Amalgamation and Absorption of Companies

CHAPTER 5
Amalgamation and Absorption of Companies

Mergers and Acquisitions – Amalgamation – Purchase Consideration – Amalgamation in the
nature of Merger – Amalgamation in the nature of Purchase – Illustrations – Exercises
MERGERS AND ACQUISITIONS:
According to the Indian Companies Act, 1956 “Merger refers to an arrangement wherein, one
company (existing or newly formed) acquires one or more business entities (Companies)
which may result in combination of companies”.
“Acquisition refers to taking over controlling stake in a company by another
company, an individual or group of individuals, employees, leaders or any other person. It is
popularly called as “Takeover”.
AS – 14 prescribes accounting treatment for “Mergers” by recognizing it as
“Amalgamation”. However, “Acquisition” does not call for conventional accounting
treatment and therefore is not covered under AS-14.
This chapter deals with accounting treatment for Amalgamation of Companies.
MEANING OF AMALAGAMATION:
Amalgamation means an Amalgamation pursuant to the provisions of the Indian Companies
Act, 1956, or any other statute, which may be applicable to Companies.
MEANING OF AMALGAMATION ACCORDING TO AS-14

According to Accounting Standard – 14 issued by the Institute of Charted Accountants of
India, there are two types of Amalgamations;
1. Amalgamation in the nature of merger; and
2. Amalgamation in the nature of purchase.
AMALGATION IN THE NATRURE OF MERGER:

Amalgamation in the nature of merger is an amalgamation which satisfies all the following
conditions;
A. All the assets and liabilities of the transferor company, after amalgamation becomes,
the assets and liabilities of the transferee company.
B. Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than 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.
C. The consideration for the amalgamation receivables 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.
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D. The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
E. No adjustment is intended to be made to the book values of the 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.
AMALGAMATION IN THE NATURE OF PURCHASE:
Amalgamation in the nature of purchase is an amalgamation which does not satisfy

one or more of the above conditions. That is, an amalgamation can be considered as
amalgamation in the nature of purchase;
1. All the assets and liabilities of the transferee company does not become the assets and
liabiltie4s of the transferee company after amalgamation; or
2. Shareholders holding not less than 90%of the face value of the equity shares of the
transferor company do not become equity shareholders of the transferee company by
virtue of the amalgamation; or
3. The consideration for amalgamation is given by transferee company in the form of cash,
debentures, etc., with or without equity shares of the transferee company; or
4. The transferee company is not intending to carry on the business of the transferor company,
after amalgamation; or
5. The assets and liabilities of the transferor company are incorporated in the books of the
transferee company at adjusted values.
Variants of Amalgamation of Companies:

The following are the different variants of amalgamation of Companies;
1. Acquisition of an existing company/ies by another existing company. That is,
assets and liabilities of an existing company is acquired by another existing
company.
2. Merger of two or more existing companies and forming of a new company.
That is formation of a new company for acquiring two or more existing
companies.
3. Acquisition of an existing company by a newly formed company. That is,
formation of a new company for acquiring an existing company.
Note: The Company which is acquired is called “Transferor Company or Amalgamating
Company” and the acquiring company is “Transferee Company or Amalgamated Company”.
DIFFERENCE BETWEEN AMALGAMATION, ACQUISITION AND EXTERNAL

RECONSTRUCTION:
Amalgamation, Absorption and External Reconstruction can be differentiated on the
following basis;
Basis of Difference Amalgamation Acquisition External Reconstruction

1. Liquidation of Two or more One or more Only one company will
Companies companies will be companies will be be liquidated.
liquidated liquidated
2. Formation of a A new company will No new company A new company will be
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new company be formed. will be formed formed.
3. Combination of Results in Results in Does not result in any
Companies combination of combination of combination of
companies companies companies
Note: The term “Acquisition” and “External Reconstruction” is used colloquially. For
accounting purposes, all the variants are referred as “Amalgamation”. Hence, for further
discussion of accounting treatment, only the term “Amalgamation” is used. However, the
treatment is illustrated under the following three broad categories;
1. When one or more existing companies are acquired an existing company and the
Transferee company continues with its existing identify.
2. When two or more existing companies are acquired by a newly formed company.
3. When an existing company is acquired by a newly formed company.
ACCOUNTING TREATMENT FOR AMALGAMATION OF COMPANIES
There are two methods of accounting for amalgamation, viz.,

A. The pooling of interest methods; and
B. The purchase method.
When the amalgamation is in the nature of merger, pooling of interests method is
adopted for accounting, while purchase method is adopted in case of amalgamation in
the nature of purchase.
Under pooling of interest method, all assets, liabilities and reserves of the transferor
company will be recorded by the transferee company at book values unless any
adjustment is required due to different accounting policies followed by these
companies.
Under purchase method, assets and liabilities of the transferor company, taken over,
will be recorded in the books of Transferee Company at agreed values. In this case,
no reserve (other than statutory reserves) of the transferor company will be taken
over/ recorded in the books of Transferee Company.
Differences between the Two Methods of Accounting
Pooling of Interest Method Purchase Method

1. All the assets and liabilities of 1. Only assets and liabilities taken
Transferor Company will be over by Transferee Company will
incorporated in the books of be incorporated in its books.
Transferee Company. 2. Other than Statutory Reserves
2. All the reserves of Transferor (see below), no other reserves of
Company will be recorded in the the transferor company will be
books of Transferee Company. recorded in the books of
3. The assets and liabilities of Transferee Company.
Transferor Company will be 3. The assets and liabilities of
recorded in the books of Transferor Company will be
Transferee Company at book recorded in the books of
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values. Transferee Company at agreed
4. Any difference between purchase values.
consideration and value of assets 4. Any difference between purchase
and liabilities taken over must be consideration and value of assets
adjusted against general reserve. and liabilities taken over must be
treated as goodwill or capital
reserve, as the case may be.
STATUTORY RESERVE:
It refers to the reserves to be maintained as per the requirements of any law or

legislation in case of Amalgamation in the nature of purchase (Purchase Method). For
example, investment Allowance Reserve, Development Rebate Reserve, Workmen
Compensation Fund, Foreign Project Reserve, Export Profit Reserve etc., Statutory Reserve
must be treated like any other liability in the realization account in the books of Transferor
Company. But in the books of Transferee Company to the extent of statutory reserve must be
transferred to “Amalgamation Adjustment Account” and appear in the Balance Sheet. In
other words, statutory reserve of the transferor company should be incorporated in the
balance sheet of Transferee Company by way of the following entry;
Amalgamation Adjustment Account Dr

To Statutory Reserve Account
Statutory Reserve must be taken under “Reserves and Surplus” and Amalgamation
Adjustment Account must be taken under “Miscellaneous Expenditure i.e., other non –
current assets” in the Balance Sheet.
When the above Statutory Reserve will no longer be required to be maintained by
Transferee Company, such reserve will be eliminated by reversing the above entry.
CLASSIFICATION OF ACCOUNTS:
It is very essential to know the components of trade liabilities, liabilities, accumulated profits,
provisions and accumulated losses, in the case of Amalgamation. Summary of various items
of the above is given in the following table;
1. Trade Liabilities:
A. Sundry Creditors
B. Bills Payables
C. Trade Creditors
2. Liabilities:
A. Trade Creditors
B. Bills Payables
C. Bank Overdraft
D. Debentures
E. Loans
F. Pension Fund
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G. Provident Fund
H. Super Annuation Fund
I. Workman Savings Bank Account
J. Workman Profit Sharing Fund
K. Provision for Taxation
L. Unclaimed Dividend
M. Outstanding Expenses
3. Accumulated Profits
A. Profit and Loss Account (Credit)
B. General Reserve
C. Reserve Fund
D. Revenue Reserve
E. Sinking Fund or Debenture Redemption Fund
F. Capital Redemption Reserve
G. Share Forfeited Account
H. Securities Premium Account
I. Workman Compensation Fund Account
J. Insurance Fund
K. Dividend Equalization Fund
L. Dividend Rebate Reserve
4. Provisions and Accumulated Losses:
A. Provision for Depreciation or Depreciation Fund
B. Provision for Doubtful Debts
C. Provision for Investments
D. Profit & Loss Account (Debt)
E. Preliminary Expenses
F. Discount on Issue on Shares & Debentures
5. Statutory Reserves
A. Investment Allowance Reserve
B. Development Rebate Reserve
C. Workman Compensation Fund
D. Foreign Project Reserve
E. Export Profit Reserve
ACCOUNTING PROCEDURE FOR AMALGAMATION OF COMPANIES:
The accounting procedure is the same for all the variants of amalgamation. The
following are the steps involved in the accounting amalgamation;
Steps involved in the accounting procedure of Amalgamation:
1. Calculation of purchase consideration

2. Ascertainment of discharge of purchase consideration.
3. Closing the books of transferor company/companies
4. Passing opening entries and preparation of Balance Sheet in the books of Transferee
Company.
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Step 1: Purchase Consideration
Purchase Consideration refers to the consideration payable by the Transferee

Company to the Transferor Company for taking over the assets and liabilities of Transferor
Company.
Para 3(g) of Accounting Standard – 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”.
Although, purchase consideration refers to the total payment made by purchasing

company to the shareholders of Vendor Company, its calculations could be different
methods, as explained below;
1. Lump sum method

2. Net Assets Method
3. Net Payments Method
LUMP SUM METHOD:
Strictly speaking, this is not a method, when the purchase consideration amount is
mentioned in the problem itself, it is called Lump Sum Consideration. This method, does not
involve any calculation regarding purchase consideration.
Example 1
Total purchase consideration is Rs 2,60,000 which is to be discharged by issue of 16,000
equity shares of Rs10 each and Rs1,00,000 in cash. Calculate the purchase consideration?
Solution
Calculation of Purchase Consideration:
Payment to Shareholders:
1. Equity Shares of 16,000 @10 each 1,60,000

2. Cash 1,00,000
_______
Total Purchase Consideration 2,60,000
----------
Example 2
Total Purchase Consideration is Rs2,00,000 which is to be discharged by issue of 15,000

Equity Shares of Rs10 each and the balance in cash. Calculate the Purchase Consideration.
Solution:
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Particulars Amount (Rs)
Payment to the Shareholders:
1. Equity Shares of 15,000 @10 each 1,50,000
2. Cash (balancing figure) 50,000
NET ASSETS METHOD:

Under this method, Purchase Consideration will be excess of value of assets taken
over by the Transferee Company, over the value of liabilities taken over. That is, under this
method, the purchase consideration will be;
+ taken
Purchase Consideration=toal value of Assets of total Liabilities taken
−Value
Example:
Assets of A Limited are valued at Rs2,70,000 taken over by X Limited and amount payable
to creditors and debenture holders are Rs50,000 and Rs1,10,000 (10,000 ,12% debentures of
Rs10 each at a premium of 10%). Calculate the Purchase Consideration.
Solution

Value of Assets taken over 2,70,000
Less: value of liabilities taken over:
Sundry Creditors 50,000
12% Debentures@10 each 1,00,000
Premium on debentures @10% 10,000
Example: 4
Calculate the Purchase Consideration to be discharged by Y Limited to X Limited from the
following information;
1. The assets of X Limited are valued at Rs1,00,000

2. The liabilities of X Limited are valued at Rs40,000
3. Rs20,000 cash is paid to the Shareholders of X Limited
4. The balance of Purchase Consideration is discharged by issue of shares of Rs10 each
at Rs20 per share.
Solution:
Note: As the number of shares issued by Y Limited is not given in the problem, Purchase
Consideration is calculated on the basis of “Net Asset Basis”.
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Value of Assets taken over 1,00,000
Less: Value of Liabilities taken over: 40,000
Total Purchase Consideration 60,000
Discharge of Purchase Consideration:
cash 20,000
Equity shares of 2,000 @Rs10 each per share
at Rs20 per share 40,000
Total Purchase Consideration 60,000
Note: Calculation of Number of Shares issued;
40,000
Number of Shares issued= =2,000 shares of Rs10 each at a market value of Rs 20
20
NET PAYMENT METHOD:
Under this method, the Purchase Consideration will be the total of payment made (in
any form) by transferee company to transferor company, on any basis. Generally, Transferee
Company decides the payment to be made towards liabilities of Transferor Company which
not taken over and towards expenses. The total of such payments will be the Purchase
Consideration.
Example 5
X Limited is acquired by Y Limited agrees to make the following payments;
1. Cash at Rs 5 per share for 10,000 shares of Rs10 each held by X Limited.
2. Issue of two shares of Rs20 each for every five shares held in X Limited.
3. Discharge Rs1,00,000, 12% Debentures of X Limited at 10% Premium by issuing
13% Debentures in Y Limited.
4. Rs50,000 cash to creditors of X Limited in final settlement of their accounts
Determine the amount of Purchase Consideration.
Solution:

1. Cash (Rs10,000X5) 50,000
2. Equity Shares: ( 2/5 X10,000) = 4,000 80,000
Equity Shares of Rs 20 each
Note: Only payment for the shareholders (Equity and Preference) is taken for the purpose of
Purchase Consideration. Payment made for Debenture and Sundry Creditors are not
considered for calculation of Purchase Consideration and these payments have to be made
directly after taking over of liabilities from Transferor Company by passing an entry in the
transferee company.
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Example 6
The shareholders to get Rs10 cash for every share in X Limited (Shares in X Limited
is 40,000 shares of Rs10 each) and 5 shares of Rs10 each for every 4 shares held by X
Limited.
Solution:

Cash (40,000X5) 2,00,000
Shares – 50,000 Shares @10 each 5,00,000
Working Notes:
For 4 shares – Number of shares issued 5 shares
For 40,000 shares – number of shares issued?
40,000
¿ X 5=50,000 Shares …
4
How to identify the Method of Purchase Consideration, Application for the given
problem?
Step 1
1. If the problem specifies the method to be adopted – adopt the method specified in the
problem.
2. If the method is not specified in the problem, but the amount of Purchase
Consideration is given, it is lump sum method and does not need any calculation.
3. When the payments made by Transferee Company to Transferor Companies is given,
with the statement “Balance in ……….” Then, “Net Assets Method” must be
adopted.
4. When the payments made by Transferee Company to Transferor Companies is given
liability wise or any other item wise without the statement “Balance in……” then,
“Net Payments Method” must be adopted.
Step 2:
Discharge of Purchase Consideration refers to the form in which, then purchase consideration
is discharged by the transferee company. Under Net Payments Method, calculation and
discharge of Purchase Consideration would be one and the same. Under Net Assets Method
and Lump Sum Method, based on the information in the problem, the mode of discharge
must be ascertained. When the problem is salient about the mode of discharge of purchase
consideration, it must be assumed that Purchase Consideration is discharged by issue of
equity shares of Transferee Company.
Step 3: Closing the Books of Transferor Company:

Closing Transferor Company books involves the following steps and entries. While
solving problems, students are advised to follow the below order strictly to avoid confusion
in both amalgamation in the nature of merger and amalgamation in the nature of purchase;
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Accounting entries in the Books of Transferor Company:
1. For transfer of various assets including cash at their book values;
Realization A/c…………………..Dr
To Concerned Asset A/c
Note: Cash is transferred to Realization Account only if it is taken over by the Transferee
Company, whereas all other assets are always transferred to Realization Account.
2. For transfer of various outsiders liabilities including debentures at their book

values including Statutory Reserve (if any)
Concerned Liability A/c ………….Dr
To Realization A/c
3. For purchase consideration due;
Transferee Company A/c………………Dr
To Realization A/c
4. For the payment of Realization Expenses
A. If it is paid by the Transferor Company
Realization A/c ……………………….Dr
To Cash/Bank A/c
B. If it is paid by the Transferee Company
1. For making payment
Transferee Company A/c …………..Dr
To Cash/Bank A/c
2. For collecting the amount from Transferee Company
Cash /Bank A/c……………………Dr
To Transferee Company A/c
5. For sale of assets not taken over by the Transferee Company
Cash /Bank A/c……………………Dr
To Realization A/c
6. For payment of outsiders liabilities not taken over by the transferee company
(including debentures)
Realization A/c …………………….Dr
To Cash/Bank A/c
7. For Preference Share Capital
A. Payable at par;
Preference Share Capital A/c……….Dr
To Preference Shareholders A/c
B. Payable at a higher value i.e., at a premium
Preference Share Capital A/c ……..Dr (with face value)
Realization A/c…………………. Dr (with premium on redemption)
To Preference Shareholders A/c (with total amount due)
C. Payable at Discount
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Preference Share Capital A/c…….Dr
To Realization A/c
To Preference Shareholders A/c
8. For closing Realization Account
A. In case of profit;
Realization A/c………………….,Dr
To Equity Shareholders A/c
B. In case of loss;
Equity Shareholders A/c…………Dr
To Realization A/c
9. For transfer of share capital, reserves and profits
Equity Share Capital A/c……………Dr
Reserves Account…………………..Dr
Profit & Loss A/c……………………Dr
To Equity Shareholder’s A/c
10. For transfer of preliminary expenses, underwriting commission, discount on issue
of shares and debentures and Profit and Loss Account (loss) etc.,
Equity Shareholder’s Account ……Dr
To Preliminary Expenses A/c
To Underwriting Commission A/c
To Discount on issue of Shares & Debentures A/c
To Profit & Loss A/c
11. For the receipt of purchase consideration
Equity Shares in Transferee Company A/c…………Dr
Preference Shares in Transferee Company A/c…….Dr
Cash/Bank Account ………………………………..Dr
To Transferee Company A/c
12. For the final payment made to Preference Shareholders
Preference Shareholders A/c………………….Dr
To Cash/Bank A/c
To Shares in Transferee Company A/c
(In payment is made by distributing shares)
Note:
In case of Amalgamation in nature of merger, only share capital must be transferred to
equity shareholders account and all other items belonging to shareholders must be
transferred to realization account. In case of Amalgamation in the nature of purchase,
all items relating to equity shareholders must be transferred to the equity shareholders
account other than statutory reserves, which is to be transferred to realization account.
13. For the final payment made to Equity Shareholders
Equity Shareholders A/c………………………Dr
To Equity Shares in Transferee Company A/c
To Cash/Bank A/c
Note: When the Transferee Company issue debentures for discharge of Transferor Company
debentures, in the books of Transferor Company the debentures must be shown as
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“taken over” by Transferee Company, and later in the books of Transferee Company
the discharge must be recorded by way of entry for payment of liabilities (as per
requirement of AS-14).
Step 4: Opening Entries in the Books of Transferee Company

The following entries will be passed in the books of Transferee Company in the case
of Amalgamation;
1. For Purchase Consideration due;
Business Purchase A/c ……………..Dr
To Liquidator’s of Transferor Company A/c
2. For incorporating assets and liabilities taken over;
A. In case of Amalgamation in the nature of merger (pooling of interest method)
Various Assets A/c………………….Dr
` `General Reserve A/c ………………Dr (Bal fig) (Capital Loss)
To Various Liabilities A/c
To Business Purchase A/c
To General Reserve A/c
(With the book of assets, liabilities and reserves and the amount of purchase
consideration. The excess or shortage of purchase consideration over share capital of
Transferor Company is recorded (adjusted) as General Reserve.
B. In case of Amalgamation in the nature of purchase (Purchase Method)
Various Assets A/c………………Dr
Goodwill A/c (Bal..fig)(if any).....Dr
To Various Liabilities A/c
To Statutory Reserve A/c
To Business Purchase A/c
To Capital Reserve A/c (bal fig if any)
C. For the incorporation of Statutory Reserve
Amalgamation Adjustment A/c….Dr
To Statutory Reserve A/c
D. For discharging Purchase Consideration
Liquidators of Transferor Company A/c…..Dr
To Share Capital A/c
To Securities Premium A/c
To Bank A/c
(With the amount of discharge of Purchase Consideration)
Note: When there is no need for maintaining statutory reserve, the following reversal entry
must be passed.
1. Statutory Reserve A/c………….Dr
To Amalgamation Adjustment A/c
2. for incurring Formation Expenses
Formation Expenses/Preliminary Expenses A/c……Dr
To Bank A/c
3. For payment of amalgamation or realization expenses of Transferor Company
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Goodwill A/c………………….Dr
To Bank A/c
4. For making payment to Debentures and other liabilities of transferor company
Debenture/Item of Liability (of Transferor Company)A/c….Dr
To Debenture A/c
To Share Capital A/c
To Cash A/c
This chapter has been divided into two parts;

