Adv Accounts - Amalgamation

CHAPTER
4 Amalgamation
BASIC QUESTIONS
(1) Given below are the Balance Sheets of X Ltd. and Y Ltd. as at 31st March, 20X1 at which date Y Ltd. was absorbed
by X Ltd.
[` in lakhs]
Liabilities X Ltd. ` Y Ltd. ` Assets X Ltd. ` Y Ltd. `

Equity shares of ` 10 each 5.00 10.00 Fixed Assets 20.00 8.00
Profit & Loss A/c 27.40 6.55 Investments 3.45 5.20
12% Debentures of ` 100 each 2.00 1.00 Stock 5.00 1.00
Creditors for Goods 1.15 .10 Debtors 4.00 .75
Bills Payable .45 0.35 Cash at Bank Bills .76 1.40
Receivable Misc. .25 .35
Expenditure 2.54 1.30
36.00 18.00 36.00 18.00
Additional Information: Investments of X Ltd. and Y Ltd. are considered worth ` 3,59,000 and ` 4,95,000
respectively.
Required: Give the journal entries in the books of X Ltd. and Y Ltd. and prepare the Balance Sheet of X Ltd. after
absorption in each of the following alternative cases:
Case (a) If the purchase consideration is to be discharged by the issue of equity shares of ` 10 each at a premium
of ` 50 per share.
Case (b) If the purchase consideration is to be discharged by issue of 25,000 Equity Shares of ` 10 each at a
premium of ` 50 per share.
Case (c) If the purchase consideration is to be discharged by issue of equity shares on the basis of intrinsic
value of shares of both the companies.
CHAPTER 4: AMALGAMATION
(2) (EXAM QUESTION) Ajanta Limited agreed to acquire the business of Elora Limited as on 31st March, 1997. The
Balance sheet of Elora Limited as on that date was as under:
Liabilities ` Assets `
Paid-up-Capital: Fixed Assets:
10,000-12% Preference Land and Building 2,00,000
Shares of ` 10 each 1,00,000 Machineries 1,00,000
20,000 Equity Shares of ` 10 each 2,00,000 Current Assets:
Reserves 20,000 Stock 2,00,000
Profit and Loss Account 30,000 Debtors 50,000
12% Debentures 1,00,000 Cash and Bank Balance 35,000
Sundry Creditors 1,50,000 Miscellaneous Expenditure 10,000
Preliminary Expenses 5,000
Debenture Discount
6,00,000 6,00,000
The consideration payable by Ajanta Limited was agreed as under:
(i) The Preference Shareholders of Elora Limited were to be allotted 14% Preference Shares of ` 1,10,000.
(ii) Equity Shareholders to be allotted six Equity Shares of ` 10 each issued at a premium of 10% and ` 3 cash
against every five shares held.
(iii) 12% Debenture holders of Elora Limited to be paid @ 8% premium by issue of 14% Debentures at 10%
discount.
While arriving at the agreed consideration the directors of Ajanta Limited valued Land and Building at
` 2,50,000, Stock ` 2,20,000, and Debtors at their book value subject to an allowance of 5% to cover doubtful
debts. Debtors of Elora Limited included ` 10,000 due from Ajanta Limited. The machineries were valued at
book value. It was agreed that before acquisition, Elora Limited will pay dividend at 10% on Equity Shares.
Liquidation expenses are ` 5,000. Draft Journal entries necessary to close the books of Elora Limited and to
record acquisition in the books of Ajanta Limited.
(3) With a view to effecting economy in working, the United Mills Limited agrees to take over the business of
the Bharat Hoisery Limited, from 31st October 1983. The following is the Balance Sheet of the Bharat Hoisery
Limited as on that date:
Paid-up Capital: Goodwill 1,80,000
12,000 shares of ` 50 each 6,00,000 Land, Building and Plant 1,25,000
Reserve Fund 1,20,000 Stock-in-trade 2,50,000
Reserve for Doubtful Debts 10,000 Debtors 2,90,000
Creditors 75,000 Cash & Bank Balance 25,000
Profit & Loss A/C 65,000
8,70,000 8,70,000
The purchasers took all the assets and liabilities of the vendor company excepting a sum of ` 10,000 to provide
for cost of liquidation and payment to any dissentient shareholders. The purchase price was to be discharged
by the allotment to the shareholders of the vendor company of 1 share of ` 100 (` 90 paid-up) of the United
ADVANCED ACCOUNTING CA-IPCC
Mills Limited for every 2 shares in the Bharat Hosiery Limited. The expenses of liquidation amount to ` 3,000.
Dissentient shareholders of 100 shares are paid out at ` 70 per share viz. ` 7,000.
PASS THE NECESSARY JOURNAL ENTRIES IN THE BOOKS OF THE RESPECTIVE COMPANIES TO GIVE EFFECT
TO THE ABOVE TRANSACTIONS.
(4) (EXAM QUESTION) CAMIB Limited is absorbed by Wye Limited. Given below are the Balance Sheets of the two
Companies prepared after revaluation of their assets on a uniform basis.
Balance Sheet of CAMIB Limited
Authorised Share Capital: Sundry Assets 16,85,000
9,000 Equity Shares of ` 150 each. 13,50,000 Cash in hand 3,500
Paid up Share Capital:
9,000 Equity Shares of ` 150 each ` 135 paid up
General Reserve 12,15,000
Profit and Loss A/c 4,03,500
Sundry Creditors 15,000
55,000
16,88,500 16,88,500
Balance Sheet of Wye Limited
Authorised Share Capital: Sundry Assets 43,57,500
60,000 Equity shares of ` 75 each 45,00,000 Cash in Hand 27,500
Paid up Share Capital:
40,000 Equity Shares of ` 75 paid up 30,00,000
General Reserve 12,85,000
Profit and Loss A/c 35,000
Sundry Creditors 65,000
43,85,000 43,85,000
The holder of every three Shares in CAMIB Limited was to receive five Shares in the Wye Limited plus as much
cash as is necessary to adjust the rights of shareholders of both the companies in accordance with the intrinsic
values of the shares as per the respective Balance sheets.
Required: Pass necessary journal entries in the books of Wye Limited and prepare the Balance Sheet giving
effect to the above scheme of absorption. Entries are to be made at par value only.
(5) The following are the Balance Sheets of A Ltd. and B Ltd. as on 31.12.1984:
A Ltd.
` `
15,000 Equity Shares of ` 100 each 15,00,000 Fixed Assets 17,00,000
5,000 Preference Shares of ` 100 Stocks(Pledged with secured 92,00,000
each 5,00,000 Loan holders)
Development Rebate Reserve Other Current Assets 18,00,000
Secured Loans (Secured against 2,00,000 Profit & Loss A/C 83,00,000
pledge of stocks) 80,00,000
Unsecured Loans
Current Liabilities 43,00,000
65,00,000
2,10,00,000 2,10,00,000
B Ltd.
` `
50,000 Equity Shares of ` 10 Fixed Assets 34,00,000
each 5,00,000 Current Assets 48,00,000
General Reserves 14,00,000
Secured Loans 40,00,000
82,00,000 82,00,000
The two companies go into liquidation and C Ltd. is formed to take over their business. The following
information is given:
(a) All current assets of the two companies except pledged stock are taken over by C Ltd.. The realisable value
of all current assets are 80% of book values in case of A Ltd. and 70% for B Ltd.
(b) The break-up of current liabilities is as follows:
A Ltd. B Ltd.
Statutory Liabilities (including ` 11,00,000 in case
of A Ltd. in respect of a claim not having been
admitted shown as a contingent liability) 36,00,000 5,00,000
Liability of Employees 15,00,000 9,00,000
The balance of current liability is to Miscellaneous Creditors.

