Why we debit goodwill?

This query is : Resolved

CA Gyati Gupta (Querist)
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20 January 2013 Sir
in amalgamantion,when the transferee company pays realization expenses,why does it debit goodwill a/c?
what is the reason behind it?

Hari Beldona

Hari Beldona (Expert)
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20 January 2013 Realization expenses paid by the transferee company is treated as cost of acquisition of assets and liabilities for for arriving at purchase consideration. To illustrate

Cost of acquisition of of two or more existing companies= Purchase Consideration( Assets taken over-Liabilities assumed by the transferee company) = Rs 6,00,000
Realization expenses = of each company say= Rs 5,000

Assets value shown in the books of Amalgamated Company = Rs 6,00,000+ Rs 5,000+ Rs 5,000=610000
The amount excess paid that is Rs 1, 10, 000 is treated as goodwill in the amalgamated company.
Why realization expenses paid by the transferee company is nothing but one of the terms of the amalgamation
The reason is transferee company is purchasing transfer companies at higher price it means at premium because they may have very good reputation, consistently making profits or good market share for their products etc