Unit : I

Lesson : 1
Amalgamation and External Reconstruction
Objectives: After studying this lesson you will be able to understand:
1. Meaning of amalgamation.

2. Types of Amalgamation.

3. Difference between Amalgamation, Absorption and External Reconstruction.

4. Amalgamation as per accounting standard 14.
5. Difference between amalgamation in the nature of merger and purchase.

Introduction

Up to 1st April 1995 the terms used for amalgamation were amalgamation,
absorption and external reconstruction. The meaning of the terms was as following:

Amalgamation: when two or more company doing similar type of business go into
liquidation and a new company is formed to takeover the business it is known as
amalgamation.

Absorption: No new company is formed in absorption. Where an existing

company purchased another existing company it is known as absorption.

Usually the absorbing company is a large company whereas the absorbed

company is smaller company.

External reconstruction: Newly formed co which is generally similar in name and

owned by the same shareholder to a great extent.

The Institute of Chartered Accountants of India has issued Accounting

Standard (AS) 14 on Accounting for Amalgamations. It has been made effective in
respect of accounting periods commencing on or after Ist April, 1995. It is
mandatory in nature. With the issue of this Standard, the guidance Note on
Accounting Treatment of Reserves in Amalgamations issued by the Institute in
1993 stands withdrawn with effect from the abovementioned date.

Meaning: Amalgamation refers to a situation where two or more existing companies

are joined to form a third company or where an existing company takes over the
other existing company. Thus amalgamation includes following two types of
situations:

(i) Two or more companies join and form a new company.

(ii) One company absorbs other company.

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1.2 Definition:

(1)_ Amalgamation is a blending of two or more existing undertakings, the

shareholder of each blending company becoming substantially the shareholders in
the company which is to carry on the blended undertakings. There may be
amalgamation either by transfer of two or more undertakings to a new company or
by transfer of one or more undertakings to an existing company.

- Halsbury’s Laws of England

(2) Amalgamation means an amalgamation in pursuant to the provisions of
the Companies Act 1956 or any other statute applicable to companies.

Accounting Standard 14

Types of Amalgamation :

Generally speaking, amalgamation falls into two broad categories. AS-14 also
recognizes amalgamation in two forms i.e.

(1) Amalgamation in the nature of merger and

(2) Amalgamation in the nature of purchase.

Amalgamation in the nature of merger;

In this type of amalgamation there is a genuine pooling not merely of the assets
and liabilities of the amalgamating companies but also of the shareholder’s
interests and of the business of these companies. the accounting treatment of
such amalgamations should ensure that the resultant figures of assets, liabilities,
capital and reserves more or less represent the sum of the relevant figures of the
amalgamating companies.

Amalgamation in the nature of purchase:

those amalgamations in which one company acquires another company and, as

consequence, the shareholders of the company which is acquired normally do
not continue to have a proportionate share in the equity of the combined
company or the business of the company which is acquired is not intended to be
continued. Such amalgamations are amalgamations in the nature of ‘purchase’.

As per AS-14 an amalgamation in the nature of merger is an amalgamation

which satisfies all the following conditions:
(i) All assets and liabilities of the transfer Company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held there in, immediately before amalgamation, by
the transferee company or its subsidiary or their nominees) become

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 equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders who agree to become equity shareholders of
transferee company, is discharged wholly by the issue of equity
shares in the transferee company except that cash may be paid in
respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on
, after the amalgamation , by transferee company.
(v) No adjustment intended to be made to the book value of assets and
liabilities of the transferor company except to ensure uniformity in
accounting policies.
An amalgamation is classified as an “amalgamation in the nature of
merger” when all the conditions listed above are satisfied.

Amalgamation in the nature of purchase: An amalgamation

which does not satisfy any one or more of the five conditions
mentioned above is classified as amalgamation in the nature of
purchase.

Terms used in above conditions:

 Transferor Company means the company which is amalgamated into

another company i.e. the one which went into liquidation.
 Transferee Company means the company into which a transferor company is
amalgamated. This company does not go into liquidation but retains it’s legal
entity.

Difference between Pooling of interest method and purchase method

Purchase method
Sl.No Basis of difference Pooling of interest
method

1. Shareholders interest In such case generally In such a case one

pooling is not merely of company acquires
assets and liabilities of another company. As a
amalgamated company consequence
but also of the shareholders of the
shareholders interest. The transferor company
shareholders of the normally do not have
transferor company proportionate share in
continue to have the equity or the
substantial proportion in management of the
the equity and the transferee company.
management of the
transferee company.

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2. Record of assets , In such case assets,
liabilities and reserves liabilities and reserves of
the transferor company
are recorded by transferee
company at their existing
value.
In such case assets
liabilities and reserves
are recorded by the
transferee company at
the value realized on
the basis of face value.

3. Treatment of balance Balance of the Profit and The Profit and Loss
Loss Account transferor Account and the
company is aggregated reserves of transferor
with Profit and Loss company other than
Account of transferee statutory reserves are
company. All the reserves not included in the
are also merged with books of transferee
reserves of transferee company.
company.

4. Continuation of It is always intended to It may not be intended

business continue the business of to continue the
transferor company business of transferor
company.

Purchase Consideration :

Accounting standard 14 defines the term purchase Consideration as the

aggregate of shares and other securities issued and the payment made in the
form of cash by the transferee company to the shareholders of the transferor
company.

Purchase consideration does not include the sum which the transferee company
will pay directly to the creditors of the transferor company. Even the expenses on
winding up paid by the transferee company will not form part of purchase
consideration. Purchase consideration is the payment meant only for shareholders
equity and preference. Therefore, purchase consideration does not include any
payment to outsiders including debenture holde`

Calculation of Purchase Consideration

There are four methods of calculation of purchase consideration:
1. Lump Sum Method :

It is the simplest method. In this method, the purchase consideration is stated as

a lump sum. For example, it may be stated that P Ltd. Taken over the business of
Q Ltd. for `700,00,000 here the sum of ` 70,00,000 is the purchase consideration.

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2. Net Assets Method :

Under this method, the consideration is calculated by adding he agreed values of

the assets taken over by the transferee company and deducting there from the
agreed value of liabilities taken over by the transferee company.

Under this method the purchase consideration is ascertained as follows:

Agreed value of assets taken over - - ------------------------
less: Agreed value of liabilities taken over ---------------------------
= Purchase Consideration

Following Assets are not included:

: Fictitious Assets like

 Preliminary Expenses
 Under writing commission
 Debit balance of Profit & Loss Account
 Discount on issue of shares
 Discount on issue of debentures
 Miscellaneous Expenditure or any other fictitious assets.

Liabilities do not include all such items appears under the heading Reserves
and Surplus or any account which denotes to undistributed profits like following

Profit & Loss Account (Credit balance)

General Reserve or Reserve fund

Dividend Equalisation Reserve/Fund

Sinking Fund

Development Rebate Reserve

Capital Redemption Reserve

Debenture Redemption Reserve/Fund

Workmen’s Compensation Fund

Share Forfeited Account

Securities Premium,

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 Share Forfeiture fund

Capital Reserve

Insurance Fund

Following provisions are included:

Provision for Bad & Doubtful debts

Provision for repairs and renewals

Provision against fluctuation in Investment

(Investment Fluctuation Fund)

Provision for Taxation

Provision for Depreciation and

Proposed Dividend.

3. Intrinsic Value Method :

In this method purchase consideration is to be discharged in shares based on

certain ratio which is determined by their respective intrinsic values. The
purchase consideration is calculated by multiplying the number of shares to be
issued to shareholders of Transferor Company by the agreed value of the share
which may either be face value, market value or the intrinsic value itself.
Fractional shares should be valued at market price unless otherwise stated.
Following steps are taken.

(i) Calculate the net assets of the transferor company and divide the same
by  the number of equity shares to ascertain the intrinsic value of share
of Transferor Company.
(ii) Calculate the net assets of the transferee company and ascertain the
intrinsic value as per step first.
(iii) Determine the ratio of exchange between the shares of transferor and
Transferee Company.

