CHAPTER

14
AMALGAMATION

What we will study in this chapter

Amalgamation – Meaning, Purchase consideration,
Types of Amalgamation: Merger, Purchase
Amalgamation
Accounting in the books of purchaser, Pooling of interest method, Purchase method,
Accounting in the books of vendor,
Inter company debt, Inter company stocks,
Distribution of shares among partners

Provisions in very brief of Companies Act 2013,

regarding Compromise, Arrangement, Merger &
Amalgamation:
(These are all procedural aspects and the accounting will be as per AS-14
only as was done till now)

Company can Compromise or make arrangement with creditors

(including debenture holders) or members or a class of creditor
or members. U/s 230, 231, 232.
A company can make compromise or arrangements. Arrangements includes re-orgnisation
of share capital by consolidation of shares of different classes or division of shares in to
shares of different classes or by both.
Such compromise or arrangement shall be agreed to (at a meeting convened by Tribunal)
by three fourth (3/4th ) in value of creditors or a class of creditors or members or a class of
members and if sanctioned by Tribunal it will be binding on all.
If at least 90% in value agree to scheme by an affidavit then Tribunal may dispense with
calling of the meeting.
If Tribunal is satisfied that compromise or arrangement as sanctioned can not be
implemented and company is unable to pay its debts as per the scheme, then it can order
winding up.
Compromise or arrangement proposed may be part of a scheme of reconstruction of a
company or merger or amalgamation of two or more company, then Tribunal will order
accordingly.
Amalgamation
When an existing company takes over business of one or more companies, it is known as
merger by absorption & here transferor & transferee both are referred as merging
companies.
When a new company is formed to take over business of two or more companies, it is
known as merger by formation of new company & here transferor companies are
referred as merging companies.
A scheme involves division (commonly known as demerger) when property & liabilities of a
company are divided & transferred to two or more companies which may be an existing
company or a new company.

Merger & Amalgamation of Companies U/s 233, 234, 235, 236 &
237.
U/s 233(1) Merger or amalgamation between (i) two or more small companies (ii)
holding company & its wholly owned subsidiary company or (iii) such other class or classes
of companies as may be prescribed.
Objections to proposed scheme from Registrar & official liquidator shall be invited &
considered at general meeting and scheme be approved by members or a class of members
holding at least 90% of the total number of shares.
Each company to file declaration of solvency to the registrar. Scheme shall be approved by
at least 90% in value of the creditor or a class of creditor of the respective company.
Copy of this approved scheme to be filed to Central Govt., Registrar & official liquidator. The
central govt after considering the objections & suggestions received from Registrar & official
liquidator, shall register and issue confirmation to the companies or may refer it to the
Tribunal to consider the scheme u/s 232. Tribunal may pass or order u/s 232 or may
confirm the scheme.
Amalgamation involving Foreign Co.: U/s 234 Central govt may make rules in
consultation with RBI for amalgamation with foreign companies. Rest of the provisions of
this chapter shall apply as it is.
Acquisition of shares of shareholders dissenting to the scheme of Amalgamation:
U/s 235 Scheme shall be approved by holder of not less than 90% in value of share whose
transfer is involved (other than the shares held by transferee company or its nominee or its
subsidiary company), then transferee can give notice to dissenting shareholder to acquire
their shares at the same terms as those of the consenting shareholders then (unless
otherwise ordered by Tribunal on an application by dissenting shareholder) transferee shall
be entitled and bond to acquire those shares.
Purchase of Minority shareholding: U/s 236 An acquirer or a person or a group of
person becoming holder of 90% of issued equity share capital of a company, then they shall
notify the company of their intention to buy the remaining equity share capital. Price to be
determined by a registered valuer. The minority shareholder can themselves offer their
shares.
Power of Central Govt. order amalgamation of companies in public interest: U/s
237 When Central Govt. is satisfied that it is essential in the public interest that two or more
companies shall amalgamate, it may order ( to be notified in official gazette) for
amalgamation in to a single company with such terms & conditions as may be specified.
Every member, creditor or debenture holder of transferor company shall have as nearly as
may be the same interest and rights in the transferee company as it had in the transferor
company. If such interest & rights are less then they will be entitled for compensation.

