Chapter 13: Accounting for Reconstruction - Test 3: answer key

Question 1 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Meridian Industries Ltd. proposes to absorb Lumen Components Ltd. under a scheme effective from 1 April 2026. Both companies operate in the automobile components industry, and the management intends to continue Lumen's existing manufacturing operations without interruption. The following is an extract of Lumen's Balance Sheet as at 31 March 2026 (₹ lakh): Assets: Property, Plant and Equipment 180; Inventories 72; Trade receivables 43; Cash and bank balances 20. Total 315. Equity and Liabilities: Equity share capital (12,00,000 shares of ₹10 each) 120; 12% Preference share capital (30,000 shares of ₹100 each) 30; General Reserve 18; Capital Reserve 8; Profit and Loss Account (credit balance) 12; Revaluation Reserve 7; 10% Debentures 50; Trade Payables 60; Warranty provision 10. Total 315. Meridian agrees to take over every asset and liability of Lumen. No revaluation is intended. However, Lumen values its inventories using the weighted average method at ₹72 lakh, whereas Meridian follows FIFO. The inventory value under FIFO, determined on the amalgamation date, is ₹76 lakh. All holders of Lumen's equity shares will become equity shareholders of Meridian. They will receive 11 new equity shares of ₹10 each for every 10 equity shares held in Lumen. Preference shareholders will receive one Meridian preference share of ₹100 each for every existing preference share. No additional cash or other consideration is payable. Lumen's debenture-holders will receive equivalent Meridian debentures, and the trade creditors and warranty obligations will continue with Meridian. Meridian's existing reserves immediately before amalgamation comprise General Reserve ₹40 lakh, Capital Reserve ₹6 lakh, Profit and Loss Account ₹15 lakh and Revaluation Reserve ₹4 lakh. All necessary corporate approvals have been obtained. The scheme satisfies the stipulated shareholder-consent, business-continuity and asset-transfer requirements.

Considering all the conditions stipulated under AS 14, how should Meridian classify the amalgamation with Lumen?

1. Amalgamation in the nature of purchase, since preference shares are also exchanged.
2. Amalgamation in the nature of merger, accounted for by pooling of interests. (correct answer)
3. Amalgamation in the nature of purchase, since the inventory value requires adjustment.
4. Amalgamation in the nature of merger, accounted for by the purchase method.

Answer: B — Amalgamation in the nature of merger, accounted for by pooling of interests.

Explanation. All five conditions under AS 14 para 3(e) are fulfilled. All assets and liabilities transfer, all of eligible equity shareholders become Meridian shareholders, and their consideration is discharged wholly through equity shares. The preference shareholders also receive preference shares. The same business continues, and the only carrying-value adjustment is required to achieve uniform accounting policies. An accounting-policy adjustment does not disqualify merger classification. Therefore, pooling of interests applies.

Where it goes wrong. Assuming that the issue of preference shares or an accounting-policy adjustment automatically makes the amalgamation a purchase.

Authority. AS 14, para 3(e); AS 14, para 13

Question 2 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

At what amount should Meridian recognise Lumen's inventory in its financial statements immediately after amalgamation?

1. ₹72 lakh, being the original carrying amount.
2. ₹74 lakh, being the average of both valuations.
3. ₹76 lakh, being the FIFO valuation required by Meridian. (correct answer)
4. ₹80 lakh, being the estimated replacement value.

Answer: C — ₹76 lakh, being the FIFO valuation required by Meridian.

Explanation. Under AS 14 para 13, assets are normally incorporated at existing carrying amounts, subject to the uniform-accounting-policy requirement in para 14. Lumen's inventory is ₹72 lakh under weighted average, but Meridian follows FIFO, which gives ₹76 lakh on the amalgamation date. Accordingly, inventory is recognised at ₹76 lakh. Retaining ₹72 lakh would preserve the inconsistent policy instead of ensuring uniformity. The adjustment is not an independent revaluation.

Where it goes wrong. Applying the general carrying-value rule without considering the exception for uniformity of accounting policies.

Authority. AS 14, para 13; AS 14, para 14; AS 2, para 5

Question 3 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Calculate the amount to be adjusted against Meridian's reserves on account of the difference between the share capital issued and Lumen's existing share capital under the pooling of interests method.