(c) Secured loans includes ` 8,00,000 accrued interest in the case of B Ltd.
(d) 1,00,000 Equity Shares of ` 10 each are allotted at par against cash payment of entire face value by C Ltd. to
the shareholders of A Ltd. and B Ltd. in the ratio of face values of shares held by them in A Ltd. and B Ltd.
(e) Preference Shareholders are issued equity shares worth ` 1,00,000 in lieu of present holdings.
(f ) Secured loan holders agree to continue the balance amount of their claims to C Ltd. after adjusting value of
pledged security in case of A Ltd. and after waiving 50% of interest due in the case of B Ltd.
CHAPTER 4: AMALGAMATION 171
(g) Unsecured loans are taken over by C Ltd. at 25% of loan amounts.
(h) Employees are issued fully paid up Equity Shares in C Ltd. at par in full settlement of their dues.
(i) Statutory Liabilities are taken over by C Ltd. at full values and Miscellaneous Creditors are taken over at 80%
of the book values.
SHOW THE OPENING BALANCE SHEET OF C LTD.

(6) Long Ltd. and Short Ltd. were amalgamated on and from 1st April 1995. A new company Moderate Ltd. was
formed to take over the business of the existing companies. The Balance Sheet of Long Ltd. and Short Ltd. as on
31st March 1995 are given below:
(` Lacs)
Liabilities Long Ltd. Short Assets Long Ltd. Short

Ltd. Ltd.
Share capital: Fixed Assets: Land
Equity Shares of Re. 100 850 725 & Building Plant & 460 275
each Machinery 325 210
14% Preference Shares of 320 175 Investment 75 50
Re. 100 each Current Assets
Reserve and Surplus: Loans & Advances:
Revaluation Reserve 125 80 Stock 325 269
General Reserve 240 160 Sundry Debtors 305 270
Investment Allowance Bills Receivables 25 -
Reserve 50 30 Cash & Bank 385 251
P&L A/C 75 52
Secured Loans:
13% Debentures (`
100 each) 50 28
Unsecured Loans:
Public Deposits 25 -
Current Liabilities &
Provision:
Sundry Creditors 145 75
Bills Payable 20 -
1,900 1,325 1,900 1,325
Other Information:
(1) 13% Debenture holders of Long Ltd. and Short Ltd. are discharged by Moderate Ltd. by issuing such number
of its 15% Debentures of ` 100 each so as to maintain the same amount of interest.
(2) Preference Share holders of the two companies are issued equivalent number of 15% Preference Shares of
Moderate Ltd. at a price of ` 125 per share (face value ` 100).
(3) Moderate Ltd. will issue 4 equity shares for each equity share of Long Ltd. and 3 equity shares for each equity
share of Short Ltd. The shares are to be issued @ ` 35 each, having a face value of ` 10 per share.
(4) Investment Allowance Reserve is to be maintained for two more years.
PREPARE THE BALANCE SHEET OF MODERATE LTD. AS ON 1st APRIL 1995 AFTER THE AMALGAMATION
HAVE BEEN CARRIED OUT ON THE BASIS OF THE FOLLOWING ASSUMPTIONS:
(1) Amalgamation is in the nature of MERGER.