562
 Amalgamation

AMALGAMATION
Nature of arrangement Before After
Amalgamation A Ltd. + B Ltd.  C Ltd.
Absorption M Ltd. + N Ltd.  M Ltd.
External Reconstruction X Ltd.  New X Ltd.
 
Companies known as Vendor company Purchaser company
Transferor company Transferee company
Amalgamating company Amalgamated company
(Except M Ltd.)
Note: It doesn’t include takeover of control by acquisition of shares of acquired co. or acquisition of
some or all assets of other co. whereby that other co. doesn’t get dissolved.

AMALGAMATION, ABSORPTION & EXTERNAL RECONSTRUCTION

Amalgamation & Absorption External Reconstruction

(Covered by AS-14) (Not covered by AS-14)

It will be accounted similar to

Purchasing co./ Vendor co./ Purchase Method
Amalgamated co./ Amalgamating co./
Transferee co. Transferor co.

It is treated as It is treated as
Merger Purchase Merger Purchase
if all conditions if any one or
of AS-14 para more condition
29 are fulfilled is not fulfilled
 
Account by Account by In both the cases, accounting to close the books of
pooling of purchase account is same by opening realisation a/c. AS-14
interest method method is silent about accounting in the books of vendor. It may
be because the books of account anyhow have to be
closed and doesn’t require any special treatment

563
Amalgamation

INTRODUCTION
A Company can purchase/ acquire/take-over the business of (1) Proprietory concern/ partnership
firms or (2) Another company. This in general is known as purchase/ acquisition/ take over of
the business. And the acquisition of business of a company by another company is specifically known
as Amalgamation/ Absorption/ External reconstruction.

15.1. Explain the term Amalgamation Absorption & Reconstruction

 Amalgamation: When a new company (Amalgamated company/purchasing company) is formed
to take-over the business of two or more existing companies (amalgamating company/vendor
company), it is called amalgamation.
Example: A ltd and B ltd two existing companies are merged in to form a new company C Ltd is
an example of Amalgamation. Here X Ltd will be liquidated. Here A Ltd & B Ltd will be dissolved.

 Absorption : When an existing company takes over the business of one or more existing
companies, it is called absorption.(In AS-14 the absorption is also referred to as amalgamation
only)
Example: M ltd and N ltd are two existing companies and want to merge in to one. M Ltd
acquires the business of N ltd this is an example of Absorption. Here N Ltd will be dissolved.
Note : In Amalgamation & Absorption there is combing of two or more business & are covered by
AS-14

 External Reconstruction: When a new company is formed to take over an existing company it
is known as external reconstruction.
Example: Business of X ltd is transferred in to a new X Ltd is an example of External
reconstruction. Here X Ltd will be dissolved.
 Here there is only one business getting converted in to new name, no combining of business,
hence not an Amalgamation as per AS-14.

 Internal Reconstruction: It is an arrangement whereby a company makes changes in its

Capital Structure and book value of other Assets & Liabilities without closing (Liquidating) the
company.
Example: Z ltd reduces its capital and liability and uses this credit to writes off accumulated
assets and reduce assets to its proper value. This is an example of internal reconstruction.

Purchasing Company = Amalgamated Company = Transferee Company

Vendor Company = Amalgamating Company = Transferor Company

PURCHASE CONSIDERATION

15.2. What is purchase consideration (pc)

 AS-14 defines consideration for the amalgamation means the aggregate of the shares & other
securities issued and the payment made in the form of cash or other assets by the transferee co.
to the shareholders of the transferor co. (Therefore payment to debenture holders/creditors etc
can be excluded from the figure of purchase consideration and be accounted separately.)
 Shares & other securities issued be valued at fair value which may be value fixed by statutory
authorities.

564
 Amalgamation
 Other assets given up as consideration should be valued at market value but if market value is not
ascertainable then the net book value of such asset can be taken.

15.3. Explain the usual ways of calculating purchase consideration

15.3.1. Purchase consideration is the amount (price) to be paid by Purchasing Co. to Vendor Co.
Students may encounter different situations in the exam, to tackle the same following points are
relevant. Details about consideration may be given in question in either of the following 3 ways.
1) Calculated lump-sum amount may be given.

2) Payment Basis: What are the payments to be made will be given like how many shares,
debentures etc to be issued & how much cash to be paid will be given. Then the aggregate
value of all such items(considering issue at par, premium or discount as the case may be)
will be the purchase consideration.
P.C. = (No. of shares X issue price) + (No. of debentures X issue price) + cash / other assets
etc.