1. ₹12 lakh debit (correct answer)
2. ₹12 lakh credit
3. ₹15 lakh debit
4. ₹10 lakh credit

Answer: A — ₹12 lakh debit

Explanation. New equity capital issued is 12,00,000 × 11/10 × ₹10 = ₹132 lakh. New preference share capital is ₹30 lakh. Therefore, total share capital issued is ₹162 lakh. Lumen's existing equity and preference share capital total ₹120 + ₹30 = ₹150 lakh. The excess of ₹12 lakh is debited to Meridian's reserves under AS 14 para 13. It is not goodwill because this is a pooling-of-interests amalgamation.

Where it goes wrong. Comparing only equity share capital issued and ignoring preference share capital.

Authority. AS 14, para 13

Question 4 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

What will be the General Reserve balance of Meridian immediately after giving effect to the amalgamation and the pooling adjustment?

1. ₹58 lakh
2. ₹52 lakh
3. ₹40 lakh
4. ₹46 lakh (correct answer)

Answer: D — ₹46 lakh

Explanation. Meridian's existing General Reserve is ₹40 lakh. Lumen's General Reserve of ₹18 lakh is incorporated under pooling of interests, giving ₹58 lakh before adjustment. The additional share capital issued over the transferor's existing share capital is ₹12 lakh and is debited to reserves. Therefore, the closing General Reserve is ₹58 − ₹12 = ₹46 lakh. The other reserve categories continue under their respective identities.

Where it goes wrong. Deducting the adjustment before incorporating the transferor's General Reserve.

Authority. AS 14, para 13

Question 5 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Northstar Electrical Ltd. and Brightline Cables Ltd. enter into a scheme of amalgamation effective from 1 August 2026. Northstar intends to continue Brightline's manufacturing business and integrate its distribution network into the existing operations. Brightline's Balance Sheet extract as at 31 July 2026 (₹ lakh) is as follows: Assets: Property, Plant and Equipment 165; Inventories 85; Trade receivables 42; Cash and bank balances 18. Total 310. Equity and Liabilities: Equity share capital (10,00,000 equity shares of ₹10 each) 100; 10% Preference share capital 20; General Reserve 24; Capital Reserve 10; Profit and Loss Account 16; Revaluation Reserve 10; 12% Debentures 65; Trade Payables 55; Other provisions 10. Total 310. Northstar takes over all the assets and liabilities at existing carrying amounts, except for an accounting-policy adjustment to inventories. Brightline follows weighted average valuation and reports inventory of ₹85 lakh. Northstar follows FIFO, under which the inventory is valued at ₹88.60 lakh. No other adjustment to carrying amounts is intended. Immediately before amalgamation, Northstar's wholly-owned subsidiary holds 2,00,000 Brightline equity shares. Of the remaining eligible equity shares, holders of 7,20,000 shares agree to become Northstar equity shareholders. They receive three Northstar equity shares of ₹10 each for every two Brightline shares held. The other 80,000 eligible shares are settled in cash at ₹12 per share. Certain participating shareholders also receive cash totalling ₹20,000 in settlement of fractional share entitlements. Preference shareholders receive Northstar preference shares having an aggregate face value of ₹20 lakh. All assets and liabilities vest in Northstar, the same business is continued, and no changes other than the uniform accounting-policy adjustment are intended. The scheme has received all required approvals.

What percentage of the eligible face value of Brightline's equity share capital becomes equity share capital of Northstar under the scheme?

1. 90% (correct answer)
2. 85%
3. 88%
4. 92%

Answer: A — 90%

Explanation. The 2,00,000 shares held by Northstar's subsidiary are excluded from the denominator. Eligible shares are therefore 10,00,000 − 2,00,000 = 8,00,000 shares. Holders of 7,20,000 shares become Northstar equity shareholders. The percentage is 7,20,000/8,00,000 × 100 = 90%. The condition requires not less than 90% of the eligible face value, so the threshold is achieved exactly.

Where it goes wrong. Including the shares already held by the transferee's subsidiary when calculating the eligible shareholding.

Authority. AS 14, para 3(e)(ii)

Question 6 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

How many new Northstar equity shares must be issued to the Brightline equity shareholders who agree to become Northstar shareholders?

1. 10,00,000 shares
2. 10,80,000 shares (correct answer)
3. 12,00,000 shares
4. 9,60,000 shares

Answer: B — 10,80,000 shares

Explanation. Only the holders of 7,20,000 participating Brightline equity shares are entitled to the equity exchange. The ratio is three Northstar shares for every two Brightline shares. Accordingly, new shares issued = 7,20,000 × 3/2 = 10,80,000 shares. The 80,000 dissenting shares are settled in cash and do not receive shares under the exchange. The 2,00,000 subsidiary-held shares are also excluded.

Where it goes wrong. Applying the exchange ratio to all 10,00,000 Brightline shares instead of only the participating shares.