(2) Amalgamation is in the nature of PURCHASE.
ADVANCED PROBLEMS
(7) A Ltd. agreed to acquire the business of B Ltd. as on 31st December 1985. On that date Balance Sheet of B Ltd.
was summarized as follows:
Share Capital (Fully paid Shares 3,00,000 Goodwill 50,000
of ` 10) Land, Building and
General Reserve 85,000 Plant 3,20,000
P&L A/C 55,000 Stock-in-trade 84,000
6% Debentures 50,000 Debtors 18,000
Creditors 10,000 Cash & Bank Balance 28,000
5,00,000 5,00,000
The Debenture holders agreed to receive such 7% Debentures issued at 96 each as would discharge the
debentures in B Ltd. at a premium of 20%. The shareholders in B Ltd. were to receive ` 2.50 in cash per share
and 3 shares in A Ltd. for every 2 shares held, the shares in A Ltd. being considered as worth ` 12.50 each.
There were fractions equaling 50 shares for which cash was paid. The directors of A Ltd. considered the various
assets to be valued as follows:
`
Land 1,00,000
Building 2,50,000
Plant 3,50,000
Stock 80,000
Debtors 18,000
The cost of liquidation of B Ltd. ultimately was ` 5,000. Due to technical hitch, the transactions could be
completed on 1st July 1986. Till date B Ltd. carried on trading which resulted in a profit ` 20,000 (subject to
interest) after providing ` 15,000 as depreciation. On 30th June 1986 Stock was ` 90,000, Debtors were ` 25,000
and Creditors were ` 15,000. There was no addition to or deletion from the fixed assets. It was agreed that the
profit should belong to A Ltd.
You are required, as on July 1, 1986 TO:
(I) Prepare realization account and the shareholders account in the ledger of B Ltd.; and
(II) Give journal entries in the books of A Ltd.
(8) Following are the Balance Sheets of A Ltd. and B Ltd. as on March 31st 1997:
A Ltd.
Share Capital: Fixed Assets 30,00,000
40,000 Equity Shares of ` 100 each 40,00,000 Investments 5,00,000
General Reserve 30,00,000 Current Assets 65,00,000
1,00,00,000 1,00,00,000
B Ltd.
Share Capital: Fixed Assets 3,50,000
20,000 Equity Shares of ` 50 each 10,00,000 Goodwill 50,000
General Reserve 5,00,000 Current Assets 14,00,000
Provision for Tax 1,00,000
Proposed Dividend 1,00,000
18,00,000 18,00,000
B Ltd. is to be absorbed by A Ltd. on the following terms:

(1) B Ltd. declares a dividend of 10% before absorption for the payment of which it is to retain sufficient amount
of cash.
(2) The net worth of B Ltd. is valued at ` 14,50,000.
(3) The purchase consideration is satisfied by the issue of fully paid up shares of ` 100 each in A Ltd.
Following further information is also to be taken into consideration:
(i) A Ltd. holds 5,000 shares of B Ltd. at a cost of ` 3,00,000.
(ii) The stock of B Ltd. included items valued at ` 1,00,000 purchased from A Ltd. (Cost to A Ltd. ` 75,000).
(iii) The creditors of B Ltd. include ` 50,000 due to A Ltd.
Show the ledger accounts in the books of B Ltd. to give effect to the above & balance sheet of A Ltd. after
completion of the absorption.
(9) The Balance Sheets of Big Ltd. and Small Ltd. as on 31.03.95 were as follows:
Balance Sheet as on 31.03.95
Big Ltd. Small Ltd. Big Ltd. Small Ltd.
( `) (` ) (` ) (` )
Equity Share Capital 8,00,000 3,00,000 Building 2,00,000 1,00,000
(` 10) Machinery 5,00,000 3,00,000
10% Preference Share - 2,00,000 Furniture 1,00,000 60,000
Capital (` 100) Investment:
General Reserve 3,00,000 1,00,000 6,000 shares of
Profit & Loss A/C 2,00,000 1,00,000 Small Ltd. 60,000 -
Creditors 2,00,000 3,00,000 Stock 1,50,000 1,90,000
Debtors 3,50,000 2,50,000
Cash and Bank 90,000 70,000
Preliminary
Expenses 50,000 30,000
15,00,000 10,00,000 15,00,000 10,00,000
Big Ltd. has taken over the entire undertaking of Small Ltd. on 30.09.95, on which date the position of current
assets except cash and bank balances and current liabilities were as under:
Big Ltd. Small Ltd.

( `) (` )
Stock 1,20,000 1,50,000
Debtors 3,80,000 2,50,000
Creditors 1,80,000 2,10,000
Profits earned for the half year ended on 30.09.95 after charging depreciation at 5% on building, 15% machinery
and 10% on furniture, are:
Big Ltd. ` 1,02,500
Small Ltd. ` 54,000
186 ADVANCED ACCOUNTING CA-IPCC
On 30.08.95 both companies have declared 15% dividend for 1994-95.
Goodwill of Small Ltd. has been valued at ` 50,000 and other Fixed Assets at 10% above their book values on
31.03.95. Preference Shareholders of Small Ltd. are to be allotted 10% Preference Shares of Big Ltd. and Equity
Shareholders of Small Ltd. are to receive requisite number of equity shares of Big Ltd. valued at ` 15 per share
in satisfaction of their claims.
Show the Balance Sheet of Big Ltd. as of 30.09.95 assuming absorption is through by that date.
(10) Balance Sheets of X Ltd. and Y Ltd. as on 31.12.1987 are given below:
X Ltd. Y Ltd. X Ltd. Y Ltd.

Share Capital Assets 6,00,000 3,40,000
(` 10 each) 4,00,000 2,00,000 5,000 shares of X
9% Debentures - 1,00,000 Ltd. - 50,000
Reserve 1,00,000 40,000
Creditors 1,00,000 50,000
6,00,000 3,90,000 6,00,000 3,90,000
X Ltd. to take over Y Ltd. on the following terms:
(a) For each share of Y Ltd., X Ltd. will issue its one share of ` 10 at ` 11 and pay cash 50 paise.
(b) X Ltd. to issue such an amount of fully paid 10% debentures at 90 as is sufficient to discharge 9% debentures
of Y Ltd. at a premium of 8%.
Give journal of X. Also give realisation account and shareholders A/C in the books of Y Ltd.
(11) Given below are the Balance Sheets of X Ltd. and Y Ltd. as at 31st March, 20X1 at which date Y Ltd. was taken
over by X Ltd. on the basis of their respective value of shares.
[` in lakhs]
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

