Why is it that we adopt different method in amalgamation in nature of merger for computing Goodwill/CR, then that used in nature of purchase?
Amalgamation in the nature of purchase : Amalgamation in nature of purchase involves a deal with outsider and it is nothing but is in the nature of sale to outsiders. Therefore selling our business at a higher rate than the net worth (Goodwill) or at a lower rate than the networth (Capital reserve). Indirectly, Selling the business at a higher rate means, our business value is more than the networth as shown in the balance sheet. As we have extra earning capacity and as we are sacrificing it, we will sell it for a higher rate and that difference will be treated as goodwill and everything will be vice-versa in the case of capital reserve. Amalgamation in the nature of merger: As majority of shareholders become the members of resulting company the loss or gain on sale is to be again born by the shareholders as they are only the members of the resulting company also. Therefore every loss or gain are adjusted in the reserves only. Here there is no outsider, therefore we will adjust them in the reserves Example for merger : taking out 10/- from our shirt pocket and again putting them in pant pocket.