Amalgamation and Valuation by CA Raj

CA FINAL
FINANCIAL REPORTING
OLD COURSE
5 DAYS FACE TO FACE REVISION BATCH
BY
CA. JAI CHAWLA
FCA, IFRS, DISA, M.COM
DAY – 2
Topics:
1. Valuation
2. Corporate Restructuring
Compiled by CA. Jai Chawla Page 1

VALUATION
Valuation of Goodwill
Goodwill Means: Monetary Value of Advantage of Earning More Profits. Goodwill is based
on Normal Operating Future Profits after Tax.
Class Notes:
Methods of Valuing Goodwill:
Average Profit Method – FMP x No. of years purchased
Super Profit Method – (FMP – Normal Profit) x No. of years purchased
Capitalisation Method – Super Profit / Capitalisation Rate
Annuity Method – SP x Annuity Value (as per Present value factor)
NO. OF YEARS PURCHASE – It will always be given in the question, if not given we will
use capitalization rate. If it is required to be used but not given then we can assume NYP
as 3-5 years.
NRR: It means normal rate of return expected in the same business. It is generally given
in question. If it is not given then it will be calculated as under:
NRR = Div/MPS *100
(Avg Dividends and Avg MPS is allowed) (NRR is considered Post Tax Always)
CALCULATION OF FMP is based on Projected profits method and past profits method.
While calculating Past profits approach following items will be adjusted:
1. Tax Expenses
2. Abnormal Items
3. Rectification of Errors
4. Effects of Changes in A/c Policy

5. Revaluation of Current Assets and Liabilities
6. Non recurring items (eg. Loss/profit on sale of assets)
7. Non operating Incomes (eg. Interest on investments)
8. Goodwill w/off added back
9. Additional Depreciation due to revaluation of FAs
10. Future Incomes and Exp
11. Future Tax Rate
If past years profits are not available, but opening balance sheet and closing balance sheet
is provided then we will take only single year profit by taking difference between closing
Reserves & Surplus and Opening reserves and surplus.
Note: When NRR is given after Tax for both SH then FMP after Tax is to be considered.
When NRR is given for ESH then FMP after Tax after Pref. Dividend is considered.
Average of FMP is not specified in Question
 Check Trend in NP ratios if these are available: Apply Weighted Avg if trend is
available otherwise Simple Avg.
 If NP ratios are not available then check trend in Adjusted Profits: Apply
Weighted Avg is trend is available otherwise Simple Avg.
 Trend line average will be used only when asked in the question.
Trend Line average – Y = a + bx, where Y is future profit, a is simple average, b is growth
and x is distance from centre point.
CAPITAL EMPLOYED: Capital employed means Shareholders fund (Eqt + Pref) applied in
the business for operating activities. It is calculated as under:
All Assets XXX
Less: All Liabilities XXX
 Assets are to be considered after – Revaluation, Rectification and Change in

Accounting Policy
 Non Operating Investment will be excluded in Capital employed. (if nothing is
specified in question we always assume that Investments are Non Operating)
 If there is Purchased Goodwill in BS then it is considered otherwise it is will be
excluded.
 These are not Liabilities for the purpose of capital employed – Proposed Dividend
and Pref Share Capital. But if NRR given in question is for ESH then they are
deducted.
 Capital employed may be “Closing Capital Employed” or “Average Capital Employed”
 Tangible capital employed means Closing Capital employed excluding Intangible
Assets.
 Avg. Capital Employed may be –
½ (Opening CE + Closing CE)
Or
Closing CE – ½ Rectified PAT
 Which Capital Employed to Use ?
If Not Specified in the question, then we have to check the basis of FMP. If FMP is
based on Projected Profits, Trendline Avg. or Weighted Avg. then we may use
Closing Capital Emp. and if FMP is based on Simple Avg. then we may use Avg.
Capital Employed.
Note: Tangible Capital Employed means Closing Capital Employed excluding Intangible
Assets.
Some Important Key Points:
 Investment for Replacement of P&M/Building is Trade Investment.
 RPAT is the actual profit earned after rectifications since we take capital emp
after rectification also. Moreover RPAT also includes income on Non Trade
Investment assuming that it is utilized in business activities.

 Abnormal Year is not to be considered in the valuation until and unless the loss due
to abnormal activity is mentioned and quantified separately.
 If the Goodwill is shown in balance sheet and nothing is given in question about
goodwill, then we will assume it as Self Generated and not to be considered.
 We need to consider the additional provision of Tax due to increase in Tax Rate.
 Rectification is required when there is any Error or Omission or any information is
given which shows that there is wrong treatment in books. (Eg. Some trade
receivables are bad – it is assumed as error and to be rectified)
Q1. The following is the Balance Sheet (as at 31st December, 2006) of Sun Ltd:
Equity & Liabilities Rs.
Shareholders Fund
80,000 Equity shares of Rs.10 each fully paid up 800,000
50,000 Equity shares of Rs.10 each Rs.8 paid up 400,000
36,000 Equity shares of Rs.5 each fully paid up 180,000
30,000. Equity shares of Rs.5 each Rs. 4 paid-up 120,000
3,000 10% Preference shares of Rs.100 each fully paid 300,000
General reserve 140,000
Profit and Loss account 210,000
Preliminary Expenses – 10,000
Non Current Liabilities
Secured Loan: 12% debenture 200,000
Unsecured loan: 15% term loan 150,000
Deposits 100,000
Current Liabilities
Bank Loan 50,000
Creditors 150,000
Outstanding expenses 20,000
Provision for tax 200,000
Proposed Dividend:
Equity 150,000
Preference 30,000
3,190,000
Assets Rs.
Non Current Assets

Goodwill 1,00,000
Plant and Machinery 8,00,000
Land and Building 10,00,000
Furniture and Fixtures 1,00,000
Vehicles 2,00,000
Investments 3,00,000
Current Assets
Stock 2,10,000
Debtors 1,95,000
Prepaid Expenses 40,000
Advance 45,000
Cash and Bank balance 2,00,000
31,90,000
Additional Information:
(1) In 2004 a new machinery costing Rs 50,000 was purchased, but wrongly charged to
revenue (no rectification has yet been made for the same).
(2) Stock is overvalued by Rs 10,000 in 2005. Debtors are to be reduced by Rs 5,000 in
2006, some old furniture (Book value Rs 10,000) was disposed of for Rs 6,000.
(3) Fixed assets are worth 5 percent more than their actual book value. Depreciation
on appreciated value of Fixed assets except machinery is not to be considered for
valuation of goodwill.
(4) Of the investment 20 per cent is trading and the balance is non-trading. All trade
investments are to be valued at 20 per cent below cost. Trade investment was
purchased on 1st January, 2006. 50 percent of the nontrade investments were
acquired on 1st January, 2005 and the rest on 1st January, 2004. A uniform rate of
dividend of 10 percent is earned on all investments.
(5) Expected increase in expenditure without commensurate increase in selling price is
Rs.20,000.
(6) Research and Development expenses anticipated in future Rs.30,000 per annum.
(7) In a similar business a normal return on capital employed is 10%.
(8) Profit (after tax) are as follows:
In 2004 - Rs. 2,10,000, in 2005 – Rs. 1,90,000 and in 2006 - Rs.2,00,000,
(9) Current income tax rate is 50%, expected income tax rate will be 40%.

From the above, ascertain the ex-dividend and cum-dividend intrinsic value for different
categories of Equity shares. For this purpose goodwill may be taken as 3 years purchase of
super profits, Depreciation is charged on machinery @ 10% on reducing system.
(Answer: FMP-202581; Goodwill – 5557; CCE – 2106273; ACE – 2007286; IV (Ex) –

1.23 Per Rupee) (May 2007; 16 Marks)
Q2. The summarized Balance Sheet of M/s Indus Ltd. as on 31.03.2013 is as follows:
Liabilities Amount Assets Amount

Equity Share Capital 10/- each 5,00,000 Goodwill 1,00,000
12% Pref. Shares 10/- each 4,00,000 Land & Building 4,50,000
Equity shares of 10/- each, 7/- 2,80,000 Plant & Machinery 5,45,000
paid Vehicle 3,50,000
Reserves and Surplus 2,20,000 Investment 5,00,000
Secured Loan (12%) 7,50,000 Inventory 4,25,000
Sundry creditors 2,50,000 Debtors 1,00,000
Provision for Expenses 1,50,000 Cash and Bank Balances35,000
Prepaid Expenses 45,000
25,50,000 25,50,000
(1) Net profits of the company for the past four years (Before intt and tax) were as
under:
2012-13 5,50,000
2011-12 3,85,000
2010-11 5,25,000
2009-10 4,90,000
(2) The company has purchased a furniture in the year 2011-12 for Rs. 1,20,000 which
was wrongly charged to Revenue A/c. Furniture and fixture are depreciated at 15%
of the WDV.
(3) In the year 2012-13 asset having book value of Rs. 80000 was sold for Rs. 65,000
only.
(4) In the year 2010-11 company paid Rs. 25,000 against failure to comply with the
rules as per the environment pollution control board.
(5) 60% of the Investments are non trade investments and market value of the trade
investments is 15% below the book value. The investments realize an interest of 8%
p.a. whether trade or not. The Non trade investments were purchase on 01.04.2012.

