a Diccemfing thaveholdeds in Gre Hhose Shatchefders Who hove vied agrecel fo -the Ccohome of anal gnmotirn jedal shoccholders (5000) AN ia Capee) Yeo (ape) ay vawil chotch eit Ao lde 292 | cb ph der e chrfdesd Loil ing sre t : : Poreh i+ Loss FO =F Pod wp Capitol helel >, Peat Ie Vs by rem would be ‘le 40 “oily sranstersed +0 < (aces Mc “Dicserhrg Ghoreholdess | Ale > Accomulated 5 Any P aks J Pemiuen Hee (to foil ye cee, ov ticcount Stastholeea We a alled must be 4]k te Puntisednn Tov Cyarnple ub — pel Yoooo is ‘tel Sooo0- Panyenant 35000-7 ar Wi ication cfmt pP atad to cee ~ Shawhelder $ a Ve 7 enoloy Co , Purchasing Co. 4 uo” —s Gah wil No Goh is to bo = red by Hae yetalned by vend” vendor Co oud of ta “Co 2 Pay mart Todance Sheek | e Coil be clu Gah o¢ Bank bolance te pe G@usidesation .Illustration 18 (Dissenting Shareholders Paid by Transferor Company) Y With a view to effecting economy in working, the United Mills Limited agrees to take over the business of the Bharat Hosiery Limited, from 31 October, 2012. The following is the position of asssets and Equity and liabilities of the Bharat Hosiery Limited as on that date: Equity and Liabilities T | Assets z Paid up capital: Land and buildings 1,80,000 12,000 shares of % 50 each 6,00,000 | Plant and machinery 1,25,000 Reserve fund 1,20,000. | Stock 2,50,000 Reserve for doubtful debts 10,000. | Debtors 2,90,000 Creditors 75,000 | Cash at bank 25,000 Surplus 65,000 8,70,000 000 The purchasers took all the assets and liabilities of the vendor company excepting a sum of % 10,000 to provide for cost of liquidation and payment to any dissentient shareholders. The purchase price was to be discharged by the allotment to the shareholders of the vendor company of one share of 100 (% 90 paid up) of the United Mills Limited for every two shares in the Bharat Hosiery Limited. The expenses of liquidation amounted to % 3,000. Dissentient shareholders of_100_ shares are paid out at % 70 per share, viz., € 7,000. Pass the necessary journal entries in the books of the respective companies to give effect to the above transactions. Ignore narratiion.i ation a COSA ABSORPTION [ACCOUNTING PROCEDURE} ad in the beginni Aseyplatnedt tnt Nees of another existing company: (af 6 fof this chapter, in absorption, one existing eo panies), ny takes over (i.e. absorbs) sean ye tsitness 0 he feror) company may be called as the absorbed company while the purchasing vy (transferor) comps (transferee) company pe vende te termes! as absorbing company _ tient by vendor company: The accounting procedure adopted by the absorbed company is the same ing treatment by vendor ¢ gooounting plained earlier sintng treatment by purchasing company: The account iher explained catice in connection with anna 1 entries made by the absorbing company are similar mation in the nature of merger or amalgamation in the nature of cvial issues in accounting for absorption; There are certain transactions which are peculiar to absorption only scause it absorption) is concerned with two or more tha an two existing companies, For example, there may be certain the scheme of absorption such as inter-company sale and purchase of goods, acceptances (bills of loans ete. In addition, the companies idends before the absorption is complete or purchasing company is common whether the absorption is in ay declare and pay di The accounting procedure in the books of be nature of merger or purchase, “INTER-COMPANY OWINGS dosorption.it might be found that wrvand creditors of each other, The nge given by one con abvorbing (transferee) company ason may be purchase mpany to another comp. and theabsorbed (transferor) company and sale of goods or loans and advances or bills of Alter the take ove books of purchasing (transferee or absorbing) “Sct: namely: amount payable and amount receivable. On absorption both the companies cgal entity with the result that these amounts are neither receivable nor payable. Hence, these ave to be Cancelled by debiting the Payable (Creditors and Bills Payable) Accounts and Crediting the (Debtors and Bills Receivable) Accounts, In other words, the sun dry debtors must be sity creditors and bills ree st bills payable with the lower of two figures. The journa seks of purchasing comp: W show both the set off against civable ag, I entries in the any are: “scellation of Inter-Company Debtors and Creditors “oaty Creditors (Trade Payables) Accou "sty Debtors (Trade Receivables) Acc “ecellation of Inter-Company Loans Di (Amount Payable) (Amount Receivable) Payable Account Dr (Amount Payable) (Amount Receivable) * Loans Receivable Account ‘cxtlton of tner-Company Bills of Exchange ‘vable Account De (Amount Payable) Neng, ils Receivable Account (Amount Receivable) ore fog a ay atom items of mutual debts have tobe made ater the