AMALGAMATION OF COMPANIES

X Ltd. Y Ltd.
(Mfg. Pen) (Mfg. Pen)

Rs. 5 Rs. 4.80

Price: Decreasing Revenue
Rs. 4.80 Rs. 4.70

Rs.5,00,000 Rs.6,00,000
Advertisement: Increasing Cost
Rs.6,00,000 Rs.6,50,000

X Ltd. Y Ltd. Z Ltd. (or) XY Ltd.

+ =
(Old Co.) (Old Co.) (New Co.)

New Price Increasing Revenue

Price: Rs. 5 Rs. 4.80 Rs. 5

Adv.: Rs.5,00,000 Rs. 6,00,000 Rs. 7,00,000 Decreasing Cost

+

Amalgamation Absorption External Reconstruction

X+Y=Z X+Y=X X=Z

X Ltd. + Y Ltd. = Z Ltd.

Amalgamating Co. Amalgamated Co.

(or) (or)
Transferor Co. Transferee Co.
(or) (or)
Vendor Co. Purchasing Co.
(or) (or)
Old Co. New Co.

Vinay Dawar – Assistant Professor in Commerce (Chandigarh University) Page 1

 Types of Amalgamation

I. In the nature of Merger (Pooling Interest) [Applicable, if all the following 5 conditions are satisfied]:
1) All the assets and all the liabilities are to be transferred by the Amalgamating Co. (Old Co.) to the
Amalgamated Co. (New Co.).
2) Shareholders holding more than 90% value of Equity Shares in Amalgamating Co. (Old Co.) are ready to
become the Equity Shareholders in Amalgamated Co. (New Co.).
3) Purchase Consideration must be discharged in the form of Equity Shares. Fractions can be paid in Cash.

Transfer all Asset & Liability

X Ltd. (Old Co.) Y Ltd. (New Co.)

Payment (Purchase Consideration)

4) There must be an intention of Purchasing Co. (New Co.) to carry on the business of Vendor Co. (Old Co.)
even after the amalgamation.
5) There is no need to do the adjustments in the book values of asset and liabilities of Vendor Co. (Old Co.)
while incorporating those in the books of Purchasing Co. (New Co.).

II. In the nature of Purchase [Applicable, if any one or more of the above conditions are not satisfied]

Topics to be Covered in the Chapter

Calculation of Books of Books of

Purchase Amalgamating Amalgamated
Consideration Co. (Old Co.) Co. (New Co.)

Methods

Merger Method Purchase

(Pooling Interest) Method
Lump Sum Net Worth Net Payment Intrinsic Value
Method Method Method Method

If nothing is mentioned about

the method in the Question
then apply Purchase Method

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Purchase Consideration: PC is the amount which is paid by the Purchasing Co. (Amalgamated Co.) for the purchase of
the business of the Vendor Co. (Amalgamating Co.)

Purchase Consideration
• Equity Shares
• Pref. Shares
Means the amount available only and Equity &
only for shareholders Preference We can give them • Cash
• Debentures
• Any Asset

• Equity Shares But these are not

Debenture Holders We can give them
• Cash the part of PC
• Debentures

Because the amount which is given only &

only to the shareholders are part of PC.

Methods of Purchase Consideration:-

1) Lump Sum Method: When the Purchasing Company (Amalgamated Co.) agrees to pay a fixed sum to the Vendor
Co. (Amalgamating Co.), it is called a Lump Sum Payment of purchase consideration. E.g. if X Ltd. takes over the
business of Y Ltd. and agrees to pay Rs.25,00,000 in all, it is a case of Lump Sum Method.

2) Net Worth or Net Asset Method: The Net Worth is arrived at by adding the agreed values of all the assets taken
over by the Purchasing Co. (Amalgamated Co.) and deducting therefrom the agreed values of the liabilities taken
over by the Purchasing Co.
PC or Net Worth is calculated as follows:-
Total Assets taken over (at New or Agreed Value) : ××××
Less: Total Outside Liabilities taken over (at New or Agreed Value) : (××××)
Net Worth or Purchase Consideration : ××××

Note:
i. “Total Assets” will always include Cash in hand and Cash at bank unless otherwise specified but doesn’t
include fictitious assets (preliminary expenses, underwriting commission, discount on issue of debenture &
shares, debit balance of P&L a/c)
ii. Total outside liabilities will not include Equity Share Capital, Preference Share Capital and Reserve &
Surplus.
iii. The term “Business” will always mean both Assets & Liabilities.
iv. Asset & Liabilities are to be considered at the agreed value, if given, otherwise at the book value as it
appears in the books of the Amalgamating company.