Authority. AS 14, para 3(e)(ii); AS 14, para 3(e)(iii)

Question 7 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Determine the amount to be adjusted against Northstar's reserves under the pooling of interests method, considering all consideration components stipulated in the scheme.

1. ₹8.20 lakh debit
2. ₹9.60 lakh debit
3. ₹10.00 lakh credit
4. ₹17.80 lakh debit (correct answer)

Answer: D — ₹17.80 lakh debit

Explanation. Capital issued comprises equity shares of 10,80,000 × ₹10 = ₹108 lakh and preference shares of ₹20 lakh. Additional consideration comprises dissenting-shareholder cash of 80,000 × ₹12 = ₹9.60 lakh and fractional-share cash of ₹0.20 lakh. Total Step I is ₹137.80 lakh. Existing equity and preference share capital total ₹120 lakh. Therefore, ₹137.80 − ₹120 = ₹17.80 lakh is debited to reserves under AS 14 para 13.

Where it goes wrong. Ignoring the cash consideration paid to dissenting shareholders or the fractional-share settlement when computing the pooling adjustment.

Authority. AS 14, para 13

Question 8 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Does the payment of cash to the 80,000 dissenting shareholders and the additional settlement of fractional entitlements prevent classification as an amalgamation in the nature of merger?

1. Yes, because any cash consideration makes pooling unavailable.
2. Yes, because at least all of eligible shareholders must join.
3. No, because the 90% threshold is met and participants receive equity shares except for fractions. (correct answer)
4. No, because the transferee may settle any shareholder's consideration in cash.

Answer: C — No, because the 90% threshold is met and participants receive equity shares except for fractions.

Explanation. The eligible shareholder participation is exactly 90%, satisfying para 3(e)(ii). Para 3(e)(iii) requires equity consideration to participating shareholders to be discharged wholly through equity shares, except cash for fractional shares. The dissenters do not become equity shareholders and their cash settlement does not breach the condition applicable to participating holders. Therefore, cash paid to these dissenters does not automatically disqualify the merger classification.

Where it goes wrong. Treating every payment of cash to any transferor shareholder as a violation of the merger conditions.

Authority. AS 14, para 3(e)(ii); AS 14, para 3(e)(iii)

Question 9 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Helix Industrial Ltd. proposes to absorb Terra BioPharm Ltd. with effect from 1 October 2026. Both entities operate in the pharmaceutical manufacturing sector. The amalgamation is designed as a genuine continuation of Terra's business, including its manufacturing facilities, product registrations and distribution arrangements. Terra's Balance Sheet as at 30 September 2026 contains the following amounts (₹ lakh): Assets: Property, Plant and Equipment 130; Non-current Investments 35; Inventories 42; Trade receivables 31; Cash and bank balances 10. Total 248. Equity and Liabilities: Equity share capital (8,00,000 shares of ₹10 each) 80; 10% Preference share capital 20; General Reserve 30; Capital Reserve 15; Revenue Reserve 12; Profit and Loss Account (credit balance) 8; Revaluation Reserve 5; Debentures 40; Trade Payables 28; Other provisions 10. Total 248. Helix takes over all assets and liabilities at their existing carrying amounts. Terra follows the weighted average method for inventories, whereas Helix follows FIFO. On the amalgamation date, the FIFO value of Terra's inventories is determined at ₹45 lakh. No other revaluation is intended. All 8,00,000 Terra equity shares are exchanged for 9,00,000 Helix equity shares of ₹10 each. Any fractional entitlement is settled through a cash payment aggregating ₹5,000. Terra's preference shareholders receive Helix preference shares having an aggregate face value of ₹20 lakh. No other additional consideration is payable. Helix intends to continue Terra's existing business activities. Immediately before amalgamation, Helix's reserves comprise General Reserve ₹25 lakh, Capital Reserve ₹7 lakh, Revenue Reserve ₹9 lakh, Profit and Loss Account ₹5 lakh and Revaluation Reserve ₹3 lakh. The amalgamation qualifies under the conditions of AS 14 for accounting by the pooling of interests method.

At what amount should Terra's inventory be incorporated in Helix's financial statements under the pooling of interests method?

1. ₹42 lakh
2. ₹43 lakh
3. ₹45 lakh (correct answer)
4. ₹47 lakh

Answer: C — ₹45 lakh

Explanation. Terra's inventory is carried at ₹42 lakh using weighted average. Helix follows FIFO, under which the inventory value is ₹45 lakh on the amalgamation date. Under AS 14 para 14, a uniform set of accounting policies must be adopted. Hence, inventory is recognised at ₹45 lakh. The difference of ₹3 lakh is a uniformity adjustment, not a discretionary fair-value revaluation.

