UNIT 1- ACCOUNTING FOR BUSINESS

COMBINATION - I
 Meaning –
o Amalgamation
o Acquisition
o External reconstruction

 Methods of Purchase Consideration

o Lumpsum Method
o Net Assets Method
o Net Payments Method

 Types of Amalgamation
o Amalgamation in the nature of merger -Pooling of interest method
o Amalgamation in the nature of Purchase – Purchase Method

 Journal entries and ledger

o In the books of Seller Company
o In the books of Purchaser Company

 Preparation of Balance sheet (Vertical Format)

AMALGAMATION
When two or more existing companies carrying on similar businesses go into
liquidation and form themselves into a new company to take over their
existing businesses, the arrangement or process is called amalgamation of
companies.
 EXAMPLES
1. Maruti Motors operating in India and Suzuki based in Japan
amalgamated to form a new company called Maruti Suzuki (India)
Limited.

2. Tata Sons operating in India and AIA Group based in Hong

Kong amalgamated to form a new company called TATA AIG
Life Insurance.
ACQUISITION / TAKEOVER / ADSORPTION
Acquisition or Takeover refers to a- A company gets liquidated and is sold to another
company.
Absorption of Company is a way of business arrangement in which an existing
company takes over the business of the another entity. The entity who gets absorbed
goes into the liquidation process.

Examples
1. hutch + Vodafone = Vodafone.
2. Takeover of Myntra by Flipkart
EXTERNAL RECONSTRUCTION
A company gets liquidated and in place of it a new company is formed.
In short ―One liquidation and one formation or External Reconstruction
Example

Goldstar = LG
Amalgamation
Existing companies A and B are wound up and a new company C is formed
to take over the businesses of A and B – Amalgamation
In short ―Two or more liquidations and one formation.

Absorption
Existing company A takes over the business of another existing company B
which is wound up
In short ―One liquidation and no formation

External reconstruction
A New Company X is formed to take over the business of an existing
company Y which is wound up.
In short ―One liquidation and one formation
Example: in simple words, X + Y = Z
Real life example: Hero + Honda = Herohonda.

Example: A + B = B
Real life example: hutch + Vodafone = Vodafone.

Example: A = B
Real life example: Goldstar = LG
WHY AMALGAMATE?
1. To acquire cash resources
2. Eliminate competition
3. Tax savings
4. Economies of large-scale operations
5. Increase shareholders value
6. To reduce the degree of risk by diversification
7. Managerial effectiveness
8. To achieve growth and gain financially
 PROCEDURE FOR AMALGAMATION
1.Theterms of amalgamation are finalized by the board of directors of
the amalgamating companies.
2.A scheme of amalgamation is prepared and submitted for approval
to the respective High Court.
3.Approval of the shareholders of the constituent companies is obtained
followed by approval of SEBI.
4.A new company is formed and shares are issued to the shareholders
of the transferor company.
5.The transferor company is then liquidated and all the assets and
liabilities are taken over by the transferee company.
ACCOUNTING PROCEEDURE
1. Calculation of Purchase Consideration
2. Discharge of Purchase Consideration
3. Closing the books of the Transferor Company (Selling Company)
4. Passing Opening entries in the books of Transferee
Company(Purchasing Company)
Types of Amalgamation
I. Amalgamation in the nature of Merger
II. Amalgamation in the nature of Purchase
1. Amalgamation in the nature of
Merger
1. All the assets and liabilities of the selling
company are to be taken over by the
purchasing company.
2. Shareholders holding not less than 90%
equity shares of the selling company
become equity shareholders of the
purchasing company by virtue of the
amalgamation.
3. Purchase consideration should issued be
issued to the shareholders of the selling
company in shares only, except for cash
to satisfy fractions of shares
4. Assets and liabilities taken over should be
shown in purchasing company at their
book values
5. The business of the transferor company is
intended to be carried on after the
amalgamation, by the transferee
company.
2. In the nature of purchase method
1. All the assets and liabilities of the selling
company may not be taken over by the
purchasing company.
2. Shareholders holding not less than 90%
equity shares of the selling company may
become equity shareholders of the
purchasing company by virtue of the
amalgamation.
3. Purchase consideration should issued be
issued to the shareholders of the selling
company may be in shares only, except
for cash to satisfy fractions of shares
4. Assets and liabilities taken over may be
be shown in purchasing company at
values other than book values
5. Business may or may not be carried on in
future
ACCOUNTING FOR AMALGAMATION

