Amalgamation

Step 1
Identify nature of Amalgamation
If the six conditions of amalgamation in nature of merger not satisfied then

it is treated as amalgamation in nature of purchase. If the information
provided in the question is not sufficient to decide the nature of
amalgamation or question is silent on the nature of amalgamation then it is
better to assume the nature of amalgamation as purchase.
Step 2
Method of accounting
After identifying the nature of amalgamation the method of accounting is

determined, it may be as follows:-
Nature of Amalgamation Method of Accounting
Merger Pooling of Interest Method
Purchase Purchase Method
Step 3
Purchase consideration
Purchase consideration is amount payable by transferee company

(purchasing accompany) to transferor company (selling company) at the
event of amalgamation. The payment may be in the mode of shares,
debentures and cash. The purchase consideration may be in lump sum
payment or based on net assets of selling company.
LUMP SUM NET ASSETS METHOD
PAYMENT/PAYMENT METHOD
Aggregate of consideration paid to Aggregate of assets taken over at fair
share holder (equity and value XXX
preference) in various forms Less:-
Liabilities taken over at agreed
amounts XXX
Net assets xxxx
Note:- In case of pooling of interest method the 90% shareholders of selling
company will get consideration in the form of equity shares. The
consideration paid by the purchase company may be in following cases
Particular Merger nature Purchase nature
Case 1 Consideration paid is more than Consideration paid is more
paid up capital of selling than net assets of selling
company company
Case 2 Consideration paid is less than Consideration paid is less
paid up capital of selling than net assets of selling
company company
Step 4
Discharge of purchase consideration
Purchase consideration is discharged by transferee company(purchasing co)

in various forms
After computation of purchase consideration it is discharged in the forms of
shares at different values, It may be issued by debentures and by cash etc.
Step 5
Accounting in the books of transferor company (Selling company)
The selling company has to close all accounts by transferring to realization

account except shareholders account. The shareholders account is prepaid
and closed after passing necessary entries.
Note:- Before attempting the question just clarify whether there is any
requirement of passing journal entries in the books of transferor(Selling Co)
Step 6
Computation of Profit / loss in case of amalgamation for transferee

company(Purchasing co)
As accounting standard 14 the profit or loss should be recognized in the

following way:-
Amalgamation in the nature
of merger
Particular Amalgamation in the Profit or Loss
nature of merger
Case 1 Consideration paid is It is loss for the purchasing
more than paid up company and the same should be
capital of selling adjusted against free reserves of
company selling company and purchasing
company
Case 2 Consideration paid is It is Profit for the purchasing
less than paid up capital company and the same should be
of selling company treated as capital reserve in the
books of purchasing company
Amalgamation in
nature of purchase
Particular Amalgamation in Profit or Loss
nature of purchase
Case 1 Consideration paid is It is loss for the
more than net assets of purchasing company
selling company and the same should be
treated as goodwill in
the books of purchasing
company
Case 2 Consideration paid is It is Profit for the
less than net assets of purchasing company
selling company and the same should be
treated as capital
reserve in the books of
purchasing company
Step 7
Accounting in the books of transferee (purchasing company)
Transferee company (Purchasing company) has to merge all assets and

liabilities taken over at fair value.
Note:- Before attempting the question just clarify whether there is any
requirement of passing journal entries in the books of transferee(Purchasing
Co).
In the most of the questions they will ask to prepare balance sheet after
amalgamation.
Let us take a small illustration:-