Example: if intrinsic value of P Ltd. and Q Ltd. are ` 80 and ` 60 respectively.

Then the ratio of exchange will be determined as follows :

Intrinsic Value ` 80 ` 60
Ratio of intrinsic Value 4 : 3

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 It means 3 shares of P Ltd. are equal to 4 shares of Q Ltd.
P Ltd.’s 3 shares @ ` 80 = Q Ltd.’s 4 shares @ ` 60
` 240 = ` 240
Alternatively the Net assets of Transferor Company may be divided by
intrinsic value of Transferee Company to get the number of shares to be
issued to Transferor Company and multiplied by the agreed value of
share.
4. Net Payment Method :

Under this method purchase consideration includes all payments made by the
transferee company only to the share holders of the transferor company
irrespective of their form of payment. Thus, under this method consideration is
ascertained by adding up payments may be made by the transferee company in
the form of shares, debentures or any other securities and cash to the
shareholders of transferor company.

. AS-14, stats that the shares should be valued at par in case of merger
and at marked price in case of amalgamation in the nature of purchase.
However, the intention of Transferee company and Transferor
company should also be taken into account. The shares may be valued at
market price but recorded at par value if so agreed upon.
Fractional Shares:
. Share fraction is the fraction of one share which arises due to
exchange ratio. Since “share cannot be issued in fraction”, it has to be paid in
cash on the basis of market value of share if not otherwise stated.
Fractional Shares represent sum total of share fractions and hence
these are expressed in absolute figures, such as total sum of fractions is 100,
50 or 200. In such a case the fractional shares may be paid either on the
basis of par value or market value as per the mutual agreement between the
transferor and transferee company.

Meaning of Amalgamation:

The Institute of Chartered Accountants of India has issued Accounting

Standard (AS) 14 on Accounting for Amalgamations. It has been made effective
in respect of accounting periods commencing on or after Ist April, 1995. It is
mandatory in nature. With the issue of this Standard, the guidance Note on
Accounting Treatment of Reserves in Amalgamations issued by the Institute in
1993 stands withdrawn with effect from the abovementioned date.

Types of Amalgamation:

(i) The transferor company means the company which is amalgamated into
another company while the transferee company means the company into
which a transferor company is amalgamation.

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 (ii) Consideration for the amalgamation means the aggregate of the shares
and other securities issued and the payment made in the form of cash or
other assets by the transferee company to the shareholders of the
transferor company.

EXTERNAL RECONSTRUCTION

It is the process in which one existing company reconstructs itself with new company
and identity. It is similar to amalgamation though not exactly the same. In external
reconstruction a new company is formed for the purpose of taking over the business
of an existing sick company which has incurred huge losses and is facing financial
difficulties. Existing company is wound up by selling its business to the newly formed
company which is generally similarly named and owned by the same shareholders to
a great extent. There are two types of Reconstruction of company.

1. Internal Reconstruction and

2. External Reconstruction

Internal Reconstruction

1. No new company is formed. The existing company continues as a going

concern;
2. The ailing company will not goes into liquidation under the capital reduction
scheme
3. Involves complying the requirements under the Companies Act.

External Reconstruction

1. A new company is formed by the existing shareholder of the old company to

take over the assets and liabilities;

2. The ailing company goes into liquidation and

3. There is no need to comply with particular clause in the Companies Act.

Objectives of External Reconstruction

1. To write off accumulated losses of past yea` And to bring down value
of assets to their real value.
2. To offer the shareholders the shares which truly represent the real
worth of the company.

3. To save the company from losses in the future.

4. To raise fresh capital by issuing new shares.

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 5. to altogether change the Memorandum of Association

Difference between amalgamation absorption and external reconstruction

Sl no. Basis of Amalgamation Absorption External

difference Reconstruction

1 Winding up. All companies All those company Only that

which goes into goes into wind up company goes
amalgamation will whose business is into winding up
wound up purchased by whose business is
another company being
constructed.

2. Formation of The new No new company is A new company

new company company must be formed because must be formed.
formed. business is
purchased by
another company.

3. Object Its main object is Its main object is Its main object is
to is to eliminate expansion of to write off
the competition business and accumulated
among achievement of losses and
amalgamated large scale offering to the
companies. business shareholders
shares which truly
represent the real
worth of the
business.

4. Shareholders Shareholder of Purchasing Most of the

representing in the amalgamating company has its shareholders of
the new company own shareholders the old company
company becomes the and though continue the
shareholders in shareholders of shareholders of
the new company selling company new company

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 and they becomes the with proportionate
generally shareholders of share in the
continue to held purchasing equity of the new
proportionate company but they company.
share in the generally do not
equity of the new continue to have
company. proportionate
shares in the equity
of purchasing
company.

5. Financial Financial position Financial position of Financial position

position of the of the companies absorbing company of the old
company. going into is usually sound company is very
liquidation is then the financial bad. It is normally
usually the same. position of a sick company
absorbed company which has
incurred huge
losses.

SELF CHECK QUESTION:

1. Describe amalgamation in the nature of merger and amalgamation in

the nature of purchase.

2. Differentiate amalgamation in the nature of merger and amalgamation in

the nature of purchase.

3. What is purchase consideration as per Accounting Standard 14? What

are the methods of calculating purchase consideration?

4. What do you understand by external reconstruction of the company?

Differentiate between Amalgamation in the nature of merger and
Amalgamation in the nature of purchase and External Reconstruction?

5. Write notes on the following:

(1) External Reconstruction of companies

(2) Purchase consideration

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LESSON 2
METHODS OF ACCOUNTING FOR AMALGAMATION
OBJECTIVE OF THE LESSON:

After studying this lesson, you should be able to understand:

- Accounting treatment in the books of Transferor Company

- accounting treatment in the books of transferee company

- pooling of interest method

- The purchase method

I Accounting Treatment in The Books of Transferor Company

Transferor company goes into liquidation because assets and liabilities are taken
over by the transferee company, and the same are transferred to Transferee
company. In case, if some of the assets or liabilities are not taken over the same are
realised or discharged by the transferor company.

The account of shareholders is settled after the receipt of purchase consideration

from Transferee Company. For this purpose accumulated profits or losses in
whatever form these may be, including fictitious assets are transferred to
Shareholders Account. It is to be noted that besides share capital the profit or loss
arising from transfer of assets and liabilities taken over including disposal or
discharge of assets or liabilities not taken over, are transferred to Shareholders’
Account.

Accounting Entries in the books of transferor company :

The accounting entries in the books of Transferor Company in case of

amalgamation in the nature of merger as well as amalgamation in the nature of
purchase will be the same

1. On transfer of assets:

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Realisation A/c    Dr.  

      To Sundry Assets     (with book value of all individual assets.)

* In case Cash or Bank balance is not taken over by the Transferee company the same
shall not be transferred to Realisation Account. Similarly fictitious assets will not form part
of Sundry Assets but these will be transferred to Shareholders Account.
 

2. On transfer of liabilities

Sundry Liabilities A/c   Dr.   (with book value of individual liability)

      To Realisation A/c     

3. On recording the purchase consideration receivable

Transferee Company’s A/c  Dr.   (with total Purchase .Consideration)

      To Realisation A/c

4. On realisation of assets not taken over

Bank A/c     Dr.   with sale proceeds

      To Realisation A/c

5. On payment of liabilities not taken over

Realisation A/c    Dr.   (with book value)

      To Bank A/c      (Amount paid)

*It is to be noted that if liabilities not takenover are not transferred to Realisation A/c then
the difference between book value of the liability and the amount paid is transferred to
Realisation A/c.
 

6. Realisation expenses borne by Transferee company

No Entry, lf however, actual expenses exceed the amount paid by the Transferee
Company the excess will be debited to Realisation Account.

