Meaning &n Definition of Merger A merger is a combination of two or more companies into one company.

The Income Tax Act, 1961 of India uses the term amalgamation for merger. According to Section 2(1A) of the Income Tax Act 1961: The term amalgamation means the merger of one or more companies with another company or merger of two or more companies to form one company in such a manner that: 1. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. 2. All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by the virtue of the amalgamation. 3. Shareholders holding not less than 90 percent of the face value of the equity shares of the transferor company (other than the equity shares already held by the transferee company or its subsidiaries or nominees) become the equity shareholders of the transferee company by virtue of the amalgamation. Accounting Treatment for Merger: 1. Books of Transferor Company 2. Books of Transferee Company Books of Transferor Company 1. On transfer of Assets Realization A/c To Assets A/c

Dr. (BV) (BV)

2. On transfer of liabilities Liabilities A/c Dr. (BV) To Realization A/c (BV) 3. On recording the purchase consideration receivable: Transferee Companys A/c Dr. with total P.C To Realization A/c 4. On realization of assets not taken over Bank A/c Dr. To Realization A/c with sales proceeds 5. On payment of liabilities not taken over Realization A/c Dr. with B.V To Bank A/c Amount paid 6. Realization expenses borne by Transferee Company: No Entry If however actual expenses exceed the amount paid by the transferee company the excess will be Dr. to realization A/c 7. Realization expenses paid by Transferor Company Realization A/c Dr. To Bank A/c with amount of expenses 8. When preference shares are redeemed at premium: Realization A/c Dr. To Preference Shareholders A/c Amount of premium 9. If preference shareholders are paid less than the nominal (book) value of shares Preference Shareholders A/c Dr. To Realization A/c 10. For Profit on realization

Realization A/c Dr. To Equity shareholders A/c 11. For Loss on realization Equity Shareholders A/c Dr. TO Realization A/c 12. On transfer of equity capital and accumulated profits: Equity Shareholders A/c Dr. Accumulated Profits ( GR,P&L A/c etc) To Equity Shareholders/c 13. On transfer of accumulated losses and fictitious assets: Equity Shareholders A/c Dr. To P&L A/c To Preliminary Exp. To Discount on issue of Shares/ Debentures 14. On receipt of purchase Consideration Shares in Transferee Co. A/c Dr. Debentures in Transferee Co. A/c Bank A/c Dr. To Transferee Co. A/c 15. On payment to preference shareholders: Preference Shareholders A/C Dr. To Shares in Transferee Co. A/c To Debentures in Transferee Co. To Bank A/c

Que 1: The Balance Sheets of A Ltd. And B Ltd. Are as follows: Liabilities A Ltd. 9% Preference Share Capital ( shares of Rs.100 each) 4,00,000 Equity share capital (Shares of Rs.10 each) 8,00,000 Reserve 1,60,000 P&L A/c 2,00,000 Creditors 40,000 16,00,000 Assets Goodwill Building (office) Plant and Machinery 2,80,000 4,00,000 3,00,000

B Ltd. Nil 4,00,000 1,00,000 40,000 20,000 5,60,000 Nil 1,20,000 80,000

Furniture and fixtures Investments Stock Debtors Bank Balance

1,40,000 2,00,000 1,60,000 80,000 40,000 16,00,000

Nil 80,000 60,000 20,000 5,60,000

A new company called AB Ltd. Was formed to takeover both companies on following terms: 1. A Ltd. Was valued worth Rs. 20,00,000 and purchase consideration was paid by issue of equity shares of Rs.10 each at a premium of Rs.6 per share. 2. B Ltd. Was considered worth Rs.8,00,000 to be paid in equity shares of Rs.10 @ Rs.16 per share. 3. Liquidation expenses amounted to Rs.8,000 and Rs. 4,000 for A and B Ltd. Which were paid by AB Ltd. Record journal entries and prepare necessary ledger accounts to close the books of A Ltd and B Ltd.

Books of Transferee Company: 1. Pooling of Interest Method 2. Purchase Method y     Pooling of Interest Method: Where balance sheet of the two companies are simply added together. Recording of assets and liabilities: existing carrying amounts Recording Reserve: existing carrying amounts Recording of Balance of P& L A/c: added to transferee co. or transfer to General reserve A/c Difference between the Purchase consideration and the amount of Share capital of the transferor Company: the difference between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets and the amount of share capital of the transferor company should be adjusted in reserve. Uniform Set of Accounting Policies:  For Purchase Consideration becoming due: Business Purchase A/c Dr. To Liquidators Transferor Co.s A/c  For taking over various assets and liabilities of the transferor company: Sundry Assets A/c Dr. To Sundry Liabilities A/c To Reserves of Transferor Co. To Business Purchase A/c Note: Sundry assets and liabilities should be on B.V. If any difference between Dr. and Cr. Because of purchase consideration, difference should adjusted in General reserve of the transferee co.  For making the payment of PC: Liquidators of Transferor Co. A/c To Bank A/c To Equity Share Capital To Preference Share Capital In case share are issued at premium, securities should be credited. In case of discount, share discount will be debited.