(6) The company has been paying managerial remuneration of Rs. 1,00,000 p.a. but as
per the companies Act, the amount eligible is Rs. 80,000 only for the past four
years.
(7) The goodwill in the books has been purchased in the year 2009-10.
(8) 60% of the Secured loan was availed from US which was recorded at a rate of $1 =
Rs. 50 where the closing rate was $1= Rs. 55.
(9) The company wishes to revalue Assets on the realizable value as under:
Land & Building 5,50,000
Plant & Machinery 5,00,000
Vehicles 2,50,000
Debtors 80,000
(ignore the change in depreciation due to change in value of Assets)
The rate of Tax on companies is 30% and the rate of return on capital employed is
15% p.a. Calculate Goodwill based on four years purchase of Super Profit. Make
appropriate assumption wherever required. (16 Mark, November 2013)
(Answer: FMP - 297903; Clo. Cap – 1046700; Avg Cap - 901695; Goodwill –
650596; RPAT- 145005)
Hint: Managerial Remuneration is Rectification of Error and Exchange Difference &

Additional Interest on Ex. Diff assume as Rectification

Suggested Solutions of ICAI:

Leverage Effect on Goodwill:
Q3. Balance Sheet of X Ltd.
Equity & Liabilities: Rs. (in lakhs)

Shareholders Fund:

Share Capital 80
Profit & Loss A/c - 20
13% Debentures 1,20
Current Liabilities
Sundry Creditors 40
2,60
Assets Rs. in lakhs
Non Current Assets
Sundry Fixed Assets 1,80
Current Assets
Stock 40
Debtors 20
Cash & Bank 20
2,60
Calculate Goodwill assuming normal return on shareholder funds 20% and long
terms funds 18%. Future maintainable profits before interest are 38.4 lakhs.
Calculate Leverage effect. (Study Material)
Hint:
Capital employed (Shareholders' fund approach)
Rs 260 lakhs - 160 lakhs outside liabilities = Rs. 100 lakhs.
Capital employed (long term fund approach):
Rs. 260 lakhs - Rs. 40 lakhs Sundry Creditors = Rs. 220 lakhs
Value of goodwill is:
- Rs. 220 lakhs

i.e. Rs. 213.33 lakhs – Rs. 220 lakhs
i.e., Rs. 6.67 lakhs, negative goodwill.
If shareholders' fund approach is followed, value of goodwill as per capitalization
method is:
- Rs. 100 lakhs

i.e. Rs. 114 lakhs – Rs. 100 lakhs
i.e. Rs. 14 lakhs, positive goodwill.
Favaourable Leverage 20.67

Q4. Find out Leverage effect on Goodwill from the following information:
(i) Average capital employed (Equity Approach) Rs. 11,50,000
(ii) FMP on equity fund (After Tax) Rs. 1,80,000
(iii) 10% Long Term Loan Rs. 4,50,000
(iv) Tax Rate 40%
(v) Normal Rate of return
On equity capital employed 15%
On Long term capital employed 12%
(November – 2015, 6 Marks)
(Answer: Goodwill – 50000 at equity approach and Goodwill – 125000 at LT Funds
approach)
Suggeted Solution of ICAI:

Valuation of Shares
Methods for Valuation of Shares:
 Intrinsic Value Method
 Earning Capitalization Method
 Dividend Capitalization Method
 Fair Value Method
Intrinsic Value Method: (also called Net Asset method, Book value method,
Breakup value method)
It shows the expected return or refund per share if the company is being liquidated.
It is calculated as under:
Closing Capital Employed XXX
(+) Goodwill (as per valuation) Xxx
(+) Non Trade Investment Xxx
(-) Pref. Share Capital (xxx)
(-) Pref. Dividend (xxx)
(-) Proposed Dividend on Equity (xxx)
Net Assets for ESH XXX
(+) Uncalled capital/Calls in arrears Xxx
Total Assets available for ESH XXX
÷ No. of Equity Shares or Total ESC xx
Intrinsic Value per share or per Rupee (Ex- XX
Dividend)
Key Points:
- This method is only applicable for Equity Shares.
- If the equity shares are of different face values then we will use Total Equity
Share Capital in rupees instead of No. of Equity Shares.

- To Calculate Cum-Dividend value per share, DPS is to be added to the Ex-dividend
value per share.
- Goodwill will be valued if required data is provided in question.
Capitalization Method (Earning and Dividend Capitalization):

Earning Capitalization Method (ECM) is calculated as under
Value per Share = Expected EPS÷Ke
Or Value per Share = Earning Rate ÷ Ke x Paid up Value per Share
Earning Rate means - Earnings available for ESH ÷Equity paid up capital x 100
Ke = NRR
Dividend Capitalization Method (DCM) is calculated as under:
Value per Share = Expected DPS ÷ Ke
Or Value per Share = Dividend Rate ÷ Ke x Paid up Value per Share
Dividend rate can be average of previous years dividend rates.
Key Poins:
 ECM is generally used for large lot of shares and DCM is used for Small lot of
Shares.
 For DCM, future expected dividend rate will be given or prior years dividend rate
will be given.
 EAESH is calculated as under:
FMP after Tax XXX
(+) Non Operating Income (net of T ax) XXX
(-) Pref. Dividend XXX
(-) CDT on pref. dividend XXX
 For the calculation of Dividend rate in DCM, sometimes question mentions “transfer
to general reserve” which implies the balance profits as expected dividend to be
distributed and hence this is also the maximum possible dividend rate.

Normal Rate of Return (NRR):
NRR is to be calculated by any of the following two approaches:
1. CAPM = Rf + (Rm – Rf) β
2. Estimation of NRR – Here the NRR of a company is estimated by considering the
NRR of the industry for the similar class of shares in which the company operates.
It is to be calculated as under:
NRR of the Industry for specific class of
share
+ 0.5% for Poor dividend track record
+ 0.5% for Poor debt equity ratio or Capial
gearing ratio
+ 0.5% for Poor dividend coverage ratio
+ 0.5% for Poor Asset backing ratio
NRR of Company
Important Key Points:
(a) The above 0.5% is the risk premium which the shareholder expects from a company
for taking higher risk and these 0.5% are assumed figures, they might change
according to the quesiton‟s requirement. This may be 1% or 2% etc.
(b) Asset Backing Ratio – calculated for Equity Share valuation only. Higher the better.
Intrinsic Value Per Share ÷ Paid up value per share
(c) Debt Equity Ratio – Lower the Better
Long term debts ÷ Shareholders fund (for PSH)
(d) Capital Gearing Ratio – Lower the Better
(Long term debts + PSC) ÷ ESH Fund (for ESH)
(e) Dividend Coverage Ratio – Higher the better
Profit after Tax ÷ Pref. Dividend (for PSH)
EAESH ÷ Eqt. Dividend (for ESH)

Fair Value Method:
This method is used when large quantities of Shares are to be acquired or when the
controlling interest is to be acquired.
Fair value of share = (Intrinsic Value per Share + ECM) ÷ 2
Valuation of Shares: Yield Basis

Q5. Capital structure of Lot Ltd. as at 31-03-1998 was as under:
Rs. in lakhs
Equity share capital 10
10% preference share capital 5
15% Debentures 8
Reserves 4
Lot Ltd. earn a profit of Rs. 5 lakhs annually on an average before deduction of interest on
debentures and income-tax which works out to 40%.
Normal return on equity shares of companies similarly placed is 12% provided:
(a) Profit after tax covers fixed interest and fixed dividends at least 3 times
(b) Capital gearing ratio is 0.75.
Yield on share is calculated at 50% of profits distributed and at 5% on undistributed
profits.
Lot Ltd. has been regularly paying equity dividend of 10%.
Compute the value per equity share of the company.
Ans.: Earning 53900, earning rate 5.39% NRR 13% Value of Share 4.15 paid up
value assumed Rs.10.
Q6. The capital structure of M/s Global Ltd. on 31st March, 2015 was as follows:
Equity share capital (25000 shares of Rs. 100/-) Rs. 25,00,000

12% Pref Share capital (7000 shares of Rs. 100 each) Rs. 7,00,000
12% Secured Debentures Rs. 7,00,000
Reserves Rs. 5,00,000
PBIT during the year was Rs. 9,90,000
Tax Rate was 40%