Two methods of accounting for amalgamation

(A) Pooling of interest method
(B) Purchase method
A. POOLING OF INTEREST METHOD
A. Pooling of interest Method is applicable for amalgamation in
the nature of Merger.
Under pooling of interest method, all assets, liabilities and reserves
of the transferor company will be recorded by the transferee
company at Book Values unless any adjustment is required due to
different accounting policies followed by these companies.
B. PURCHASE METHOD
B. Purchase Method is adopted for amalgamation in
the nature of Purchase Under this method assets and
liabilities of the transferor company will be
recorded by the transferee company at Agreed
Values.
Difference between Pooling of interest method and Purchase Method
Pooling of Interest Method
1. All assets and liabilities of Transferor Co.
will be incorporated in the books of
Transferee Co.
2. All reserves of Transferor Co. will be
recorded in the books of Transferee Co.
3. The assets and liabilities of Transferor
Co. will be recorded in the books of
Transferee Co. at Book Values.
4. Any difference between Purchase
Consideration and value of assets and
liabilities taken over, must be adjusted
against general reserve.
Purchase Method
1. Only assets and liabilities taken over by
Transferee Co. will be incorporated
2. Only Statutory Reserve of the Transferor
Co will be recorded in the books of
Transferee Co.
3. The assets and liabilities of Transferor Co.
will be recorded in the books of Transferee
Co. at Agreed Values.
4. Any difference between Purchase
consideration and value of assets and
liabilities taken over, must be treated as
Goodwill or Capita Reserve, as the case
may be.
PURCHASE CONSIDERATION
Purchase Consideration refers to the consideration payable by the Transferee Co. to
the Transferor Co. for taking over the assets and liabilities of the Transferor
Company.
In case of amalgamation, purchase consideration is the agreed amount which
transferee company (Purchasing company) pays to the transferor company
(Seller company) in exchange of the ownership of the transferor company.
It may be in form of cash, shares or any other assets as agreed between both
the companies.
Methods of Purchase Consideration
 Lumpsum Method
 Net Assets Method
 Net Payments Method
Method # 1. Lump Sum Method:
The purchasing company may agree to pay a lump-sum to the vendor company on account
of the purchase of its business.

Illustration 1.
A purchasing company agreed to take over a business of selling company for Rs. 5, 00,000.
In such a case, the purchase consideration is Rs. 5,00,000.
No calculations are needed.

Illustration 2.
Total Purchase consideration is Rs.2,60,000 which is to be discharged by issue of 16,000
equity shares of Rs.10 each and Rs.1,00,000 in cash. Calculate Purchase Consideration.
Solution 2.

Calculation of Purchase Consideration

Payment to Shareholdings;
1. Equity shares 16,000 equity shares of Rs.10 each (16,000 *10) = 1,60,000
2. Cash = 1,00,000
Purchase Consideration = 2,60,000
METHOD # 2. NET WORTH OR NET ASSETS METHOD:

