Accountancy Part AIssue and Redemption of Debentures

Excess value of net assets over purchase consideration at the time of…

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

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Capital reserve

When a company buys a business and the net assets taken over are worth more than the purchase consideration, it has made a gain on a capital transaction. Such a capital profit is not available for dividend, so it is credited to Capital Reserve. In the opposite case (consideration more than net assets) the excess is debited to Goodwill.

Note: The book’s answer key prints “6 (c)” (Vendors’ account) for this item. By the book’s own text, the excess of net assets over the purchase consideration is credited to Capital Reserve, so the answer should be (b); the key line is a misprint.

NCERT (2026-27 edition):
Test your Understanding – II

Extract from the NCERT textbook

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).”