Amalgamation of Companies: Accounting Treatment

Introduction: Concept and Types

In order to take the advantage of economies of large scale production, to avoid competition and
duplication of expenses and to employ efficient staff in an organization at a higher salary two or
more companies may combine together forming a new company or by existing company taking
over the business of another existing company. Amalgamation of companies included two types
of activities:

i) Amalgamation: Two or more firm combine together to form a new firm.

ii) Absorption: One or more existing firm may take over the business of another existing firm.

Types of Amalgamation

According to AS-14, for the purpose of accounting there are two types of amalgamation.
Types of Amalgamation

1. Amalgamation in the Nature of Merger

2. Amalgamation in the Nature of Purchase

Amalgamation in the Nature of a Merger

i) The purchasing company or the transferee takes over all the assets of the vendor or the
transferor.

ii) The shareholders holding 90% or more face value of the equity shares of vendor (transferor)
becomes the equity shareholders of the purchasing (transferee) company.

iii) The consideration due to the equity shareholders of the transferor for amalgamation is to be
paid wholly by the issue of equity shares in the transferee, except cash which is to be paid to
dissenting shareholders.

iv) After the amalgamation transferors business is to be run by the transferee.

v) The purchasing company takes over all assets and liabilities of transferor at their book values
except for ensuring uniformity in the accounting policies.

Amalgamation in the Nature of Purchase

Basis Merger Purchase

The purchasing company or the
Assets and
transferee takes over all the assets The transferee company may not take over a
Liabilities
of the vendor or the transferor. assets of the vendor or the transferor compan
Status of Equity The shareholders holding 90% or The equity shareholders of the transferor ma
Shareholding more face value of the equity shares become the equity shares of the purchasing
of vendor (transferor) becomes the company.
equity shareholders of the
purchasing (transferee) company.
Business The business of the transferor
company is being carried over by The transferee company may not carry on th
the transferee company. business of the vendor company.
Payment The purchasing company The entire purchase consideration need not b
discharges the entire purchase discharged by the issue of equity shares.
consideration is via issue of equity
shares. Except that, cash is paid to
the dissenting shareholders.
Book value The purchasing company takes over
all assets and liabilities of transferor The transferee may not buy the assets and lia
at their book values except for of the vendor company
ensuring uniformity in the at their book value
accounting policies.
Reserve All the reserves including statutory
reserve are recorded at their Book Only statutory reserves are recorded at their
Values. Values if they are to be statutorily maintained
It is recorded in the books of the It is not recorded in the books of purchasing
Profit and Loss
purchasing company. company.
Difference It is transferred to General Reserve. The difference between the two is transferred
between the Net to Goodwill Account or Capital Reserve.
Assets and the
Purchase
 Consideration

Purchase Consideration
According to As-14 Consideration for amalgamation means an aggregate of shares and other
securities issued and the payment made in the form of cash by the transferee company to the
shareholders of the transferor company. Thus the purchase consideration will not include the
sum which is being to creditors, debenture holders, or any other liability to third party and even
the expenses which are being for the winding up of the company. If some of the liabilities of the
transferor company are not taken over by the transferee company then such liability is to be
discharged by the transferor company. For the purpose of calculation of purchase consideration
assets and liabilities are taken over at their fair value by the transferee company and if the fair
value is not mention then at their net book values.

Methods For computation of Purchase Consideration

Following are the methods for the computation of purchase consideration:

i) Net Assets Method:

Under this method the value of purchase consideration is calculated by adding the agreed
value/Market value or the fair value of the assets taken over by the purchasing (transferee)
company and deducting the agreed values of the liabilities taken over by the (purchasing)
transferor company. It is calculated as follows:

Agreed value/book value/market value of Assets XXX
(-) Agreed values of liabilities taken over XXX
 Value of Purchase Consideration XXX

Illustration 1: (Net Assets Method)

Following is the balance sheet of A Ltd. As on 31 st March, 2014 on which all its assets and Liabilities are
taken over by B ltd.

EQUITY AND LIABILITY

Share Capital:
1,00,000 Equity Shares of 10 each Fully Paid up 10,00,000
General Reserve 2,50,000
10% Debenture(of 100 Each) 3,00,000
Bills Payable 7,00,000
Other Sundry Liabilities 5,00,000
27,50,000
ASSETS
Plant and Machinery 5,00,000
Furniture 2,50,000
Inventories 10,00,000
Bills Receivable 7,50,000
Cash and Bank 1,50,000
Discount on issue of debentures 1,00,000
27,50,000

Assets and Liabilities are taken over at the following values:

Plant and Machinery: 3,65,000

Furniture: 2,00,000

Inventories:12,00,000

Bills Receivables at 90% of the book value

Bills payable at 5% discount

B Ltd. issued 75,000 Equity Shares of 10 each at 12 per share to the shareholders of A Ltd. and
balance amount of purchase consideration is paid in cash.

