Business Combination – Practice Questions

1. Chaitanya Limited is absorbed by New Wave Limited. Following are the summary balance sheets of
the two companies as on 31st March 2021.
Capital & Liabilities Chaitanya New Wave Assets Chaitanya New Wave
(Rs.) (Rs.) (Rs.) (Rs.)
Equity share capital Sundry Assets 20,30,000 98,10,000
10,000 Equity shares of Rs. 7,00,000 - Cash in hand 20,000 2,70,000
100 each Rs. 70 paid up
1,00,000 Equity shares of Rs. - 75,00,000
100 each Rs. 75 paid up
Reserve fund 8,50,000 22,00,000
Profit & Loss A/c 3,00,000 2,00,000
Creditors 2,00,000 1,80,000
20,50,000 1,00,80,000 20,50,000 1,00,80,000
It was decided that the holder of every three shares in Chaitanya Ltd. was to receive five shares in New
Wave Ltd., plus as much cash as is necessary to adjust the rights of shareholders of both the companies in
accordance with the intrinsic value of shares as per respective balance sheets. Calculate amount of purchase
consideration and show how it will be discharged.

2. A Ltd. and B Ltd. carrying on similar business decided to amalgamate and for this purpose a new
company AB Ltd. was formed to take over assets and liabilities of both the companies. It is agreed that fully
paid shares of Rs. 100 each shall be issued by the new company to the value of net assets of each of the old
companies. Following are the summary balance sheets of the two companies as on 31st March 2021.
Capital & Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
(Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000)
Equity share capital Goodwill 5,000 2,000
Shares of Rs. 50 each 50,000 40,000 Land & Building 17,000 10,000
General reserve 20,000 - Plant & Machinery 24,000 16,000
Profit & Loss A/c 3,000 - Stock 10,000 7,500
Creditors 4,000 8,000 Debtors 12,000 7,000
Bills Payable 4,000 - Furniture & Fittings 5,000 7,500
Bank overdraft - 8,000 Cash at bank 8,000 300
Profit & Loss A/c - 5,700
81,000 56,000 81,000 56,000
The following is the accepted scheme of valuation of business of the two companies:
A Ltd.:
To provide for provision for bad debts @ 5% on debtors,
To write off Rs. 4,00,000 from stock, and
To write off 331/3% from plant & machinery
B Ltd.:
To eliminate its goodwill and profit & loss account balances,
To write off bad debts Rs. 10,00,000 and to provide provision of 5% on the balance debtors,
To write down plant and machinery by 10% and
To write off Rs. 14,00,000 from the value of stock.
You are required to pass the journal entries and prepare the necessary ledger accounts to close the books of
A Ltd. and B Ltd. giving effect to the above transactions. Also pass the journal entries in the books of AB
Ltd. and prepare balance sheet of AB Ltd. after the business combination.

3. The following are the balance sheets of Nisha Ltd. and Usha Ltd. as on 31st March 2021.
Capital & Liabilities Nisha Ltd. Usha Ltd. Assets Nisha Ltd. Usha Ltd.
Equity share capital Land & Building 70,000 -
Shares of Rs. 100 each 2,00,000 1,20,000 Plant & Machinery 2,20,000 1,00,000
15% Debentures 40,000 - Stock 35,000 18,000
Reserve Fund 76,000 5,000 Debtors 25,000 16,000
Employee’s PF 6,000 - Bank 6,000 2,000
Creditors 30,000 16,000 Misc. Expenses not
Profit & Loss a/c 4,000 - written off
Advertisement exp. - 5,000
3,56,000 1,41,000 3,56,000 1,41,000
The two companies agree to amalgamate and form a new company Ujala Ltd. which takes over the assets
and liabilities of both the companies. The authorised capital of Ujala Ltd. is Rs. 20,00,000 consisting of
2,00,000 equity shares of Rs. 10 each.
The assets of Nisha Ltd. are taken over at 90% of the book value with the exception of land & building
which is accepted at book value.
Both the companies are to receive 10% of the net valuation of their respective business as goodwill. The
purchase consideration is to be satisfied by Ujala Ltd. in its fully paid shares at 10% premium.
In exchange of debentures of Nisha Ltd., debentures of the same amount and denomination are to be issued
by Ujala Ltd.
You are required to close the books of Nisha Ltd. and Usha Ltd. and show the opening balance sheet of
Ujala Ltd.

