Solutions to Exercises on Amalgamation

Solution 1.
Ledger Accounts in the books of A Ltd.
Realization Account
Date Particulars Rs. Date Particulars Rs.
1.4.2020 To Goodwill A/c 1,30,000 1.4.2020 By Loan from A A/c 1,60,000
1.4.2020 To Machinery A/c 6,40,000 1.4.2020 By Sundry creditors a/c 3,20,000
1.4.2020 To Building A/c 3,40,000 1.4.2020 By 10 % Debentures A/c 4,00,000
1.4.2020 To Stock A/c 2,20,000 1.4.2020 By B Ltd. A/c 12,10,000
1.4.2020 To Debtors A/c 2,60,000 1.4.2020 By Equity Shareholders A/c
1.4.2020 To Bank A/c (debentures) 4,00,000 (Loss on realization) 76,000
1.4.2020 To Bank A/c (Loan of A) 1,60,000
1.4.2020 To Bank A/c(Expenses) 16,000
Total 21,66,000 Total 21,66,000

Bank Account
Date Particulars Rs. Date Particulars Rs.
1.4.2020 To Balance b/d 1,36,000 1.4.2020 By Realization A/c (Loan of A) 1,60,000
1.4.2020 To B Ltd. A/c 6,00,000 1.4.2020 By Realization A/c (Debentures) 4,00,000
1.4.2020 By Realization A/c (Expenses) 16,000
1.4.2020 Equity shareholders’ A/c 1,60,000
Total 7,36,000 Total 7,36,000

Equity Shareholders Account

Date Particulars Rs. Date Particulars Rs.
1.4.2020 To Miscellaneous Expenses A/c 34,000 1.4.2020 By Equity share capital A/c 8,00,000
1.4.2020 To Realization A/c 76,000 1.4.2020 By General Reserve A/c 80,000
1.4.2020 To Equity Shares in B Ltd. A/c 6,10,000
1.4.2020 To Bank A/c 1,60,000
Total 8,80,000 Total 8,80,000

Balance sheet as at 1st April, 2020

Particulars Note No. Rs.
I EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a)Share capital (4,880 equity shares of Rs. 100 each, other than cash) 4,88,000
(b)Reserves and surplus (Securities premium Account = 4,880 X Rs. 25) 1,22,000
Sub-total 6,10,000
(2) Current liabilities
(a)Trade payables (Trade creditors for Rs.3,20,000-Rs. 40,000) 2,80,000
(b)Other current liabilities (Bank overdraft) 6,00,000
Sub-total 8,80,000
Total 14,90,000
II ASSETS
(1) Non-current assets
(a)Fixed assets (Machinery Rs. 5,76,000+Building Rs.3,06,000) 8,82,000
(b)Intangible assets(Goodwill-Rs. 2,16,000+15,000) 2,31,000
Sub-total 11,13,000
(2) Current assets
(a)Inventories (Rs. 2,20,000-Rs. 22,000-Rs. 15,000) 1,83,000
(b)Trade receivables (Trade debtors Rs. 2,60,000-Rs. -26,000-Rs. 40,000) 1,94,000
Sub-total 3,77,000
Total 14,90,000
Note: It is assumed that the company B Ltd. has issued cheque for Rs. 6,00,000 which is in excess of the bank balance
available in the bank account of the company.

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 Working Notes
(i) Computation of consideration for the amalgamation (Net assets basis)
Particulars Rs. Rs.
A. Assets taken over at agreed values
(i)Machinery (Rs.6,40,000-Rs. Rs. 64,000) 5,76,000
(ii)Building (Rs. 3,40,000-Rs. 34,000) 3,06,000
(iii)Stock (Rs. 2,20,000-Rs. 22,000) 1,98,000
(iv)Debtors (Rs. 2,60,000-Rs. 26,000) 2,34,000
(v)Goodwill 2,16,000
Total of assets at agreed values 15,30,000
B. Total liabilities taken over at agreed amount
Trade creditors taken over at carrying amount 3,20,000
C.Net assets being consideration for the amalgamation(A-B) 12,10,000

