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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Vihaan Ltd absorbs Wadia Ltd under the purchase method. Assets taken over are ₹19,00,000 and liabilities taken over are ₹5,00,000, both at agreed values. The purchase consideration is ₹16,50,000. Wadia Ltd's balance sheet shows a statutory reserve of ₹1,50,000, which the statute requires to be maintained after the amalgamation. Which treatment is correct in Vihaan Ltd's books?

Goodwill is ₹2,50,000, being the consideration of ₹16,50,000 less net assets of ₹14,00,000. The statutory reserve of ₹1,50,000 must be preserved, so it is recorded with a matching debit to Amalgamation Adjustment Reserve. That entry does not affect the goodwill figure.

  1. AGoodwill ₹2,50,000; statutory reserve of ₹1,50,000 is created with a matching debit to Amalgamation Adjustment ReserveCorrect
  2. BGoodwill ₹1,00,000; statutory reserve of ₹1,50,000 is netted against goodwill and no other entry is made
  3. CGoodwill ₹4,00,000; statutory reserve of ₹1,50,000 is created with a matching debit to Amalgamation Adjustment Reserve
  4. DGoodwill ₹2,50,000; statutory reserve of ₹1,50,000 is transferred to general reserve

Explanation

Net assets are 19,00,000 − 5,00,000 = ₹14,00,000, so goodwill is 16,50,000 − 14,00,000 = ₹2,50,000. Because the statutory reserve must continue, it is recorded in the transferee's books by debiting Amalgamation Adjustment Reserve for the same amount. This does not change goodwill, so netting it (₹1,00,000) or adding it (₹4,00,000) is wrong.

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