Paper Code : 44801

QP code: 76608

Q.1.a. True / False (1 marks each)

1. False
2. False
3. False
4. True
5. False
6. False
7. True
8. False
9. False
10. False

Q.1.b. MCQ (1 marks each)

1. (c) 1 year from the date of passing of the special resolution

2. (c) Equal to the nominal value of shares so purchased
3. (b) The articles of association
4. (c) SEBI
5. (b) Cannot issue same kind of shares within 6 months
6. (b) If the company has recovery prospects
7. (c) To the Tribunal
8. (a) Liquidator expenses, Outsider Liabilities, Preferential Liabilities, Owners
9. (b) Statutory Reserve
10. (b) Only payment to shareholders are taken into consideration

Q.2. a. Balance Sheet before Reconstruction (1mark)

Liabilities Rs. Assets Rs.

Preference Shares 4,00,000 Goodwill 1,00,000
1,50,000 Equity shares of Rs. 10 each 15,00,000 Land 2,00,000
10% Debentures 5,00,000 Plant & Machinery 12,00,000
Bank Loan 5,00,000 Receivables: Good 5,00,000
Creditors 15,00,000 Doubtful 30,000
Cash Credits 2,50,000 Inventories 6,00,000
Preliminary Expenses 70,000
Profit & Loss (bal fig) 19,50,000
46,50,000 46,50,000
Journal entries

(1/2)1 Cash/bank a/c Dr 1,00,000

To Preference Share Capital 1,00,000
(1/2)2 Preference share capital Dr 5,00,000
To Preference Share Capital 3,00,000
To Capital Reduction 2,00,000
(1)3 Equity Share Capital Dr 15,00,000
To Equity Share Capital 6,00,000
To Capital Reduction 9,00,000
(1)4 Equity Share of Rs.10 Dr 6,00,000
To Equity Share of Rs. 1 6,00,000
(1)5 10% Debentures Dr 5,00,000
To 11% Debentures 3,00,000
To Capital Reduction 2,00,000
(1)6 Land Dr 4,00,000
To Capital Reduction 4,00,000
 (2) 7 Capital Reduction Dr 27,80,000
To Plant & Machinery 4,80,000
To Stock 1,50,000
To Goodwill 1,00,000
To Recievables (Doubt Ful) 30,000
To Profit & Loss 19,50,000
To Preliminary Expenses 70,000
(1)8 Creditors Dr 1,50,000
To Cash/Bank 50,000
To Capital Reduction 1,00,000
(1)9 Capital Reduction Dr 50,000
To Cash / Bank 50,000
(1)10 Cash/Bank Dr 4,00,000
To Equity Share 4,00,000
(1)11 Goodwill Dr 10,30,000
To Capital Reduction 10,30,000
Capital Reduction

To Plant & Machinery 4,80,000 Preference share capital 2,00,000

To Stock 1,50,000 Equity Share Capital 9,00,000
To Goodwill 1,00,000 10% Debentures 2,00,000
To Receivables (Doubt Full) 30,000 Land 4,00,000
To Profit & Loss 19,50,000 Creditors 1,00,000
To Cash / Bank 50,000 Goodwill 10,30,000

28,30,000 28,30,000
Balance Sheet after Restructuring (3marks)

Particulars Note Rs.

No.
A. EQUITY AND LIABILITIES
1. Shareholders’ Funds:
a. Share Capital 1 13,00,000
b. Reserves & Surplus 2 -
c. Money Received against Share warrants -
2. Share Application Money received Pending allotment: -
3. Non-Current Liabilities:
a. Long –Term Borrowings 3 8,00,000
4. Current Liabilities:
a. Short Term Borrowings 2,50,000
b. Trade Payables 13,50,000
c. Other Current Liabilities -
Total 37,00,000
B. ASSETS
1. Non-Current Assets:
a. Fixed Assets
Intangible Assets 4 10,30,000
Tangible Assets 13,20,000
b. Non-Current Investments -
2. Current Assets:
a. Current Investments
b. Inventories 4,50,000
c. Trade Receivables 5,00,000
d. Cash & Cash Equivalents 4,00,000
Total 37,00,000
ALTERNATE SOLUTION FOR THE ANSWER (Marks scheme will be same)
Q.2. a. Balance Sheet before Reconstruction

Liabilities Rs. Assets Rs.

