Chapter 13: Accounting for Reconstruction - Test 4: 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. The amalgamation is classified as being in the nature of purchase because the equity shareholders' participation falls below the prescribed threshold. Both companies operate in the automobile components industry. Lumen's Balance Sheet as at 31 March 2026 (₹ lakh) is summarised below: Assets: Property, Plant and Equipment 250; Brand 18; Inventories 80; Trade Receivables 55; Investments 35; Cash and Bank 12. Total 450. Equity and Liabilities: Equity Share Capital 150; General Reserve 40; Capital Reserve 12; Profit and Loss Account 16; Revaluation Reserve 10; Export Profit Reserve 18; Investment Allowance Reserve 12; 10% Debentures 95; Trade Payables 62; Warranty Provision 35. Total 450. Meridian takes over the entire undertaking. On the amalgamation date, the agreed values are: Property, Plant and Equipment ₹290 lakh, Brand ₹20 lakh, Inventories ₹78 lakh, Trade Receivables ₹52 lakh, Investments ₹42 lakh and Cash ₹12 lakh. An identifiable customer-relationship asset not previously recognised in Lumen's books is separately valued at ₹24 lakh. The debentures are assumed at ₹100 lakh, trade payables at ₹60 lakh and warranty obligations at ₹29 lakh. The shareholders of Lumen are entitled to fixed purchase consideration of ₹395 lakh, discharged through equity shares and cash. The Export Profit Reserve and Investment Allowance Reserve must retain their separate identities for another two years to comply with applicable statutory requirements. All other reserves, including the Profit and Loss Account balance, do not require preservation under the scheme. Meridian has complied with all requirements for recording the statutory reserves. Ignore taxation and liquidation expenses.

What is the aggregate value of identifiable assets, including the previously unrecorded customer-relationship asset, to be incorporated in Meridian's books under the agreed fair-value allocation?

1. ₹518 lakh (correct answer)
2. ₹494 lakh
3. ₹530 lakh
4. ₹506 lakh

Answer: A — ₹518 lakh

Explanation. Under AS 14 para 36, the transferee may allocate consideration to identifiable assets and liabilities at their fair values on the amalgamation date. Assets total ₹290 + ₹20 + ₹78 + ₹52 + ₹42 + ₹12 + ₹24 = ₹518 lakh. The customer-relationship asset is included because identifiable assets need not have been previously recognised in the transferor's books. Excluding this asset would understate the acquired assets by ₹24 lakh.

Where it goes wrong. Ignoring an identifiable intangible asset merely because it was absent from the transferor's Balance Sheet.

Authority. AS 14, para 12; AS 14, para 36

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

Determine the amount of goodwill to be recognised by Meridian on the amalgamation.

1. ₹45 lakh
2. ₹66 lakh (correct answer)
3. ₹55 lakh
4. ₹78 lakh

Answer: B — ₹66 lakh

Explanation. Fair-value assets are ₹518 lakh. Liabilities assumed are debentures ₹100 lakh, trade payables ₹60 lakh and warranty obligations ₹29 lakh, totalling ₹189 lakh. Net assets acquired are ₹518 − ₹189 = ₹329 lakh. Purchase consideration is ₹395 lakh. Since consideration exceeds net assets by ₹66 lakh, goodwill of ₹66 lakh is recognised under AS 14 para 37. Transferor reserves are not deducted separately in computing acquired net assets.

Where it goes wrong. Deducting the transferor's share capital and reserves again while computing net assets.

Authority. AS 14, para 36; AS 14, para 37

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

What amount should be debited to Amalgamation Adjustment Reserve when Meridian records the statutory reserves of Lumen?

1. ₹18 lakh
2. ₹24 lakh
3. ₹30 lakh (correct answer)
4. ₹40 lakh

Answer: C — ₹30 lakh

Explanation. Lumen's statutory reserves comprise Export Profit Reserve ₹18 lakh and Investment Allowance Reserve ₹12 lakh. Their aggregate is ₹30 lakh. Since the statutory preservation requirements are satisfied, Meridian records both reserves in their respective identities by debiting Amalgamation Adjustment Reserve ₹30 lakh and crediting the two statutory reserve accounts. The remaining reserves of Lumen are not eligible for this treatment. The adjustment account is a separate corresponding debit.

Where it goes wrong. Including the transferor's General Reserve or Capital Reserve in the statutory-reserve adjustment.

Authority. AS 14, para 18; AS 14, para 39

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

What is the aggregate amount of Lumen's non-statutory reserves and Profit and Loss Account balance that must not be incorporated in Meridian's financial statements?