Solution:

Value of Assets taken over

Plant and Machinery 3,65,000
Furniture 2,00,000
Inventories 12,00,000
Bills Receivable 6,75,000
Cash and Bank 1,50,000
25,90,000
Less: Sundry Liabilities
10% Debentures Sundry 3,00,000
Creditors 6,65,000
Other Sundry Liabilities 5,00,000
14,65,000
Purchase Consideration 11,25,000

ii) Net Payment Method:

In the Net Payment Method, the value of the purchase consideration is calculated by summing up the total
amount paid by the transferee company to the equity shareholders, preference share holders of the
transferor company including the amount paid in cash if any but it will not include any payment which is
being made to the debenture holders of the transferor company.
Amount of Preference Shares
Purchase Consideration = + Amount of Equity Shares
+ Cash for Preference Shareholders and
Equity Shareholders
Illustration 2: Net Payment Method

Y Co. Ltd agrees to take over the business of Z Co. Ltd; the consideration being the assumption of trade
liabilities 75,000, liquidation expenses amounted to 4,000, redemption of 10% debentures of
8,00,000 at a premium of 10% by the issue of 12% debentures in Y Co. Ltd. and the payment of 20
per share in cash and the exchange of 4 fully paid 10 share in Y Co. Ltd. at the market price of 30 per
share for every share in Z Co. Ltd. The share capital of Transferor Company consists of 10,000 shares of
50 each fully paid.

Solution:

Calculation of Purchase Consideration

Payment to shareholders (Cash):10,000 X 20
2,00,000
Payment to shareholders in shares of Transferee Company i.e.
12,00,000
10,000 X 4 X 30
Purchase Consideration 14,00,000

iii) Intrinsic Value Method/Share Exchange Method:

In the Intrinsic Value Method, the purchase consideration is computed on the basis of Intrinsic Value of
the shares. The Intrinsic Value is calculated by dividing the value of net assets of equity shareholders by
the number of equity shareholders. If the Exchange ratio or swap ratio of the two companies are given
then intrinsic value need not be calculated.

Intrinsic Value = Value of net assets of Equity Shareholders Number of Equity

Shareholders

Illustration 3: Intrinsic value Method

Y Ltd. takes over the business of Z Ltd. and agrees to pay the following amounts:

i) 6 equity shares of Y ltd. for every 10 equity shares of Z Ltd at 30 per share. Z Ltd. has
1,00,000 Equity shares of 10 each.

ii) 10 per share in cash

Calculation of Purchase Consideration

Payment to Equity shareholders:
 Equity shareholders (1,00,000x6/10)30 18,00,000

Cash 12,00,000
Purchase Consideration 30,00,000

Note: (i) When the Exchange Ratio is not given, it will be calculated as follows:

Exchange Ratio = Value of one Share of Transferor Company

Value of one Share of Transferee Company Such value can be market value, intrinsic
value or paid up value.

(ii) When the value of the shares of the companies is not given then the Intrinsic Value of the same has
to be calculated.
Intrinsic value = Value of Net assets available to equity Shareholders Number of Equity Shares
i)

iv) Lump Sum Payment Method:

Under this method transferee (purchasing) company pays a fixed sum to the transferor (vendor) company.

Accounting Treatment as per AS-14

Books of Transferor Company
In case of amalgamation the transferor(vendor)company is dissolved and hence all the
accounts such as equity, assets, liabilities is to be closed by opening Realisation Account,
Equity Shareholders Account, Preference shareholders Account, Bank Account, and accounts
of transferee company.

I) For Transfer of assets to the Realisation Account at their Book Values

Realisation Account Dr.

To Sundry Assets Accounts (Individually)

(i) All Assets are to be transferred at their book values.

 (ii) Provisions against the assets such as Provisions for Bad and Doubtful debts,
Provision for Depreciation etc. should be separately transferred to realisation
account.

(iii) Assets which are not taken over are also to be transferred to realisation account at
their gross book values i.e. without deducting provisions against them

(iv)Cash (in hand as well as at bank) is also transferred to the realisation account in
case of amalgamation in the nature of merger. In the case of an amalgamation in the
nature of purchase, it is transferred only when these are taken over by the transferee
company.

(v) Fictitious Assets such as discount on the issue of shares, debit balance in profit and
loss account, preliminary expenses etc are never transferred to realisation account
even in case when the entire business is taken over by the transferee company.

(vi)Goodwill and other intangible assets such as trademark, patents are also to be
transferred to realisation account.

II) For Transfer of all liabilities to the Realisation Account at their Book Values
Sundry Liabilities Account Dr.

To Realisation Account
(i) All the liabilities whether taken over by the purchasing company or not are to be
transferred at their respective book values to the Realisation Account.

(ii) Fund items such as Pension fund, Provident fund, superannuation fund are external
liabilities and hence should be transferred to Realisation Account.

(iii) In respect of some funds like workmen compensation fund, Employee Insurance
Fund which are partly profit and partly liability; then in that case liability is
transferred to the realisation account and balance which is profit is transferred to the
Equity Shareholders Account.

(iv)Accumulated Profits and Reserves are not transferred to realisation account. These
are transferred to Equity Shareholders Account.
 (v) Debenture holders and other external third part liability is also transferred to the
Realisation Account.

