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Advanced Accounting
Test - 9

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 Test-9 (Notes Mcq)
Other Accounting Standards

Q.1 A manufacturing company, Zephyr Industries, receives a government grant for

implementing eco-friendly practices in its production facilities. The grant, subject to
specific conditions, is anticipated to be received next year. As per Accounting Standard 12
(AS 12), which of the following is not covered under this standard?

1. Accounting treatment for the government grant received in the form of duty drawbacks
or cash incentives.

2. Disclosure requirements for government grants related to specific fixed assets and
revenue, and those resembling promoters' contributions.

3. Handling of government assistance in forms other than government grants, like subsidies
or soft loans.

4. Accounting for government participation in the ownership of the enterprise.

Ans. (4) Accounting for government participation in the ownership of the enterprise.

Reason:

AS 12 - Accounting for Government Grants primarily focuses on the accounting treatment of

grants received by enterprises, their presentation in financial statements, and the
appropriate method of accounting for such grants. However, it specifically excludes the
treatment of government participation in the ownership of the enterprise.

Options 1, 2, and 3 reflect aspects covered by AS 12, including the treatment of various
types of government grants, their conditions, and the necessary accounting treatments. On
the other hand, option 4, accounting for government participation in the ownership of the
enterprise, is not within the scope of AS 12. This standard does not address the accounting
aspects related to government ownership in an enterprise.

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Q.2 X Corporation applies for a grant from the local authority for a social cause, subject to
certain conditions. There is a reasonable assurance that X Corporation will receive the
grant in time. However, after applying, there arises a possibility that X Corporation may
not meet all the conditions tied to the grant. In this scenario, how should X Corporation
account for the grant in its books?

1. Recognize the grant as income in anticipation of meeting the conditions, regardless of the
uncertainty surrounding compliance.

2. Delay recognition of the grant until all conditions are met, even if there is a reasonable
assurance of receiving the grant in time.

3. Recognize a portion of the grant income that aligns with the conditions X Corporation is
confident about meeting, deferring the rest until meeting all conditions.

4. Recognize the entire grant as income once it is received, irrespective of the conditions
met or unmet at that time.

Ans. (2) Delay recognition of the grant until all conditions are met, even if there is a
reasonable assurance of receiving the grant in time.

Reason:

According to Accounting Standard 12 (AS 12) - Accounting for Government Grants,

recognition of grants is contingent upon certain conditions. Even though there's a
reasonable assurance of receiving the grant, if there's uncertainty about meeting all the
conditions, the grant should not be recognized until there is reasonable assurance of
fulfilling all attached conditions.

Option 2 accurately aligns with this accounting principle. It indicates that X Corporation
should delay the recognition of the grant income until all the conditions attached to the
grant are met. This approach ensures compliance with AS 12, reflecting cautious and
accurate recognition of income, considering the uncertainty surrounding the fulfillment of
all conditions despite the reasonable assurance of receiving the grant.

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Q.3 X Academy, seeking to establish a school in locality A, applies for land grant from the
State authority. The authority grants land valued at Rs.20 crore for school construction
but offers it to X Academy at a nominal cost of Rs.50 lakhs, covering registration expenses.
The grant is subject to the condition that 20% of the school seats must be reserved for
free education to underprivileged children. X Academy has reasonable assurance that it
can fulfill this condition. How should X Academy account for the land granted by the State
authority?

1. Recognize the land at its market value of Rs.20 crore to accurately reflect the economic
benefit received, regardless of the nominal cost.

2. Record the land at the nominal cost of Rs.50 lakhs as it represents the amount paid by X
Academy for the land acquisition.

3. Recognize the land at Rs.50 lakhs but separately disclose the market value of Rs.20 crore
in the financial statements.

4. Defer recognition of the land until the condition of reserving 20% of seats for
underprivileged children is met, regardless of the nominal cost.

