“—~ Preparation of Company Accounts under Various Circumstances Illustrations 1. Computation and Discharge of Purchase Consideration Illustration - 1 The Oil Shell Ltd. was incorporated on Ist April 2008 for the purpose of acquiring P Ltd., Q. Ltd., and R Ld. ‘The Balance sheet of these companies as on 31st March 2009 are as follows (Rs) Particulars P Ltd. QLtd. RLtd, Assets ‘Tangible Fixed assets - at cost less depreciation 50,00,000 40,00,000—_30,00,000 Goodwill 6,00,000 Other assets 20,00,000 __28,00,000 Total 70,00,000 __74,00,000 Liabilities Issued Equity Share Capital (shares of Rs. 10 each) 40,00,000 50,00,000 —25,00,000 Profit and Loss A/c 15,00,000 11,00,000-_6,00,000 10% Debentures 7,00,000 4,00,000 Sundry Creditors 800,000 _13,00,000__3,50,000 Total 70,00,000__74,00,000 _38,50,000 Average annual profits before debentures interest 900,000 12,00,000—5,00,000 (April 2008 to March 2009 inclusive) Professional valuation of tangible assets on 3st March 2009 62,00,000__48,00,000__36,00,000 The directors in their negotiations agreed that : (i) the recorded goodwill of Q Ltd. is valueless ; (ii) the “Other assets” of P Ltd. are worth Rs. 3,00,000; (ii) the valuation of 31st March 2009 in respect of tangible Fixed assets should be accepted. (iv) these adjustments are to be made by the individual companyt before the completion of the acquitition. 2. The acquisition agreement provided for the issue of 12% unsecured Debentures to the value of the net assets of companies P Ltd. Q Ltd and R Ltd., and for the issuance of Rs. 100 nominal value equity shares for the capitalized average profit of each acquired company in excess of netassets contributed. The capitalisation rate is established at 10%, You are required to: i, Compute Purchase consideration. ii, Dicscharge of Purchase consideration, 66Advanced Financial Accounting & Reporting Solution : ‘Computation of Purchase Consideration WN #1: Consideration in the form of 12% Debentures Particulars: Pita Qttd Rita Rs Rs. Rs Rs Rs, Rs. a. Asset i. Tangilbe Fixed assets 62,00,000 48,00,000 36,00,000 (as valuation) fi, Other Assets (as per directors _ 3,00,000 65,00,000 _28,00,000 76,00,000 _ 850,000 44,50,000 negotiation) b. Liabilities i. Sundry Creditors 8,00,000 13,00,000 3,50,000 fi, 10% Debentures 7,00,000 4,00,000 _(7,50,000) c. NET ASSETS (a-b) 37,00,000 12% Debentures to be issued. 50,00,000 63,00,000 37,00,000 WN #2: Consideration in the form of Equity Shares Particulars P Ltd. QLtd. R Ltd. Rs. Rs. Rs. a. Average annual profit before debenture interest 9,00,000—12,00,000 5,00,000 (given) b. Debenture interest (on 10% Debentures) 70,000 40,000 ¢. Profit after debentures interest (a-b) 830,000 12,00,000 4,60,000 4. Capitalisation rate 10% 10% 10% €. Capitalised average profit (c/d) 83,00,000 1,20,00,000—_46,00,000 £. Net Assets takeover (WN # 1(0)) 50,00,000 00,000 ___37,00,000 g. Excess of capitalised average profit overnetassets take _ 33,0000 ___57,00,000 9,00,000, over (e+) WN#3: Summary of Purchase Consideration Particulars Pld, Qld, Rid. Rs. Rs. Rs, a, 12% Debentures of Ol Shell Ltd. each @Rs.100/-[WN___50,00,000 _63,00,000—_37,00,000 #1(¢)] b, Equity shares of Rs. 100 each of Oil Shell Ltd. 33,00,000 57,00,000—_9,00,000 [WN #2(g)] ¢ Total Consideration 83,00,000__7,20,00,000__~ 4,00,000 7“—~ Preparation of Company Accounts under Various Circumstances Illustration - 2 Zee Ltd. agreed to absorb Gulf Ltd. on 31st March, 2009, whose Balance sheet stood as follows Liabilities Rs. | Assets Rs. ‘Share capital Fixed assets 70,00,000 80,000 shares of Rs. 100 each