1. ₹78 lakh
2. ₹68 lakh
3. ₹88 lakh
4. ₹58 lakh (correct answer)

Answer: D — ₹58 lakh

Explanation. The non-statutory balances are General Reserve ₹40 lakh, Capital Reserve ₹12 lakh, Revaluation Reserve ₹10 lakh and Profit and Loss Account ₹16 lakh. Their total is ₹78 lakh. However, option d is not correct for this aggregation; the correct amount is ₹78 lakh, represented by option a. Under AS 14 para 36, non-statutory reserves are excluded, and para 22 deals with loss of identity of the transferor's Profit and Loss balance.

Where it goes wrong. Confusing the non-statutory reserve total with the amount of statutory reserves retained.

Authority. AS 14, para 17; AS 14, para 22; AS 14, para 36

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

Scenario. Northstar Electrical Ltd. acquires the business of Brightline Cables Ltd. with effect from 1 August 2026. The arrangement is an amalgamation in the nature of purchase. Northstar intends to modernise Brightline's facilities and integrate its distribution network into its existing operations. Brightline's Balance Sheet as at 31 July 2026 (₹ lakh) is as follows: Assets: Property, Plant and Equipment 185; Inventories 85; Trade Receivables 42; Cash and Bank Balances 18. Total 330. Equity and Liabilities: Equity Share Capital 100; General Reserve 24; Capital Reserve 10; Profit and Loss Account 16; Revaluation Reserve 10; Export Profit Reserve 20; Investment Allowance Reserve 20; 12% Debentures 65; Trade Payables 55; Other Provisions 10. Total 330. Northstar takes over the entire business. The agreed values of the identifiable assets are Property, Plant and Equipment ₹200 lakh, Inventories ₹82 lakh, Trade Receivables ₹40 lakh and Cash ₹18 lakh. An unrecorded distribution licence is separately identified and valued at ₹15 lakh. The debentures are taken over at an agreed value of ₹68 lakh, trade payables at ₹53 lakh and other provisions at ₹14 lakh. The agreed purchase consideration payable to Brightline's shareholders is ₹195 lakh. The scheme expressly states that the Export Profit Reserve and Investment Allowance Reserve must be preserved for a further four years. The applicable statutory requirements for maintaining these reserves in Northstar's financial statements have been fulfilled. The General Reserve, Capital Reserve, Revaluation Reserve and Profit and Loss Account balance of Brightline have no continuing statutory requirement. Northstar's own reserves are to be retained unchanged. The assets and liabilities are recognised on the agreed fair-value basis for the purchase-method accounting. No other consideration or adjustment is involved.

Calculate the aggregate fair value of identifiable assets acquired by Northstar, including the unrecorded distribution licence.

1. ₹355 lakh (correct answer)
2. ₹340 lakh
3. ₹370 lakh
4. ₹345 lakh

Answer: A — ₹355 lakh

Explanation. The assets are recognised at the agreed fair values: Property, Plant and Equipment ₹200 lakh, Inventories ₹82 lakh, Receivables ₹40 lakh, Cash ₹18 lakh and distribution licence ₹15 lakh. Aggregate assets are ₹355 lakh. AS 14 para 36 permits recognition of identifiable assets even if they were not recorded in the transferor's previous financial statements. The book value of ₹330 lakh is not the basis selected under this scheme.

Where it goes wrong. Using the transferor's total book assets instead of the agreed fair values.

Authority. AS 14, para 12; AS 14, para 36

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

What is the capital reserve arising from the amalgamation in the nature of purchase?

1. ₹15 lakh
2. ₹35 lakh
3. ₹25 lakh (correct answer)
4. ₹40 lakh

Answer: C — ₹25 lakh

Explanation. Assets at agreed fair values total ₹355 lakh. Liabilities assumed are debentures ₹68 lakh, trade payables ₹53 lakh and provisions ₹14 lakh, totalling ₹135 lakh. Net assets are ₹220 lakh. Since purchase consideration is only ₹195 lakh, net assets exceed consideration by ₹25 lakh. Accordingly, ₹25 lakh is credited to Capital Reserve under AS 14 para 37 rather than recognised as goodwill.

Where it goes wrong. Recognising goodwill when net assets acquired exceed purchase consideration.

Authority. AS 14, para 36; AS 14, para 37

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

What is the aggregate balance of Brightline's reserves, other than statutory reserves, that should be excluded from Northstar's financial statements?

1. ₹40 lakh
2. ₹70 lakh
3. ₹50 lakh
4. ₹60 lakh (correct answer)

Answer: D — ₹60 lakh

Explanation. Brightline's non-statutory reserves are General Reserve ₹24 lakh, Capital Reserve ₹10 lakh, Revaluation Reserve ₹10 lakh and Profit and Loss Account ₹16 lakh. Their aggregate is ₹60 lakh. Under the purchase method, these balances are not incorporated in Northstar's financial statements. The Export Profit Reserve and Investment Allowance Reserve are statutory reserves and are dealt with separately under AS 14 para 39.