(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net
Assets
Illustration 3
Assets of A Ltd. Are valued ₹2,70,000 taken over by X ltd. And amount payable to
creditors and debenture holders are ₹50,000 and ₹1,10,000 (10,000 12%
Debentures of ₹10 each at a premium of 10%). Calculate Purchase Consideration.
Calculation of Purchase Consideration
Value of assets taken over- ₹2,70,000
Less- Value of Liabilities taken over:
Creditors ₹50,000
12% Debentures of ₹10 each at 10% premium ₹1,10,000 ₹1,60,000
(1,00,000 + 10,000)
Total Purchase Consideration ₹1,10,000
ILLUSTRATION 4 (NET ASSETS METHOD):
CALCULATE PURCHASE CONSIDERATION FROM THE FOLLOWING
GIVEN BALANCE SHEET:
SOLUTION
Illustration 5 (Anil Kumar Book, pg. no 83)
Calculate Purchase Consideration to be discharged by Y Ltd. To X Ltd. From the
following information.
The assets of X Ltd. are valued at ₹1,00,000
The liabilities of X Ltd. are valued at ₹40,000.
₹20,000 cash is paid to the shareholders of X Ltd.
The balance of purchase consideration is discharged by issue of shares of 10 each at
₹20per share.
 The following relevant points are to be noted while ascertaining the purchase price under
this method:
(i) Purchasing co. – agree – A &L – Inclusive of cash and bank balance
(ii) All Assets = does not include
a. fictitious assets,
b. like Debit balance of Profit and Loss Account,
c. Preliminary Expenses Account,
d. Discount and other expenses on issue of shares and Debentures,
e. Advertising Expenses Account etc.
(iii) Any specific asset - not taken over by Purchasing Co., - ignored
(iv) Goodwill, pre-paid expenses etc. - Included in the assets - Unless otherwise stated,
 (v) Liabilities will always signify all liabilities to third parties.
- Trade liabilities are those incurred for the purchase of goods such as Trade
Creditors or Bills Payable,
-Other liabilities like Bank Overdrafts, Tax payable, Outstanding expenses etc. are
not a part of trade liabilities.
vi) Liabilities do not include
a. accumulated or undistributed profits like,
b. General Reserve,
c. Securities Premium,
d. Workmen Accident Fund,
e. Insurance Fund,
f. Capital Reserve,
g. Dividend Equalisation Fund etc
METHOD # 3. NET PAYMENT METHOD:
 Net Payment Method: P.C. will be the total of the payments made by
Transferee Co. to Transferor Co. (As per A.S.14 only payment for the
Equity Shareholders & Preference Shareholders are taken for the
purpose of Purchase Consideration.)
Illustration 6
X Ltd is absorbed by Y Ltd. Y ltd agrees to make the following payments:
a. Cash at Rs.5 per share for 10,000 shares of Rs.10 each issued by X ltd.
b. Issued two shares of Rs.20 each for every 5 shares held in X ltd.
c. Discharge Rs.1, 00,000 12% Debentures of X ltd at 10% premium by
issuing Debentures in Y ltd at par.
d. Rs.50, 000 cash to creditors of X ltd in final settlement of their account.

Determine the amount of purchase consideration as per A.S.14.

The following points are to be noted while ascertaining the purchase price under
net payment method:
(i) The assets and liabilities taken over by the transferee company and the values at
which they are taken over are not relevant to compute the purchase consideration.
(ii) All payments agreed upon should be added, whether it is for equity shareholders
or preference share-holders.
(iii) If any liability is taken over by purchasing company to be discharged later on,
such amount should not be deducted or added while computing purchase
consideration.
(iv) When liabilities are not taken over by the transferee company, they are neither
added or deducted while computing consideration.
(v) Any payment made by transferee company to some other party on behalf of
transferor company are to be ignored.
Calculation of Purchase Consideration
As the various payments are mentioned in the question specifically Net Payment
Method is followed.
Payment to Equity Share holders:
By Cash (5x10, 000) = 50,000
By shares (10,000x2/5x20) = 80,000
Purchase consideration = 1, 30,000

(As per A.S.14 consideration given to the Equity share holders & Preference share
holders (Owners) only will be considered for calculating Purchase consideration.
Any payment given to the Debenture holders & Creditors (Outsiders) are not considered
for calculating purchase consideration.
and these payments have to be made directly after taking over of liabilities from
transferrer company by passing an entry in the transferee company.)
Illustration 7(Net Payment Method):
Following in the Balance Sheet of Abi Ltd.:

Calculate purchase consideration under Net Payments Method on the following basis:
1. The vendee company agrees to discharge the 7% debentures at a premium of 10% by issuing 9%
debentures of vendee company.
2. Preference shares are discharged at a premium of 10% by issuing 15% Preference Shares of Rs.
100 each in vendee company.
3. For every 2 Equity shares in Abi Ltd. 3 Equity shares of Rs. 10 each in vendee company will be
issued, in addition to cash payment of Rs. 3 per Equity share in Abi Ltd.
HOW TO IDENTIFY WHICH METHOD
If the problem specifies any method adopt the method specified.
If the amount of P.C. is given: Lump sum Method
When all the payments is given specifically Net Payment Method
When the Payments is given with the statement ―Balance in (cash or shares) ―Net
Asset Method
Sometimes all the payments and agreed value of Assets and Liabilities will be given
in that
ACCOUNTING PROCEEDURE
1. Calculation of Purchase Consideration
2. Discharge of Purchase Consideration
3. Closing the books of the Transferor Company (Selling
Company)
4. Passing Opening entries in the books of Transferee
Company(Purchasing Company)
ACCOUNTING FOR AMALGAMATION

