When one company acquires the entire business of other firm and if the amount of debentures issued is more than the amount of the net assets taken over, the difference will be:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Treated as value of goodwill and the same shall also be debited while passing the journal entry for the purchase of vendor’s business
When a company takes over a whole business for debentures worth more than the net assets it receives, it has paid extra for something not shown among those assets: the goodwill of the business. Goodwill is an asset received, so it is debited in the purchase entry along with the other assets. Only in the reverse case, when the debentures are worth less than the net assets, is the difference credited to Capital Reserve.
Why the other options are incorrect
Option (1) Treated as capital reserve and the same shall also be credited while passing the journal entry for the purchase of vendor’s business — Incorrect. Capital reserve arises only when the consideration is less than the net assets, the opposite of this case.
Option (3) Treated as value of goodwill and the same shall also be credited while passing the journal entry for the purchase of vendor’s business — Incorrect. The head is right but the side is wrong: goodwill is an asset, so it is debited.
Option (4) Treated as value of capital reserve and the same shall also be debited while passing the journal entry for the purchase of vendor’s business — Incorrect. Both the head and the side are wrong; a capital reserve is a credit item, and it does not arise here.
NCERT (2026-27 edition): |