Illustration 1: A Limited agreed to acquire the business of E Limited as on 31 st December, 2011.

when E Limited had capitals as under:
10,000 6% Preference shares of Rs.10 each = Rs.1,00,000
20,000 Equity shares of Rs.10 each = Rs.2,00,000
& 7% Debentures of = Rs.1,00,000
The consideration payable by A Limited was agreed as under:
1. The preference Share-holders of E Limited were to be allotted at 8% preference Shares of Rs.
1,10,000.
2. Equity Share-holders to be allotted six Equity Shares of Rs.10 each issued at a premium of 10%
and Rs.3 cash against every five shares held.
3. 7% Debenture holders of E Limited to be paid 8% premium by 9% Debenture at 10% Discount.
Calculate Purchase consideration on Payment basis.

Solution:
Computation of Purchase consideration (By Payment Method)
For Whom Amount In the form of
For Pref. shareholder: 8% Pref. shares at par
Their Capital
1,00,000 1,10,000
Premium payable to them
10,000
For Equity shareholder Capital – 2,40,000
20,000 Equity share
 6  24,000 share @ 11 2,64,000 Premium – 24,000
5
20000 12,000 Cash
Cash given x3
5
Purchase consideration as per in AS-14 3,86,000

For 7% Debenture Holder 9 % Debentures

Debenture Capital 1,00,000 Debenture Capital : 1,20,000
+ 8% premium payable to them 8,000 1,08,000 Discount on debenture – 12,000
4,94,000 Net Value 1,08,000

As per AS-14 Purchase consideration is what is payable to the shareholders of transferor company,
and hence it can be accounted at Rs.3,86,000 and liability of debenture holders of A be taken over
together with other liability and discharged by E by allotting its debenture to them.

565
Amalgamation

3) Assets taken over Basis: If (1) OR (2) as above is not given then this method will be
applicable.
P.C.= Assets taken at agreed value + Goodwill if to be considered (-) Liabilities taken over
Fictitious assets or Exp. not w/off should not be added and General Reserve, funds etc. which
represents undistributed profit should not be deducted while calculating P.C. as above.

Illustration 2: B. Ltd. had the following Balance-Sheet as on 31st March, 2011. C Ltd is acquiring B
Ltd.
B. Ltd.
Liabilities Rs. Assets Rs.
Share Capital 50000 shares of 50,00,000 Fixed Assets 83,00,000
Rs.100 each
Capital Reserve 10,00,000 Current Assets 69,00,000
General Reserve 36,00,000
Unsecured Loans 22,00,000 Investment 17,00,000
Sundry Creditors 42,00,000
Provision for taxation 11,00,000 Good Will 2,00,000
171,00,000 171,00,000
For the purposes of the amalgamation the goodwill of B. Ltd. is considered valueless. There are also
arrears of depreciation in B. Ltd. amounting to Rs.4,00,000. Calculate Purchase consideration on net
asset basis.
Solution:
Purchase Consideration: On Net Asset Basis
Fixed Asset (83,00,000 – 4,00,000) 79,00,000
Current Asset 69,00,000
Investment 17,00,000
1,65,00,000
Less Liabilities:
Loans 22,00,000
Creditors 42,00,000
Provision for Taxation 11,00,000 75,00,000
Purchase Consideration for acquiring ‘B’ Ltd. 90,00,000

15.3.2. Note Some Special Points regarding Purchase Consideration:

1) When inter company share holding is involved, then calculation of purchase consideration &
accounting will require certain adjustments which is dealt with separately in this chapter.
2) For calculating share exchange ratio/share swap the shares of both the Co's (i.e.
acquiring/amalgamated /purchaser co.) and (acquired/amalgamating co./ vendor) can be
calculated on (a) Market value (b) Book value basis (c) Intrinsic Value basis or (d) EPS X P.E.
ratio basis or any combination of this.
These terms are explained below:
 Earning Per Share (EPS) = Profit After Tax (PAT) & after preference dividend ÷ Number of Equity Shares
 Price Earning Ratio(PE Ratio) = Market Price ÷ EPS
 Market Price = EPS  PE Ratio
 Book Value (Intrinsic Value) per share = Net Worth ÷ No. of Equity Shares
 Return on Equity(ROE) = PAT & after preference dividend ÷ Net Worth X 100
 Dividend Pay Out Ratio = Dividend ÷ PAT X 100
 Retention Ratio = 100% - Dividend Pay Out Ratio
 EPS Growth Rate = ROE X Retention Ratio
 Worth of a Shareholder = No. of Shares held X Market Price