(ii) Calculation of the form and respective amounts of discharge of consideration for the amalgamation
Particulars From Rs.
(a)Payment by cash Cheque 6,00,000
(b)Payment by issue of shares 4,880 Equity shares in B Ltd.@ of Rs. 100 each at Rs. 125 each 6,10,000
Total 12,10,000

Notes:
(i) The entry to be passed in the books of B Ltd. to reduce the value of stock will be to debit ‘Goodwill A/c’ and credit
‘Stock A/c’ by Rs. 15,000 [i.e. Rs. 25,000-Rs. 10,000 (10 % of Rs. 1,00,000)]. Since the figures for the items related to
B Ltd. are not given in the problem, the Balance Sheet in the books of B Ltd. can be prepared only on the basis of the
assets and liabilities taken over from B Ltd. and other transactions with B Ltd.
(ii) It may be noted that the consideration for the amalgamation as per AS 14is the amount payable only to the
shareholders of the company. As per the instant problem, consideration for the amalgamation is Rs. 12,10,000 which
should be meant for the shareholders only. However, the amount paid to the shareholders is 7,70,000 only (i.e. Rs.
6,10,000 being the equity shares issued by B Ltd. and Rs. 1,60,000 being cash paid to the shareholders out of total
cash Rs. 6,00,000 paid by B Ltd. Thus, the provision of AS 14 in respect of the meaning of consideration for the
amalgamation is violated meaning thereby that the payment made by B Ltd. includes not only the payment made to
the shareholders of A Ltd. but also for other purposes which should never form part of consideration for the
amalgamation. This situation has arisen because of the error in drafting of the problem.
It is possible that the payment made by B Ltd. may not be sufficient for the payment to shareholders of A Ltd. and
hence the balance payment may be made by A Ltd. itself to its shareholders but vice versa as the one in the instant
problem is not possible.
(iii)B Ltd. is paying cash amounting to Rs.6,00,000 to A Ltd. Since it is not given in the problem whether B Ltd. has
cash or not, it is assumed that B Ltd. has overdrawn its bank A/c resulting into Bank overdraft. It can otherwise also
be assumed, e.g. B Ltd. has taken any long-term loan. If it is so assumed that Rs. 6,00,000 (Bank overdraft) will not
appear under ‘Other current liabilities. Rather, it will appear under ‘Long term borrowings’ under ‘Non-current
liabilities’. Another assumption that may be made is that B Ltd. has the share capital of Rs. 6,00,000 and
corresponding cash balance of Rs. 6,00,000 before merger and this cash has been paid by B Ltd. to liquidator of A
Ltd. If this assumption is made then share capital amount will be Rs.10,88,000 (i.e. Rs.4,88,000+Rs.6,00,000).

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Solution 2.
Journal entries in the books of B Ltd.
Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
Business Merger A/c Dr. 8,00,000
To Liquidator of B Ltd. A/c 8,00,000
(Being consideration for the amalgamation made due to the
liquidator of B Ltd.)
Building A/c Dr. 4,50,000
Machinery A/c Dr. 3,10,000
Furniture A/c Dr. 1,15,000
Stock A/c Dr. 2,25,000
Trade Debtors A/c Dr. 1,60,000
Bank A/c Dr. 80,000
Capital Loss A/c Dr. 1,00,000
To 10 % Debentures A/c 2,00,000
To Trade Creditors A/c 1,00,000
To Business Merger A/c 8,00,000
To General Reserve A/c 1,80,000
To Statutory Reserve A/c 90,000
To P&L A/c 70,000
(Being the assets and liabilities and all items of reserves and
surplus of B Ltd. recorded at book values and the difference
between consideration and share capital Loss A/c)
General Reserve A/c Dr. 1,00,000
To Capital Loss A/c 1,00,000
(Being capital set off against general reserve)
Liquidator of B Ltd. A/c Dr. 8,00,000
To Equity Share Capital A/c 5,00,000
To 10 % Preference share Capital A/c 2,00,000
To Securities Premium A/c 1,00,000
(Being consideration for the amalgamation paid to the liquidator
of B Ltd. by the issue of 50,000 equity shares of Rs. 10 each at Rs.
12 each and 2,000 10 % preference shares of Rs. 100 each at par)
10 % Debentures A/c Dr. 2,00,000
To 12 % Debentures A/c 2,00,000
(Being 10 % debentures of B ltd. discharged by the issue of 2,000
12 % debentures of Rs. 100 each at par)
General Reserve A/c/P&L A/c Dr. 20,000
To Bank A/c 20,000
(Being winding up expenses of B Ltd. paid)

