Steel and Company purchased a machine from Safe Machine Limited for Rs. 4,80,000 and took over its liabilities of Rs. 3,00,000. As per the purchase agreement, Rs. 50,000 was paid in cash and balance by the issue of 2000 shares of Rs.100 each. What will be the amount of goodwill/capital reserve?
Steel and Company purchased a machine from Safe Machine Limited for Rs. 4,80,000 and took over its liabilities of Rs. 3,00,000. As per the purchase agreement, Rs. 50,000 was paid in cash and balance by the issue of 2000 shares of Rs.100 each. What will be the amount of goodwill/capital reserve?
Solution
Purchase Consideration represents what Steel and Company is paying:
Cash paid = Rs. 50,000
Shares issued = 2,000 × Rs. 100 = Rs. 2,00,000
Total Purchase Consideration = Rs. 50,000 + Rs. 2,00,000 = Rs. 2,50,000
Net Assets Acquired represents what Steel and Company is receiving:
Assets acquired (Machine) = Rs. 4,80,000
Less: Liabilities taken over = Rs. 3,00,000
Net Assets = Rs. 1,80,000
Comparison:
Purchase Consideration paid (Rs. 2,50,000) > Net Assets received (Rs. 1,80,000)
When purchase consideration exceeds net assets, the difference represents Goodwill.
Goodwill = Rs. 2,50,000 - Rs. 1,80,000 = Rs. 70,000
(If purchase consideration were less than net assets, it would have been Capital Reserve instead)
Answer: Option 2 - Goodwill of ₹ 70,000
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