UNIT-I

AMALGAMATION O FCOMPANIES

1.1
AMALGAMATIONABSORPTION AND EXI TION AND EXTERNAL
RECONSTRUCTION

AMALGAMATION
When two a new
or form company, it is
amalgamation. All theexisting companies combine
more to

new company is floated to

ated. A
take over their business.combining companies are
Real life example: Hero +
Hond
1.2 ABSORPTION

When existing company takes

one more existing Companies. itic
akes over the business of one or
absorption.The companies" whose
over the business
liquidated. No new
taken over are company is
formed. Real life example: hutch + business is taken overa
Vodafone Vodatone
1.3 EXTERNAL RECONSTRUCTION

wnen an exXIsting company is liquidated and a new company is formed with the same

shareholders to take over its business, it is external reconstruction. Sick companies with
accumulated losses usually undergo such reconstruction. Real life example: Gold star LG

14 DIFFERENCES AND EXTERNAL

BETWEEN AMALGAMATION
ECONSTRUCTION
Amalgamation of companies involves liquidation of two or more companies, while
external reconstruction involves liquidation of only one company,
2 Amalgamation of companies results in combination of companies, but external
reconstruction does not result in any such combination.

1.5 DIFFERENCES BETWEEN ABSORPTION AND EXTERNAL

RECONSTRUCTION
. Absorption of companies does not involve formation of a new company; however,
external reconstruction involves formation of a new company.
2. Absorption of companies results in liquidation of one or more companies while
externalreconstruction results in liquidation of only one company.
3 Absorption of companies involves combination of companies,
whereas external reconstruction does not involve any combination.

2. ACCOUNTING PROCEDURE FOR EXTERNAL RECONSTRUCTION

The accounting procedure in case of external reconstruction is the same as in case of

amalgamation or absorption in the nature of purchase. However, there are no different kinds
in this case, unlike in case of amalgamation or absorption, which were of two kindspkie in
nature of merger and in the nature of purchase. The steps in accounting for external
reconstruction are outlined below:
(1) Calculation of purchase consideration:s e consideration
(ii) Ascertainment of discharge of purchase cons
(ii) Closing the books of Vendor Company c o m p a n y

purchasing

(iv) Passing /opening entries in the books of

purchasin
sing company to the
Purchase Consideration: by
the
payable Company.
Purchase Consideration refers to the consideration of
Vendor
liabilities
as the "aggregate of the
vendor company for taking over the assets and ideration
ch
ofach or other assets by
Accounting Standard 14 defines the term purchase in the
form

shares and other securities issued and the payment

made
company'".
Ithough,
Alth purchase
shareholders of
transferor

to the s
the transtferee company to the shareholders of the company

purchasing below:
consideration refers total payment made
to by as
explained
methods,
Company, its calculation could be in different
Vendor
a.
Lump sum method

b.
Net payments method
Net Assets Method
Other basis for purchase consideration Where the purchase
a
method.
this is not Lump Sum
sum Method: strictly speakino
directly, it
is called
a). Lump
consideration
amount is mentioned in the agreement calculation regarding purchase

consideration. This method, does not involve any

consideration. consideration will be the total

purchase
Method: under this method, the on any basis.
b) Net Payments to vendor
company,
form) by purchasing company liabilities of Vendor
of payments made(in any be made towards
company decides the
payment to s will be the
Generally, purchasing The total of such payment
taken over and towards expenses.
Company, not
the excess of
purchaseconsideration.
consideration will be
Method: under this method,
purchase taken
c) Net Assets over the
value of liabilities
company,
taken over by the purchasing calculated using the
value of assets consideration will be
the purchase
over. That is, under this method,
formula Liabilities taken over

(at taken over values) -

= Assets taken over

Purchase Consideration

(at taken over value)

d) Intrinsic value
method: basis of ration in
consideration is ascertained on the
Under this method,
the purchase the selling company.
are exchanged with those of
company
which shares of the purchasing the basis of intrinsic values
of the respective
determined on
The exchange ratio is generally,
companies' shares.