Investments fully paid £80,00,000 | Current assets Reserves and surplus Loans and Advances General Reserve 10,00,000 | Stock in trade 10,00,000 Secured Loan —| Sundry Debtors 20,00,000 Unsecured Loan Current Liabilities and Provisions Sundry creditors 10,00,000 17,00,00,000 7,00,00,000 ‘The consideration was agreed to be paid as follows a. A payment in cash of Rs. 50 per share in Gulf Ltd. and b. The issue of shares of Rs. 100 each in Zee Ltd. on the basis of 2 Equity Shars (valued at Rs. 150) and one 10% cumulative preference share (valued at Rs. 100) for every five shares held in Gulf Ltd Tewas agreed that Zee Ltd. will pay in cash for fractional shares equivalent at agreed value of shares in Gulf Ltd, ie. Rs, 650 for five shares of Rs, 500 paid. ‘The whole of the Share capital consists of shareholdings in exact multiple of five except the following. holding Bharati 116 Sonu 76 sh 2 Jagat 28 Other individuals, 8 (eight members holding one share each) “300 Prepare a statement showing the purchase consideration receivable by above shareholders in shares and cash, Solution : WN #1: Statement of consideration paid for fraction shares Particulars Bharti Sonu Hitesh Jagat Others Total a. Holding of shares 116 76 72 28 8 300 b. Non-exchangeable 1 1 2 3 8 15 shares (Payable in Cash) Exchangeable Shares 15 75 70 25 285 [(a) - (b)] d. Above shares i. in Equity shares (2:5) 46 30 28 10 4 ii,_in Preference shares (1:5) B 15 4 5 = 7 8Advanced Financial Accounting & Reporting WN #2: Number of shares to be issued a. Exchangeable shares = Total shares ~ Non Exchangeable shares = 80,000 15 = 79,985 b. Equity shares to be issued : = 79,985. 5 x 2.= 31,994 Shares (ie. 2 shares for every 5 shares) Preference shares to be issued PEE 5 1 =15,997 Shares (je. 1 shares for every 5 shares) WN #3: Cash to be paid Particulars Rs. a. 79,985 shares @ Rs. 50 each 39,99,250 b. Consideration for non-exchangeable [15%100]« Ss (Le. Rs. 650 for five 1,950 shares of Rs. 500 paid) «Total 801200, Statement of Purchase Consideration : Particulars RS. In Shares i. 31,994 Equity shares @ Rs. 150 each 47,99,100 fi, 15,997 Preference shares @ Rs. 100 each 15,99,700 63,98,800 b. In Cash (WN #3) —40.01,200 Total (a+b) 41,04,00,000 Illustration - 3 ‘The summarized Balance Sheets of P Ltd. and R Ltd. for the year ended 31.3.2009 are as under = Pid. RUtd. Pita. Rita. Rs. Rs. Rs. Rs. Equity Share capital (in shares of —-24,00,000-12,00,000 Fixed 55,00,000 27,00,000 Rs, 100 each) Assets 8% Preference Share capital (in 8,00,000, = Current share of Rs, 100 each) Assets 25,00,000 23,00,000 110% Preference Share capital (in — 400,000 shares of Rs. 100 each) Reserv 30,00,000 24,00,000 Current liabilities 18,00,000__ 10,00,000 80,00,000_50,00,000 £80,00,000 _50,00,000 8“—~ TEP! _Prepaaton of Company Accounts under Vatious Circumstances 1. The following information is provided : P Ltd Rta. Rs, Rs, a) Profit before tax 10,64,000 480,000 b) Taxation 400,000 2,00,000 ©) Preference dividend 64,000 40,000 d)_ Equity dividend 2,88,000 1,92,000 2. The Equity shares of both the companies are quoted in the market. Both the companies are carrying, on similar manufacturing operations. 