` ` ` `
Equity-Shares of ` 10 each 5.00 10.00 Fixed Assets 22.00 10.00
Investments 3.25 5.00
General Reserve 26.20 5.85 Current Assets 8.05 0.65
12% Debentures 2.20 1.10 Misc. Expenditure 1.70 1.85
Creditors 1.60 0.55
35.00 17.50 35.00 17.50
Investments of Y Ltd. represent 10,000 equity shares of X Ltd.
Investments of X Ltd. represent 25,000 equity shares of Y Ltd.
Required: Give journal entries in the books of X Ltd. and Y Ltd. and prepare the balance sheet of X Ltd. after
absorption.
(12) The following Balance sheets of X Ltd. & Y Ltd. as at 31st March, 20X1 are given to you:
[` in lakhs]
Liabilities XLtd. Y Ltd. Assets X Ltd. Y Ltd.
` ` ` `
Equity-Shares of ` 100 each 15.00 5.00 Fixed Assets 10.00 .50
1000 shares in Y Ltd. 1.50
General Reserve 2.00 1.00 3000 shares in X Ltd. 5.00
Profit and Loss A/c 1.60 .10 Stock 4.80 2.10
12% Debentures 3.00 Cash at Bank 1.40 .90
Current Liabilities 2.00 .90 Sundry Debtors 2.90 1.50
20.60 10.00 20.60 10.00
Y Ltd. trade in raw materials which were required by X Ltd. for manufacture of its products. Stock of X Ltd.
includes ` 1,00,000 for purchases made from Y Ltd. which company made a profit of 20% on selling price. X
Ltd. owed ` 40,000 to Y Ltd. in this respect. It was decided that X Ltd. should absorb Y Ltd. on the basis of the
intrinsic value of the shares of the two companies. Before absorption, X Ltd. declared a dividend of 8% X Ltd.
also decided to revalue the shares in Y Ltd. before recording entries relating to the absorption.
Required: Show the Journal entries which X Ltd. must pass to record the acquisition and prepare its Balance
Sheet immediately thereafter.
(13) AB Ltd. and MB Ltd. decide to amalgamate and to form a new company AM Ltd. The following are their Balance
Sheets as at 31.3.1998:
Liabilities AB Ltd. MB Ltd. Assets AB Ltd. MB Ltd.
Share Capital (` 10,00,000 6,00,000 Fixed Assets 7,50,000 2,00,000
100) each General Investments: 3,50,000 -
Reserve 1,00,000 50,000 1,500 shares in
Investment Allow. MB Ltd. - 5,00,000
Reserve 40,000 30,000 4,000 shares in
12% Debentures 3,00,000 1,00,000 AB Ltd. 4,00,000 1,00,000
(` 100 each) Current Assets
Sundry Creditors 60,000 20,000
15,00,000 8,00,000 15,00,000 8,00,000
Calculate the amount of Purchase consideration for AB Ltd. and MB Ltd. and draw up the Balance Sheet of AM
Ltd. after considering the following:
(a) Assume amalgamation is in the nature of Purchase.

(b) Fixed assets of AB Ltd. are to be reduced by ` 50,000 and that of MB Ltd. are to be taken at ` 3,00,000.
(c) 12% Debentureholders of AB Ltd. and MB Ltd. are discharged by AM Ltd. by issuing such number of its 15%
debentures of ` 100 each so as to maintain the same amount of interest.
(d) Shares of AM Ltd. are of ` 100 each.
Also show, how the investment allowance reserve will be treated in the Financial Statement assuming the
Reserve will be maintained for 3 years.
Amalgamation (AS-14)
The I.C.A.I. has introduced AS-14 on Accounting for Amalgamations, according to which Amalgamation may be of
two types viz.
1) Amalgamation in the nature of MERGER.

2) Amalgamation in the nature of PURCHASE.
Amalgamation in the nature of MERGER is an Amalgamation, which satisfies all the following conditions:
(1) All assets and liabilities of the Transferor Company become, after amalgamation, the assets and liabilities of the
Transferee Company.
(2) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other
than the equity shares already held therein, immediately before the amalgamation by the transferee company
or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(3) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who
agree to become Equity shareholders of the transferee company is discharged by the transferee company wholly
by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional
shares.
(4) The business of the Transferor Company is intended to be carried on, after the amalgamation, by the Transferee
Company.
(5) No adjustment is intended to be made to the book values of assets and liabilities of the Transferor Company
when they are incorporated in the financial statements of the Transferee Company except to ensure uniformity
of accounting policies.
If any one or more of the above conditions are not satisfied in an Amalgamation such Amalgamation is called
Amalgamation in the nature of purchase.
ACCOUNTING PROBLEM:
(1) To close the book of the company which is liquidated i.e. the transferor company/vendor company.
(2) To record the takeover of business in the books of purchasing company/transferee company.
TREATMENT OF RESERVES:
(IN THE BOOKS OF VENDOR COMPANY)
Amalgamation in the nature of merger:
In this case all reserves appearing in the books of Transferor Company are transferred to realisation A/C.
Amalgamation in the nature of purchases:
In this case, all reserves appearing in the books of Transferor Company are transferred to equity shareholders A/C.
Examples:
SET I:
(1) General Reserve

(2) Reserve Fund
(3) Profit & Loss A/C
(4) Dividend Equalization Reserve
SET II:
(1) Share Premium

(2) Share Transferred Account/Share Forfeiture Account
(3) Capital Reserve
(4) Capital Redemption Reserve
Note: Even the above profits are of capital nature they are transferred to Equity Shareholders Account. Thus, the
distinction between capital and revenue profits is irrelevant for the purposes of this chapter.
SET III:
(1) Workman Compensation Fund

(2) Workman Accident Fund
(3) Workman Profit Sharing Fund
(4) Workman Savings Bank Account
Out of the above 4, the first 2 are in the nature of accumulated profits PROVIDED there is no liability on their account.
The last 2 are in the nature of Liabilities. Thus, the last 2 are NOT to be transferred to Equity Shareholders A/C.
SET IV:
(1) Pension Fund (2)

