Chapter 9: Other Accounting Standards - Test 3: answer key

Question 1 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Sunrise Ltd. and Zenith Ltd. are engaged in renewable energy equipment manufacturing. On 1 April 2026, Sunrise Ltd. absorbed Zenith Ltd. under a scheme sanctioned by the NCLT. The scheme satisfies all conditions of an amalgamation in the nature of merger under AS 14: all assets and liabilities transfer; holders of 95% of the face value of Zenith equity become Sunrise equity shareholders; consideration is discharged wholly by equity shares, with cash only for fractional shares; Zenith's business is intended to be carried on by Sunrise; and no book value adjustments are intended except to ensure uniform accounting policies. Pre-amalgamation balance sheets: Sunrise Ltd.: equity share capital ₹800 lakh (80 lakh shares of ₹10 each), General Reserve ₹150 lakh, Profit and Loss Account ₹90 lakh. Zenith Ltd.: equity share capital ₹300 lakh (30 lakh shares of ₹10 each), General Reserve ₹120 lakh, Revaluation Reserve ₹40 lakh, Profit and Loss Account ₹30 lakh. Sunrise issued 36 lakh fully paid equity shares of ₹10 each to Zenith's equity shareholders as consideration. No other consideration was paid. The accountant is finalising the merger entries under the pooling of interests method and has asked about the adjustment for excess share capital, preservation of reserves and post-merger balances. Assume no fractional cash and no adjustment for uniform accounting policies.

What is the amount of the difference between the share capital issued by Sunrise Ltd. and the share capital of Zenith Ltd., and how is it adjusted in the pooling of interests method?

1. ₹60 lakh debit to reserves (correct answer)
2. ₹60 lakh credit to reserves
3. ₹360 lakh debit to reserves
4. ₹300 lakh credit to reserves

Answer: A — ₹60 lakh debit to reserves

Explanation. Under the pooling of interests method, the difference between the amount recorded as share capital issued (plus additional consideration) and the transferor's share capital is adjusted in reserves. Sunrise issued 36 lakh shares × ₹10 = ₹360 lakh; Zenith's share capital is ₹300 lakh. Excess = ₹360 lakh – ₹300 lakh = ₹60 lakh, which is debited to reserves. Option (b) reverses the adjustment; (c) uses the full issued capital.

Where it goes wrong. Crediting the excess to reserves instead of debiting, or using the full consideration as the difference.

Authority. AS 14 para 12

Question 2 · 2 marks · Chapter 9: Other Accounting Standards · medium

If the excess share capital difference is adjusted against General Reserve, what is the balance of General Reserve after the merger?

1. ₹270 lakh
2. ₹210 lakh (correct answer)
3. ₹150 lakh
4. ₹240 lakh

Answer: B — ₹210 lakh

Explanation. Sunrise General Reserve ₹150 lakh plus Zenith General Reserve ₹120 lakh = ₹270 lakh. The excess consideration over transferor share capital is ₹60 lakh, debited to General Reserve. Post-merger General Reserve = ₹270 lakh – ₹60 lakh = ₹210 lakh. Option (a) ignores the adjustment; (c) ignores Zenith's reserve; (d) uses an incorrect adjustment.

Where it goes wrong. Adding both reserves but forgetting to debit the ₹60 lakh difference.

Authority. AS 14 para 12

Question 3 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the total balance of Reserves and Surplus of Sunrise Ltd. immediately after the merger?

1. ₹310 lakh
2. ₹430 lakh
3. ₹370 lakh (correct answer)
4. ₹400 lakh

Answer: C — ₹370 lakh

Explanation. Post-merger General Reserve = ₹210 lakh; Revaluation Reserve = ₹40 lakh (preserved); Profit and Loss Account = ₹90 lakh + ₹30 lakh = ₹120 lakh. Total Reserves and Surplus = ₹210 + ₹40 + ₹120 = ₹370 lakh. Option (b) ignores the ₹60 lakh adjustment; (a) eliminates the revaluation reserve; (d) is an arbitrary figure.

Where it goes wrong. Forgetting to preserve the revaluation reserve or not aggregating the P&L balances.

Authority. AS 14 para 11; AS 14 para 12

Question 4 · 2 marks · Chapter 9: Other Accounting Standards · medium

How should the Revaluation Reserve of Zenith Ltd. be treated in the books of Sunrise Ltd. under the pooling of interests method?