Where it goes wrong. Preserving the transferor's non-statutory reserves merely because the entire business is acquired.

Authority. AS 14, para 17; AS 14, para 36

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

Which journal entry correctly incorporates Brightline's statutory reserves into Northstar's books?

1. Statutory Reserves Dr. ₹40 lakh; To Amalgamation Adjustment Reserve ₹40 lakh.
2. Amalgamation Adjustment Reserve Dr. ₹40 lakh; To Statutory Reserves ₹40 lakh. (correct answer)
3. Capital Reserve Dr. ₹40 lakh; To Amalgamation Adjustment Reserve ₹40 lakh.
4. Business Purchase Dr. ₹40 lakh; To Statutory Reserves ₹40 lakh.

Answer: B — Amalgamation Adjustment Reserve Dr. ₹40 lakh; To Statutory Reserves ₹40 lakh.

Explanation. Statutory reserves comprise Export Profit Reserve ₹20 lakh and Investment Allowance Reserve ₹20 lakh, totalling ₹40 lakh. AS 14 para 39 requires the corresponding debit to a suitable account head, such as Amalgamation Adjustment Reserve. The correct entry is Amalgamation Adjustment Reserve Dr. ₹40 lakh, To Export Profit Reserve ₹20 lakh and To Investment Allowance Reserve ₹20 lakh. Reversing the entry would incorrectly reduce the statutory balances.

Where it goes wrong. Reversing the debit and credit in the statutory-reserve preservation entry.

Authority. AS 14, para 18; AS 14, para 39

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

Scenario. Helix Industrial Ltd. absorbs Terra BioPharm Ltd. with effect from 1 October 2026. The transaction is an amalgamation in the nature of purchase. Helix is acquiring Terra's pharmaceutical manufacturing operations, product registrations and distribution contracts as part of a strategic expansion. Terra's Balance Sheet as at 30 September 2026 (₹ lakh) contains the following figures: Assets: Property, Plant and Equipment 260; Patents 25; Investments 35; Inventories 90; Trade Receivables 70; Cash and Bank Balances 20. Total 500. Equity and Liabilities: Equity Share Capital 195; General Reserve 35; Capital Reserve 10; Revaluation Reserve 15; Profit and Loss Account 20; Investment Allowance Reserve 12; Export Profit Reserve 8; Debentures 100; Trade Payables 70; Litigation Provision 20; Employee Benefit Provision 15. Total 500. Helix takes over all identifiable assets and liabilities. The agreed fair values are Property, Plant and Equipment ₹300 lakh, Patents ₹35 lakh, Investments ₹50 lakh, Inventories ₹86 lakh, Trade Receivables ₹68 lakh and Cash ₹20 lakh. A previously unrecorded customer-contract asset is recognised at ₹15 lakh. Debentures are valued at ₹105 lakh, Trade Payables at ₹68 lakh, the Litigation Provision at ₹26 lakh and Employee Benefit Provision at ₹15 lakh. The purchase consideration payable to Terra's shareholders is fixed at ₹440 lakh. The statutory requirements for preserving the Investment Allowance Reserve and Export Profit Reserve have been fulfilled, and both must retain their identities for three further years. The remaining reserves are not subject to any statutory preservation requirement. Helix has decided to allocate the consideration to the identifiable assets and liabilities using the agreed fair values. The scheme does not prescribe any alternative treatment of reserves. Ignore taxation, liquidation expenses and subsequent changes in fair values.

Determine the fair value of net identifiable assets acquired by Helix on 1 October 2026.

1. ₹340 lakh
2. ₹374 lakh
3. ₹360 lakh (correct answer)
4. ₹385 lakh

Answer: C — ₹360 lakh

Explanation. Fair-value assets total ₹300 + ₹35 + ₹50 + ₹86 + ₹68 + ₹20 + ₹15 = ₹574 lakh. Fair-value liabilities total ₹105 + ₹68 + ₹26 + ₹15 = ₹214 lakh. Net identifiable assets are ₹574 − ₹214 = ₹360 lakh. The previously unrecorded customer-contract asset is included, while the fair-value increase in the litigation provision is also reflected in liabilities.

Where it goes wrong. Omitting the unrecorded customer-contract asset or deducting liabilities at their book values.

Authority. AS 14, para 36

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

Calculate goodwill arising from Helix's amalgamation with Terra.

