Question

If the amount of debentures issued is more than the amount of the net assets taken over by a company, the difference will be treated as :

• A. Capital Reserve
• B. Goodwill
• C. Purchase Consideration
• D. General Reserve

Hint:

In business acquisition: - If Purchase Consideration $>$ Net Assets, the difference is Goodwill (Dr.). - If Purchase Consideration $<$ Net Assets, the difference is Capital Reserve (Gain on Bargain Purchase) (Cr.).

Answer 1

The Correct Option is B

Step 1: Understand the Scenario:
A company acquires net assets (Assets - Liabilities) and issues debentures as payment (Purchase Consideration, PC).
Given: Amount of Debentures Issued (PC) $>$ Net Assets Taken Over.
Step 2: Determine the Treatment of Excess Payment:
When the Purchase Consideration (PC) paid for a business/assets is greater than the value of Net Assets acquired, the excess amount represents payment for the intangible value (reputation, brand, etc.) of the acquired entity.
Excess Payment (PC - Net Assets) is recorded as Goodwill.
Conclusion:
The difference, where the debentures issued (PC) exceed the net assets, is treated as Goodwill.