566
 Amalgamation

ACCOUNTING FOR AMALGAMATIONS

 The Institute of Chartered Accountants of India has issued Accounting Standard-14 (AS-14).
“Accounting for Amalgamations” which states the procedures for accounting for amalgamations
(with effect from1.4.1995).
 It may be noted that there will be changes only in accounting procedures with regard to
amalgamation and absorption.
 For reconstruction, both external and internal, there will be no change and the same accounting
procedures as earlier will follow (Earlier only Purchase Method was there) .
 The salient features of the accounting standard and accounting procedures are covered in this
book.

15.4. Explain meaning of amalgamation as defined in As –14 :

 The Amalgamation is defined in the Standard as: Amalgamation means an amalgamation
pursuant to the provisions of the Companies Act, 1956 or any other statute, which may be
applicable to, companies.
 In the fact, amalgamation may take the shape of merging of one company with another or
merging of two or more companies to form a new company. In case of amalgamation, the
amalgamating company/ies) is/are dissolved without winding up and gets merged with the
amalgamated company.
 In the notes above we have seen that amalgamation means merging of two or more companies to
form a new company and absorption means taking over of the business of one or more
companies by another existing company. However, in terms of this Accounting Standard, this
distinction between amalgamation and absorption is not of any significance.

15.5. What are the types of amalgamation

Briefly explain the types of amalgamation (May 2012)

 Accounting problems of amalgamation are dealt with in AS-14 according to the type of
amalgamation.
 Types of Amalgamation: Amalgamation for accounting purposes can be classified into two
categories.
(i) Amalgamation in the nature of merger, and
(ii) Amalgamation in the nature of purchase.

15.6. What is Amalgamation in the Nature of merger

What are the conditions that are to be satisfied for ‘Amalgamation in the nature of merger’ is an Amalgamation? [Nov,2006]
[May,2001]
As per Accounting Standard-14, what are the conditions which must be satisfied for an amalgamation in the nature of merger?
[Nov,2009]

 Amalgamation in the Nature of Merger is a type of amalgamation, which satisfies all the following
conditions.
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90 percent of the face value of the equity shares of the
transferor company (other than the equity shares already held 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.

567
Amalgamation
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) 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.
 In this type of amalgamation, there is genuine pooling of assets and liabilities of the combining
entities. In addition, equity shareholders of the combining entities continue to have a
proportionate share in the combined entity.
 The accounting treatment of such amalgamations should ensure that the resultant figures of
assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of
the amalgamating companies.

15.7. What is amalgamation in the nature of purchase

 Amalgamation may be considered in the nature of purchase when any one or more of the five
conditions specified for amalgamations in the nature of merger is not satisfied.
 These are amalgamations which are in effect a mode by which one company acquires another
company and hence, the equity shareholders of the combining entities do not continue to have a
proportionate share in the equity of the combined entity or the business of the acquired company
is not intended to be continued after the amalgamation.

15.8. What are the Methods of Accounting for Amalgamations

Distinguish between (i) The pooling of interests method and (ii) The purchase method of recording transactions relating to
amalgamation. [May,2002]
Briefly explain the methods of accounting for amalgamation as per Accounting standard-14 [May,2004]
What are the two main methods of accounting amalgamation of companies? [Nov,2007]
Name two methods of accounting for amalgamations as contemplated by AS-14. [May,2009]
 It may be noted that the Accounting Standard deals with the accounting mechanism only in the
books of the transferee company.
 So far as the books of the transferor company are concerned, the normal procedures of
accounting through the realisation accounts as explained later in this book will be followed for
both the types of amalgamations.
 The accounting procedures for amalgamation in the books of the transferee company will differ
depending upon the type of amalgamation. There are two methods of accounting.
(i) Pooling of Interest Method; and
(ii) Purchase Method.