Preference Shares 40,00,000 Goodwill 1,00,000
1,50,000 Equity shares of Rs. 10 each 15,00,000 Land 2,00,000
10% Debentures 5,00,000 Plant & Machinery 12,00,000
Bank Loan 5,00,000 Receivables: Good 5,00,000
Creditors 15,00,000 Doubtful 30,000
Cash Credits 2,50,000 Inventories 6,00,000
Preliminary Expenses 70,000
Profit & Loss (bal fig) 55,50,000
82,50,000 82,50,000
Journal entries

1 Cash/bank a/c Dr 10,00,000

To Preference Share Capital 10,00,000
2 Preference share capital Dr 50,00,000
To Preference Share Capital 30,00,000
To Capital Reduction 20,00,000
3 Equity Share Capital Dr 15,00,000
To Equity Share Capital 6,00,000
To Capital Reduction 9,00,000
4 Equity Share of Rs.10 Dr 6,00,000
To Equity Share of Rs. 1 6,00,000
5 10% Debentures Dr 5,00,000
To 11% Debentures 3,00,000
To Capital Reduction 2,00,000
6 Land Dr 4,00,000
To Capital Reduction 4,00,000
7 Capital Reduction Dr 63,80,000
To Plant & Machinery 4,80,000
To Stock 1,50,000
To Goodwill 1,00,000
To Receivables (Doubt Ful) 30,000
To Profit & Loss 55,50,000
To Preliminary Expenses 70,000
8 Creditors Dr 1,50,000
To Cash/Bank 50,000
To Capital Reduction 1,00,000
9 Capital Reduction Dr 50,000
To Cash / Bank 50,000
10 Cash/Bank Dr 4,00,000
To Equity Share 4,00,000
11 Goodwill Dr 10,30,000
To Capital Reduction 10,30,000
Capital Reduction

To Plant & Machinery 4,80,000 Preference share capital 20,00,000

To Stock 1,50,000 Equity Share Capital 9,00,000
To Goodwill 1,00,000 10% Debentures 2,00,000
To Receivables (Doubt Full) 30,000 Land 4,00,000
To Profit & Loss 55,50,000 Creditors 1,00,000
To Cash / Bank 50,000 Goodwill 28,30,000
To Preliminary expenses 70,000
64,30,000 63,60,000
Balance Sheet after Restructuring

Particulars Note Rs.

No.
A. EQUITY AND LIABILITIES
1. Shareholders’ Funds:
Share Capital 1 40,00,000
Reserves & Surplus 2 -
Money Received against Share warrants -
2. Share Application Money received Pending allotment: -
3. Non-Current Liabilities:
Long –Term Borrowings 3 8,00,000
4. Current Liabilities:
Short Term Borrowings 2,50,000
Trade Payables 13,50,000
Other Current Liabilities -
Total 64,00,000
B. ASSETS
1. Non-Current Assets:
Fixed Assets
Intangible Assets 4 28,30,000
Tangible Assets(6,00,000 + 7,20,000) 13,20,000
Non-Current Investments -
2. Current Assets:
Current Investments
Inventories 4,50,000
Trade Receivables 5,00,000
Cash & Cash Equivalents 13,00,000
Total 64,00,000

Q.2. b. Statement of Underwriting of Shares

Particulars Ratio SBI Citi JM Financial Morgan Total Marks
Stanley
Gross Liability 4:3:2:1 32,00,000 24,00,000 16,00,000 8,00,000 80,00,000 1
(-) Marked 30,00,000 20,00,000 10,00,000 5,00,000 65,00,000
Application
2,00,000 4,00,000 6,00,000 3,00,000 15,00,000 1
(-) Unmarked 4:3:2:1 (2,40,000) (1,80,000) (1,20,000) (60,000) (6,00,000)
Application
(40,000) 2,20,000 4,80,000 2,40,000 9,00,000 1
Adjust balance 3:2:1 40,000 20,000 13,333 6,667 -
of SBI
- 2,00,000 4,66,667 2,33,333 9,00,000 2
(-) Firm (2,00,000) (1,00,000) (1,00,000) (1,00,000) (5,00,000)
Underwriting
(2,00,000) 1,00,000 3,66,667 1,33,333 4,00,000 1
Adjust balance 2,00,000 (1,00,000) (66,667) (33,333) -
of SBI
- - 3,00,000 1,00,000 4,00,000 2
(+) Firm 2,00,000 1,00,000 1,00,000 1,00,000 5,00,000
underwriting
Net Liability 2,00,000 1,00,000 4,00,000 2,00,000 9,00,000 1
* Issue Price 250 250 250 250 250
5,00,00,000 2,50,00,000 10,00,00,000 5,00,00,000 22,50,00,000
Commission @ 5% of (32,00,000*250* (24,00,000*250* (16,00,000 (8,00,000*250*5 10,00,00,000 1
Gross Liability 5%) 5%) *250*5%) %)
4,00,00,000 3,00,00,000 2,00,00,000 1,00,00,000
Net Amount 1,00,00,000 (50,00,000) 8,00,00,000 4,00,00,000
Receivable/ Payable
Payable

Journal Entries
Sr. Marks
No. Particulars Rs. Rs.