acytbsition entries are way ade by the purchasing company YOUR ATTENTION PLEASE her company and discounted with the hank are not ' bills but bills payable to an outsider, that i the bank, e cancelled because these are telating to inter co bed ung them to Realisation Account, Thus, hasing or absorting) company ts transferred to the realisation Wer these accounts, “ Nt payable tour recetvable fn ton the assumption iwan INTER-COMPANY STOCK Iorption, it might be found that some Boods sold yy 1 ae ied purchasing company = Js sold by ¥ coe ae putin company a Wi company to the pu ad include the profit charged by the Vendor ¢, lsaeat alec of the yn conan and include the pratt books of purchasing celled so that stock is sI ntries: Obviously such x On absorption such profit has to be This is done by making the following eof merger rofit in sto . De. [With the amount of unrealised Profit in stock] eos General Reserve Account To Stock Account n is in the nature of purchase ; , na ' Dr {With the amount of unrealised profit in stock] Gooulill Account Tis Stock Account ing company: The stock of goods of the transferor (Vendor) company might include, x: & Fer Imonptlns some pals sold by transferee (purchasing) company to the transferor (ender ope the vendor company is absorbed its stock becomes stock of the purchasing company. Cons ue he sock bythe purchasing company wold be ts price and thus include unrealised profit In suc a css he pus company would record such stock at cost price (to the purchasing company) while passing acts of the assets of the vendor comy n) NSMENT OF DIVIDEND BEFORE ABSORPTION When the transferor or transferee company pays dividend to its shareholders, the transaction is recorded a: Profit and Loss Appropriation or Surplus Account Dr, [With the Amount of Dividend} General Reserve Account Dr To Bank Account However % ifthe proposed dividend account appears in the balance sheet, the entry would be: Proposed Dividend Account Dr. fo Hank Account The followings points are worth: ting in this connectior (i) Dividend is paid to preference shareholders also, (ii) When the dividend is paid by the transferor (vendor orabsorb: or suprlus account balance and cash balance is reduce paid before absorption, it must be ensured that only account while closing the books of the and loss appropriation oF supr company, ist reduced cash balance is transfe ‘fr ansferor (vendor) company. Also the reduced balance Ts int is transferred to equity shareholders account of # 8 accou: Gif) When the dividend is paid by the transferee ( ‘count and bank mice sheet after aot (purchasing) company, the balances of the prea Account should be reduced by the amount of divide absorption, “pptopriation oF suprlus Preparing the by SALE OF SHARES RECEIVED AS PUR sharcholders of of the vent nge) some of the shares rec rea ‘The journal en \CHASE CONSIDERATION yet in the market Oo Pany may request the liquidator to sell in the ae ‘se consideration from the purchasing or transsalpamation of Companies so ang . scot sharesin the purchasing company 6 gn account « Dr. [With the amount of sale] 7 Purchasing Company “osharesi orpofitomsale oa For Purchasing Company Account Dr. {With the profit on sale quit Shareholders Account forts sale oy Scolds Account Dr. {With the loss on sale] “a Sharesin Purchasing Company aymatvey, te provit or loss on sale may be transferred to Realisation Account. DISTRIBUTION OF REMAINING SHARES sje wmsining shares would be distributed amongst the equity shareholders and they will get the balance, “if any’ in ah It may be noted that due to sale of shares, the number of shares received is less and the amount of cash received is ethan the respective amounts originally agreed upon. The relevant entry i Equity Shareholders Account Dr ‘To Shares in Purchasing Company ‘To Bank Account DISSENTING SHAREHOLDERS the paid up capital held by the dissenting shareholders would be transferred to a ignated as "Disseftting Shareholders’ Account” and any premium they ion Account as is done in the case of preference red to Willing Shareholders Account. All wuld be transferred to the majority ‘Wi Inan examination problem, separate shareholders’ account usually desi recive or the discount they allow must be transferred to the Realisati sharcholders. The remaining profit or loss on realisation is transfei tolance sheet-Hems pertaining to accumulated profits or losses wot Stareholders’ Account’ AS-14 AND EXTERNAL RECONSTRUCTION hnetenal reconstruction, the assets and liabilities ofthe old company are taken over by the new company at their true Crrevsed values and not gt their book valueS-Fence, itis an amalgamation in the nature of purchase. The reason is tht external reconstruction is resorted To only when most of the assets are overvalued and thus, do