Additional Information:
(1) The profit after tax covers fixed interest and fixed dividend at least 4 times.
(2) The debt equity ratio is at least 2.
(3) The rate of return on equity shares of this type of industry is 15%.
(4) Yield on shares is calculated at 60% of distributed profit and 10% of undistributed
profits.
(5) The company has been paying regularly an Equity dividend of 15%
(6) The risk premium for dividends is generally assumed at 2%.
You are required to find out value of Equity Shares of the Company.
(May 2016 - 8 Marks) (Answer: 54.94/-; Expected return – 17%, ER – 9.34%)
Suggested Solution of ICAI:

Q7. Compute the values of a preference share and an equity share of each of the
companies A and B on the basis of the following information:
Company A Company B
Profit after tax 10,00,000 10,00,000
12% Pref (shares of Rs. 100 each) 10,00,000 20,00,000
Equity Capital (shares of Rs. 10 each) 50,00,000 40,00,000
Assume that market expectation is 15% and that 80% of Profit is distributed. (Study
Material)
Ans.: Earning Rate 17.6% and 19% for A ltd and B ltd NRR 15% and 15.5% NRR
Preference 13% and 13.5% Value Equity 11.73 and Rs. 12.26 Value Preference Rs.
92.2 and 88.89. Slab rate 2% for Risk
Q8. The following abridged Balance Sheet as at 31st March, 2005 pertains to Glorious
Ltd.
Equity & Liabilities Rs. in lakhs
Shareholders Fund:
Share Capital:
180 lakh Equity shares of Rs. 10 each, fully paid-up 1,800
90 lakh Equity shares of Rs.10 each, Rs. 8 paid-up 720
150 lakh Equity shares of Rs.5 each, fully paid-up 750
Reserves and Surplus 5,628
Preliminary Expenses -171
Non Current Liabilities:
Secured Loans 4,500
Current Liabilities: 1,242
Provisions 960
15,429
Non Current Assets Rs. in lakhs
Goodwill, at cost 420

Other Fixed Assets 11,166
Current Assets 2,910
Loans and Advances 933
15,429
You are required to calculate the following for each one of three categories of equity
shares appearing in the above-mentioned Balance Sheet:
 Intrinsic value on the basis of book values of Assets and Liabilities including goodwill;
 Value per share on the basis of dividend yield.
 Normal rate of dividend in the concerned industry is 15%, whereas Glorious Ltd. has
been paying 20% dividend for the last four years and is expected to maintain it in the
next few years; and
 Value per share on the basis of EPS
 For the year ended 31st March, 2005 the company has earned Rs. 1,371 lakh as profit
after tax, which can be considered to be normal for the company. Average EPS for a
fully paid share of Rs. 10 of a company for a fully paid share in the same industry is
Rs. 2. (November 2005,- Marks 16)
Ans.:
(i) Intrinsic Value
Value of fully paid-up share Rs. 10; Rs.25.82
Value of partly paid-up share of Rs.8 Rs.23.82
Value of fully paid-up share of Rs.5. Rs. 12.91
Value per share on dividend yield basis
Value of fully paid-up-share Rs. 10 Rs. 13.33
Value of panty paid-up-share Rs. 8. Rs. 10.67
Value of panty paid-up-share Rs. 5 Rs. 06.6
Value per share on the basis of EPS
Value of fully paid shares of Rs 10 Rs. 20.95
Value of shares of Rs. 10, Rs. paid up Rs. 16.75

Value of fully paid shares of Rs.5 Rs.10.50
Comments
Valuation of Shares: The candidates have performed badly in this question.
Some of the candidates ignored notional call on 90 lakhs equity shares @ Rs.2 per share
while calculating the intrinsic value of shares. Many candidates could not arrive at the
correct value per share on the basis of EPS.
VALUATION OF BUSINESS
Q9. Jayadev Ltd. has earned a PAT of Rs. 48 lakhs for the year ended 2013. It wants you
to ascertain the value of its Business, based on the following information:
(a) Tax rate for the year 2013 was 36%. Future Tax rate is estimated at 34%.
(b) The company‟s equity shares are quoted at Rs. 120 at the Balance Sheet date. The
company had an equity share capital of Rs. 100 lakhs, dividend into shares of Rs. 50 Each.
(c) Profits for the year 2013 have been calculated after considering the following in the
Profit and Loss Account:
(i) Subsidy of Rs. 2 lakhs received from the Government towards fulfillment of certain
social obligations. The govt. has withdrawn this subsidy and hence this amount will not be
received in future.
(ii) Interest of Rs. 8 lakhs on term loan. The final installment of this term loan was fully
settled this year.
(iii)Managerial remuneration Rs. 15 Lakhs. The Shareholders have approved an increase of
Rs. 6 lakhs in the overall managerial remuneration from the next year onwards.
(iv)Loss on sale of Fixed assets and investment amounting to Rs. 8 lakhs. (RTP –
May 2014)
(Answer: Value of Business – Rs. 273.90 Lakhs; FMP – Rs. 54,78,000; Capitalization
Rate – 20% considering P/E Ratio of 5)
Q10. The Balance Sheet of R Ltd. for the year ended on 31 st March, 2006, 2007 and
2008 are as follows: (Rs. in thousands)

Equity & Liabilities 31.3.2006 31.3.2007 31.3.2008
Shareholders Fund:
3,20,000 equity shares of Rs.10 3,200 3,200 3,200
each, fully paid
General reserve 2,400 2,800 3,200
Profit and Loss account 280 320 480
Current Liabilities:
Creditors 1,200 1,600 2,000
7,080 7,920 8,880
Non Current Assets:
Goodwill 2,000 1,600 1,200
Building & Machinery less, depreciation2,800 3,200 3,200
Current Assets
Stock 2,000 2,400 2,800
Debtors 40 320 880
Bank balance 240 400 800
7,080 7,920 8,880
Additional information:
(a) Actual valuations were as under:
Building and machinery less, dep 3,600 4,000 4,400
Stock 2,400 2,800 3,200
(b) Net profit (including opening balance after writing off depreciation, goodwill, tax
provision and transferred to general reserve) 840; 1,240; 1,640
(c) Capital employed in the business at market value at the beginning of 2005-06 was
Rs. 73,20,000 which included the cost of goodwill, The normal annual return on
average capital employed in the line of business engaged by R Ltd. is 12.5%
(d) The balance in the general reserve on 1st April, 2005 was Rs. 20 lakhs.
(e) The goodwill shown on 31.3.2006 was purchased on 1.4.2005 for Rs. 20 lakhs on
which date the balance in the Profit and Loss account was Rs. 2,40,000. Find out
the average capital employed in each year.
(f) Goodwill is to be valued at 5 year's purchase of Super profit (Simple average
method). Find Out the total value of the business as on 31.3.2008.

(Answer: Goodwill: 5195.85; Value of Business: 12475.85/ 11392.5 on simple avg Or
Goodwill – 4112.5 SP (Avg) – 822.50)
Q11. Shyam Garments Ltd. is a company which produces and sells to retailers a certain
ranges of fashion clothings They have made the following estimates of potential cash flows
for the next 10 years. (Study Module)
Year 1 2 3 4 5 6 7 8 9 10
Cash 15,00 17,00 20,00 25,00 30,00 34,00 38,00 45,00 50,00 6,000
flow
Kiddies Wear Ltd. is a company which owns a series of boutiques in a certain locality. The
boutiques buy clothes from various suppliers and retail them. Each boutique has a manager
and an assistant but all purchasing and policy decisions are taken centrally. Independent
cash flow estimates of Kiddies Wear Ltd. was as follows:
Year 1 2 3 4 5 6 7 8 9 10
Cash 1,20 1,60 2,00 2,80 3,40 4,60 5,20 6,00 6,60 8,00
flow
Shyam Garments Ltd is interested in acquiring Kiddies Wear Ltd. in order to get some
additional retail outlets. They make the following cost-benefit calculations:
(1) Net value of assets of Kiddies Wear Ltd.