Ans. (2) Record the land at the nominal cost of Rs.50 lakhs as it represents the amount
paid by X Academy for the land acquisition.

Reason:

According to Accounting Standard 12 (AS 12) - Accounting for Government Grants, the land
should be recognized at the acquisition cost when the grant is received at a nominal or
concessional rate, even if its market value is significantly higher.

Option 2 aligns with this accounting principle. X Academy should recognize the land at the
nominal cost of Rs.50 lakhs, representing the amount actually paid for the land acquisition,
despite the market value being significantly higher. AS 12 requires the grant to be
recognized at the nominal cost when it is provided at a concessional rate, ensuring a
conservative approach in recognizing the economic benefit received through the grant.

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Q.4 Zeta Ltd. purchased a fixed asset for Rs.50 lakhs, with an estimated useful life of 5
years and a salvage value of Rs.5,00,000. Concurrently, the government granted Zeta Ltd.
Rs.10 lakhs as a grant for the asset. The company treats the grant as deferred income.
Based on the given journal entries for the first two years, how should the deferred
government grant be accounted for?

1. The entire deferred government grant of Rs.10 lakhs should be recognized in the Profit &
Loss Account in the first year itself.

2. Proportionate recognition of the deferred government grant of Rs.2 lakhs each year in the
Profit & Loss Account.

3. Recognition of the entire deferred government grant of Rs.10 lakhs in the first year in the
Fixed Assets Account.

4. No recognition of the deferred government grant until the useful life of the asset ends.

Ans. (2) Proportionate recognition of the deferred government grant of Rs.2 lakhs each
year in the Profit & Loss Account.

Reason:

The treatment of the government grant as deferred income implies its recognition over the
useful life of the asset. The journal entries provided illustrate the process of recognizing the
grant proportionately over the asset's useful life.

Option 2 aligns with this approach. The entries made in the first two years allocate a
proportionate amount of the deferred government grant (Rs.2 lakhs) to the Profit & Loss
Account each year. This method ensures that the grant is recognized in the income
statement over the useful life of the asset, reflecting the economic benefit received from
the grant over time, in line with the concept of matching expenses (in the form of
depreciation) and income (in the form of the grant) over the asset's useful life.

Q.5 Top & Top Limited, operating in a designated backward area, received a subsidy of
20% amounting to Rs.10 crore from the Government of India on its total investment of

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Rs.50 crore in capital assets. The company aims to treat this subsidy as a revenue item to
offset its losses in the profit and loss account for the year ended March 31, 20X2.
According to the relevant Accounting Standard, is this treatment justified?

1. Yes, the subsidy can be recognized as revenue since it directly reduces the company's
losses for the accounting period, regardless of its nature.

2. No, the subsidy should be treated as a capital reserve since it is a promoters' contribution,
not related to specific fixed assets or revenue.

3. Recognition of the subsidy as revenue is appropriate since it serves as an incentive

provided by the government without any associated costs for the company.

4. The subsidy should be recognized as deferred income since it is received as an incentive

and can be distributed as dividend according to the Accounting Standard.

Ans. (2) No, the subsidy should be treated as a capital reserve since it is a promoters'
contribution, not related to specific fixed assets or revenue.

Reason:

According to Accounting Standard 12 (AS 12) - Accounting for Government Grants, grants
provided as promoters' contributions, not specifically related to particular fixed assets or
revenue, are treated as capital reserve. This treatment is outlined in paragraph 10 of AS 12.

Option 2 correctly aligns with this principle. The subsidy received by Top & Top Limited is of
the nature of a promoters' contribution, linked to the total investment and not tied to any
particular asset or revenue. Therefore, it should be recognized as a capital reserve and
cannot be treated as revenue to offset losses in the profit and loss account. The treatment
sought by the company to recognize it as revenue is not justified per the AS 12 guidelines.