7. Realisation expenses paid by Transferor Company

Realisation A/c    Dr.    (with amount of expenses)

      To Bank A/c

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8. When Preference shares are redeemed at premium

Realisation A/c    Dr.    (Amount of premium)

      To Preference Shareholders A/c

9. If preference shareholders are paid less than the nominal (book) value of
shares:

Preference Shareholders A/c  Dr.    (with Difference)

      To Realisation A/c 

 

10. For Profit on realisation

Realisation A/c    Dr.

      To Equity Shareholders A/c

11. For Loss on realisation:

Equity Shareholders A/c  Dr.

      To Realisation A/c

12. On transfer of equity capital Accumulated profits:

Equity Share Capital A/c           Dr.

Accumulated Profit A/c Dr (such as General Reserves, P & L A/c etc.)

 To Equity Shareholders A/c

13. On transfer of accumulated losses and fictitious assets.

Equity Shareholders A/c   Dr.

      To Profit & Loss A/c

      To Preliminary Expenses A/c

      To Discount on Issue of Shares/Debentures A/c

14. On receipt of Purchase Consideration

Shares in Transferee Co. A/c   Dr.

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Debentures in Transferee Co. A/c   Dr.

Bank A/c      Dr.

      To Transferee Company A/c

15. On Payment to Preference Shareholders

Preference Shareholders A/c   Dr.

   To Shares in Transferee Co. A/c     as the form of

      To Debentures in 'lfansferee Co. A/c    payment may be

      To Bank A/c

16. Equity Shareholders A/c   Dr.

      To Shares in Transferee Co. A/c

      To Debentures in Transferee Co. A/c

      To Bank A/c

LEDGER ACCOUNTS:

Following are the main Ledger Accounts which are prepared in the books of
transferor company:

LEDGER ACCOUNTS
Realisation A/c (A Format)
` `
To Sundry Assets By Sundry Liabilities
(Each individual asset except : at Book (Each individual liability)
at Book
Fictitious assets value
value
  Cash & bank balance, By Transferee Company
Purchase
   if not taken over. )
Consideratio
* To Bank (Liability not taken By Bank (Disposal of assets
n
over) not taken over)
To Bank (Expenses)
     If paid by Transferor Company
*To Liability (Loss on ← or → *By Liability (Profit on
discharge of liability not discharge of liability not
taken over) taken over)

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To Preference Shareholders ← or → By Preference Shareholders
Account A/c
        (Premium on Redemption) (Discount on redemption, if
any)
To Equity Shareholders A/c ← or → By Equity Shareholders A/c
(Profit) (Loss)
*** ***
* Only one entry.

EQUITY SHAREHOLDERS’ A/C

` `
To Fictitious Assets - By Equity Share Capital -
To Realisation A/c (Loss) - By Revenue Reserves -
To Share in Transferee Co. - By Capital Reserves -
To Other Securities in Transferee - By Other accumulated -
Co. Profits
To Bank A/c - By Realisation A/c (Profit) -
*** ***

TRANSFEREE COMPANY’S A/C

` `
To Realisation A/c P.C. By shares in Transferee Co. -
By Debentures in Transferee Co. -
By Bank A/c
** **

ACCOUNTING FOR AMLGAMATION IN THE BOOKS 0F TRANSFEREE

COMPANY

Accounting treatment in the books of transferee company will be different in both

types of amalgamation. As per AS 14 there are two main methods of accounting for
amalgamation:

(a) The Pooling of Interest Method and

(b) The Purchase Method.

(a) The Pooling of Interest Method

This Method is confined to and applied in case of amalgamation in the nature of

merger.in such a case the minimal changes are made in aggregating the assets and
liabilities of the amalgamating company. Following rules are applicable in this type
of merger:

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Recording of assets and liabilities .

Under pooling of interest method the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing
carrying amounts and in the same form as on that date of amalgamations.
(after making the adjustment in the values, if any, to ensure uniformity in
policy.)

Balance of Profit and Loss A/c

The balance of  Profit and Loss a/c of transferor company should be

aggregated with the corresponding balance appearing in the financial
statements of the transferee company or alternatively transferred to the
General Reserve; if any.

Uniform set of Accounting Policies

If at the time of amalgamation, the transferor and transferee companies have

conflicting accounting policies, an uniform set of accounting policies should be
adopted following the amalgamation. The effects on the financial statements
of any changes in accounting policies should be reported in accordance with
AS—5

Treatment of Reserve and Surplus.

The identity of the reserves is preserved and they appear in the financial
statements of the transferee company in the same form in which these
appeared in the financial statements of transferor company.

For example, the General Reserve of transferor company becomes the

General Reserve of the transferee company, the Capital Reserve of
transferee Company becomes the Capital Reserve of the transferee company
and likewise Revaluation Reserve of transferee company becomes the
Revaluation Reserve of transferee Company.

Treatment of difference between purchase consideration and amount of

share capital

The difference between the amount recorded as share capital issued (plus
any additional consideration in the form of cash or other assets) and the
amount of share capital of the transferor company is adjusted in reserves in
the financial statements of the transferee Company.

Note:  If there is excess of share capital and accumulated profits of Transferor
company over purchase consideration the difference should be transferred to
General Reserve. If however, the purchase consideration is more than the Share

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Capital and accumulated profits the difference should be adjusted against the
Reserves of Transferee company or shown as debit balance of P & L A/c.

Share Capital and Accumulated Profits       ***

 Less Purchase Consideration          **

 Add to the General Reserve of Transferee Co.         * *

If purchase consideration exceeds then the difference is treated as Profit & Loss A/c
(Dr.)

ACCOUNTING ENTRIES IN CASE OF POOLING OF INTEREST METHOD

(1) When business is takenover & purchase consideration due

Business Purchase A/c  Dr.

      To Liquidator of Transferor Co.

(2) When assets & liabilities are transferred

Sundry Assets (individually) (Takenover)   Dr.    (with respective book values)

      To Sundry Liabilities (individually)    (with respective book values)

      To Provisions (individually)    (with respective book values)

      To Profit & Loss Arc      (with respective book values)

      To Reserves A/c (Individually)     (with respective book values)

      To Business Purchase A/c     (with purchase consideration)

(The difference between the debit side and credit side is adjusted in the reserves of
the transferee Company. However the excess of debits over credits of above entry
will be transferred to Reserves or may be shown as debit balance of Profit & Loss
A/c on the assets side of Balance Sheet in case there are no reserves of the
transferor Company. However, such a debit balance be adjusted against the
reserves of transferee company.)  

(3) On payment of Purchase Consideration.

Liquidator of Transferor Company A/c  Dr.

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      To Share Capital Arc     (with face value)

      To Preference Share Capital Afc    (with face value)

      To Securities Premium A/c    (Amount of premium)

      *To other assets (if any)     (with fair value)

      *To Bank Ale      (to deal with fractions)

(*may be required for dissenting shareholders)

(4) On payment of liquidation Expenses.

Liquidation Expenses A/c    Dr.

      To Bank A/c

            and

Profit & Loss A/c     Dr.

      To Liquidation Expenses A/c

(5) On payment of formation expenses.

Preliminary Expenses A/c    Dr.

      To Bank A/c

(6) On discharge of any liability takenover

Liability (Creditors/Debentures other liability) A/c  Dr.

      To New Debentures A/c    (if debenture are issued)

      To Share Capital A/c    (if shares are issued)

      To Bank Ale      (if paid in cash)

Note : Discount/premium on issue of new securities against the discharge of any

liability will be debited credited as the case may be.  

(b) The Purchase Method

It is confined and applied only in case. of amalgamation in the nature of purchase.

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Following are the rules related to amalgamation in the nature of purchase:

Record of assets and liabilities

Under Purchase Method the assets and liabilities of the Transferor Company should
be incorporated and recorded at their existing carrying amounts {Book Values) or at
their fair values (Revised Values) on the date of amalgamation

Treatment of Reserve and Surplus

The identity of reserves (Whether Capital reserve, revenue reserve or revaluation

reserve) of the transferor company, other than the "statutory reserves" is not
maintained and hence not included in the financial statements of transferee
company.