Rs .in lacs
Sundry Fixed Assets 800
Investments 200
Stock 400
1400
Less Sundry Creditors 400
Net Assets 1000

(2) Sundry Fixed Assets amounting to Rs. 50 lacs cannot be used and their net realizable
value is Rs. 45 lacs.
(3) Stock can be realized immediately at Rs 470 lacs.
(4) Investments can be disposed off for Rs. 212 lacs.
(5) Some workers of Kiddies Wear Ltd. are to be retrenched for which estimated
compensation is Rs. 1,30 lacs.
(6) Sundry creditors are to be discharged immediately,
(7) Liabilities an account of retirement benefits not accounted for in the Balance Sheet
by Kiddies Wear Ltd. is Rs. 48 lacs.
(8) Expected cash flows of the combined business will be as follows:Rs in lacs)
Year 1 2 3 4 5 6 7 8 9 10
Cash 18,00 19,00 23,00 29,50 35,00 40,00 45,00 53,00 58,00 69,00
flow
Find out the maximum value of Kiddies Wear Ltd. which Shyam Garments Ltd. can quote.
Also show the difference in valuation had there been no merger. Use 20% as discount
factor.
(Ans. Price 2,013.70. Value of if no merger 1295.38. Present value of Cash flows
718.32)
BRAND VALUATION
Brand may be SELF GENERATED or ACQUIRED.
Valuation of Acquired Brand is given below:
1. Brand Value = Price paid to acquire such brand; or
2. Brand Value = Purchase Consideration – Net Assets taken over
Valuation of Self Generated Brand is given below:

1. Historical Cost Method
Brand Value = Actual Cost Incurred in Brand Building (Development + Marketing +
Promotion Cost)
2. Potential Earning Model
Brand Value = Profit arising due to Brand / Capitalisation Factor
How to Calculate Profit due to Brand?
PAT xxx
Less: Expected Return due to unbranded Products (xxx)
(From Tangible and Intangible Assets other than Brand)
Q12. From the Following, determine the possible value of brand as per potential earning
model:
Rs. In Lakhs
1 Profit after tax (PAT) 2500
2 Tangible Fixed Assets 10000
3 Identifiable intangible assets other than brand 1500
4 Weighted average cost of capital (%) 14%
5 Expected normal return on tangible assets
[weighted average cost (14%) + normal spread 4%] 18%
6 Appropriate capitalization factor for intangibles 25%
(Answer: 1,300)
Q13. Zed Ltd. is a FMCG player in the range of Men‟s cosmetics and deals in both
Branded and Unbranded products. The Branded products are sold under brand of „Zed‟ and
are full outsourced from third party manufacturers. The Company‟s unbranded products
are manufactured at its own manufacturing units. The earnings for the last three years
(Lakhs Rs.) are furnished below:

Year 1 Year 2 Year 3
Earnings before interest and Tax from Sale of 5100 7500 9900
Products 190 135 225
Other Income – Royalty from partial use of Zed 9000 10800 13500
Brand 14% 12% 14%
Tangible Fixed Assets employed
Returns (Before interest and Tax) on cost of 2% 3% 3%
tangible assets
Spread over return
The average annual fund‟s used in the company‟s operations is Rs. 5200 lakhs of which Rs.
2800 lakhs is in respect of the branded business. The company‟s tax rate is 33.33% and
has an average cost of funds of 17% after considering tax shelter on cost of borrowed
funds. You are required to determine the value of Brand Zed considering a capitalization
rate of 20%.
(November – 2013, 8 Marks)
(Answer: Value of Brand – 19435 by Weighted avg. or 17170 by Simple avg.)
Suggested Answer by ICAI

Q14. Agile Ltd. is a manufacturer cum-dealer of R Tuff brand Trusers. With the passage
of time, its brand has been well accepted in the market. The company has been approached
by the foreign company engaged in the same trade to enter as a partner in its business.
Agile in order to negotiate the deal wants to get its brand valued. The following
information based on market research is available:
(i) Garment industry in which Agile is a constituent, is expected to grow up by 9%
per annum during the next five years. The present market size of the industry
is Rs. 7500 crores.
(ii) There are other brands both national and international in the market. The
existence of duplicate brands is unavoidable. The share of such players is
expected to be 63% of the total industry market. The market share of other
national brands will increase @0.25% year to year basis in the next 5 years.
The share of international brand is expected to grow 1.5 times of national
brands. But the existence of duplicate brands is to fall by 2.5% over the period
of next 5 years, spread equally.

(iii) The expected foreign partner needs the production line of the company to be
re-engineered which will lead to an increase in the yield of the company by 3%
after the one year over the present yield of 10% followed thereafter by
further increase of 5% year on year.
Following the market orientation approach, determine the brand value to be
used for negotiation with the foreign company, considering the discounting
factor for 1st five years as 0.909; 0.826, 0.751, 0.683 and 0.621. (Monetary
values in crores to be rounded off to the nearest 2 decimal places).
(Answer: Brand Value – Rs. 2,443.43 cr.)

IMPORTANT NOTES:

IMPORTANT NOTES:

CORPORATE RESTRUCTURING
Part – 1 Amalgamation Of Companies
Class Notes:
Meaning of Purchase Consideration:

Payment made in ANY form to the Equity and Preference Shareholders of Transferor
Co. by Transferee Co.
Calculation of Purchase Consideration:

PC can be calculated by (i) Net Payment Method i.e. Exchange Ratios basis and (ii) Net
Asset Method.
We will always use Net Payment method in first priority
Net Assets Method is generally used when not all the assets are taken over only certain
assets & liabilities are taken over.
Net Payment Method: Here we need Exchange Ratio (Swap Ratio) for calculation of PC.
Exchange ratio is a ratio for exchange of No. of Shares. It can be given in the question.
If it is missing in question, then we use Deemed Exchange Ratio as under:
Value of Share of Transferor – Cum Dividend / Value of Share of Transferee – Ex

Div.
The above values can be Intrinsic Values, Market Values or any other values given in the
question.
In absence of any Information we will use Intrinsic Values.
While calculating PC, there may be fraction in no. of shares. Here it is important to note
that “we have to follow odd-even technique if proper information is given in the
question.
ACCOUNTING ENTRIES
In the Nature of Purchase In the Nature of Merger
Business Purchase A/c Dr. (PC) Business Merger A/c Dr. (PC)
To Liquidator of Transferor Co. A/c To Liquidator of Transferor Co. A/c
(PC) (PC)
Sundry Assets A/c Dr. (agreed Sundry Assets A/c Dr. (Book
value) value)

Goodwill/CR A/c Dr. (Bal. Fig) Gen. Res or P&L A/c Dr. (Bal. Fig)
To Sundry Liabilities A/c (Payable To Sundry Liabilities A/c (Payable
Value) Value)
To Business Purchases A/c To Business Merger A/c (PC)
To Reserves and Surplus (Book value)
Payment of PC:
Liquidator A/c Dr. Payment of PC:
To Cash A/c Liquidator A/c Dr.
To Equity Share Capital A/c To Cash A/c
To Pref. Share Capital A/c To Equity Share Capital A/c
To Security Premium A/c To Pref. Share Capital A/c
To Security Premium A/c
Cancellation of Receivables and Payables Cancellation of Receivables and Payables

Payables A/c Dr. Payables A/c Dr.
To Receivables A/c To Receivables A/c
For Payment of Liability: For Payment of Liability:

Liability A/c (eg. Debenture holders A/c) Liability A/c (eg. Debenture holders A/c)
To Cash A/c To Cash A/c
To New Liability A/c To New Liability A/c
(debentures are taken over at agreed (debentures are taken over at agreed
value and settled by issue of new value and settled by issue of new
debentures in above entry) debentures in above entry)
For Payment of Expenses/Unrecorded For Payment of Expenses/Unrecorded

Liability: Liability:
CR / Goodwill A/c Dr. Gen. Res. or P&L A/c Dr.
To Cash A/c To Cash A/c
(in balance sheet goodwill and CR should
set off to show net figure) No Statutory reserve to be created
separately
For creation of Statutory Reserves:
Amalgamation Adjustment Reserve Dr. For Unrealised Profit:
To Statutory Reserves A/c Upstream and Downstream Transaction:
(Following are statutory reserves: General Reserve A/c Dr.
1. Invst. Allowance Res. To Stock A/c
2. Export Profit Res.
3. Foreign Project Res.
4. Tea Development Res.
5. Shipping Res.
6. Site Restoration Fund
*Amalg. Adjust. Reserve should be

shown as a separate line item under the
head R&S
For Unrealised Profit:

Upstream Transaction:
Goodwill A/c Dr.
To Stock A/c
Downstream Transaction:
General Reserve A/c Dr.
To Stock A/c
It is important to note that in case of Amalgamation in the nature of merger
question may specify revalued figures or Market values of Assets, such values
would be used for the purpose of calculation of PC.
Books of Transferor Company:

1. Transfer all the Assets and Liabilities to Realisation A/c
2. EQ Share Capital, Reserves, Losses, Proposed Dividends, Fict. Assets shall be
transferred to ESH A/c
3. PSC is to be transferred to PSH A/c
4. Investment in New Co. – Make Investment A/c Separately
5. Cash and Bank – If taken over then transfer it to Realisation A/c otherwise
Make it seaparately
6. Raise PC in Credit side of Realisation A/c
7. Before closing Realisation A/c, close Pref. Share Holder A/c after discharging
PC to them so that if there remains any difference in PSH A/c it will be
transferred to Realisation A/c
8. Close Realisation A/c, Balance of this account will be transferred to ESH A/c
9. Discharge PC to ESHs and Transfer Investment already held to ESHs A/c
Calculation of Purchase Consideration using Payments Method:
Q1. A Ltd. agreed to absorb B Ltd. on 31st March 1999, whose balance sheet stood as
follows:
Equity & Liabilities:
Shareholders Fund:
Share Capital 80,000 shares of 10/-fully paid 800,000
Reserves & Surplus:
General Reserve 100,000
Non-Current Liabilities:

