Accountancy Part AIssue and Redemption of Debentures

If the consideration for issue of Debentures is less than the amount…

If the consideration for issue of Debentures is less than the amount of debentures issued, then the difference is :

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Debited to Goodwill Account

When a business is bought and debentures are issued as purchase consideration, the net assets received are the “consideration” for the debentures. If these are less than the debentures issued, the company has paid extra for the business, and the excess is goodwill, debited to Goodwill Account.

Option (1) Credited to Goodwill Account — Incorrect. Goodwill is an asset; it is debited, not credited.

Option (2) Credited to Capital Reserve Account — Incorrect. Capital Reserve is credited in the opposite case, when the net assets exceed the debentures issued.

Option (4) Debited to Capital Reserve Account — Incorrect. Capital Reserve is not debited for this difference.

NCERT (2026-27 edition):
Issue of Debentures for Consideration other than Cash – “… In case of the whole business being taken over if the amount of debentures issued is more than the amount of the net assets taken over, the difference (excess) will be treated as value of goodwill and the same shall also be debited while passing the journal entry for the purchase of vender’s business (see Illustration 11). But if it is the other way round, i.e., the value of debentures is less than the value of the net assets taken over the difference will be credited to capital Reserve accounts (See Illustration 12).”