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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Under the purchase method, Kaveri Ltd absorbs Lakshmi Ltd. The agreed values of assets taken over are ₹25,00,000 and liabilities taken over are ₹7,00,000. The purchase consideration is ₹16,50,000. Lakshmi's books show an Investment Allowance Reserve of ₹1,00,000 which, under statutory requirements, must be maintained in Kaveri's books. Which of the following entries/amounts is correct in Kaveri's books?

A Capital Reserve of ₹1,50,000 arises, being net assets of ₹18,00,000 less consideration of ₹16,50,000. The statutory reserve of ₹1,00,000 is credited in the transferee's books with an equal debit to Amalgamation Adjustment Account, so it does not alter the capital reserve.

  1. ACapital Reserve ₹1,50,000, and Amalgamation Adjustment Account debited ₹1,00,000 against the statutory reserve creditedCorrect
  2. BCapital Reserve ₹2,50,000, with no Amalgamation Adjustment Account
  3. CGoodwill ₹1,50,000, and Amalgamation Adjustment Account debited ₹1,00,000
  4. DCapital Reserve ₹50,000, and statutory reserve credited ₹1,00,000 without any Amalgamation Adjustment Account

Explanation

Net assets taken over = 25,00,000 − 7,00,000 = ₹18,00,000. Consideration is 16,50,000, so the excess of net assets is a capital reserve of ₹1,50,000. The statutory reserve is recreated by crediting it and debiting Amalgamation Adjustment Account by ₹1,00,000, so it does not change the capital reserve. Adding or subtracting it from the capital reserve is wrong.

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