Provident Fund (3)
Gratuity Fund (4)
Insurance Fund
The first 3 are NOT accumulated profits. These are in the nature of liabilities and thus are NOT to be transferred
to Equity Shareholders A/C. However, Insurance Fund is in the nature of accumulated profit and therefore to be
transferred to Equity Shareholders A/C.
SET V:
(1) Investment Allowance Reserve

(2) Development Rebate Reserve
(3) Export Profit Reserve
(4) Foreign Project Reserve
The above are in the nature of Statutory Reserves. These too appearing in the books of Transferor Company are
transferred to Equity Shareholders A/C.
TREATMENT OF STATUTORY RESERVES IN THE BOOKS OF PURCHASING/TRANSFEREE COMPANY:
IN CASE OF PURCHASE:
The reserves of the Transferor Company, other than Statutory Reserves, should not be included in the financial
statements of the Transferee Company. In case of Statutory Reserves, where the maintenance of such reserves for a
specific period is required by statue, these should be recorded in the financial statements of the Transferee Company
with the help of the following entry:
Amalgamation Adjustment A/C Dr.
To Statutory Reserves A/C
The Amalgamation Adjustment A/C should be disclosed as a part of Miscellaneous Expenditure in the Balance
Sheet of the Transferee Company. Where the Statutory Reserves are no longer required to be maintained, the above
entry shall be reversed.
IN CASE OF MERGER:
All reserves are transferred in the financial statements of the Purchasing Company.
TREATMENT OF ACCUMULATED LOSSES:
Like reserves, accumulated losses appearing in the Balance Sheet of the Transferor Company may be transferred to
Equity Shareholders A/C (in case of PURCHASE).
These are transferred to Realisation A/C in case of MERGER.
Examples:
(1) Profit & Loss A/C (Dr. Balance)

(2) All Deferred Revenue Expenditure (to the extent not written off )
Example:
Preliminary Expenses
Discount on the issue of shares/debentures
Commission on the issue of shares/debentures
Advertisement
Research & Development Expenditure etc.
TREATMENT OF LIABILITIES:

Amalgamation in the nature of merger :
All Liabilities of the Transferor Company are transferred to Realisation A/C.
Amalgamation in the nature of purchase:

Case I: Liabilities taken over by the Purchasing Company:
Transfer them to Realisation A/C.
Case II: Liabilities not taken over by the Purchasing Company:
(i) Transfer them to Realisation A/C.

(ii) Make Payment Entry through Realisation A/C.
Case III: Liabilities not taken over but the payment is made directly by the Purchasing Company:
Treat such Liabilities as taken over by the Purchasing Company. Such payment by the Purchasing
Company is not to become a part of the Purchase Consideration.
Case IV: Liabilities arising after the phenomenon of takeover is completed:
Ignore them.
Case V: Unrecorded Liabilities:
Record the payment through Realisation A/C.
Case VI: Contingent Liabilities:
1. If materialised make the payment and record through Realisation A/C.

2. If not materialised ignore them.
TREATMENT OF PROVISION:

Provisions created against the assets are to be transferred to Realisation A/C.
Provisions created against the assets appearing in the Balance Sheet of the Transferor Company are transferred to
Realisation A/C only where the respective assets against which they are created are transferred to Realisation A/C.
PURCHASE CONSIDERATION:
Para 3(g) of AS-14 defines the term Purchase Consideration as 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.
Thus, Purchase Consideration does not include the sum, which the Transferee Company pays directly to the
Creditors of the Transferor Company.
METHODS OF CALCULATING PURCHASE CONSIDERATION:
(1) Net Payment Method.

(2) Net Assets Method.
(3) Intrinsic Value Method.
Method I: Net Payment Method:

Amalgamation in the nature of MERGER:
In this situation the amount of Equity shares issued to equityshareholders and any form of payment given to
Preferenceshareholders by the Transferee Company for the shareholders of the Trannsferor Company represents
the amount of Purchase Consideration. Besides if cash is paid by Transferee Company in respect of any fractional
shares, such amount of cash is added to the amount of Equity Shares to work out the total Purchase Consideration.
Under this situation, in accordance with AS-14, Purchase Consideration is calculated by adding the amount 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. In other words, regardless of the form of payment the
sum total of all the payments made by the Transferee Company to the shareholders, whether Equity or Preference, of
the Transferor Company will be the amount of Purchase Consideration. Thus, the payment made by the Transferee
Company in respect of Liabilities of the Transferor Company will not be considered for calculating the Purchase
Consideration.
Method II: Net Assets Method:
Rule:
Book value of Assets taken over XX

Less: Book value of Liabilities taken over XX
XX
Less: Reserves of the Transferor Company XX

Purchase Consideration XX

Rule:
Agreed value of Assets taken over XX

Less: Agreed value of Liabilities taken over XX
Purchase Consideration XX
Note: Normally, Net Assets Method of calculating Purchase Consideration is followed when the Net Payment Method
cannot be applied i.e. when various forms of payment are given but the amount of any form is missing.
Method III: Intrinsic Value Method:
As such this is not an independent method of calculating Purchase Consideration. It is only an extension of Net
Assets Method. Under the Net Assets Method of calculating Purchase Consideration, the value of net assets of the
Vendor Company is taken as the amount of Purchase Consideration. Under this method, the number of shares to be
issued by the Purchasing ( Transferee) Company is determined on the basis of the Intrinsic Value per share of the two
companies.
Illustration:
There are two companies A Ltd. & B Ltd. A Ltd. is the Transferee Company and B Ltd. is the Transferor Company.
The Intrinsic Value per share of the two companies is as under:
A Ltd. ` 30/-
B Ltd. ` 20/-
No. of shares in the Transferor Company = 15,000
Value of Purchase Consideration:
(1) No. of shares to be issued by the Transferee Company = 15,000*2/3 = 10,000

