Company X, has acquired Company Y, in a merger transaction. The acquisition is considered to be in nature of purchase. As per the merger agreement, the fair value of identifiable assets and liabilities of the company is

Calculation of Purchase Consideration: Shares of Y = 1,00,000 Exchange ratio: 1 share of X for 1 share of Y Value of 1 share of X = ₹80/- Cash per share of Y = ₹40/- Purchase Consideration per share of Y = Value of 1 share of X + Cash per share of Y = ₹80 + ₹40 = ₹120/- Total Purchase Consideration = 1,00,000 shares * ₹120/- per share = ₹1,20,00,000 (₹120 lakhs) Calculation of Fair Value of Net Assets: Fair value of identifiable assets = ₹150 lakhs Fair value of identifiable liabilities = ₹50 lakhs Fair Value of Net Assets = Assets - Liabilities = ₹150 lakhs - ₹50 lakhs = ₹100 lakhs Calculation of Goodwill/Capital Reserve: Goodwill/Capital Reserve = Purchase Consideration - Fair Value of Net Assets Goodwill/Capital Reserve = ₹120 lakhs - ₹100 lakhs = ₹20 lakhs (Goodwill) In the given case, the excess of the amount of the consideration i.e ₹120 lakhs over the fair value of the net assets i.e. (150-50=100 lakhs) of the Y, (the transferor company) should be recognized in the transferee company's financial statements as goodwill. The assets and liabilities taken over from company Y (the transferor company) should be incorporated at their fair values and ₹20 lakhs will be recorded as goodwill in the books of company X.