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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Under the purchase method, Zenith Ltd takes over Omega Ltd, which has a statutory reserve of Rs 1,50,000 that must be maintained under applicable statutory requirements. How should Zenith Ltd record this in its books, as per AS 14?

Zenith Ltd credits the statutory reserve with Rs 1,50,000 and debits the same amount to amalgamation adjustment reserve. Under the purchase method reserves are generally not carried over, but a statutorily required reserve is preserved, with the debit to the adjustment reserve offsetting it.

  1. ACredit statutory reserve Rs 1,50,000 and debit amalgamation adjustment reserve Rs 1,50,000Correct
  2. BCredit statutory reserve Rs 1,50,000 and credit capital reserve Rs 1,50,000
  3. CIgnore the reserve completely as purchase method does not preserve any reserves
  4. DCredit the Rs 1,50,000 to goodwill and do not record a statutory reserve

Explanation

Under the purchase method, transferor reserves are normally not carried over. However, where statutory requirements force a reserve to be maintained, it is recorded in the transferee's books and the same amount is debited to an amalgamation adjustment reserve, which is shown as a separate item and reversed when the reserve is eventually released. Crediting capital reserve would inflate reserves, and ignoring it breaches the statutory requirement.

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