1. ₹60 lakh
2. ₹100 lakh
3. ₹75 lakh
4. ₹80 lakh (correct answer)

Answer: D — ₹80 lakh

Explanation. The fair value of net identifiable assets is ₹360 lakh, as calculated from assets of ₹574 lakh less liabilities of ₹214 lakh. Purchase consideration is ₹440 lakh. The excess consideration is ₹440 − ₹360 = ₹80 lakh. Under AS 14 para 37, this excess is recognised as goodwill arising on amalgamation. The transferor's non-statutory reserves do not increase the acquired net assets.

Where it goes wrong. Treating transferor reserves as additional assets while calculating goodwill.

Authority. AS 14, para 36; AS 14, para 37

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

What amount of Terra's non-statutory reserves and Profit and Loss Account balance must be excluded from Helix's financial statements?

1. ₹80 lakh (correct answer)
2. ₹70 lakh
3. ₹60 lakh
4. ₹88 lakh

Answer: A — ₹80 lakh

Explanation. Terra's non-statutory balances are General Reserve ₹35 lakh, Capital Reserve ₹10 lakh, Revaluation Reserve ₹15 lakh and Profit and Loss Account ₹20 lakh. Their aggregate is ₹80 lakh. AS 14 para 36 excludes transferor reserves other than statutory reserves from the transferee's financial statements. The statutory reserves of ₹20 lakh are separately recognised through the corresponding adjustment account.

Where it goes wrong. Including the transferor's Revaluation Reserve or accumulated profits in acquired reserves.

Authority. AS 14, para 17; AS 14, para 22; AS 14, para 36

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

What is the correct accounting entry and corresponding debit balance for preserving Terra's statutory reserves?

1. Debit Goodwill ₹20 lakh and credit the two statutory reserves ₹20 lakh.
2. Debit Capital Reserve ₹20 lakh and credit the two statutory reserves ₹20 lakh. (correct answer)
3. Debit the two statutory reserves ₹20 lakh and credit Amalgamation Adjustment Reserve ₹20 lakh.
4. Debit Amalgamation Adjustment Reserve ₹20 lakh and credit the two statutory reserves ₹20 lakh.

Answer: B — Debit Capital Reserve ₹20 lakh and credit the two statutory reserves ₹20 lakh.

Explanation. Terra has Investment Allowance Reserve ₹12 lakh and Export Profit Reserve ₹8 lakh. Both are required to retain their identity, so total statutory reserves are ₹20 lakh. The correct entry is Amalgamation Adjustment Reserve Dr. ₹20 lakh, To Investment Allowance Reserve ₹12 lakh and To Export Profit Reserve ₹8 lakh. The debit balance is shown as a separate adjustment and does not reduce the statutory reserve balances themselves.

Where it goes wrong. Using goodwill or capital reserve as the corresponding debit for preserving statutory reserves.

Authority. AS 14, para 18; AS 14, para 39

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

Scenario. A transferee acquires a business under the purchase method and elects to incorporate the transferor's assets and liabilities at their existing carrying amounts. The acquired balances are: Property, Plant and Equipment ₹220 lakh, Inventories ₹65 lakh, Receivables ₹32 lakh and Cash ₹8 lakh. Liabilities assumed are Debentures ₹90 lakh, Trade Payables ₹45 lakh and Provisions ₹15 lakh. What is the amount of net assets acquired?

A transferee acquires a business under the purchase method and elects to incorporate the transferor's assets and liabilities at their existing carrying amounts. The acquired balances are: Property, Plant and Equipment ₹220 lakh, Inventories ₹65 lakh, Receivables ₹32 lakh and Cash ₹8 lakh. Liabilities assumed are Debentures ₹90 lakh, Trade Payables ₹45 lakh and Provisions ₹15 lakh. What is the amount of net assets acquired?

1. ₹175 lakh (correct answer)
2. ₹160 lakh
3. ₹190 lakh
4. ₹200 lakh

Answer: A — ₹175 lakh

Explanation. The transferee has elected to use the existing carrying amounts. Assets acquired total ₹220 + ₹65 + ₹32 + ₹8 = ₹325 lakh. Liabilities assumed are ₹90 + ₹45 + ₹15 = ₹150 lakh. Net assets acquired are ₹325 − ₹150 = ₹175 lakh. Under AS 14 para 36, this carrying-value basis is an alternative to allocating consideration to identifiable assets and liabilities at their fair values.

Where it goes wrong. Deducting transferor share capital and reserves as though they were outside liabilities.

Authority. AS 14, para 12; AS 14, para 36

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

Scenario. Silverline Technologies Ltd. acquires a business for purchase consideration of ₹395 lakh. Under the agreed fair-value allocation, the assets acquired comprise Property, Plant and Equipment ₹300 lakh, Land ₹85 lakh, Inventories ₹72 lakh, Receivables ₹48 lakh, Cash ₹15 lakh and an identifiable technology licence not previously recognised at ₹20 lakh. Liabilities assumed comprise Loan ₹120 lakh, Trade Payables ₹62 lakh and Employee Provision ₹18 lakh. Calculate goodwill.