IN THE BOOKS OF PURCHASING COMPANY (Transferee Company)

15.9. What is Pooling of Interest Method

 This method of accounting is applicable for amalgamation in the nature of merger.
 In this case, the amalgamation is accounted for as if the separate business of the amalgamating
companies were intended to be carried on by the transferee (i.e. amalgamated) company.
 Accordingly, only minimal changes are made in aggregating the individual financial statements of
the amalgamating companies.

568
 Amalgamation
 The following factors should be taken into consideration while making accounting entries in this
method.
1. In the books of the transferee company, the assets, liabilities and reserves (whether capital
or arising on revaluation) of the transferor company should be recorded at their existing
carrying amounts and in the same form as at the date of amalgamation.
2. The balance of the Profit and Loss Account of the transferor company should be aggregated
with the corresponding balance of the transferee company or transferred to general reserve,
if any.
3. This reflects the fact that the entries are simply merged together. No goodwill account should
be accounted for.
4. The difference between the amount recorded as share capital issued (plus any additional
consideration in the form of cash or other assets) and the amount of share capital of the
transferor company should be adjusted against the reserves of transferee company.
 The purpose is that all items (including reserves) of the transferor company should be recorded at
their book value and in the same form as on the date of amalgamation.

15.10. Give Draft entries in case of pooling of interest method

 The following journal entries are appropriate for incorporating the financial statements of the
Transferor Company in the books of transferee Co. (Purchaser Co.)

(1) On amalgamation of the business entry for purchase consideration due.

Business Purchase A/c Dr. (with the amount of purchase consideration)
To Liquidator of Transferor Company a/c

(2) When assets, liabilities and reserves are taken-over from the transferor company and
incorporated in the books.
Sundry Assets A/c (individually) Dr. (book value)
To Sundry Liabilities A/c (individually) (book balance)
To Profit and Loss A/c (book balance)
To Reserves A/c (book balance)
To Business Purchase A/c (book value)
The difference between the debits and credits is adjusted in the reserves of the transferee
company.
If it is credit short credit it to capital reserve. If it is debit short and there is capital reserve
balance adjust against it otherwise adjust against revenue reserves. If revenue reserves are also
exhausted then if profit & loss account balance is there, transfer it to reserves and then adjust the
difference against it.

(3) When the purchase consideration is satisfied.

Liquidator of Transferor Company a/c Dr. (Purchase consideration amount)
To Share Capital a/c (Share capital issued)
To Share Premium a/c (premium amount)
(or debit Discount on issue of shares)
To Cash a/c (for fractional shares & dissenting shareholders)
To Non-cash Consideration a/c (fair value-for dissenting shareholders)

(4) For Liquidation expenses paid.

P & L a/c/General Reserve a/c Dr.
To Cash/Bank a/c

569
Amalgamation
If acquisition/ Winding up expenses are paid & borne by Purchasing Co.

Illustration 3: The following are the Balance Sheet of A Co. Ltd. and B Co. Ltd. as on 30th
September, 2011.
A Co. Ltd.
Liabilities Rs. Assets Rs.
Share Capital- Buildings 1,50,000
50,000 Equity Shares of Rs.10 Machinery 5,50,000
each, fully paid-up 5,00,000 Stock 80,000
General Reserve 1,70,000 Debtors 70,000
Profit and Loss A/c. 30,000 Cash 15,000
12% Debentures of Rs.100 each 1,00,000
Trade Creditors 50,000
Employees Provident Fund 15,000
8,65,000 8,65,000

B Co. Ltd.
Liabilities Rs. Assets Rs.
Share Capital Machinery 2,50,000
30,000 Equity Shares of Rs.10 3,00,000 Stock 40,000
each Debtors 50,000
40,000 Less: Prov. for Doubtful Debt 5,000 45,000
Trade Creditors Cash 5,000
3,40,000 3,40,000
The two companies agree to amalgamate and form a new company called C. Co. Ltd. which takes
over all the assets and liabilities of both the companies on 1st October, 2011.
The purchase consideration is agreed at Rs. 6,61,500 and Rs. 3,15,000 for A Co. Ltd. and B Co. Ltd.
and show the opening entries in the books of C. Co. Ltd. Also prepare the opening Balance Sheet in
the books of C. Co. Ltd. as on 1st October, 2011. The authorised capital of C Co. Ltd. is 2,00,000
equity shares of Rs.10 each.