Working Notes
Computation of consideration for the amalgamation
Payable to Form Calculation Rs.
Equity shareholders Equity shares in A Ltd. 50,000 x Rs.12 6,00,000
Preference shareholders 10 % preference shares in A Ltd. 2,000 x Rs.100 2,00,000
Total 8,00,000

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Solution 3.
Journal entries in the books of Y Ltd.
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Business Merger A/c Dr. 2,23,000
To Liquidator of X Ltd. A/c 2,23,000
(Being consideration for the amalgamation made due to the
liquidator of X Ltd.)
Building A/c Dr. 1,25,000
Furniture A/c Dr. 67,500
Trademarks A/c Dr. 35,000
Current Investments A/c Dr. 1,00,000
Trade Debtors A/c Dr. 90,000
Bank A/c Dr. 25,000
Capital Loss A/c Dr. 20,500
To 15 % Debentures A/c 1,00,000
To Bank Loan A/c 50,000
To Trade Creditors A/c 75,000
To Accrued Interest on Debentures A/c 15,000
To Business Merger A/c 2,23,000
(Being assets and liabilities of X Ltd. recorded at the carrying
amounts in the books of X Ltd.)
General Reserve A/c Dr. 20,500
To Capital Loss A/c 20,500
(Being capital loss set off against general reserve)
Liquidator of X Ltd. A/c Dr. 2,23,000
To Bank A/c 4,000
To Equity Share Capital A/c 69,000
To 15 % Preference Share Capital A/c 1,00,000
To Securities Premium A/c 50,000
(Being the consideration for the amalgamation discharged)
15 % Debentures A/c Dr. 1,00,000
Accrued Interest on Debentures A/c Dr. 15,000
To Equity Share Capital A/c 1,15,000
(Being the 15 % Debentures and accrued interest thereon
discharged by the issue of equity shares of Rs. 10 each)
Trade Creditors A/c Dr. 75,000
To Bank A/c 37,500
To Equity Share Capital A/c 18,750
To Capital Reserve A/c 18,750
(Being trade creditors discharged by the payment of cash and
issue of equity shares of Rs. 10 each)
Incorporation Cost A/c * Dr. 2,500
To Bank A/c 2,500
(Being the incorporation of Y Ltd. accounted for)

*This will be transferred to Profit and Loss A/c at the end of the year of incorporation.

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 Working Notes
Calculation of consideration for the amalgamation (as per Payment to Shareholders method*)
Payment to Form Calculation Rs.
Equity shareholders (approving) Equity shares in Y Ltd. (23,000/2) x 6 69,000
Equity shareholders (Dissenting) Cash 2,000 x 2 4,000
Preference shareholders 15 % preference shares in Y Ltd. 10,000 x 15 1,50,000
Total 2,23,000

*Since all the forms of payment to shareholders along with their respective amounts are given in the problem, the
consideration is calculated as per this method and not as per Net Assets method.