Q.6 On April 1, 20X1, XYZ Ltd. received a Government grant of Rs.300 lakhs for the
acquisition of machinery costing Rs.1,500 lakhs. The grant was credited to the cost of the
asset. The machinery has a life of 5 years and is depreciated at 20% on the Written Down
Value (WDV) basis. Due to non-fulfillment of certain conditions, the company had to

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refund the grant in May 20X4, having not charged any depreciation for the year 20X4.
How should the refund of the grant be dealt with in the books of XYZ Ltd.?

1. Record the refund of the grant by reducing the deferred income balance by Rs.300 lakhs
without adjusting the book value of the asset.

2. Increase the book value of the asset by Rs.300 lakhs without any adjustment in the
deferred income balance.

3. Increase the book value of the asset by Rs.300 lakhs and provide prospective depreciation
on the revised book value over the residual useful life of the asset.

4. Reduce the book value of the asset by Rs.300 lakhs and adjust the depreciation for the
year 20X4 accordingly.

Ans. (3) Increase the book value of the asset by Rs.300 lakhs and provide prospective
depreciation on the revised book value over the residual useful life of the asset.

Reason:

According to Accounting Standard 12 (AS 12) - Accounting for Government Grants, when a
grant related to a specific fixed asset needs to be refunded due to non-fulfillment of
conditions, it should be accounted for by increasing the book value of the asset or reducing
the deferred income balance, as appropriate, by the refundable amount.

Option 3 aligns with this principle. The refund of the grant is recorded by increasing the
book value of the asset by Rs.300 lakhs. Subsequently, prospective depreciation is provided
on the revised book value over the residual useful life of the asset. This approach ensures
accurate reflection of the revised value of the asset due to the grant refund and adjusts
depreciation in line with the updated book value.

Q.7 RST Ltd. recorded fixed assets initially valued at Rs.40 lakhs, with a grant of Rs.16
lakhs, totaling Rs.24 lakhs in the books. The assets are depreciated at Rs.4 lakhs per year
over 4 years. What would be the value of the fixed assets after two years but before the
refund of the grant, following the first alternative?

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1. Rs.32 lakhs

2. Rs.20 lakhs

3. Rs.16 lakhs

4. Rs.8 lakhs

Ans. (3) Rs.16 lakhs

Reason:

The fixed assets were initially recorded at Rs.24 lakhs (Rs.40 lakhs - Rs.16 lakhs). With
depreciation at Rs.4 lakhs per year over 2 years, the accumulated depreciation would be
Rs.8 lakhs (Rs.4 lakhs/year * 2 years).

The value of fixed assets after two years but before the refund of the grant is calculated by
subtracting the accumulated depreciation from the initial value of fixed assets:

Initial value of fixed assets - Accumulated depreciation = Rs.24 lakhs - Rs.8 lakhs = Rs.16
lakhs.

Therefore, the value of the fixed assets after two years but before the refund of the grant,
following the first alternative, would be Rs.16 lakhs.

Q.8 Jade Corporation received a total grant of Rs.90 lakhs. They recognized Rs.18 lakhs per
year as income for the first 3 years, summing up to Rs.54 lakhs. What would be the
remaining amount classified as deferred income?

1. Rs.90 lakhs

2. Rs.18 lakhs

3. Rs.36 lakhs

4. Rs.72 lakhs

Ans. (3) Rs.36 lakhs

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Reason:

The total grant received by Jade Corporation was Rs.90 lakhs. Over the first 3 years, they
recognized Rs.18 lakhs per year, totaling Rs.54 lakhs. To find the remaining deferred income:

Total grant received - Grant recognized as income = Remaining deferred income

Rs.90 lakhs - Rs.54 lakhs = Rs.36 lakhs

Therefore, the remaining amount classified as deferred income after recognizing Rs.18 lakhs
per year for the first 3 years would be Rs.36 lakhs.

