Question

If the value of debentures allotted to vendors for acquiring some assets as payment for purchase consideration is more than the agreed purchase price, the difference is credited to __________.

• A. Capital reserve account
• B. Debenture suspense account
• C. Goodwill account
• D. Profit & loss account

Answer 1

The correct option is C Goodwill account

Goodwill Account-

• Sometimes a company purchases some assets and liabilities from the vendor and purchase consideration (amount of payment) is determined in advance.
  
• Payment is made by issuing debentures by the company; it is called issue of debentures for consideration other than cash. Such issue of debentures may be at par, discount or premium.
• The entry for acquisition of assets & liabilities and issuance of debenture is shown as above:

a. Assets A/c Dr.

To Liabilities A/c

To Vendor’s A/c

(Purchase of assets & liabilities from vendor)

b. Vendor’s A/c Dr.

To Debentures A/

(Issue of debentures to vendors)

• In such cases, if purchase consideration is more than assets & liabilities acquired then the difference is goodwill and amount of difference to “Goodwill A/c” which is calculated as below:

Goodwill= Purchase consideration- Assets acquired- Liabilities taken over

• The entry of goodwill will be as shown below:

Assets A/c Dr.

Goodwill A/c Dr.

To Liabilities A/c

To Vendor’s A/c

(Purchase of assets & liabilities from vendor)