Part – 1: Amalgamation in the nature of Merger
Part – 2: Amalgamation in the nature of Purchase
PART – 1: AMALGAMATION IN THE NATURE OF MERGER
The problems have been divided according to variants of Amalgamation of Companies as

follows;
1. When one or more existing companies are acquired by an existing company and the
Transferee Company continues with its existing identity (popularly known as
Absorption of Companies)
2. When two or more existing companies are acquired by a newly formed company
(popularly known as Amalgamation of Companies)
3. When an existing company is acquired by a newly formed company (popularly known
as Amalgamation in the nature of Merger)
WHEN ONE OR MORE EIXSTING COMPANIES ARE ACQUIRED BY AN

EXISTING COMPANY AND THE TRANSFEREE COMPANY CONTINUES WITH
ITS EXISTING IDENTITY (POPULARLY KNOWN AS ABSORPTION OF
COMPANIES)
Illustration No: 1 (Problem on Pooling of Interest Method with Statutory Reserve)
The following are the Balance Sheets of Mahesh Limited and Suresh Limited as on
st
31 March, 2017.
Liabilities Mahesh Suresh Assets Mahesh Suresh

Ltd (Rs) Ltd (Rs) Ltd (Rs) Ltd (Rs)
Equity Share Land & Buildings 2,50,000 1,55,000
Capital(@Rs10 each 5,00,000 3,00,000 Plant & Machinery 3,25,000 1,70,000
14% Preference Share Furniture & Fittings 57,500 35,000
Capital @Rs100 each 2,20,000 1,70,000 Investments 1,25,000 95,000
General Reserve 50,000 25,000 Inventory 90,000 1,03,000
Export Profit Reserve 30,000 20,000 Sundry Debtors 72,500 52,000
Investment Allowance Cash & Bank 70,000 50,000
Reserve - 10,000
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Profit & Loss A/c 75,000 50,000
13% Debentures
(@Rs100 each 50,000 35,000
Current Liabilities 65,000 50,000
9,90,000 6,60,000 9,90,000 6,60,000
Mahesh Limited takes over Suresh Limited on 1st April, 2017. Mahesh Limited discharges
the purchase consideration as below;
1. Issued 35,000 Equity Shares of Rs10 each at par to the Equity Shareholders of Suresh
Limited.
2. Issued 15%^ Preference Shares of Rs100 each to discharge the Preference
Shareholders of Suresh Limited at 10 % Premium.
The debentures of Suresh Limited will be converted into equivalent number of Debentures of
Mahesh Limited. The Statutory Reserves of Suresh Limited (Export Profit Reserve and
Investment Allowance Reserve) are to be maintained for 3 (three) more years.
You are required to show the Journal entries and Balance Sheet in the books of Mahesh
Limited (Transferee Company) under Amalgamation in the nature of merger method.
Solution:
Note:
When there is an Amalgamation in the nature of Merger (i.e., pooling of interest
method), all the assets and liabilities of Transferee Company becomes the assets and
liabilities (including General Reserve, Profit and Loss Account, Statutory Reserve,
Debentures etc.,) Transferee Company. Therefore all the assets and liabilities (including
General Reserve, Profit & Loss A/c and Statutory Reserves is transferred to Realization
Account in the Books of Transferor or Vendor Company.

1. 35,000 Equity Shares of Rs10
each(35,000X10) 3,50,000
2. 1,870 Preference Shares of Rs100
each (1,870X100) 1,87,000
In the case of Amalgamation in the nature of Merger

In the Books of Mahesh Limited (Transferee Company)
Journal Entries
Date Particulars LF No Debit (Rs) Credit (Rs)

1 Business Purchase A/c…………………Dr 5,37,000
To Liquidators of Suresh Limited A/c 5,37,000
(Being Purchase Consideration due)
2 Land & Buildings A/c……………………Dr 1,55,000
Plant & Machinery A/c………………….Dr 1,70,000
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Furniture & Fittings A/c ………………..Dr 35,000
Investments A/c …………………………Dr 95,000
Inventory A/c…………………………… Dr 1,03,000
Sundry Debtors A/c ……………………..Dr 52,000
Cash & Bank Balance A/c ………………Dr 50,000
General Reserve A/c(bal fig)(capital loss)Dr 42,000
To 13% Debentures A/c 35,000
To Current Liabilities A/c 50,000
To Export Profit Reserve A/c 20,000
To Investment Allowance Reserve A/c 10,000
To Profit & Loss A/c 50,000
To Business Purchase A/c 5,37,000
(Being incorporation of assets, liabilities and
reserves)
3 Liquidators of Suresh Limited A/c ……..Dr 5,37,000

To Equity Share Capital A/c 3,50,000
To Preference Share Capital A/c 1,87,000
(being discharge of Equity Share Capital and
Preference Share Capital
4 13% Debentures (Suresh Ltd) A/c ………Dr 35,000
To 13% Debentures (Mahesh Ltd)A/c 35,000
(being discharge of debentures by issue of
new debentures)
Calculation of General Reserve to be shown in the Balance Sheet after Merger

General Reserve of Mahesh Ltd 50,000
Less: Net General Reserve (Debit Balance) 42,000
8,000
Alternatively:
Calculation of General Reserve in the Balance Sheet after Merger:

Mahesh Ltd General Reserve 50,000
Add: Suresh Ltd General Reserve 25,000
75,000
Less: difference between purchase
consideration and Suresh Ltd Share Capital
(Rs5,37,000 – Rs4,70,000) 67,000
8,000
Balance Sheet of Mahesh Limited as on 1st April, 2017
EQUITY AND LIABILITIES Note Amount (Rs)

Shareholders’ Funds:
Share Capital:
85,000 Equity Shares of Rs10 each 8,50,000
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1,870, 15% Preference Shares of Rs 100 each 1,87,000
2,200, 14% Preference Shares of Rs100 each 2,20,000
Reserves & Surpluses
General Reserve 8,000
Export Profit Reserve 50,000
Investment Allowance Reserve 10,000
Profit & Loss Account 1,25,000
Non – Current Liabilities
Secured Loans
13% Debentures of Rs100 each 85,000
Unsecured Loans -
Current Liabilities 1,15,000
Total Equity and Liabilities 16,50,000
ASSETS
Non Current Assets
Fixed Assets
Land & Buildings 4,05,000
Plant & Machinery 4,95,000
Furniture & Fittings 92,500
Investments 2,29,000
Current Assets
Inventory 1,93,000
Sundry Debtors 1,24,500
Cash & Bank 1,20,000
Total Assets 16,50,000
Illustration No: 2 (Problem under Pooling of Interest in the nature of Merger Method
with Intercompany owing – with Statutory Reserve.
The following are the Balance Sheets of Sunlight Limited and Moonlight Limited as on 31 st
March, 2017.
Balance Sheet as on 31st March, 2017
(Rs in Lakhs)
Liabilities Moonligh Sunlight Assets Moonligh Sunlight

t Ltd (Rs) Ltd (Rs) t Ltd (Rs) Ltd (Rs)
Equity Share Capital Land & Buildings 6,000 -
(fully paid up shares Plant & Machinery 14,000 5,000
of Rs10 each) 15,000 6,000 Furniture & Fittings 2,304, 1,700
Securities Premium 3,000 - Inventory 7,862, 4,041
Foreign Projects Sundry Debtors 2,120 1,020
Reserve - 310 Cash and Bank 1,114 609
General Reserve 9,500 3,200 Bills Receivables - 80
Profit & Loss A/c 2,870 825 Cost of Issue of - 50
12% Debentures - 1,000 Debentures
Bills Payables 120 -
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
Page 16 of 89
33,400 12,500 33,400 12,500
On 1st April, 2017, Moonlight Limited took over Sunlight Limited in an amalgamation
in the nature of merger. It was agreed that in discharge of consideration for the business,
Moonlight Limited would allot three fully paid equity shares of Rs10 each at par for every
two shares held in Sunlight Limited. It was also agreed that 12% Debentures in Sunlight
Limited would be converted 13% Debentures in Moonlight Limited of the same amount and
denominations. Expenses of Amalgamation amounting to Rs1 lakh were borne by Moonlight
Limited. All the bills receivables held by Sunlight Limited were Moonlight Limited’s
acceptances.
You are required to: Close the books of Sunlight Limited. Pass Journal Entries in the
books of Moonlight Limited and prepare Balance Sheet immediately after the merger.
Note: Foreign Project Reserve is a compulsory reserve to be maintained under “Income
Tax Act) by companies engaged in Foreign Project Business.
Solution:
Step 1: Calculation of Purchase Consideration:

Since payment made to shareholders of Transferor Company, by Transferee Company is not
specified, “Net Payment Method” has been used for Calculating Purchase Consideration.
In equity shares of Moonlight Limited;
6,000 lakh 3
Equity share Capital= X X 10=Rs 9,000 lakh
Rs 10 2
Step 2: Discharge of Purchase Consideration:
In equity shares of Moonlight Limited = Rs9,000lakh
Step 3: Closing the books of Transferor Company
In the Books of Sunlight Limited (Transferor Company)
Dr Realization Account (Rs in Lakh) Cr

Particulars Amount (Rs) Particulars Amount (Rs)
To Plant & Machinery 5,000 By Foreign Project Reserve 310
To furniture & Fittings 1,700 By General Reserve A/c 3,200
To Stock A/c 4,041 By Profit & Loss A/c 825
To Sundry Debtors A/c 1,020 By 12% Debentures A/c 1,000
To Bank A/c (cash at bank) 609 By Sundry Creditors A/c 463
To Bills Receivables A/c 80 By Sundry Provisions A/c 702
To Cost of Issue of By Moonlight Ltd A/ 9,000
Debentures A/c 50 (Purchase consideration due)
To Equity Shareholders A/c 3,000
(balancing figure)
15,500 15,500
Page 17 of 89
Dr Moonlight Limited Account (Rs in lakh) Cr
To Realization A/c 9,000 By Equity Shares in 9,000
Moonlight Limited A/c
9,000 9,000
Dr Equity Shareholders Account (Rs in lakh) Cr

To Equity Shares in By Equity Share Capital A/c 6,000
Moonlight Limited A/c 9,000 By Realization A/c 3,000
9,000 9,000
Step 4: Entries and Balance Sheet in the books of Transferee Company:
In the books of Moonlight Limited (Transferee Company)

Journal Entries

1 Business Purchase A/c…………………Dr 9,000
To Liquidators of Sunlight Ltd A/c 9,000
2 Plant & Machinery A/c………………….Dr 5,000
Furniture & Fittings A/c ………………..Dr 1,700
Stock A/c…………………………… ….Dr 4,041
Sundry Debtors A/c ……………………..Dr 1,020
Bank A/c ……………………………….Dr 609
Bills Receivables A/c…………………….Dr 80
Cost of Issue of Debentures A/c…………Dr 50
General Reserve A/c (bal fig)………….Dr 3,200
To Foreign Project Reserve A/c 310
To Securities Premium A/c 3,000
To Profit & Loss A/c 825
To Sundry Creditors A/c 463
To Sundry Provisions A/c 702
To Business Purchase A/c 9,000
(Being assets, liabilities and reserves of
Sunlight Limited incorporated recorded)
3 Liquidators of Sunlight Ltd A/c………..Dr 9,000

To Equity Share Capital A/c 9,000
(being purchase consideration discharged
Page 18 of 89
recorded)
4 12% Debentures A/c ……………………Dr 1,000
(being conversion of 12% debentures of
Sunlight Limited discharged by issue of
13% Debentures of Moonlight Ltd)
5 General Reserve A/c…………………….Dr 1
To Bank A/c 1
(being amalgamation expenses incurred
recorded)
Note: The expenses of amalgamation is
adjusted against “General Reserve” at par
the requirement of “Pooling of Interest
Method”
6 Bills Payables A/c………………………..Dr 80
To Bills Receivables A/c 80
Balance Sheet of Japan Company Limited as on 1st April, 2017

Share Capital:
Equity Share Capital @Rs10 each 24,000
Securities Premium A/c 3,000
Foreign Project Reserve A/c 310
General Reserve A/c (9,500+200+1) 9,699
Profit & Loss A/c (2870+825-50) 3,645
Secured Loans 1,000
13% Debentures 1,000
Unsecured Loans -
Current Liabilities
Bills Payables (120-80) 40
Sundry Creditors (1080+463) 1,543
Sundry Provisions (1830+702) 2,532
Total Equity and Liabilities 45,769
ASSETS
Non Current Assets
Fixed Assets
Land & Buildings 6,000
Plant & Machinery (14,000+5,000) 19,000
Furniture & Fittings (2,304+1,700) 4,000
Investments -
Current Assets
Inventory (7,862+4,041) 11,903
Sundry Debtors (2,120+1,020) 3,140
Cash & Bank(1,114+609+1) 1,722
Total Assets 45,769
Page 19 of 89
When two or more existing companies are acquired by a newly formed company
(Amalgamation)
Illustration No 3 (Problem on Amalgamation in the nature of Merger – Pooling of

Interest Method
Balance Sheets of Hiroshima Limited and Nagasaki Limited
Liabilities Hiroshima Nagasaki Assets Hiroshima Nagasaki

Equity Share Capital Land & Buildings 25,00,000 15,50,000
(fully paid up shares Plant & Machinery 32,50,000 17,00,000
of Rs10 each) 50,00,000 30,00,000 Furniture & 5,75,000 3,50,000
14% Preference Fittings
Share Capital 22,00,000 17,00,000 Investments 7,00,000 5,00,000
@Rs100 each 5,00,000 2,50,000 Inventory 12,50,000 9,50,000
General Reserve 3,00,000 2,00,000 Sundry Debtors 9,00,000 10,30,000
Export Profit Cash and Bank 7,25,000 5,20,000
Reserve (required
under IT Act) - 1,00,000
Investment
Allowance Reserve
A/c (Statutory) 7,50,000 5,00,000
Profit & Loss A/c 5,00,000 3,50,000
13% Debentures 4,50,000 3,50,000
Trade Creditors
Other Current 2,00,000 1,50,000
Liabilities
99,00,000 66,00,000 99,00,000 66,00,000
Japan Company is formed to take over Hiroshima Company Limited and Nagasaki Company
Limited for the following considerations;
Hiroshima Company Limited:
1. Issue of 4,80,000 Equity Shares of Rs10 each of Japan Company Limited at par to the
equity shareholders.
2. Issue of 15% Preference Shares of Rs100 each of Japan Company Limited to
discharge the preference shares of Hiroshima Company Limited at 10% Premium.
Nagasaki Company Limited:
1. Issue of 3,50,000 equity shares of Rs10 each of Japan Company Limited at par, to the
equity shareholders.
2. Issue of 15% Preference Shares of Rs100 each of Japan Company Limited and
discharge the preference shareholders of Nagasaki Limited at 10% premium.
The debentures of Hiroshima Limited and Nagasaki Limited will be converted into equivalent
number of debentures of Japan Company Limited. The statutory reserve are to be maintained
for two more years.
Page 20 of 89
Close the books of Hiroshima Limited and Nagasaki Limited and show the opening
entries and balance sheet of Japan Company Limited on the assumption that the
amalgamation is the nature of merger.
Solution:
Step 1: Calculation of Purchase Consideration
According to AS -14, payment made by purchasing company towards the shareholders of

vendor companies constitutes purchase consideration. Accordingly, the purchase
consideration is
Particulars Hiroshima Limited (Rs) Nagasaki Limited (Rs)

A. Towards Equity Shareholders
In Equity Shares of Japan
Company
Hiroshima Limited 4,80,000
shares @Rs10 each 48,00,000
Nagasaki Limited 3,50,000 shares
@Rs10 each 35,00,000
B. Towards Preference Shareholders
15% Preference shares of Japan
Company:
Hiroshima Ltd
Rs22,00,000+Rs2,20,000 24,20,000
Nagasaki Ltd
Rs17,00,000+Rs1,70,000 18,70,000
72,20,000 53,70,000
Step 2: Discharge of Purchase Consideration
Particulars Hiroshima Limited (Rs) Nagasaki Limited (Rs)

In Equity Shares of Japan Company 48,00,000 35,00,0000
In 15% Preference Shares of Japan 24,20,000 18,70,000
Company
Total Purchase Consideration 72,20,000 53,70,000
Step 3: Closing the books of vendor or Transferor Company
In the books of Hiroshima Company Limited (Transferor Company)

To Land & Buildings A/c 25,00,000 By General Reserve A/c 5,00,000
To Plant & Machinery 32,50,000 By Export Profit Reserve A/c 3,00,000
To furniture & Fittings 5,75,000 By Profit & Loss A/c 7,50,000
To Investments A/c 7,00,000 By 13% Debentures A/c 5,00,000
To Stock A/c 12,50,000 By Sundry Creditors A/c 4,50,000
To Sundry Debtors A/c 9,00,000 By Other Current Liabilities
To Bank A/c (cash at bank) 7,25,000 A/c 2,00,000
Page 21 of 89
To 14% Preference By Japan Company A/c 72,20,000
Shareholders A/c 2,20,000 (Purchase consideration)
By equity Shareholders A/c 2,00,000
(balancing fig)(loss)
1,01,20,000 1,01,20,000
Dr Japan Company Limited Account (Rs in lakh) Cr

To Realization A/c 72,20,000 By Equity Shares in Japan
Company Limited A/c 48,00,000
By 15% Preference Shares in
Japan Company Limited 24,20,000
72,20,000 72,20,000

To Equity Shares in Japan By Equity Share Capital A/ 50,00,000
To Realization A/c (loss) 2,00,000
50,00,000
Dr 14% Preference Shareholders Account (Rs in lakh) Cr
To 15% Preference Shares in 24,20,000 By 14% Preference Share
Japan Company Limited A/c Capital A/c 22,00,000
By Realization A/c 2,20,000
(balancing figure)
24,20,000 24,20,000
In the books of Nagasaki Company Limited (Transferor Company)

Dr Realization Account Cr
To Land & Buildings A/c 15,50,000 By General Reserve A/c 2,50,000
To Plant & Machinery 17,00,000 By Export Profit Reserve A/c 2,00,000
To furniture & Fittings 3,50,000 By Investment Allowance 1,00,000
To Investments A/c 5,00,000 Reserve A/c
To Stock A/c 9,50,000 By Profit & Loss A/c 5,00,000
To Sundry Debtors A/c 10,30,000 By 13% Debentures A/c 3,50,000
To Bank A/c (cash at bank) 5,20,000 By Sundry Creditors A/c 3,50,000
To 14% Preference 1,70,000 By Other Current Liabilities 1,50,000
Shareholders A/c A/c
To Equity Shareholder A/c 5,00,000 By Japan Company A/c 53,70,000
(Balancing Figure) (Purchase consideration)
72,70,000 72,70,000
Dr Japan Company Limited Account (Rs in lakh) Cr
Page 22 of 89
To Realization A/c 53,70,000 By Equity shares in Japan 35,00,000
Company Limited
By 15% Preference Shares in 18,70,000
Japan Company Limited A/c
53,70,000 53,70,000
To Equity Shares in Japan 35,00,000 By Equity Share Capital A/c 30,00,000
Company Limited A/c By Realization A/c 5,00,000
35,00,000
Dr 14% Preference Shareholders Account (Rs in lakh) Cr
To 15% Preference Shares in 18,70,000 By 14% Preference Share
Japan Company Limited A/c Capital A/c 17,00,000
(balancing figure)
18,70,000 18,70,000
Step 4: Opening Entries and Balance Sheet in the Books of Transferee Company
In the books of Japan Company Limited