1 SBI Dr 5,00,00,000
Citi Dr 2,50,00,000
JM Financial Dr 10,00,00,000 2
Morgan Stanley Dr 5,00,00,000
To Equity Share Capital 22,50,00,000

2 Underwrting Commission Dr 10,00,00,000

To SBI 4,00,00,000
To Citi 3,00,00,000 1
To JM Financial 2,00,00,000
To Morgan Stanley 1,00,00,000

3 Cash/Bank Dr 13,00,00,000
To SBI 1,00,00,000
To JM Financial 8,00,00,000 1
To Morgan Stanley 4,00,00,000

4 Citi Dr 50,00,000
To Cash/Bank 50,00,000 1

Q.3. a)
A) Maximum amount of Buy back
I. Available free Reserve 2 marks
Revenue Reserve 30,00,000
Security Premium 5,00,000
Profit & Loss A/c 2,50,000
37,50,000

II. 25% Limit of Own Funds 2 marks

Paid up capital 25,00,000
Free Reserves 37,50,000
62,50,000
25% of own fund 15,62,500

III. Excess of Equity over Debt 1 mark

Equity 62,50,000
Debt (Secured loans + Unsecured loans)/2
(37,50,000 + 20,00,000)/2 (28,75,000)
33,75,000

Maximum Amount of Buy back I, II, III whichever is less = 15,62,500

B) Maximum No. of Equity shares to be Buyback

25% of Equity Share Capital = 25,00,000 × 25% = 6, 25,000/10 = 62,500 equity shares

Since company has to Buyback 50,000 Equity shares which is lesser than maximum no. of shares
which can be bought back so it is allowed to buyback shares. (1 marks)

50,000 shares × 20 = 10,00,000

FV SP
50,000 × 10 50,000 × 10
5,00,000 5,00,000

FV of Equity shares to Buyback = FI + SP & DP transfer to CRR

5,00,000 = Nil + 5,00,000

POBS = SP + Other DP
5,00,000 = 5,00,000 + Nil

Journal Entries

Particulars Rs. Rs. Marks

1. Revenue Reserve A/c Dr. 5,00,000 1
To CRR 5,00,000

2. Equity Share Capital A/c Dr. 5,00,000

POBB A/c Dr. 5,00,000 1
To Equity Share Holder A/c 10,00,000

3. Equity Share Holder A/c Dr. 10,00,000

To Cash /Bank A/c 10,00,000 1

4. Security Premium A/c Dr. 5,00,000

To POBB 5,00,000 1

Balance Sheet after Buy Back (5 marks)

Particulars Note Rs.

No.
A. EQUITY AND LIABILITIES
1. Shareholders’ Funds:
d. Share Capital 20,00,000
e. Reserves & Surplus 32,50,000
f. Money Received against Share warrants -
2. Share Application Money received Pending allotment: -
3. Non-Current Liabilities:
b. Long –Term Borrowings 57,50,000
4. Current Liabilities:
d. Short Term Borrowings 13,00,000
e. Trade Payables 10,00,000
f. Other Current Liabilities 10,00,000
Total 1,43,00,000
B. ASSETS
1. Non-Current Assets:
c. Fixed Assets
i. Tangible Assets 93,00,000
d. Non-Current Investments -
2. Current Assets:
e. Current Investments 10,00,000
f. Inventories 10,00,000
g. Trade Receivables 10,00,000
h. Cash & Cash Equivalents 20,00,000
Total 1,43,00,000

Notes of Accounts:
1. Share Capital:
Authorised Capital:
3,00,000 Equity Shares of Rs. 10 each 30,00,000
Issued, Subscribed and paid up Capital:
2,50,000 Equity Shares of Rs. 10 each fully paid 20,00,000