III) Purchase Consideration Becoming Due

Transferee (Purchasing) Company Account Dr.
To Realisation Account
IV) Liquidation Expenses

(i) When liquidation expenses are paid and borne by the transferor company:

Realisation Account Dr.

To Bank Account

(ii) When the liquidation expenses are paid by the transferor company and reimbursed
by the transferee company:

Transferee Companys Account Dr.

To Bank Account

Bank Account Dr.

To Transferee Companys

(iii) When the liquidation expenses are paid as well as borne by the transferee
company, then in that case no entry is made in the books of Transferor Company.

V) Sale of Assets not taken over by the transferee company

Bank Account D
r.
To Realisation Account

VI) Payment of Liability not Taken Over

Realisation Account D
r.
To Bank Account
VII) Payment made to Preference Shareholders

a) When Payable at Par

Preference Shareholders Capital Account D

r.
To Preference Shareholders Account

b) When Payable at Premium

Preference Shareholders Capital Account D
r.
Realisation Account D
r.
To Preference Shareholders Account

c) When Payable at Discount

Preference Shareholders Capital Account D
r.
To Preference Shareholders Account

To Realisation Account

VIII) Closing of Accounts by Recording of Profit/Loss on Realisation Account

a) Profit on Realisation

Realisation Account Dr.

To Equity Shareholders Account

b) Loss on Realisation

Equity shareholders Account D

r.
To Realisation Account

IX) Purchase Consideration Received

Bank Account D
r.
Preference Shares in Transferee Company Account D
 r.
Equity Shares in Transferee Company Account D
r.
To Transferee Companys Account

X) For paying the Preference Shareholders

Preference shareholders Account D
r.
To Bank Account

To Preference Shares in Transferee Company Account

To Equity Shares in Transferee Company Account

XI)Recording the transfer of Equity Share Capital Account, Accumulated Profit and
Reserve Account to Equity Shareholders Account

Equity Share Capital Account D

r.
Capital Reserve Account D
r.
General Reserve Account D
r.
Securities Premium Account D
r.
Profit and Loss Account D
r.
Revaluation Reserve Account D
r.
Capital Redemption Reserve Account D
r.
Sinking Fund Account D
r.
To Equity Shareholders Account

XII) For Transferring Accumulated losses and Fictitious Assets Account to Equity
Shareholders Account

Equity Shareholders Account Dr.

 To Preliminary Expenses Account

To Discount on Issue of shares/Debentures Account

To Underwriting Commission Account

To Advertisement Suspense Account

To Profit and Loss Account

XIII) For Paying the Equity Shareholders

Equity Shareholders Account Dr.

To Equity Shareholders Account in Transferee Company Account

To Cash/Bank Account

Books of Transferee Company

According to AS-14, there are two methods of accounting for Amalgamation:

1. Amalgamation in the nature of Merger (Pooling of Interest Method)

2. Amalgamation in the nature of Purchase (Purchase Method)

Accounting Treatment for Pooling of Interest Method

I) For Purchase Consideration Becoming Due

Business Purchase Account Dr.

To Liquidators of Transferor Company

II) For Recording the Assets Taken over by the Transferee Company From the
Transferor Company

Sundry Assets Account Dr.

To Sundry Liability Account

 To Profit and Loss/Surplus

To General Reserve Account

To Other Reserves Account

To Business Purchase Account

[The books of the transferee company record all the assets, Liabilities and reserves of the
transferor company at their book values on the date of amalgamation. The difference between
the debit and credit balance if any is adjusted in reserve account.]

III) For Paying the Purchase Consideration

Liquidators of Transferor Company Dr.

To Equity Share Capital Account

To Preference Share Capital Account

To Bank Account

[If the Shares are issued at discount or premium then same is debited or credited with the amount
of discount or premium on the issue of shares]

IV) Recording the Payment of the Liabilities of the Transferor Company

Debentures of Transferor Company Account Dr.

To Debentures Account

[If the debentures are issued at discount or at premium then same is debited or credited with the
amount of discount or premium on the issue of debentures]

V) For recording of Liquidation Expenses Paid and borne by the transferee

company

a) Liquidation Expenses Account Dr.

To Bank Account

b) General Reserve/Profit and Loss Account Dr.

To Liquidation Expenses
 VI) For the Payment of formation Expenses by the Transferee Company

Preliminary Expenses Account Dr.

To Bank Account
No Adjustment is to be made in Statutory Reserve. These will be recorded in the books of
transferee company at book values.

5.2.2 Accounting Treatment under Purchase Method

I) For Recording the Business Purchase

Business Purchase Account Dr.

To Liquidators of Transferor Company

[The Assets and liabilities are to be recorded at their book value or a their market values as the
case may be]

II) For Recording the Assets and Liabilities of the Transferor Company taken
over by the Transferee Company

Sundry Assets Account Dr.

To Sundry Liabilities Account

To Business Purchase Account

[The Assets and liabilities are to be recorded at their book value or a their market values as the
case may be]

If the amount of credit account exceeds the amount of Debit account then such
balance is to be debited to Goodwill Account.

If the amount of debit account exceeds the amount of credit account then such
balance is to be credited to Capital Reserve Account.
 III) For Paying the Purchase Consideration

Liquidators of Transferor Company Dr.