1. Transfer to General Reserve
2. Credit to Capital Reserve
3. Eliminate against goodwill
4. Continue as Revaluation Reserve of ₹40 lakh (correct answer)

Answer: D — Continue as Revaluation Reserve of ₹40 lakh

Explanation. In an amalgamation in the nature of merger, the identity of reserves is preserved. The Revaluation Reserve of the transferor becomes the Revaluation Reserve of the transferee in the same form. It is not transferred to General Reserve, credited to Capital Reserve or eliminated. Therefore, ₹40 lakh continues as Revaluation Reserve.

Where it goes wrong. Treating the revaluation reserve like a purchase-method reserve and eliminating or reclassifying it.

Authority. AS 14 para 11

Question 5 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Pinnacle Ltd. acquired the business of Orbis Ltd. on 1 April 2026 in an amalgamation in the nature of purchase. The scheme was approved by shareholders and the NCLT. Consideration payable by Pinnacle Ltd.: (i) 50 lakh fully paid equity shares of ₹10 each issued at an agreed value of ₹20 per share; and (ii) cash payment of ₹200 lakh to Orbis equity shareholders. Pinnacle Ltd. also agreed to discharge Orbis's 12% debentures of ₹150 lakh by issuing its own 13% debentures of ₹150 lakh; this is settlement of a liability and not consideration to shareholders. Orbis's identifiable assets at fair value on the date of amalgamation were ₹1,800 lakh, and liabilities were ₹700 lakh. Orbis had an Investment Allowance Reserve of ₹60 lakh which must be maintained for three more years under income-tax law; Pinnacle complied with the statutory conditions for recording it. Orbis's accumulated Profit and Loss debit balance of ₹25 lakh loses its identity under the purchase method. Goodwill, if any, is to be amortised over five years. At 31 March 2027, there is no impairment.

What is the amount of purchase consideration payable by Pinnacle Ltd. as per AS 14?

1. ₹1,350 lakh
2. ₹1,200 lakh (correct answer)
3. ₹1,000 lakh
4. ₹1,150 lakh

Answer: B — ₹1,200 lakh

Explanation. Purchase consideration includes shares and other securities issued plus cash or other assets paid to the transferor's shareholders. Equity shares: 50 lakh × ₹20 = ₹1,000 lakh; cash ₹200 lakh; total ₹1,200 lakh. The discharge of Orbis's debentures is settlement of a liability and is not consideration to shareholders. Option (a) wrongly includes debentures; (c) ignores cash.

Where it goes wrong. Including the discharge of debenture holders in purchase consideration.

Authority. AS 14 para 10

Question 6 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the amount of goodwill arising on amalgamation in the books of Pinnacle Ltd.?

1. ₹100 lakh (correct answer)
2. ₹200 lakh
3. ₹50 lakh
4. ₹150 lakh

Answer: A — ₹100 lakh

Explanation. Under the purchase method, goodwill is the excess of consideration over the fair value of net identifiable assets acquired. Net assets = ₹1,800 lakh – ₹700 lakh = ₹1,100 lakh. Purchase consideration = ₹1,200 lakh. Goodwill = ₹1,200 lakh – ₹1,100 lakh = ₹100 lakh. Option (b) uses gross assets; (c) and (d) use incorrect net asset figures.

Where it goes wrong. Comparing consideration with gross assets instead of net identifiable assets.

Authority. AS 14 para 9

Question 7 · 2 marks · Chapter 9: Other Accounting Standards · hard

How should the Investment Allowance Reserve of ₹60 lakh be recorded by Pinnacle Ltd. under the purchase method?

1. Debit Investment Allowance Reserve and credit Amalgamation Adjustment Reserve
2. Credit Capital Reserve and ignore the statutory reserve
3. Set off Amalgamation Adjustment Reserve against the statutory reserve and show only the net balance
4. Credit Investment Allowance Reserve and debit Amalgamation Adjustment Reserve, shown as a separate line item (correct answer)

Answer: D — Credit Investment Allowance Reserve and debit Amalgamation Adjustment Reserve, shown as a separate line item

Explanation. In a purchase, statutory reserves whose identity must be maintained are recorded by crediting the statutory reserve and debiting a suitable account, usually Amalgamation Adjustment Reserve. This negative reserve is presented as a separate line item and is not set off against the statutory reserve. Option (a) reverses the entry; (c) improperly nets the two.

Where it goes wrong. Netting the Amalgamation Adjustment Reserve against the statutory reserve instead of showing it separately.

Authority. AS 14 para 15

Question 8 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the carrying amount of goodwill in Pinnacle Ltd.'s balance sheet as on 31 March 2027, assuming amortisation over five years?