Where it goes wrong. Preserving the transferor's inventory valuation policy even though the transferee follows a different policy.

Authority. AS 14, para 13; AS 14, para 14; AS 2, para 5

Question 10 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Calculate the closing General Reserve of Helix after incorporating Terra's reserves and recording the pooling-of-interests adjustment.

1. ₹44.95 lakh (correct answer)
2. ₹55.00 lakh
3. ₹45.00 lakh
4. ₹54.95 lakh

Answer: A — ₹44.95 lakh

Explanation. New equity share capital issued is ₹90 lakh, preference share capital issued is ₹20 lakh, and fractional-share cash is ₹0.05 lakh. Total Step I is ₹110.05 lakh. Existing equity and preference capital of Terra is ₹100 lakh. The excess of ₹10.05 lakh is debited to reserves. Helix's General Reserve after incorporating Terra's General Reserve is ₹25 + ₹30 = ₹55 lakh. Closing balance is ₹55 − ₹10.05 = ₹44.95 lakh.

Where it goes wrong. Ignoring the fractional-share cash or using the difference between net assets and purchase consideration instead of the share-capital adjustment.

Authority. AS 14, para 13

Question 11 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

What is the aggregate balance of Reserves and Surplus immediately after amalgamation, assuming the pooling adjustment is charged to General Reserve?

1. ₹119 lakh
2. ₹108.95 lakh (correct answer)
3. ₹110.05 lakh
4. ₹98.95 lakh

Answer: B — ₹108.95 lakh

Explanation. Helix's existing reserves total ₹49 lakh and Terra's reserves total ₹70 lakh. Under pooling, the reserves are combined while retaining their respective identities. The adjustment of ₹10.05 lakh is debited to General Reserve. Aggregate closing reserves are therefore ₹49 + ₹70 − ₹10.05 = ₹108.95 lakh. The separate reserve classifications are General Reserve ₹44.95 lakh, Capital Reserve ₹22 lakh, Revenue Reserve ₹21 lakh, Profit and Loss ₹13 lakh and Revaluation Reserve ₹8 lakh.

Where it goes wrong. Omitting the transferor's reserves or deducting the pooling adjustment twice.

Authority. AS 14, para 13

Question 12 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Which treatment is correct regarding goodwill or capital reserve arising from the difference between purchase consideration and net assets in Terra's amalgamation with Helix?

1. Recognise goodwill if the purchase consideration exceeds net assets.
2. Recognise capital reserve if net assets exceed purchase consideration.
3. Recognise goodwill and adjust the transferor's reserves separately.
4. Do not create goodwill or capital reserve as a balancing figure under pooling. (correct answer)

Answer: D — Do not create goodwill or capital reserve as a balancing figure under pooling.

Explanation. Under the pooling-of-interests method, assets, liabilities and reserves are incorporated at existing carrying amounts, subject to uniformity adjustments. The difference between share capital issued, additional consideration and the transferor's existing share capital is adjusted in the transferee's reserves. Goodwill or capital reserve is not created as a balancing figure based on the difference between net assets and purchase consideration. Those treatments belong to the purchase method.

Where it goes wrong. Applying the goodwill and capital reserve calculation applicable to the purchase method to a merger.

Authority. AS 14, para 13

Question 13 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Orchid Engineering Ltd. absorbs Falcon Manufacturing Ltd. in an amalgamation qualifying as a merger. Falcon's building has a carrying amount of ₹90 lakh, plant and machinery has a gross cost of ₹300 lakh and accumulated depreciation of ₹120 lakh, investments are carried at ₹40 lakh, and inventory is ₹55 lakh. No differences in accounting policies exist. The transferee's valuation team estimates the building at ₹110 lakh and machinery at ₹210 lakh. At what total amount should these four assets be incorporated under the pooling method?

Orchid Engineering Ltd. absorbs Falcon Manufacturing Ltd. in an amalgamation qualifying as a merger. Falcon's building has a carrying amount of ₹90 lakh, plant and machinery has a gross cost of ₹300 lakh and accumulated depreciation of ₹120 lakh, investments are carried at ₹40 lakh, and inventory is ₹55 lakh. No differences in accounting policies exist. The transferee's valuation team estimates the building at ₹110 lakh and machinery at ₹210 lakh. At what total amount should these four assets be incorporated under the pooling method?