Q.9 PQR Ltd. received a grant of Rs.16 lakhs credited to the Fixed Assets Account. After
two years of depreciation, the value of fixed assets was Rs.16 lakhs. Upon refund of the
grant, the fixed assets' value increased to Rs.32 lakhs. The company will charge
depreciation of Rs.12 lakhs per annum for the remaining two years. What is the correct
reason for charging this depreciation?

1. The depreciation of Rs.12 lakhs per annum is based on the increased book value of the
assets post-refund, without considering the impact of the initial grant on the asset's value.

2. The depreciation of Rs.12 lakhs per annum is based on the initial cost of the asset before
the grant, considering the refund's impact on the asset's book value for the remaining useful
life.

3. The depreciation of Rs.12 lakhs per annum is derived from the revised book value of the
asset post-refund, spread over the remaining useful life of two years.

4. No depreciation is charged for the remaining two years as the grant refund has already
impacted the asset's value.

Ans. (3) The depreciation of Rs.12 lakhs per annum is derived from the revised book value
of the asset post-refund, spread over the remaining useful life of two years.

Reason:

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The refund of the grant led to an increase in the book value of the fixed assets from Rs.16
lakhs to Rs.32 lakhs. Since the remaining useful life of the assets is two years, depreciation
of Rs.12 lakhs per annum is applied, calculated from the revised book value of Rs.32 lakhs
over the remaining useful life of the assets. This method aligns with the principle of charging
depreciation on the revised book value of the assets after any adjustments or refunds
impacting their value.

Q.10 GreenSprout Ltd. received a subsidy of Rs.100 lakhs from the Central Government for
establishing a unit in a backward area, which is in the nature of promoters' contribution.
According to AS 12 - 'Accounting for Government Grants', how should this subsidy be
treated in the accounts?

1. Recognize the subsidy as deferred income to be spread over the useful life of the assets
acquired with it.

2. Credit the subsidy to revenue as it directly offsets the initial investment for the new unit.

3. Treat the subsidy as a capital reserve since it is a promoters' contribution, not linked to
specific fixed assets or revenue.

4. Allocate the subsidy as an extraordinary gain in the income statement for the current
financial year.

Ans. (3) Treat the subsidy as a capital reserve since it is a promoters' contribution, not
linked to specific fixed assets or revenue.

Reason:

According to AS 12 - 'Accounting for Government Grants', grants categorized as promoters'

contributions, associated with the total investment or capital outlay of an enterprise,
without any repayment expected, are considered as capital reserves.

Option 3 aligns with this principle. The subsidy received by Green Sprout Ltd. for
establishing a unit in a backward area is not related to any particular fixed asset or revenue.

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Therefore, as per AS 12, the subsidy of Rs.100 lakhs should be credited to the capital
reserve, as it cannot be distributed as dividends nor considered as deferred income.

Q.11 In the context of amalgamation accounting, which statement regarding the

treatment of the Profit and Loss Account balances in the financial statements is accurate?

1. In the case of an 'amalgamation in the nature of merger,' the Profit and Loss Account
balances of both the transferor and transferee companies are combined or transferred to
the General Reserve.

2. In the case of an 'amalgamation in the nature of merger,' the Profit and Loss Account
balances of the transferor company lose their identity.

3. In the case of an 'amalgamation in the nature of purchase,' the Profit and Loss Account
balances of the transferor company are transferred to the General Reserve.

4. In the case of an 'amalgamation in the nature of purchase,' the Profit and Loss Account
balances of the transferor company, whether debit or credit, lose their identity.

Ans. (1) In the case of an 'amalgamation in the nature of merger,' the Profit and Loss
Account balances of both the transferor and transferee companies are combined or
transferred to the General Reserve.

Explanation:

In an 'amalgamation in the nature of merger,' the Profit and Loss Account balance of the
transferor company maintains its identity and is aggregated with the corresponding balance
in the transferee company's financial statements. Alternatively, it might be transferred to
the General Reserve, if any, preserving its identity in the amalgamated entity's accounts.