To Equity Share Capital Account

To Preference Share Capital Account

To Bank Account

[If the Shares are issued at discount or premium then same is debited or credited with the amount
of discount or premium on the issue of shares]

IV) Liquidation Expenses paid and borne by the Transferee Company

Goodwill Account Dr.

To Bank Account

V) Recording the Payment of the Liabilities of the Transferor Company

Debentures of Transferor Company Account Dr.

To Debentures Account

[If the debentures are issued at discount or at premium then same is debited or credited with the
amount of discount or premium on the issue of debentures]

VI) For Statutory Reserves

Amalgamation Adjustment Account Dr.

To Statutory Reserve Account

[When statutory reserve such as Investment Allowance Reserve, Development Rebate

Reserve etc. are required to be maintained then the above entry is passed]

VII) Formation Expenses of the Transferee company

Preliminary Expenses Account Dr.

To Bank Account
 Illustration 1: Amalgamation in the nature of Merger
The Balance sheet of X Ltd. and Y Ltd. as at 31st March 2014 were as follows:

X Ltd.
Particulars Amount(
)
EQUITY AND LIABILITIES:
Equity share Capital (Shares of 10 each) 15,00,000
General Reserve 20,000
Sundry Creditors 1,00,000
16,20,000
ASSETS
Land and Building 7,50,000
Plant and Machinery 4,50,000
Stock 1,40,000
Debtors 1,80,000
Cash at bank 1,00,000
16,20,000
Y Ltd.
Particulars Amount()
EQUITY AND LIABILITIES:
Equity share Capital 7,50,000
(Shares of 10 each)
General Reserve 1,80,000
Sundry Creditors 45,000
9,75,000

ASSETS
Land and Building 4,50,000
Plant and Machinery 3,00,000
Stock 97,500
Debtors 82,500
Less: Provision (7,500) 75,000
Cash at bank 52,500
 9,75,000

X. Ltd Agreed to absorb the business of Y. Ltd on the following terms and conditions:
i) All the Assets and Liabilities of Y Ltd. are taken over by X Ltd. at book value.
ii) X Ltd. agreed to issue six shares of 10 for every five shares of Y Ltd.
The expenses of absorption amounting to 15,000 were paid X Ltd.
Pass the Journal Entries in the books of X Ltd. according to pooling of interest method and
prepare its balance sheet after absorption.

Solution:

Calculation of Purchase Consideration

Equity Shares: 6/5 x 75,000 x 10=9,00,000

Books of X Ltd.

Particulars Debit Credit

Business Purchase Dr. 9,00,000
To Liquidators of Y Ltd. 9,00,000

(Purchase consideration for taking over the business of Y

Ltd.)
Land and Building Dr. 4,50,000

Plant and Machinery Dr. 3,00,000

Sundry Debtors Account Dr. 82,500

Stock Account Dr. 97,500

Cash at bank Account Dr. 52,500

9,00,000
To Business Purchase Account
45,000
To Sundry Creditors Account
7,500
To Provision for Doubtful Debts
30,000
To General Reserve (Balancing Figure)
(Transfer of all assets and Liabilities and balance to general
reserve)
9,00,000
Liquidators of Y Ltd. Dr.
9,00,000
To Equity Share Capital Account
(Being Payment of Purchase Consideration)
15,000
Liquidation Expenses Account
15,000
To Bank Account
(Being Payment of Liquidation Expenses)
15,000
General Reserve Dr. 15,000
To Liquidation Expenses Account
(Liquidation Expenses Transferred to General Reserve)

X Ltd.
Balance Sheet As at 31st March 2014

Particulars Note
I EQUITY AND LIABILITIES
1. Shareholders Funds
a) Share Capital 1 24,00,000
b) Reserves and Surplus 2 35,000
Sub Total 24,35,000
2. Current Liabilities 3

Trade Payables 1,45,000

Total Equities and Liabilities 25,80,000

II
ASSETS
1. Non Current Assets
a) Fixed Assets
4 19,50,000
i) Tangible Assets
2. Current Assets
5 2,37,500
a) Inventories
6 2,55,000
b) Debtors
7 1,37,500
c) Cash and Cash Equivalent
6,30,000
Sub Total
25,80,000
Total Assets

Notes to Accounts
 Share Capital

Equity Share Capital

1.
Issued , Subscribed and Fully Paid
24,000 Shares of 10 each.
2.
Reserves and Surplus General 2,40,000
Reserve:

Balance b/d

Add: Y Ltd. Portion 20,000

3.
Less: Liquidation Expenses 30,000

Trade Payable 50,000

Creditors For Goods 15,000

Tangible Assets 35,000

Land and Building 1,45,000

4.
Plant and Machinery

Inventories 12,00,000

Stock of Goods 7,50,000

Trade Receivables 19,50,000

5. Debtors For Goods 2,37,500

Less: Provision For Doubtful debts 2,62,500

6. Cash and Cash Equivalent 7,500

2,55,000

7. Cash at Bank 1,37,500

Accounting Notes:

According to the Expert Committee appointed by ICAI:

 i) The difference between the share capital of the transferor company and the share capital
issued by the transferee company on amalgamation should be treated as capital reserve
which is not available for distribution as dividend.

ii) The Difference between the share capital issued and the amount of the share capital of
the transferor (vendor) company should be treated as capital loss as shown below:

Share capital issued by X Ltd. 9,00,000

Less: Share Capital of Y Ltd. 7,50,000

Capital Loss 1,50,000

iii) This Capital loss should be first adjusted against the capital reserve and then against
the revenue reserve.