Journal Entries
1 Business Purchase A/c…………………Dr 1,25,90,000
To Liquidators of Hiroshima Limited A/c 72,20,000
To Liquidators of Nagasaki Limited A/c 53,70,000
2 Liquidator of Hiroshima Limited A/c……Dr 72,20,000
To 15% Preference Share Capital A/c 24,20,000
recorded)
3 Liquidator of Nagasaki Limited A/c……Dr 53,70,000
recorded)
Furniture & Fittings A/c ………………..Dr 9,25,000
Investment A/c…………………………..Dr 12,00,000
Stock A/c…………………………… ….Dr 22,00,000
Sundry Debtors A/c ……………………..Dr 19,30,000
Bank A/c ……………………………….Dr 12,45,000
To General Reserve A/c (bal fig) 60,000
To Export Reserve A/c 5,00,000
To Investment Allowance Reserve A/c 1,00,000
Page 23 of 89
To Profit & Loss A/c 12,50,000
To 13% Debentures A/c 8,50,000
To Sundry Creditors A/c 8,00,000
To Other Current Liabilities A/c 3,50,000
To Business Purchase A/c 1,25,90,000
5 13% Debentures A/c …………………….Dr 8,50,000
To 13% Debentures (Japan Ltd)A/c 8,50,000
(being conversion of debentures of
Hiroshima Ltd and Nagasaki Ltd into the
debentures of Japan Ltd)

Share Capital:
Equity Share Capital @Rs10 each 83,00,000
15% Preference Share Capital @Rs10 each 42,90,000
General Reserve 60,000
Export Profit Reserve 5,00,000
Investment Allowance Reserve 1,00,000
Profit & Loss Account 12,50,000
Secured Loans
15% Debentures 8,50,000
Unsecured Loans
Current Liabilities
Trade Creditors 8,00,000
Other Current Liabilities 3,50,000
Total Equity and Liabilities 1,65,00,000
ASSETS
Non Current Assets
Fixed Assets
Furniture & Fittings 9,25,000
Current Assets
Inventory 22,00,000
Cash & Bank 12,45,000
Total Assets 1,65,00,000
Page 24 of 89
Problem No 4: Problem on Amalgamation under Net Assets Methods with Statutory
Reserve under Pooling of Interest Method
Tall Limited and Small Limited have agreed to amalgamate and to form a new company
called Medium Limited which has taken over both the companies’ as per their balance sheets
give below;
Balance Sheet of Tall Limited as on 31st March, 2017

Liabilities Amount (Rs) Assets Amount (Rs)
Share Capital Land & Buildings 2,00,000
Subscribed and Paid up Plant & Machinery 1,50,000
Capital Furniture 50,000
50,000 Equity Shares of Investment in government 2,00,000
Rs10 each 5,00,000 securities
Reserves & Surpluses Stock 90,000
General Reserve 1,50,000 Trade Debtors 80,000
Surplus 50,000 Bank 30,000
Development Rebate Reserve 30,000
Bills Payables 20,000
8,00,000 8,00,000
Balance Sheet of Small Limited as on 31st March, 2017

Subscribed and Paid up Plant & Machinery 2,50,000
Capital Patents 1,50,000
Equity Shares of Rs10 each 8,00,000 Furniture 50,000
Reserves & Surpluses Investment in other 4,50,000
General Reserve 3,00,000 securities
Surplus 1,00,000 Stock 1,20,000
Secured Loans 1,50,000 Trade Debtors 90,000
Unsecured Loans 50,000 Bank 90,000
Trade Creditors 60,000
15,00,000 15,00,000
Prepare ledger accounts in the books of Transferor Companies and opening entries in the
books of Transferee Company under: Amalgamation in the nature of Merger.
Assume that Development Rebate Reserve (Statutory Reserve) is continued in the Transferee
Company.
Solution:
Note:
1. Statutory Reserve must be treated like any other liability in the Realization Account in
the books of Transferee Company. In the books of Transferee Company, it is
Page 25 of 89
transferred to Amalgamation Adjustment Account to the extent of Statutory Reserve
and shown under Reserves and Surplus on the liability side and Miscellaneous
Expenses and Losses on the assets side.
2. Since the Statutory Reserve is to be maintained further, the reversal entry is not
required.
Step1: Calculation of Purchase Consideration
Since no details of payments made by Medium Company to Tall Company and Small
Company have been specified, and no lump sum amount of purchase consideration
has been given, “Net Assets Method” is used to calculate Purchase Consideration.
Particulars Tall Ltd (Rs) Small Ltd (Rs)

A. Assets taken Over Values
Land & Buildings 2,00,000 3,00,000
Plant & Machinery 1,50,000 2,50,000
Furniture & Fittings 50,000 50,000
Patents - 1,50,000
Investments 2,00,000 4,50,000
Stock 90,000 1,20,000
Sundry Debtors 80,000 90,000
Bank Balance 30,000 90,000
Total Assets taken over 8,00,000 15,00,000
B. Less: Liabilities taken over values
Development Rebate Reserve 30,000 -
Secured Loans - 1,50,000
Unsecured Loans - 50,000
Sundry Creditors 50,000 60,000
Bills Payables 20,000 40,000
General Reserve 1,50,000 3,00,000
Profit & Loss Account 50,000 1,00,000
Total Liabilities taken over 3,00,000 7,00,000

Purchase consideration (A-B) 5,00,000 8,00,000
Step 2: Discharge of Purchase Consideration
Mode of payment Tall Ltd (Rs) Small Ltd (Rs)

In Equity Shares of Medium 5,00,000 8,00,000
Ltd
5,00,000 8,00,000
In the books of Tall Limited (Transferor Company)

To Land & Buildings A/c 2,00,000 By Development Rebated
To Plant & Machinery 1,50,000 Reserve (statutory reserve) 30,000
To furniture & Fittings 50,000 By Secured Loans -
To Patents/c - By Unsecured Loans -
To Investments A/c 2,00,000 By Sundry Creditors A/c 50,000
Page 26 of 89
To Stock A/c 90,000 By Bills Payables A/c 20,000
To Sundry Debtors A/c 80,000 By General Reserve A/c 1,50,000
To Bank A/c 30,000 By Profit & Loss A/c 50,000
By Medium Ltd (Purchase 5,00,000
Consideration)
8,00,000 8,00,000
Dr Medium Company Limited Account Cr
To Realization A/c (Purchase 5,00,000 By Equity shares in Medium 5,00,000
Consideration ) Company Limited
5,00,000 5,00,000

To Equity Shares in Medium 5,00,000 By Equity Share Capital A/c 5,00,000
Company Limited A/c
5,00,000 5,00,000
In the books of Small Company Limited (Transferee Company)

To Land & Buildings A/c 3,00,000 By Secured Loans 1,50,000
To Plant & Machinery 2,50,000 By Unsecured Loans 50,000
To furniture & Fittings 50,000 By Sundry Creditors 60,000
To Patents 1,50,000 By Bills Payables 40,000
To Investments A/c 4,50,000 By General Reserve A/c 3,00,000
To Stock A/c 1,20,000 By Profit & Loss A/c 1,00,000
To Sundry Debtors A/c 90,000 By Medium Ltd (Purchase 8,00,000
To Bank A/c 90,000 consideration)
15,00,000 15,00,000
Note: There is no profit or loss on realization
Dr Medium Company Limited Account Cr

To Realization A/c 8,00,000 By Equity shares in Medium 8,00,000
(Purchase Consideration) Company Limited
8,00,000 8,00,000

To Equity Shares in Medium 8,00,000 By Equity Share Capital A/c 8,00,000
Page 27 of 89
Company Limited A/c
8,00,000 8,00,000
In the Books of Medium Company Limited

Journal Entries
To Liquidators of Tall Limited A/c 5,00,000
To Liquidators of Small Limited A/c 8,00,000
Furniture & Fittings A/c ………………..Dr 1,00,000
Patents A/c………………………………Dr 1,50,000
Investment A/c…………………………..Dr 6,50,000
Stock A/c…………………………… ….Dr 2,10,000
Sundry Debtors A/c ……………………..Dr 1,70,000
Bank A/c ……………………………….Dr 1,20,000
To Secured Loans A/c 1,50,000
To Unsecured Loans 50,000
To Development Rebate Reserve/c 30,000
To Bills Payables A/c 60,000
To General Reserve A/c 4,50,000
5 Liquidator of Tall Ltd A/c………………Dr 5,00,000
Liquidator of Small Ltd A/c……………Dr 8,00,000
recorded)
A. EQUITY AND LIABILITIES Note Amount (Rs)

Share Capital:
Authorised Capital 25,00,000
Issued, Subscribed and Paid up Capital 13,00,000
General Reserve 6,30,000
Secured Loans 1,50,000
Unsecured Loans 50,000
Current Liabilities
Page 28 of 89
B. ASSETS
Non Current Assets
Fixed Assets
Furniture & Fittings 1,00,000
Patents 1,50,000
Current Assets
Inventory 1,70,000
PART - II
AMALGAMATION IN THE NATURE OF PURCHASE
The problems have been divided according to variants of Amalgamation of Companies as

follows;
A. When one or more existing companies are acquired by an existing company and the
Transferee Company continues with its existing identify (popularly known as
Absorption)
B. When two or more existing companies are acquired (merged) by a newly formed
company (popularly known as Amalgamation of Companies )
C. When an existing companies is acquired by a newly formed company(popularly
known as External Reconstruction of Companies)
WHEN ONE OR MORE EXISTING COMPANIES ARE ACQUIRED BY AN

EXISTING COMPANY AND THE TRANSFEREE COMPANY CONTINUES WITH
ITS EXISTING IDENTIFY
PROBLEM ON AMAGAMATION IN THE NATURE OFM PURCHASE, WHEN

PURCHASE CONSIDERATION IS CALCULATED BY NET PAYMENT METHOD
Illustration No:5 (Problem on acquisition in the nature of Purchase with net payment
method of purchase consideration is calculated by Net Payment Method
The following is the Balance Sheet of Ashwini Company Limited on 31st March, 2015.
Page 29 of 89
Share Capital: 2,00,000 Land & Buildings 1,20,000
(Shares of Rs10 each) Plant & Machinery 1,50,000
Debentures 1,00,000 Work in Progress 30,000
Sundry Creditors 30,000 Stock 60,000
Reserve Fund 25,000 Furniture 2,500
Workmen Compensation Debtors 25,000
Fund 10,000 Cash at bank 12,500
Dividend Rebate Reserve 10,000 Cash in hand 100
Profit & Loss A/c 5,100
Depreciation Fund 20,000
(Land & Buildings)
4,00,100 4,00,100
The company is absorbed by Jaswant Company Limited on the above date. The
consideration for the absorption is the discharge of debentures at a premium of 5%, taking
over the trade liability and a payment of Rs7 in cash and one share of the face value of Rs5 in
Jaswant Company Limited (market value Rs8 per share) in exchange for one share in
Ashwini Company Limited. The cost of liquidation Rs500 is to be met by the purchasing
company. Calculate purchase consideration and the journal entries in the books of both the
companies, under Amalgamation in the nature of Purchase Method.
Solution
Step 1: Calculation of Purchase Consideration (Net Payment Method)
Payment to Equity Shareholders;
1. By cash (Rs20,000X7) 1,40,000

2. By Equity Shares (20,000 shares of
Rs5 each at a market price of Rs8
each) 1,60,000
Step 2: Journal Entries in the Books of Ashwini Company Limited (Transferee Company)
Journal Entries

1 Realization A/c…………………………Dr 4,00,100
To Land & Buildings A/c 1,20,000
To Plant & Machinery A/c 1,50,000
To Work in Progress A/c 30,000
To Stock A/c 60,000
To Furniture A/c 2,500
To Debtors A/c 25,000
To Cash at Bank A/c 12,500
To Cash in hand A/c\ 100
(Being transfer of assets to
realization account)
Page 30 of 89
2 Creditors A/c……………………………Dr 30,000
Debentures A/c…………………………Dr 1,00,000
Depreciation Fund A/c………………....Dr 20,000
To Realization A/c 1,50,000
(being transfer of liabilities to realization
including debentures)
3 Jaswant Company Limited A/c…………Dr 3,00,000
(Being purchase consideration due)
4 Cash A/c…………………………………Dr 1,40,000
Shares in Jaswant Company Ltd A/c……Dr 1,60,000
To Jaswant Company Ltd A/c 3,00,000
(being receipt of purchase consideration)
5 Jaswant Company Ltd A/c………………Dr 500
To Cash A/c 500
(being payment of realization expenses)
6 Realization A/c…………………………Dr 49,900
(Being profit on realization transferred)
7 Cash A/c…………………………………Dr 500 500
To Jaswanth Com Ltd A/c
(being recovery of realization expenses)
8 Equity Share Capital A/c………………Dr 2,00,000
Reserve A/c……………………………Dr 25,000
Profit & Loss A/c………………………Dr 5,100
Dividend Rebate Reserve A/c……………Dr 10,000
Workmen Compensation Fund A/c……Dr 10,000
To Equity Shareholders A/c 2,50,100
(being transfer of share capital, reserve and
profits)
9 Equity Shareholders A/c…………………Dr 3,00,000
To Equity Shares in Jaswant Company Ltd 1,60,000
To cash A/c 1,40,000
(being final payment made to equity
shareholders)
Note: Dividend Rebate Reserve and Workmen Compensation Fund are accumulated profit,
transferred to Equity Shareholders Account.
Step 3: Journal Entries in the Books of Jaswant Company Limited (Transferee Company)
Journal Entries

To Liquidators of Ashwini Company Ltd 3,00,000
(being purchase consideration due)
2 Land & Buildings A/c…………...............Dr 1,20,000
Work in Progress A/c……………………Dr 30,000
Stock A/c………………………………..Dr 60,000
Page 31 of 89
Furniture A/c…………………………….Dr 2,500
Debtors A/c……………………………..Dr 25,000
Cash at Bank A/c………………………Dr 12,500
Cash in Hand A/c……………………….Dr 100
Goodwill A/c(balfig)…………………….Dr 54,900
To Creditors A/c 30,000
To Debentures A/c 1,05,000
To Depreciation Fund A/c 20,000
(being assets and liabilities are taken over)
3 Ashwini Company Limited A/c………….Dr 3,00,000
To Cash A/c 1,40,000
To Share Premium A/c 60,000
(Being payment of purchase
consideration)
4 Goodwill A/c…………………………….Dr 500
To Cash A/c 500
(being payment of realization expenses of
Ashwini Company Limited)
5 Debentures A/c I(in Aswini Com)……….Dr 1,05,000
(Being discharge of debentures)
Illustration No 6: Problem on Acquisition in the nature of Purchase with Net Payment

Method of Purchase Consideration without Statutory Reserve
The following is the Balance Sheet of Weak Company Limited as on31st March, 2017.

Share Capital: Land & Buildings 1,60,000
Shares of Rs 30 each fully Plant & Machinery 1,80,000
paid 3,00,000 Furniture & Fittings 10,000
General Reserve 30,000 Patents 50,000
Workmen’s Profit Sharing 15,000 Inventory 40,000
Fund Trade Debts 20,000
Debentures 1,00,000 Cash at Bank 10,000
Trade Creditors 25,000
4,70,000 4,70,000
The above company is absorbed by Strong Company Limited. The purchase

consideration being the discharge of debentures at a premium of 5% by the issue of
debentures in Strong Company Limited, taking over the liabilities and payment of Rs5 in
cash and 2 shares of Rs 10 each fully paid at the market value of Rs16 per share in exchange
for every one share in Weak Company Limited. The expenses of Liquidation amounting to
Rs1,000 are to be borne by Strong Limited.
Page 32 of 89
Pass necessary journal entries in the books of both the companies under
Amalgamation in the nature of Purchase Method.
Solution :
Calculation of Purchase Consideration (Net Payment Method)
Mode of Payment Amount (Rs)

1. By Cash (10,000X5) 50,000
2. By Equity Shares
20,000 Shares of Rs10 each at a
market price of Rs16 per share 3,20,000
(20,000X16)
1
¿ X 10,000=20,000
2
In the books of Weak Company Limited
Journal Entries

To Furniture &Fittings A/c 10,000
To patents A/c 50,000
To Inventory A/c 40,000
To Trade Debts A/c 20,000
To Cash at Bank A/c\ 10,000
2 Workmen’s Profit Sharing Fund A/c……Dr 15,000
Debentures A/c………………………….Dr 1,00,000
Trade Creditors A/c…………………….Dr 25,000
(being liabilities are transferred to
3 Strong Company Limited A/c…………Dr 3,70,000
4 Cash A/c…………………………………Dr 50,000
Equity Shares in Strong Ltd A/c…………Dr 3,20,000
To Strong Company Ltd A/c 3,70,000
5 Jaswant Company Ltd A/c………………Dr 500
To Cash A/c 500
(being payment of realization expenses)
7 Cash A/c…………………………………Dr 1,000
Page 33 of 89
To Strong Company Ltd A/c 1,000
(being recovery of realization expenses)
Reserve A/c……………………………Dr 30,000
profits)
To Cash A/c 50,000
To Equity Shares in Strong Ltd 3,20,000
shareholders)
In the books of Strong Company Limited

Journal Entries
To Liquidators of Weak Company Ltd 3,70,000
Furniture & Fittings A/c...……………….Dr 10,000
Patents A/c..……………………………..Dr 50,000
Inventory A/c……………………………Dr 40,000
Trade Debts A/c...……………………….Dr 20,000
Cash at Bank A/c………………………..Dr 10,000
Goodwill A/c(bal fig)……………………Dr 45,000
To Workmen’s Profit Sharing Fund Ac 15,000
To Trade Creditors A/c 25,000
3 Liquidator’s of Weak Limited A/c............Dr 3,70,000
To Cash A/c 50,000
To Equity Shares in Strong Ltd A/c 3,20,000
(being payment made on behalf of purchase
consideration)
4 Goodwill A/c…………………………….Dr 1,000
To Cash A/c 1,000
(being payment of realization expenses of
Weak Company Limited)
5 Debentures A/c I(Weak Ltd)…….………Dr 1,05,000
To 5% Debentures in Strong Ltd A/c 1,05,000
Illustration No: 7 (Problem on Acquisition in the nature of Purchase with Net Payment
Method of Purchase Consideration without statutory Reserve)
Page 34 of 89
Alpha Company Limited is absorbed by Beta Company Limited. The consideration being;
1. Assumption of liabilities
2. Discharge of debentures at a premium of 5% by the issue of 5% debentures in Beta
Company
3. A payment of cash of Rs 30 per share
4. To exchange 3 shares of Rs10 each in Beta Company Limited at an agreed value of
Rs15 per share, for every share in Alpha Company Limited.
Balance Shee33t of Alpha Company Limited as on 31st March, 2016

Share Capital:\60,000 Equity Goodwill 2,50,000
Shares of Rs 50 each fully paid 30,00,000 Land & Buildings 7,65,000
General Reserve 3,20,000 Plant & Machinery 22,00,000
Profit & Loss Account 1,80,000 Patents 50,000
5% Debentures 15,00,000 Patterns 25,000
Trade Creditors 2,00,000 Investments 50,000
Stock 10,60,000
Trade Debtors 4,50,000
Bank 3,50,000
52,00,000 52,00,000
Pass journal entries to close the books of Alpha Company Limited together with
necessary ledger accounts, under amalgamation in the nature of Purchase
Consideration.
Solution :
Note: Only payment for the shareholders (Equity and Preferences) is taken for the purpose of
Purchase Consideration. Payment made for Debentures and Creditors are not considered
for calculation of Purchase Consideration. When purchasing company issues debentures for
discharge of vendor company debentures, in the books of vendor company the debentures
must be shown is “taken over| by purchasing company and credited to “Realization
Account” and later in the books of purchasing company, the discharge must be rewarded by
way of entry for exchange (as per requirement of AS – 14).
Payment to the Equity Shareholders:

1. By Cash (60,000X3) 18,00,000
2. By Equity Shares:
Issue of 1,80,000 shares at Rs10each
at an agreed value of Rs15 per share 27,00,000
(1,80,000 X 15)
Page 35 of 89
In the books of Alpha Company Limited (Vendor or Transferor Company)
Journal Entries

To Goodwill A/c 2,50,000
To Patents A/c 50,000
To Patterns A/c 25,000
To Investments A/c 50,000
To Inventory A/c 10,60,000
To Trade Debts A/c 4,50,000
To Cash at Bank A/c\ 3,50,000
2 5%Debentures A/c……………………….Dr 15,00,000
Trade Creditors A/c…………………….Dr 2,00,000
(being liabilities are transferred to realization
account)
3 Beta Company Limited A/c…………Dr 45,00,000
4 Cash A/c…………………………………Dr 18,00,000
Equity Shares in Beta Ltd A/c…………Dr 27,00,000
To Beta Company Ltd A/c 45,00,000
Reserve A/c……………………………Dr 3,20,000
Profit & Loss A/c………………………Dr 1,80,000
profits)
To Cash A/c 18,00,000
To Equity Shares in Beta Ltd 27,00,000
shareholders)

To Goodwill A/c 2,50,000 By Trade Creditors 2,00,000
To Land & Buildings A/c 7,65,000 By 5% Debentures A/c 15,00,000
To Plant & Machinery 22,00,000 By Beta Company A/c 45,00,000
To Patents 50,000 (Purchase consideration
Page 36 of 89
To Patterns A/c 25,000 due)
To Investments A/c 50,000
To Stock A/c 10,60,000
To Trade Debtors A/c 4,50,000
To Bank A/c 3,50,000
(Bal Fig) (Profit on
Realization A/c)
62,00,000 62,00,000
Dr Beta Company Limited Account Cr

To Realization A/c 45,00,000 By Cash A/c 18,00,000
(Purchase Consideration) By Equity shares in Medium 27,00,000
Company Limited
45,00,000 45,00,000
Dr Equity Shares in Beta Ltd Account (Rs in lakh) Cr

To Beta Company Limited 27,00,000 By Equity Shareholders A/c 27,00,000
A/c
27,00,000 27,00,000

To Cash A/c 18,00,000 By Equity Share Capital A/c 30,00,000
To Shares in Beta Ltd 27,00,000 By Reserves A/c 3,20,000
By Profit & Loss A/c 1,80,000
45,00,000 45,00,000
Dr Cash Account Cr
To Balance B/d 3,50,000 By Realization A/c 3,50,000
To Beta Company Ltd A/c 18,00,000 By Equity Shareholders A/c 18,00,000
21,50,000 21,50,000
Illustration No: 8 (Problem on Acquisition the nature of purchase with net payment
method of purchase consideration without statutory reserve)
The assets of the Going Company Limited were purchased by the Surviving Company
Limited. The purchase consideration was as follows;
1. A payment in cash at Rs40 for every share in the Going Company Limited.
Page 37 of 89
2. A further payment in cash Of Rs110 for every debenture in the Going Company
Limited.
3. An exchange of 4 shares in the Surviving Company Limited of Rs50 each at the
market value of Rs80 for every share in the Going Company Limited.
The Balance Sheet of Going Company Limited as on 31st March, 2015 as follows;

Share Capital: Land & Buildings 75,000
1,000 Shares of Rs200 each 2,00,000 Plant & Machinery 1,50,000
1,000 Debentures of Rs100 1,00,000 Stock 90,000
each 30,000 Debtors 80,000
Trade Creditors 65,000 Bank 35,000
Reserve 10,000
Workmen’s Savings Bank 25,000
Profit & Loss Account
4,30,000 4,30,000
Prepare the necessary ledger accounts in the books of Going Company Limited and opening
entries in the books of Surviving Company Limited, under the amalgamation in the nature of
purchase method.
Solution:
Step 1: Calculation Purchase Consideration

Payment to Equity Shareholders:

1. By Cash (1,000 Shares @Rs40 40,000
2. By Equity Shares
4,000 Equity shares of Rs50 each at a
market price of Rs890 per share
(4,000 Shares @Rs80) 3,20,000
In the Books of Going Company Limited (Transferor Company)
Ledger Accounts

To Land & Buildings A/c 75,000 By Trade Creditors 30,000
To Plant & Machinery A/c 1,50,000 By Debentures 1,00,000
To Stock A/c\ 90,000 By Workmen’s Savings Bank 10,000
To Debtors A/c 80,000 A/c
To Bank A/c 35,000 By Surviving Company A/c 3,60,000
To Equity Shareholders A/c 70,000 (Purchase Consideration)
(Bal fig) (Profit)
5,00,000 5,00,000
Page 38 of 89
To Cash A/c 40,000 By Equity Share Capital A/c 2,00,000
To Shares in Surviving Ltd 3,20,000 By Reserves A/c 65,000
By Profit & Loss A/c 25,000
By Realization A/c (Profit) 70,000
3,60,000 3,60,000
Dr Surviving Company Limited Account Cr

To Realization A/c 3,60,000 By Cash A/c 40,000
(Purchase Consideration) By Equity shares in Surviving 3,20,000
Company Limited
3,60,000 3,60,000
Dr Equity Shares in Surviving Ltd Account (Rs in lakh) Cr

To Surviving Company 3,20,000 By Equity Shareholders A/c 3,20,000
Limited A/c
3,20,000 3,20,000
Dr Cash Account Cr
To Balance B/d 35,000 By Realization A/c 35,000
To Surviving Company Ltd 40,000 By Equity Shareholders A/c 40,000
A/c
75,000 75,000
In the Books of Surviving Company Limited (Transferee Company)
Journal Entries

To Liquidators of Going Company Ltd 3,60,000
2 Land & Buildings A/c…………...............Dr 75,000
Stock A/c…...……………………………Dr 90,000
Trade Debts A/c...……………………….Dr 80,000
Bank A/c……….………………………..Dr 35,000
Goodwill A/c(bal fig)……………………Dr 80,000
To Trade Creditors A/c 30,000
To Workmen Savings Bank A/c 10,000
To Debentures A/c(1,00,000+10,000) 1,10,000
Page 39 of 89
3 Liquidator’s of Weak Limited A/c............Dr 3,60,000
To Cash A/c 40,000
To Equity Shares in Strong Ltd A/c 3,00,000
To Share Premium A/c(4,000X30) 1,20,000
consideration)
4 Debentures A/c I(Going Ltd)…….………Dr 1,10,000
Note: 1. Workmen savings bank account is a liability. Purchase Consideration is paid in
cash; therefore, it cannot be a case of amalgamation (or absorption) in the nature of merger.
Illustration No: 9 Problem on Acquisition in the nature of Purchase with net payment
method of purchase consideration without Statutory Reserve.
The balance sheet of Dark Limited as on 31st March, 2017 was as follows;

8,000 Equity Shares of Rs50 Plant & Machinery 1,80,000
each fully paid 4,00,000 Furniture 20,000
General Reserve 50,000 Stock 90,000
Workmen’s Accident Sundry Debtors 1,00,000
Compensation Fund 30,000 Less: Provision for
(Outstanding liability of Doubtful Debts 95,000
Rs8,000) 5,000 2,000
1,000, 14% Debentures of 50,000 Cash
Rs50 each Discount on Issue of 3,000
Sundry Creditors 40,000 Debentures
Bank Overdraft 10,000
Staff Provident Fund 40,000
6,20,000 6,20,000
The business of the company is taken over by Bright Limited on that date;
1. A payment in cash at Rs10 for every share in Dark Limited.

2. An exchange of 5 shares in Bright Limited of Rs10 each, at the market value of Rs15
per share, for every two shares in Dark Limited.
Show the Realization Account, Cash Account and the Equity Shareholders Account in
the books of Dark Limited. The expenses of liquidation amounted to Rs5,000 were
borne by Dark Limited under business purchase method.
Solution
Calculation of Purchase Consideration (Net Payment Method)
Page 40 of 89
Payment to Equity Shareholders:

1. By cash (8,000XRs10) 80,000
2. By Equity Shares in Bright Limited
20,000 shares of Rs10 each at an
agreed value of Rs15 per share
(20,000X15) 3,00,000
In the Books of Dark Limited (Transferor Company)

To Land & Buildings A/c 2,30,000 By Provision for Doubtful 5,000
To Plant & Machinery A/c 1,80,000 Debts A/c 40,000
To Furniture A/c 20,000 By Sundry Creditors A/c 8,000
To Stock A/c 90,000 By Outstanding Liability 10,000
To Debtors A/c 1,00,000 (Workmen’s Accident
To Cash A/c 2,000 Compensation Fund)
To Cash A/c 5,000 By Bank Overdraft 50,000
(Realization Expenses) By Staff Provident Fund 40,000
By Bright Limited A/c 3,80,000
(Purchase Consideration)
By Equity Shareholders A/c 94,000
(loss on realization a/c)
6,27,000 6,27,000
Dr Equity Shares in Bright Limited Account (Rs in lakh) Cr

To Bright Company Limited 3,00,000 By Equity Shareholders A/c 3,00,000
A/c
3,00,000 3,00,000
Dr Bright Company Limited Account Cr

(Purchase Consideration) By Equity shares in Surviving 3,00,000
Company Limited
3,80,000 3,80,000

To Discount on Debentures 3,000 By Equity Share Capital A/c 4,00,000
To Realization A/c 94,000 By General Reserves A/c 50,000
(loss on realization a/c) By Workmen’s Accident 22,000
To Equity shares in Bright 3,00,000 Compensation Fund
Limited A/c (Balance amount
Page 41 of 89
To Cash A/c (Bal..fig) 75,000 distributed)
4,72,000 4,72,000
Dr Cash Account Cr
To Bright Company Ltd A/c 80,000 By Realization A/c 5,000
82,000 82,000
Note:
Workmen’s Accident Compensation Fund of Rs22,000 (Rs30,000-Rs8,000) is not

required to be continued even after the acquisition. It is transferred to Equity Shareholders’
Account and outstanding Workmen’s Compensation Fund of Rs8,000 is a liability to be
continued even after the acquisition.
Illustration No: 10 (Problem on acquisition in the nature of purchase with net payment
method of purchase consideration with statutory reserve)
Following is the Balance Sheet of Akbar Limited as on 31st March, 2017.

1,20,000 Equity Shares of Land & Buildings 7,50,000
Rs10 each 12,00,000 Plant & Machinery 3,64,500
Reserve Fund 6,00,000 Stock A/c 4,55,750
Development Rebate 12,500 Sundry Debtors A/c 3,82,500
Reserve Bank A/c 1,25,030
Sundry Creditors A/c 2,00,000
20,77,780 20,77,780
The concern is acquired by Babar Company Limited. The purchase consideration

being the payment of Rs10,00,000 in cash and allotment of two fully paid shares of Rs10
each at an agreed price of Rs12.50 in exchange for every three shares of Akbar Limited. The
liquidation expenses of the Vendor Company is Rs15,000.
Show the necessary journal entries to record the above in the books of both the
companies under Purchase Method. Assume that Development Rebate Reserve will continue
for three more years in Transferee Company.
Solution:

1. By Cash 10,00,000
Page 42 of 89
80,000 Equity shares of Rs10 each at
an agreed value of Rs12.50 each 10,00,000
(80,000XRs12.50)
In the Books of Akbar Company Limited (Transferor Company)
Journal Entries

To Sundry Debtors A/c 3,82,500
To Cash at Bank A/c\ 1,25,030
2 Sundry Creditors A/c…………………….Dr 2,00,000
Development Rebate Reserve…………Dr 12,500
account)
3 Babar Company Limited A/c…………Dr 20,00,000
4 Cash A/c…………………………………Dr 10,00,000
Equity Shares in Babar Ltd A/c…………Dr 10,00,000
To Babar Company Ltd A/c 10,00,000
To Cash A/c 15,000
(Being payment of realization expenses)
(being profit on realization account
transferred)
Reserve Fund A/c………………………Dr 6,00,000
Profit & Loss A/c………………………Dr 65,280
(being transfer of share capital, reserves and
profits)
To Equity Shares in Babar Limited 10,00,000
shareholders)
In the Books of Babar Company Limited
Page 43 of 89
Journal Entries

To Liquidators of Akbar Company Ltd 20,00,000
Stock A/c…...……………………………Dr 4,55,750
Sundry Debtors A/c...…….…………….Dr 3,82,500
Bank A/c……….………………………..Dr 1,25,030
Goodwill A/c(bal fig)……………………Dr 1,22,220
To Trade Creditors A/c 2,00,000
3 Amalgamation Adjustment A/c…………Dr 12,500
To Development Rebate Reserve A/c 12,500
(being statutory reserve incorporated
recorded)
4 Liquidator’s of Akbar Limited A/c............Dr 20,00,000
To Cash A/c 10,00,000
To Equity Shares Capital A/c 8,00,000
To Share Premium A/c(4,000X30) 2,00,000
consideration)
PROBLEMS ON AMALGAMATION IN THE NATURE OF PURCHASE, WHEN

PURCHASE CONSIDERATION IS CALCULATED BY NET ASSETS METHOD
Illustration No: 11 (Problem on Acquisition in the nature of purchase with net assets
method of purchase consideration without statutory reserve)
Everest Limited sells its business to Himalaya Company Limited as on 31st March, 2017. On
that date, it balance sheet was;

2,000 Equity Shares of Goodwill 50,000
Rs100 each fully paid 2,00,000 Premises 1,50,000
Debentures 1,00,000 Plant 83,000
Sundry Creditors 30,000 Stock 39,000
Reserve Fund 50,000 Debtors 27,500
Profit & Loss A/c 20,000 Cash 50,000
4,00,000 4,00,000
Himalaya Company Limited agreed to take over the assets (exclusive of cash and goodwill)
at 10% less than the books values, to pay Rs75,000 for Goodwill and to take over debentures.
The purchase consideration was to be discharged by the allotment of 1,500 shares of Rs100
each at a premium of Rs10 per share and the balance in cash. Cost of liquidation amounted
Page 44 of 89
to Rs3,000 met by Everest Company Limited. Show the necessary accounts in the books of
Everest Company Limited. Pass journal entries in the books of Himalaya Limited.
Solution:
Calculation of Purchase Consideration (Net Assets Method)

Assets Taken Over values:
Goodwill 75,000
Premises 1,35,000
Plant 74,700
Stock 35,550
Debtors 24,750
Total value of assets taken over 3,45,000
Less: liabilities agreed
Debentures 1,00,000
Purchase Consideration 2,45,000
Mode of Payment:
Mode of payment Amount (Rs)

1,500 shares of Rs100 each at a 1,65,000
premium of Rs10 per share
2. By cash (balancing figure) 80,000
In the Books of Everest Company Limited;

To Goodwill A/c 50,000 By Debentures A/c 1,00,000
To Premises A/c 1,50,000 By trade Creditors A/c 30,000
To Plant A/c 83,000 By Himalaya Limited A/c 2,45,000
To Stock A/c 39,500 (Purchase consideration)
To Debtors A/c 27,500 By Equity Shareholders A/c 8,000
To Cash A/c Creditors paid) 30,000 (loss)
To Cash A/c 3,000
(Realization Expenses)
3,83,000 3,83,000
Dr Himalaya Company Limited Account Cr
(Purchase Consideration) By Equity shares in Himalaya 1,65,000
Limited
2,45,000 2,45,000
Dr Equity Shares in Himalaya Limited Account (Rs in lakh) Cr

To Himalaya Company 1,65,000 By Equity Shareholders A/c 1,65,000
Page 45 of 89
Limited A/c
1,65,000 1,65,000

To Realization A/c 8,000 By Equity Share Capital A/c 2,00,000
To Equity shares in Himalaya 1,65,000 By General Reserves A/c 50,000
Company Limited A/c By Profit & Loss A/c 20,000
To Cash A/c 97,000
(Balancing figure)
2,70,000 2,70,000
Dr Cash Account Cr
To Himalaya Company Ltd 80,000 By Realization A/c 3,000
A/c By Equity Shareholders A/c 97,000
1,30,000 1,30,000
In the Books of Himalaya Company Limited

Journal Entries

To Liquidators of Everest Company Ltd 2,45,000
2 Goodwill A/c………..…………...............Dr 75,000
Premises A/c……;.;….………………….Dr 1,35,000
Plant A/c…………………………………Dr 74,700
Stock A/c…...……………………………Dr 35,550
Sundry Debtors A/c...…….…………….Dr 24,750
3 Liquidator’s of Everest Limited A/c..........Dr 2,45,000
To Cash A/c 80,000
To Share Premium A/c(4,000X30) 15,000
consideration)
Note: trade creditors are not taken over. Therefore, discharged.
Illustration No: 12 Problem on Acquisition in the nature of purchase with Net Assets
Method of Purchase Consideration without Statutory Reserve
The following is the Balance Sheet of Small Limited as on 31st March, 2017.
Page 46 of 89
Share Capital: Goodwill 40,000
Equity Shares of Rs10 each Fixed Assets 1,65,000
fully paid 2,00,000 Current Assets 1,95,000
Profit & Loss Account 70,000
Debentures 1,00,000
4,00,000 4,00,000
Big Limited agreed to take over the assets (exclusive of Goodwill, Fixed Assets of Rs40,000)
and Cash Rs10,000 included in Current Assets) at 10% less than book value and to discharge
the trade creditors to pay Rs60,000 for Goodwill.
The Purchase Consideration was to be settled by the allotment of 2,000 shares of Rs10 each,
Rs8 called up at a market value of Rs15 per share and the balance in cash. Liquidation
expenses amounted to Rs4,000.
1. Show the calculation of Purchase Consideration
2. Give the Journal Entries in the books of Small Limited
3. Opening entries in the books of Big Limited under business purchase method.
Solution:
Note: Since all the assets are not taken over at book value, it cannot be “Amalgamation in
the nature of merger” (i.e., pooling of interest method cannot be used).
Calculation of Purchase Consideration (Net Assets Method)

Assets taken over values
Goodwill 60,000
Fixed Assets (Rs1,25,000-10%) 1,12,500
Current Assets (Rs1,85,000-10%) 1,66,500
Total of all assets taken over 3,39,000
Less: Liabilities taken over
Creditors 30,000
Mode of Payment:
1. Shares 20,000 shares of Rs10 each Rs
8 called up at a market value of Rs15
per share (20,000X15) 3,00,000
2. Cash (Balancing Figure) 9,000
Total Purchase consideration 3,09,000
In the Books of Small Limited (Transferor Company)
Journal Entries

To Goodwill A/c 40,000
Page 47 of 89
To Fixed Assets A/c 1,65,000
To Current Assets A/c 1,85,000
2 Sundry Creditors A/c…………………….Dr 30,000
Debentures A/c………………..…………Dr 1,00,000
account)
3 Big Company Limited A/c…..…………Dr 3,09,000
To Cash A/c 4,000
(Being payment of realization expenses)
5 Cash A/c…………………………………Dr 40,000
To Realization A/c 40,000
(being realization of fixed assets not taken
over/ sold)
6. Realization A/c…………………………..Dr 1,00,000
(Being discharge of debentures not taken
over by the purchasing company)
7 Equity Shareholders A/c…………………Dr 15,000
(being loss on realization transferred)
Profit & Loss A/c………………………..Dr 70,000
(Being transfer to share capital, profit and
loss account etc.,)
9 Cash 9,000
A/c………………………………….Dr 3,00,000
Equity Shares in Big Company Ltd A/c…Dr 3,09,000
To Big Company Limited A/c
(being purchase consideration received)
10 Cash 45,000
A/c………………………………….Dr 45,000
To Equity Shares in Big Company
A/c
(being sale of sufficient shares for
discharging of debentures not taken over)
To Equity Shares in Big Company A/c 2,55,000
(Being final payment made to equity
shareholders)
Page 48 of 89
To Goodwill A/c 40,000 By Sundry Creditors A/c 30,000
To Fixed Assets A/c 1,65,000 By Debentures A/c 1,00,000
To Current Assets A/c 1,85,000 By Big Company Ltd A/c 3,09,000
To Cash A/c (realization exp) 4,000 By Cash A/c (fixed assets) 40,000
To Cash A/c (debentures) 55,000 By Equity Shareholders A/c 15,000
To Shares in Big Company 45,000 (loss)
4,94,000 4,94,000
Dr Equity Shareholders Account Cr