1. ₹385 lakh (correct answer)
2. ₹410 lakh
3. ₹420 lakh
4. ₹395 lakh

Answer: A — ₹385 lakh

Explanation. Under AS 14 para 13, the assets are incorporated at their existing carrying amounts when no uniformity adjustment is required. Building is ₹90 lakh, machinery is ₹300 − ₹120 = ₹180 lakh, investments are ₹40 lakh and inventory is ₹55 lakh. Total carrying value is ₹90 + ₹180 + ₹40 + ₹55 = ₹365 lakh. The market estimates of ₹110 lakh and ₹210 lakh are irrelevant under pooling. The options deliberately test the distinction between carrying amounts and fair values.

Where it goes wrong. Revaluing the assets to market estimates when the pooling method requires carrying amounts.

Authority. AS 14, para 13

Question 14 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. Transferor Zenith Plastics Ltd. has 10,00,000 equity shares of ₹10 each. Of these, 1,50,000 shares are held immediately before amalgamation by the transferee company and its subsidiaries. Holders of 7,65,000 eligible shares become equity shareholders of the transferee. What is the percentage participation for the purpose of AS 14?

Transferor Zenith Plastics Ltd. has 10,00,000 equity shares of ₹10 each. Of these, 1,50,000 shares are held immediately before amalgamation by the transferee company and its subsidiaries. Holders of 7,65,000 eligible shares become equity shareholders of the transferee. What is the percentage participation for the purpose of AS 14?

1. 76.50%
2. 85.00%
3. 90.00% (correct answer)
4. 95.00%

Answer: C — 90.00%

Explanation. The transferee-held shares are excluded from the calculation. Eligible equity shares are 10,00,000 − 1,50,000 = 8,50,000 shares. Shares held by participating shareholders are 7,65,000. The participation percentage is 7,65,000 ÷ 8,50,000 × 100 = 90%. Therefore, the minimum prescribed threshold is achieved exactly. Using all 10,00,000 shares as the denominator would incorrectly produce 76.50%.

Where it goes wrong. Using the entire issued equity share capital instead of excluding shares held by the transferee and its subsidiaries.

Authority. AS 14, para 3(e)(ii)

Question 15 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. In a qualifying merger, the transferee issues equity shares having a nominal capital of ₹100 lakh and preference shares having a nominal capital of ₹20 lakh. It additionally pays ₹40,000 in cash to settle fractional share entitlements. The transferor's existing equity and preference share capital are ₹90 lakh and ₹20 lakh respectively. What amount should be adjusted against the transferee's reserves?

In a qualifying merger, the transferee issues equity shares having a nominal capital of ₹100 lakh and preference shares having a nominal capital of ₹20 lakh. It additionally pays ₹40,000 in cash to settle fractional share entitlements. The transferor's existing equity and preference share capital are ₹90 lakh and ₹20 lakh respectively. What amount should be adjusted against the transferee's reserves?

1. ₹10 lakh debit
2. ₹10.40 lakh debit (correct answer)
3. ₹10.40 lakh credit
4. ₹20.40 lakh debit

Answer: B — ₹10.40 lakh debit

Explanation. Under the pooling calculation, Step I comprises equity capital ₹100 lakh, preference capital ₹20 lakh and fractional-share cash ₹0.40 lakh, totalling ₹120.40 lakh. Step II comprises existing equity capital ₹90 lakh and preference capital ₹20 lakh, totalling ₹110 lakh. The difference is ₹10.40 lakh. Since Step I exceeds Step II, the amount is debited to the transferee's reserves. The fractional-share cash cannot be ignored.

Where it goes wrong. Ignoring additional consideration when calculating the reserve adjustment.

Authority. AS 14, para 13

Question 16 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. A transferor company values its inventory at ₹120 lakh using the weighted average method. The transferee follows FIFO, under which the inventory is valued at ₹126 lakh on the amalgamation date. The amalgamation qualifies as a merger. What is the appropriate inventory value under the pooling method?

A transferor company values its inventory at ₹120 lakh using the weighted average method. The transferee follows FIFO, under which the inventory is valued at ₹126 lakh on the amalgamation date. The amalgamation qualifies as a merger. What is the appropriate inventory value under the pooling method?

1. ₹120 lakh
2. ₹123 lakh
3. ₹132 lakh
4. ₹126 lakh (correct answer)

Answer: D — ₹126 lakh

Explanation. AS 14 para 13 generally requires carrying-value recognition, while para 14 requires a uniform set of accounting policies after amalgamation. The transferee follows FIFO and its corresponding inventory value is ₹126 lakh. Therefore, the transferor's inventory is adjusted upwards by ₹6 lakh from ₹120 lakh to ₹126 lakh. The correct treatment is not to retain the original carrying value merely because the amalgamation uses pooling.