Solution:
Amalgamation treated as Merger in the Books of C Co. Ltd. (Purchaser Co.)
(Accounted by Pooling of Interest Method)

1 Business Purchase a/c Dr. 9,76,500

To Liquidator of A Co. Ltd a/c 6,61,500
To Liquidator of B Co. Ltd. a/c 3,15,000
(Purchase consideration due)

2 Building a/c Dr. 1,50,000

Machine a/c Dr. (5,50,000 + 2,50,000) 8,00,000
Stock a/c Dr. (80,000 + 40,000) 1,20,000
Debtors a/c Dr. (70,000 + 50,000) 1,20,000
Cash a/c Dr. (15,000 + 5,000) 20,000
To Business Purchaser a/c 9,76,500
To Creditors a/c (50,000 + 40,000) 90,000
To Debentures a/c 1,00,000
To Employee Provident Fund a/c 15,000
To Provision for Bad Debt a/c 5,000
To General Reserve a/c 1,70,000 + 30,000 - 1,76,500 (Bal fig) 23,500

570
 Amalgamation
(Asset, Liabilities and Profit, Reserves of vendor co.
recorded)

3 Liquidator of A Co. Ltd a/c Dr. 6,61,500

To Equity share capital a/c 6,61,500
(Purchase consideration paid)

4 Liquidator of B Co. Ltd a/c Dr. 3,15,000

To Equity Share Capital a/c 3,15,000
(Purchase consideration paid)

Balance Sheet of ‘C’ Co. Ltd.

As On 01.10.2011
Particulars Notes Rs.
1 3 4 5
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital 9,76,500
Reserves and surplus: General Reserve 23,500 10,00,000

(2) Share application money pending allotment --

(3) Non-current liabilities
Long-term borrowings: 12% Debenture 1,00,000

(4) Current liabilities

Trade Payables 90,000
Employee Provident Fund 15,000 1,05,000
TOTAL 12,05,000
II. ASSETS
(1) Non-current assets
Fixed assets: Building 1,50,000
Machinery 8,00,000 9,50,000

(2) Current assets

Stock in trade 1,20,000
Trade receivables 1,20,000
Less: Provision 5,000 1,15,000
Cash and cash equivalents 20,000 2,55,000
TOTAL 12,05,000

Here if the shares were given to Vendors of Rs.8,00,000 i.e. equal to the paid up capital of Vendor
Co. then there would not have arisen any difference in entry no. 2, to be adjusted in the reserves.
As a consequence in the balancesheet share capital will be less and reserves more by Rs.1,76,500.
But even when Rs.8,00,000 shares are given they should be divided among the share holders of the
two co. in the Ratio of their net worth i.e. in the ratio of 6,61,500 : 3,15,000.

15.11. Explain Purchase Method :

 This method of accounting is applicable for amalgamation in the nature of purchase.
 This will also be followed for external reconstruction etc., which are not covered by AS-14.
 The following factors should be considered while making accounting entries in this method:

571
Amalgamation
(i) In the books of the transferee company the assets and liabilities of the Transferor Company
should be incorporated at their existing carrying amount or
(ii) Or the consideration should be allocated to individual identifiable assets and liabilities on the
basis of their fair values.
(iii) The reserves (whether capital or revenue or arising on revaluation) of the transferor
company other than the statutory reserves should not be included in the financial statements
of the transferee company.
(iv) Any excess of the purchase consideration over the value of net assets of the Transferor
Company should be treated as goodwill and debited to goodwill account.
(v) On the other hand, if the purchase consideration is lower than the value of net assets
acquired, the difference should be credited to capital reserve.

15.12. Give journal Entries in case of purchase method

 The following journal entries are appropriate for incorporating the financial statements of the
Transferor Company in the books of transferee Co. (Purchaser Co.)

1) Business Purchase a/c Dr. With value of purchase consideration payable.

To Vendors a/c

2) Assets a/c Dr. All assets taken over with their respective values which
Purchasing Co.. wants to show/Agreed value.
To Business Purchase a/c Amount of Purchase consideration (as in entry 1)
To Liabilities A/c. Value at which take-over the liabilities.
In the above entry –
If debit is short, the difference (it is the extra purchase consideration paid) is Debited to Goodwill a/c
If Credit is short, the difference (it is less purchase consideration, hence capital profit) is credited to
Capital Reserve a/c

3) Vendor’s a/c Dr.