Statutory reserves are those reserves which are required to be maintained as per the
legal provisions, and there is a restriction on it’s usage. For example, to avail
benefits under Income Tax Act 1961, for example Development Allowance Reserve
or Investment Allowance Reserve has to be maintained. The identity of the reserves
should be maintained for specified period.

Thus if a statutory reserve is appearing in the balance sheet of a transferor

company, the same should appear in the financial statements of` the transferee
company, For this purpose Amalgamation Adjustment A/c is opened and this
account is debited and Statutory Reserve A/c is credited. They are shown on the
assets side under the heading Miscellaneous Expenditure and on the liabilities side
under the heading Reserves & Surplus respectively as shown below:

BALANCE SHEET OF TRANSFEREE CO.

Liabilities ` Assets `
Reserve & Surplus   Miscellaneous Exp.  
Name of Statutory Reserve *** Amalgamation Adjustment A/c ***
 

After the expiry of required time limit when statutory reserves are not required to be
maintained a reverse entry is required cancelling both the accounts.

Statutory Reserves A/c    Dr.

      To Amalgamation Adjustment A/c

Treatment of Purchase Consideration:

The purchase consideration is allocated to individual assets & liabilities on the basis
of their fair value at the date of amalgamation. In other words the purchase

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consideration is to be valued at the market price of the shares issued by the
transferee company.

Any excess of purchase consideration over net assets of the transferor company
should be recognised as goodwill in the financial statements of transferee company.
While excess of net assets over purchase consideration should be treated as capital
reserve.

Amortization of Goodwill:

The goodwill so arising on amalgamation should be amortised systematically over

it’s useful life. The period of amortisation, however, should not exceed five years
unless the longer period is justified. 
 

 ACCOUNTING ENTRIES IN THE BOOKS OF TRANSFERREE COMPANY

Dr. Cr.
(1) When business is takenover & purchase
consideration due
Business Purchase Account …Dr.
    To Liquidator of Transferor company.
    ( Purchase price agreed to be paid for the business
of Transferor company)

(2) , When assets & liabilities are transferred

,
Land and Buildings … Dr.
Plant and Machinery …Dr.
Patents and Trade Marks …Dr.
Stock …Dr.
Sundry Debtors …Dr.
Bank …Dr.
Goodwill …Dr.
    To Sundry Creditors
    To Provision for Bad Debts Account
    To Business Purchase Account
(The various assets and liabilities taken over;
Goodwill  being the excess of the cost of acquisition
over the  value of net assets other than Goodwill).
Note: in the case of excess of cost of acquisition over
the value of liabilities the balance will be the Capital
Reserve )
,, (3) On payment of Purchase Consideration.
,,
liquidator of Transferor company …Dr.
    To Equity Share Capital Account
(Allotment of equity shares and payment of cash in

20
 satisfaction of purchase consideration of business.)
(4) On payment of liquidation Expenses.

Liquidation Expenses A/c    Dr.

      To Bank A/c
            and
Profit & Loss A/c     Dr.
      To Liquidation Expenses A/c

On payment of formation expenses.

(5) Preliminary Expenses A/c    Dr.

      To Bank A/c

(6) On discharge of any liability takenover

Liability (Creditors/Debentures other liability) A/c

Dr.

      To New Debentures A/c    (if debenture are

issued)

      To Share Capital A/c    (if shares are issued)

      To Bank Ale      (if paid in cash)

Note : Discount/premium on issue of new securities

against the discharge of any liability will be debited
credited as the case may be.

(7) for recording of the statutory reserve of transferor

company

Amalgamation Adjustment A/c Dr.

Statutory Reserve A/c .

21
Self Check Question

1. Explain briefly the pooling of interest method and purchase method?

2. Give jouranal enteries in the books of transferor and transferee company in

case of amalgamation in the nature of merger and amalgamation in the nature
of purchase.

3. Write difference of accounting treatment between amalgamation in the nature

of merger and amalgamation in the nature of purchase.

4. Explain the adjustment of Reserves and Surplus at the time of amalgamation

of companies as per Accounting Standard 14.

22
LESSON 3
PRACTICAL PROBLEMS AND SOLUTION
OBJECTIVE OF THE LESSON: After studying this lesson you will be able to
understand :

1. Problem and solution in case of amalgamation in the nature of merger

2. Problem and solution in case of amalgamation in the nature of purchase

3. accounting treatment of Inter- company transactions

4. Problem and solution of External Reconstruction of the companies.

Amalgamation in the nature of merger

Illustration - 1 : The following are the balance sheets of A Ltd. and B Ltd. as on 31 st
      March, 2008 :

Liabilities ` Assets `
Share Capital in fully paid equity Land and Buildings 5,60,000
Share of ` 10 each 15,00,000 Plant and Machinery 9,42,000
Share Premium 1,50,000 Furniture 1,01,500
General Reserve 4,70,000 Stock 5,37,340
Debtors 2,80,6309 Debtors 2,80,630
Profit & Loss Account 1,89,360 Cash at Bank 1,10,960
Sundry Creditors 2,33,070 Cost of Issue of Share Account 10,000
25,42,430 25,42,430
B Ltd.
Liabilities ` Assets `
Share Capital : Machinery 3,60,000
60,000 Equity Shares of ` 10 Furniture and Fixtures 89,500
each, fully paid 6,00,000 Stock
Capital Reserve 15,000 Debtors 1,03,000 2,52,410
Sundry Creditors 1,01,630 Less: Provision for Bad 5,37,340
         Debts 5,150 97.850
Cash at Bank 20,340
Profit and Loss Account 96,530
9,16,630 9,16,630

The two companies agree to amalgamate and form a new company called C
Ltd. which takes over all the assets and liabilities of both the companies on 1 st April,
2008. The consideration is agreed at ` 19,50,000 and ` 4,80,000 for A Ltd. and B Ltd.
respectively; and entire amount being payable by C Ltd. in the form of its fully paid
equity shares of ` 10 each. B Ltd.’s 10% debentures are converted into identical

23
number of C Ltd.’s 11% debentures for ` 2,00,000 Expenses of amalgamation
amounting to ` 15,000 are borne by C Ltd.

Pass journal entries and prepare important ledger accounts to class the books of
A Ltd. and B Ltd. Also pass journal entries in the books of C Ltd. and prepare its
balance sheet immediately after the amalgamation in the nature of merger.

Solution : Books of A Ltd.

Journal
` `
2008 Realisation Account … Dr. 25,32,430
Apr. 1    To Land and Buildings Account 5,60,000
   To Plant and Machinery Account 9,42,000
   To Furniture Account 1,01,500
   To Stock Account 5,37,340
   To Debtors 2,80,630
   To Cash of Bank 1,10,960
(Transfer of various assets at their book values of
Realisation Account).
,, ,, Sundry Creditors … Dr. 2,33,070
   To Realisation Account 2,33,070
Transfer of the accounts of sundry creditors to
Realisation Account.
,, ,, C Ltd. … Dr. 19,50,000
   To Realisation Account 19,50,000
(Consideration receivable from C Ltd. for the
business)
,, ,, Equity Shares in C Ltd. Account … Dr. 19,50,000
   To C Ltd. 19,50,000
(Receipt of fully paid 1,95,000 equity shares of `
10 each from C Ltd. in discharge of  consideration
of the business).
,, ,, Equity Shares in Capital Account … Dr. 15,00,000
Share Premium Account … Dr. 1,50,000
General Reserve Account …Dr. 4,70,000
,, ,, Profit and Loss Account … Dr. 1,89,360
   To Equity Shareholders Account 23,09,360
(Transfer of Equity Share Capital Account and all
the reserves to Equity Shareholders Account)
,, ,, Equity Shareholders Account … Dr. 10,000
   To Cost of Issue of Share Account 10,000
(Transfer of Cost of Issue of Share Account to
Equity Shareholder Account)

,, ,, Equity Shareholders Account … Dr. 3,49,360

24
    To Realisation Account 3,49,360
   (Transfer of loss on realisation to Equity
Shareholders Account)
,, ,, Equity Shareholders Account … Dr. 19,50,000
      To Equity Shares in C Ltd. Account 19,50,000
(Distribution of equity shares in C Ltd. among our
shareholde`)

Ledger
Realisation Account
2008 ` 2008 `
Apr. 1 Apr. 1
To Land and Buildings 5,60,000 By Sundry Creditors 2,33,070
Account By C Ltd. (Consideration) 19,50,000
To Plant and 9,42,000 By Equity Shareholders 3,49,360
Machinery Account      Accounts (Loss)

To Furniture Account 1,01,500

To Stock Account 5,37,340
To Debtors 2,80,630
To Cash at Bank 1,10,960
25,32,430 25,32,430

C Ltd.
2008 ` 2008 `
Apr. 1 Apr. 1
To Realisation Account 19,50,000 By Equity Shares in 19,50,000
(Consideration) C Ltd. Account

Equity Shares in C Ltd.

