Question

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

• A. Credited to the Capital Reserve.
• B. Debited to the Goodwill Account.
• C. Credited to the General Reserve Account.
• D. Credited to the Vendor's Account.

Hint:

To remember this easily:
• Paying More = Buying Reputation (Goodwill - Debit).
• Paying Less = Making a Profit (Capital Reserve - Credit).

Answer 1

The Correct Option is A

Concept: When one company purchases another business, the price paid is known as the Purchase Consideration. The Net Worth (Net Assets) of the business is calculated as $\text{Total Assets} - \text{External Liabilities}$.

Step 1: Analyzing the scenario where Net Assets $>$ Purchase Consideration.
As noted in the handwritten text, when the Net Worth is greater than the Purchase Consideration, the purchasing company has essentially made a "bargain purchase."
• This difference represents a capital gain for the acquiring company because they acquired more value in assets than they paid for in consideration.
• According to accounting principles, such a capital gain is credited to the Capital Reserve.

Step 2: Contrast with Goodwill.
If the scenario were reversed ($\text{Purchase Consideration} > \text{Net Assets}$), the excess amount paid would be considered a payment for the reputation or brand value of the business and would be debited to the Goodwill Account.