Share/Debenture Discount A/c Dr.
To Equity Share capital a/c Purchase Consideration discharged by issue of shares /
To Preference Sh. capital a/c Debentures (at par, premium or discount) and cash
payment
To Debenture a/c
To Share/Debenture premium a/c
To Cash a/c

4) Goodwill/Capital Reserve a/c Dr. If acquisition / Winding up expenses

To Cash a/c are paid & borne by Purchasing Co.

Statutory Reserves: (Following entries required only in case of ‘Purchase Method’.)

5) If it becomes necessary to carry forward any statutory reserve of the transferor in the books of
the transferee for legal compliance, it is accounted by debiting ‘Amalgamation Adjustment
Account’ and crediting ‘Statutory Reserve Account’.
Amalgamation Adjustment a/c Dr. (with the amount)

572
 Amalgamation
To Statutory Reserve a/c.
6) The Amalgamation Adjustment Account should be disclosed as a part of other current or non-
current asset (depending on the period) in the balance sheet.
7) When the identity of the statutory reserve is no longer required to be maintained, both
Statutory Reserve Account and Amalgamation Adjustment Account should be reversed.
Statutory Reserve a/c Dr.
To Amalgamation Adjustment a/c
Note:
1) As per AS-14 Goodwill account should be written off over a period generally not exceeding 5
years unless higher period can be justified.
2) When shares/debentures are allotted by Purchasing Company at premium or at discount, then
at the time of passing the entries in the books of purchasing Company, share
capital/debenture A/c will be credited with its face value and Vendors A/c will be debited with
the total issue price. If issue price is more than face value, the difference will be credited to
share premium A/c and if the issue price is less, the difference will be debited to Discount A/c.
3) Once the No. of shares to be allotted are worked out based on their intrinsic values (fair value),
then whether they are recorded at their intrinsic value (fair value) or at par value, will not
make any difference because the Vendor Company will receive the same number of shares
and they have got the same market value whether we account in the books at intrinsic value
or at Face value.
By recording the shares at Face value the Purchasing Co. is benefited because they don’t
create Share Premium A/c ( a restricted reserve) which can be used only as per the specific
provisions of the Act and the other effect will be that the capital Reserve will get increased or
Goodwill will get reduced on take-over.
Such condition of accounting at par should be included in the amalgamation scheme itself.

Companies Act 2013 prohibits issue of shares at discount except sweat equity shares.

Illustration 4: The Indo-Gulf Co. Ltd. sells its business to the Continental Co. Ltd. as on December
31, 2011, on which date its Balance Sheet was as under:
Liabilities Rs. Assets Rs.
Paid-up Capital 2000 shares 2,00,000 Freehold property 1,50,000
Of Rs.100 each Good Will 50,000
Debentures 1,00,000 Plant and Tools 83,000
Trade Creditors 30,000 Stock 35,000
Reserve Fund 50,000 Bills Receivable 4,500
Profit & Loss Account 20,000 Sundry Debtors 27,500
Cash at Bank 50,000
4,00,000 4,00,000
The Continental Co. Ltd. agreed to take over the Assets (exclusive of cash at Bank and Goodwill) at
10 percent less than the book value, to pay Rs. 75,000 for Goodwill, and to take over the
Debentures.
The purchase consideration was to be discharged by the allotment to the Indo-Gulf Ltd. of 1,500
shares of Rs.100 each at premium of Rs.10 per share and the balance in cash.
The cost of the liquidation amounted to Rs. 3,000. Show the necessary journal entries recording the
transactions in the books of the Continental Co. Ltd and Balance-sheet ignoring its existing figures.
Solution:
In the Books of continental Co. Ltd (Purchaser Company)
Accounting by Purchase Method
1. Business Purchase a/c Dr. 2,45,000
To Liquidator of Indo-Gulf Ltd. a/c 2,45,000
(Purchase consideration due)

573
Amalgamation

2. Freehold Property a/c Dr. 1,35,000

Plant a/c Dr. 74,700
Stock a/c Dr. 31,500
Bills Receivable a/c Dr. 4,050
Debtors a/c Dr. 24,750
Goodwill a/c Dr. 75,000
To Business Purchase a/c 2,45,000
To Debenture a/c 1,00,000
(Asset, Liabilities acquired are recorded)

3. Liquidator of Indo-Gulf a/c Dr. 2,45,000

To Equity share Capital a/c 1,50,000
To Share Premium a/c 15,000
To Cash / Bank a/c 80,000
(Purchase consideration paid)

Balance Sheet of M/S Continental Ltd.