2. Reserve & Surplus:

Revenue Reserve 25,00,000
Capital Redemption Reserve 5,00,000
Profit & Loss A/c 2,50,000
32,50,000
3. Long Term Borrowings:
Secured Loans:
12% Debentures 37,50,000
Unsecured Loans 20,00,000
57,50,000
Fixed Assets:
a. Tangible assets:
Land & Building 53,00,000
Plant & Machinery 30,00,000
Furniture & Fittings 10,00,000
93,00,000

Q.3 b.
Working Notes:

Rs. Rs. Marks

Cash 20,000
Add: FA 84,000
Stock 5,000
Book debts 1,15,000 2,04,000
2,24,000
Less: Liquidation Expenses (3,000) 9
2,21,000
Less: Trade Creditors (175,000)
46,000
(-) Preference share capital 50,000
(-) Equity share capital 1,75,000 (2,25,000)
Deficiency (1,79,000)
Value per share = 1,79,000/2500 = 71.6
FV/Pd FV/Pd
Value per share 100 25
 (71.6) (35.8)
28.4 ×1,000 (10.8) × 3,000
= 28,400 = 32,400
Liquidators Statement (6 marks)

To Cash/Bank 20,000 By liquidation expenses 3,000

To Assets By creditors 1,75,000
Fa 84,000 By Preference share capital 50,000
Book debts 1,15,000 By Equity shares 28,400
To surplus of stock 5,000
To cash from contributories 32,400
2,56,400 2,56,400

Q.4. a. Purchase Consideration: (3marks)

A Ltd.
Equity shares of A Ltd. Held Issued
5 6
60,000 72,000
72,000× 15 = 10,80,000
Fv = 7,20,000
Sp = 3,60,000
Total P.C. = 10,80,000
BLtd.
Equity shares of B Ltd. Held Issued
5 6
50,000 60,000
9,00,000
60,000× 15 = 9,00,000
Fv = 6,00,000
Sp = 3,00,000

Preference shares of B Ltd. Held Issued

5 4
30,000 24,000
2,40,000
FV =24,000 × 10 = 2,40,000
Total P.C. = Total Equity Shares + Preference Shares = 9,00,000 + 2,40,000 = 11,40,000
Journal Entries:
Particulars Rs. Rs. Marks
1. Business purchase 22,20,000 1
To Liquidator of A 10,80,000
To liquidator of B 11,40,000

2. Plant & Machinery A/c 15,00,000

Inventories A/c 2,60,000
Debtors A/c 3,90,000 2
Cash /Bank A/c 1,50,000
Goodwill A/c 3,80,000
To 12% Debenture A/c 3,00,000
To Security premium A/c 1,60,000
To Business purchase A/c 22,20,000

3. Liquidator of A A/c 10,80,000

Liquidator of B A/c 11,40,000 2
To Equity share capital A/c 13,20,000
To security premium A/c 6,60,000
To preference share capital A/c 2,40,000

4. 12% Debentures A/c 3,00,000

To 12% Debentures A/c 3,00,000 1

5. Creditors A/c 10,000

To Debtors A/c 10,000 1

Particulars AB Ltd. Marks

A. EQUITY AND LIABILITIES
1. Shareholders’ Funds:
a. Share Capital:
Equity Shares of Rs. 10 each fully paid 13,20,000
11% Preference Shares of Rs. 10 each fully paid 2,40,000
b. Reserves & Surplus
Security Premium 6,60,000
2. Share Application Money received Pending allotment: -
3. Non-Current Liabilities:
a. Long –Term Borrowings – 12% Debentures 3,00,000
4. Current Liabilities:
a. Trade Payables
Sundry Creditors 1,50,000
Total 26,70,000 5
B. ASSETS
1. Non-Current Assets:
b. Fixed Assets
i. Tangible Assets
Plant & Machinery 15,00,000
ii. Intangible assets
Goodwill 3,80,000
2. Current Assets:
a. Inventories 2,60,000
b. Trade Receivables
Sundry Debtors 3,80,000
c. Cash & Cash Equivalents
Cash at Bank 1,50,000
Total 26,70,000
Q.4. b.
Working Note:
Calculation of Purchase Consideration: (3 marks)
Equity shareholders of Hexz Ltd Held Issue
1 1
6,00,000 6,00,000
Face Value= 60,00,000
66,00,000 SP = 6,00,000
In Equity Shares of Penta Ltd
Held Cash
1 4
6,00,000 24,00,000
24,00,000
Total P.C. 90,00,000
Journal Entries in the books of Penta Ltd
Sr. Marks
No. Particulars Rs. Rs.