In contrast, in an 'amalgamation in the nature of purchase,' the Profit and Loss Account
balance of the transferor company, regardless of being a debit or credit balance, loses its
identity and is not maintained as a separate entity in the transferee company's financial
statements.

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Q.12 In the context of an amalgamation in the nature of purchase and the preservation of
reserves' identity, which of the following statements is accurate regarding 'statutory
reserves' as per the Income-tax Act, 1961?

1. Statutory reserves lose their identity in the financial statements of the transferee
company, regardless of compliance with relevant statutes.

2. Statutory reserves always retain their original form in the financial statements of the
transferee company.

3. Statutory reserves maintain their identity in the financial statements of the transferee
company only if compliance with relevant statutes is ensured.

4. Statutory reserves are absorbed into the general reserves of the transferee company,
irrespective of statutory requirements.

Ans. (3) Statutory reserves maintain their identity in the financial statements of the
transferee company only if compliance with relevant statutes is ensured.

Explanation:

In an amalgamation in the nature of purchase, reserves typically lose their original identity;
however, an exception exists for 'statutory reserves.' These reserves retain their original
form in the financial statements of the transferee company, but this preservation of identity
is conditional upon compliance with the relevant statutes. Therefore, the identity of
statutory reserves is maintained in the transferee company's financial statements only if
adherence to the specific statutory requirements is met.

Q.13 When applying the purchase method in an amalgamation, the transferee company
accounts for the amalgamation by:

1. Incorporating assets and liabilities at their original carrying amounts.

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2. Allocating consideration based on the fair values of individual identifiable assets and
liabilities of the transferor company at the date of amalgamation, even those not recorded
in the transferor's financial statements.

3. Incorporating only the assets and liabilities recorded in the financial statements of the
transferor company at their original carrying amounts.

4. Allocating consideration based on the fair values of recorded assets and liabilities of the
transferor company, excluding any unrecorded assets and liabilities.

Answer: (2) Allocating consideration based on the fair values of individual identifiable
assets and liabilities of the transferor company at the date of amalgamation, even those
not recorded in the transferor's financial statements.

Explanation:

Under the purchase method, the transferee company has two approaches: either
incorporating assets and liabilities at their original carrying amounts or allocating
consideration based on the fair values of individual identifiable assets and liabilities of the
transferor company at the date of amalgamation. The key distinction is that this method
allows for the inclusion of identifiable assets and liabilities, even those not initially recorded
in the transferor's financial statements, thereby emphasizing the determination of fair
values at the amalgamation date for a comprehensive assessment of the business
combination.

Q.14 Which of the following characteristics is indicative of an amalgamation in the nature

of merger as per the specified conditions?

1. The transferee company intends to make adjustments to the book values of the assets
and liabilities of the transferor company to reflect fair values in their financial statements.

2. The consideration for the amalgamation is discharged by the transferee company

primarily through cash payments to the equity shareholders of the transferor company.

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3. Shareholders holding less than 90% of the face value of the equity shares of the
transferor company become equity shareholders of the transferee company post-
amalgamation.

4. All assets and liabilities of the transferor company become those of the transferee
company, with no intent to make adjustments except for ensuring uniformity in accounting
policies.

Ans. (4) All assets and liabilities of the transferor company become those of the transferee
company, with no intent to make adjustments except for ensuring uniformity in
accounting policies.

Explanation:

An amalgamation in the nature of a merger is characterized by several conditions, including

the integration of all assets and liabilities of the transferor into the transferee company
without adjustments to their book values except for ensuring uniformity in accounting
policies. This distinct feature sets it apart from other forms of amalgamation where
adjustments to reflect fair values might be made, emphasizing the continuity of assets and
liabilities without significant alterations in their recorded values.

Q.15 In an amalgamation scenario where Y Co. Ltd. acquires X Co. Ltd. and issues 11
equity shares of Rs.10 each for every 10 shares of X Co. Ltd., what is the adjustment
mechanism in the books of Y Co. Ltd. for the shares issued under the 'Pooling of interests
method' of amalgamation as per AS 14?