or Vendor Company:
Accounting Entries in
the books of Transferor Company
Realisation A/c
For transferring Assets to Dr. Page
Realisation Account
Account
To Sundry Asset
 For
transferring Liabilities to Realisation A/c Dr.
Liabilities Account
To Realisation Account
3. For
purchase consideration due
Purchasing company account Dr
To Realisation Account
4. For
receiving the purchase consideration Dr
Bank A/c
Share in Purchase Co. A/c Dr
Debenture in Dr
purchasing Co. A/c
To Purchasing Cos A/c
5. For realization assets not taken over
Bank A/c Dr
To Realisation A/c
For payment of
liabilities
not taken over
Dr.
Liability Ac
Realisation A/c (Premium) Dr.
To Bank A/c
To Realisation A/c (Discount)
7. For the payment of realization expenses
(a) fa Expenses paid by Transferor company:
Realisation Account Dr.
To Cash/Bank Account
(b) fExpenses paid by purchasing company:
Purchasing company account Dr.
To cash/bank account
8 For discharging the debentures
(i) Payable at Premium
Debenture account Dr. (with face value)
Realisation Account Dr.
To Debenture Account
(i) Payable at Discount
Debenture Account Dr.
To Realisation Account
To Debenture Account
9 For payment to debenture holders
Debenture holders A/e Dr.
To Bank A/c
To Debenture in purchasing Co.
10 For discharge of preference share cupital
i) Payable at Premium Page3
Preference Share Capital Account Dr. (with face value)
Realisation Account Dr.
 To
Preference Shareholders Account
(ii.) Payable at Discount Dr.
Preference Share Capital Account
To Realisation Account
To Preference
Shareholders Account
11. For closing Realisation
account
(i.) In case
ofprofit Dr.
Realisation Account
To Equity Share Holders Account
(ii.) In case
of loss Dr.
Equity Share Holders Account
To Realisation Account
12. For final payment to the equity shareholders Dr.
Equity shareholder A/c
To Bank A/c
To Share in purchasing Co.

Purchasing Company
Company or
Accounting Entries in the books of Transferee

For Purchase consideration payable

Dr.
Business purchase A/c

To liquidator of Transfere Co.,

2. For Assets and Liabilities taken over

Dr.
Sundry Assets A/c
Dr.
Goodwill Alc
To Sundry Liabilities A/c
To Business Purchase Alc
To Reserve A/e
Capital
For payment of purchase price
3.
A/c Dr.
Liquidator of selling Co.
To Bank Ae
To Share capital A/c
To Securit premium A/c
To Debenture A/c
Transferee Co.
4 For Expense of liquidation paid by
Dr.
Goodwill A/c
To Bank A/c
Co.
5. For Formation expenses of Transferee
Preliminary expenses Alc Dr. Page 4

To Bank A/e
Co. to be continued
For Statutory reserve of the Transferor
 Dr
Amalganmation adjustment A/e
To Statutory Reserve Alc T r a n s f e r o r
Ca

For settlement of
debenture holder creditors oof
or
editors
Dr.
Debenture holder A/c Dr.
Creditors Ac
To Bank A/c

Problems following
terms:
on
the
Ltd.,
Raman Ltd., agrees to purchase the business ofKrishnan

shares res in Raman Ltd.,of

Ltd. 2
Krishnan

i) For each of the 10000 shares of Rs.10 ch in In addition, Rs,.4 ner

er
share.

Rs. 12
per
Rs.10 each will be issued at an agreed value of

share cash also will be paid. 9% debentures in

Rs.60000
settle the
worth Rs.80000 will be issued to
(i)8% debentures
Krishnan Ltd.. up.Calculate the purchase
exnenses of
winding
KS.10000 will be paid towards
(ii)
consideration.
31-3-2014
as on
Following is the balance sheet of Samay Ltd.,
Assets
Rs
Liabilities Rs. Fixed assets 16,25,000
Share capital:
of Rs. 3,00,000
8% preference shares
Investments
3,75,000
100 each
Current 2,50,000
Rs.10 each 7,50,000
Equity shares of assets

General Reserve 4,50,000

3,50,000
7% debentures
Current liabilities
2,50,000
Total 21,75,000
21,75,000
Total

Ltd.,
take over the business of samay
Romay Ltd., agreed to the basis of the
consideration under Net assets method on
Calculate purchase
(A)
following: 9%
debentures at a premium of 10% by issuing
to discharge 7%
1. Romay ltd., agreed
debentures of Romay ltd., investments at par, and
valued at 10% above book value, the
2. Fixed assets are to be
liabilities at book value.
current assets at 10% discount
and current

Page 5
 QUESTIONS
PART

What is amalgamation?
What is absorption?
absorption.
State the difference between amalgamation
and reconstruction.