So the net Provision of General Reserves is:

General Reserve of X Ltd. 20,000

Add: General Reserve of Y Ltd. 1,80,000

2,00,000

Less: Capital Loss 1,50,000

50,000

Less: Liquidation Expenses 15,000

35,000
Illustration 2:

(Amalgamation in the nature of Purchase)

The Balance Sheet of Bhanu Ltd. as on 31st March , 2014 is as follows:

Particulars Amount()
EQUITY AND LIABILITIES Share
Capital:
 1,00,000 Equity Shares of 10 each 10,00,000

4,000 15% Preference Shares of 100 each 4,00,000

General Reserve 2,40,000

Profit and Loss Account 1,60,000

10% Debentures 2,00,000

Sundry Creditors 3,00,000

Total 23,00,000

ASSETS 1,50,000

Goodwill 6,40,000

Land and Building 6,30,000

Plant and Machinery 4,40,000

Stock 1,80,000

Sundry Debtors 1,40,000

Bills Receivables 1,00,000

Cash at Bank 20,000

Preliminary Expenses 23,00,000

Anu Ltd. acquired all the assets and liabilities of Bhanu Ltd. Assets and Liabilities are valued as
follows:


Goodwill 2,50,000

Land and Building 8,60,000

Plant and Machinery 6,00,000

Stock 4,00,000

Sundry Debtors 1,60,000

Bills Receivables 1,30,000

25% of the Purchase Consideration was satisfied by the issue of 20% Preference shares of
100 each fully paid up. Half of the Purchase Consideration was paid by the issue of fully paid
up equity shares at par and the balance was paid in cash. The Preference Shares received from
Anu Ltd. were given to Preference Shares of Bhanu Ltd. in exchange of shares held by them.
Liquidation expenses amounted to 20,000 which was paid by Bhanu Ltd. out of Cash
received from Anu Ltd. Debenture holders of Bhanu Ltd. were discharged by issue of 15%
own debentures of Anu Ltd.

You are required to Prepare:

i) Realisation Account, Preference Shareholders Account, Anu Ltd. Account, Equity

Shareholders Account and Cash and Bank Account ii) Pass the journal Entries in the books of
Anu Ltd.

Solution:

Calculation of Purchase Consideration

 Assets taken Over Amount()
Goodwill 2,50,000
Land and Building 8,60,000
Plant and Machinery 6,00,000
Stock 4,00,000
Sundry Debtors 1,60,000
Bills Receivables 1,30,000
1,00,000
Less: Liabilities Taken over 25,00,000
Sundry Creditors 3,00,000
10% Debentures 2,00,000 5,00,000
20,00,000
Purchase Consideration To be discharged as under:
20% Preference shares 5,00,000
Equity Shares 10,00,000
Cash 5,00,000
20,00,000

In the Books of Bhanu Ltd.

Dr. Realisation Account Cr.

Particulars Amount () Particulars Amount ()

To Goodwill A/c 1,50,000 By 10% Debentures A/c 2,00,000
To Land And Building A/c 6,40,000 By Sundry Creditors By 3,00,000
To Plant and Machinery A/c 6,30,000 Anu Ltd. 20,00,000
To Stock A/c 4,40,000
To Sundry Debtors A/c 1,80,000
To Bills Receivable A/c 1,40,000
To Cash at Bank A/c 1,00,000
To Preference Shareholders A/c 1,00,000
To Bank A/c (Liq Expenses) 20,000
To Equity Shareholders (Profit) 1,00,000

25,00,000 25,00,000

Dr. Anu Ltd. Account Cr.

Particulars Amount () Particulars Amount ()

To Realisation A/c 20,00,000 By 20% Preference Shares in Anu Ltd. 5,00,000
By Equity Shares in Anu Ltd. By 10,00,000
Bank A/c 5,00,000
20,00,000 20,00,000

Dr. Preference Shareholders Account Cr.

Particulars Amount() Particulars Amount()

To 20% Preference shares in 5,00,000 By 15% Preference Share 4,00,000
Anu Ltd. Capital
By Realisation A/c 1,00,000
5,00,000 5,00,000

Dr. Equity Shareholders Account Cr.

Particulars Amount() Particulars Amount()

To Preliminary Expenses A/c 20,000 By Equity Share Capital 10,00,000

To Equity Shares in Anu Ltd 10,00,000 By General Reserve A/c 2,40,000

To Bank A/c 4,80,000 By Profit and Loss A/c 1,60,000

By Realisation A/c 1,00,000

 15,00,000 15,00,000

Dr. Bank Account Cr.

