Question

The excess of purchase consideration over net asset is __________________.

• A. Goodwill
• B. Capital Reserve
• C. General Reserve
• D. Statutory Reserve

Answer 1

Answer: (A)

Goodwill

Under Net assets method of purchase consideration , all assets are added and liabilities are deducted from the total of assets.

If any extra amount is paid against purchase consideration over and above the net assets, the balance amount is considered as payment for goodwill.

For example:

Plant & Machinery $Rs.200000$

Land & Building $Rs.100000$

Debtors $Rs.50000$

Stocks $Rs.30000$

---------------------

Total Assets $Rs.380000$

Less: Liabilities $Rs.80000$

--------------------

Net Assets $Rs.300000$

If purchase consideration is $Rs.400000$

Goodwill= Purchase Consideration-Net Assets

= $Rs.400000-Rs.300000$

Amount paid towards Goodwill is $Rs.100000$.