Where it goes wrong. Confusing preservation of carrying amounts with preservation of inconsistent accounting policies.

Authority. AS 14, para 13; AS 14, para 14; AS 2, para 5

Question 17 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. Following a qualifying merger, the transferee has an existing Revenue Reserve of ₹32 lakh. The transferor has General Reserve ₹12 lakh, Capital Reserve ₹4 lakh, Revenue Reserve ₹9 lakh, Profit and Loss Account credit balance ₹7 lakh and Revaluation Reserve ₹5 lakh. No pooling adjustment affects these balances. What amount should appear under Revenue Reserve immediately after amalgamation?

Following a qualifying merger, the transferee has an existing Revenue Reserve of ₹32 lakh. The transferor has General Reserve ₹12 lakh, Capital Reserve ₹4 lakh, Revenue Reserve ₹9 lakh, Profit and Loss Account credit balance ₹7 lakh and Revaluation Reserve ₹5 lakh. No pooling adjustment affects these balances. What amount should appear under Revenue Reserve immediately after amalgamation?

1. ₹41 lakh (correct answer)
2. ₹53 lakh
3. ₹32 lakh
4. ₹57 lakh

Answer: A — ₹41 lakh

Explanation. Under the pooling-of-interests method, the reserves of the transferor are incorporated in the same form in which they appeared in its financial statements. Revenue Reserve is therefore added to the corresponding Revenue Reserve of the transferee. Closing Revenue Reserve is ₹32 + ₹9 = ₹41 lakh. Capital Reserve, Profit and Loss Account and Revaluation Reserve retain their own identities rather than being transferred into Revenue Reserve.

Where it goes wrong. Combining all transferor reserves into General Reserve or including unrelated reserve categories in Revenue Reserve.

Authority. AS 14, para 13

Question 18 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. In a qualifying merger, a transferee company has General Reserve of ₹50 lakh. The transferor has General Reserve of ₹30 lakh and existing equity and preference share capital of ₹100 lakh and ₹20 lakh respectively. The transferee issues new equity shares having nominal capital of ₹118 lakh and preference shares having nominal capital of ₹20 lakh. Calculate the closing General Reserve after the pooling adjustment.

In a qualifying merger, a transferee company has General Reserve of ₹50 lakh. The transferor has General Reserve of ₹30 lakh and existing equity and preference share capital of ₹100 lakh and ₹20 lakh respectively. The transferee issues new equity shares having nominal capital of ₹118 lakh and preference shares having nominal capital of ₹20 lakh. Calculate the closing General Reserve after the pooling adjustment.

1. ₹80 lakh
2. ₹68 lakh
3. ₹62 lakh (correct answer)
4. ₹50 lakh

Answer: C — ₹62 lakh

Explanation. Share capital issued is ₹118 + ₹20 = ₹138 lakh. Existing transferor share capital is ₹100 + ₹20 = ₹120 lakh. Therefore, ₹18 lakh is debited to reserves. The General Reserve after incorporating the transferor's balance is ₹50 + ₹30 = ₹80 lakh. After the adjustment, closing General Reserve is ₹80 − ₹18 = ₹62 lakh. The debit is against reserves, not a newly created goodwill account.

Where it goes wrong. Calculating the difference using only equity share capital instead of equity and preference share capital together.

Authority. AS 14, para 13

Question 19 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Under which circumstance can the transferee pay cash to equity shareholders who become equity shareholders of the transferee without violating the relevant merger condition of AS 14?

Under which circumstance can the transferee pay cash to equity shareholders who become equity shareholders of the transferee without violating the relevant merger condition of AS 14?

1. Where cash is paid to replace all the shares otherwise issuable.
2. Where cash is paid only in respect of fractional share entitlements. (correct answer)
3. Where cash is paid to shareholders who prefer not to receive shares.
4. Where cash is paid to shareholders holding a majority of the shares.

Answer: B — Where cash is paid only in respect of fractional share entitlements.

Explanation. AS 14 para 3(e)(iii) requires consideration receivable by equity shareholders who agree to become equity shareholders of the transferee to be discharged wholly through equity shares, except cash for fractional shares. The exception is narrow and does not permit shareholders to elect cash instead of equity consideration while still being counted as participating shareholders for the merger condition. Cash settlement of dissenting shareholders is a separate matter.