Solutions to exercises on Internal Reconstruction

Solution 1.
Journal entries in the books of X Ltd.
Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
Equity Share Final Call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Being final call made due on 20,000 equity shares @ Rs.40 each)
Bank A/c Dr. 8,00,000
To Equity Share Final Call A/c 8,00,000
(Being final call money received on 20,000 equity shares)
Equity Share Capital (Rs. 100 each) A/c Dr. 20,00,000
To Equity Share Capital (Rs. 20 each) A/c 4,00,000
To Reconstruction A/c 16,00,000
(Being 20,000 equity shares of Rs. 100 each converted into the same number of
equity shares of Rs. 20 each)
10 % first Debentures A/c Dr. 4,00,000
To 13.5 % Debentures A/c 4,00,000
(Being the debenture holders holding 4,000, 10 % debentures of Rs. 100 each
discharged by the issue of 4,000, 13.5% debentures of Rs. 100 each)
12 % Second Debentures A/c Dr. 10,00,000
To 15 % Debentures A/c 8,00,000
To Reconstruction A/c 2,00,000
(Being the debenture holders holding 10,000, 12 % second debentures of Rs. 100
each discharged by the issue of 8000, 15 % debentures of Rs. 100 each)
Trade Creditors A/c Dr.
To Equity Share Capital A/c 23,00,000
To Bank A/c 6,00,000
To Reconstruction A/c 6,00,000
(Being Mr. Y, one of the trade creditors, paid 6,00,000 in full settlement of Rs. 11,00,000
17,00,000 and the balance trade creditors discharged by the issue of 30,000
equity shares of Rs. 20 each)
Outstanding Interest on Debentures A/c* Dr. 1,60,000
To Reconstruction A/c 1,60,000
(Being the balance in Outstanding Interest on Debentures A/c transferred to
Reconstruction A/c)
Reconstruction A/c Dr. 30,60,000
To Profit and Loss A/c 20,00,000
To Underwriting Commission A/c 40,000
To Property, Plant and Equipment A/c 10,20,000
(Being the fictitious assets fully written off and by the balance in Reconstruction
A/c, fixed assets amount brought down)

*Outstanding Interest on debentures after discharge of debenture holders fully is a liability not required to be paid
and hence is transferred to Reconstruction A/c.
**Market value of investment being Rs. 40,000 is not to be accounted for. It is simply for the sake of disclosure of
additional information as per schedule III.

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Working Notes:
(i) Since the balance sheet of the company has not been given in a complete form, the same as at 31st March, 2020
may be prepared as under:
Particulars Note No. Rs.
I EQUITY AND LIABILITIES
(1) Shareholders ‘funds
(a)Share capital
Equity Share Capital (60 % Paid up) 12,00,000
(b)Reserves and surplus
Surplus i.e. Balance in Statement of Profit and Loss (20,00,000)
Sub-total (8,00,000)
(2) Non-current liabilities
Long term borrowings
(i)10 % first debentures 4,00,000
(ii)12 % second debentures 10,00,000
Sub-total 14,00,000
(3) Current liabilities
(a)Trade payables
Trade creditors (including Y for Rs. 17,00,000) 23,00,000
(b)Other current liabilities 1,00,000
(i) Bank overdraft
(ii) Outstanding interest on debentures for one year 1,60,000
Sub-total 25,60,000
Total 31,60,000
II ASSETS
(1) Non-current assets
(a)Fixed assets 14,00,000
(b)Non-current investments
Investments (Market value Rs. 40,000) 20,000
(c)Other non-current assets (Underwriting commission) 40,000
Sub-total 14,60,000
(2) Current assets
(a)Inventories(Stock) 7,80,000
(b)Trade receivables (Trade debtors) 9,20,000
Sub-total 17,00,000
Total 31,60,000

(ii) Reconstruction Account

Particulars (Rs.) Particulars (Rs.)
To Profit and Loss A/c 20,00,000 By Equity Share Capital A/c 16,00,000
To Preliminary Expenditure A/c 40,000 By 12 % Second Debentures A/c 2,00,000
To Fixed Assets A/c (Bal. fig.) 10,20,000 By Trade Creditors A/c 11,00,000
By Outstanding Interest on Debentures A/c 1,60,000
Total 30,60,000 Total 30,60,000