4. BK Ltd. is formed to take over Bunty Ltd. and Kuber Ltd. The balance sheets of the two companies
as on 31st March 2021 are given below:
Capital & Liabilities Bunty Ltd. Kuber Ltd. Assets Bunty Ltd. Kuber Ltd.
Equity share capital Goodwill - 25,000
Shares of Rs. 10 each 2,40,000 1,60,000 Buildings 1,50,000 1,40,000
11% Preference shares 1,50,000 1,00,000 Machinery 80,000 60,000
General Reserve 45,000 40,000 Furniture 10,000 5,000
Profit & Loss a/c 30,000 21,000 Investments 1,40,000 80,000
9% Debentures 1,00,000 1,00,000 Debtors 1,65,000 60,000
Creditors 60,000 40,000 Stock 75,000 90,000
Other liabilities 40,000 24,000 Cash & bank balances 13,000 8,000
Other current assets 20,000 10,000
Share issue expenses 12,000 7,000
6,65,000 4,85,000 6,65,000 4,85,000
BK Ltd. issued 10,000 equity shares of Rs. 10 each to the public at a premium of 10%. Bunty Ltd. and
Kuber Ltd. were taken over by BK Ltd. on the following terms:
Bunty Ltd.:
Equity shareholders are to be issued 7 equity shares of Rs. 10 each at par in BK Ltd. and are to be paid Rs. 5
in cash for surrender of each 6 shares.
Preference shareholders are to be paid at 10% premium by 12.5% preference shares in BK Ltd. issued at par
All assets & liabilities are valued at book value except machinery which is valued at 10% below book value
and debtors are worth Rs. 1,60,000.
Liquidation expenses of Rs. 12,500 are to be borne by BK Ltd.
Discharge the debentures of Bunty Ltd. at a discount of 10% by issue of 13% debentures of Rs. 100 each in
BK Ltd.
Kuber Ltd.:
Cash Rs. 3,000 is to be retained for liquidation expenses
Debtors and investments are valued at 90% of cost
Machinery & stock are valued at 10% above cost and other assets and liabilities are valued at book value
except fictitious assets
Preference shareholders are to be paid at 10% premium by 12.5% preference shares in BK Ltd. issued at par
Balance of purchase consideration is payable in equity shares at par
Discharge the debentures of Kuber Ltd. at par by the issue of 13% debentures of Rs. 100 each in BK Ltd.
The face value of equity shares and preference shares in BK Ltd. is Rs. 10 each.
You are required to prepare necessary ledger accounts to close the books of Bunty Ltd. and Kuber Ltd. Also
calculate the amount of purchase consideration and its discharge.
 5. The following are the balance sheets of Rohan Ltd. and Sohan Ltd. as on 31st March 2021:
Capital & Liabilities Rohan Ltd. Sohan Ltd. Assets Rohan Ltd. Sohan Ltd.
Equity share capital Goodwill 1,50,000 1,50,000
Shares of Rs. 100 each 9,00,000 15,00,000 Land & Building 6,00,000 7,50,000
9% Preference shares of Rs. 6,00,000 9,00,000 Plant & Machinery 4,50,000 6,00,000
100 each
General Reserve 75,000 90,000 Computer 3,00,000 4,50,000
Profit & Loss a/c 15,000 30,000 Investments 1,50,000 1,50,000
Revaluation reserve 45,000 60,000 Debtors 1,50,000 3,00,000
Export profit reserve 30,000 45,000 Stock 3,00,000 4,50,000
12% Debentures of Rs. 100 3,00,000 4,50,000 Bills receivable 75,000 1,50,000
each
Term loan 1,50,000 75,000 Bank balance 1,95,000 3,75,000
Creditors 2,25,000 1,80,000
Bills payable 30,000 45,000
23,70,000 33,75,000 23,70,000 33,75,000
Mohan Ltd. was formed to take over the business of Rohan Ltd. And Sohan Ltd. With an authorised share
capital of Rs 30,00,000 consisting of 20,000, 13% Preference shares of Rs. 100 each and 1,00,000 Equity
shares of Rs. 10 each.
Terms of amalgamation:
1) 9% preference shareholders of both the companies are issued equal number of 13% preference shares
of Mohan Ltd. at a price of Rs. 125 each
2) Mohan Ltd. will issue four equity shres for three equity shares of Rohan Ltd. and four equity shares
for five equity shares of Sohan Ltd. The shares are to be issued at Rs. 35 each.
3) 12% Debenture holders of both the companies are discharged by Mohan Ltd. by issuing such number
of its 15% Debentures of Rs. 100 each so as to maintain the same amount of interest.
4) Mohan Ltd. agrees to take over all assets and liabilities at book values except the following:
a. Tangible fixed assets at 10% more than book values
b. Investments and debtors at 90% of their book values
5) Export profit reserves are to be maintained for three more years
You are required to:
a) Compute purchase consideration of Rohan Ltd. and Sohan Ltd.
b) Pass journal entries to give effect to the business combination in the books of Mohan Ltd.
c) Prepare the balance sheet of Mohan Ltd. after business combination.

