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

To solve the problem, we need to determine how the difference is treated when the amount of debentures issued by a company is more than the net assets taken over.

1. Understanding the Scenario:
When a company issues debentures to acquire assets (e.g., during a business purchase), the amount of debentures issued represents the purchase consideration. Net assets taken over are calculated as the total assets minus total liabilities acquired. If the amount of debentures issued exceeds the net assets taken over, this difference indicates an excess payment over the fair value of the net assets.

2. Identifying the Treatment of the Difference:
In accounting, when the purchase consideration (debentures issued) is greater than the net assets taken over, the difference is treated as 'Goodwill'. Goodwill represents the premium paid for factors like brand value, customer base, or other intangible benefits not reflected in the net assets' book value.

Here, since the amount of debentures issued is more than the net assets, the difference is:

\( \text{Difference} = \text{Amount of Debentures Issued} - \text{Net Assets Taken Over} \)
This difference is recorded as Goodwill in the books of the company.

Final Answer:
The difference will be treated as Goodwill.