Question

Purchase of goodwill by issue of debenture is

• A. Application of fund
• B. Source of fund
• C. No flow of fund
• D. None of these

Hint:

A quick rule for fund flow analysis: A flow of funds occurs only when there is a 'cross-transaction' between a current item and a non-current item. If the transaction is between two non-current items (like Fixed Asset and Long-term Liability in this case) or two current items, there is no flow of funds.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks to analyze the transaction 'Purchase of goodwill by issue of debentures' from the perspective of a fund flow statement.
Step 2: Key Concept:
A fund flow statement analyzes the changes in the financial position of a company between two balance sheet dates. 'Funds' in this context usually refer to 'working capital' (Current Assets - Current Liabilities). A transaction results in a 'flow of fund' only if it involves one current account and one non-current account.
- Source of fund: A transaction that increases working capital.
- Application of fund: A transaction that decreases working capital.
- No flow of fund: A transaction that does not affect working capital. This happens when a transaction involves two non-current accounts or two current accounts.
Step 3: Detailed Explanation:
Let's analyze the accounts involved in the transaction:
- Purchase of Goodwill: Goodwill is a non-current asset (an intangible fixed asset). An increase in a non-current asset is involved.
- Issue of Debentures: Debentures are a form of long-term borrowing, which is a non-current liability. An increase in a non-current liability is involved.
The journal entry for this transaction would be:
Goodwill A/c Dr.
\quad To Debentures A/c
Since both accounts involved (Goodwill and Debentures) are non-current accounts, there is no impact on the working capital (Current Assets - Current Liabilities). Therefore, this transaction does not result in any flow of funds.
Step 4: Final Answer
The purchase of goodwill by the issue of debentures is a transaction between two non-current accounts and thus results in no flow of fund.