Solution 2.
Journal entries in the books of Downhill Ltd.
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
Equity Share capital (Rs. 100 each) A/c Dr. 20,00,000
To Equity share capital (Rs. 5 each) A/c 1,00,000
To Reconstruction A/c 19,00,000
(Being 20,000 equity shares of Rs. 100 each reduced to Rs. 5 each)
Equity Share Capital (Rs. 5 each) A/c Dr. 1,00,000
To Equity Share Capital (Rs. 10 each) A/c 1,00,000
(Being 20,000 equity shares of Rs.5 each consolidated into 10,000
equity shares of Rs.10 each)
Outstanding Debenture Interest A/c Dr. 1,20,000
To Reconstruction A/c 1,20,000
(Being outstanding debenture interest waived by the debenture

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 holders)
12 % Debentures A/c Dr. 5,00,000
To 14 % Debentures A/c 5,00,000
(Being 12 % debentures converted into 14 % debentures)
Bank A/c Dr. 5,00,000
To Equity Share Application A/c 5,00,000
(Being application money received for 50,000 equity shares @ Rs.
10 each)
Equity share Application A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being 50,000 equity shares of Rs. 10 each allotted at par)
Trade Creditors A/c Dr. 3,00,000
To Equity Share Capital A/c 2,00,000
To Bank A/c 50,000
To Reconstruction A/c 50,000
(Being creditors of Rs. 2,00,000 issued 20,000 equity shares of Rs.
10 each at par and the balance of creditors paid 50 % cash)
Land and Building A/c Dr. 75,000
To Reconstruction A/c 75,000
(Being land and building revalued upwardly)
Profit Prior to Incorporation A/c Dr. 25,000
To Reconstruction A/c 25,000
(Being the balance in Profit Prior to Reconstruction A/c transferred
to Reconstruction A/c)
Reconstruction A/c Dr. 21,70,000
To Discount on issue of Debentures A/c 20,000
To Profit and Loss A/c 19,80,000
To Plant and Machinery A/c 1,15,000
To Provision for Doubtful Debts A/c 5,000
To Goodwill A/c 50,000
(Being the balance in Reconstruction A/c collected from various
sources used to eliminate losses and assets and the remaining
amount transferred to Capital Reserve A/c)

Balance Sheet after Reconstruction as at 31.3.2020

Particulars Note No. Rs.
I EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital(including 20000 for non-cash consideration) 8,00,000
(2) Non-current liabilities
Long term borrowings(Debentures 5,00,000 + Bank Loan 55,000) 5,55,000
Total 13,55,000
II ASSETS
(1) Non-current assets
Fixed assets
Tangible assets 1 4,90,000
(2) Current assets
(a)Inventories (Stock) 3,50,000
(b) Trade receivables (Trade debtors) 60,000-5000 55,000
(c)Cash and cash equivalents 2 4,60,000
Sub-total 8,65,000
Total 13,55,000
Notes to Accounts (Amount in Rs.)
1. Tangible assets
Land and building 2,25,000
Plant and machinery 1,85,000
Furniture 80,000
Total 4,90,000

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 2. Cash and cash equivalents
Opening bank balance 10,000
Add: Receipt from issue of 50,000 equity shares to directors 5,00,000
Less: payment to creditors (50,000)
Balance 4,60,000

Working Notes
Reconstruction A/c
Particulars Rs. Particulars Rs.
To Discount on Issue of Debentures A/c 20,000 By Equity share capital A/c 19,00,000
To Profit and Loss A/c 19,80,000 By Outstanding Debenture Interest A/c 1,20,000
To Plant and Machinery A/c 1,15,000 By Trade Creditors A/c 50,000
To Provision for Doubtful Debts A/c 5,000 By Land and Building A/c 75,000
To Goodwill A/c 50,000
Total 21,45,000 Total 21,45,000

