Zoom Ltd. acquired 70% shares of Star Ltd. @30 per share. Following is the extract of Balance Sheet of Star Ltd.: Particulars ₹ 15,00,000 Equity…

As per para 13 of AS 21 any excess of the cost to the parent of its investment in a subsidiary over the parent's portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements. When the cost to the parent of its investment in a subsidiary is less than the parent's portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements. Since dividend is declared by Star Ltd. on the date of acquisition itself, it would be out of the divisible profits of Star Ltd. existing on the date of acquisition i.e., pre-acquisition profits from the perspective of Zoom Ltd. Accordingly, as per para 12 of AS 13, such pre-acquisition dividend would be reduced from the cost of investment, as seen below in the determination of Goodwill on the date of acquisition. Calculation of Goodwill or Capital Reserve Particulars ₹ Cost of Investment in Star Ltd. (70% stake): 15,00,000 Equity Shares x 70% x 30 per share 3,15,00,000 Less: Pre-acquisition dividend: 10,50,000 shares x 2 (21,00,000) 2,94,00,000 Less: Share of Zoom Ltd. in Net Assets of Star Ltd (W.N) (1,55,40,000) Goodwill on Date of Acquisition 1,38,60,000 Working Note: Calculation of net asset Particulars ₹ Assets Property, Plant and Equipment 1,05,00,000 Less: Value written off (105lakhs x 10%) (10,50,000) 94,50,000 Investments at Market Value 90,00,000 Current Assets 1,02,00,000 Loans and Advances 33,00,000 3,19,50,000 Less: Liabilities Trade Payables 82,50,000 15% Debentures 15,00,000 (97,50,000) Net Assets of Star Ltd. 2,22,00,000 Share of Zoom Ltd. in Net Assets of Star Ltd.: 70% 1,55,40,000 Note: In the absence of information about the reserves, it is presumed that the given extract of the Balance Sheet of Star Ltd. is after considering the effects of the dividend declared on the date of acquisition.