Where it goes wrong. Treating the fractional-share exception as a general permission to make cash payments to participating equity shareholders.

Authority. AS 14, para 3(e)(iii)

Question 20 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferor has equity share capital of ₹75 lakh and preference share capital of ₹20 lakh. The transferee issues four equity shares of ₹10 each for every three transferor equity shares and issues preference shares having nominal capital of ₹20 lakh. What amount is debited to the transferee's reserves under the pooling method?

A transferor has equity share capital of ₹75 lakh and preference share capital of ₹20 lakh. The transferee issues four equity shares of ₹10 each for every three transferor equity shares and issues preference shares having nominal capital of ₹20 lakh. What amount is debited to the transferee's reserves under the pooling method?

1. ₹20 lakh
2. ₹15 lakh
3. ₹30 lakh
4. ₹25 lakh (correct answer)

Answer: D — ₹25 lakh

Explanation. The transferor has 7,50,000 equity shares of ₹10 each. The transferee issues 7,50,000 × 4/3 = 10,00,000 shares, giving new equity capital of ₹100 lakh. Adding preference capital of ₹20 lakh gives total issued capital of ₹120 lakh. Existing equity and preference capital total ₹95 lakh. The excess of ₹25 lakh is debited to reserves under AS 14 para 13.

Where it goes wrong. Applying the exchange ratio to the rupee amount of share capital instead of the number of shares.

Authority. AS 14, para 13

Question 21 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. The existing equity and preference share capital of a transferor company is ₹70 lakh and ₹20 lakh respectively. The transferee issues new equity shares with nominal capital of ₹64 lakh and preference shares with nominal capital of ₹16 lakh. What is the appropriate reserve adjustment?

The existing equity and preference share capital of a transferor company is ₹70 lakh and ₹20 lakh respectively. The transferee issues new equity shares with nominal capital of ₹64 lakh and preference shares with nominal capital of ₹16 lakh. What is the appropriate reserve adjustment?

1. ₹10 lakh credit to reserves (correct answer)
2. ₹10 lakh debit to reserves
3. ₹16 lakh credit to reserves
4. ₹16 lakh debit to reserves

Answer: A — ₹10 lakh credit to reserves

Explanation. The transferee issues share capital of ₹64 + ₹16 = ₹80 lakh. The transferor's existing share capital is ₹70 + ₹20 = ₹90 lakh. Step I is therefore lower than Step II by ₹10 lakh. Under AS 14 para 13, the difference is adjusted in the reserves of the transferee. Since the issued capital is lower, the adjustment is a credit to reserves of ₹10 lakh rather than a debit.

Where it goes wrong. Automatically debiting reserves without considering whether newly issued share capital is greater or smaller than existing transferor share capital.

Authority. AS 14, para 13

Question 22 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. A transferor has 10,000 equity shares of ₹10 each and 2,000 equity shares of ₹100 each. Immediately before amalgamation, the transferee or its subsidiaries hold 500 shares of ₹100 each. Holders of 8,800 shares of ₹10 each and 1,400 shares of ₹100 each become equity shareholders of the transferee. What is the participation percentage for the merger condition under AS 14?

A transferor has 10,000 equity shares of ₹10 each and 2,000 equity shares of ₹100 each. Immediately before amalgamation, the transferee or its subsidiaries hold 500 shares of ₹100 each. Holders of 8,800 shares of ₹10 each and 1,400 shares of ₹100 each become equity shareholders of the transferee. What is the participation percentage for the merger condition under AS 14?

1. 88.00%
2. 89.60%
3. 91.20% (correct answer)
4. 94.00%

Answer: C — 91.20%

Explanation. Total face value of equity shares is ₹3,00,000. Excluding 500 transferee-group-held shares of ₹100 each, eligible face value is ₹2,50,000. Participating holders represent ₹88,000 from the ₹10 shares and ₹1,40,000 from the ₹100 shares, totalling ₹2,28,000. The participation percentage is ₹2,28,000 ÷ ₹2,50,000 × 100 = 91.20%. The calculation must be based on face value, not the number of shareholders or shares.

Where it goes wrong. Calculating participation by share count rather than face value when the transferor has shares of different denominations.

Authority. AS 14, para 3(e)(ii)

Question 23 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. In a qualifying amalgamation in the nature of merger, the transferor's net assets at carrying amounts are ₹280 lakh and the consideration issued to its shareholders is valued at ₹305 lakh. The difference between share capital issued and the transferor's existing share capital is nil. What is the correct treatment under pooling of interests?