1. ₹100 lakh
2. ₹90 lakh
3. ₹80 lakh (correct answer)
4. ₹75 lakh

Answer: C — ₹80 lakh

Explanation. Goodwill arising is ₹100 lakh. AS 14 permits amortisation over a period not exceeding five years unless a longer period is justified. Annual amortisation = ₹100 lakh / 5 = ₹20 lakh. After one year, carrying amount = ₹100 lakh – ₹20 lakh = ₹80 lakh. Option (a) ignores amortisation; (b) and (d) use incorrect amortisation periods.

Where it goes wrong. Not amortising goodwill within the same financial year or using an incorrect useful life.

Authority. AS 14 para 16

Question 9 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Which of the following, by itself, would prevent an amalgamation from being classified as an amalgamation in the nature of merger under AS 14?

Which of the following, by itself, would prevent an amalgamation from being classified as an amalgamation in the nature of merger under AS 14?

1. Cash is paid to equity shareholders beyond fractional shares (correct answer)
2. Cash is paid only for fractional shares
3. Shareholders holding 95% of the face value of equity shares become equity shareholders of the transferee
4. The transferee intends to carry on the transferor's business

Answer: A — Cash is paid to equity shareholders beyond fractional shares

Explanation. One condition for merger is that consideration to equity shareholders who become equity shareholders of the transferee is discharged wholly by issue of equity shares, except cash for fractional shares. Payment of cash beyond fractional shares violates this condition. Options (b), (c) and (d) are consistent with merger conditions.

Where it goes wrong. Thinking any cash payment disqualifies merger, including fractional-share cash.

Authority. AS 14 para 5

Question 10 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Alpha Ltd. took over Beta Ltd. and discharged consideration as follows: issued 20,000 equity shares of ₹10 each at an agreed value of ₹25 per share to Beta's equity shareholders; issued 2,000 12% preference shares of ₹100 each at ₹110 per share to Beta's preference shareholders; paid ₹50,000 cash to Beta's equity shareholders; discharged Beta's debentures of ₹2,00,000 by issuing its own debentures; and paid liquidation expenses of ₹30,000. What is the purchase consideration as per AS 14?

Alpha Ltd. took over Beta Ltd. and discharged consideration as follows: issued 20,000 equity shares of ₹10 each at an agreed value of ₹25 per share to Beta's equity shareholders; issued 2,000 12% preference shares of ₹100 each at ₹110 per share to Beta's preference shareholders; paid ₹50,000 cash to Beta's equity shareholders; discharged Beta's debentures of ₹2,00,000 by issuing its own debentures; and paid liquidation expenses of ₹30,000. What is the purchase consideration as per AS 14?

1. ₹7,20,000
2. ₹8,00,000
3. ₹7,70,000 (correct answer)
4. ₹9,70,000

Answer: C — ₹7,70,000

Explanation. Purchase consideration includes shares and other securities issued plus cash paid to shareholders. Equity: 20,000 × ₹25 = ₹5,00,000; preference: 2,000 × ₹110 = ₹2,20,000; cash ₹50,000; total ₹7,70,000. Debenture discharge and liquidation expenses are not paid to shareholders and are excluded. Option (b) includes liquidation expenses; (a) omits cash.

Where it goes wrong. Including debenture holders or liquidation expenses in purchase consideration.

Authority. AS 14 para 10

Question 11 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Under the pooling of interests method, if the transferor and transferee companies have conflicting accounting policies, what is the required treatment?

Under the pooling of interests method, if the transferor and transferee companies have conflicting accounting policies, what is the required treatment?

1. Continue both sets of policies without adjustment
2. Restate all prior periods as if the policies had always been uniform
3. Adjust the difference to goodwill arising on amalgamation
4. Adopt a uniform set of accounting policies and report the effect of changes in accordance with AS 5 (correct answer)

Answer: D — Adopt a uniform set of accounting policies and report the effect of changes in accordance with AS 5

Explanation. AS 14 requires that, after amalgamation, a uniform set of accounting policies be adopted where the transferor and transferee had conflicting policies. The effect of changes in accounting policies is reported in accordance with AS 5. Option (a) ignores uniformity; (b) overstates restatement; (c) wrongly routes policy differences to goodwill.

Where it goes wrong. Continuing conflicting policies or adjusting the effect to goodwill/capital reserve.

Authority. AS 14 para 8; AS 5

Question 12 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. In a purchase-method amalgamation, a statutory reserve of ₹75 lakh must be maintained. How should it be presented?

In a purchase-method amalgamation, a statutory reserve of ₹75 lakh must be maintained. How should it be presented?