To Realization A/c 15,000 By Equity Share Capital A/c 2,00,000
To Equity shares in Big By Profit & Loss A/c 70,000
(Balancing figure)
2,70,000 2,70,000
Dr Cash Account Cr
To Balance B/d 10,000 By Realization A/c (exp) 4,000
To Realization A/c 40,000 By Realization A/c 1,00,000
To Big Company Ltd A/c 9,000 (payment to debentures)
To Equity Shares in Big
Company Limited A/c 45,000
(balancing figure)
1,04,000 1,04,000
In the Books of Big Company Limited
Journal Entries

To Liquidators of Small Company Ltd 3,09,000
2 Goodwill A/c………..…………...............Dr 60,000
Fixed Assets A/c……………………… Dr 1,12,500
Current Assets A/c………………………Dr 1,66,500
3 Liquidator’s of Small Limited A/c..........Dr 3,09,000
To Cash A/c 9,000
To Share Premium A/c(2,000*7) 1,40,000
consideration)
Page 49 of 89
Illustration No: 13 (Problem on Acquisition in the nature of Purchase with Net Assets
Method of Purchase Consideration without Statutory Reserve)
The Balance Sheet of Novelty Company as on 31st March, 2017 was as follows;

2,000 Shares of Rs100 each Goodwill 35,000
fully paid 2,00,000 Buildings 85,000
Reserve Fund 20,000 Machineries 1,60,000
Loan from Rao ( A Director) 1,00,000 Stock on hand 55,000
Sundry Creditors 40,000 Debtors 65,000
Cash at Bank 34,000
Discount on Debentures 6,000
4,40,000 4,40,000
This company was agreed to be purchased by Marvel Company Limited on the following
terms and conditions;
1. Marvel Company Limited to acquire all assets at book value less 10% except cash,
which is retained in the Novelty Company. The goodwill is to be valued on the
following lines;
A. The goodwill is to be valued at 4 years purchase of the excess of average profits of 5
years over 8% of the combined share capital and reserve fund.
2. Marvel Company Limited to take over creditors at 5% discount.
3. The Purchase Consideration to be paid as to Rs1,50,000 in cash and the balance in
shares of Rs10 each, valued at Rs12.50 each.
4. The average profits for the last five years is Rs30,100, the expenses of realization are
Rs4,000.
Prepare the necessary ledger accounts in the books of Novelty Company Limited and
Journal Entries in the Books of Marvel Company Limited.
Solution:
Note:
1. Since all the assets are not taken over at book values by the transferee company, it
cannot be amalgamation in the nature of merger (i.e., pooling of interest method
cannot be used).
This problem states that purchase consideration should be paid up to Rs1,50,000 in
cash and balance in shares. Hence, Net Assets Method of calculating Purchase Consideration
must be adopted.
Calculation of the Value of Goodwill:

Average Profits of last five years 30,100
Less: 8% of combined share capital and 17,600
Page 50 of 89
reserve fund (2,00,000+20,000 =
Rs2,40,000*8/100)
Excess 12,500
Goodwill = 4 Years of Purchase of Excess
= 4 X Rs12,500
= Rs50,000
Calculation of Purchase Consideration (Net Asset Method)

1. Assets Taken over
Goodwill 50,000
Buildings (Rs85,000 – Rs8,500) 76,500
Machineries (Rs1,60,000-Rs16,000) 1,44,000
Stock (Rs55,000 – Rs5,500) 49,500
Debtors (Rs65,000- Rs6,500) 58,500
2. Less: Liabilities taken over
Trade Creditors (Rs80,000-Rs4,000) 76,000
Mode of payment Amount (Rs)

1. By Cash 1,50,000
2. By Equity Shares 1,52,500
(balancing figure)
Rs 1,52,500
No of Shares Issued= =¿
Rs 12.50 per share
12,200
Closing the Books of Transferor Company
In the Books of Novelty Company (Transferor Company)
To Goodwill A/c 35,000 By Loan from Rao A/c 40,000
To Buildings A/c 85,000 By Creditors A/c 80,000
To Machinery A/c 1,60,000 By Marvel Company A/c 3,02,500
To Stock A/c 55,000 (purchase consideration)
To Debtors A/c 65,000 By Equity Shareholders A/c 21,500
To Bank A/c (Rao’s loan) 40,000 (loss, balancing figure)
To Bank A/c (Realization ex) 4,000
4,44,000 4,44,000
Dr Marvel Company Limited Account Cr

To Realization A/c 3,02,500 By Equity shares in Marvel 1,52,500
(Purchase Consideration) Limited 1,50,000
Page 51 of 89
By Bank A/c
3,02,500 3,02,500

To Discount on Issue of 6,000 By Equity Share Capital A/c 2,00,000
Debentures A/c By Reserve Fund A/c 20,000
To Equity Shares in Marvel 1,52,500
Company Limited A/c
To Realization A/c (loss) 21,500
To Bank A/c (balancing 40,000
figure)
2,20,000 2,20,000
Dr Debenture Shareholders Account Cr

To Bank A/c 1,00,000 By 5% Debentures A/c 1,00,000
1,00,000 1,00,000
Dr Bank Account Cr
To Balance B/d 34,000 By Debenture Holders A/c 1,00,000
To Marvel Company Ltd A/c 1,50,000 By Realization A/c(Rao’s loan) 40,000
By Realization A/c (Expenses) 4,000
1,84,000 1,84,000
Note:
1. Loan of Rao is not taken over and hence has been discharged by paying cash.
2. Debentures are not taken over. Hence, they are discharged by paying cash. The
treatment can also be given turnover Realization Account like any other liability not
taken over.
Opening Entries in the books of Transferee Company
In the Books of Marvel Company Limited (Transferee Company Limited)
Journal Entries

To Liquidators of Novelty Company Ltd 3,02,500
Page 52 of 89
2 Goodwill A/c………..…………...............Dr 50,000
Buildings A/c….……………………… Dr 76,500
Machinery A/c….………………………Dr 1,44,000
Stock A/c………………………………...Dr 49,500
Debtors A/c……………………………..Dr 58,500
3 Liquidator’s of Novelty Limited A/c........Dr 3,02,500
To Share Premium A/c( 30,500
(being payment made on behalf of
purchase consideration)
WHEN TWO OR MORE EXISTING COMPANIES ARE ACQUIRED (MERGED)BY

A NEWLY FORMED COMPANY (POPULARLY KNOWN AS AMALGAMATION)
Illustration No: 14 (Problem on Amalgamation in the nature of Purchase under the net
payments method with Statutory Reserve)
Given below is the Balance Sheet of two companies as on 31st March, 2015.
Liabilities Ram Ltd Bhim Assets Ram Ltd Bhim

(Rs) Ltd (Rs) (Rs) Ltd (Rs)
Share Capital of Rs10 Goodwill 1,50,000 50,000
each fully paid up 15,00,000 3,90,000 Freehold Property 4,00,000 1,80,000
Share Premium 4,500 - Machinery 3,50,000 1,00,000
General Reserve 1,00,000 - Stock 6,82,000 1,62,000
Profit & Loss A/c 1,65,650 - Debtors 2,58,500 95,000
8% Debentures 3,50,000 70,000 Bank 3,37,500 -
Development Rebate Profit & Loss A/c - 1,36,000
Reserve 27850 57,000
Sundry Creditors 30,000 2,00,000
Bank OD - 6,000
21,78,000 7,23,000 21,78,00 7,23,000
0
The two companies decided to amalgamate their business as on the date of Balance Sheet and
a new company called Ayodhya Limited was formed with an authorized capital of
Rs25,00,000 in shares of Rs10 each. The terms and conditions of amalgamation are as
follows
Ram Limited:
1. 6 shares of Rs10 each fully paid in the new company in exchange for every 5 shares
in Ram Limited and Rs10,000 in cash.
2. The debenture holders were to be allotted such debentures in new company bearing
interest at 7% p.a., a would bring the same amount of interest.
Bhim Limited:
Page 53 of 89
1. One share of Rs10 each fully paid in the new company in exchange for every 3 shares
in Bhim Limited and Rs5,000 in cash.
2. The debenture holders were to be allotted such debentures in the New Company
bearing interest at 7% as would bring the same amount of interest.
The new company took over all the assets and liabilitie4s of the two companies.
Development Rebate Reserve is to be maintained for 2 more years. Record the entries
in the books of Ayodhya Limited go give effect to the above arrangements. Also
draw the opening journal entries and Balance Sheet after amalgamation in the books
of Transferee Company under amalgamation in the nature of purchase method.
Solution:
Note:
Only payment for the shareholders (Equity and Preference) is taken for the purpose of
Purchase Consideration. Payment made for Debentures and Creditors are not considered
for calculation of Purchase Consideration. When purchasing company issues debentures for
discharge of vendor company debentures, in the books of vendor company the debentures
must be shown is “taken over” by purchasing company and credited to “Realization
Account” and later in the books of purchasing company, the discharge be rewarded by way
of entry for exchange (as per requirement of AS-14).
Calculation of Purchase Consideration of Ram Limited

1. By shares – 1,80,000 shares of Rs10
each fully paid up (1,80,000X10) 18,00,000
2. By cash 10,000
Calculation of Purchase Consideration of Bhim Limited

1. By shares – 13,000 shares of Rs10
each fully paid up (13,000X10) 1,30,000
2. By cash 5,000
Calculation of Discharge of Debentures in Ram Limited
Debenture Interest 3,50,000@8% 28,000

Debentures = 28,000/7X100 4,00,000
Calculation of Discharge of Debentures of Bhim Limited
Debenture Interest 70,000@8% 5,600

Debentures = 5,600/7X100 80,000
Note: As the development rebate reserve is to be maintained for 2 more years, it is treated as
Statutory Reserve.
In the Books of Ram Limited (Transferor Company)
Page 54 of 89
To Goodwill A/c 1,50,000
To Freehold Premises A/c 4,00,000
To Machineries A/c 3,50,000
To Debtors A/c 2,58,500
(Being transfer of assets to realization
account)
2 8%Debentures A/c………………..……...Dr 3,50,000
Development Rebate Reserve A/c………Dr 27,850
Sundry Creditors A/c……………………Dr 30,850
account)
3 Ayodhya Company Limited A/c…..…….Dr 18,10,000
4. Equity Shares in Ayodhya Limited A/c….Dr 18,00,000
Cash A/c…………………………………Dr 10,000
To Ayodhya Limited 18,10,000
(being profit on realization transferred)
6 Equity Share Capital A/c……..…………Dr 15,00,000
Share Premium A/c……………………..Dr 4,500
General Reserve A/c……………………..Dr 1,00,000
Profit & Loss A/c………………………Dr 1,65,650
(Being transfer to share capital, premium,
profit and loss account etc.,)
To Equity Shares in Ayodhya Ltd A/c 18,00,000
To cash A/c 10,000
(Being final payment made to equity
shareholders)
In the Books of Ayodhya Company Limited (Transferee Company)
Journal Entries

To Liquidators of Ram Company Ltd 18,10,000
Page 55 of 89
To Liquidators of Bhim Company Ltd 1,35,000
2 Freehold Premises A/c…………………...Dr 5,80,000
Machineries A/c………………………….Dr 4,50,000
Stock A/c………………………………...Dr 8,44,000
Debtors A/c………………………………Dr 3,53,500
Bank A/c…………………………………Dr 3,37,500
Goodwill A/c……………………………Dr 96,300
To Bank Overdraft A/c 6,000
Amalgamation Adjustment A/c………….Dr 84,500
To Development Rebate Reserve A/c 84,500
recorded)
4 Liquidator’s of Ram Limited A/c..............Dr 18,10,000
Liquidator’s of Bhim Limited A/c……….Dr 1,35,000
To Cash A/c 19,30,000
To Equity Shares Capital A/c 15,000
consideration)
5 8% Debentures A/c………………………Dr 4,80,000
(being debentures discharged)
Balance Sheet of Ayodhya Company Limited as on 31st March, 2017.
C. EQUITY AND LIABILITIES Note Amount (Rs)

Share Capital:
Authorised Capital 25,00,000
Issued, Subscribed and Paid up Capital 19,30,000
Secured Loans
Unsecured Loans
Current Liabilities
Bank Overdraft 6,000
ASSETS
Non Current Assets
Fixed Assets
Goodwill 96,300
Freehold Property 5,80,000
Page 56 of 89
Machineries 4,50,000
Investments -
Amalgamation Adjustment Account 84,550
Current Assets
Inventory 8,44,000
Illustration No: 15 (Problem on Amalgamation in the nature of Purchase under the Net
Payments Method with Statutory Reserve)
Ganges Limited and Indus Limited doing business in the same field, decided to amalgamate
to avoid unnecessary competition and secure in product and marketing. Following are the
Balance Sheets as on 31stMarch, 2017.
Liabilities Ganges Indus Ltd Assets Ganges Indus Ltd

Ltd (Rs) (Rs) Ltd (Rs) (Rs)
Share Capital: Goodwill - 1,00,000
Equity Shares of Land & buildings 15,30,00 8,10,000
Rs10 each fully paid A/c 0 2,40,000
up 10,00,00 5,00,000 Plant & Machinery 4,80,000 26,000
8% Preference 0 Furniture & Fittings 30,000 10,000
Shares of 10 each 3,00,000 Investments A/c 20,000 1,87,000
8% Debentures of 5,00,000 Stock A/c 3,05,000 69,000
Rs10 each 2,50,000 Sundry Debtors A/c 1,25,000 11,000
Reserve Fund - 1,10,000 Bills Receivables A/c 19,000 38,000
Workmen’s Savings 1,60,000 50,000 Cash and Bank A/c 74,000
Bank Account 70,000 Miscellaneous 33,000
Export Profits - Expenses 63,000
Reserve 36,000
Other Liabilities 3,14,000
2,50,000
26,46,00 15,24,000 26,46,00 15,24,000
0 0
The amalgamation was effected on 1st April, 2017. The Purchase Consideration payable by
the new company Himalaya Company Limited was as follows;
For Ganges Limited:
1. Equity Shareholders to get one equity share of Rs10 each in Himalaya Limited,
valued at Rs12 per share for every equity share in Ganges Limited.
2. 8%Preference Shareholders to get 10% Preference Shares in Himalaya Limited, equal
to their claim.
Page 57 of 89
3. 10% Debenture holders to get sufficient 12.5%Debentures in Himalaya Limited, so as
to get the same amount of interest as they were getting in Ganges Limited.
For Indus Limited:
1. 4 Equity Shares of Rs10 each in Himalaya Limited, valued at Rs12 per share for every
5 Equity shares in Indus Limited.
2. 8% Preference Shareholders to get 90% of their claim in 10% Preference Shares in
Himalaya Limited
3. 8% Debenture holders to get sufficient 12.5% Debentures in Himalaya Limited so as
to get the same amount of interest as they were getting in Indus Limited.
Himalaya Limited took over all the assets and liabilities of both the companies
at their book values except Land and Buildings, Plant and Machinery and Stock of
Ganges Limited, which were taken over at Rs18,50,000, Rs3,20,000 and Rs2,80,000
respectively and investments of Indus Limited at Rs16,000. The liquidation expenses
of Ganges Limited came to Rs13,000 and that of Indus Limited to Rs9,000. Balance
of Cash and Bank balance was transferred to Himalaya Limited.
The authorised capital of Himalaya Limited is 2,50,000 Equity Shares of Rs10
each and 1,00,000, 10% Preference Shares of Rs10 each. Export Profit Reserve
(Statutory Reserve) is to be maintained for three more years.
Prepare Purchase Consideration Statement, close the books of Ganges Limited
and Indus Limited and Prepare the Opening Balance Sheet of Himalaya Limited under
the amalgamation in the nature of purchase.
Solution:
Note: Workmen’s Savings Bank Account is a liability.
Calculation of Purchase Consideration
Since payments are made to each item of liability are specifically given in the problem, “Net
Payments Method” of Purchase Consideration must be adopted to calculate Purchase
Consideration.
For Ganges Limited:

1. Payment to the Equity Shareholders:
In Equity Shares of Himalaya Limited
(1,00,000 Equity Shares of Rs12 per
share) 12,00,000
2. Payment to Preference Shareholders;
In 10% Preference Shares of
Himalaya Limited 5,00,000
For Indus Limited

1. Payment to the Equity Shareholders:
In Equity Shares of Himalaya Limited
Page 58 of 89
(Rs5,00,000/10X4/5XRs12) 4,80,000
2. Payment to Preference Shareholders;
In 10% Preference Shares of
Himalaya Limited (90% of 2,70,000
Rs3,00,000)
Particulars Ganges Ltd (Rs) Indus Ltd (Rs)

In Equity Shares of Himalaya Limited 12,00,000 4,80,000
In 10% Preference Shares of Himalaya
Limited 5,00,000 2,70,000
17,00,000 7,50,00
Closing the Books of Transferor Companies
In the Books of Ganges Limited (Transferor Companies)
To Plant & Machinery A/c 4,80,000 By 8% Debentures A/c\ -
To Furniture & Fittings A/c 30,000 By Workmen’s Savings Bank 1,30,000
To Investments A/c 20,000 By Export Profit Reserve A/c 36,000
To Stock A/c 3,05,000 (Statutory Reserve)
To Sundry Debtors A/c 1,25,000 By Other Liabilities A/c 2,50,000
To Bills Receivables A/c 19,000 By Himalaya Limited A/c 17,00,000
To Cash and Bank A/c 61,000 (Purchase Consideration)
(see note)
To Bank A/c (expenses) 13,000
(bal fig, Profit)
26,16,000 26,16,000
Dr Himalaya Company Account Cr

To Realization A/c By Equity Shares in Himalaya
(Purchase Consideration) 17,00,000 Company Limited A/c 12,00,000
Himalaya Limited A/c 5,00,000
17,00,000 17,00,000
Dr 8% Preference Shareholders Account Cr

To 10% Preference Shares in By Balance B/d 5,00,000
Page 59 of 89
To Realization A/c -
(Balancing Figure)
5,00,000 5,00,000

To Miscellaneous Expenses By Balance B/d 10,00,000
A/c 63,000 By Reserve Fund A/c 1,60,000
To Equity Shares in By Profit & Loss A/c 70,000
Himalaya Company Ltd A/c 12,00,000 By Realization A/c 33,000
12,63,000 12,63,000
Dr Cash & Bank Account Cr

By Balance b/d 74,000 By Realization A/c 61,000
By Realization A/c (expenses) 13,000
74,000 74,000
In the books of Indus Company Limited (Transferor Company)
To Goodwill A/c 1,00,000 By 10% Debentures A/c -
To Plant & Machinery A/c 2,40,000 By Workmen’s SB A/c -
To Furniture & Fittings A/c 26,000 By Other Liabilities A/c 3,14,000
To Investments A/c 10,000 By Himalaya Company A/c 7,50,000
To Stock A/c 1,87,000 (Purchase Consideration)
To Sundry Debtors A/c 69,000 By 8% Preference 30,000
To Bills Receivables A/c 11,000 Shareholders A/c (3,00,000 –
To Cash & Bank A/c 2,70,000)
(see note) 29,000 By Equity Shareholders A/c 1,47,000
To Bank A/c (Expenses) 9,000 (Balancing Figure) (loss)
14,91,000 14,91,000
Dr Himalaya Company Account Cr