2008 ` 2008 `
Apr. 1 To C Ltd.
Apr. 1
19,50,000 By Equity Sharesholders 19,50,000
Account

Equity Shareholders Account

2008 ` 2008 `
Apr. 1 To Cost of Issue of Apr. 1 By Equity Share Capital
Shares Account 10,000       Account 15,00,000
To Realisation Account 3,49,360 By Share Premium
To Equity Shares in Account 1,50,000

25
 C Ltd. Account 19,50,000 By General Reserve
      Account 4,70,000
By Profit and Loss A/c 1,89,000
23,09,360 23,09,360

Books of B Ltd.
Journal
2008
Apr. 1 Realisation Account …Dr. 8,25,250
    To Machinery Account 3,60,000
    To Furniture and Fixtures Account 89,500
    To Stock Account 2,52,410
    To Debtors 1,03,000
    To Cash at Bank 20,340
(Transfer of various assets to Realisation Account)
,, ,, 10% Debentures Account …Dr. 2,00,000
Sundry Creditors …Dr. 1,01,630
Provision for Bad Debts Account …Dr. 5,510
    To Realisation Account 3,06,780
(Transfer of various liabilities and Provision for Bad
Debts Account to Realisation Account.)
,, ,, C Ltd. …Dr. 4,80,000
     To Realisation Account 4,80,000
(Consideration for the business receivable from C
Ltd.)

,, ,, Equity Shares in C Ltd. …Dr. 4,80,000

    To C Ltd. 4,80,000
(Equity shares in C Ltd. received in satisfaction of
    consideration for the business.)
,, ,, Equity Share Capital Account …Dr. 6,00,000
Capital Reserve …Dr. 15,000
    To Equity Shareholders Account 6,15,000
(Transfer of Equity Share Capital and Capital Reserve
to Equity Shareholders Account).
,, ,, Equity Shareholders Account …Dr. 96,530
    To profit and Loss Account 96,530
(Transfer of debit balance of Profit and Loss Account
to Equity Shareholders Account).
,, ,, Equity Shareholders Account …Dr. 38,470
    To Realisation Account 38,470
(Transfer of loss on realization to Equity Shareholders
Account.)
,, ,, Equity Shareholders Account …Dr. 4,80,000
    To Equity Shares in C Ltd. 4,80,000

26
 (Distribution of equity shares in C Ltd. among the
shareholde`)

Ledger Account

Realisation Account
2008 ` 2008 `
Apr. 1 To Machinery 3,60,000 Apr. 1 By 10% Debentures A/c 2,00,000
Account
To Furniture and By Sundry Credetors 1,01,630
     Fixture Account 89,500 By provision for Bad
To Stock Account 2,52,410     Debts Account 5,150
To Debtors 1,03,000 By C Ltd. 4,80,000
(Consideration)
To Cash at Bank 20,340 By Equity Shareholders
     Account (Loss) 38,470
8,25,250 8,25,250

C Ltd.
2008 ` 2008 Rs
Apr. 1 To Realisation Apr. 1 By Equity Shares in C Ltd. 4,80,000
Account 4,80,000
(Consideration)

Equity Shares in C Ltd.

2008 ` 2008 `
Apr. 1 To C Ltd. 4,80,000 Apr. 1 By Equity Sharesholders A/c 19,50,000

Equity Shareholders Account

2008 ` 2008 `
Apr. 1 To Profit and Loss A/c 96,530 Apr. 1 By Equity Share Capital A/c 6,00,000
By Capital Reserve A/c 15,000
To Realisation A/c
     (Loss)
38,470
To Equity Shares in
   C Ltd. (Distribution) 4,80,000
6,15,000 6,15,000

Books of C Ltd.
Journal
2008 ` `
Apr. 1 Business Purchase Account … Dr. 24,30,000
    To Liquidator of A Ltd. 19,50,000
    To Liquidator of B Ltd. 4,80,000
(Consideration payable to liquidators of A Ltd. and Y td.)
,, ,, Land and Buildings Account … Dr. 5,60,000

27
 Plant and Machinery Account … Dr. 13,02,000
Furniture and Fixtures Account … Dr. 1,91,000
Stock Account … Dr. 7,89,750
Debtors … Dr. 3,83,630
Cash in Bank … Dr. 1,31,300
Cost of Issue of Shares Account … Dr. 10,000
    To 10% Debentures (B Ltd.) 2,00,000
    To Sundry Creditors 3,34,700
To Provision for Bad Debts Account 5,150
To Capital Reserve Account 15,000
To Share Premium Account 1,50,000
To General Reserve Account 2,32,830
To Business Purchase Account 24,30,000
(Incorporation to assets, liabilities and reserves of A Ltd.
and B Ltd., excess of consideration over the share capital
of the transferor companies being adjusted in the general
reserve.)
,, ,, Liquidator of A Ltd. … Dr. 19,50,000
Liquidator of B Ltd. … Dr. 4,80,000
    To Equity Share Capital Account 24,30,000
(Allotment of fully paid equity shares of ` 10 each in
discharge of consideration for the net assets of A Ltd,
and B Ltd.)
,, ,, 10% Debentures (B Ltd.) Account … Dr. 2,00,000
    To 11% Detentures Account 2,00,000
(Allotment of 11% debentures to discharge the liability
on 10% debentures in B Ltd.)
,, ,, General Reserve Account … Dr. 15,000
    To Cash at Bank 15,000
(Payment of expenses relating to amalgamation.)

Balance Sheet of C Ltd. as on 1st April, 2008

Liabilities ` Assets `
Share Capital Fixed Assets
Authorised ? Land and Buildings 5,60,000
Issue and Subscribed: Plant and Machinery 13,02,000
2,43,000 Equity Shares Furniture and Fixtures 1,91,000
of ` 10 each fully paid 24,30,000
Current Assets, Loans
(All of the above shares
and Advances
have been allotted as (A) Current Assets
fully paid-up to vendors Stock
pursuant to a contract Debtors 3,83,630
without payments being Less : Provision
received in cash)        for Bad Debts 5,150 3,78,480

28
Reserve and Surplus Cash at Bank 1,16,300
Capital Reserve 15,000 (B)  Loans and Advances Nil
Share Premium 1,50,000 Miscellaneous Expenditure
General Reserve 2,17,830 Cost of Issue of Shares 10,000
Secured Loans
11% Debentures 2,00,000
Current Liabilities and
Provisions
(A) Current Liabilities
Sundry Creditors 3,34,700
(B)  Provisions Nil
33,47,530 33,47,530

Amalgamation in the nature of purchase:

Illustration - 2 : The following is balance sheet of A Ltd. as on March 31,2009

Liabilities ` Assets `
Equity Share Capital 10,00,000 Goodwill 1,90,000
General Reserve 1,10,000 Land and Buildings 2,00,000
Workmen’s Accident Plant and Machinery 4,40,000
Compensation Reserve 50,000 Patents and Trade Marks 30,000
Profit & Loss Account 70,000 Stock 2,10,000
Sundry Creditors 1,60,000 Sundry Debtors 1,80,000
Less: Provision for Bad Debts 12,000 1,68,000
Cash at Bank 1,32,000
Preliminary Expenses 20,000
13,90,000 13,90,000