(2) Purchase Consideration = 10,000* 30 = ` 3,00,000
Alternatively,
No. of shares to be issued by the Purchasing Company can be ascertained by dividing the Net Assets of the Transferor
Company with the Intrinsic Value per share of the Transferee Company.
Mathematically,
No. of shares to be issued
by the Purchasing Company = Net Assets of the Transferor Company

Intrinsic Value per share of the Transferee
Company
Note: Intrinsic Value per Share:
Assets at Market Value XX

Less: Liabilities to be paid in the event of Liquidation XX
Net Assets (A) XX
No. of Equity Shares (B) XX

Intrinsic Value Per Share (A/B) XX
TREATMENT OF LIQUIDATION EXPENSES:
Liquidation Expenses may be borne either by the Vendor Company or by the Purchasing Company.
Case I: When borne by the Vendor Company:

Books of Vendor (Transferor) Company:
Liquidation Expenses are Debited to Realisation A/C.
Books of the Transferee Company:
No effect.
Case II: When borne by the Purchasing Company:

Books of the Transferor Company:
No effect.
The treatment of Liquidation Expenses depends upon the nature of Amalgamation. Such Expenses will
be Debited to P&L A/C or General Reserve in case of Amalgamation in the nature of MERGER, and it will
be Debited to Goodwill A/C in case of Amalgamation in the nature of PURCHASE.
TREATMENT OF DISSENTING SHAREHOLDERS:
Dissenting Shareholders are those shareholders who have not given their assent to the scheme of Amalgamation
passed by the Majority Shareholders.
Treatment:
(1) The Paid-Up Share capital held by Dissenting Shareholders is transferred to a separate A/C. It is not merged with
the Equity Shareholders A/C.
(2) All Accumulated Profits and Losses appearing in the Balance Sheet are not transferred to Dissenting Shareholders
account. They are closed in the usual manner by transferring them to Majority Shareholders A/C.
(3) Realisation Profit or Loss is also not transferred to Dissenting Shareholders A/C. It is transferred to Majority
Equity Shareholders A/C ONLY.
(4) Any Profit or Loss on the payment to Dissenting Shareholders is transferred to Realisation A/C.
ACCOUNTING TREATMENT:
BOOKS OF THE TRANSFEROR COMPANY:
Situation I: Amalgamation in the nature of purchase:
(1) Transfer the Assets to Realisation A/C:
Entry:
Realisation A/C Dr.
To Sundry Assets
Notes:
(a) Assets are to be transferred at book values.

(b) Cash/Bank is to be transferred to Realisation A/C to the extent taken over by the Transferee Company.
(c) Accumulated Losses appearing on the Assets side of the Balance Sheet are not to be transferred to Realisation
A/C. These are transferred to Equity Shareholders A/C.
(d) Goodwill and other Intangible Assets are transferred to Realisation A/C like other Assets.
2. Transfer the Liabilities to Realisation A/C:
Entry:
Sundry Liabilities Dr.
To Realisation A/C
Notes:
(a) Liabilities are to be transferred to Realisation A/C at their book values.

(b) Accumulated Profits appearing on the Liabilities side of the Balance Sheet are NOT to be transferred to
Realisation A/C. These are to be transferred to Equity Shareholders A/C.
3. Make due the Purchase Consideration:
Entry:
Purchasing Company Dr.
To Realisation A/C
4. Liquidation Expenses:
The detailed treatment of Liquidation Expenses has been given earlier.
Entry:
Realisation A/C Dr.
To Cash/bank
5. Realisation of Assets Not taken over:
Entry: Situation I: If the Assets is earlier transferred to Realisation A/C.
Cash/Bank A/C Dr.
To Realisation A/C
Situation II: If the Assets are earlier not transferred to Realisation A/C.
Cash/Bank Dr.
To Assets A/C
Note: Any Profit/Loss resulting therefrom is transferred to Realisation A/C.
6. Payment of Liabilities Not taken over:
Entry: Situation I: If the Liabilities are earlier transferred to Realisation A/C.
Realisation A/C Dr.
To Cash/Bank A/C
Situation II: If the Liabilities are earlier Not transferred to Realisation A/C.
Liability A/C Dr.
To Cash/Bank A/C
Note: Any Profit/Loss resulting therefrom is transferred to Realisation A/C.

7. Profit/Loss on the payment to Preference Shareholders:
Entry: Loss: When the Preference Shares are redeemed at a Premium:
Realisation A/C Dr.
To Preference Shareholders A/C
Profit: When the Preference Shares are redeemed at a Discount:
Preference Shareholders A/C Dr.
To Realisation A/C
8. Close the Realisation A/C:
Entry: If Profit is disclosed:
Realisation A/C Dr.
To Equity Sharehoders A/C
If Loss is disclosed:
Equity Shareholders A/C Dr.
To Realisation A/C
9. Receipt of Purchase Consideration:
Entry:
Eq. Shares/Pref. Shares/Deb./Cash A/C Dr.
To Purchasing Company A/C
10. Transfer of Equity Share Capital:
Entry:
Equity Share Capital A/C Dr.
To Equity Shareholder A/C
11. Transfer of Preference Share Capital:
Entry:
Preference Share Capital A/C Dr.
12. Transfer of Accumulated Profits:
Entry:
Accumulated Profits A/C Dr.
To Equity Shareholders A/C

13. Transfer of Accumulated Losses:

Entry:

To Accumulated Losses A/C
14. Payment to Preference Shareholders:
Entry:

To Cash/Bank/Shares in Transferee Company
15. Payment to Equity Shareholders:
Entry:

Situation II: Amalgamation in the nature of merger:

1. Transfer the Assets to Realisation A/C:
Entry:
Realisation A/C Dr.

To Sundry Assets A/C
Notes:
(a) Assets are to be transferred at BOOK VALUES.
(b) Accumulated Losses MAY be transferred to Realisation A/C.
(c) Goodwill & Other Intangible Assets are transferred to Realisation A/C like other assets.
2. Transfer the Liabilities to Realisation A/C:
Entry:
Sundry Liabilities A/C Dr.