Secured Loan -
Unsecured Loan -
Sundry Creditors 100,000
1,000,000
Assets:
Non Current Assets
Fixed Assets 700,000
Investments -
Current Assets:
Stock in trade 100,000
Sundry Debtors 200,000
1,000,000
The consideration was agreed to be paid as follows:
(a) A payment in cash of Rs. 5 per share in B Ltd. and the issue of shares of Rs. 10 each in
A Ltd., on the basis of 2 Equity Shares (valued at Rs. 15) and one 10% cum. Preference
share (valued at Rs. 10) for every five shares held in B Ltd.
The whole of the share capital consists of shareholdings in exact multiple of five except
the following holding:
Chopra 116
Karki 76
Amar Singh 72
Malhotra 28
Other individuals 8 (Eight members holding one share each)
300
It was agreed that A Ltd. will pay in cash for fractional shares equivalent at agreed value
of shares in B Ltd. i.e. Rs. 65 for five shares of Rs. 50 paid.
Prepare a statement showing the purchase consideration receivable in share and cash.
(Ans : Purchase Consideration Rs. 10,40,000) (May 2011- 8 Marks)
Accounting under Purchase Method
Q2. The summarized Balance Sheet of R Ltd. and P Ltd, for the year ending on 31-03-
2000 are as under:
Equity & Liabilities
Shareholders Fund: R Ltd. P Ltd.
Equity Share Capital (in shares of Rs. 10 each) 24,00,000 12,00,000

8% Preference Share Capital (in shares of Rs. 10 each)8,00,000
10% Preference Share Capital (in shares of Rs. 10 each) - 4,00,000
Reserves 30,00,000 24,00,000
Current Liabilities 18,00,000 10,00,000
80,00,000 50,00,000
Assets:
Non Current Assets:
Fixed Assets 55,00,000 27,00,000
Current Assets 25,00,000 23,00.000
80,00,000 50,00,000
The following information is provided:
R Ltd. P Ltd.
(a) Profit before tax 10,64,000 4,80,000
(b) Taxation 4,00,000 2,00,000
(c) Preference dividend 64,000 40,000
(d) Equity dividend 2,88,000 1,92,000
2. The equity Shares of both the Companies are quoted in the market. Both the companies
are carrying on similar manufacturing operations.
3. R. Ltd. Proposes to absorb P Ltd. as on 31-03-2000. The terms of absorption are as
under:
(a) Preference shareholders of P Ltd. will receive 8% Preference shares of R Ltd.
sufficient to increase the income of Preference shareholders of P Ltd. by 10%.
(b) The equity shareholders of P Ltd. will receive equity shares of R Ltd on the following
basis.
(i) The equity shares of P Ltd. will be valued by applying to the earning per share of P Ltd.
75% of price earnings ratio of R Ltd. based on the results of 1999-2000 of both the
companies.
(ii) The market price of equity shares of R Ltd. is Rs. 40 per share.
(iii)The number of shares to be issued to the equity shareholders of P Ltd. will be based on
the above market value.
(iv) In addition to equity shares, 8% preference shares of R Ltd. will be issued to the
equity shareholders of P Ltd. to make up for the loss in income arising from the above -
exchange of shares based on the dividends for the year 1999-2000.
4. The assets and liabilities of P Ltd. as on 31-03-2000 are revalued by professional value
as under:

Increased by Decreased by
Fixed Assets 1,00,000 -
Current Assets - 2,00,000
Current Liabilities 40,000
5. For the next two years, no increase in the rate of equity dividend is expected.
You are required to:
1. Set out in detail the purchase consideration
2. Give the Balance Sheet as on 31-03-2000 after absorption
Note: Journal entries are not required. (November, 2000)
(Ans.: P.C. 47,50,000; Goodwill 8,10,000; Balance Sheet Total
1,09,50,000/1,37,10,000)
Q3. T Ltd. and V Ltd. propose to amalgamate. Their balance sheets as at 31st March 2008
were as follows:
Equity & Liabilities T Ltd V Ltd
Shareholders Fund:
Share Capital
Equity Shares of Rs. 10 each 1,500,000 600,000
General Reserve 600,000 60,000
Profit & Loss a/c 300,000 90,000
Creditors 300,000 150,000
2,700,000 900,000
Non Current Assets: T Ltd V Ltd.
Fixed Assets:
Less: Depreciation 1,200,000 300,000
Investments 300,000
(Face value of Rs. 3 lakhs, 6% G.P notes)
Current Assets:
Stock 600,000 390,000
Debtors 510,000 180,000
Cash and Bank Balances 90,000 30,000
2,700,000 900,000
Their Net Profits (after taxation) were as follows:
Year T Ltd V Ltd
2005-06 3,90,000 1,35,000
2006-07 3,75,000 1,20,000
2007-08 4,50,000 1,68,000

Normal trading profit may be considered as 15% on closing capital invested Goodwill may
be taken as 4 year's purchase of average super profits. The stock of T Ltd. and V Ltd. are
to be taken at Rs. 6,12,000 and Rs. 4,26,000 respectively for the purpose of amalgamation.
W Ltd. is formed for the purpose of amalgamation of two companies. Assume Tax Rate
40%.
(a) Suggest a Ratio of exchange of shares and
(b) Draft the opening balance sheet of W Ltd. (May 2008; Marks 16)
Solutions:
(a) Scheme of capitalization of W. Ltd. and ratio of exchange of shares
Computation of Net Assets of amalgamating companies
T Ltd. V Ltd
Goodwill (W.N.2) 3,19,200 1,21,200
Fixed Assets 12,00,000 3,00,000
6% investments (Non-trade) 3,00,000 -
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000 30,000
30,31,200 10,57,200
Less: Creditors 3,00,000 1,50,000
Net Assets * 27,31,200 9,07,200
No. of Equity shares 1,50,000 60,000
Intrinsic value of a share Rs. 18.208 15.12
No of shares to be issued by W. Ltd to
T. Ltd 1,50,000 x 18.208/10 2,73,120 shares
V. Ltd 60,000 x 15.12/10 90,720 shares
In total 2,73,120 + 90,720 i.e. 3,63,840 shares will be issued by W. Ltd.
Ratio of exchange of shares will be as follows:

1.Holders of 1,50,000 equity shares of T Ltd. will get 2,73,120 shares in W. Ltd.
2.Similarly, holders of 60,000 equity shares of V Ltd. will get 90,720 shares in W. Ltd
(b) Opening Balance Sheet of W. Ltd

Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
3,63,840 Equity shares Goodwill (W.N.2)
of Rs. 10 each 36,38,400 (3,19,200 + 1,21,200) 4,40,400
(issued for consideration Other fixed Assets
other than cash, pursuant (12,00,000+ 3,00,000) 15,00,000

to scheme of amalgamation) Investments in 6%
Current Liabilities: G.P. Notes 3,00,000
Creditors 4,50,000Current Assets:
Stock (6,12,000 + 4,26,000) 10,38,000
Debtors (5,10,000 + 1,80,000) 6,90,000
Cash and bank balance
(90,000 + 30,000) 1,20.000
40,88,400 40,88,400
Working Notes:
1. Calculation of closing trading capital employed on the basis Of net assets
T. Ltd. V. Ltd.
Fixed Assets 12,00,000 3,00,0000
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000
30,000
24,12,000 9,36,000
Less: Creditors 3,00,000 1,50,000
Net Assets 21,12,000 7,86,000
2. Calculation of value of goodwill
T. Ttd. V. Ltd
(i) Average Trading Profit
2005-06 3,90,000 1,35,000
2006-07 3,75,000 1,20,000
2007-08 4,50,000 1,68,000
Profit after tax 12,15,000 4,23,000
Profit before tax (40%) 20,25,000 7,05,000
Add: Under valuation of closing stock 12,000 36,000
20,37,000 7,41,000
Average of 3 years' profit before tax 6,79,0002,47,000
Less: Income from non-trade investments
(3,00,000 - 6%) 18,000
Average profit before tax 6,61,000 2,47,000
Less: 40% tax 2,64,400 98,800
Average profit after tax 3,96,600 1,48,200
(ii) Super Profits

Average trading profit 3,96,600 1,48,200

Less: Normal Profit
T. Ltd. Rs. 21,12,000 x 15% 3,16,800
V. Ltd Rs. 7,86,000 x 15% 1,17,900
79,800 30,300
(iii) Value of goodwill at 4 years'
Purchase of super profits 3,19,200 1,21,200
Pooling of Interests Method

Q4. Alpha Limited and Beta Limited were amalgamated on and from 1st April 2001. A new
Company Gamma Limited was formed to take over the business of' the existing companies.
The balance sheet of Alpha Limited and Beta Limited as on 31st March, 2001 are given
below:
(Rs. in lakhs)
Equity & Liabilities Alpha Ltd. Beta Ltd.
Shareholders Fund:
Share Capital
Equity shares of Rs. 100 each 1,000 800
15% Pref shares of Rs. 100 each 400 300
Reserve & Surplus
Revaluation Reserve 100 80
General Reserve 200 150
Profit & Loss Account 80 60
Secured Loan
12% Debentures of Rs. 100 each 96 80
Current Liabilities: 204 95
2,080 1,564
: Alpha Ltd. Beta Ltd.
Non Current Assets
Fixed Assets 1,200 1,000
Current Assets:
Loans and advances 880 565
2,080 1,565
Other information:
1. 12% Debenture holders of Alpha Limited and Beta Limited are discharged by
Gamma Limited by issuing adequate number of 16% Debentures of Rs. 100 each to
ensure that they continue to receive the same amount of interest.