To Realization A/c 7,50,000 By Equity Shares in Himalaya
(Purchase Consideration) Company Limited A/c 4,80,000
7,50,000 7,50,000
Dr 8% Preference Shareholders Account Cr
Page 60 of 89
To 10% Preference Shares in By Balance B/d 3,00,000
(Balancing Figure)
3,00,000 3,00,000
To Miscellaneous Expenses 33,000 By Balance B/d 5,00,000
A/c By Reserve Fund A/c 1,10,000
To Equity Shares in By Profit & Loss A/c 50,000
Himalaya Company Ltd A/c 4,80,000
6,60,000 6,60,000
Dr Cash & Bank Account Cr

By Balance b/d 9,000 By Realization A/c (expenses) 9,000
9,000 9,000
Note: Cash and Bank Balance is transferred to Himalaya Company Limited, after setting
aside for expenses. So, amount of cash and bank balance to be transferred to realization
account is calculated as follows;
Ganges Ltd (Rs) Indus Ltd (Rs)

Cash & Bank Balance (as per Balance Sheet) 74,000 38,000
Less: Amount required for meeting Liquidation
Expenses 13,000 9,000
Amount to be transferred to Himalaya Limited 61,000 29,000
Opening Entries and Balance Sheet in the books of Purchasing Company
In the Books of Himalaya Company Limited
Valuation of Debentures taken over;
From Ganges Company Limited
Taken over – 10% Debentures of Rs5,00,000
Interest on such Debentures- 10% of Rs5,00,000 = Rs50,000
Interest rates in Himalaya Company Limited @12.5%
Debentures value @12.5% to get interest of Rs50,000 will be
Rs 50,000 X 100
=Rs 4,00,000
12.5
Page 61 of 89
From Indus Company Limited
Taken over – 8% Debentures of Rs2,50,000
Interest on such debentures – 8% Debentures of Rs2,50,000 = Rs20,000
Interest rate in Himalaya Company Limited @12.5%
Note: Debenture value @12.5% to get interest of Rs20,000 will be
Rs 20,000 X 100
=Rs 1,60,000
12.5
In the books of Himalaya Company Limited (Transferee Company)
Journal Entries

To Liquidators of Ganges Company Ltd 17,00,000
To Liquidators of Indus Company Ltd 7,50,000
2 Land & buildings A/c.…………………...Dr 26,60,000
Plant & Machinery A/c.………………….Dr 5,60,000
Furniture & Fittings A/c………………...Dr 56,000
Investments A/c…………………………Dr 36,000
Stock A/c...………………………………Dr 4,67,000
Sundry Debtors A/c…...…………………Dr 1,94,000
Bills Receivables A/c…………………….Dr 30,000
Bank A/c…………………………………Dr 90,000
To 10% Debentures of Ganges Ltd A/c 4,00,000
To 8% Debentures of Indus Ltd A/c 1,60,000
To Workmen’s SB A/c (liability) 1,30,000
To Other Liabilities A/c(Rs2,50,000 – 5,64,000
Rs3,14,000)
To Capital Reserve A/c (balancing fig) 3,89,000
Amalgamation Adjustment A/c………….Dr 36,000
To Export Profit Reserve A/c 36,000
recorded)
4 Liquidator’s of Ganges Limited A/c..........Dr 17,00,000
Liquidator’s of Indus Limited A/c……….Dr 7,50,000
To Securities Premium A/c 2,80,000
consideration)
5 10% Debentures A/c……………………Dr 4,00,000
8% Debentures A/c…………………….Dr 1,60,000
Page 62 of 89
To 12.5% Debentures A/c 5,60,000
(being debentures discharged)
D. EQUITY AND LIABILITIES Note Amount (Rs)

Share Capital:
Authorised Capital
Equity Share Capital 25,00,000
10% Preference Share Capita 10,00,000
35,00,000
Issued, Subscribed and Paid up Capital
Equity Share Capital 14,00,000
10% Preference Share Capital 7,70,000

Securities Premium A/c 2,80,000
Capital Reserve A/c 3,89,000
Export Profit Reserve A/c 36,000
Secured Loans
12.5% Debentures 5,60,000
Unsecured Loans
Current Liabilities
Workmen’s SB Account 1,30,000
Other Liabilities 5,60,000

ASSETS
Non Current Assets
Fixed Assets
Land & Buildings A/c 26,60,000
Plant & Machinery A/c 5,60,000
Furniture & Fittings A/c 56,000
Investments A/c 36,000
Amalgamation Adjustment A/c 36,000
Current Assets
Stock A/c 4,67,000
Bills Receivables 30,000
Cash & Bank 90,000
Page 63 of 89
C. WHEN AN EXISTING COMPANIES ARE ACQUIRED BY A NEWLY FORMED
COMPANY (POPULARLY KNOWN AS EXTERNAL RECONSTRUCTION OF
COMPANIES)
Illustration No: 16 (Problem on Business Purchase Method – Without Statutory Reserve –

Net Payment Method)
Pavani Company Limited after a series of heavy losses resolve to go into voluntary
liquidation and to reconstruct by means of a new company under the name of New Pavani
Company Limited, on the date of reconstruction the Balance Sheet of Pavani Company
Limited as follows;

Capital: Buildings 3,92,500
2,00,000 Shares of Rs5 each 10,00,000 Machinery 2,39,000
Sundry Creditors 30,000 Motor Lorry 19,400
Bank Loan 15,000 Stock 91,410
Bills Payables 10,000 Sundry Debtors 1,09,100
Bank A/c 3,590
Profit & Loss A/c 2,00,000
10,55,000 10,55,000
The following is the scheme of reconstruction;

1. The new company is to take over the assets of the old company and not the liabilities.
2. Capital of the new company is to consist of 5,00,000 shares of Rs5 each.
3. The new company is to issue 2,80,000 shares of Rs5 each credited with Rs2.50 per
shares as paid up to the old company and to pay to it Rs1,00,000 in cash by way of
purchase of consideration.
4. The balance of Rs2.50 per share by the member of the new company is duly received.
Record the journal entries in the books of both the companies and prepare the Balance
Sheet of the new company.
Solution:
1. Calculation of Purchase Consideration:

Since the total payments made by Purchasing Company to Vendor Company is
specified, “Net Payments Method” of calculating purchase consideration must be
adopted.
Note: only payment for the shareholders (Equity and Preferences) are taken for the
purpose of purchase consideration. Payment made for Debentures and Creditors are
not considered for calculation of Purchase Consideration. When purchasing company
issues debentures for discharge of vendor company debentures, in the books of vendor
company the debentures must be shown is “taken over” by purchasing company and
credited to Realization Account, and later in the books of purchasing company, the
Page 64 of 89
discharge must be rewarded by way of entry for exchange ( as per requirement of
AS14)
Payment to the Shares of New Pavani Company
1. 2,80,000 shares @Rs2.50 each 7,00,000

2. Payment in cash 1,00,000
In shares of New Pavani Company 7,00,000

In cash 1,00,000
Closing Entries in the books of Transferor Company

Journal Entries in the Books of Pavani Company Limited (Transferor Company)

To Buildings A/c 3,92,500
To Machinery A/c 2,39,000
To Motor Lorry A/c 19,400
To Stock A/c 91,410
To Sundry Debtors A/c 1,09,100
To Bank A/c 3,590
2 Sundry Creditors A/c……………………Dr 30,000
Bank Loan A/c…………………………..Dr 15,000
Bills Payables A/c……………………….Dr 10,000
account)
3 Share Capital A/c ………………………Dr 10,00,000
To Shareholders A/c 10,00,000
(being transfer entry)
4. Shareholders A/c…………………………Dr 2,00,000
(being transfer entrty)
5 New Pavani Company A/c……………….Dr 8,00,000
(being purchase consideration due recorded)
6 Realization A/c…………………………..Dr 55,000
To Bank A/c 55,000
(being creditors, bank loan and bills
payables not taken over paid recorded)
7 Shareholders A/c…………………………Dr 55,000
(being loss on realization transferred
Page 65 of 89
recorded)
8 Shares in New Pavani Company A/c…….Dr 7,00,000
Bank A/c…………………………………Dr 1,00,000
To New Pavani Company A/c 8,00,000
(being purchase consideration received
recorded)
9 Shareholders A/c…………………………Dr 7,00,000
To Shares in New Pavani Company 7,00,000
recorded)
To Bank A/c 45,000
(being balance paid recorded)
Opening entries and Balance Sheet in the books of Transferee Company
In the Books of New Pavani Company (Transferee Company)
Journal Entries

To Liquidators of Pavani Company Ltd 8,00,000
2 Liquidator of Pavani Company A/c…….Dr 8,00,000
To Share Capital A/c 7,00,000
recorded)
Buildings A/c……………………………Dr 3,92,500
Machinery A/c…………………………..Dr 2,39,000
Motor Lorry A/c…………………………Dr 19,400
Stock A/c………………………………...Dr 91,410
Sundry Debtors A/c……………………...Dr 1,09,100
Bank A/c…………………………………Dr 3,590
To Capital Reserve A/c (bal fig) 55,000
(being assets and liabilities taken over,
incorporated recorded)
4 Share Call A/c….………………………...Dr 7,00,000
(being the balance of Rs2.50 per share due
recorded)
5 Bank A/c…………………………………Dr 7,00,000
To Share call A/c 7,00,000
(being call money received recorded)
E. EQUITY AND LIABILITIES Note Amount (Rs)

Share Capital:
Issued, Subscribed and Paid up Capital
Page 66 of 89
2,80,000 Equity Shares @ Rs5 each 14,00,000
Reserves & Surpluses 55,000

Capital Reserve A/c
Secured Loans
Unsecured Loans
Current Liabilities

ASSETS
Non Current Assets
Fixed Assets
Buildings 3,92,500
Machinery 2,90,000
Motor Lorry 19,400
Investments -
Current Assets
Stock A/c 91,140
Bank Balance 6,03,590
Illustration No: 17 (Problem on External Reconstruction without Statutory Reserve)
The creditors and shareholders’ are having agreed upon a scheme of reconstruction the
Unsound Company Limited went into voluntary liquidation. The Balance Sheet as on 31 st
March, 2015 as follows;

25,000 Shares of Rs10 each 2,50,000 Goodwill 30,000
8% Debentures 1,00,000 Factory Buildings 95,000
Trade Creditors 40,000 Plant 1,05,000
Depreciation Fund 27,000 Stock 50,000
Debtors 60,000
Cash at Bank 2,000
4,17,000 4,17,000
The scheme of reconstruction provided;
1. That a new company called Sound Company Limited be formed with a share capital
of Rs5,00,000 in 50,000 shares of Rs10 each to take over from the above company
and debtors at 20% less than the book value, factor buildings and plant at Rs77,000
and Rs1,00,000 respectively.
Page 67 of 89
2. The Debenture holders were to be satisfied by the issue of 9% mortgage debentures of
Rs1,05,000 in Sound Company Limited in exchange for the old debentures.
3. The trade creditors agreed to receive Rs35,000 from Sound Company in full
satisfaction of their claims.
4. The shareholders agreed to receive 25,000 shares of Rs10 each, credited with Rs5 per
share with a cal of Rs2.50 per share to be made forthwith.
5. The Bank balance was utilised in payment of reconstruction cost.
Pass journal entries to close the Books of Unsound Company and also the opening
entries in the Books of Sound Company Limited assuming that the call made on the
shareholders was duly received.
Solution:
Note: Only payment for the shareholders (Equity and Preference) is taken for the purpose of
Purchase Consideration. Payment made for debentures and creditors are not considered for
calculation of purchase consideration. When purchasing company issues debentures for
discharge of vendor company debentures, in the books of vendor company, the debentures
must be shown is “taken over” by purchasing company and credited to “Realization
Account”, and later in the books of purchasing company, the discharge must be rewarded by
way of entry for exchange (as per requirement of AS14).
Payment made to each item of liability is specifically given in the problem. Hence, “Net
Payment Method” of calculating purchase consideration must be adopted.
Payment to the Shareholders:
In shares of Sound Limited:

25,000 shares @ Rs5 per share 1,25,000
In shares of Sound Limited:

25,000 shares @ Rs5 per share 1,25,000
1,25,000
Closing the Books of Transferee Company
In the Books of Unsound Company Limited (Transferor Company)
Journal Entries

To Buildings A/c 95,000
To Plant A/c 1,05,000
To Goodwill A/c 30,000
To Stock A/c 50,000
To Sundry Debtors A/c 60,000
Page 68 of 89
2 8% Debentures A/c……………………….Dr 1,00,000
Sundry Creditors A/c……………………..Dr 40,000
Depreciation Fund A/c……………………Dr 27,000
account)
3 Share Capital A/c ………………………Dr 2,50,000
To Shareholders A/c 2,50,000
(being transfer entry)
4. Shareholders A/c…………………………Dr 75,000
To Profit & Loss A/c 75,000
(being transfer entrty)
5 Sound Company A/c…………………….Dr 1,25,000
(being purchase consideration due recorded)
6 Shares in Sound Limited A/c…………….Dr 1,25,000
To Sound Company Ltd A/c 1,25,000
7 Shareholders A/c…………………………Dr 1,25,000
To Shares in Sound Ltd A/c 1,25,000
(being discharge recorded)
8 Realization A/c…………………………..Dr 2,000
To Bank A/c 2,000
(being reconstruction expenses paid
recorded)
(being loss on realization transferred
recorded)
Opening entries in the books of Purchasing Company
In the Books of Sound Company Limited (Transferee Company)
Journal Entries

To Liquidators of Unsound Company Ltd 1,25,000
2 Liquidator of Unsound Company A/c…...Dr 1,25,000
recorded)
Buildings A/c……………………………Dr 77,000
Machinery A/c…………………………..Dr 1,00,000
Stock A/c………………………………...Dr 40,000
Page 69 of 89
Sundry Debtors A/c……………………...Dr 48,000
To Sundry Creditors A/c 35,000
(being assets and liabilities taken over,
incorporated recorded)
4 8% Debentures (of Unsound Ltd) A/c…Dr 1,05,000
To 9% Mortgage Debentures A/c 1,05,000
(being exchange recorded)
5 Creditors A/c……………………………..Dr 35,000
To bank A/c 35,000
(Being discharge of creditors recorded)
6 Bank A/c…………………………………Dr 35,000
To Share Capital A/c 35,000
(being Rs2.50 per share received in partly
paid shares, recorded)
EXERCISES
Section – A Type Questions
1. What is Amalgamation?
2. Differentiate between Amalgamation and Absorption?
3. State any four objectives of Amalgamation?
4. How do you treat the excess of net assets over purchase price of the business taken
over?
5. Mention any four examples of statutory reserve
6. What is external reconstruction?
7. State any two objectives of Absorption or Acquisition?
8. How do you treat the liabilities not taken by the Transferee Company under
amalgamation in the nature of purchase?
9. Mention any four ledger accounts opened in the books of Transferor Company under
amalgamation in the nature of purchase
10. What is the journal entry for the payment of liquidation expenses in the books of
Transferor Company?
11. Differentiate between Amalgamation and External Reconstruction?
12. Differentiate between Absorption and External Reconstruction?
13. What is meant by Purchase Consideration?
14. List the different methods of calculating Purchase Consideration?
15. What is Net Assets?
16. What is the journal entry for showing Purchase Consideration due, in the books of
Transferor Company and Transferee Company?
17. State the different types of amalgamation
18. Mention the different methods of accounting for amalgamation?
19. State the ledger accounts required to be prepared, while closing the books of
Transferor Company
20. Mention the different methods of accounting for Amalgamation
Page 70 of 89
SECTION – B TYPE QUESTIONS
21. Bring out the differences between the two methods of accounting for Amalgamation
22. List the steps involved in closing the books of Transferor Company in the case of
Amalgamation.
23. What are the opening entries in the books of Transferee Company?
24. What are the differences between amalgamation and external reconstruction?
25. As per AS-14, state the conditions of amalgamation in the nature of a merger.
26. Write a note on amalgamation in the nature of purchase.
27. List the steps involved in closing the books of Transferor Company in case of
acquisition of company briefly.
28. Balance Sheet of Mahendra Limited show the following on 31st March, 2016
1,00,000 Equity Shares of Rs10 each fully paid Rs10,00,000
50,000 5% Preference Shares of Rs10 each fully paid Rs5,00,000
6% Debentures Rs5,00,000
Narendra Limited acquired Mahendra Limited on the same date and agreed to pay the
following;
A. 50,000 Equity Shares of Rs10 each at Rs12, 30,000, 8% Preference Shares of
Rs10 each and 78% Debentures to the extent of Rs2,00,000 to the equity
shareholders of Mahendra Limited.
B. 30,000 Equity Shares of Rs10 at Rs12 each and 20,000, 8% Preference Shares of
Rs10 each to the 5% Preference Shareholders of Mahendra Limited.
Calculate the Purchase Consideration.
29. Calculate the purchase consideration
A. Total assets at book value Rs 1,25,000
B. Assets taken over at 10% less than the book values
C. Total liabilities Rs50,000
D. Liabilities not taken over Rs12,500
E. Liquidation expenses Rs2,500 is to be borne by the transferee company
30. Calculate the amount of purchase consideration
A. Cash payment of Rs50,000
B. Issue of 80,000 Equity Shares of Rs10 each fully paid at Rs15 per share
C. Issue of 50,00 Preference Shares of Rs10 each Rs6 per share paid up
D. Issue of 30,000 Debentures of Rs10 each at a discount of 10%
31. Write the journal entries for settlement of purchase consideration in the books of
transferee company from the following details;
Purchase Consideration Rs5,00,000, settled by issue of equity shares of Rs100 each at
a premium of 25%.
32. Calculate the amount of Purchase Consideration;
A. A cash payment of Rs25,000
B. Issue of 40,000 equity shares of Rs10 each fully paid at Rs15 per share
C. Issue of 25,000 preference shares of Rs10 each, Rs6 per share paid up.
D. Issue of 15,000 debentures of Rs10 each at a discount of 10%.
And also make the journal entries in the books of transferee company.
33. Calculate the purchase consideration from the following;
Page 71 of 89
A. Value of assets as per the Balance Sheet Rs25,12,750
B. Agreed value of assets taken over Rs18,21,570
C. Liabilities as per the balance sheet R23,21,570
D. Liabilities not taken over Rs21,570
34. Bindu Limited was agreed to be acquired by Sindu Limited as on 31 st March, 2017 on
this date the balance sheet of Bindu Limited was as follows;

50,000 Equity Shares of Fixed Assets 9,00,000
Rs10 each 5,00,000 Current Assets 1,60,000
General Reserve 2,00,000 (Excluding Cash)
Profit & Loss A/c 1,50,000 Cash in hand 40,000
Sundry Creditors 1,30,000
11,00,000 11,00,000
Sindhu Limited agreed to acquire fixed assets at 10% more than the book values, but
current assets were valued only Rs1,50,000. The purchase consideration was paid
50% in shares of Rs10 each and balance in cash.
Determine purchase consideration and also show the discharge of purchase
consideration.
35. Pink Limited and Rose Limited decided to amalgamate their business and form a new
company called Rose Pink Limited, their Balance Sheets on the date of amalgamation
were as follows;
Liabilities Pink Ltd Rose Assets Pink Ltd Rose

(Rs) Ltd (Rs) (Rs) Ltd (Rs)
Equity Shares of Land & Buildings 3,00,000 -
Rs10 each 6,00,000 2,00,000 Plant &
General Reserve 4,00,000 2,00,000 Machinery 5,00,000 3,00,000
Secured Loans 6,00,000 1,00,000 Furniture &
Sundry Creditors 6,00,000 4,00,000 Fittings 1,00,000 -
Stock A/c 8,00,000 4,00,000
Sundry Debtors
A/c 4,00,000 1,00,000
Cash at Bank 1,00,000 1,00,000
22,00,00 9,00,000 22,00,00 9,00,000
0 0
The terms and conditions of Amalgamation were as follows;
1. Rose Pink Limited agreed to take all assets and liabilities of both the companies at
book values.
2. The liquidation expenses in case of Pink Limited was Rs6,000 and Rose Limited
Rs7,500 which were met by Rose Pink Limited.
3. Rose Pink Limited agreed to pay the purchase consideration to both the companies
in equity shares of Rs10 each fully paid and also Rs20,000 each as additional
amount in cash.
Page 72 of 89
4. The authorised capital of Rose Pink Limited was Rs20,00,000 in equity shares of
Rs10 each
Show the opening entries in the books of Rose Pink Limited.
36. Following is the Balance Sheet of Geetha Limited as on 31st March, 2017.