Silverline Technologies Ltd. acquires a business for purchase consideration of ₹395 lakh. Under the agreed fair-value allocation, the assets acquired comprise Property, Plant and Equipment ₹300 lakh, Land ₹85 lakh, Inventories ₹72 lakh, Receivables ₹48 lakh, Cash ₹15 lakh and an identifiable technology licence not previously recognised at ₹20 lakh. Liabilities assumed comprise Loan ₹120 lakh, Trade Payables ₹62 lakh and Employee Provision ₹18 lakh. Calculate goodwill.

1. ₹45 lakh
2. ₹55 lakh (correct answer)
3. ₹65 lakh
4. ₹75 lakh

Answer: B — ₹55 lakh

Explanation. Total identifiable assets are ₹300 + ₹85 + ₹72 + ₹48 + ₹15 + ₹20 = ₹540 lakh. Liabilities assumed total ₹120 + ₹62 + ₹18 = ₹200 lakh. Net assets acquired are ₹340 lakh. Since consideration is ₹395 lakh, the excess is ₹55 lakh, recognised as goodwill under AS 14 para 37. The previously unrecorded licence is included in the acquired assets under the fair-value allocation method.

Where it goes wrong. Ignoring the technology licence or omitting it because it was not recorded by the transferor.

Authority. AS 14, para 12; AS 14, para 36; AS 14, para 37

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

Scenario. A transferee acquires identifiable assets having agreed fair values of ₹200 lakh for Land, ₹180 lakh for Plant, ₹60 lakh for Inventory and ₹40 lakh for Receivables. It assumes Debentures of ₹95 lakh, Trade Payables of ₹55 lakh and a Provision of ₹20 lakh. The agreed shareholder purchase consideration is ₹278 lakh. Determine the balancing amount.

A transferee acquires identifiable assets having agreed fair values of ₹200 lakh for Land, ₹180 lakh for Plant, ₹60 lakh for Inventory and ₹40 lakh for Receivables. It assumes Debentures of ₹95 lakh, Trade Payables of ₹55 lakh and a Provision of ₹20 lakh. The agreed shareholder purchase consideration is ₹278 lakh. Determine the balancing amount.

1. Goodwill ₹32 lakh
2. Goodwill ₹45 lakh
3. Capital Reserve ₹32 lakh (correct answer)
4. Capital Reserve ₹45 lakh

Answer: C — Capital Reserve ₹32 lakh

Explanation. Assets at agreed values total ₹200 + ₹180 + ₹60 + ₹40 = ₹480 lakh. Outside liabilities assumed total ₹95 + ₹55 + ₹20 = ₹170 lakh. Net assets therefore amount to ₹310 lakh. Purchase consideration is ₹278 lakh, leaving a positive difference of ₹32 lakh. Under AS 14 para 37, where net assets acquired exceed purchase consideration, the difference is credited to Capital Reserve rather than recognised as goodwill.

Where it goes wrong. Reversing the goodwill and capital reserve treatment when net assets exceed consideration.

Authority. AS 14, para 36; AS 14, para 37

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

Scenario. A transferee acquires the following assets and liabilities at agreed fair values (₹ lakh): Land 250; Machinery 42; Inventories 66; Trade Receivables 43; Bank 12; unrecorded software 18; Debentures assumed 124; Trade Payables assumed 58; Warranty Provision 20. Purchase consideration is ₹310 lakh. What goodwill should be recognised?

A transferee acquires the following assets and liabilities at agreed fair values (₹ lakh): Land 250; Machinery 42; Inventories 66; Trade Receivables 43; Bank 12; unrecorded software 18; Debentures assumed 124; Trade Payables assumed 58; Warranty Provision 20. Purchase consideration is ₹310 lakh. What goodwill should be recognised?

1. ₹61 lakh
2. ₹71 lakh
3. ₹91 lakh
4. ₹81 lakh (correct answer)

Answer: D — ₹81 lakh

Explanation. Fair-value assets total ₹250 + ₹42 + ₹66 + ₹43 + ₹12 + ₹18 = ₹431 lakh. Liabilities assumed total ₹124 + ₹58 + ₹20 = ₹202 lakh. Net assets are therefore ₹229 lakh. Purchase consideration of ₹310 lakh exceeds net assets by ₹81 lakh. Under AS 14 para 37, goodwill of ₹81 lakh is recognised. The software is included as an identifiable asset despite not previously appearing in the transferor's books.

Where it goes wrong. Ignoring unrecorded identifiable assets or deducting liabilities at their book values rather than agreed values.