2. Preference shareholders of Alpha Limited and Beta Limited have received same
number of 15% Preference shares of Rs. 100 each of Gamma Limited.
3. Gamma Limited has issued 1.5 equity shares for each equity share of Alpha Limited
and 1 equity share for each equity share of Beta Limited. The face value of shares
issued by Gamma Limited is Rs. 100 each.
Required:
Prepare the Balance Sheet of Gamma Limited as on 1st April, 2001 after the
amalgamation has been carried out using the pooling of interest method.
(May, 2001)
(Ans: Purchase Consideration. Alpha 1,900; Beta 1,100 and BS - 3645)
CROSS HOLDING
Q5. Old Co. New Co.

No. of Shares 40,000 50,000
Holding of Old Co. - 5,000
New Co. 4,000 -
Intrinsic Value 20 15
Calculate Purchase Consideration.
(Ans.: Purchase Consideration Rs. 7,40,000/-; Payment to be discharged Rs.
6,40,000/-.)
Q6. (Nov. 2015 – RTP)

The following are the Balance Sheets of A Ltd. and B Ltd. as on 31st March, 2015:
Liabilities A Ltd. B Ltd.
Share Capital:
Equity Shares of Rs. 10 each fully paid 45,00,000 10,00,000
8% Pref. Shares of Rs. 10 each fully paid - 5,00,000
General Reserve 3,50,000 3,10,000
Profit and Loss A/c 6,34,000 60,000
10% Debentures - 8,00,000
Current Liabilities 6,00,000 3,80,000
Total 60,84,000 30,50,000
Assets:
Fixed Assets 30,50,000 7,30,000
30,000 Equity Shares in B Ltd. 3,00,000 -
90,000 Equity Shares in A Ltd. - 10,00,000
Debtors 12,70,000 4,50,000

Stock 8,40,000 5,50,000
Bank Balance 6,24,000 3,20,000
Total 60,84,000 30,50,000
A Ltd. absorbs B Ltd. on the basis of intrinsic values of both the companies as on 31st
March, 2015. It is informed that the preference shares of B Ltd. do not have priority over
payment of capital and dividend. Before absorption, A Ltd. declared dividend of 8%,
Dividend tax is 10%.
Prepare Balance Sheet of A Ltd., after the absorption of B Ltd. with necessary Notes to
accounts.
(Anwser: BS – 75,09,990; PC – 9,42,600 and DPC – 5,46,900; IV – 11.51 and
13.19)
Suggested Answer by ICAI:

INTER COMPANY HOLDING - CROSS PARTLY PAID UP
Q7. The following are the Balance Sheets of Big Ltd. and Small Ltd. as at 31.3.2006
(Rs.'in lakhs)
Equity & Liabilities: Big Ltd. Small Ltd.
Shareholders Fund: Rs. Rs.
Share Capital 40 15
Profit & Loss A/c 7.5 -2.5
Sundry Creditors 12.5 12.5
60 25
Big Ltd. Small Ltd.
Non Current Assets: Rs. Rs.
Sundry Assets (including Ivst) 56 20
Goodwill 4 5
60 25
Additional Information
(i) The two Companies agree to amalgamate and form a new company, Medium Ltd.

(ii) Big Ltd. holds 10,000 shares in Small Ltd, acquired at a cost of Rs. 2,50,000 and
Small Ltd. holds 5,000 shares in Big Ltd. acquired at a cost of Rs 7,00,000.
(iii) The shares of Big Ltd. are of Rs. 100 and are fully paid and the shares Small
Ltd. are of Rs. 50 each on which Rs. 30 has been paid-up.
(iv) It is agreed that the goodwill of Big Ltd. would be valued at Rs 1,50,000 and
that Of Small Ltd. at Rs. 2,50,000.
(v) The new shares are to be of a nominal value of Rs. 50 each credited as Rs. 25
paid.
You are required to :

(a) Prepare the Balance Sheet of Medium Ltd., as at 31st March, 2006 after giving
effect to the above transactions ; and
(b) Prepare a statement showing the shareholdings in the new company
attributable to the shareholders of the merged companies.
(May,2006, Marks 16) (Answer: PC – 4549850; BS 7049850; IV 110.51 and
17.05)
Q8: XY Ltd. has been incorporated with an authorized capital of Rs. 70 lakhs equity
shares of Rs. 10 each and Rs. 4 lakhs preference shares of Rs. 100 each.
The subscribers to the MOA have subscribed and paid for 1 lac equity shares. The
expenses for incorporation incurred amounted to Rs. 8.09 lakhs.
XY Ltd. desires to amalgamate X Ltd. and Y Ltd. as at 1st April, 2015. Following information
is available: Balance Sheet as on 31st March, 2015 (in lacs)
X Ltd. Y Ltd.
LIABILITIES
Equity Shares (FV 100/-) 750 725
10% Preference Shares (FV 100/-) 420 180
Reserves and Surplus
Revaluation Reserve 125 75
Capital Reserve 270 190
Statutory Reserve 60 40
Profit and Loss A/c 35 12
Loan Funds
Secured Loans
12.5% Debentures (FV 100/-) 50 28

Unsecured Loans 25 0
Current Liabilities
Trade Payables 165 75
1900 1325
ASSETS
Fixed Assets
Land & Building 470 290
Plant & Machinery 310 210
Investments 75 50
Current Assets
Trade Receivables 345 270
Inventories 345 254
Cash and Cash Equivalents 355 251
1900 1325
Before amalgamation, X Ltd. and Y Ltd. will make the following adjustments in their
Balance Sheets:
(a) Pay off unsecured loans

(b) X Ltd. will revalue its Land and Building by enhancing the book value by 10% and Y
Ltd. will revalue the Land and Building at Rs. 330 Lakhs.
(c) Y Ltd. will revalue its Plant and Machinery at Rs. 220 Lakhs.
(d) Investment will be disposed off. X Ltd. sold its investments for Rs. 67 lakhs and Y
Ltd. disposed the same for Rs. 52 lakhs.
(e) Debenture holders of X Ltd. and Y Ltd. will be discharged by XY Ltd. by issue of
15% debentures of Rs. 100 each for such an amount which will not put any additional
burden of interest outgo on XY Ltd. than presently payable by X Ltd. and Y Ltd.
(f) Preference shareholders of X Ltd. and Y Ltd. will be issued 15% Preference Shares
in XY Ltd. in the ratio 2:3 i.e. 2 shares will be issued for every 3 shares held at a
premium of Rs. 25
(g) Equity shares in XY Ltd. will be issued as under:
1. Shareholders of X Ltd. in the ratio of 4:1 @ Rs. 35 per share; and
2. Shareholders of Y Ltd. in the ratio of 3:1 @ Rs. 32 per share
(h) Statutory reserves having met its purpose will be merged with Capital reserves.
Prepare the Amalgamated Balance Sheet of XY as at 31st March, 2015 as per
Schedule III.
(Answer: BS 3292.91, Capiral Reseve – 307.33 + 432.67, PC – 1400 & 846)
(May – 2015; 16 Marks)

Q9. Dawn Ltd. was incorporated to take over Arun Ltd., Brown Ltd. and Crown Ltd. Balance
Sheet of all the three companies as on 31.03-2008 are as follows:
(Rs.'000)
Equity & Liabilities:
Shareholders Fund Arun Ltd. Brown Ltd. Crown Ltd.
Equity Share Capital(Share of 10 each) 1,800 2,100 900
Reserve 300 150 300
10% Debentures 600 - 300
Other Liabilities 600 450 300
Total 3,300 2700 1,800
Non Current Assets:
Net Tangible Block 2,400 1,800 1,500
Goodwill - 150 -
Current Assets:
Other Assets 900 750 300
Total 3,300 2,700 1,800
From the following information you are to:
Work out the number of Equity shares and Debentures are to be issued to the
shareholders of each company.
Prepare the Balance Sheet of Dawn Ltd. as on 31.03.2008
Information:
(1) Assets are to be revalued and revalued amount of Tangible Block and other Assets
are as follows:
Tangible Block Other Assets

Arun Ltd. 30,00,000 10,50,000
Brown Ltd. 15,00,000 4,20,000
Crown Ltd. 18,00,000 2,40,000
(2) Normal profit on capital employed to be taken at 10%.
(3) Average amount of profit for three years before charging interest on debenture
are:
Arun Ltd. Rs. 5,40,000

