Question

Excess value of net assets over purchase consideration at the time of purchase of business is

• A. Credited to the Capital Reserve.
• B. Debited to the Goodwill Account.
• C. Credited to the General Reserve Account.
• D. Credited to the Vendor's Account.

Hint:

To remember this easily:
• Paying More = Buying Reputation (Goodwill - Debit).
• Paying Less = Making a Profit (Capital Reserve - Credit).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
When one company acquires another business, we compare the Net Assets (Total Assets \( - \) External Liabilities) with the Purchase Consideration (the price agreed upon for the takeover).
Step 2: Detailed Explanation:
There are two scenarios in business acquisition accounting:
1. Bargain Purchase: If Net Assets \(>\) Purchase Consideration, the buyer has acquired more value than they paid for. This surplus is a capital gain and is credited to the Capital Reserve Account.
2. Paying for Reputation: If Purchase Consideration \(>\) Net Assets, the buyer is paying extra for the brand name or future potential. This excess payment is debited to the Goodwill Account.
Step 3: Final Answer:
Since the question specifies the excess of net assets over purchase consideration, it is a capital gain and must be credited to the Capital Reserve.
Therefore, the correct option is (a).