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CS Professional · Corporate Restructuring, Valuation and Insolvency · Accounting in Corporate Restructuring: Concept and Accounting Treatment

Under the purchase method, Sigma Ltd takes over Tau Ltd. Tau's assets taken over at fair value are Rs 12,00,000 and liabilities assumed are Rs 3,00,000. Sigma pays Rs 10,50,000 as purchase consideration. What is recorded in Sigma's books?

Goodwill of Rs 1,50,000 is recorded. Net assets acquired are Rs 9,00,000 (12,00,000 less 3,00,000), and the purchase consideration of Rs 10,50,000 exceeds them. Excess consideration over net identifiable assets is goodwill under the purchase method.

  1. ACapital reserve of Rs 1,50,000
  2. BGoodwill of Rs 1,50,000Correct
  3. CGoodwill of Rs 4,50,000
  4. DCapital reserve of Rs 4,50,000

Explanation

Net assets = 12,00,000 - 3,00,000 = 9,00,000. Consideration 10,50,000 exceeds this by 1,50,000, which is goodwill. Capital reserve would arise only if the consideration were lower than net assets.

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