Brown Ltd. Rs. 4,32,000
Crown Ltd Rs. 3,12,000

(4) Goodwill is to be calculated at three year's purchase of average super profits for
three years, such average is to be calculated after adjustment of 10% depreciation
on Increase/Decrease on revaluation of Fixed Assets (Tangible Block).
(5) Capital employed being considered on the basis of net revaluation of Tangible
Assets.
(6) Equity Shares of Rs. 10 each fully paid up in Dawn Ltd. are to be distributed in the
ratio of average Profit after adjustment of depreciation on revaluation of Tangible
Block.
(7) 10% Debentures of Rs. 100 each fully paid up are to be issued by Dawn Ltd. for the
Balance due.
(8) The ratio of issue Equity shares and debentures of Dawn Ltd. are to be maintained
at 3: 1, towards the takeover companies.
(9) The amount required for preliminary expenses of Rs. 1,50,000 and for, payment to
existing Debentureholders, were provided by issuing Equity shares of Rs 10 each in
Dawn Ltd.
(November 2008; New Course, Marks 16) (Answer: Goodwill – 855000, Nil,
144000)
Suggested Answer by ICAI:

Q10. The following are the Balance Sheet of Andrew ltd. and Barry Ltd. as at 31.12.2004:
Andrew Ltd.
Liabilities Amount (‘000) Assets Amount
(‘000)
Share Capital Fixed Assets 3,400
3,00,000 Equity shares of 3,000
10/- 1,000 Inventories (Pledged with 18,400
10,000 Pref Shares of 100/- 400 secured loan trade
General Reserves 16,000 payables)
Secured Loans (secured 3,600
against pledged of 8,600 Other Current Assets
inventories) 13,000 16,600
Unsecured Loans 42,000 Profit and Loss A/c 42,000
Current Liabilities
Barry Ltd.
Liabilities Amount (‘000) Assets Amount
(‘000)
Share Capital Fixed Assets 6,800
1,00,000 Equity shares of 1,000
10/- 2,800 Current Assets 9,600
General Reserves 8,000
Secured Loans 4,600
Current Liabilities 16,400 16,400
Both the companies go into liquidation and Charlie Ltd. is formed to take over their
businesses. The following information is given:
(a) All Current Assets of Two companies except pledged inventories are taken over by
Charlie. The realizable value of all current assets is 80% of the book values in case
of Andrew Ltd. and 70% in case of Barry Ltd. Fixed assets are taken over at book
value.
(b) The break up of current liabilities is as follows:
Andrew Ltd. Barry Ltd.
Statutory Liabilities (in case of 22/- lakhs in case of
Andrew Ltd. in case of a claim not having been
admitted shown as contingent Liability) 72,00,000 10,00,000
Liability to employees 30,00,000 18,00,000
The balance of current liabilities is misc trade payables.
(c) Secured loans includes Rs. 16,00,000 accrued interest in case of Barry Ltd.
(d) 2,00,000 equity shares of 10/- each are allotted by Charlie Ltd. at par against cash
payment of entire face value to the shareholders of Andrew Ltd. and Barry Ltd. in
the ratio of shares held by them in Andrew Ltd. and Barry Ltd.

(e) Preference Shareholders are issued Equity Shares worth 2,00,000/- in lieu of
present holdings.
(f) Secured loan payables agree to continue balance amount of their loan to Charlie
Ltd. after adjusting value of pledged security in case of Andrew Ltd. and after
waiving 50% of interest due in case of Barry Ltd.
(g) Unsecured loans are taken over by Charlie Ltd. at 25% of Loan Amount.
(h) Employees are issued fully paid equity shares of Charlie Ltd. in full settlement of
their dues.
(i) Statutory liabilities are taken over by Charlie Ltd. at full values and trade payables
are taken over at 80% of the book value.
Show the Opening Balance Sheet of Charlies Ltd., Working should be part of the
answer.
(Answer: BS – 31, 270 (‘000) Net Goodwill – 9,470 (‘000)
(Practice Manual)
Suggested Answer of ICAI:

ACQUISITION OF SHARES:
Q11. The summarized Balance Sheet of A Ltd. and its subsidiary B Ltd. as on
31/03/2001` are as follows:
Equity and Liabilities: A Ltd. B Ltd.
Shareholders Fund:
Shares of Rs. 10 each 1,00,00,000 20,00,000
Reserves and Surplus 1,40,00,000 60,00,000
Secured Loans 40,00,000
Current Liabilities: 60,00,000 20,00,000
3,40,00,000 1,00,00,000
Non Current Assets:
Fixed Assets 1,20,00,000 35,00,000
Investment in B Ltd. 7,40,000 -
Current Assets:
Sundry Debtors 70,00,000 10,00,000

Inventories 60,00,000 50,00,000
Cash and Bank 82,60,000 5,00,000
3,40,00,000 1,00,00,000
A Ltd. holds 76% of the paid up capital of B Ltd. The balance shares in B Ltd, are held by a
Foreign Collaborating Company. A memorandum of understanding has been entered into
with the foreign company providing for the following:
1. The shares held by the foreign company will be sold to A Ltd. The price per share will be
calculated by capitalizing the yield at 16%. Yield, for this purpose would mean 40% of the
average of pre-tax profits for the last 3 years, which were Rs. 35 lakhs, Rs. 44 lakhs and
Rs. 65 lakhs.
2. The actual cost of shares to the foreign company was Rs. 2,40,000 only. The profit that
would accrue to them would be taxable at an average rate of 30%. The tax payable be
deducted from the proceeds and A Ltd. will pay it to the Government.
3. Out of the net consideration, 50% would be remitted to the foreign company
immediately and the balance will be an unsecured loan repayable after one year. It was also
decided that A Ltd. would absorb B Ltd. simultaneously by writing down the Fixed Assets
of B Ltd. by 5%, The Balance Sheet figures included a sum of Rs. 1,50,000 due by B Ltd.
to A Ltd.
The entire arrangement was approved by all concerned for giving effect to on 1-04-2001.
You are required to show the Balance Sheet of A Ltd. as it would appear after the
arrangement is put through on 01-04-2001.(November, 2001)(Ans.: Balance Sheet Total
410.99)
Q12. Agni Ltd. and Bayu Ltd. both engaged in similar merchanting activities since 2012,
decide to amalgamate their businesses. A holding company Chandrama Ltd. would be
formed on 1st Jan, 2015 to acquire the entire shares in both the companies.
From the following information given below you are required to prepare:
(a) A statement of Purchase consideration supported by requisite working notes.
(b) Balance sheet of Chandrama Ltd. after transactions have been completed.
o The terms of offer were:
 Rs. 100, 15% debentures for every Rs. 100 of net assets owned by each company on
31st December, 2014.
 Rs. 100 equity shares based on two years purchase of profit before taxation. The
profit is to be determined by taking weighted average profits of 2013 and 2014,
weights being 1 and 2 respectively.
 It was agreed that accounts of Bayu Ltd. for the two years ended 31st December,
2014 be adjusted, where necessary, to conform to the accounting policies followed
by Agni Ltd.

o The pretax profits, including investment income of two companies were as
follows:
2013 2014
Agni Ltd. 16,38,000 18,36,000
Bayu Ltd. 17,88,300 25,74,000
o Agni Ltd. values its inventory on FIFO basis while Bayu Ltd. used a different
basis. To bring Bayu Ltd.‟s value in line with those of Agni Ltd., value of its
inventory will require to be reduced by Rs. 36,000 at the end of 2013 and
Rs. 1,02,000 at the end of 2014.
o Both the companies use straight line method of depreciation.
o Bayu Ltd. deducts 1% from trade receivables as general provision against
doubtful debts.
o Prepaid expenses of Bayu Ltd. includes advertisement expenditure carried
forward of Rs. 1,80,000 in 2013 and Rs. 90,000 in 2014, being part of initial
advertising in 2013, which is being written off over three years. Similar
expenses in Agni Ltd. has been fully written off in 2013.
o To bring Directors‟ Remuneration on comparative basis, the profits of Bayu
Ltd. are to be reduced by Rs. 1,20,000 in 2013 and Rs. 1,80,000 in 2014 and
the net assets are also to be adjusted accordingly.
Summarised Balance Sheets at 31st December, 2013 and 2014 were as follows:
Agni Ltd.
Liabilities 2013 2014 Assets 2013 2014
12,000 Shares of 12,00,000 12,00,000 Furniture &
100 each fully paid Fixtures:
At Cost 6,90,000 6,90,000
Capital Reserve - 2,10,000 Less: (69,000) (1,38,000)
Revenue Reserve 7,98,300 16,74,000 deprecition 6,21,000 5,52,000
Current Liabilities
& Provisions: Quoted - 7,80,000
Trade Payables 15,02,700 18,21,000 Investments at
Provision for Tax 8,40,000 9,60,000 Market Value
18,30,000 21,75,000
Inventory at 18,00,000 22,20,000
Cost 30,000 42,000
Trade 60,000 96,000
43,41,000 58,65,000 Receivables 43,41,000 58,65,000
Prepaid
Expenses
Cash at Bank