Two methods of accounting for amalgamation

(A) Pooling of interest method
(B) Purchase method
A. POOLING OF INTEREST METHOD
A. Pooling of interest Method is applicable for amalgamation in
the nature of Merger.
Under pooling of interest method, all assets, liabilities and reserves
of the transferor company will be recorded by the transferee
company at Book Values unless any adjustment is required due to
different accounting policies followed by these companies.
B. PURCHASE METHOD
B. Purchase Method is adopted for amalgamation in
the nature of Purchase Under this method assets and
liabilities of the transferor company will be
recorded by the transferee company at Agreed
Values.
Difference between Pooling of interest method and Purchase Method
Pooling of Interest Method
1. All assets and liabilities of Transferor Co.
will be incorporated in the books of
Transferee Co.
2. All reserves of Transferor Co. will be
recorded in the books of Transferee Co.
3. The assets and liabilities of Transferor
Co. will be recorded in the books of
Transferee Co. at Book Values.
4. Any difference between Purchase
Consideration and value of assets and
liabilities taken over, must be adjusted
against general reserve.
Purchase Method
1. Only assets and liabilities taken over by
Transferee Co. will be incorporated
2. Only Statutory Reserve of the Transferor
Co will be recorded in the books of
Transferee Co.
3. The assets and liabilities of Transferor Co.
will be recorded in the books of Transferee
Co. at Agreed Values.
4. Any difference between Purchase
consideration and value of assets and
liabilities taken over, must be treated as
Goodwill or Capita Reserve, as the case
may be.
AMALGAMATION IN THE NATURE OF PURCHASE
Step 3 - Journal entries
Step 4 –Journal entries
 3. CLOSING THE BOOKS OF THE TRANSFEROR
COMPANY (SELLING COMPANY)
1. Transfer of assets to realisation account
2. Transfer of liabilities to realisation account (Including debentures)
3. Purchase consideration due
4. Receipt of Purchase consideration
5. Payment of Realisation expenses
a) Selling co.
b) Purchasing co. - 2
6. Closing of Realisation a/c
7. Transfer of share capital, reserves & profits
8. Final payment to equity shareholders
1. Realization A/cDr
To Individual Asset A/C 5. Expenses met by Transferor Co.
Realisation A/c Dr
2. Individual Liability A/c Dr To Cash / Bank A/c
To Realization A/c

If reimburses by the transferee company

3. Transferee Company A/c Dr At the time of payment
To Realization A/c Transferee co. A/c Dr
To Cash / Bank A/c
4. Equity Shares in Transferee Co. A/c Dr.
Pref. Shares in Transferee Co. A/c Dr Collecting money from the transferee co.
Cash / Bank A/c Dr Cash / Bank a/c Dr
To Transferee Company A/c To Transferee Co.

If Transferee Company meets the Realisation Expenses

directly, no entry is required in Transferor Co.’s Books
6. In case of Profit
Realisation A/c Dr.
To Equity Shareholders A/c
In case of Loss 8. Equity Shareholders
Equity Shareholders A/c Dr. Equity Shareholders A/c Dr.
To Realisation A/c To Cash / Bank A/c
To Shares in Transferee Co. A/c
7. Equity Share Capital A/c Dr.
Reserves A/c Dr.
P&L A/c Dr.
To Equity Shareholders A/c
LIABILITIES
1. Trade creditors 9. Workman savings bank account
2. Bills payable 10. Workman Profit Sharing Fund
3. Bank over draft 11. Provision for taxation
4. Debentures 12. Unclaimed dividend
5. Loans 13. Outstanding Expenses
6. Pension fund 14. Depreciation fund (Land & Builiding)
7. Provident fund
8. Super annuation fund
 Q. 5. The following is the balance sheet of Ashwini Co. Ltd on 31.3.2015

Liabilities Amt Assets Amt

Share Capital (shares of Rs.10 each) 2,00,000 L&B 1,20,000

Debentures 1,00,000 P&M 1,50,000

Creditors 30,000 Work in Progress 30,000

Reserve Fund 25,000 Stock 60,000

Workmen Compensation Fund 10,000 Furniture 2,500

Dividend Rebate Reserve 10,000 Debtors 25,000

P&L A/c 5,100 Cash at Bank 12,500

Depreciation Fund (L&B) 20,000 Cash in Hand 100

4,00,100 4,00,100

The company is absorbed by Jaswant Company Ltd. on the above date. The consideration for
the absorption is the discharge of debentures at a premium of 5%, taking over the trade
liability and a payment of Rs.7 in cash and one share of the face value of Rs.5 in Jaswant
Company Ltd (market value Rs.8 per share) in exchange for one hare in Ashwini co. Ltd. The
cost of liquidation Rs.500 is to be met by the purchasing company. Calculate purchase
consideration and the journal entries in the book of both the companies, under Amalgamation
in the nature of purchase method.
4. PASSING OPENING ENTRIES IN THE BOOKS
OF TRANSFEREE COMPANY(PURCHASING
COMPANY)
1. Purchase consideration due
2. Assets and Liabilities taken over
3. Payment of purchase consideration
4. Payment of realization expenses
5. discharge of debentures
1. Business Purchase/c Dr
To Liquidator of Transferor Co. A/c