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 3) Net Payment Method: This method aggregates the payments made in the form of Shares, Securities and Cash by
the Purchasing Co. to the Vendor Co.

Payment to Payment in Workings Amount

1. Equity Any Form (Swap × (No. of × (New Value ××××
Shareholders Ratio) Shares) of Shares
inc.Prem.)

2. Preference Any Form (Swap × (No. of × (New Value ××××

Shareholders Ratio) Shares) of Shares
inc.Prem.)
Net Payment or Purchase Consideration ××××

(or)
Equity Shares : ××××
Add: Preference Shares : ××××
Add: Cash Paid : ××××
Purchase Consideration : ××××

Note:
i. In this method, the assets & liabilities taken over by the purchasing company are not to be considered.
ii. The payment made by the purchasing company only to the shareholders is taken into account. All other
payments are ignored for the calculation of PC.
iii. Liquidation expenses of the old company, borne by the transferee company will not be added to the PC.
iv. Net Payment method is to be applied only in those cases where all the information regarding payment
to shareholders (equity & preference) is given or everything is clear about the payment and nothing
is missing regarding the payment. But if there is any ambiguity or unclearness about the payment
(e.g. issue 5000 shares and balance of payment in cash) or something is missing about the payment,
then Net Asset method is applicable.

4) Intrinsic Value Method: The intrinsic value of a share is calculated by dividing the net assets available for
equity shareholders by the number of equity shares.

For a newly formed company:

Intrinsic value = Paid up value + Premium – Discount
For existing company:
Intrinsic value of equity share can be calculated as follows:

Sundry Assets at agreed value : ××××

Less: Sundry Outside Liabilities at agreed value : (××××)
Less: Preference Share Capital at agreed value : (××××)
Net Assets available for Equity Shareholders : ××××

𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒 𝐻𝑜𝑙𝑑𝑒𝑟𝑠

𝐼𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

Vinay Dawar – Assistant Professor in Commerce (Chandigarh University) Page 4

 Note: (i) Intrinsic value can be calculated only for equity shares.
(ii) Sundry assets include all tangible and intangible assets but do not include fictitious assets.

This value determines the ratio of exchange of shares between the purchasing and vendor company.

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑙𝑑 𝐶𝑜. 𝑆ℎ𝑎𝑟𝑒 (𝑀. 𝑉. 𝑜𝑟 𝐼. 𝑉. )

𝐷𝑒𝑒𝑚𝑒𝑑 𝑆𝑤𝑎𝑝 𝑅𝑎𝑡𝑖𝑜 =
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑁𝑒𝑤 𝐶𝑜. 𝑆ℎ𝑎𝑟𝑒 (𝑀. 𝑉. 𝑜𝑟 𝐼. 𝑉. )

Books of Amalgamating Company (Transferor/Old Co.)

The books of Amalgamating Co. (Winding Co.) will be closed in the same way as the books of a partnership frim
at the time of dissolution. Following steps will be followed while closing the books of Amalgamating Co.:-

Step I: Transfer all the items of Balance Sheet of Amalgamating Co. at book value to respective accounts:

i. Equity Share Capital , Reserve & Surplus, Fictitious Assets ----→ Equity Share Holder A/c

ii. Preference Share Capital ----→ Preference Share Holder A/c

iii. All remaining assets & liabilities which are taken over
by the Amalgamated Co. ----→ Realization A/c

Step II: Due the Purchase Consideration and then receive the purchase consideration.

Step III: Sale of Assets and Payment of Liabilities which are not taken over by the Amalgamated Co.

