Question

While preparing the books of the transferee company in purchase method, the difference between purchase consideration and share capital of the transferor company should be adjusted in _______.

• A. Share capital
• B. Reserves
• C. Assets
• D. Liabilities

Answer 1

The correct option is B Reserves

For the purpose of accounting for amalgamation, we are essentially guided by AS-14 'Accounting for Amalgamations'. Para (3)g of AS 14 defines 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 company to the shareholders of the transferor company." in simple words it is the price payable by the transferee company to the transferor company for taking over the business of the transferor 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.