Bayu Ltd.
Liabilities 2013 2014 Assets 2013 2014
15,000 Shares of 15,00,000 15,00,000 Furniture &
100 each fully paid Fixtures:
At Cost 9,60,000 9,60,000
Revenue Reserve 8,58,000 21,42,000 Less: deprecition (1,44,000) (2,88,000)
8,16,000 6,72,000
Current Liabilities &
Provisions: Quoted
Trade Payables 14,70,000 14,82,000 Investments - 12,00,000
(Market Value –
Bank Overdraft - 5,10,000 14,70,000)
Provision for Tax 9,30,000 12,90,000 Inventory at 17,91,000 22,26,000

Cost
Trade 17,82,000 26,73,000
Receivables 2,16,000 1,44,000
Less:Provision 1,53,000 9,000
47,58,000 69,24,000 Prepaid 47,58,000 69,24,000
Expenses
Cash at Bank
(Answer: 66,24,000 + 82,39,200 = 1,48,63,200; BS – 1,48,63,200)
Suggested answer by ICAI:

Important Notes:

Important Notes:

Part – 2 Demerger of Companies
Q1. Travels and Tours Ltd. has two divisions- „Inland‟ and „International‟. The Balance
Sheet at 31st December, 2004 was as under: (Rs. In Crores)
Equity and Liabilities Inland International Total

Shareholders Fund:
Equity Capital of Rs. 10 each - - 50
Reserves and Surplus - - 650
Loan Funds (Secured on Fixed - 100 100
Assets) 200 200 400
Current Liabilities
Total 200 300 1200
Non Current Assets:
Fixed Assets: Cost 600 600 1200
Less: Depreciation 500 200 700
WDV 100 400 500
Current Assets 400 300 700
Total 500 700 1200
It is decided to form a new company „IT Ltd‟ for international tourism to take over the
assets and liabilities of international division.
Accordingly, „IT Ltd‟ was formed to takeover at Balance Sheet figures the assets and
liabilities of international division. „IT Ltd‟ is to allot 5 Crore equity shares of Rs.10 each in
the company to the members of „ Travels and Tours Ltd‟ in full consideration.
The members of Travels & Tours Ltd. are therefore to become members of „IT Ltd‟ as well
without having to make any further investment.
(a) You are asked to pass journal entries in relation to the above in the books of „
Travels& Tours Ltd.‟ and also in „IT Ltd.‟ Also show the Balance Sheet of both the
companies as on 1st January, 2005 showing corresponding figures before the
reconstruction also.
(b) The directors of both the companies ask you to find out the net asset value of
equity shares pre and post de-merger.
(c) Comment on the impact of demerger on “shareholders wealth”.
(Ans: (a) Travels and Tours Ltd. Balance Sheet Total: After Reconstruction – Rs.
300, Before reconstruction – Rs. 800, and IT Ltd. Balance Sheet Total – Rs. 500;

(b) Net Assets Value of Equity share: T&T Ltd. Pre demerger Rs. 140, Post
Demerger Rs. 60, and IT Ltd. Post demerger Rs. 80)

Part – 3 Sale Of Division
Q1. Ksha Ltd. and Yaa Ltd. are two companies. On 31st March, 1999 their Balance Sheet
were as under: (In Crores)
Equity and Liabilities Ksha Ltd. Yaa Ltd.

Shareholder Fund:
Share Capital
Authorised: 500 500
Issued: Equity shares of Rs. 10 each fully 300 200
paid
Reserves and Surplus: 40 20
Capital reserves 700 425
Revenue reserves 10 5
Surplus
Non Current Liablities: 250 350
Loan Funds 1,300 900
Current Liabilities
2,600 1,900
Assets:
Non Current Assets:
Fixed Assets:
Cost Less dep of 400 and 300 600 400
Current Assets 2,000 1,500
2,600 1,900
Ksha Ltd. has 2 divisions : very profitable division A and loss making division B.
Similarly Yaa Ltd. has 2 Division very profitable division B and loss making division A.
The Two companies decided to reorganize. Necessary approvals from creditors and
members and sanction by high court have been obtained to the following scheme:
1. Division B of Ksha Ltd. which has fixed assets costing Rs. 400 Cr. (WDV Rs. 160
Cr.), Current assets Rs. 900 Cr., Current Liabilities Rs. 750 Cr. and Loan funds of
Rs. 200 Cr. is to be transferred at Rs. 125 Cr. to Yaa Ltd.
2. Division A of Yaa Ltd. which has Fixed assets of Rs. 500 Cr. (Dep. Rs. 200 Cr.),
Current assets Rs. 800 Cr., Current Liabilities Rs. 700 Cr. and Loan Funds of Rs.
250 Cr. is to be transferred at Rs. 140 Cr. to Ksha Ltd.
3. The difference in the two considerations is to be treated as loan carrying interest
at 15% per annum.
4. The directors of each of the companies revalued the fixed assets taken over as
follows:

(a) Division A of Yaa Ltd. taken over at Rs. 325 Cr.
(b) Division B of Ksha Ltd. taken over at Rs. 200 Cr.
All the other assets and liabilities are recorded at the balance sheet values.
(a) Directors of the both the companies ask you to prepare the Balance Sheets after
the reconstruction (showing the corresponding figures before reconstruction)
(b) Master Richie Rich, who owns 50,000 Equity shares of ksha Ltd. and 30,000 Equity
share of Yaa Ltd. wants to know whether he has gained or lost in terms of Net
Asset value of equity shares on the above reorganisation.
(Ans: Increase in wealth 1,06,000)

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CA FINAL

5 DAYS FACE TO FACE REVISION BATCH

CA. JAI CHAWLA

FCA, IFRS, DISA, M.COM

Compiled by CA. Jai Chawla Page 1

on Normal Operating Future Profits after Tax.

Methods of Valuing Goodwill:

Average Profit Method – FMP x No. of years purchased

Super Profit Method – (FMP – Normal Profit) x No. of years purchased

Capitalisation Method – Super Profit / Capitalisation Rate

Annuity Method – SP x Annuity Value (as per Present value factor)

in question. If it is not given then it will be calculated as under:

NRR = Div/MPS *100

While calculating Past profits approach following items will be adjusted:

4. Effects of Changes in A/c Policy

Compiled by CA. Jai Chawla Page 3

6. Non recurring items (eg. Loss/profit on sale of assets)

7. Non operating Incomes (eg. Interest on investments)

8. Goodwill w/off added back

9. Additional Depreciation due to revaluation of FAs

10. Future Incomes and Exp

11. Future Tax Rate

Reserves & Surplus and Opening reserves and surplus.

Average of FMP is not specified in Question

available otherwise Simple Avg.

Weighted Avg is trend is available otherwise Simple Avg.

and x is distance from centre point.

the business for operating activities. It is calculated as under:

All Assets XXX

Less: All Liabilities XXX

 Assets are to be considered after – Revaluation, Rectification and Change in

Compiled by CA. Jai Chawla Page 4

 Non Operating Investment will be excluded in Capital employed. (if nothing is

specified in question we always assume that Investments are Non Operating)

 If there is Purchased Goodwill in BS then it is considered otherwise it is will be

 Capital employed may be “Closing Capital Employed” or “Average Capital Employed”

 Tangible capital employed means Closing Capital employed excluding Intangible

 Avg. Capital Employed may be –

½ (Opening CE + Closing CE)

Closing CE – ½ Rectified PAT

 Which Capital Employed to Use ?

Some Important Key Points:

 Investment for Replacement of P&M/Building is Trade Investment.

Investment assuming that it is utilized in business activities.

Compiled by CA. Jai Chawla Page 5

to abnormal activity is mentioned and quantified separately.

goodwill, then we will assume it as Self Generated and not to be considered.

 Rectification is required when there is any Error or Omission or any information is

receivables are bad – it is assumed as error and to be rectified)

Compiled by CA. Jai Chawla Page 6

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(Answer: FMP-202581; Goodwill – 5557; CCE – 2106273; ACE – 2007286; IV (Ex) –

Liabilities Amount Assets Amount

Compiled by CA. Jai Chawla Page 8

Hint: Managerial Remuneration is Rectification of Error and Exchange Difference &

Compiled by CA. Jai Chawla Page 9

Compiled by CA. Jai Chawla Page 10

Equity & Liabilities: Rs. (in lakhs)

Compiled by CA. Jai Chawla Page 12

- Rs. 220 lakhs

- Rs. 100 lakhs

Compiled by CA. Jai Chawla Page 13

Compiled by CA. Jai Chawla Page 14

 Intrinsic Value Method