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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Under the purchase method, Reddy Pharma Ltd. takes over Nair Labs Ltd. Net assets of Nair Labs (assets less external liabilities, excluding all reserves) are accepted at Rs 15,00,000, and the purchase consideration is Rs 14,00,000. Nair Labs has a statutory Development Allowance Reserve of Rs 2,00,000, and the statutory requirements mean the reserve must be continued in Reddy's books. Which treatment is correct in Reddy's books?

Capital reserve of Rs 1,00,000 arises because net assets of Rs 15,00,000 exceed the consideration of Rs 14,00,000. The statutory reserve of Rs 2,00,000 is recreated by crediting that reserve and debiting Amalgamation Adjustment Account by the same amount, which keeps the statutory requirement without affecting capital reserve.

  1. AGoodwill Rs 1,00,000; statutory reserve not recorded
  2. BCapital reserve Rs 1,00,000; statutory reserve credited Rs 2,00,000 with an equal debit to Amalgamation Adjustment AccountCorrect
  3. CCapital reserve Rs 3,00,000; no statutory reserve recorded
  4. DCapital reserve Rs 1,00,000; statutory reserve Rs 2,00,000 credited with a debit to Goodwill

Explanation

Net assets 15,00,000 less consideration 14,00,000 gives a Rs 1,00,000 excess, which is capital reserve (not goodwill). Where the statutory reserve must be maintained, it is recreated by crediting the reserve and debiting Amalgamation Adjustment Account for the same Rs 2,00,000. It is not netted against goodwill or capital reserve.

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