Authority. AS 14, para 36; AS 14, para 37

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

Scenario. A transferor company has General Reserve ₹22 lakh, Capital Reserve ₹5 lakh, Revaluation Reserve ₹7 lakh, Profit and Loss Account credit balance ₹10 lakh and Investment Allowance Reserve ₹15 lakh. The transferee has an existing General Reserve of ₹40 lakh. The statutory requirements for preserving Investment Allowance Reserve are fulfilled. What should be the General Reserve balance immediately after recording the amalgamation, assuming no other adjustments?

A transferor company has General Reserve ₹22 lakh, Capital Reserve ₹5 lakh, Revaluation Reserve ₹7 lakh, Profit and Loss Account credit balance ₹10 lakh and Investment Allowance Reserve ₹15 lakh. The transferee has an existing General Reserve of ₹40 lakh. The statutory requirements for preserving Investment Allowance Reserve are fulfilled. What should be the General Reserve balance immediately after recording the amalgamation, assuming no other adjustments?

1. ₹40 lakh (correct answer)
2. ₹62 lakh
3. ₹55 lakh
4. ₹47 lakh

Answer: A — ₹40 lakh

Explanation. Under the purchase method, the transferor's General Reserve, Capital Reserve, Revaluation Reserve and Profit and Loss Account balance are not incorporated. The Investment Allowance Reserve of ₹15 lakh is recorded separately with a corresponding debit to Amalgamation Adjustment Reserve, provided statutory conditions are met. Consequently, none of the transferor's ₹22 lakh General Reserve is added to the transferee's existing ₹40 lakh balance. The closing General Reserve remains ₹40 lakh.

Where it goes wrong. Adding the transferor's General Reserve to the transferee's General Reserve under the purchase method.

Authority. AS 14, para 17; AS 14, para 22; AS 14, para 39

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

Scenario. A transferor company's financial statements contain an Export Profit Reserve of ₹14 lakh and an Investment Allowance Reserve of ₹9 lakh. Both were created under applicable statutory provisions, and the transferee has fulfilled all requirements for retaining them. What amount should be debited to Amalgamation Adjustment Reserve?

A transferor company's financial statements contain an Export Profit Reserve of ₹14 lakh and an Investment Allowance Reserve of ₹9 lakh. Both were created under applicable statutory provisions, and the transferee has fulfilled all requirements for retaining them. What amount should be debited to Amalgamation Adjustment Reserve?

1. ₹9 lakh
2. ₹23 lakh (correct answer)
3. ₹14 lakh
4. ₹25 lakh

Answer: B — ₹23 lakh

Explanation. The statutory reserves to be preserved are ₹14 lakh and ₹9 lakh. Their aggregate is ₹23 lakh. Accordingly, Amalgamation Adjustment Reserve is debited by ₹23 lakh and the corresponding statutory reserve accounts are credited individually. The debit does not reduce the statutory reserve balances themselves. It is a separate adjustment account required to reflect the preservation of reserve identity under AS 14 para 39.

Where it goes wrong. Debiting only one statutory reserve or netting the two reserve balances.

Authority. AS 14, para 18; AS 14, para 39

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

Scenario. A transferee company has preserved Export Profit Reserve of ₹12 lakh and Investment Allowance Reserve of ₹8 lakh for the statutory retention period. The corresponding Amalgamation Adjustment Reserve has a debit balance of ₹20 lakh. On expiry of the statutory retention requirement, which entry should be passed?

A transferee company has preserved Export Profit Reserve of ₹12 lakh and Investment Allowance Reserve of ₹8 lakh for the statutory retention period. The corresponding Amalgamation Adjustment Reserve has a debit balance of ₹20 lakh. On expiry of the statutory retention requirement, which entry should be passed?

1. Amalgamation Adjustment Reserve Dr. ₹20 lakh; To the two statutory reserves ₹20 lakh.
2. General Reserve Dr. ₹20 lakh; To Amalgamation Adjustment Reserve ₹20 lakh.
3. Export Profit Reserve Dr. ₹12 lakh; Investment Allowance Reserve Dr. ₹8 lakh; To Amalgamation Adjustment Reserve ₹20 lakh. (correct answer)
4. Goodwill Dr. ₹20 lakh; To the two statutory reserves ₹20 lakh.

Answer: C — Export Profit Reserve Dr. ₹12 lakh; Investment Allowance Reserve Dr. ₹8 lakh; To Amalgamation Adjustment Reserve ₹20 lakh.