1. Debit the statutory reserve and credit Amalgamation Adjustment Reserve
2. Credit the statutory reserve and debit Amalgamation Adjustment Reserve, shown as a separate negative line item (correct answer)
3. Set off Amalgamation Adjustment Reserve against the statutory reserve and disclose only the net amount
4. Credit the statutory reserve directly to Capital Reserve

Answer: B — Credit the statutory reserve and debit Amalgamation Adjustment Reserve, shown as a separate negative line item

Explanation. Statutory reserves whose identity must be preserved are recorded by crediting the statutory reserve and debiting Amalgamation Adjustment Reserve. AS 14 requires the debit balance in Amalgamation Adjustment Reserve to be presented as a separate line item, not set off against the statutory reserve. Option (a) reverses the entry; (c) improperly nets; (d) misclassifies.

Where it goes wrong. Netting the statutory reserve and Amalgamation Adjustment Reserve in the balance sheet.

Authority. AS 14 para 15

Question 13 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Goodwill of ₹180 lakh arose on amalgamation. No longer period than five years is justified. If the company amortises goodwill over the maximum permitted period, what is its carrying amount at the end of the third year?

Goodwill of ₹180 lakh arose on amalgamation. No longer period than five years is justified. If the company amortises goodwill over the maximum permitted period, what is its carrying amount at the end of the third year?

1. ₹108 lakh
2. ₹90 lakh
3. ₹72 lakh (correct answer)
4. ₹60 lakh

Answer: C — ₹72 lakh

Explanation. Goodwill is amortised over a period not exceeding five years unless a longer period is justified. Annual amortisation = ₹180 lakh / 5 = ₹36 lakh. Three years' amortisation = ₹108 lakh. Carrying amount = ₹180 lakh – ₹108 lakh = ₹72 lakh. Option (a) is cumulative amortisation; (b) uses four years; (d) uses an incorrect period.

Where it goes wrong. Reporting cumulative amortisation instead of the remaining carrying amount.

Authority. AS 14 para 16

Question 14 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. In an amalgamation in the nature of merger, the transferor has a debit balance in Profit and Loss Account of ₹40 lakh and the transferee has a credit balance of ₹100 lakh. How should the balance be reflected after the merger?

In an amalgamation in the nature of merger, the transferor has a debit balance in Profit and Loss Account of ₹40 lakh and the transferee has a credit balance of ₹100 lakh. How should the balance be reflected after the merger?

1. Debit balance of ₹40 lakh separately
2. Net credit balance of ₹60 lakh (correct answer)
3. Credit balance of ₹140 lakh
4. Net debit balance of ₹60 lakh

Answer: B — Net credit balance of ₹60 lakh

Explanation. In a merger, the transferor's Profit and Loss Account balance is aggregated with the transferee's corresponding balance (or transferred to General Reserve). Transferee credit ₹100 lakh less transferor debit ₹40 lakh = net credit ₹60 lakh. Option (c) adds instead of netting; (a) and (d) ignore aggregation.

Where it goes wrong. Adding debit and credit balances instead of aggregating them.

Authority. AS 14 para 34

Question 15 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Consideration for an amalgamation in the nature of purchase is ₹900 lakh. The fair value of net identifiable assets acquired is ₹1,050 lakh. A statutory reserve of ₹80 lakh is to be maintained. What amount is credited to Capital Reserve?

Consideration for an amalgamation in the nature of purchase is ₹900 lakh. The fair value of net identifiable assets acquired is ₹1,050 lakh. A statutory reserve of ₹80 lakh is to be maintained. What amount is credited to Capital Reserve?

1. ₹70 lakh
2. ₹80 lakh
3. ₹230 lakh
4. ₹150 lakh (correct answer)

Answer: D — ₹150 lakh

Explanation. Under the purchase method, if consideration is less than the fair value of net identifiable assets, the difference is credited to Capital Reserve. ₹1,050 lakh – ₹900 lakh = ₹150 lakh. The statutory reserve is recorded separately by debiting Amalgamation Adjustment Reserve and does not reduce net assets for this computation. Option (a) wrongly deducts the statutory reserve.

Where it goes wrong. Reducing net assets by the statutory reserve while computing capital reserve.

Authority. AS 14 para 9; AS 14 para 15

Question 16 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. When the identity of a statutory reserve recorded in a purchase-method amalgamation is no longer required to be maintained, what is the correct accounting entry?

When the identity of a statutory reserve recorded in a purchase-method amalgamation is no longer required to be maintained, what is the correct accounting entry?

