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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Under the purchase method, Farhan Ltd absorbed Gagan Ltd. Gagan's balance sheet showed a general reserve of ₹2,00,000 and a statutory reserve of ₹1,00,000 that must be maintained under the law for a specified period. Which treatment is correct in Farhan Ltd's books as per AS 14?

Under the purchase method the general reserve is not carried over, but a statutory reserve is recorded in the transferee's books to preserve its statutory character. The matching debit goes to Amalgamation Adjustment Account. Carrying over all reserves is the pooling of interests treatment, not purchase.

  1. ABoth reserves are carried over to Farhan Ltd in the same form
  2. BNeither reserve is carried over, and no further entry is needed
  3. CThe general reserve is carried over and the statutory reserve is ignored
  4. DThe general reserve is not carried over; the statutory reserve is recorded with an equal debit to Amalgamation Adjustment AccountCorrect

Explanation

Under the purchase method, the transferor's reserves are not carried over because the assets are recorded at consideration-based values. The exception is a statutory reserve, which must be maintained for compliance. Farhan Ltd credits the statutory reserve ₹1,00,000 and debits Amalgamation Adjustment Account by the same amount. Carrying over both reserves is the pooling treatment.

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