PURCHASE METHOD:
2. Sundry Assets A/c (at agreed values) Dr.
Goodwill A/c (balancing figure, if any) Dr.
To Sundry Liabilities A/c (at agreed values)
To Business Purchase A/c (Purchase Consideration)
To Capital Reserve A/c (balancing figure, if any)
(If Purc Consi> Net Assets, Goodwill will arise
as bal. fig.)
(If Purc Consi< Net Assets, Capital Reserve will arise as b/f)
3. Liquidator of Transferor Company A/c Dr.
To Equity / Preference Share Capital A/c
To Securities Premium A/c (if any)
To Cash / Bank A/c (for fractions, etc.)

4. Good will A/c Dr

To Cash A/c

5. Debentures A/c (in Transferor Co)

To Cash A/c
 Illustration. 6. The following the balance sheet of Chandra Ltd. as on 31.3.2015

Liabilities Amt Assets Amt

Share Capital (shares of Rs.30 each, 3,00,000 Building 1,60,000

fully paid)

General Reserve 30,000 Machinery 1,80,000

Wokmen’s Profit sharing fund 15,000 Furniture 10,000

Debenture 15,000 Patents 50,000

Creditors 25,000 Stock 40,000

Debtors 20,000

Cash at bank 10,000

4,70,000 4,70,000

The above company is absorbed by Ravindra Ltd the purchase consideration being the
The above company is absorbed by Ravindra Ltd the purchase consideration being the discharge
discharge of debentures at a premium of 5% by the issue of debentures in Ravindra Ltd,
of debentures at a premium of 5% by the issue of debentures in Ravindra Ltd, taking over the
taking over the liabilities and payment of Rs.5 in cash and 2 shares of Rs.10 each fully paid at
liabilities and payment of Rs.5 in cash and 2 shares of Rs.10 each fully paid at the market value
the market value of 16 per share in exchange for every one share in Chandra Lts. The
of 16expenses
per shareofinliquidation
exchangeamounting
for every one share inare
to Rs.1000 Chandra Ltd. by
to be borne TheRavindra
expenses of liquidation
Ltd. Pass Journal
amounting
entriesto
inRs.1000
the books are
ofto be companies,
both borne by Ravindra Ltd. Pass Journal
under amalgamation in the entries in purchase
nature of the books of both
companies,
method. under amalgamation in the nature of purchase method.
 Illustration. 7. A Company Ltd. is absorbed by B Company Ltd. The consideration being:
a. Assumption of liabilities
Q. 7. A Company
b. Ltd. is absorbed
Discharge by B Company
of debentures Ltd. Theof
at a premium consideration being:of 5% debentures in B
5% by the issue
a. Assumption
companyof liabilities
Ltd.
b. Discharge
c. of Adebentures
payment at of a premium
cash of 5%
of Rs.30 perby the issue of 5% debentures in B company Ltd.
share

c. A payment
d. ofTocash of Rs.303per
exchange share
shares of Rs.10 each in B Co Ltd at an agreed value of Rs.15 per

d. To exchange 3 shares of Rs.10 each in B Co Ltd at an agreed value of Rs.15 per share, for every share in A
share, for every share in A Company Ltd.

Company Ltd. Balance Sheet of A Co. Ltd as on 31.3.2015

Liabilities Amt Assets Amt

Share Capital (60000 shares of Rs.50 each, 30,00,000 Goodwill 2,50,000

fully paid)

General Reserve 3,20,000 Land and Building 7,65,000

P&L A/c 1,80,000 Plant and 22,00,000

Machinery

5% Debenture 15,00,000 Patents 75,000

Creditors 2,00,000 Investments 50,000

Stock 10,60,000

Debtors 4,50,000

Cash at bank 3,50,000

52,00,000 52,00,000

Pass Journal Entries to close the books of A Co. Ltd together with necessary ledger accounts under amalgamation
Pass Journal Entries to close the books of A Co. Ltd together with necessary ledger accounts
in the natureunder
of purchase method.
amalgamation in the nature of purchase method.