Equity Share Capital: Fixed Assets 20,00,000
10,000 Shares of Rs10 Current Assets 5,00,000
each 10,00,000
Reserves & Surpluses 5,00,000
25,00,000 25,00,000
Seethe Limited acquires the business of Geetha Limited as at the above date and
agrees to discharge the purchase consideration as under;
1. Cash payment of Rs2 per share.
2. Issue of sufficient number of equity shares of Rs10 each at a premium of 100%
for the balance.
Calculate the purchase consideration and state the number of equity shares issued
assuming that fixed assets are valued at Rs27,50,000 and current assets at
Rs4,50,000.
37. Following are the Balance Sheets of Gold spot Company Limited and Limca
Company Limited as at 31st March, 2017.
Liabilities Gold Spot Limca Assets Gold Spot Limca

Equity Share Land &
Capital: Buildings 1,00,000 1,50,000
15,000 shares 1,50,000 1,50,000 Plant &
Reserves & Machinery 1,50,000 1,25,000
Surpluses 50,000 1,00,000 Stock 75,000 75,000
12% Debentures 1,00,000 1,00,000 Debtors 25,000 50,000
Creditors 60,000 60,000 Cash 10,000 10,000
3,60,000 4,10,000 3,60,000 4,10,000
Gold Spot Limited and Limca Limited agreed to amalgamate their business and for a
new company called Citra Limited. The assets f both the companies are valued as
follows;
Fixed assets 25%more\
Stock 15%less and
Debtors 10% less
The purchase consideration is discharged by the issue to both companies, sufficient
number of equity shares of Rs10 each in Citra Limited, at an agreed value of Rs12.50
per share.
Page 73 of 89
Calculate the purchase consideration and state the number of equity shares issued to
each company.
38. Following is the Balance Sheet of Ever Growing Limited as on 31st March, 2017.

Equity Share Capital Land & Buildings A/c 1,00,000
20,000 Shares of Rs10 Plant & Machinery A/c 50,000
each 2,00,000 Stock and Debtors A/c 75,000
12% Debentures 1,00,000 Cash A/c 10,000
Sundry Creditors 50,000 Profit & Loss A/c 1,15,000
3,50,000 3,50,000
Ever Growing Company Limited is liquidated and a new company called Fast
Growing Company Limited is formed. The Land & Buildings and Plant & Machinery
are re valued at Rs 1,75,000 and Rs40,000 respectively.
Ever Growing Company Limited realized stock and debtors at Rs45,000 and
discharged creditors at 5% discount. Liquidation expenses came to Rs1,500.
Assuming that the purchase consideration is discharged by the issue of equity shares
in new company prepare;
1. Realization Account
2. Fast Growing Company Limited Account
3. Equity Shareholders Account in the books of Ever Growing Company Limited.
39. Calculate the Purchase Consideration
Total assets at book values Rs5,00,000
Assets are taken over at 10% less than book values
Total liabilities Rs2,00,000
Liabilities not taken over Rs50,000
Liquidation expenses of Rs5,000 is to be borne by the Purchasing Company.
40. Delight Company Limited was acquired by Enlighten Company Limited
The share capital of Delight Limited was 4,000 shares of Rs100 each
Enlighten Company issued 2 shares of Rs60 each at Rs65 per share and also agreed to
pay Rs2 per share in cash to the shareholders of Delight Limited in exchange for one
share in Delight Limited.
Delight Limited sold in the open market ¼ of the shares received from Enlighten
Limited at the average rate ofRs63 per share.
A. Give the statement of Purchase Consideration
B. Give the Journal Entries affecting the sale of Share in Books of Delight Limited.
41. Mobile Phone Limited absorbs Land Phone Limited by issuing 4 equity shares of
Rs10 each at a premium of 10% for every 2 shares in Land Phone Limited. The share
Capital of Land Phone Limited was 16,000 shares of Rs10 each. Land Phone Limited
held 6,000 shares in Mobile Phone Limited. Calculate the Purchase Consideration.
42. United Limited agreed to take over Bharath Limited from 31st December, 2017.
The paid up capital of Bharath Limited was 12,000 shares of Rs50 each. The
Purchase price was discharged by the allotment to the shareholders of the vendor
company of the share of Rs100 (Rs90 pad up) of the United Limited for every two
Page 74 of 89
shares in Bharath Limited. Shareholders of 100 shares did not agree for Absorption.
These dissentient shareholders are paid out at Rs70 per share.
Calculate the Purchase Consideration and pass journal entries for payment made to
dissentient shareholders and close their accounts.
43. The following is the Balance Sheet of Rapid Company Limited

Issued Share Capital of Goodwill 30,000
Rs10 each 1,50,000 Fixed Assets (Cost less
Trade Liabilities 60,000 Depreciation) 50,000
Floating Assets 80,000
Profit and Loss A/c 50,000
2,10,000 2,10,000
Transparent Company Limited agreed to take over the business of Rapid Company
Limited. The shareholders of Rapid Limited agreed to accept shares of Transparent
Company Limited on the basis that the share of Transparent Company Limited were
worth Rs12.50 and that of Rapid Company Limited worth Rs5 each, which is taken as
the basis for calculating Purchase Consideration.
The purchasing Company took over fixed and floating assets only. Trade liabilities
were not taken over. Calculate the Purchase Consideration and give the Revised
Value of Assets.
SECTION C TYPE QUESTIONS
44. The following is the financial position of Sweet Limited and Spicy Limited on 31 st
March, 2015.
Liabilities Sweet Spicy Assets Sweet Spicy

Equity Shares of Land & Buildings 30,000 -
Rs100 each fully Plant &
paid 1,00,000 60,000 Machinery 1,10,000 50,000
6% Debentures of Stock 16,000 8,000
Rs10 each 20,000 - Debtors 14,000 9,000
Reserve Fund 34,000 - Cash 3,000 1,000
Dividend
Equalization Fund 4,000 -
Employees
Provident Fund 3,000 -
Profit & Loss A/c 2,000 -
1,73,000 68,000 1,73,000 68,000
The two companies agreed to amalgamate to form a new company called Bitter
Company Limited. The authorised capital of Bitter Company Limited is 1,00,000
Page 75 of 89
equity shares of Rs10 each. The assets of Sweet Limited are taken over at a reduced
valuation of 10% with the exception of Land and Buildings which are accepted at
book values.
Both the companies to receive 5% of the valuation of their respective business as
goodwill. The entire purchase price is to be paid by Bitter Company Limited in fully
paid shares. In return for debentures in Sweet Limited, debentures of the same
amount and denomination are to be issued by Bitter Limited. Calculate the Purchase
Consideration and Prepare opening Balance Sheet of Bitter Company Limited.
45. National Company Limited and Regional Company Limited carrying on similar
business decided to amalgamate and a new company International Company Limited
is to be formed to take over the assets and liabilities of both the companies and it is
agreed that fully paid equity shares of Rs100 each shall be issued b the new company
to the value of net assets of each of old companies.
Liabilities National Regional Assets National Regional

Equity Shares of Goodwill 5,000 2,000
Rs50 each fully Land & Buildings 17,000 10,000
paid 50,000 40,000 Plant &
General Reserve 20,000 - Machinery 24,000 16,000
Profit & Loss A/c 3,000 - Furniture 5,000 7,500
Sundry Creditors 4,000 8,000 Stock 10,000 7,500
Bills Payables 4,000 - Cash 8,000 300
Bank Overdraft - 8,000 Debtors 12,000 7,000
Profit & Loss A/c - 5,700
81,000 56,000 81,000 56,000
All tangible assets are taken over at book values and goodwill of National Company Limited
is to be valued at Rs12,000 while that of Regional Company Limited is nil. Prepare the
necessary ledger accounts in the books of both the companies.
46. On 31st March, 2017 the Balance Sheet of Ajantha Limited was as follows;

Rs10 each 5,00,000 Fixed Assets 1,75,000
General Reserve 2,50,000 Bank balance 50,000
Current Liabilities 1,50,000 Other Current Assets 6,50,000
9,00,000 9,00,000
Ajantha Limited was to be acquired by Ellora Limited on the following terms and
conditions;
1. Ellora Limited to take over the Assets (Except Bank) and the liabilities at 10%^
less than the book values.
2. The consideration is to be discharged by Ellora Limited in the form of equity
shares of Rs10 per share at a premium of Rs5 per share. Show ledger accounts in
the books of Ajantha Limited and give journal entrie3s in the books of Ellora
Limited.
Page 76 of 89
47. Reddy & Reddy Company plans for external reconstruction to come out to huge
financial disorders. The Balance Sheet of the company as on 31 st March, 2017 was as
follows;

2,00,000 Equity Shares Fixed Assets 20,00,000
of Rs10 each 20,00,000 Current Assets 12,00,000
Bank Overdraft 10,00,000 Cash 1,20,000
Sundry Creditors 12,00,000 Profit & Loss A/c 9,00,000
42,20,000 42,20,000
The scheme of reconstruction was as follows;

1. The new company shall have an authorised capital of Rs40,00,000 in equity shares
of Rs10 each. The company agreed to take assets and liabilities of Reddy &
Reddy Company Limited.
2. Sundry Creditors were paid 80% of their claims in shares of ne3w company of
Rs10 each in final settlement.
3. Fixed assets and current assets were r3evalued at Rs25,00,000 and Rs13,00,000
respectively by the new company.
4. Each share holder of Reddy & Reddy Company Limited shall receive one new
share of Rs10 each in the new company.
5. New Company also made a fresh issue of its shares to the extent of 50,000 shares
of Rs10 each to the public, the amount so re3ceived was utilized to pay off 50% of
the Bank Overdraft. The amount on public issue was duly received by the
company.
6. Liquidation expenses which amounted to Rs20,000 and Bills Payables Rs20,000
was paid fully by the new company.
Give opening journal entries and the Balance Sheet in the New Company’s books
after the reconstruction.
48. Vikas Limited and Mohith Limited carrying on similar business decided to
amalgamate and a new company Mohith Vikas Limited is to be formed to take over
the assets and liabilities of both the companies and it is agreed that fully paid equity
shares of Rs100 each shall be issued by the new company to the value of net assets of
each of the old companies.
Liabilities Vikas Mohith Assets Vikas Mohith

Equity Shares of Goodwill 10,000 4,000
Rs50 each fully Land & Buildings 34,000 20,000
paid 1,00,000 80,000 Plant &
General Reserve 40,000 - Machinery 48,000 32,000
Profit & Loss A/c 6,000 - Furniture 10,000 15,000
Sundry Creditors 8,000 16,000 Stock 20,000 15,000
Bills Payables 8,000 - Cash 16,000 600
Page 77 of 89
Bank Overdraft - 16,000 Debtors 24,000 14,000
Profit & Loss A/c - 11,400
1,62,000 1,12,000 1,62,000 1,12,000
The tangible assets are taken over at book values and goodwill of Vikas Limited is
to be valued at Rs24,000 while that of Mohith Limited is valueless. Prepare necessary
ledger accounts in the books of Vikas Limited and Mohith Limited as on the date.
49. On 31st March, 2017, the Balance Sheet of Mohan Limited was as follows;

12,500 Shares of Rs10 Goodwill 6,250
each 1,25,000 Other Fixed Assets 43,750
General Reserve 62,500 Bank 12,500
Current Liabilities 37,500 Other Current Assets 1,62,500
2,25,000 2,25,000
Mohan Limited is acquired by Rohan Limited on the following terms;

1. Rohan Limited to take over the assets except Bank balance and the liabilities at
10% less than book values.
2. The consideration is to be discharged by Rohan Limited in the form of equity
shares of Rs10 each at a premium of Rs2.50 per share.
Show the ledger accounts in the books of Mohan Limited and give journal entries
in the books of Rohan Limited.
50. The following is the balance sheet of Anand Limited as on 31st march, 2017.

Equity Shares of Rs10 Plant & Machinery 60,000
each 3,00,000 Stock 60,000
Debentures 1,50,000 Debtors 35,000
Creditors 50,000 Cash 5,000
5,00,000 5,00,000
The company went into voluntary liquidation and a new company called Sadanand
Limited was formed. The scheme of reconstruction is as under;
1. The authorised capital of Sadanand Company is 10,00,000 consisting of 1,00,000
shares of Rs10 each.
2. The new company to take over the assets at their book values and discharge 10%
debentures by the issue of equal number of 8% debentures.
3. The creditors to be discharged by the issue of 4,000 Equity shares of Rs10 each in
full settlement of their claims.
4. The entire purchase consideration is to be discharged by the issue of sufficient
number of equity shares of Sadanand Company Limited.
5. Liquidation expenses of Anand Limited Rs3,000 to be met by Sadanand Limited.
Prepare Realization A/c and Equity Shareholders A/c in the books of Andand
Limited and Balance Sheet in the books of Sadanand Limited.
Page 78 of 89
51. Knighthood Limited Pride Limited carrying on similar business decided to
amalgamate and a new company Emperor Limited is to be formed to takeover assets
and liabilities of both the companies and it is agreed that fully paid equity shares of
Rs100 each shall be issued by the new company to the value of net assets of each of
the old companies;
Liabilities Knighthood Pride Ltd Assets Knighthood Pride Ltd

Share Capital of Goodwill 5,000 2,000
Rs50 each 50,000 40,000 Land &
General Reserve 20,000 - Buildings 17,000 10,000
Profit & Loss A/c 3,000 - Plant &
Sundry Creditors 4,000 8,000 Machinery 24,000 16,000
Bills Payables 4,000 - Furniture 5,000 7,500
Bank OD - 8,000 Stock 10,000 7,500
Cash 8,000 300
Debtors 12,000 7,000
Profit & Loss - 5,700
A/c
81,000 56,000 81,000 56,000
All tangible assets are taken over at book values and goodwill of Knighthood Limited
is to be valued at Rs12,000 while that Pride Limited is value less. You are required to
prepare the necessary ledger accounts in the books of Knighthood Limited and
Amalgamated Balance Sheet in the books of Emperor Limited.
52. Following is the Balance Sheet of Amar Limited as on 31st March, 2017.

Equity Share Capital: Land & Buildings 1,00,000
20,000 Equity Shares of Plant & Machinery 50,000
Rs10 each 2,00,000 Stock & Debtors 75,000
12% Debentures 1,00,000 Cash 10,000
Sundry Creditors 50,000 Profit & Loss A/c 1,15,000
3,50,000 3,50,000
Amar Limited is liquidated and a new company called Akbar Limited is formed. The
new company takes over only the fixed assets and 12% Debentures of Amar Limited.
The Land and Buildings and Plant and Machinery are re valued at Rs1,75,000 and
Rs40,000 respectively. Amar Limited realized stock and debtors at Rs45,000 and
discharged creditors at 5% discount, liquidation expenses came to Rs1,500.
Assuming that the purchase consideration is discharged by the issue of equity shares
in Akbar Limited. Prepare necessary ledger accounts in the books of Amar Limited
and opening entries in the books of Akbar Limited.
53. Following are the Balance Sheets of Gold Limited and Silver Limited as 31 st March,
2017.
Liabilities Gold Ltd Silver Assets Gold Ltd Silver Ltd

(Rs) Ltd (Rs) (Rs) (Rs)
Page 79 of 89
Share Capital: Goodwill 1,40,000 -
Equity Shares of Stock 3,60,000 1,60,000
Rs10 each 6,00,000 4,00,000 Sundry debtors 4,00,000 4,40,000
Profit & Loss A/c 1,00,000 84,000
5% Debentures 1,40,000 -
Sundry Creditors 60,000 1,16,000
9,00,000 6,00,000 9,00,000 6,00,000
The two companies decided to amalgamate and form a new company called Diamond
Limited. The average profits of both the companies have been Rs1,20,000 and
Rs80,000 respectively.
Diamond Limited agreed to take over both the companies for a sum of Rs12,00,000
and also agreed to discharge all the liabilities. The purchase consideration is paid
Rs2,00,000 in cash and balance in equity shares of Rs10 each of Diamond Limited.
If anything is to be divided between the shareholders of the company in the same
proportion as the previously earned by them.
Prepare the ledger accounts in the books of both the companies and show the opening
entries in the books of Diamond Limited
54. Following is the Balance Sheet of Seetha Limited as on 31st March, 2017.

30,000 Shares of Rs10 Plant & Machinery 1,00,000
each fully paid 3,00,000 Stock at end 35,000
General Reserve 10,000 Sundry Debtors 70,000
Profit & Loss A/c 20,000 Bank A/c 5,000
Sundry Creditors 50,000 Preliminary Expenses 20,000
3,80,000 3,80,000
Geetha Limited acquired the business of Seetha Limited agreed to take over the assets
except the debtors and cash, but took over no liabilities except sundry creditors
agreeing to them out of the collection of Sundry Debtors which amounted to Rs65,000.
Geetha Limited discharged the purchase consideration by allotment of 10 equity shares

for every 20 shares held in Seetha Limited of Rs10 each at a market price of Rs20 each
and Rs5 in cash for every share in Seetha Limited.
The expenses of liquidation were Rs5,000 show the necessary ledger accounts to close
the books of Seetha Limited.
55. Charu Limited plans for external reconstruction to come out of huge financial
disorders, the balance sheet of the company on 31st March, 2017 was as follows;

Share Capital Fixed Assets 10,00,000
1,00,000 shares of Rs10 Current Assets 6,00,000
each 10,00,000 Cash 60,000
Bank OD 5,00,000 Profit & Loss A/c 4,50,000
Page 80 of 89
Bills payables 10,000
21,10,000 21,10,000
The scheme of reconstruction was as follows;

1. The New Company shall have an authorised capital of Rs20,00,000 in Equity
Shares of Rs10 each. The company agreed to take assets and liabilities of Charu
Limited.
2. Sundry Creditors were paid 80% of their claims in shares of the new company of
Rs10 each in final settlement.
3. Fixed assets and current assets were re valued at Rs12,50,000 and Rs6,50,000
respectively by the new company.
4. Each shareholder of Charu Limited shall receive one new share at Rs10 each in
the New Company.
5. New Company also made a fresh issue of its shares to the extent of 25,000 shares
of Rs100 each to the public; the amount so received was utilized to pay off 50% of
the bank overdraft. The amount on public issue was duly received by the
company.
6. Liquidation expenses which amounted to Rs10,000 and Bills Payables Rs10,000
was paid fully by the new company.
Give the opening journal entries and the Balance Sheet in the new company’s
books after reconstruction.
56. Given below are the balance sheets of Hindustan Limited and India Limited as at 31 st
March, 2018
Liabilities Hindustan India Ltd Assets Hindustan India Ltd

Share Capital: Goodwill 10,000 5,000
Shares of Rs10 Buildings 40,000 40,000
each 1,50,000 1,00,000 Machineries 60,000 30,000
Share Premium 4,500 2,000 Stock 18,000 8,000
General Reserve 10,000 5,000 Debtors 25,000 16,000
Profit & Loss A/c 1,500 1,000 Cash 47,000 26,000
Development
Rebate Reserve 6,000 3,000
12% Debentures 25,000 10,000
2,00,000 1,25,000 2,00,000 1,25,000
The two Companies amalgamated and formed a new Company called “Bharath Limited” on
the following terms;
1. Bharath Limited to assume liabilities of both the companies and continue to maintain
development rebate reserve for 3 more years.
2. Authorised share capital of Bharath Limited to be 75,000 equity shares of Rs10 each.
Page 81 of 89
3. Bharath Limited to issue 16,000 equity shares of Rs10 each at a premium of 20% and
pay cash at Rs2 per share to the shareholders of Hindustan Limited.
4. Bharath Limited to issue 14,000 equity shares of Rs10 each at a premium of 20% and
pay cash at Rs2 per share to the shareholders of India Limited.
5. Immediately after amalgamation, Bharath Limited to issue Right shares to the existing
shareholders in the ratio of 2:1. These shares are issued at a premium of 60%.
Pass journal entries and show Balance Sheet in the books of Bharath Limited.
57. Following is the Balance Sheet of Janatha Limited as at 31st March, 2017.