1. The difference between the purchase consideration and the share capital of X Co. Ltd. is
adjusted through the creation of a Debenture Redemption Reserve.

2. The excess value of the shares issued over the share capital of X Co. Ltd. is adjusted
against Y Co. Ltd.'s retained earnings.

3. The difference arising from the purchase consideration and the share capital of X Co. Ltd.
is adjusted by increasing Y Co. Ltd.'s trade payables.

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4. The disparity between the purchase consideration and the share capital of X Co. Ltd. is
adjusted through the utilization of a General Reserve.

Ans. (4) The disparity between the purchase consideration and the share capital of X Co.
Ltd. is adjusted through the utilization of a General Reserve.

Explanation:

Under the 'Pooling of interests method' of amalgamation as per AS 14, when Y Co. Ltd.
acquires X Co. Ltd. by issuing shares, the difference between the purchase consideration
and the share capital of X Co. Ltd. is adjusted in the books of Y Co. Ltd. In this scenario, the
excess value (Rs.55,00,000 - Rs.50,00,000 = Rs.5,00,000) is adjusted through the utilization
of a General Reserve, aligning with accounting standards to address the difference arising
from the amalgamation process while maintaining financial accuracy and integrity.

Q.16 On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and

discharged purchase consideration as follows:

(i) Issued 50,000 fully paid Equity shares of ` 10 each at a premium of ` 5

per share to the equity shareholders of Rina Ltd.

(ii) Cash payment of ` 50,000 was made to equity shareholders of Rina

Ltd.

(iii) Issued 2,000 fully paid 12% Preference shares of ` 100 each at par to

discharge the preference shareholders of Rina Ltd.

(iv) Debentures of Rina Ltd. 20,000) will he converted into equal number

and amount of 10% debentures of Tina Ltd.

Calculate the amount of Purchase consideration as per AS-14.

1. Rs.10,00,000

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2. Rs.7,50,000

3. Rs.6,00,000

4. Rs.9,50,000

Ans. (1) Rs.10,00,000

Explanation:

As per AS 14, consideration for the amalgamation means the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.

Computation of Purchase Consideration

Particulars Rs.
Equity Shares (50,000x 15) 7,50,000
Cash payment 50,000
12% Preference Share Capital 2,00,000
Purchase Consideration 10,00,000

Q.17 Considering the share capital structure of a company, which of the following
statements accurately represents the issuance of equity and preference shares as fully
paid-up pursuant to contracts without actual cash receipt?

1. The equity shares of Rs.10 each were issued at a premium of Rs.5 per share, while the
preference shares of Rs.100 each were issued at a premium of Rs.400 per share.

2. The equity shares of Rs.10 each were issued at a premium of Rs.5 per share, and the
preference shares of Rs.100 each were issued at par value.

3. The equity shares of Rs.10 each were issued at par value, whereas the preference shares
of Rs.100 each were issued at a premium of Rs.500 per share.

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4. Both equity shares of Rs.10 each and preference shares of Rs.100 each were issued at par
value without any premium.

Ans. (4) Both equity shares of Rs.10 each and preference shares of Rs.100 each were
issued at par value without any premium.

Explanation:

The scenario describes the issuance of equity and preference shares as fully paid-up
pursuant to contracts without cash receipt. In this context, the correct option specifies that
both the equity shares of Rs.10 each and the preference shares of Rs.100 each were issued
at par value, meaning they were issued without any premium on top of their face value. This
reflects the issuance of shares without any additional payment beyond their nominal value,
in accordance with the terms of the contracts.

Q.18 After an amalgamation accounted for using the pooling of interests method, the
reserves of the transferee company are adjusted primarily due to:

1. Alignment of accounting policies between the transferor and transferee.

2. Discrepancy between the recorded share capital issued and the transferor company's
share capital.

3. Calculation of goodwill arising from the amalgamation.

4. Adjustment for contingent liabilities of the transferor company.

Ans. (2) Discrepancy between the recorded share capital issued and the transferor
company's share capital.