The company is acquired by X Ltd., which pays ` 14,00,000 in all – ` 12,00,000

in fully paid ` 10 shares and the balance in cash. There was a contingent liability in
respect of a claim for compension under the Workmen’s Compensation Act. The
claim was not taken over by X Ltd. and A Ltd. had to pay ultimately a sum of ` 20,000
against the claim. The balance sheet of X Ltd. on 31st March 2009 was as follows:

Liabilities ` Assets `
Share Capital : Goodwill 2,20,000
2,20,000 Equity Shares of ` 10 each 20,00,000 Land and Buildings 6,00,000
General Reserve 2,00,000 Plant and Machinery 8,00,000
Profit and Loss Account 1,00,000 Stock 5,00,000
12% Debentures 3,50,000 Sundry Debtors 3,00,000
Sundry Creditors 2,10,000 Cash at Bank 4,40,000
28,60,000 28,60,000

29
 The expenses of liquidation of A Ltd. came to ` 10,000. Draft journal entries to
close the books of A Ltd., and show the important accounts. A Gove journal entry in
the books of X Ltd. and redraft X Ltd.’s balance sheet after the amalgamation in the
nature of purchase has been completed.

Solution : Books of A Ltd.

Journal
` `
2009 Realisation Account … Dr. 13,82,000
Mar. 31    To Goodwill 1,90,000
   To Land and Buildings 2,00,000
   To Plant and Machinery 4,40,000
   To Patents and Trade Marks 30,000
   To Stock 2,10,000
   To Sundry Debtors 1,80,000
   To Cash at Bank 1,32,000
(Transfer of the various assets to Realisation
Account on sale of business to X Ltd).
,, ,, Sundry Creditors … Dr. 1,60,000
Provision for Bad Debts Account 12,000
   To Realisation Account 1,72,000
(Transfer of sundry creditors and Provision for Bad
Debts Account to  Realisation Account).
,, ,, X Ltd. … Dr. 14,00,000
   To Realisation Account 14,00,000
(Amount receivable from X Ltd. for the business
sold to it.)
,, ,, Shares in X Ltd. … Dr. 12,00,000
Bank … Dr. 2,00,000
   To X Ltd. 14,00,000
(Receipt of 1,20,000 shares of ` 10 each and `
2,00,000 in cash from X Ltd. in full settlement of
the consideration for the business sold to it.)
,, ,, Realisation Account … Dr. 10,000
     To Bank 10,000
(Expenses of liquidation)
,, ,, Workmen’s Accident Compensation Reserve …Dr. 20,000
   To Bank 20,000
(The claim for compensation for accident paid and
debited to Workmen’s Accident Compensation
Reserve).
,, ,, Equity Share Capital Account … Dr. 10,00,000
   To Equity Shareholders Account 10,00,000
(Transfer to Equity Share Capital Account to

30
 Equity    Shareholders Account)
,, ,, General Reserve …Dr. 1,10,000
Workmen’s Accident Compensation Reserve …Dr. 30,000
Profit and Loss Account …Dr. 70,000
     To Equity Shareholders Account 2,10,000
(Transfer of General Reserve, Profit & Loss
Account and the balance remaining in
Workmen’s Accident Compensation Reserve
after meeting claim for accident to Equity
Shareholders Account).
,, ,, Realisation Account … Dr. 1,80,000
      To Equity Sharesholders Account 1,80,000
(Profit on realisation transferred to Equity
Shareholders Account.)
,, ,, Equity Shareholders Account … Dr. 20,000
     To Preliminary Expenses Account 20,000
(Transfer of Preliminary Expenses Account to
Equity Shareholders Account.)
,, ,, Equity Shareholders Account … Dr. 13,70,000
     To Equity Shares in X Ltd. 12,00,000
     To Bank 1,70,000
(Distribution of equity Shares in X Ltd. and cash to
settle final claim of equity shareholde`)

Ledger Accounts
Realisation Account

Cr.
2009 ` 2009 `
Mar. 31 To Goodwill 1,90,000 Mar. 31 By Sundry Creditors 1,60,000
To Land and Buildings 2,00,000 By Provision for Bad
To Plant and Machinery 4,40,000      Debts 12,000
To patents and Trade Marks 30,000 By X Ltd. 14,00,000
To Stock 2,10,000 (Consideration)
To Sundry Debtors 1,80,000
To Cash at Bank 1,32,000
To Bank (Expenses) 10,000
To Equity Shareholders
     Account
(Transfer of Profit) 1,80,000
15,72,000 15,72,000

31
 X Ltd.
2009 ` 2009 `
Mar. 31 Mar. 31
To Realisation 14,00,000 By Share in X Ltd. 12,00,000
By Bank 2,00,000
14,00,000 14,00,000

Dr. Cash Book (Bank Columns) Cr.

2009 ` 2009 `
Mar. 31 Mar. 31
To Balance b/fd 1,32,000 By Realisation A/c
To X Ltd. 2,00,000 (Transfer) 1,32,000
By Realisation A/c
(Expenses) 10,000
By Workmen’s Accident
    Compensation Reserve 20,000
By Equity Shareholders
Account 1,70,000
2,00,000 2,00,000

Equity Shareholders Account

2009 ` 2009 `
Mar. 31 To Preliminary Expenses 20,000 Mar. 31 By Equity Share
To Equity Shares in 12,00,000 Capital Account By 10,00,000
X Ltd. General Reserve
To Bank 1,70,000 By Workmen’s 1,10,000
Accident
Compensation
Reserve 30,000
By Profit and Loss A/c 70,000
By Realisation A/c 1,80,000
13,90,000 13,90,000

Books of X Ltd.
Journal
Dr. Cr.
2009 ` `

32
Mar. 31 Business Purchase Account …Dr. 14,00,000
    To Liquidator of A Ltd. 14,00,000
   ( To Purchase price agreed to be paid for the
business of A Ltd.)
,, ,, Land and Buildings …Dr. 2,00,000
Plant and Machinery …Dr. 4,40,000
Patents and Trade Marks …Dr. 30,000
Stock …Dr. 2,10,000
Sundry Debtors …Dr. 1,80,000
Bank …Dr. 1,32,000
Goodwill …Dr. 3,80,000
    To Sundry Creditors 1,60,000
    To Provision for Bad Debts Account 12,000
    To Business Purchase Account 1,40,000
(The various assets and liabilities taken over;
Goodwill       being the excess of the cost of
acquisition over the       value of net assets other than
Goodwill).
,, ,, Liquidator of A Ltd. …Dr. 14,00,000
    To Equity Share Capital Account 12,00,000
(Allotment of equity shares and payment of cash in
satisfaction of purchase consideration of business)

Balance Sheet of X Ltd. as on 31st March, 1997

Liabilities ` Assets `
Share Capital Fixed Assets
Authorised - Goodwill 6,00,000
Issued & Subscribed: - Land and Buildings 8,00,000
3,20,000 Equity Shares Plant and Machinery 12,40,000
of ` 10 each fully paid Plants and Trademarks 30,000
32,00,000
(Of the above shares, Current Assets, Loans
1,20,000 equity shares and Advances
have been allotted as (A) Current Assets
     Stock 7,10,000
fully paid up pursuant of
Sundry Debtors 4,80,000
a contract without Less : Provision for Bad
payment being received Debts 12,000 4,68,000
in cash)
Reserve and Surplus Cash at Bank 3,72,000
General Reserve 2,00,000 (B)  Loans and Advances Nil
Profit & Loss Account 1,00,000
Secured Loans
12% Debentures 3,50,000
Current Liabilities and
Provisions

33
(A) Current Liabilities
    Sundry Creditors 3,70,000
(B)  Provisions Nil
42,20,000 42,20,000

Accounting treatment of Inter-Company Transactions

The transactions taking place between two companies are called Inter-company
Transactions. These transactions usually occur between companies in same business.
because companies in same business amalgamate therefore these transactions take
place after amalgamation of the companies. These inter-company transactions should
be deleted after amalgamation.
These inter-company transactions can be categorised under the following head

1 Inter – Company Debts

2 Unrealised Profit on Stock
3 Inter-company holdings.

1. Inter-Company Debts : In case of amalgamation, inter- company debts arise

due to sale-purchase of goods or loans and advances. Such loans may be due to
creditors, debtors, bills payable, bills receivable or other loans.