X Ltd and Z Ltd amalgamated on and from 1st January 2015. A new company
XZ Ltd was formed to take over the business of the existing companies.
Balance sheet as on 31.12.2014
Liabilities X Ltd Z Ltd Assets X Ltd Y Ltd
Equity share 60,00,000 70,00,000 Sundry 85,00,000 75,00,000
capital Rs.10 Fixed assets
General 15,00,000 20,00,000 Investment 10,50,000 5,50,000
reserve
Profit & Loss 10,00,000 5,00,000 Stock 12,50,000 27,50,000
A/c
Statutory 5,50,000 2,00,000 Debtors 18,00,000 40,00,000
Reserves
12% 30,00,000 40,00,000 Bank & 4,50,000 4,00,000
Debentures Cash
Sundry 10,00,000 15,00,000
creditor
1,30,50,000 1,52,00,000 1,30,50,000 1,52,00,000
Z Ltd issued enough number equity shares for the net assets , compute
purchase consideration and mode of discharge thereof draft the balance
sheet of XZ Ltd. After amalgamation.
Solution:-
Step 1:-
Nature of amalgamation
As the question is silent about nature of amalgamation, it is assumed as
amalgamation in the nature of purchase.
Step 2:-
Method of accounting
It is assumed the nature fo amalgamation is purchase then the method of
accounting will be purchase method.
Step 3:-
Purchase consideration
The information related to purchase consideration is not given in the
question and it is clearly mentioned that is discharged based on net assets of
selling companies.
Computation of Net Assets
Particular X Ltd Z Ltd
Assets
Sundry fixed assets 85,00,000 75,00,000
Investment 10,50,000 5,50,000
Stock 12,50,000 27,50,000
Debtors 18,00,000 40,00,000
Cash and Bank 4,50,000 4,00,000
Total(A) 1,30,50,000 1,52,00,000
Liabilities
12% Debentures 30,00,000 40,00,000
Sundry Creditors 10,00,000 15,00,000
Total(B) 40,00,000 55,00,000
Net Assets(A-B) 90,50,000 97,00,000
Step 4:-
Discharge of purchase consideration
Purchase consideration is discharged by XZ Ltd in the forms of equity shares.
The number of shares to be issued to X Ltd is Rs.90,50,000/Rs.10=905000
shares
The number of shares to be issued to X Ltd is Rs.97,00,000/Rs.10=970000
shares
Step 5:-
Accounting in the books of transferor company (Selling company)
In the question it is not mentioned to prepare ledgers in selling company
Step 6:-
Computation of Profit / loss in case of amalgamation for transferee
company(Purchasing co)
Amalgamation in nature of
purchase
Particular Amalgamation in Profit or Loss
nature of purchase
1 Consideration paid is No loss , No profit
equal to net assets of
selling company
Step 7:-
Accounting in the books of transferee (purchasing company)
Journal entries have not been asked for in the question.
Amalgamated Balance sheet
Balance sheet of X ltd as at 1st January 2015.
Particulars Note Amount
EQUITY AND LIABILITIES
Shareholder’s funds
Share capital 1 1,87,50,000
Reserves and surplus 2 7,50,000
Non-current Liabilities
Long term borrowings
{30,00,000+40,00,000} 70,00,000
Current liabilities
Trade payables 25,00,000
Total 2,90,00,000
ASSETS
Non-current assets
Fixed assets
[85,00,000+75,00,000] 1,60,00,000
Non-Current Investment
[10,50,000+5,50,000] 16,00,000
Non-current assets(amalgamation 7,50,000
adjustment) 40,00,000
Current assets 58,00,000
Inventories[12,50,000+27,50,000]
Trade Receivables[18,00,000+40,00,000] 8,50,000
Cash and Cash Equivalent
[4,50,000+4,00,000]
Total 2,90,00,000
Notes to the financial statements

Share capital
Particular Amount
Authorised
Issued, subscribed and fully paid up
18,75,000 equity shares of Rs.10 each 1,87,50,000
Reserves and surplus
Particular Amount
Statutory reserves 7,50,000

Amalgamation

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Step 1

Identify nature of Amalgamation

If the six conditions of amalgamation in nature of merger not satisfied then

After identifying the nature of amalgamation the method of accounting is

Purchase consideration is amount payable by transferee company

Discharge of purchase consideration

Purchase consideration is discharged by transferee company(purchasing co)

Accounting in the books of transferor company (Selling company)

The selling company has to close all accounts by transferring to realization

Computation of Profit / loss in case of amalgamation for transferee

As accounting standard 14 the profit or loss should be recognized in the

Transferee company (Purchasing company) has to merge all assets and

Let us take a small illustration:-

Notes to the financial statements

Reserves and surplus

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