Equity Share Capital: Land & Buildings 2,00,000
Rs10 each 5,00,000 Plant & Machinery 1,75,000
Preference Share Capital Furniture & Fittings 45,000
@Rs100 each 2,00,000 Investments 60,000
General Reserve 1,50,000 Stock 3,00,000
Profit & Loss A/c 5,000 Debtors 50,000
Export Profit Reserve 50,000 Cash 1,70,000
Workmen Compensation
Fund 25,000
15% Debentures 25,000
Workmen Savings Fund 15,000
10,00,000 10,00,000
Mamatha Limited absorbs the business of Janatha Limited on the following terms;
A. Mamatha Limited to take over the assets (except Cash) and only 15% Debentures
of Janatha Limited.
B. The assets are to be taken over at the following values; Goodwill Rs50,000; Land
and Buildings Rs3,50,000; Plant and Machinery Rs1,50,000; Furniture and
Fittings Rs30,000; Investments Rs1,00,000; Stock Rs2,80,000 and Debtors
Rs40,000.
C. The purchase consideration to be discharged under;
1. Issue of 2,400 12% Preference Shares of Rs100 each to the Preference
Shareholders of Janatha Limited.
2. Issue of 7 Equity Shares of Rs10 each to the equity shareholders for every 5
equity shares held and
3. Payment of cash to the equity shareholders for the balance of purchase
consideration. Janatha Limited discharged the creditors at a discount of
Rs5,000 and incurred an expenditure of Rs7,500 towards liquidation
proceedings.
Pass Journal entries in the books of Janatha Limited.
58. Following is the Balance Sheet of Land Rover Limited as at 31st March, 2017

Equity Shares of Rs10 3,00,000 Land & Buildings 2,00,000
Page 82 of 89
each Plant & Machinery 60,000
10% Debentures 1,50,000 Stock 60,000
Cash 5,000
5,00,000 5,00,000
The Company went into voluntary liquidation and a new company called Tata
Limited was formed. The scheme of reconstruction is as under;
1. The new company to have authorised capital of Rs10,00,000 consisting of
1,00,000 equity shares of Rs10 each.
2. The new comp0any to take over the assets at their book values and discharge 10%
debentures by the issue of equal number of 8% Debentures.
3. The creditors to be discharged by the issue of 4,000 equity shares of Rs10 each in
full settlement of their claims.
4. The entire purchase consideration is to be discharged by the issue of sufficient
number of equity shares of Tata Limited.
5. Liquidation expenses of Land Rover Limited Rs3,000 to be met by Tata Limited.
6. The new company to issue 15,000 new shares to the public at par and purchase
new plant and machinery at a cost of Rs1,25,000.
Prepare Realization Account and Equity Shareholders Account in the Books of
Land Rover Limited, and pass Journal entries and Balance Sheet in the books of
Tata Limited.
59. Avenue Limited Hallmark Limited carrying on similar business decided to
amalgamated and a new company to be formed to take over the assets and liabilities
of both companies and it is agreed that fully paid shares of Rs10 each shall be issued
by the new company to the value of the net assets of each of the old companies.
Liabilities Avenue Hallmark Assets Avenue Hallmark

Share Capital of Goodwill 2,500 1,000
Rs50 each 25,000 20,000 Land &
General Reserve 10,000 - Buildings 8,500 5,000
Profit & Loss A/c 1,500 - Plant &
Sundry Creditors 2,000 4,000 Machinery 12,000 8,000
Bills Payables 2,000 - Furniture 2,500 3,750
Bank OD - 4,000 Stock 5,000 3,750
Debtors 6,000 3,500
Cash 4,000 150
Profit & Loss
A/c - 2,850
40,500 28,000 40,500 28,000
All tangible assets are taken over at book values and goodwill of Avenue Limited is to
be valued at Rs6,000; while that of Hallmark Limited was valueless. You are
Page 83 of 89
required to compute the purchase consideration and present the balance sheet of the
new company.
60. On 31st March, 2017 the Balance Sheet of Corporation Limited was as follows;

Rs10 each 2,50,000 Other Fixed Assets 87,500
General Reserve 1,25,000 Bank 25,000
Current Liabilities 75,000 Other Current Assets 3,25,000
4,50,000 4,50,000
Corporation Limited is to be acquired by Dawn Limited on the following terms;

1. Dawn Limited to take over the assets (excluding bank) and the liabilities at 10%
less than the book values.
2. The consideration is to be discharged by Dawn Limited in the form of equity
shares of Rs10 per share at a premium of Rs5 per share.
Show the ledger accounts in the books of Corporation Limited and give the
Journal Entries in the books of Dawn Limited.
61. On 31st March, 2017 the Balance Sheet of Asia Limited as under;

Authorized & Issued Goodwill 50,000
Capital: Sundry Creditors 1,25,000
1500 6% Preference Cash 5,000
Shares of Rs25 each 37,500 Profit & Loss A/c 95,000
400 Equity Shares of
Rs50 each 2,00,000
2,75,000 2,75,000
Preference dividend were in arrears for two years. A scheme of reconstruction agredd
upon was as follows;
1. A new company was to be formed called “New Asia Limited” with an authorised
capital of Rs2,50,000 all in equity shares of Rs100 each.
2. One equity share of Rs100 each fully paid in the new company to be issued in
exchange for every three preference shares in old company.
62. The following is the balance sheet of Blue Star Limited and Red Star Limited as on
31st March, 2017.
Liabilities Blue Star Red Star Assets Blue Star Red Star
Share Capital: Fixed Assets
Equity Shares of (cost less
Rs10 each fully depreciation) 1,40,000 75,000
paid 1,50,000 1,20,000 Current Assets
General Reserve 95,000 10,000 Stock 42,000 47,000
10% Debentures - 20,000 Trade Debtors 30,000 50,000
Trade Creditors 47,000 32,000 Balance at Bank 80,000 10,000
Page 84 of 89
2,92,000 1,82,000 2,92,000 1,82,000
Blue Star Limited to absorb Red Star Limited as on 31 st March, 2017 on the following
terms and conditions;
1. Blue Star Limited agreed to repay10% Debentures of Red Star Limited.
2. Blue Star Limited re value its fixed assets at Rs1,95,000 to be incorporated in its
books.
3. Shares of both companies to be valued on net asset basis after considering towards
value of 50,000 Goodwill of Red Star Limited.
4. The shareholders of Red Star Limited are allotted in full satisfaction of their claim
shares in Blue Star Limited. In the same proportion as the respective intrinsic
value of shares of the two companies bear to one another.
5. The cost of absorption Rs3,000 are met by Blue Star Limited
You are required to calculate;
1. Ratio of exchange of shares
2. Give the necessary ledger accounts in the books of Red Star Limited
3. Give the balance sheet of Blue Star Limited after absorption
63. Given below is the balance sheet of Rhea Company Limited and Titan Company
Limited which agreed to amalgamate and form a new company Saturn Company
Limited. The balance sheets of Rhea Limited and Titan Limited as on 31 st March,
2017 was as follows;
Liabilities Rhea Titan Assets Rhea Titan

Share Capital: Goodwill 75,000 25,000
Equity Shares of Machinery 50,000 40,000
Rs10 each 2,00,000 2,50,000 Patents 15,000 5,000
Profit & Loss A/c 80,000 - Investments 65,000 -
Reserve Fund 70,000 - Debtors 64,000 1,23,000
Accident Fund 10,000 - Stock 55,000 75,000
Creditors 60,000 90,000 Bank 26,000 2,000
Loans 20,000 70,000 Profit and Loss - 60,000
A/c
Buildings 90,000 80,000
4,40,000 4,10,000 4,40,000 4,10,000
The scheme of amalgamation is as under;
1. Rhea Limited declared dividend of 10% before takeover which was paid by it.
2. Saturn Limited takes over all assets and liabilities of Rhea Limited excluding loan
and goodwill at an agreed value of Rs1,00,000
3. Rhea Limited will receive from Saturn Limited Rs14,000 in cash and balance in
fully paid equity shares of Rs100 each.
4. Eventually Rhea Limited shall pay its loan together with accrued interest of
Rs1,000.
5. All the assets and liabilities of Titan Limited will be taken over by Saturn Limited
excluding Buildings for Rs75,000 to be paid in fully paid equity shares of Rs100
each in Saturn Limited.
Page 85 of 89
6. Goodwill of Titan Limited is considered worthless.
7. Titan Limited realized buildings at a profit of 25%.
You are required to prepare closing ledger accounts in the books of Rhea Limited
and Titan Limited and opening journal entries in the books of Saturn Limited
64. Given below is the balance sheet of Unsound Limited;

Shares of Rs10 each 4,00,000 Plant 1,30,000
Profit & Loss A/c 70,000 Patents 40,000
Sundry Creditors 3,00,000 Stock 70,000
Provision for Taxation 10,000 Debtors 2,00,000
Cash 15,000
Preliminary Expenses 5,000
7,80,000 7,80,000
The company adopted the following scheme;

1. The company to go into voluntary liquidation.
2. New company to be formed with an authorised capital of Rs8,00,000 to take over
all the assets and liabilities of the old company except provision for taxation.
3. The liability for taxation was calculated at Rs12,000 ws paid by the old company
Unsound Limited for which cash was retained and balance transferred to the New
Company.
4. Preferential creditors Rs10,000 in the above balance sheet to be paid in full.
5. Unsecured creditors to receive either 50 paise in a rupee of their claim or 6%
Debentures in the new company equivalent to their claim at par.
6. Shareholders of old company to be allotted one share in the new company of Rs10
each, Rs5 paid for every existing share held by them.
7. Reconstruction cost is met by new company Rs4,000
8. Half of the unsecured creditors in value opted out for immediate cash payment for
which purpose the new company made a call of Rs5 per share on the partly paid
shares allotted aforesaid. The new company valued all assets (except land and
buildings) taken over from old company at par.
You are required to ;
A. Show the statement of Purchase Consideration
B. Give the Journal entries in the books of Unsound Limited.
C. Prepare the Balance Sheet of New Company.
65. Aravali Limited and Himalaya Limited agreed to amalgamate and form a new
company Greater Himalaya Company which will take over all the assets and liabilities
of the two companies. in the case of Aravali Limited, the assets and liabilities are to
be taken over at book value for shares in Greater Himalaya Limited at the rate of 5
shares in Greater Himalaya Limited at 10% premium (i.e., Rs11 per share) for every
four shares in Aravali Limited. In the case of Himalaya Limited;
Page 86 of 89
1. The debentures of Himalaya Limited would be paid off by the issue of an equal
number of debentures in Greater Himalaya Limited at a discount of 10%
2. The holders of 6% Preference Shares of Himalaya Limited would be allotted four,
7% Preference shares of Rs100 each in Greater Himalaya Limited for every five
preference shares in Himalaya Limited.
3. The equity shareholders would be allotted sufficient shares in Greater Himalaya
Limited to cover the balance on their accounts after adjusting asset values by
reducing plant and machinery by 10% and providing 5% on sundry debtors.
The position of the two companies just prior to amalgamation was as follows;
Liabilities Aravali Himalaya Assets Aravali Himalaya

Equity share Plant &
Capital of Rs10 Machinery 8,00,000 8,00,000
each 4,00,000 5,00,000 Stock 65,000 60,000
6% Preference Debtors 95,000 50,000
Shares of Rs100 Profit & Loss
each - 3,00,000 A/c - 1,40,000
4% Debentures - 2,00,000 Bank 65,000 40,000
Profit & Loss A/c 5,00,000 -
Contingency
Reserve 50,000 -
10,25,000 10,90,000 10,25,000 10,90,000
Show the journal entries in the books of Greater Himalaya Limited and prepare its
Balance Sheet. Working should support your answer.
(Answer : Purchase consideration Aravali Limited Rs5,50,000, Himalaya
Limited Rs 2,77,500, Balance Sheet total Rs19,12,500)
66. The East Karnataka Limited sells its business to Basu Products Limited as on 31 st
March, 2017 on which date its balance sheet was as under;

Paid up Share Capital Goodwill 50,000
(2,000 Shares of Rs100 Freehold Property 1,50,000
each) 2,00,000 Plant & Tools 83,000
Debentures 1,00,000 Stock 35,000
Sundry Creditors 30,000 Bills Receivables 4,500
General Reserve 50,000 Debtors 27,500
Profit & Loss A/c 20,000 Cash at Bank 50,000
4,00,000 4,00,000
Basu Products Limited agreed to take over the assets (exclusive of cash and goodwill)
at 10% less than the book value to pay Rs75,000 for goodwill to take over the
debentures . The purchase consideration was to be discharged by the allotment to the
East Karnataka Company Limited of 1,500 shares of Rs100 each at a premium of
Rs10 per share and balance in cash.
Page 87 of 89
The cost of liquidation amounted to Rs3,000. Show Realisation Account,
Shareholders Account, Basu Product Limited Account, Bank Account in the books of
Vendor Company and entries in the books of Basu Products Limited.
(Answer: Purchase Consideration Rs1,90,000)
67. The Balance Sheet as on 31st March, 2017 of the Delta Company Limited was as
follows;

Share Capital: Lands & Buildings 65,000
1,000 Shares of Rs100 Machinery 22,000
each fully paid up 1,00,000 Furniture 3,000
8% Debentures 40,000 Stock 25,000
Cash 4,000
1,46,000 1,46,000
It was decided to reconstruct the company and for this purpose a new company called
Omega Company Limited was formed with a nominal capital of Rs1,00,000 divided
into 500 9% Preference shares of Rs100 each and 500 Equity shares of Rs100 each, to
take over the assets and liabilities of the Delta Company Limited on the following
terms;
A. The Debenture holders in Delta Company Limited are to accept 400 Preference
Shares.
B. The Shareholders of Delta Company Limited are to receive one equity share in
Omega Limited for every two shares held by them; and
C. The cost of liquidation amounting to Rs600 is paid by the new company.
D. The balance of preference shares has been issued and taken up by the public.
Give important ledger accounts in the books of Delta Company Limited and
Journal Entries in the books of Omega Company Limited.
(Ansser: Purchase Consideration Rs50,000; Realization Loss Rs38,000)
68. The books of Nova Limited contained the following balances on 31st March, 2017.
Particulars Debit (Rs) Credit (Rs)

Equity Share Capital of Rs10 each - 12,00,000
Sundry Creditors - 14,00,000
Patents and Trade Marks 12,00,000
Stock 3,00,000
Debtors 5,00,000
Cash 12,500
Preliminary Expenses 72,500
Profit and Loss A/c 1,15,000
26,00,000 26,00,000
Patents and Trade Marks were considerably over valued. The company is also not in
a position to raise further capital. The following scheme of reconstruction has
therefore been framed;
Page 88 of 89
1. The company will go into voluntary liquidation. A new company Supernova
Limited will be formed with an authorised capital of Rs20,00,000 to take over the
assets and liabilities.
2. Liability will be discharged by the new company to the creditors by payment of 25
paise in a rupee in cash and 50 paise in a rupee by the issue of 9% Debentures.
3. 1,20,000 shares of Rs10 each (Rs5 per share paid) will be issued to the
shareholders of Supernova Limited, the balance of Rs5 per share to be paid on
allotment.
4. Expenses of liquidation amounting to Rs17,500 to be paid by Supernova Limited.
5. The scheme was approved by all concerned. You are required to;
A. Prepare Realization Account and Shareholders Account in the books of
Supernova Limited. And
B. Draft the Journal Entries in the books of Supernova Limited.
Page 89 of 89

Amalgamation and Absorption of Companies

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CHAPTER 5

Amalgamation and Absorption of Companies

MERGERS AND ACQUISITIONS:

MEANING OF AMALGAMATION ACCORDING TO AS-14

AMALGATION IN THE NATRURE OF MERGER:

AMALGAMATION IN THE NATURE OF PURCHASE:

Amalgamation in the nature of purchase is an amalgamation which does not satisfy

Variants of Amalgamation of Companies:

DIFFERENCE BETWEEN AMALGAMATION, ACQUISITION AND EXTERNAL

Basis of Difference Amalgamation Acquisition External Reconstruction

ACCOUNTING TREATMENT FOR AMALGAMATION OF COMPANIES

There are two methods of accounting for amalgamation, viz.,

Differences between the Two Methods of Accounting

Pooling of Interest Method Purchase Method

It refers to the reserves to be maintained as per the requirements of any law or

Amalgamation Adjustment Account Dr

ACCOUNTING PROCEDURE FOR AMALGAMATION OF COMPANIES:

Steps involved in the accounting procedure of Amalgamation:

1. Calculation of purchase consideration

Purchase Consideration refers to the consideration payable by the Transferee

Although, purchase consideration refers to the total payment made by purchasing

1. Lump sum method

LUMP SUM METHOD:

1. Equity Shares of 16,000 @10 each 1,60,000

Total Purchase Consideration is Rs2,00,000 which is to be discharged by issue of 15,000

Calculation of Purchase Consideration:

NET ASSETS METHOD:

Particulars Amount (Rs)

1. The assets of X Limited are valued at Rs1,00,000

Particulars Amount (Rs)

NET PAYMENT METHOD:

Particulars Amount (Rs)

Particulars Amount (Rs)

For 4 shares – Number of shares issued 5 shares

For 40,000 shares – number of shares issued?

Step 3: Closing the Books of Transferor Company:

2. For transfer of various outsiders liabilities including debentures at their book

Step 4: Opening Entries in the Books of Transferee Company

This chapter has been divided into two parts;

PART – 1: AMALGAMATION IN THE NATURE OF MERGER

The problems have been divided according to variants of Amalgamation of Companies as

WHEN ONE OR MORE EIXSTING COMPANIES ARE ACQUIRED BY AN

Illustration No: 1 (Problem on Pooling of Interest Method with Statutory Reserve)

Liabilities Mahesh Suresh Assets Mahesh Suresh

Calculation of Purchase Consideration:

Particulars Amount (Rs)

In the case of Amalgamation in the nature of Merger

Date Particulars LF No Debit (Rs) Credit (Rs)

3 Liquidators of Suresh Limited A/c ……..Dr 5,37,000

Calculation of General Reserve to be shown in the Balance Sheet after Merger

Particulars Amount (Rs)

Particulars Amount (Rs)

Balance Sheet of Mahesh Limited as on 1st April, 2017

EQUITY AND LIABILITIES Note Amount (Rs)

Liabilities Moonligh Sunlight Assets Moonligh Sunlight

Step 1: Calculation of Purchase Consideration:

Step 2: Discharge of Purchase Consideration:

In equity shares of Moonlight Limited = Rs9,000lakh

Step 3: Closing the books of Transferor Company

In the Books of Sunlight Limited (Transferor Company)

Dr Realization Account (Rs in Lakh) Cr

Dr Equity Shareholders Account (Rs in lakh) Cr