GENERAL KNOWLEDGE

THE PURCHASE CONSIDERATION THAT IS LOWER THAN THE NET ASSET IMPLIES THAT, THE BUYER HAS GAINED THE ADVANTAGE OF

  • A. capital reserve ✓
  • B. net loss
  • C. revenue reserve
  • D. net income

 

The answer to the question is: A. capital reserve

When the purchase consideration is lower than the net asset value, it implies that the buyer has gained the advantage of capital reserve. This situation arises in the context of business acquisitions or mergers, where the purchase consideration refers to the amount paid by the acquiring company to purchase another company, and the net asset value represents the total assets of the acquired company minus its total liabilities.

The concept of capital reserve comes into play in such scenarios. Capital reserve is a part of shareholders’ equity and represents funds that are not distributable as dividends. It is created from sources other than retained earnings and is often used to absorb certain types of losses or to account for specific transactions. When a buyer pays less than the net asset value for an acquired company, it can be seen as gaining an advantage in terms of potential capital reserves that may exist within the acquired company’s balance sheet.

In this context, choosing option A. capital reserve as the answer is appropriate because when a buyer pays less than the net asset value for an acquired company, it can potentially gain access to any existing capital reserves within the acquired company’s financial structure.

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