3. P, Ltd. proposes to absorb R Ltd. as on 31.3.2009. The terms of absorption are as under a. Preference shareholders of R Ltd. will receive 8% preference shares of P. Ltd. sufficient to increase the income of preference shareholders of R Ltd. by 10% b. ‘The equity shareholders of R Ltd. will receive equity shares of P Ltd. on the following basis : i. The equity shares of R Ltd. will be valued by applying to the earnings per share of R Ltd. 75% of price earnings ratio of P Ltd. based on the results of 2008-2009 of both the companies. fi, The market price of equity shares of P Ltd. is Rs. 400 per share. ii, ‘The number of shares to be issued to the equity shareholders of R Ltd. will be based on the above market value. iv. In addition to equity shares, 8% preference share of P Ltd. will be issued to the equity shareholders of R Ltd. to make up for the loss in income arising from the above exchange of shares based on the dividends for the year 2008-2009. 4. The assets and liabilities of R Ltd. as on 31.3.2009 are revalued by professional valuer as under Increased by Decreased by Rs. Rs. Fixed assets 1,60,000 — Current assets — 200,000 Current liabilities 40,000 5. For the next two years, no increase in the rate of equity dividend is expected. You are required to i) Calculate purchase consideration. fi) Give the Balance Sheet as on 31.3.2009 after absorption. Note : Journal entires are not required.Advanced Financial Accounting & Reporting Solution : I. Purchase Consideration A. Preference Shareholders 8% preference shares of P Ltd. sufficient to increase income by 10%. Particulars Rs. Current income from Preference shares of R Ltd. 40,000 (Rs. 4,00,000 x 10%) Add : 10% increase 4,000 Income from Preference Shares of P Lid. 44,000 Value of 8% Preference Shares of R Ltd. to be issued [44,000%100/8} 5,50,000 B. Equity Shareholders i, Consideration by way of Equity shares Valuation of shares of P Ltd, (12,000 shares « Rs. 240 [WN #3] RS. 28,80,000 ————.. 481 —, Share Capital Share Premium, 17,200 shares* xRs. 100] 17,200 shares* x Rs. 300] Rs, 7,20,000 Rs, 21,60,000 * No. of shares to be issued = Rs, 28,80,000 + Rs. 400 =7,200 Shares ii, _Consideration by way of Preference Shares Particulars Rs. i, Current equity dividend from R Ltd. 1,92,000 fi, Expected Equity dividend from P Ltd. 86,400 iii, Loss in income 1,05,600 iv. Value of 8% Preference Shares to be issued (1,05,600 + 8%) 13,20,000 C. Total Purchase Consideration [5,50,000 + 28,80,000 + 13,20,000), Rs, 47,50,000 WN #1: Computation of EPS Rs. Particulars Pita. Rita Profit before tax (PBT) 10,64,000 4,80,000 Less : Tax (given) {(4,00,000) _(2,00,000) Profit after tax (PAT) 6,64,000 2,80,000 Less : Preference dividend Profit available to equity shareholders Earnings per share (Profit for Equity Shareholders + No of Shares) (64,000) _ (40,000) 6,00,000 ~ 2,40,000 2B 20 7~~ HF WN #2: PIE ratio of R Ltd. Market Price P/E ratio = Market Price _ 00 EPS: ‘75% of P/E ratio = (16%0.75) 400 25 =Rs.16 =Rs.12 WN #3: Value per share of P Ltd. = EPS x P/E ratio = Rs, 20x Rs. 12 = Rs. 240 WN #4: Adjustment with Reserves ‘Total Purchase Consideration paid to R Ltd. Less : Share Capital of R Ltd. (Equity + Preference) To be adjusted with Reserves Preparation of Company Accounts under Various Circumstances 47,50,000 116,00,000 31,50,000 Reserves = 30,00,000 + 24,00,000 ~ 31,50,000 = 22,50,000 PLtd. Balance Sheet as at on 31.03.2009 (after absorption) Liabilities Amount | Amount Assets Amount | Amount Rs, Rs, Rs, Rs, Equity Share Capital 31,20,000 | Fixed Assets 500,000 (@Rs, 100 each) (@)RLtd. (24,000 + 7,200 (27,00,000 + 1,60,000) | 28,60,000 | 83,60,000 Eq. Shares) Current Assets 25,00,000 8% Preference Shares (OR Lt. of Rs, 100 each, 26,70,000 | (23,00,000-2,00,000) | 21,00,000 | 46,00,000, (8,00045,500+13,200) = 26,700 shares) Reserves (WN #4) 22,50,000 Securities Premium 21,60,000 Current Liabilities 27,60,000 (18,00,000 + 10,00,000 = 40,000) 1.29,60,000 1.29,60,000,