Explanation:

In the pooling of interests method for accounting amalgamation, the adjustment of reserves
in the transferee company primarily arises due to the difference between the recorded
share capital issued by the transferee and the actual share capital of the transferor
company. This difference represents any additional consideration beyond the share capital

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of the transferor, such as cash or other assets issued during the amalgamation process. It's
essential to reconcile this difference to accurately reflect the financial position after the
amalgamation.

While alignment of accounting policies is indeed an important aspect after amalgamation, it

does not directly result in the adjustment of reserves. Goodwill calculation and contingent
liabilities might also be relevant in the context of amalgamation accounting, but they do not
directly lead to the adjustment of reserves in the manner described in the pooling of
interests method.

Therefore, the correct choice is 2. Discrepancy between the recorded share capital issued
and the transferor company's share capital as it directly aligns with the adjustment of
reserves in the transferee company following the amalgamation.

Q.19 In the context of amalgamation accounting, when statutory reserves are recorded in
the financial statements of the transferee company, the corresponding debit entry is
made to a "Reserve Account." Why is this Reserve Account presented as a separate line
item?

1. To emphasize the negative balance of the Reserve Account.

2. To prevent the set off against the statutory reserve taken over.

3. To highlight the exclusion of statutory reserves from the amalgamation process.

4. To demonstrate the isolation of amalgamation adjustments from other accounting

entries.

Ans. (2) To prevent the set off against the statutory reserve taken over.

Explanation:

When statutory reserves are incorporated into the financial statements of the transferee
company during amalgamation accounting, the corresponding debit is made to a "Reserve
Account" specifically to ensure that it remains distinct and separate. This Reserve Account,

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despite holding a debit entry, signifies a negative balance. The separate presentation as a
line item serves the purpose of isolating and distinguishing it from other reserves.

The main reason for highlighting this as a separate line item is to underscore that this
particular debit entry cannot be offset against the statutory reserves taken over from the
transferor company. It's essential to maintain the identity and non-offsetting nature of this
entry, hence the emphasis on its separate representation.

Options 1, 3, and 4 might seem plausible but don't directly address the specific purpose
behind presenting the Reserve Account as a separate line item in relation to the statutory
reserves and the prohibition of setting it off against reserves taken over. Hence, the correct
choice is 2. To prevent the set off against the statutory reserve taken over, as it aligns with
the necessity to maintain the distinct identity of this entry in the financial statements.

Q.20 When determining the useful life of goodwill arising from an amalgamation, which
factor among the following is considered crucial but difficult to estimate with certainty?

1. Foreseeable life of the industry and business trends.

2. Effects of product obsolescence and economic changes.

3. Service life expectancies of key individuals or employee groups.

4. Expected actions by competitors or potential competitors.

Ans. (3) Service life expectancies of key individuals or employee groups.

Explanation:

Among the factors listed that influence the estimation of the useful life of goodwill, the
service life expectancies of key individuals or employee groups are often critical but
challenging to predict accurately.

In many instances, the performance and success of a business, especially after an

amalgamation, can be significantly tied to the presence, contributions, and continuity of key
individuals or employee groups. However, estimating their service life expectancies can be

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uncertain due to various factors like changes in personal decisions, career paths, or
unforeseen circumstances affecting their association with the business.

Options 1, 2, and 4 are indeed important considerations in assessing the useful life of
goodwill, but they may be relatively more predictable or observable compared to the
uncertainties surrounding the service life expectancies of key individuals or employee
groups.

Hence, the correct choice is 3. Service life expectancies of key individuals or employee
groups, as it aligns with the inherent challenge in accurately estimating this factor when
determining the useful life of goodwill arising from an amalgamation.

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