not reflect their ‘ne values, counting by vendor or old company: The vendor company will make the accounting entries to close its books of “Count in the usual manner as explained earlier. countin the purchasing company usually adopts basically the same accounting Proced jhe nature of purchase unless required otherwise by the examiner. ig by purchasing or new company ‘ ‘ure as is applicable to amalgamation in a sean Al points in external reconstruction: The new companys PY ther "i “them directly. The new company may also satisfy the contingent 2 the time of external reconstruction. The accounting proces vs of the old company: In most of the cases, the ereditors of the old company are ‘2ken over by the new company and in the examination problem no mention is made about their payment with ‘heresult that they are shown in the new balance sheet, However, in external reconstruction, the new company ™ay agree to pay them off in cash or shares of debentures ete 1h such a case the creditors should be treated like cbentureholders, But such payment to the ‘creditors should never be included in calculating purchase Consideration payable by the new company because AS-14 treats only payment to shareholders part of purchase Consideration, It means the creditors should be transferred to Realisation Account in usual manner and paid o! the new company after takeover. instead of taking over the creditors of old company, may liability of the old company arising or becoming dure is as follows: pj Direct Payment to cree10.30 . at liability of the old company by new company: The new company may ay “sm, cote lability of the old company such as arrears of dividend, claims of workers, royalty gg 28° conte paid by the new company i © shor shares etc., should not be included in the purch The ny cede Peat be transferred to Realisation Account of the old company. The contingent ie on wid a taken over the books of new ComPAnY and paid off by it. by EXTERNAL RECONSTRUCTION AND AMALGAMATION (b) Continge ould ance between the two is to be found out by studying the scheme of reorganisation as a whole ‘The differe unstruction only one company is involved while in amalgamation two oF more com Vf Pai (i) In external ree company or where one oF more companies are merged or taken over by na. Cy merged to form a new company. (ii)_In the case of amalgamation the assets and liabilities are amalgamated and the transferee company ber. ‘ested with all such assets and liabilities. On the other hand, the business carried on by a company in tbs, js transferred not to an outsider but to another company emerging out of the existing company consis cabstantially of same shareholders with a view to being continued by the new company. J tian af Number of Debentures)Particulars Note No, Alpha Lig, ® u EQUITY AND LIABILITIES. 1. Sharcholder’s Funds (a) 7% Preference Shares of 100 each Equity shares of € 100 each (b) Reserve and Surplus General Reserve Surplus Account Statutory Reserves 2. Non-Current Liabilities (a) Long-term borrowings (10% Debentures) 3. Current Liabilities (a) Trade Payables- Creditors Bills Payable Total ASSETS 1. Non-Current Assets (a) Property, Plant & Equipment (Tangible) Premises Plant & Machinery 4,50,000 8,00,000 70,000 45,000 27,000 1,50,000 603 20) ain 0 4869 8409 6,50,000 4,80,000 6,200fr Am” Computers near “ t 1,20,000 ‘Assets-Goodwill (pp Intangible 60,000 Current Assets : jes (Stock-in-trade) | {a)_ Inventories ( | (py ‘Trade Receivables ~ Debtors desea et ~ Bills Receivables sin no ; A 100, Casha alents (Ba (9 Cash nd Cash Equivalents (Bank) 12,000 24,000 Total 16,42,000 22,29,000 jauutakes over Alpha Ltd. on 1 April, 2017 on the following terms: ji) Becta Ltd. dis fa) Issued 10,000 equity shares of 100 each at a premium of 5% for the equity shareholders of Alpha Ltd. ® ders of Alpha Ltd. at charged purchase consideration as under: Issued 8% preference shares of 100 each at par to discharge the preference sharehol 10% premium. ji) The Debentures of Alpha, Ltd. to be converted into equivalent number of debentures of Beeta Ltd. ) sundry debtors of Alpha Lid. include € 25,000 being amount due from Alpha Ltd. it) Billspayable of Alpha Ltd. includes % 7,000 being the amount of bills accepted in favour of Beeta Ltd. but the bills Ltd. includes € 5,000 only being the amount ‘of bills due from Alpha Ltd. receivable of Beeta sed from Alpha Ltd. on which Alpha Ltd. made (i) Thestock of Beta Ltd. includes € 30,000 worth of goods purcha aprofit of 25% on cost. (i) Statutory reserves are to be maintained for two more years, jou are required to: 1. Calculate purchase consideration. 2. Pass Journal Entries in the books of Beet ¢ amalgamation. Ltd. assuming that amalgamation is in the nature of purchase. 3. Prepare Balance Sheet of Beeta Ltd. afte er Dr