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?

Goodwill of ₹70,000

The correct answer is option 2- Goodwill of ₹70,000.

Machine = ₹4,80,000
Liabilities = ₹3,00,000
Purchase consideration = Machine - Liabilities
                                  = 4,80,000 - 3,00,000
                                  = 1,80,000

As per the purchase agreement, ₹50,000 was paid in cash and balance by the issue of 2000 shares of ₹100 each.
Value of shares issued = 2,000 x 100
                                 = 2,00,000

Total value paid = 2,00,000 + 50,000
                        = 2,50,000

Balance on the assets side will be less than purchase consideration so balance will be goodwill.

Goodwill = 2,50,000 - 1,80,000
             = 70,000