8,00,000; goodwill is Rs 2,00,000
  3. CCredit general reserve Rs 5,00,000 and treat statutory reserve as capital reserve; goodwill is Rs 10,00,000
  4. DIgnore all reserves; goodwill is Rs 2,00,000 and no other entry is needed

Explanation

In the purchase method, only statutory reserves are recorded, if required to be maintained, with a corresponding debit to Amalgamation Adjustment Account. Goodwill = 22,00,000 - 20,00,000 = 2,00,000. General reserve is not carried over.

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