Step IV: Pay liquidation or realization expenses

Step V: Payment to Equity Share Holders and Preference Share Holders

Step VI: Close the Accounts:-

Preference Share Holder A/c Bal.Fig. will be transferred to Realization A/c
Realization A/c Bal.Fig. will be transferred to Equity Share Holder A/c
Equity Share Holder A/c Tally (or) Bal.Fig. will be Cash

Realization A/c

To Asset‟s A/c ×××× By Liability‟s A/c ××××

(Taken over by Amalgamated Co.) (Taken over by Amalgamated Co.)
To Loss on sale of assets ×××× By Amalgamated Co.
(which were not taken over) - Purchase Consideration ××××
To Loss on payment of liabilities ×××× By Profit on sale of assets ××××
To Cash/Bank (which were not taken over)
- Realization Expenses ×××× By Profit on payment of liabilities ××××
To Preference Share Holder A/c By Preference Share Holder A/c
- Loss on payment to PSH ×××× - Profit on payment to PSH ××××
To Equity Share Holder A/c (B.F.) By Equity Share Holder A/c (B.F.)
- Profit ×××× - Loss ××××
×××× ××××
 Equity Share Holder A/c

To Fictitious Asset ×××× By Equity Share Capital A/c ××××

To Equity Shares in Amalgamated Co.: ××× By Reserve & Surplus ××××
To Cash/Bank (Bal. Fig.) :××× ×××× By Realization A/c
To Realization A/c - Profit ××××
- Loss ××××
×××× ××××

Preference Share Holder A/c

To Eq/Pref Shares in Amalgamated Co.:××× By Preference Share Capital A/c ××××

To Cash/Bank :××× ×××× By Realization A/c (Bal. Fig.)
To Realization A/c (Bal. Fig.) - Loss on payment to PSH ××××
- Profit on payment to PSH ××××
×××× ××××

Journal Entries in the Books of Amalgamating (Transferor) Company

1) For transferring assets taken over by the Amalgamated (Transferee) Co.:-

Realization A/c Dr. ×××× (at B.V.)
To Asset‟s A/c (Individually) ××××
Note: Those assets which are not taken over and all the fictitious assets will not be transferred to Realization a/c.

2) For transferring liabilities taken over by the Amalgamated (Transferee) Co.:-

Liability‟s A/c (Individually) Dr. ×××× (at B.V.)
To Realization A/c ××××
Note: Those liabilities which are not taken over and Reserve & Surplus will not be transferred to Realization A/c.

3) For transferring Preference Share Capital:-

Preference Share Capital A/c Dr. ××××
To Preference Share Holder A/c ××××

4) For transferring Equity Share Capital and Reserve & Surplus:-

Equity Share Capital A/c Dr. ××××
Reserve & Surplus A/c (Individually) Dr. ××××
To Equity Share Holder A/c ××××
Note: Reserve & Surplus include General Reserve, Debenture Redemption Fund, Dividend Equalization Reserve,
Security Premium Reserve, Surplus A/c, Accident Compensation Fund, Share Forfeiture A/c, Profit Prior
to Incorporation, and any other reserve or fund.

5) For transferring Fictitious Assets:-

Equity Share Holders A/c Dr. ××××
To Fictitious Assets a/c ××××

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 Note: Fictitious assets include preliminary expenses, discount or commission or expenses on issue of shares or
debentures, debit balance of Surplus a/c.

6) For Purchase Consideration:-

Amalgamated Co. A/c Dr. ××××
To Realisation A/c ××××

7) For Receiving Purchase Consideration from the Amalgamated Co.:-

Bank/Cash A/c Dr. ××××
Shares in Amalgamated Co. A/c Dr. ××××
To Amalgamated Co. A/c ××××

8) For the sale of those assets which are not taken over by the Amalgamated Co.:-
Cash A/c Dr. ××××
Realization A/c (if Loss) Dr. ××××
To Asset A/c ××××
To Realization A/c (if Profit) ××××

9) For payment of those liabilities which are not taken over by the Amalgamated Co.:-
Liabilities A/c Dr. ××××
Realization A/c (if Loss) Dr. ××××
To Cash A/c ××××
To Shares in Amalgamated Co. A/c ××××
To Realization A/c (if Profit)

10) For Liquidation expenses:-

a. If expenses are to be met by the Amalgamating Co. itself:
Realisation A/c Dr. ××××
To Cash A/c ××××
b. If expenses are to be met by the Amalgamated Co.:
(No Entry)