1 Business purchase Dr 90,00,000 1

To Liquidator of Hexza 90,00,000

2 Building Dr 24,00,000
Plant & Machinery Dr 20,00,000
Inventories Dr 14,00,000
Sundry Debtors Dr 18,00,000 2
Cash/Bank Dr 13,20,000
Goodwill Dr 14,80,000
To Workmen Profit Sharing Fund 6,00,000
To Trade Creditors 8,00,000
To Business Purchase 90,00,000

3 Liquidator of Hexza Dr 90,00,000

To Equity Share Capital 60,00,000
To Cash 24,00,000 2
To Security Premium 6,00,000

4 Creditors Dr 1,00,000
To Debtors 1,00,000 1

5 Goodwill Dr 24,000
To Inventories 24,000 1

6 Goodwill (Liquidation Expenses) Dr 10,000

To Cash 10,000 1
In the books of Penta Ltd.
Equity Shareholders A/c (1mark)

Particulars Rs. Particulars Rs.

To Equity shares in new company 66,00,000 By Eq. Share Capital 60,00,000
To Cash 24,00,000 By General Reserve 12,00,000
By Profit / Loss A/c 15,20,000
By Realisation 2,80,000
90,00,000 90,00,000
New Company A/c (1/2 mark)
Particulars Rs. Particulars Rs.
To Realisation 90,00,000 By Equity Shares 66,00,000
By Cash 24,00,000
90,00,000 90,00,000
Equity shares in new company (1/2 mark)

Particulars Rs. Particulars Rs.

To New Company 66,00,000 By Equity Shareholders 66,00,000

Realisation A/c (2 marks)

To Sundry Assets: By W.P.F 6,00,000

Building 14,00,000 By Creditors 8,00,000
Plant & Machinery 26,00,000 By New Company 90,00,000
Goodwill 16,00,000
To Inventories 14,00,000
To Sundry Debtors 18,00,000
To Cash 13,20,000
To Equity Shareholders 2,80,000
1,14,00,000 1,14,00,000
THERE IS NO BIFURCATION OF SHARE CAPITAL. HENCE, THE SHARE CAPITAL GIVEN
IN QUESTION IS ONLY EQUITY SHARE CAPITAL.

Q.5. a. Give the methods under which Purchase Consideration are calculated

Ans 5. A. In case of amalgamation, purchase consideration is the agreed amount which

transferee company (Purchasing company) pays to the transferor company (Vendor company) in
exchange of the ownership of the transferor company. It may be in form of cash, shares or any
other assets as agreed between both the companies.
For example, XYZ Ltd is purchasing the business of ABC Ltd for an agreed amount of INR
5000K and 100K shares of INR 10 each. Here, purchase consideration is INR 6000K (5000000 +
1000000).
Methods of Purchase Consideration:
There are four various methods which can be used in this calculation:
Methods of Purchase Consideration
Net asset method –
Purchase consideration is equal to the total net assets of transferor company.
Total agreed amount of asset – Total agreed amount of liabilities
Net payment method –
Payment made to the shareholders of transferor company in form of cash, shares or debentures.
Lump sum method –
Fixed amount paid by the transferee company to the transferor company. This method does not
require any calculation as the amount is decided by mutual consent of both the companies.
Q.5. b. Give the conditions laid down for Buy Back of Equity Shares under Companies Act,
2013.
Ans 5. A) Maximum amount of Buy back
I. Available free Reserve
Revenue Reserve
Security Premium
Profit & Loss A/c
II. 25% Limit of Own Funds
Paid up capital
Free Reserves
25% of own fund
III. Excess of Equity over Debt
Equity
Debt (Secured loans + Unsecured loans)/2
Maximum Amount of Buy back I, II, III whichever is less.

Q.5. c. Short Notes

1. Capital Reduction A/c

Capital reduction is the process of decreasing a company's shareholder equity through share
cancellations and share repurchases, also known as share buybacks. The reduction of capital is
done by companies for numerous reasons, including increasing shareholder value and producing
a more efficient capital structure.
Understanding Capital Reduction
After a capital reduction, the number of shares in the company will decrease by the reduction
amount. While the company's market capitalization will not change as a result of such a move,
the float, or number of shares outstanding and available to trade, will be reduced.
The act of capital reduction may also be enacted in response to a decline in a company's
operating profits or a revenue loss that cannot be recovered from a company's expected future
earnings. In some capital reductions, shareholders will receive a cash payment for shares
canceled, but in most other situations, there is minimal impact on shareholders.
A company is required to reduce its share capital using a set of specific steps. First, a notice must
be sent out to creditors of the resolution of the capital reduction. Second, the company has to
then submit an application for entry of the reduction of share capital no earlier than three months
after publication of the initial notice. Share capital reduction is then expected to be paid to
shareholders no earlier than three months after the entry of reduction in the commercial register.