Solution: 3.
Journal entries in the books of X Ltd.
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
(a)(i) 7 % Cum. Pref. Share Capital (Rs. 100 each) A/c Dr. 5,00,000
To 7 % Cum. Preference share Capital (Rs. 80 each) A/c 4,00,000
To Reconstruction A/c 1,00,000
(Being 5,000 7 % pref shares of Rs. 100 each fully paid reduced
to 5,000 7 % preference shares of Rs. 80 each fully paid)
(a)(ii) Equity Share Capital (Rs. 10 each) A/c Dr. 10,00,00
To Equity Share Capital (Rs. 2.50 each) A/c 0 2,50,000
To Reconstruction A/c 7,50,000
(Being 1,00,000 equity shares of Rs. 10 each fully paid reduced
to 1,00,000 equity shares of Rs. 2.50 each)
(b) Reconstruction A/c Dr.
To Goodwill A/c 1,25,000 75,000
To Patents A/c 50,000
(Being intangible assets written off)
(c) Reconstruction A/c Dr.
To Stock A/c 80,000 50,000
To Debtors A/c 30,000
(Being the value of stock reduced and debtors considered
doubtful written off)
(d) Reconstruction A/c Dr.
To Equity Share Capital A/c 7,000 7,000
(Being 2,800 equity shares of Rs. 2.50 each issued as fully paid
up for the half of the arrears of pref. dividend)
(e)(i) Land and Buildings A/c Dr.
To Reconstruction A/c 70,000 70,000
(Being the increase in the value of land and building accounted
for)
(e)(ii) 7 % Debentures A/c Dr.
To Debenture holders A/c 2,50,000 2,50,000
(Being 7 % debentures made due to the debenture holders)
(e)(iii) Debenture holders A/c Dr.
To Land and Building A/c 2,50,000 2,50,000
(Being debenture holders discharged by handing over land and
building)
(e)(iv) Interest Payable to Debenture holders A/c Dr.
To 7 % Debentures A/c 17,500 17,500

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 (Being 7 % debentures issued for the interest payable to
debenture holders)
(e) (v) Bank A/c Dr.
To Debenture Application A/c 1,50,000 1,50,000
(Being application money received for the issue of 7 %
debentures)
(e)(vi) Debenture Application A/c Dr.
To 7 % Debentures A/c 1,50,000 1,50,000
(Being 7 % debentures issued to the debenture holders in lieu
of additional cash received)
(f) (i) Bank A/c Dr.
To Reconstruction A/c 40,000 40,000
(Being Rs. 40,000 recovered from the person responsible for
damage as a result of conversion of dispute for damages into
actual liability)
(f) (ii) Reconstruction A/c Dr.
To Bank 50,000 40,000
To Equity Share Capital A/c 10,000
(Being the materialization of contingent liability into actual
liability for damages settled by partial cash and the balance by
the issue of 4,000 equity shares of Rs. 2.50 each)
(g) Loan from Director A/c Dr.
To Equity Share Capital A/c 1,00,000 1,00,000
(Being the directors ’loan converted into 40,000 equity shares
of Rs. 2.50 each)
Reconstruction A/c Dr.
To Profit and Loss A/c 6,98,000 5,70,000
To Capital Reserve A/c 1,28,000
(Being the balance in Reconstruction A/c after all uses thereof
transferred to Capital Reserve A/c)

Reconstruction Account
Date Particulars Rs. Date Particulars Rs.
To Goodwill A/c 75,000 By 7 % Pref. Share Capital A/c 1,00,000
To Patents A/c 50,000 By Equity Share Capital A/c 7,50,000
To Stock A/c 50,000 By Land and Buildings A/c 70,000
To Debtors A/c 30,000 By Bank A/c 40,000
To Equity Share Capital A/c 7,000
To Bank A/c 40,000
To Equity Share Capital A/c 10,000
To Profit and Loss A/c 5,70,000
To Capital Reserve A/c 1,28,000
Total 9,60,000 Total 9,60,000

Working Notes: Computation of the number and amount of equity shares to be issued for the arrears of
preference dividend
Particulars Calculation No. of equity Rs.
shares
Arrears of preference dividend - - 14,000
Half of the arrears of dividend waived off Rs. 14,000/2 7,000
Balance of arrears of pref. dividend Rs. 14,000-Rs. 7,000 - 7,000
Nominal value per equity share - - 2.50
Number of equity shares to be issued Rs. 7,000/Rs.2.50 2,800 -

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