11) For payment made to Preference Share Holder:-

Preference Share Holder A/c Dr. ××××
To Cash A/c ××××
To Shares in Amalgamated Co. A/c ××××

12) For payment made to Equity Share Holder:-

Equity Share Holder A/c Dr. ××××
To Cash A/c ××××
To Shares in Amalgamated Co. A/c ××××

13) For Closing Preference Share Holder A/c:-

a. If Profit:-
Preference Share Holder A/c Dr. ××××
To Realization A/c ××××

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 b. If Loss:-
Realization A/c Dr. ××××
To Preference Share Holder A/c ××××

14) For Closing Realization A/c:-

a. If Profit:-
Realization A/c Dr. ××××
To Equity Share Holder A/c ××××
b. If Loss:-
Equity Share Holder A/c Dr. ××××
To Realization A/c ××××

Methods of Accounting for Amalgamation in the Books of Amalgamated (Transfree) Co.:-

I. Merger Method (Pooling of Interest Method): Journal entries in the books of Amalgamated company in case of
Merger-
1) For Purchase of Business:-
Business Purchase A/c Dr. (PC)
To Liquidators of Amalgamating Co. A/c (PC)

2) For Assets & Liabilities taken over:-

Asset‟s A/c (Individually) Dr. (BV)
Surplus (or) General Reserve A/c Dr. (Bal.Fig.)
To Liability‟s A/c (Individually) (BV)
To Business Purchase A/c (PC)
To Surplus (or) General Reserve A/c (Bal.Fig.)
Note: (i) Balancing figure can be crossed check by the following:
Debit Balance of Reserve = Purchase Consideration – Share Capital of Amalgamating Co.
(ii) Liabilities include all the reserves and assets include all the fictitious assets.

3) For payment to the liquidator of the Amalgamating Co.:-

Liquidator of Amalgamating Co. A/c Dr. (PC)
Discount on issue of shares a/c (if any) Dr. (Dis.)
To Cash A/c
To Preference Share Capital A/c (NV)
To Equity Share Capital A/c (NV)
To Security Premium A/c (if any) (Prem.)

4) For liquidation expenses paid by the Amalgamated Co.:-

General Reserve A/c Dr.
Surplus A/c Dr.
To Cash A/c

5) For the formation expenses of the Amalgamated Co.:-

Preliminary Expenses A/c Dr.
To Cash A/c

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 II. Purchase Method: Journal Entries in the books of Amalgamated Co. in case of Purchase:-

1) For Purchase of Business:-

Business Purchase A/c Dr. (PC)
To Liquidator of Amalgamating Co. A/c (PC)
2) For assets and liabilities taken over:-
Asset‟s A/c (Individually) Dr. (Agreed Value)
Goodwill A/c Dr. (Bal.Fig.)
To Liability‟s A/c (Individually) (Agreed Value)
To Business Purchase A/c (PC)
To Capital Reserve A/c (Bal.Fig.)
Note: Liabilities do not include the reserves (whether capital or revenue) other than the statutory reserves.

3) For payment to the liquidator of the Amalgamating Co.:-

Liquidator of Amalgamating Co. A/c Dr. (PC)
Discount on issue of shares a/c (if any) Dr. (Dis.)
To Cash A/c
To Preference Share Capital A/c (NV)
To Equity Share Capital A/c (NV)
To Security Premium A/c (if any) (Prem.)

4) For liquidation expenses paid by the Amalgamated Co.:-

Goodwill A/c Dr.
To Cash A/c

5) For the formation expenses of the Amalgamated Co.:-

Preliminary Expenses A/c Dr.
To Cash A/c

6) For creating/maintaining Statutory Reserve:-

Amalgamation Adjustment A/c Dr.
To Statutory Reserve A/c
Note: (i) These are the Special Reserves which are taken over by the Amalgamated Co.
(ii)Amalgamation adjustment a/c may be disclosed as deduction from the statutory reserve in the
Balance Sheet.

7) For writing off Goodwill against Capital reserve:-

Capital Reserve A/c Dr.
To Goodwill A/c

8) For paying liability by the Amalgamated Co.:-

Liability A/c Dr.
To Share Capital A/c
To Debenture A/c
To Bank A/c

Vinay Dawar – Assistant Professor in Commerce (Chandigarh University) Page 9