To Realisation A/C
Notes:
(a) Liabilities are to be transferred at BOOK VALUES.
(b) Accumulated Profits MAY be transferred to Realisation A/C.
3. Transfer the Accumulated Losses to Realisation A/C:
Entry:
Realisation A/C Dr.

To Accumulated Losses A/C
4. Transfer the Accumulated Profits to Realisation A/C:
Entry:
Accumulated Profits A/C Dr.
To Realisation A/C
5. Make Due the Purchase Consideration:
Entry:
Purchasing Company A/C Dr.
To Realisation A/C
6. Liquidation Expenses:
Entry:
Realisation A/C Dr.
To Cash/Bank A/C
7. Profit/Loss on the payment to Preference Shareholders:
Entry: Loss: When the Preference Shareholders are redeemed at Premium:
Realisation A/C Dr.
Profit: When the Preference Shareholders are redeemed at Discount:
To Realisation A/C
8. Close the Realisaion A/C:
Entry: If Profit is disclosed:
Realisation A/C Dr.
To Equity Shareholders A/C
If Loss is disclosed:
To Realisation A/C
9. Receipt of Purchase Consideration:
Entry:
Shares in Purchasing Company/Cash A/C Dr.
To Purchasing Company
10. Transfer of Equity Share Capital:

Entry:
Equity Share Capital A/C Dr.

To Equity Shareholder A/C
11. Transfer of Preference Share Capital:
Entry:
Preference Share Capital A/C Dr.

12. Payment to Preference Shareholders:
Entry:

13. Payment to Equity Shareholders:
Entry:

BOOKS OF THE TRANSFEREE COMPANY:
Situation I: Amalgamation in the nature of purchase:

1. Recording the Takeover:
Entry:
Sundry Assets A/C Dr.

To Sundry Liabilities taken over
To Transferor Company
Notes:
(a) Assets and Liabilities taken over are recorded at revised values.
(b) Transferor Company is credited with the amount of Purchase Consideration.
(c) Any difference in the total Debits and total Credits is transferred to goodwill or capital reserve.
2. Payment:
Entry:
Transferor Company Dr.

To Cash/Bank A/C To
Share Capital A/C
3. Recording the Statutory Reserves:
Entry:
Amalgamation Adjustment A/C Dr.
To Statutory Reserves
Situation II: Amalgamation in the nature of merger:
1. Recording the Merger:
Entry:
Sundry Assets Dr.
To Sundry Liabilities
To Reserves
To Transferor Company
Notes:
(a) Assets, Liabilities and Reserves are recorded at book values, i.e. at values at which these are appearing in the
balance sheet of the Transferor Company.
(b) Transferor Company is credited with the amount of Purchase Consideration.
(c) Any difference in total Debits and total Credits should be adjusted in reserves. Thus neither goodwill nor capital
reserves arises in the case of Amalgamation in the nature of merger.
1. Payment:
Entry:
Transferor Company Dr.
To Cash/Bank/Share Capital
INTER-COMPANY OWINGS:
1. Cancellation of Common Debts:
Books of the Transferor Company:
No Effect. All accounting entries are passed in the usual manner on the assumption that such Assets/Liabilities are
taken over by the Purchasing Company.
The accounting entries for takeover and payment are passed in the usual manner. Besides, one entry is passed to
cancel COMMON DEBTS.
Entry:
Creditors/B/P Dr.
To Debtors/B/R
2. Treatment of Unrealised Profit:
If goods are sold by one company to another, and out of that if some goods were left unsold at the time of
Amalgamation, then an Adjustment Entry is passed in the books of transferee (purchasing) company for the profit
element included in the unsold stock.
Adjustment Entry: In Case of Merger :
Profit & Loss A/C Dr.
To Stock Reserve
In Case of Purchase:
Goodwill A/C Dr.
To Stock Reserve
INTER-COMPANY HOLDINGS:
Sometimes one company may invest in the shares of the other company. It may result in the following 3 situations:
Situation I: Transferee Company holds shares in the Transferor Company.
Situation II: Transferor Company holds shares in the Transferee Company.
Situation III: Both Companies hold shares in each other.
ACCOUNTING TREATMENT IN THE BOOKS OF TWO COMPANIES IN EACH OF THE SITUATION:
SITUATION I: TRANSFEREE COMPANY HOLDS SHARES IN THE TRANSFEROR COMPANY:
BOOKS OF THE TRANSFEROR COMPANY:
(1) Calculate the Purchase Consideration for the entire undertaking i.e. assuming that the Transferee Company
holds no shares in the Transferor Company and for making due the Purchase Consideration, pass the following
entry:
Transferee Company Dr.
To Realisation A/C
(2) The Transferee Company will pay only that amount which is payable to outsiders. For receiving the Purchase
Consideration entry is passed in the usual manner i.e.
Cash/Shares in Purchasing Company Dr.
To Purchasing/Transferee Company
(3) This will leave Debit Balance in the account of Purchasing Company which will represent the amount receivable
from the Purchasing Company. At the same time, there will be Credit Balance of the same amount in the Equity
Shareholders A/C which will represent the amount payable by the Vendor Company to the Purchasing Company
( Transferee Company) because it is the shareholder of the Transferor Company. These two A/C s are then closed
by passing the following set-off entry:
Shareholders A/C Dr.
To Transferee Company
BOOKS OF THE TRANSFEREE COMPANY:
(1) Pass the accounting Entry for the takeover/merger in the usual manner, crediting the Transferor Company with
the full amount of Purchase Consideration.
(2) Record the payment with the actual amount paid to the Transferor Company. At this stage, Investment A/C
representing the shares held in Transferor Company in the Balance Sheet of Transferee Company is cancelled.
The final Accounting Entry is as follows:
Transferor Company Dr. (with full P.C.)