Particulars Amount() Particulars Amount()

To Balance b/d 1,00,000 By Realisation A/c 1,00,000

To Anu Ltd 5,00,000 By Realisation A/c 20,000

By Equity Shareholders A/c 4,80,000

6,00,000 6,00,000

Books of Anu Ltd.

S.No
Particulars Debit () Credit ()
.
i) Business Purchase Dr. 20,00,000

To Liquidators of Bhanu Ltd. 20,00,000

ii) (Being Purchase Consideration)

Goodwill(Balancing Figure) Dr. 2,50,000

Land and Building Dr. 8,60,000

Plant and Machinery Dr. 6,00,000

Sundry Debtors Account Dr. 1,60,000

Stock Account Dr. 4,00,000

Bills Receivables Dr. 1,30,000

Cash at bank Account Dr. 1,00,000

20,00,000
To Business Purchase Account
3,00,000
To Sundry Creditors Account
2,00,000
To 10% Debentures in Bhanu Ltd.
iii)
(Being Taking over of Assets and Liabilities)

20,00,000
Liquidators of Bhanu Ltd. Dr. 5,00,000
To Equity Share Capital Account 10,00,000

iv) To 20% Preference Share Capital 5,00,000

To Bank A/c

(Being discharge of purchase consideration)

2,00,000
10% Debentures in Bhanu Ltd. A/c Dr. 2,00,000

To 15% Debentures A/c

(Being discharge of debentures of Bhanu Ltd.

by the issue of own debentures by Anu Ltd.)
Inter Company Owings

Sometimes at the time of absorption it is found that the transferee company and the transferor
company are debtors and creditors of each other due to the sale and purchase of goods or bills
of exchange or loans and advances given by one company to another company. After the
absorption both the companies becomes the single legal entity as a result of it there are no
receivables nor payables and hence these accounts have to be eliminated by debiting the
Payable Account like creditors or Bills payable and by crediting the Receivables Accounts like
Debtors and Bills receivables.

Accounting Treatment
1. Books of Transferor Company
There is no effect of inter-company Owings in the books of transferor company. All the entries
are passed in the same manner in the books of the transferor company.

2 Books of Transferee Company

I) Cancellation of Inter Company Trade Debtors and Trade Creditors Sundry
Creditors Account Dr.

To Sundry Debtors Account

II) Cancellation of Inter Company Loans

Loan Payable Account Dr.

To Loan Receivable Account

III) Cancellation of Inter Company Bills of Exchange

Bills Payable Account Dr.

To Bills Receivable Account

Note: Any bills which is drawn by one company in favour of another company and discounted
with the bank in no longer intercompany bills of Exchange and hence no tot be cancelled.
Inter-Company Stock

Goods Sold by the Vendor Company:

Sometimes it may be possible that the goods sold by the transferor company to the Transferee
company may be lying in the stock of Transferee Company. Such Goods are at selling price of
the vendor company and hence includes the profit. In case of Absorption such profit is to be
cancelled so as to show the stock at cost price in the books of transferee company.

1)Amalgamation in the Nature of Merger

Profit and Loss Account/ General Reserve Account Dr.

To Stock Account

II) Amalgamation in the Nature of Purchase

Goodwill Account Dr.

To Stock

Goods Sold by the Purchasing Company:

At the time of absorption the stock of goods of Transferor Company might include some goods
sold by the transferee (Purchasing) Company to the transferor (Vendor) Company. When the
transferor company is absorbed it becomes the stock of Transferee Company. The stock which
is acquired by the purchasing company is at the selling price and includes unrealised profit. In
such a case the Purchasing Company would record the stock at cost price while passing the
entries on acquisition of the assets of the vendor company.

Illustration 3: (Inter Company Owings)

Mittal Ltd. agreed to acquire the business of Ashish Ltd. The Balance Sheet of Ashish Ltd as on
31st March, 2014 is as follows:
Particulars Amount()
EQUITY AND LIABILITIES
Share Capital:
75,000 Equity Shares @ 10 each Total 7,50,000
37,500 10% Preference Shares @ 10 each 3,75,000
Profit and Loss Account 1,68,750
15% Debentures 3,75,000
Sundry Creditors 5,62,500
22,31250
ASSETS
Land and Building
7,50,000
Plant and Machinery
3,75,000
Stock
7,50,000
Cash at Bank
1,87,500
Sundry Debtors
1,31,250
Discount on the issue of Shares
37,500
22,31,250
The Purchase Consideration was Payable as follows:

i) Equity Shares are discharged by the issue of 6 equity shares of 10 each at a premium of
10% and are to be paid in cash against for every 5 shares held.

ii) The Preference Shareholders of Ashish Ltd. are discharged by the issue of 20%
preference Shares at a premium of 10% in Mittal Ltd.

iii) Debenture holders of Ashish Ltd. are to be discharged by Mittal Ltd at a premium of 8%
by the issue of 20% Debentures at a discount of 5% Assets and Liabilities are valued as
follows:

Land and Building 9,37,500

Stock 8,25,000

Debtors at book value providing provision of 10% for Doubtful Debts

Debtors of Ashish Ltd include 5,000 Due from Mittal Ltd.