State the difference between external

absorption and
Write a note on
What is
purchase consideration
net assets
1. method? intrinsic value method?
8. How is purchase consideration computed under
deration computed unac
Write
ite the f
entry for Realization of profit
entry
9. What is external
10. reconstruction?
List the various forms for discharge of purchase consideration.

PART B
11.
plan ne various methods ofcomputing purchase consideration.
12. entries for closing the books of transferor
Company.
Ournal
Give the Journal
passed
entries passed in the books of purchasing company in case of
13.
absorption.
DIstinguish between 'net assets method' and 'net payment method as a basis
14
forcomputing purchase consideration.
Explain With appropriate journal entries, the treatment of realization expenses
15
when it isborne by the i) selling company ii) Purchasing company.

TEXT IREFERENCE BOOKS

1. Gupta R.LCorporate Accounting.Sultan Chand &Sons,15th Editon.,2015
2 Jaln & Narang, Advanced Accountancy, Kalyanl Publlcatlon, 20th Edltton, 2018.
3 Reddy & Murthy, Corporate Accountlng, Margham Publlcatlon.2017.
4. Hanlf M and A Mukherjee, Fundamentals of Corporate Accounting, Mcgrawhl, 2019

Page 6
 UNIT-II

TES
LIQUIDATION OF COMPANI
Company means the
LIQUIDATION MEANING: winding up
or a

termination of the Liquidation uidation orr

o the
the c i r c u m s t a n c e s ,
the assets of the
legal existence of company. Under such ed from assets
company are
a ny.
On amount
realized or
disposed off and the debts are paid, out of the
is distributed amon
from the if any ong
contributions made by the members
members and the surplus
members in
n e

a
proportion to their holding.
of a company.
TYPESOF WINDING UP: There of liquidation
are
a re three
three models
models or

A. Compulsory winding up by the court.

B. Voluntary winding up:
i) Member's voluntary winding up.
(ii) Creditor's voluntary winding up.
C. Voluntary winding up under the supervision of the cou
by the court.
In case of a compulsory winding up: an official liquidator is appointed
by the members at
In the case of a member's voluntary winding un: the liquidator is appointed

their general meeting.

and the members of the
In case of a creditor's voluntary liquidation: both the creditors
If the creditors and the
company nominate the liquidator in their respective meetings,
nominated by creditors
members nominate different persons as the liquidator, the liquidator
will act as liquidator.
of the court: the liquidator may be appointed
Where winding up takes place at the supervision
well
by the members or the creditors or by the court. The liquidator appointed by the court as

as the members and creditors may together function as liquidators.

perform certain functions at

FUNCTIONS OF LIQUIDATOR The liquidator is required to

follows:
the time of liquidation. The main functions are as

1. The primary function of a liquidator is to realise the assets of the company.

contributories.
2. He has to collect the money due from the

3. He has to distribute the amount realised from sale of assets and amount receivedagan
contributories in the order of preference as per Rule 329 of Companies Act.
 4. He has to
maintair and
in the case of submit the of cash to
of cash the
members
luntary record of receipts and payments

Liquidator's Final winding-up and to

Statenment of
nd to the Ourt in the case of compulsor winding up.
f a
of
company, the
liquidator realises all the Account At he time
of
liquidation

assets and and capital. statem

The statemes
prepared to record discharg
Ischarge the liabilities
such
Account. This receipts and payments is called
'Liquidator's
Final Statement of
statement is paym«
prepared after are fully wound-up.
The
liquidator must
make payments affairs of tthe company
Ler the affairs of

in the order of payment

1. Secured Creditors. following
ng order

2. Legal expenses (including

3. Liquidator's remuneration.
liquidation Cxpenses
expenses and cost of winding up).
and cost
4. Payments to debenture
holders and atho t arc having floating charge on the assets of
the company.
5.Payments to Preferential Creditors.
6. Payments to unsecured
Creditors.
7. Calls in advance, if any.
8. Arrears of dividends on cumulative preference shares.
9. Amount due to preference shareholders.
10. Amount due to equity shareholders.