To Cash/Bank
To Share Capital
To Investment A/C (with cost)
Here also, a difference may be there in the total debits and credits. In the case of Amalgamation in the nature of
PURCHASE, such difference is transferred to goodwill or capital reserve as the case may be.
However in the case of Amalgamation in the nature of merger such difference should be adjusted in reserves.
SITUATION II: TRANSFEROR COMPANY HOLDS SHARES IN THE TRANSFEREE COMPANY:
Special points to be borne in mind in this situation are as under:

(1) Calculation of Purchase Consideration:
(a) Calculate the No. of shares otherwise to be issued by the Purchasing/Transferee Company to the
Vendor/Transferor Company on the basis of the agreed ratio of exchange.
(b) From such No. of shares deduct the No. of shares already held by the Vendor Company. Such shares are
allowed to remain with the Vendor Company as a part of Purchase Consideration.
(c) The resultant figure of shares when multiplied by the agreed value of shares gives the amount of Purchase
Consideration.
(2) In the books of vendor/transferor company the Investment A/C represented by the shares in the
Purchasing/Transferee Company is not transferred to Realisation A/C.
(3) Sometime, the issue price of the shares now received and the price at which the previous Investment has been
acquired by the Vendor Company may differ. In such a case, Investment A/C is revalued and the Profit/Loss
resulting therefrom is transferred to Realisation A/C.
SITUATION III: BOTH COMPANIES HOLD SHARES IN EACH OTHER:
Basically, it is a combination of the first 2 situations. Here the main problem is to compute the amount of Purchase
Consideration. The calculation of purchase consideration under this method is explained below:
Net payment method:
(1) Calculate the purchase consideration ignoring the fact that Purchasing Company holds shares of Vendor
Company.
(2) From it, subtract,
No. of shares of Purchasing Company * Agreed price per share held by Vendor Company
The difference represents the amount payable for the net assets takenover.
(3) From the amount as per 2 above, subtract the amount receivable by purchasing company in the capacity of the
shareholder of vendor company.
The Resultant figure will then be the net amount of Purchase Consideration payable by the Purchasing Company.
Net assets method:
(1) Calculate the value of BOTH businesses by means of Algebraic Equations.

(2) From the Total Assets of the Vendor Company subtract the proportionate share of the Purchasing Company in
the Vendor Company.
(3) From the balance, subtract the share of the Purchasing Company held by the Vendor Company.
The resultant figure will then be the amount of Purchase Consideration to be paid by the Purchasing Company.

Adv Accounts - Amalgamation

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CHAPTER

Liabilities X Ltd. ` Y Ltd. ` Assets X Ltd. ` Y Ltd. `

The consideration payable by Ajanta Limited was agreed as under:

Balance Sheet of CAMIB Limited

Balance Sheet of Wye Limited

The balance of current liability is to Miscellaneous Creditors.

SHOW THE OPENING BALANCE SHEET OF C LTD.

Liabilities Long Ltd. Short Assets Long Ltd. Short

(1) Amalgamation is in the nature of MERGER.

You are required, as on July 1, 1986 TO:

B Ltd. is to be absorbed by A Ltd. on the following terms:

Big Ltd. Small Ltd.

On 30.08.95 both companies have declared 15% dividend for 1994-95.

X Ltd. Y Ltd. X Ltd. Y Ltd.

X Ltd. to take over Y Ltd. on the following terms:

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

Investments of Y Ltd. represent 10,000 equity shares of X Ltd.

Investments of X Ltd. represent 25,000 equity shares of Y Ltd.

(a) Assume amalgamation is in the nature of Purchase.

1) Amalgamation in the nature of MERGER.

(IN THE BOOKS OF VENDOR COMPANY)

Amalgamation in the nature of merger:

Amalgamation in the nature of purchases:

(1) General Reserve

(1) Share Premium

(1) Workman Compensation Fund

(1) Pension Fund (2)

(1) Investment Allowance Reserve

(4) Foreign Project Reserve

TREATMENT OF STATUTORY RESERVES IN THE BOOKS OF PURCHASING/TRANSFEREE COMPANY:

Amalgamation Adjustment A/C Dr.

To Statutory Reserves A/C

TREATMENT OF ACCUMULATED LOSSES:

These are transferred to Realisation A/C in case of MERGER.

(1) Profit & Loss A/C (Dr. Balance)

(IN THE BOOKS OF VENDOR COMPANY)

All Liabilities of the Transferor Company are transferred to Realisation A/C.

Amalgamation in the nature of purchase:

Case I: Liabilities taken over by the Purchasing Company:

Transfer them to Realisation A/C.

Case II: Liabilities not taken over by the Purchasing Company:

(i) Transfer them to Realisation A/C.

Case IV: Liabilities arising after the phenomenon of takeover is completed:

Case V: Unrecorded Liabilities:

Record the payment through Realisation A/C.

Case VI: Contingent Liabilities:

1. If materialised make the payment and record through Realisation A/C.

(IN THE BOOKS OF VENDOR COMPANY)

Provisions created against the assets are to be transferred to Realisation A/C.

Amalgamation in the nature of purchase:

METHODS OF CALCULATING PURCHASE CONSIDERATION:

(1) Net Payment Method.

Method I: Net Payment Method:

Book value of Assets taken over XX

Less: Reserves of the Transferor Company XX

Amalgamation in the nature of purchase:

Agreed value of Assets taken over XX

The Intrinsic Value per share of the two companies is as under:

Value of Purchase Consideration:

(1) No. of shares to be issued by the Transferee Company = 15,000*2/3 = 10,000

No. of shares to be issued

by the Purchasing Company = Net Assets of the Transferor Company

Note: Intrinsic Value per Share: