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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Yamuna Ltd is amalgamated with Godavari Ltd in the nature of purchase. Yamuna's assets at book value are ₹30,00,000, including plant with a book value of ₹14,00,000 and a fair value of ₹16,00,000. All other assets are at fair value. Its external liabilities are ₹8,00,000. Its balance sheet also shows a statutory reserve of ₹3,00,000, which the transferee must maintain under statutory requirements. Godavari issues 1,20,000 equity shares of ₹10 each at ₹12 per share and pays ₹4,00,000 in cash. It also incurs ₹40,000 on amalgamation expenses. The statutory reserve identity is preserved by Godavari. What are the capital reserve arising and the amalgamation adjustment reserve, respectively?

Net assets at fair value are ₹24,00,000, and the consideration is ₹14,40,000 in shares plus ₹4,00,000 cash, which is ₹18,40,000. The capital reserve is therefore ₹5,60,000. Amalgamation expenses go to profit and loss. The ₹3,00,000 statutory reserve is preserved with an equal Amalgamation Adjustment Reserve.

  1. ACapital reserve ₹5,60,000; Amalgamation Adjustment Reserve ₹3,00,000Correct
  2. BCapital reserve ₹3,60,000; Amalgamation Adjustment Reserve ₹3,00,000
  3. CCapital reserve ₹5,20,000; Amalgamation Adjustment Reserve ₹3,00,000
  4. DCapital reserve ₹5,60,000; Amalgamation Adjustment Reserve nil

Explanation

Assets at fair value = 30,00,000 + 2,00,000 = ₹32,00,000. Net assets = 32,00,000 − 8,00,000 = ₹24,00,000. Consideration = 1,20,000 × 12 = 14,40,000 plus 4,00,000 cash = ₹18,40,000. Capital reserve = ₹5,60,000. Amalgamation expenses of ₹40,000 are charged to profit and loss, not to capital reserve (so C is wrong). Using book plant value gives ₹3,60,000 (B). The statutory reserve of ₹3,00,000 is recorded with a matching debit to Amalgamation Adjustment Reserve, so D is wrong.

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