 For making the payment of liquidation expenses of transferor co. Liquidation expenses A/c Dr. To Bank A/c P&L A/c Dr. Or General Reserve A/c Dr. To Liquidation Expenses A/c  For paying formation expenses of transferee Co. Preliminary Expenses A/c To Bank A/c Que Following are the Balance sheets of XYZ Ltd. And ABC Ltd. As on 31st March 2010. Liabilities Authorised Capital: Equity Share of Rs.10 each Issues and Paid up capital: Equity shares of Rs.10 each fully paid up General Reserve Creditors Provision for Taxation XYZ Ltd ABC Ltd. Assets XYZ Ltd 4,00,000 and 6,24,000 5,30,000 4,42,000 28,000 ABC Ltd. 60,000 1,00,000 80,000 63,000 8,000

Building 30,00,000 5,00,000 Plant Machinery Stock Debtors 15,00,000 2,00,000 Bank

3,40,000 1,60,000 24,000

62,000 44,000 5,000

20,24,000 3,11,000

20,24,000 3,11,000

On 1st April 2010, XYZ Ltd. Absorb ABC Ltd. And all the assets and liabilities are taken by XYZ Ltd. The PC was agreed at Rs.3,36,000 to be satisfied in fully paid equity shares of XYZ Ltd. Prepare Journal entry in the books of XYZ Ltd. Necessary Ledger accounts in the books of ABC Ltd. Prepare the Balance sheet of XYZ Ltd. After amalgamation

Purchase Method: The assets and liabilities of the merged company are presented at their market value as on the date of acquisition.  For Purchase Consideration becoming due: Business Purchase A/c Dr. To Liquidators Transferor Co.s A/c  For taking over various assets and liabilities of the transferor company: Sundry Assets A/c Dr. To Sundry Liabilities A/c To Business Purchase A/c Note: Sundry assets and liabilities should be on fair or revalued vales if any

   

If any difference between Dr. and Cr. It is debited to goodwill a/c or credited to capital reserve. If Dr.<Cr. = Goodwill Dr> Cr. = Capital Reserve For making the payment of PC: Liquidators of Transferor Co. A/c To Bank A/c To Debentures A/c To Equity Share Capital To Preference Share Capital In case share are issued at premium, securities should be credited. In case of discount, share discount will be debited. For maintaining Statutory Reserve: Amalgamation Adjustment A/c Dr. To Statutory Reserve A/c For making the payment of liquidation expenses of transferor co. Goodwill A/c Dr. To Bank A/c For paying formation expenses of transferee Co. Preliminary Expenses A/c To Bank A/c For a liability paid by transferee Co. Liability A/c Dr. To Share capital Or To Debentures A/c Or To Bank A/c In case share are issued at premium, securities should be credited. In case of discount, share discount will be debited. For Setting-off goodwill against capital reserve: Capital reserve A/c Dr. To Goodwill

Que The A Ltd. Sells is business to the B Ltd. As at March 31, 2010 on which date its Balance Sheet was as under: Liabilites RA. Assets Rs Paid up Capital Free hold property 1,50,000 2,000 Shares of RS.100 2,00,000 Goodwill 50,000 each Plant and Tools 83,000 Debentures 1,00,000 Stock 35,000 Trade creditors 30,000 Bills Receivable 4,500 Reserve fund 50,000 Sundry Debtors 27,500, P& L A/c 20,000 Cash at Bank 50,000 4,00,000 4,00,000 The B Ltd. Agreed to takeover the assets (exclusive of cash at bank and goodwill) at 10% less than the BV, to pay Rs.75,000 for goodwill and to takeover the debentures. The purchase consideration was to be discharged by the allotment to the A Ltd. Of 1,500 shares of Rs.100 each at a premium of Rs.10 each per share and the balance in cash.

The cost of the liquidation amounted to Rs.3,000. Show necessary accounts in the books of A Ltd. And show the necessary journal entries recording the transactions in the books of the B Ltd. Que 2: A Ltd. And B Ltd. Were amalgamated on and 1st April 2010. A new company C Ltd. Was formed to takeover the business of the existing companies. The balance sheets of A Ltd. And B ltd. As on 31 March 2010 are give below: (Rs.in lac) Liabilities A B Assets A B Share Capital Fixed Assets: Equity Shares of 800 750 Land and Building 550 400 Rs. 100 each Plant and 350 250 12% Preference 300 200 Machinery Shares of Rs.100 each Investments: 150 50 Reserve and 150 100 Surplus: Loans and General Reserve 170 150 Advances: Investment Stocks 350 250 allowance Reserve 50 50 Sundry Debtors 250 300 P&L A/c 50 30 Bills Receivable 50 50 Secured Loan: Cash and BAnk 300 200 10% Debentures 60 30 Rs.100 each Current Liabiliites and Provisiosn: Sundry Creditors 270 120 Bills Payable 150 70 2,000 1,500 2,000 1,500 Additional Info. 1. 10% debenture-holders of A Ltd. And B Ltd. Are discharged by C Ltd. Issuing such number of its 15% Debenture of Rs.100 each so as to maintain the same amount of interest. 2. Preference shareholders of the two companies are issued equivalent number of 15% preference shares of C Ltd. At a price of Rs.150 per share (face value Rs.100) 3. C Ltd. Will issue 5 equity shares for each equity shares of A Ltd. And 4 equity shares for each equity shares of B Ltd. The shares are to be issued @Rs.30 each, having a face value of Rs. 10 per share. 4. Investment allowance reserve is to be maintained for 4 more years. Prepare the balance sheets of C Ltd. As on 1 April 2010 after the amalgamation has been carried out on the basis of amalgamation in the nature of purchase.