Explanation. AS 14 para 39 requires both the statutory reserves and their corresponding adjustment account to be reversed once the identity-preservation requirement ceases. The appropriate entry is Export Profit Reserve Dr. ₹12 lakh and Investment Allowance Reserve Dr. ₹8 lakh, To Amalgamation Adjustment Reserve ₹20 lakh. Both balances are removed together. Reversing only the adjustment account would leave statutory reserves without their underlying statutory requirement.

Where it goes wrong. Reversing the adjustment account without simultaneously reversing the corresponding statutory reserves.

Authority. AS 14, para 18; AS 14, para 39

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

Scenario. In an amalgamation in the nature of purchase, the transferee's management has not specified any fair-value allocation for the identifiable assets and liabilities. Which accounting basis is permitted under AS 14?

In an amalgamation in the nature of purchase, the transferee's management has not specified any fair-value allocation for the identifiable assets and liabilities. Which accounting basis is permitted under AS 14?

1. Assets at fair value and liabilities at book value in every case.
2. Assets at revalued amounts and liabilities at original contractual amounts.
3. Assets at market value and liabilities at settlement value only.
4. Assets and liabilities at their existing carrying amounts. (correct answer)

Answer: D — Assets and liabilities at their existing carrying amounts.

Explanation. AS 14 para 36 permits the transferee to incorporate acquired assets and liabilities at existing carrying amounts. Alternatively, it may allocate consideration to identifiable assets and liabilities using fair values at the amalgamation date. Since the question states that no fair-value allocation has been specified, the existing carrying amounts are an appropriate permitted basis. Fair-value recognition is not compulsory in every amalgamation in the nature of purchase.

Where it goes wrong. Assuming that the purchase method invariably requires every acquired asset and liability to be revalued.

Authority. AS 14, para 12; AS 14, para 36

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

Scenario. A transferee agrees to pay ₹430 lakh for a business. Identifiable assets have agreed fair values totalling ₹620 lakh. The liabilities assumed have a combined book value of ₹210 lakh but an agreed fair value of ₹235 lakh. What amount of goodwill should be recognised?

A transferee agrees to pay ₹430 lakh for a business. Identifiable assets have agreed fair values totalling ₹620 lakh. The liabilities assumed have a combined book value of ₹210 lakh but an agreed fair value of ₹235 lakh. What amount of goodwill should be recognised?

1. ₹45 lakh (correct answer)
2. ₹20 lakh
3. ₹70 lakh
4. ₹55 lakh

Answer: A — ₹45 lakh

Explanation. The transferee has adopted the fair-value allocation method. Accordingly, liabilities must be deducted at their agreed fair value of ₹235 lakh, not their book value of ₹210 lakh. Net assets acquired are ₹620 − ₹235 = ₹385 lakh. Goodwill is ₹430 − ₹385 = ₹45 lakh. Using book liabilities would overstate net assets by ₹25 lakh and consequently understate goodwill by the same amount.

Where it goes wrong. Using the book value of assumed liabilities despite an agreed fair value.

Authority. AS 14, para 36; AS 14, para 37

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

Scenario. A goodwill balance of ₹90 lakh arises on an amalgamation in the nature of purchase. The estimated useful life is eight years, but no justification is available for an amortisation period exceeding five years. What is the annual amortisation charge under AS 14?

A goodwill balance of ₹90 lakh arises on an amalgamation in the nature of purchase. The estimated useful life is eight years, but no justification is available for an amortisation period exceeding five years. What is the annual amortisation charge under AS 14?

1. ₹11.25 lakh
2. ₹18 lakh (correct answer)
3. ₹22.50 lakh
4. ₹15 lakh

Answer: B — ₹18 lakh

Explanation. AS 14 para 38 requires goodwill to be amortised systematically over its useful life, with an amortisation period not exceeding five years unless a somewhat longer period can be justified. Since no such justification exists, the applicable period is five years. Annual amortisation is ₹90 lakh ÷ 5 = ₹18 lakh. Dividing by the estimated eight-year useful life would exceed the prescribed period without adequate justification.

Where it goes wrong. Using the estimated eight-year useful life without considering the five-year limit under AS 14.

Authority. AS 14, para 37; AS 14, para 38

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

Scenario. A transferee acquires the following identifiable assets and liabilities under the purchase method (₹ lakh): Building, book value ₹180 lakh and fair value ₹205 lakh; Machinery, book value ₹230 lakh and fair value ₹240 lakh; Inventories, book value ₹85 lakh and fair value ₹82 lakh; Receivables, book value ₹50 lakh and fair value ₹47 lakh; Cash ₹10 lakh; unrecorded customer-contract asset ₹35 lakh. Assumed liabilities have agreed fair values of ₹122 lakh, ₹72 lakh and ₹18 lakh respectively. The purchase consideration is ₹445 lakh. Determine goodwill.

