Question

In purchase method, the excess of net asset of the transferor company acquired by the transferee company over the purchase consideration should be recognized as ________.

• A. P & L
• B. Goodwill
• C. General reserve
• D. Capital reserve

Answer 1

The correct option is D Capital reserve

For the purpose of accounting for amalgamation, we are essentially guided by AS-14 'Accounting for Amalgamations'. Para (3)g of AS 14 deines the term purchase consideration as "the aggregate of the shares and other securities issued and the payments made in the form of cash or other assets by the transferee companyto the sharegolders of the transferor company." in simple words it is the price apyable by the transferee company to the transferor companyfor taking overt the buiness of the transferor company.

There are two methods of accounting for amalgamation:

1. Pooling of interest method

2. Purchase method

Purchase method - In this method the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.

No reserves, other than statutory reserves, of the transferor company should

be incorporatedb in the financial statements of the transferee company.

Any excess of the amount of purchase consideration over the value of net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statement of the transferee comapany. Any short fall should be shown as a capital reserve.