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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Under the purchase method, Narmada Ltd takes over Tapti Ltd. Assets taken over at agreed values total ₹9,00,000 and liabilities taken over total ₹2,40,000. Purchase consideration is ₹7,20,000. Tapti's books show a statutory reserve of ₹50,000 that the law requires to be preserved in Narmada's books. Which treatment is correct?

Goodwill is ₹60,000, being consideration of ₹7,20,000 less net assets of ₹6,60,000. The ₹50,000 statutory reserve is preserved by crediting it in the transferee's books, with an equal debit to Amalgamation Adjustment Reserve. It does not change the goodwill calculation.

  1. AGoodwill ₹60,000; statutory reserve of ₹50,000 is kept and a matching Amalgamation Adjustment Reserve of ₹50,000 is shown on the asset sideCorrect
  2. BGoodwill ₹10,000; the statutory reserve is set off against goodwill and no reserve is kept
  3. CGoodwill ₹1,10,000; Amalgamation Adjustment Reserve ₹50,000 added to net assets
  4. DCapital reserve ₹60,000; Amalgamation Adjustment Reserve ₹50,000 shown on the asset side

Explanation

Net assets = 9,00,000 − 2,40,000 = ₹6,60,000. Goodwill = 7,20,000 − 6,60,000 = ₹60,000. The statutory reserve is not part of the consideration calculation. If it must be preserved, it is recorded in Narmada's books with a debit to Amalgamation Adjustment Reserve, so goodwill stays unchanged. Netting the reserve against goodwill (₹10,000) is wrong.

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