Steel and Company purchased a machine from Safe Machine Limited for ₹4,80,000 and took over its liabilities of ₹3,00,000. As per the purchase agreement, ₹50,000 was paid in cash and balance by the issue of 2000 shares of ₹100 each. What will be the amount of goodwill/capital reserve?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Goodwill of ₹70,000
Compare what the company paid with the net assets it received. If it paid more than the net assets are worth, the excess is goodwill; if it paid less, the shortfall is a capital reserve.
Net assets taken over = ₹4,80,000 − ₹3,00,000 = ₹1,80,000
Shares issued = 2,000 × ₹100 = ₹2,00,000
Purchase consideration = ₹50,000 + ₹2,00,000 = ₹2,50,000
Goodwill = ₹2,50,000 − ₹1,80,000 = ₹70,000
The liabilities taken over must be deducted from the machine’s value; ignoring them would show a capital reserve, as if the company had paid less than it received.
NCERT (2026-27 edition):
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