2. Firm underwriting
An underwriting in which an investment banking firm commits to buy and sell an entire issue of
stock and assumes all financial responsibility for any unsold shares. Also known as bought deal.
An agreement between the issuer of a security and its underwriters stating that the underwriters
are responsible for any unsold portion of the issue. That is, the underwriters agree to buy the
remainder of a new issue if they are unable to place its entirety with investors. This transfers the
risk of the unsold portion of the issue from the issuer to the underwriters. This guarantees that the
issuer will raise the capital it intends to raise, but leaves the underwriters with the possibility that
they must purchase an issue with low value. As a result, underwriters charge a standby fee for a
standby agreement. It is also called firm commitment underwriting or a backstopped deal.
3. Liquidation of Companies
Liquidation is a process through which a company which is running is shut down and its
existence comes to an end. This often happens when the companies are unable to pay its
creditors and hence need to sell off its assets to pay of them. Though in another version this
could be a voluntary act as well where law ensures that all the debts of a company into existence
is paid before it is closed or shut down.

4. Underwriters Commission under underwriting of Shares and Debentures

We know that a ‘Certificate of Commencement of Business’ will not be granted to a public
company until it receives the minimum subscriptions from the public. Moreover, when a
company wants to raise funds by the issue of shares or debentures, it should raise at least 90% of
the issue within a time limit of 120 days from the date of opening the issue.
In order to avoid that risk, the public companies enter into underwriting arrangements.
Underwriting means guaranteeing to subscribe to an agreed number of shares or debentures for a
certain consideration.
Underwriting Commission:
(i) The payment of commission is possible only when the same is authorised by the Articles;
(ii) The commission paid or agreed to be paid does not exceed
(a) In case of shares, 5% of the price at which the shares are issued or the amount or rate
authorised by the Articles, whichever is less, and
(b) In case of debentures, 2½% of the price at which the debentures are issued or this amount or
rate authorised by the Articles, whichever is less;
(iii) Underwriting commission may be paid in cash or in kind or lump sum as per respective
percentage mentioned above and the same cannot exceed the said percentage in any case;
(iv) No underwriting commission shall be paid to any person which are not offered for public
subscription;
(v) The commission paid or agreed to be paid is disclosed in the prospectus or statement in lieu
of prospectus, as the case may be;

5. Types of Amalgamation
Amalgamation is defined as the combination of one or more companies into a new entity. It
includes:
Two or more companies join to form a new company
Absorption or blending of one by the other
Thereby, amalgamation includes absorption.
However, one should remember that Amalgamation as its name suggests, is nothing but two
companies becoming one. On the other hand, Absorption is the process in which the one
powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of
activity or has some synergy in their operations. Again the companies may also combine for
diversification of activities or for expansion of services
Transfer or Company means the company which is amalgamated into another company; while
Transfer Company means the company into which the transfer or company is amalgamated.
Existing companies A and B are wound up and a new company C is formed to take over the
businesses of A and B Amalgamation
Existing company A takes over the business of another existing company B which is wound up
Absorption
A New Company X is formed to take over the business of an existing company Y which is
wound up. External reconstruction
How is Amalgamation different from a Merger?
Amalgamation is different from Merger because neither of the two companies under reference
exists as a legal entity. Through the process of amalgamation a completely new entity is formed
to have combined assets and liabilities of both the companies.
Types of Amalgamation
Amalgamation in the nature of merger:
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of
the shareholders’ interests and the businesses of these companies. In other words, all assets and
liabilities of the transferor company become that of the transfer company. In this case, the
business of the transfer or company is intended to be carried on after the amalgamation. There
are no adjustments intended to be made to the book values. The other conditions that need to be
fulfilled include that the shareholders of the vendor company holding atleast 90% face value of
equity shares become the shareholders’ of the vendee company.
Amalgamation in the nature of purchase:
This method is considered when the conditions for the amalgamation in the nature of merger are
not satisfied. Through this method, one company is acquired by another, and thereby the
shareholders’ of the company which is acquired normally do not continue to have proportionate
share in the equity of the combined company or the business of the company which is acquired is
generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as
the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.