1. Debit the statutory reserve and credit Amalgamation Adjustment Reserve (correct answer)
2. Debit Amalgamation Adjustment Reserve and credit the statutory reserve
3. Debit Profit and Loss Account and credit the statutory reserve
4. Debit Capital Reserve and credit the statutory reserve

Answer: A — Debit the statutory reserve and credit Amalgamation Adjustment Reserve

Explanation. AS 14 requires that when the identity of the statutory reserve is no longer required to be maintained, both the statutory reserve and the corresponding Amalgamation Adjustment Reserve are reversed. This means debiting the statutory reserve and crediting Amalgamation Adjustment Reserve. Option (b) is the original entry, not reversal; (c) and (d) route through P&L or capital reserve incorrectly.

Where it goes wrong. Reversing the original entry in the wrong direction.

Authority. AS 14 para 15

Question 17 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. An amalgamation is effected after the balance sheet date but before the financial statements are issued. How should it be treated?

An amalgamation is effected after the balance sheet date but before the financial statements are issued. How should it be treated?

1. Incorporate the amalgamation in the financial statements
2. Ignore it completely
3. Disclose it in accordance with AS 4 without incorporating it (correct answer)
4. Restate the previous year's financial statements

Answer: C — Disclose it in accordance with AS 4 without incorporating it

Explanation. AS 14 states that an amalgamation effected after the balance sheet date but before issuance of financial statements is disclosed in accordance with AS 4, but is not incorporated in the financial statements. Option (a) would improperly recognise a post-balance-sheet event; (b) ignores disclosure; (d) is not permitted.

Where it goes wrong. Incorporating a post-balance-sheet amalgamation or ignoring it altogether.

Authority. AS 14 para 42; AS 4

Question 18 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. In a merger accounted under the pooling of interests method, the transferor's share capital is ₹500 lakh and the transferee issues equity shares of ₹560 lakh as consideration. How is the difference of ₹60 lakh adjusted?

In a merger accounted under the pooling of interests method, the transferor's share capital is ₹500 lakh and the transferee issues equity shares of ₹560 lakh as consideration. How is the difference of ₹60 lakh adjusted?

1. Credit to reserves
2. Debit to reserves (correct answer)
3. Debit to goodwill
4. Credit to Capital Reserve

Answer: B — Debit to reserves

Explanation. Under pooling, the excess of share capital issued over the transferor's share capital is adjusted against reserves. Since ₹560 lakh exceeds ₹500 lakh by ₹60 lakh, reserves are debited by ₹60 lakh. Option (a) reverses the adjustment; (c) is not permitted in pooling; (d) would treat a debit as a credit.

Where it goes wrong. Crediting reserves when issued capital exceeds transferor capital.

Authority. AS 14 para 12

Question 19 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Under the purchase method, how may the transferee company account for the assets and liabilities of the transferor company?

Under the purchase method, how may the transferee company account for the assets and liabilities of the transferor company?

1. At existing carrying amounts or by allocating consideration to identifiable assets and liabilities at fair values (correct answer)
2. Only at fair values, irrespective of the consideration
3. Only at existing carrying amounts
4. Only at nominal values

Answer: A — At existing carrying amounts or by allocating consideration to identifiable assets and liabilities at fair values

Explanation. AS 14 permits the purchase method to incorporate assets and liabilities either at existing carrying amounts or by allocating consideration to individual identifiable assets and liabilities on the basis of fair values at the amalgamation date. Options (b) and (c) wrongly restrict the method; (d) is not permitted.

Where it goes wrong. Assuming purchase method must always use fair values or must always use book values.

Authority. AS 14 para 9

Question 20 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Goodwill arising on amalgamation should normally be amortised over which period, and what factors may support a longer period?

Goodwill arising on amalgamation should normally be amortised over which period, and what factors may support a longer period?

1. Over 10 years; only the industry life is relevant
2. Over the transferor's remaining legal life; no other factor is relevant
3. Immediately in the year of amalgamation; no amortisation is permitted
4. Over a period not exceeding five years unless longer is justified, considering factors such as product obsolescence and service life of key employees (correct answer)

Answer: D — Over a period not exceeding five years unless longer is justified, considering factors such as product obsolescence and service life of key employees

Explanation. AS 14 requires goodwill to be amortised to income on a systematic basis over its useful life. Because useful life is often difficult to estimate, it is amortised over a period not exceeding five years unless a longer period can be justified. Factors include foreseeable life of the business, product obsolescence, demand changes, key employee service life and competitor actions.

Where it goes wrong. Using a fixed 10-year period or immediate write-off instead of the AS 14 five-year presumption.

Authority. AS 14 para 16