Accounting in books of transferor company : There is no accounting effect

of inter company debts in the books of transferor company. While closing the
books of transferor company the balance of such items is transferred to
realization account in the same way as other assets and liabilities
.
Accounting in books of transferee company : The journal entry of business
purchase will be done according to general rules in the books of transferee
company by debiting and crediting the assets and liabilities at their
predetermined value. Journal entries in relation to inter-company debts in
different situations will be passed as follows :

(i) If Transferee company is Debtor and transferor Co. is Creditor :

Creditors (in transferee Co.) a/c Dr.
To Debtors (in transferor Co.) a/c
(ii) If Transferee Co. is Creditor and Transferor Co. is Debtor :
Creditors (in transferor Co.) a/c Dr.
To Debtors (in transferee Co.) a/c
(iii) Bills Payable in the books of transferee company and Bills Receivable
in the books of transferor company :

34
 Bills Payable (in transferee Co.) a/c Dr.
To Bills Receivable (in transferor Co.) a/c
(iv) Bills Receivable in the books of transferee company and Bills Payable
in the books of transferor company :
Bills Payable (in transferor Co.) a/c
To Bills Receivable (in transferee Co.) a/c
(V) . If loan is taken by transferee company :
Loan from transferor Co. a/c Dr.
To Loan to transferee Co. a/c

(iv) If loan has been taken by transferor company :

Loan fromtransferee Co. a/c Dr.
To Loan to transferor Co. a/c

(2) Unrealised Profit on Stock : Transactions of purchase and sale of goods

usually happens between companies in same business. Goods are sold by
adding profit on cost. If at the date of amalgamation, either the transfero
company or transferee company is holding stock of such goods then in case
goods are sold at profit, the profit included in such goods will be assumed as
unrealized Adjustment for unrealized profit in different situations will be done
as follows :
(i) When transferor company is holding stock of goods
purchased from purchasing company :
If transferor company purchased goods from transferee company and
some stock remained unsold at the date of amalgamation then it will be
shown at purchase price in the books of vendor company which is cost
price for transferor company. As the goods are sold at profit, the profit
is included in the value of goods sold by transferee company. Therefore
necessary adjustment is to be made for the amount of profit., for
example goods worth ` 15,000 costing 10,000 were sold by P Co. to R
Co. . After some time P company purchased R company. R company
was holding goods of ` 6000 which is received back by P company.

Unrealised profit included in the stock of ` 6000 is 6000 x

which is to be cancelled.
The entry will be as follows :
In the books of purchasing company :
Capital Reserve/Goodwill a/c Dr.
To Stock a/c

35
 Some accountants are of the view that if at the time of entry of purchase
of assets the above stock is debited a original cost price (in the above
example ` 6000 – ` 2000= ` 4000) then adjustment entry is not required.
Entries in the books of vendor company : This does not affect the
books of transferor company, therefore no need of adjustment.
(ii) When purchasing company holds goods purchased from
vendor company- If transferee company (purchasing company)
has purchased goods from transferor company (vendor company)
and some stock remain unsold at the date of amalgamation,
adjustment is to be made for unrealized profit on stock.
Unrealised profit on stock will be calculated in the same
manner as calculated above. The following entry will be passed
in the books of purchasing i.e. transferee company by this
amount-
Capital Reserve/Goodwill a/c Dr.
To Stock a/c
No entry will be passed in the books of vendor i.e. transferor
company.

Illustration - 3 : XY Ltd. Is formed to take over X Ltd. And Y Ltd. For ` 5,00,000
and ` 2,50,000 payable in Equity Shares of ` 10 each. The Balance sheets of two companies
are give below :
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
` ` ` `
Share Capital 3,75,000 3,00,000 Land and Buildings 1,00,000 50,000
Reserves 1,00,000 12,500 Plant and Machinery 1,12,500 37,500
Sundry Creditors 1,50,000 50,000 Stock 1,75,000 75,000
Bills Payable 25,000 37,500 Sundry Debtors 2,00,000 1,00,000
4,00,000 Bills Receivable 37,500 50,000
Cash st Bank 25,000 87,500
6,50,000 4,00,000 6,50,000 4,00,000

Stock of X Ltd. includes ` 20,000 purchased from Y Ltd. on which Y Ltd. made 20%
profit on sales.
Pass necessary Journal entries in the books of XY Ltd. and also draft the Balance
Sheet of XY Ltd.

Solution : In the books of XY Ltd.

Journal Dr. Cr.
Date Particulars L.F. Amount Amount
` `
Goodwill a/c (Balancing figure) Dr. 25,000

36
 Land and Building a/c Dr. 1,00,000
Plant and Machinery a/c Dr. 1,12,500
Stock a/c Dr. 1,75,000
Sundry Debtors a/c Dr. 2,00,000
Bill Receivable a/c Dr. 37,500
Cash and Bank a/c Dr. 25,000
     To Sundry Creditors a/c 1,50,000
     To Bills Payable a/c 25,000
     To Liquidator of X Ltd. a/c 5,00,000
(Being assets and liabilities taken over from X Ltd.
and purchase consideration agreed.)
Land and Building a/c Dr. 50,000
Plant and Machinery a/c Dr. 37,500
Stock a/c Dr. 75,000
Sundry Debtors a/c Dr. 1,00,000
Bill Receivable a/c Dr. 50,000
Cash and Bank a/c Dr. 87,000
     To Sundry Creditors a/c 50,000
     To Bills Payable a/c 37,500
     To Liquidator of Y Ltd. a/c 2,50,000
     To Capital Reserve a/c (Balancing figure) 62,500
(Being the assets and liabilities taken over from Y
Ltd. and purchase consideration agreed.)
Liquidator of X Ltd. a/c Dr. 5,00,000
Liquidator of Y Ltd. a/c Dr. 2,50,000
     To Equity Share Capital a/c 7,50,000
(Being the issue of Equity Shares in satisfaction of
purchase consideration.)
Capital Reserve a/c Dr. 4,000
      To Stock a/c 4,000
(Being the adjustment for inter-company stock.)
Capital Reserve a/c Dr. 25,000
      To Stock a/c 25,000
(Being goodwill set-off against company reserve.)

Balance Sheet of XY Ltd. as at --

Liabilities ` Assets `
Share Capital : Fixed Assets :
75,000 Equity Shares of Land and Buildings 1,50,000
` 10 each in fully paid 7,50,000 Plant and Machinery 1,50,000
Reserve and Surplus Investments : Nil
Capital Reserve 33,500 Current Assets, Loans and Advances :
Secured Loans Nil Stock (` 2,50,000 - ` 4,000) 2,46,000
Current Liabilities and Sundry Debtors 3,00,000
Provisions :
Sundry Creditors 2,00,000 Bills Receivable 87,5000
Bills Payable 62,500 Cash at Bank 1,12,500
10,46,000 10,46,000

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Illustration - 4:
Balance Sheet of Kaizen Ltd. on 31st March, 2010 shows the following position:
Balance Sheet
Liabilities Amount Assets Amount
Share Capital:   Goodwill 31,000
30,000 Share of ` 10 each 3,00,000 Premises 1,70,000
Creditors 1,08,000 Machinery 80,000
    Stock 54,000
    Debtors 45,000
    Profit & Loss a/c 20,000
    Preliminary Expenses 8,000
  4,08,000   4,08,000