It was agreed that before acquisition, Ashish Ltd will pay dividend at the rate of 20%
to Equity shareholders.
You are required to prepare necessary Ledger Accounts in the books of Ashish Ltd and pass
Journal Entries in the books of Mittal Ltd.

Solution:

Calculation of Purchase Consideration

Particulars Amount()
Preference Shareholders

20% Preference shareholders 37,500 x10=3,75,000

Cash 37,500 x 1= 37,500 4,12,500

Equity Shareholders

Equity shares 75,000 x 6/5 x 11=9,90,000

Cash 75,000 x 3/5= 45,000 10,35,000

Purchase Consideration 14,47,500

Books of Ashish Ltd.

Dr. Realisation Account Cr.

Amount Amount
Particulars Particulars
( ) ( )
To Land And Building A/c 7,50,000 By 15% Debentures 3,75,000

To Plant and Machinery A/c 3,75,000 By Sundry Creditors 5,62,500

By Mittal Ltd.
To Stock A/c 7,50,000 14,47,500

To Sundry Debtors A/c 1,31,250

To Cash at Bank A/c 37,500

(1,87,5001,50,000)

To Preference Shareholders A/c

(4,12,500-3,75,000) 37,500

To Equity Shareholders (Profit) 3,03,750

23,85,000 23,85,000

Dr. Mittal Ltd. Account Cr.

Particulars Amount() Particulars Amount()

To Realisation A/c 14,47,500 By 20% Preference Shares in Mittal Ltd. 4,12,500

By Equity Shares in Mittal Ltd. 9,90,000

By Bank A/c 45,000

14,47,500 14,47,500

Dr. Preference Shareholders Account Cr.

Particulars Amount() Particulars Amount()

To 20% Preference shares 4,12,500 By 10% Preference Share Capital 3,75,000

in Mittal Ltd. By Realisation A/c 37,500

4,12,500 4,12,500

Dr. Equity Shareholders Account Cr.

 Particulars Amount Particulars Amount

() ( )
To Discount on issue of shares 37,500
By Equity Share Capital 7,50,000
To Equity Shares in Mittal Ltd 9,90,000
By Profit and Loss A/c
To Bank A/c 45,000
(1,68,750-1,50,000) By 18,750
Realisation A/c 3,03,750
10,72,500 1072,500

In the Books of Mittal Ltd.

S.No. Particulars Debit Credit

i) Business Purchase Dr. 14,47,500
To Liquidators of Ashish Ltd. 14,47,500

(Being the Purchase Consideration) 1,15,313

ii) Goodwill(Balancing Figure) Dr. 9,37,500
Land and Building Dr. 3,75,000
Plant and Machinery Dr. 1,31,250
Sundry Debtors Account Dr. 8,25,000
Stock Account Dr. 37,500
14,47,500
Cash at bank Account
5,62,500
To Business Purchase Account
6,563
To Sundry Creditors Account
4,05,000
To Provision for bad and Doubtful debts
To Debenture holders of Ashish Ltd
14,47,500
iii) (Being taking over of assets and Liabilities)
9,00,000
Liquidators of Ashish Ltd. Dr.
90,000
To Equity Share Capital Account
4,12,500
To Securities Premium Account
45,000
To 20% Preference Share Capital
 iv) To Bank A/c
(Discharge of Purchase Consideration) Debenture
holders of Ashish Ltd. A/c Dr. 4,05,000
(3,75,000+8% of 3,75,000) 45,000
Discount on issue of Debentures Dr.
v) To 20% Debentures A/c 4,50,000

(Being discharge of debentures)

Creditors Account Dr. 5,000
5,000
To Debtor Account
(Being cancellation of mutual Owings)

Dissenting Shareholders

Dissenting shareholders are those shareholders that have not agreed to scheme of
Amalgamation. As per Section 235 of the companies Act 2013,shares of Dissenting
shareholders can be acquired by the Amalgamated Company on any one of the following
conditions:

I) On the same terms and conditions on which the other shareholders have
agreed.

II) On the separate terms and conditions between the amalgamated company
and the dissenting shareholders.

III) On the terms and conditions issued by the court on the application made
either by the transferee company or the transferor company.
Accounting Treatment
I)Purchase Consideration: It is calculated in the same manner unless transferee company
makes payment only for willing shareholders, then in that case only the payment made to
willing shareholders is taken into account while calculating the purchase consideration.

II) Entries in the Books of transferee company: Journal entries in the books of
transferee company are passed in the same manner depending upon the amalgamation in
the nature of merger or amalgamation in the nature of purchase.

III)Entries in the Books of transferor company: The paid up share capital held by
dissenting shareholders is transferred to a separate account called Dissenting Shareholders
Account and realisation account is debited or credited accordingly depending upon the
discount allowed or premium paid to them. The remaining balance is transferred to willing
shareholder account.

External Reconstruction
Sometimes, there is a need to reorganise the capital structure of the company which can have
possibly two alternatives: i) Internal Reconstruction ii) External Reconstruction

Internal Reconstruction is reorganising the capital structure of the company without the
liquidation of the company whereas External Reconstruction means reorganising the capital
structure of the company by liquidating the old company(Loss or sick unit) and forming a
brand new company consisting of substantially the same shareholders.