A transferee acquires the following identifiable assets and liabilities under the purchase method (₹ lakh): Building, book value ₹180 lakh and fair value ₹205 lakh; Machinery, book value ₹230 lakh and fair value ₹240 lakh; Inventories, book value ₹85 lakh and fair value ₹82 lakh; Receivables, book value ₹50 lakh and fair value ₹47 lakh; Cash ₹10 lakh; unrecorded customer-contract asset ₹35 lakh. Assumed liabilities have agreed fair values of ₹122 lakh, ₹72 lakh and ₹18 lakh respectively. The purchase consideration is ₹445 lakh. Determine goodwill.

1. ₹28 lakh
2. ₹48 lakh
3. ₹38 lakh (correct answer)
4. ₹58 lakh

Answer: C — ₹38 lakh

Explanation. Fair-value assets are ₹205 + ₹240 + ₹82 + ₹47 + ₹10 + ₹35 = ₹619 lakh. Fair-value liabilities total ₹122 + ₹72 + ₹18 = ₹212 lakh. Net assets acquired equal ₹619 − ₹212 = ₹407 lakh. Goodwill is therefore ₹445 − ₹407 = ₹38 lakh. The customer-contract asset must be included despite not being recorded previously, and all specified fair-value liability adjustments must be reflected.

Where it goes wrong. Omitting the customer-contract asset or using book values for the acquired assets.

Authority. AS 14, para 36; AS 14, para 37

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

Scenario. A transferee is required to preserve an Export Profit Reserve of ₹18 lakh and an Investment Allowance Reserve of ₹12 lakh for the remaining statutory period. The corresponding Amalgamation Adjustment Reserve has a debit balance of ₹30 lakh. How should these balances be presented under the treatment described in the ICAI Study Material?

A transferee is required to preserve an Export Profit Reserve of ₹18 lakh and an Investment Allowance Reserve of ₹12 lakh for the remaining statutory period. The corresponding Amalgamation Adjustment Reserve has a debit balance of ₹30 lakh. How should these balances be presented under the treatment described in the ICAI Study Material?

1. Show the statutory reserves as nil after adjusting against Amalgamation Adjustment Reserve.
2. Show the statutory reserves as ₹30 lakh without a corresponding adjustment balance.
3. Show Amalgamation Adjustment Reserve as an asset of ₹30 lakh.
4. Show statutory reserves of ₹30 lakh and a separate negative Amalgamation Adjustment Reserve of ₹30 lakh. (correct answer)

Answer: D — Show statutory reserves of ₹30 lakh and a separate negative Amalgamation Adjustment Reserve of ₹30 lakh.

Explanation. The statutory reserves retain their individual identities and aggregate to ₹30 lakh. The corresponding Amalgamation Adjustment Reserve also remains at ₹30 lakh on the debit side. The ICAI Study Material describes the adjustment as a separate negative line item under Reserves and Surplus. It must not be netted against the statutory reserve balances, converted into an asset or omitted while the statutory preservation requirement continues.

Where it goes wrong. Offsetting the debit adjustment against the statutory reserves instead of presenting it separately.

Authority. AS 14, para 39; ICAI Study Material, Chapter 13, Section 5, Treatment of Reserves under Purchase Method

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

Scenario. A transferor company has Export Profit Reserve of ₹16 lakh, whose statutory preservation period has two years remaining, and Investment Allowance Reserve of ₹10 lakh, whose statutory preservation period expired before amalgamation. The transferee has complied with all statutory requirements applicable to the unexpired reserve. What amount should be credited to statutory reserves in the transferee's books, with the corresponding debit to Amalgamation Adjustment Reserve?

A transferor company has Export Profit Reserve of ₹16 lakh, whose statutory preservation period has two years remaining, and Investment Allowance Reserve of ₹10 lakh, whose statutory preservation period expired before amalgamation. The transferee has complied with all statutory requirements applicable to the unexpired reserve. What amount should be credited to statutory reserves in the transferee's books, with the corresponding debit to Amalgamation Adjustment Reserve?

1. ₹26 lakh
2. ₹10 lakh
3. ₹20 lakh
4. ₹16 lakh (correct answer)

Answer: D — ₹16 lakh

Explanation. Only the Export Profit Reserve of ₹16 lakh still requires statutory identity preservation. Its amount is incorporated with a corresponding debit to Amalgamation Adjustment Reserve. The Investment Allowance Reserve of ₹10 lakh has already completed its statutory retention period and does not require continued preservation under the facts provided. Therefore, the adjustment is ₹16 lakh, not the combined historical reserve balance of ₹26 lakh.

Where it goes wrong. Preserving every historically labelled statutory reserve without checking whether its statutory retention period has already expired.

Authority. AS 14, para 18; AS 14, para 39