It was resolved:
1. That the company be taken into voluntary liquidation and a new company Atul
Ltd. be formed with an authorised capital of ` 4,00,000 in shares of ` 10 each to
take over the assets and liabilities of the existing company.
2. That the goodwill be eliminated and machinery be valued at 20% less in the
books of the new company.
3. That 30,000 shares of ` 10 each be issued to the shareholder in the old company
at ` 7.50 per share paid up.
4. That the shareholder to pay the balance of ` 2.50 per share in cash.
5. That the creditors of the company to be satisfied by the payment to them of half
the amount in cash and by the issue of 6% debentures as to the other half.
Pass entries in the journal of new company and prepare opening Balance sheet.
Solution:
Purchase Price: 30,000 Share of ` 7.50 paid = ` 2,25,000
In the Books of Atul Ltd. (Transferee Co.)
Journal Entries

      ` `
  Business Purchase a/c Dr.   225,000  
  To Liquidator of Kaizen Ltd.     2,25,000
  (Purchase price due)      
  Premises a/c Dr.   1,70,000  
  Machinery a/c (less 20%) Dr.   64,000  

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  Stock a/c Dr.   54,000  
  Debtors a/c Dr.   45,000  
  To Creditors a/c     1,08,000
  To Business Purchase a/c     2,25,000
  (Business of Kaizen Ltd. Purchased)      
  Liquidator of Kaizen Ltd. Dr.   225,000  
  To Share Capital a/c     225,000
(Partly paid shares issued for payment of
  purchase      
  price)      
  Creditors a/c Dr.   1,08,000  
  To Bank a/c     54,000
  To 6% Debenture a/c     54,000
  (Creditors paid half in cash and half by issue of      
  debentures)      
  Share call a/c Dr.   75,000  
  To Share Capital a/c     75,000
  (Being call due)      
  Bank a/c Dr.   75,000  
  To Share Call a/c     75,000
  (` 2.50 per share received on 30,000 share)      

Opening Balance Sheet of Atul Ltd.

Liabilities Amount Assets Amount

Share Capital:   Fixed Assets:  

Authorised: 40,000 Shares of   Premises 1,70,000

` 10 each 4,00,000 Machinery 64,000

Issued and Subscribed:   Current Assets: 54,000

30,000 Share of ` 10 each 3,00,000 Stock 45,000

Secured Loans:   Debtors 20,000

6% Debentures 54,000 Cash at Bank 8,000

    (` 75,000 - 54,000)  

  3,54,000   3,54,000

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Self Check Question
1. R Ltd. and S Ltd. agree to amalgamate and form a new company RS Ltd. with
an authorized capital ` 10,00,000 in Shares of ` 100 each. The new company
takes over all the assets and debentures of both companies, the consideration
being ` 6,00,000 in fully paid Shares to R Ltd. and to S Ltd. 2000 fully paid
shares and ` 50,000 in cash. The liquidation expenses of ` 5,000 were also met
by the new company. The formation expenses amounted to ` 10,000. Balances
at the date of amalgamation were :

Particulars R Ltd. S Ltd.

Dr. Cr. Dr. Cr.
` ` ` `
Share Capital - 4,00,000 - 2,00,000
Assets 5,00,000 - 2,75,000 -
7% Debentures - 50,000 - 50,000
Bank 1,75,000 - 15,000 -
Reserve - 2,00,000 - 40,000
Profit & Loss A/c - 25,000 - -
6,75,000 6,75,000 2,90,000 2,90,000

Assume that the formation and liquidation expenses were charged against the
Capital Reserve. You are required to record the opening Journal Entries in the
books of the new company are prepare the Balance Sheet of RS Ltd.

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2. Emco Ltd. and Emtex Ltd. decided to amalgamate and formed a new
company Emcotex Ltd. The position of the two companies was as follows :

Liabilities Emco Emtex Assets Emco Emtex

Ltd. Ltd. Ltd. Ltd.
` ` ` `
Share Capital :
6,000 Shares of ` 10 each 60,000 - Debtors 30,000 40,000
4,000 Shares of ` 10 each - 40,000 Stock 46,000 20,000
Profit & Loss A/c 6,000 4,000 Goodwill 10,000 -
8% Debentures 10,000 -
Creditors 10,000 16,000
86,000 60,000 86,000 60,000

The average profit of the Emco Ltd. and Emtex Ltd. have been ` 6,000 and `
4,000 respectively. The new company Emcotex Ltd. agrees with Emco Ltd. and
Emtex Ltd. to take over both the concerns for the sum of ` 1,20,000 and in
addition to discharge all liabilities, ` 20,000 to be paid in cash and the balance
in shares.
The profit on the conversion is to be divided between the Shareholders
of the two companies in the same proportion as the profits previously earned by
them.
Draw up a Purchase Account in the books of Emcotex Limited. Also show as
to how the Share Capital Accounts in Emco Ltd. and Emtex Ltd. would be
closed. Assume amalgamation in the nature of purchase.

3. The following are the Balance Sheets of Ram Ltd. and Rahul Ltd.

Liabilities Ram Ltd. Rahul Ltd. Assets Ram Ltd. Rahul Ltd.
` ` ` `
Equity Share Capital Building 60,000 -
(` 100 per share) 2,00,000 1,20,000 Machinery 2,20,000 1,00,000
10% Debenture of Stock 32,000 16,000
` 10 each 40,000 - Debtors 28,000 18,000
Reserve Fund 52,000 - Bank 6,000 2,000
Statutory Reserve 16,000 -
Dividend

41
 Equalisation Fund 8,000 -
Employee’s
Provident Fund 6,000 -
Creditors 20,000 16,000
Profit & Loss A/c 4,000 -
3,46,000 1,36,000 3,46,000 1,36,000

The two companies agree to amalgamate and form a new company New Ram
Ltd. The latter takes over the assets and liabilities of both the companies. The
assets of Ram Ltd., with the exception of Building which is accepted at book
value, are taken over at a reduced valuation of 10%. In return for debentures in
Ram Ltd., 12% debentures of the same amount are to be issued by New Ram
Ltd. Both companies are to receive 5% of the net valuation of their respective
business, as goodwill. The entire purchase price is to be paid by New Ram Ltd.
in fully paid Equity Shares of ` 10 each.
Give Journal entries & Ledger Accounts to close the books of Ram Ltd. and
Rahul Ltd., and show the opening Balance Sheet of New Ram Ltd. The
authorized capital of New Ram Ltd. is ` 10,00,000 in shares of ` 10 each. Also
give journal entries in the books of new company.

4. The creditors and shareholders having agreed upon a scheme of reconstruction,

the Surya Roshni Ltd. went into voluntary liquidation. The Balance Sheet at
the date of reconstruction stood as follows:

Balance Sheet
Liabilities Amount Assets Amount
Share Capital   Goodwill 40,000
25,000 Shares of ` 10 each 2,50,000 Building 95,000
8% Debenture 1,00,000 Machinery 1,05,000
Trade Creditors 40,000 Stock 50,000
Contingency Reserve 17,000 Debtors 60,000
    Bank 2,000
    Profit & Loss a/c 55,000
  4,07,000   4,07,000

The scheme of reconstruction provided as under:

1. The new company may be formed with a share capital of ` 5,00,000 in
50,000 shares of ` 10 each, to take over from the above company stock

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 and debtors at 20% less than the books value and buildings and
machinery at ` 77,000 and ` 1,00,000 respectively.
2. The debenture holders were to be satisfied by the issue of 6% mortgage
debentures of ` 1,50,000 in the new company in exchange for old
debentures.
3. The trade creditors agreed to receive ` 35,000 from the new company in
full settlement of their claims.
4. The shareholders agreed to receive 25,000 shares of ` 10 each ` 5 per
share paid up with a call of ` 2.50 per share to be made forthwith.
5. The bank balance was utilized in payment of reconstruction expenses.
You are required to give Journal Entries in the books of both the companies
and prepare the Balance Sheet of new company assuming call money is
received.

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