Amity School of Business

Amity School of Business
BBA, Semester II Financial Accounting - II Ms. Kavitha Menon


Amity School of Business

Module V
Amalgamation, Absorption and Reconstruction of Companies


 External Reconstruction: When only one existing company goes into liquidation and a new company is formed to take over the business 3 .e. Internal Reconstruction: There is no liquidation and no taking over of the business by another company.Amity School of Business Meaning Amalgamation : When two or more existing companies liquidate and form a new company. there is alteration and reduction of capital. Capital of a company is reorganized i. which go into liquidation. Absorption: When an existing company acquires the business of one or more another company.

Amity School of Business  Amalgamation involves two companies Transferor Company .a company which is amalgamated into another company  Transferee Company – the company into which a transferor company is amalgamated 4 .

” Note: Only payment to shareholders to be taken into account Consideration for debentures not to be included Liquidation expenses not included Liquidation expenses & payment of debentures & other outside liabilities are to be made by transferee company 5 .Amity School of Business Purchase Consideration “The aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.

Amity School of Business Methods of calculating purchase consideration  Lump Sum Method  Net Payment Method  Net Assets Method  Shares Exchange Method 6 .

Amity School of Business Lump sum Method  Question directly states the amount of purchase consideration 7 .

Amity School of Business Net Payments Method Payments made to shareholders of the transferor company in the form of shares and/or cash. Should not include payments made to debenture holders & creditors. 8 .

P&L a/c Dr. at an agreed value) – Sundry Liabilities (taken over by the transferee co.Amity School of Business Net Assets Method  Purchase consideration = Sundry Assets ( taken over by the transferee co. balance. at an agreed value)  Exclude preliminary expenses. discount on issue of shares and others under the head ‘Miscellaneous Expenditure  Only External liabilities must be taken  To be applied when net payment method cannot be applied 9 .

Intrinsic Value = Net Assets No. of Shares  Exchange ratio is calculated as: Net Assets of Transferor Co.Amity School of Business Share exchange method Based on the Intrinsic Value of shares of the transferor company. For fractional shares .cash to be paid (based on the market value of the shares) 10 . Intrinsic Value of Transferee Co.

is intended to be carried on after amalgamation by the transferee co. No adjustment made to the book values of assets & liabilities of transferor co. except where cash in paid in respect of fractional shares Business of transferor co. Shareholders holding not less than 90% of the face value of the equity shares of transferor co. when they are incorporated 11 . become. assets & liabilities of transferee co. become equity shareholders of the transferee co. after amalgamation.Amity School of Business Amalgamation in the nature of merger All assets & liabilities of transferor co. Consideration is wholly by the issue of equity shares in transferee co.

are recorded in the books of transferee co. at revised values Purchase consideration is satisfied by issue of equity shares & cash payment 12 .Amity School of Business Amalgamation in the nature of purchase An amalgamation which does not satisfy any one or more of the conditions specified under amalgamation in the nature of merger  Example: Assets & liabilities of transferor co.

applicable for amalgamation in the nature of purchase 13 .Amity School of Business Methods of accounting for amalgamation The Pooling of Interests Method – applicable for amalgamation in the nature of merger The Purchase Method .

Amity School of Business Accounting treatment in the books of the transferor company 14 .

discount on issue of shares a/c 15 . reserves & surplus etc Equity Share Capital a/c Dr. (individually at book value) To Realization a/c For transferring equity share capital . General Reserve a/c Dr. discount on issue of shares & debentures is transferred by debiting Shareholders a/c and crediting P&L a/c. To Equity Shareholders a/c Note: Profit & loss a/c debit balance. To Sundry Assets (individually at book value) For transferring different liabilities to Realization a/c Liabilities a/c Dr. Profit & Loss a/c Dr.Amity School of Business For transferring different assets to Realization a/c Realization a/c Dr.

To Realization a/c (with the amount of purchase consideration) 16 .Amity School of Business For transferring preference share capital Preference share capital a/c Dr. To Preference Shareholders a/c Note: If preference share holders are paid more or less than the amount due to them as per balance sheet. the difference is transferred to Realization a/c For purchase consideration due from transferee company Transferee Company a/c Dr.

To Transferee Company a/c Entries for liquidation expenses If borne by transferor company Realization a/c To bank a/c No entry Dr. Preference Shares in transferee company Dr.Amity School of Business On receiving purchase consideration from transferee company Equity Shares in Transferee Company a/c Dr. If borne by transferee company 17 . Debentures in transferee Company Dr.

To preference shares in transferee company To bank For loss on realization Equity Shareholders a/c Dr To Realization Note: Reverse the entry for profit on realization For final payment to Equity Shareholders Equity Shareholders a/c Dr.Amity School of Business For payment to preference Shareholders Preference shareholders a/c Dr. To Equity shares in transferee company To Bank 18 .

Amity School of Business Accounting treatment in the books of the transferee company 19 .

Amity School of Business Pooling of Interest Method 20 .

To Liquidator of transferor company a/c (Being the amount payable to the liquidator of … Ltd.Amity School of Business In the books of the transferee company For amalgamation of the business Business Purchase a/c Dr. under the scheme of amalgamation) For Assets. liabilities and resources taken over Sundry Assets a/c Dr. To Sundry liabilities To Reserves To Profit & loss a/c To Business Purchase 21 .

Amity School of Business For payment of Purchase consideration Liquidator of Transferor Company a/c Dr. To Share Capital (issued) To Securities Premium (premium) To cash a/c (For fractional shares) To Non-cash consideration (in the form of debentures) (Being discharge of purchase consideration) 22 .

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