In a qualifying amalgamation in the nature of merger, the transferor's net assets at carrying amounts are ₹280 lakh and the consideration issued to its shareholders is valued at ₹305 lakh. The difference between share capital issued and the transferor's existing share capital is nil. What is the correct treatment under pooling of interests?

1. Recognise goodwill of ₹25 lakh.
2. Do not recognise goodwill or capital reserve from this difference. (correct answer)
3. Recognise capital reserve of ₹25 lakh.
4. Debit General Reserve with ₹25 lakh as goodwill.

Answer: B — Do not recognise goodwill or capital reserve from this difference.

Explanation. The goodwill and capital reserve calculation based on purchase consideration and net assets applies under the purchase method. In the present case, amalgamation qualifies as a merger and pooling of interests applies. Assets, liabilities and reserves are incorporated at carrying amounts, while the reserve adjustment depends on the comparison of issued share capital plus any additional consideration with existing transferor share capital. Since that difference is nil, no balancing goodwill or capital reserve is recognised merely because consideration exceeds net assets.

Where it goes wrong. Using the purchase-method goodwill calculation in a qualifying merger.

Authority. AS 14, para 13; AS 14, para 15

Question 24 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A proposed amalgamation satisfies the conditions relating to transfer of all assets and liabilities, issue of equity shares to participating shareholders, continuity of business and carrying-value treatment. However, after excluding shares held by the transferee's subsidiaries, only 89.99% of the eligible face value of the transferor's equity shares becomes equity share capital of the transferee. What is the correct classification?

A proposed amalgamation satisfies the conditions relating to transfer of all assets and liabilities, issue of equity shares to participating shareholders, continuity of business and carrying-value treatment. However, after excluding shares held by the transferee's subsidiaries, only 89.99% of the eligible face value of the transferor's equity shares becomes equity share capital of the transferee. What is the correct classification?

1. Nature of merger, because the participation exceeds 85%.
2. Nature of merger, because the same business continues.
3. Nature of merger, because all assets and liabilities transfer.
4. Nature of purchase, because the minimum 90% criterion is not fulfilled. (correct answer)

Answer: D — Nature of purchase, because the minimum 90% criterion is not fulfilled.

Explanation. AS 14 para 3(e) requires all five merger conditions to be fulfilled cumulatively. Para 3(e)(ii) specifically requires holders of not less than 90% of the eligible face value of equity shares to become equity shareholders of the transferee. Participation of 89.99% falls short of the statutory accounting threshold. The fact that the other four conditions are satisfied cannot compensate for this failure. The amalgamation is therefore in the nature of purchase.

Where it goes wrong. Treating the five merger conditions as alternative tests instead of cumulative requirements.

Authority. AS 14, para 3(e)(ii); AS 14, para 3(f)

Question 25 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferee has existing reserves as follows: General Reserve ₹18 lakh, Capital Reserve ₹5 lakh, Revenue Reserve ₹11 lakh, Profit and Loss Account (credit) ₹9 lakh and Revaluation Reserve ₹4 lakh. A transferor qualifying for pooling has corresponding balances of ₹7 lakh, ₹3 lakh, ₹6 lakh, ₹5 lakh and ₹2 lakh respectively. Share capital issued is exactly equal to the transferor's existing share capital. What will be the closing Profit and Loss Account credit balance?

A transferee has existing reserves as follows: General Reserve ₹18 lakh, Capital Reserve ₹5 lakh, Revenue Reserve ₹11 lakh, Profit and Loss Account (credit) ₹9 lakh and Revaluation Reserve ₹4 lakh. A transferor qualifying for pooling has corresponding balances of ₹7 lakh, ₹3 lakh, ₹6 lakh, ₹5 lakh and ₹2 lakh respectively. Share capital issued is exactly equal to the transferor's existing share capital. What will be the closing Profit and Loss Account credit balance?

1. ₹14 lakh (correct answer)
2. ₹20 lakh
3. ₹13 lakh
4. ₹9 lakh

Answer: A — ₹14 lakh

Explanation. Pooling of interests requires transferor reserves to retain their individual identities and be incorporated in the same form. The transferor's Profit and Loss Account credit balance of ₹5 lakh is therefore added to the transferee's existing credit balance of ₹9 lakh. Since issued share capital equals existing transferor share capital, there is no reserve adjustment. Closing Profit and Loss Account credit balance is ₹9 + ₹5 = ₹14 lakh. Other reserve categories remain separately presented.

Where it goes wrong. Transferring the transferor's Profit and Loss balance to General Reserve or omitting it from the combined reserves.

Authority. AS 14, para 13