6. Aqua Engineers Ltd., a newly formed company acquired business of Beeta Ltd. as on 31st March
2021. The balance sheet of Beeta Ltd. as on that date was as under:
Capital & Liabilities Rs. Assets Rs.
Equity share capital Goodwill 20,000
Shares of Rs. 10 each 1,50,000 Land & Building 80,000
General Reserve 25,000 Plant 80,000
Export profit reserve 8,000 Investments 30,000
Profit & Loss a/c 18,000 Stock 40,000
12% Debentures 60,000 Debtors 50,000
Creditors 37,000 Bills receivable 8,000
Provision for tax 30,000 Bank 20,000
3,28,000 3,28,000
Terms of acquisition:
1) Aqua Engineers Ltd. issued 25,000 equity shares of Rs. 10 each at Rs. 12 per share
2) Aqua Engineers Ltd. paid Rs. 4 in cash for each share of Beeta Ltd.
3) Aqua Engineers Ltd. discharged 12% debentures of Beeta Ltd. at 10% premium by issue of its 15%
debentures at a discount of 12%
4) Aqua Engineers Ltd. paid absorption expenses Rs. 3,000
 5) Aqua Engineers Ltd. revalued land & building at Rs. 1,00,000, plant at 10% below book value, stock
at Rs. 35,000 and debtors subject to 5% provision for doubtful debts
6) Beeta Ltd. sold one-fifth of the shares received from Aqua Engineers Ltd. at Rs. 13 per share
7) Aqua Engineers Ltd. issued 10,000 equity shares of Rs. 10 each at Rs. 12 each to the public. The
issue was fuly subscribed and paid for
8) Export profit reserve is to be maintained for next three years
You are required to:
a) Compute purchase consideration
b) Prepare necessary ledger accounts in books of Beeta Ltd.
c) Prepare balance sheet of Aqua Engineers Ltd. after business combination

7. R Ltd. and S Ltd. decided to amalgamate and to form a new company T Ltd. The following are the
balance sheets of the two companies as on 31st March 2021:
Capital & Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.
Equity share capital Land & Building 45,00,000 40,00,000
Shares of Rs. 100 each 80,00,000 75,00,000 Plant & Machinery 30,00,000 20,00,000
12% Preference shares of 30,00,000 20,00,000 Stock 35,00,000 30,00,000
Rs. 100 each
Investment allowance 5,00,000 5,00,000 Debtors 54,00,000 36,00,000
reserve
General reserve 13,00,000 10,00,000 Cash 2,00,000 1,00,000
Profit & loss a/c 7,00,000 4,00,000
10% debentures (Rs. 100 6,00,000 3,00,000
each)
Creditors 25,00,000 10,00,000
1,66,00,000 1,27,00,000 1,66,00,000 1,27,00,000
Additional information:
1) T Ltd. will issue 5 equity shares for each equity share of R Ltd. and 4 equity shares for each share of
S lTd. @ Rs. 30 each, having a face value of Rs. 10 per share
2) Preference share holders of the two companies are issued equivalent number of 15% preference
shares of T Ltd., at a price of Rs. 150 per share (face value Rs. 100)
3) 10% debenture holders of R Ltd. and S Ltd. are discharged by T Ltd. by issuing such number of its
15% debentures of Rs. 100 each, so as to maintain the same amount of interest
4) Investment allowance reserve is to be maintained for 3 more years
Calculate the amount of purchase consideration for R Ltd. and S Ltd. and draw up the balance sheet of T
Ltd. after the business combination