In case of external reconstruction an old company is dissolved and a new company is formed
to take over the liquidated company. External reconstruction is neither Amalgamation nor
Absorption, it is simply reorganisation of loss and sick industrial unit.
Accounting Treatment
Books of Transferor Company
Books of the transferor company are closed in the same usual manner as in case of
Amalgamation.
Books of Transferee Company
The Journal Entries in the books of Transferee company is same as those of amalgamation in
the Nature of Purchase as in this case Assets and Liabilities are usually recorded at their fair
value.

Illustration 8: (External Reconstruction)

The Balance Sheet of Shine Ltd. as on 31st March 2014 is as follows:

Particulars Amount()
EQUITY AND LIABILITIES Share
Capital:
3,00,000 Equity Shares of 10 each 30,00,000
1,00,000 10% Preference Shares of 10 each 10,00,000
10% Debentures 6,00,000
Sundry Creditors 4,00,000
Total 50,00,000
ASSETS
Goodwill 8,00,000

Plant and Machinery 14,00,000

Furniture and Fittings 4,00,000

Patents 3,00,000

Stock 9,80,000

Sundry Debtors 5,10,000

Cash at Bank 10,000

Discount on the issue of Shares 40,000

Profit and Loss Account 5,60,000

50,00,000
On the following Terms and Conditions the Scheme of External Reconstruction agreed
upon:

i) A New Company Sun ltd. is formed called Sun Ltd. to with an authorised share capital of
65,00,000 in equity shares of 10 each.
ii) Each equity share in old company is issued one Equity share in new company at 5 each.
 iii) Each Preference Share in old Company is allotted two preference shares in New Company
at 5 each.

iv) Debenture holders are to be issued 60,000 equity shares in the New Company as fully paid
up.

v) Creditors are taken over by the New Company.

vi) The remaining unissued share are issued to the directors in the New Company as fully
paid up.

v) All the Assets of the old company are taken over by the New Company except
patents, Plant and Machinery at 8,20,000 and Stock 8,60,000.

vi) Patents Realised 20,000

v) Realisation Expenses amounted to 20,000

You are required to prepare necessary Ledger Accounts in the books of Shine Ltd and pass
Journal Entries in the books of Sun Ltd.

Solution:

Calculation of Purchase Consideration

Particulars Amount()
Preference Shareholders
Equity Shares 1,00,000 x 2 x 5=10,00,000 10,00,000
Equity Shareholders
Equity shares 3,00,000 x5 =15,00,000 15,00,000

Purchase Consideration 25,00,000

In the Books of Shine Ltd.

Dr. Realisation Account Cr.

Particulars Amount () Particulars Amount ()

 To Goodwill A/c 8,00,000 By 10% Debentures A/c 6,00,000
To Plant and Machinery A/c 14,00,000 By Creditors A/c 4,00,000
To Furniture and Fixture A/c 4,00,000 By Sun Ltd. A/c 25,00,000
To Patents A/c 3,00,000 By Bank A/c 20,000
To Stock A/c 9,80,000 By Equity Shareholders 9,00,000
To Debtors A/c 5,10,000 A/c(Loss)
To Bank A/c 10,000

To Bank(Liquidation Expenses) 20,000

44,20,000 44,20,000
Dr. Sun Ltd. Account Cr.

Particulars Amount () Particulars Amount ()

To Realisation A/c 25,00,000 By Equity Shares in Sun Ltd. 25,00,000
25,00,000 25,00,000
Dr. Preference Shareholders Account Cr.

Particulars Amount () Particulars Amount ()

To Equity Shares in Sun Ltd. 10,00,000 By Preference Share Capital 10,00,000
10,00,000 10,00,000

Dr. Equity Shareholders Account Cr.

Particulars Amount () Particulars Amount ()

To Discount on issue of shares A/c 40,000 By Equity Share Capital A/c 30,00,000

To Profit and Loss A/c 5,60,000

To Realisation Loss 9,00,000

To Equity Share in Sun Ltd. 15,00,000

30,00,000 30,00,000
In the Books of Sun Ltd.

S.No
. Particulars Debit () Credit ()
 i) 25,00,000
Business Purchase Dr.
25,00,000
To Liquidators of Shine Ltd.
ii)
9,00,000
Goodwill(Balancing Figure) Dr.
8,20,000
Plant and Machinery Dr.
5,10,000
Sundry Debtors Account Dr.
8,60,000
Stock Account Dr.
Cash at bank Account Dr. 10,000
25,00,000
To Business Purchase Account
4,00,000
iii) To Sundry Creditors Account
6,00,000
To Debenture holders of Shine Ltd
iv) Liquidators of Shine Ltd. Dr. 25,00,000
25,00,000
To Equity Share Capital Account
v) Debenture holders of Shine Ltd. A/c Dr.
6,00,000
To Equity Share Capital A/c Bank A/c 6,00,000
Dr.

To Equity share Capital A/c 9,00,000

9,00,000