As On 31.12.2011
Particulars Notes Rs.
1 3 4 5
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital 1,50,000
Reserves and surplus: Share Premium 15,000 1,65,000

(2) Share application money pending allotment --

(3) Non-current liabilities
Long-term borrowings: Debenture 1,00,000

(4) Current liabilities

Short term Borrowing: Overdraft 80,000
TOTAL 3,45,000
II. ASSETS
(1) Non-current assets
Fixed assets
Tangible : Freehold property 1,35,000
Plant & Tools 74,700 2,09,700
Intangible : Goodwill 75,000 2,84,700

(2) Current assets

Stock in trade 31,500
Trade receivables 24,750
Bills Receivable 4,050 60,300
TOTAL 3,45,000

Working Notes:
1) Purchase Consideration (Net Asset Basis)
Freehold property 1,35,000
Plants 74,700 Purchase Consideration to be paid
Stock 31,500 as follows
Bills Receivable 4,050 Equity shares 1500 x 110 1,65,000
Debtors 24,750 Cash (Balance) 80,000
Goodwill 75,000

574
 Amalgamation
3,45,000
(–) Debentures 1,00,000
2,45,000 2,45,000

15.13 Table of Comparison - Accounting in the books of Purchasing

Company
Sr. Item Amalgamation in the nature of Amalgamation in the nature
No. Merger (Pooling of interest of Purchase (Purchase
method) method)
1. Assets & Liability of  All are taken over  All or some are taken over
transferor  Accounted at book value  Accounted at book value or
revalued value (fair value)
2. Reserve of transferor All are recorded as it is Not recorded
3. Statutory reserve of Already included in (2) above, Amalgamation adj. A/c. Dr.
transferor therefore no separate entry To statutory Res. A/c.
required.
4. Goodwill/ capital Difference between P.C. & paid up Difference between P.C. & net
reserve capital of transferor co. is adjusted asses taken over is either
in reserves goodwill or capital reserve
5. Liquidation or Reserves/ Profit & Loss a/c. Dr. Goodwill/capital reserve a/c. Dr.
amalgamation exp. To cash/bank a/c. To cash/bank a/c
incurred by
transferee co.
6. Stock reserve on inter Reserves/ Profit & Loss a/c. Dr. Goodwill/capital reserve a/c. Dr.
co. stock To stock reserve/ stock a/c. To stock reserve/stock a/c.
7. Inter co. debt. BP/creditor/loan Dr. BP/creditor/loan Dr.
(mutual debt) To BR/Debtor/loan a/c. To BR/Debtor/loan a/c.
cancelled
Note: Point no. 5, 6 & 7 are not specified in AS-14.

ENTRIES IN THE BOOK OF VENDOR (Transferor Company) TO CLOSE THE BOOKS

(In both the cases i.e. amalgamation in the nature of merger & amalgamation in the nature
Purchase, accounting will be same in the books of vendor. AS-14 is silent regarding accounting in the
books of Vendor/Transferor)

15.14. Draft journal Entries in the Books of Vendor ( Transferor) co.

1) All assets to be transferred to realisation account at book values except cash/Bank balance
unless these are taken over by the Purchasing Co.
Realisation a/c Dr.
To Assets a/c.

2) All liabilities are to be transferred to realisation a/c except Partners capital/share capital,
Reserves,
P& L a/c etc.
Liabilities a/c Dr.
To Realisation a/c.

575
Amalgamation
3) The amount of purchase consideration due.
Purchasing Co. A/c. Dr.
To Realisation a/c

4) Assets & Liabilities not taken over by Purchasing Company will be realised/ paid separately.
Cash a/c Dr. Assets sold
To Realisation A/c.
Realisation a/c Dr. Liabilities paid
To Cash A/c.

5) Expense of take over/winding up are also to be debited to realisation a/c., if Vendor Co. is to
bear the expenses.
Realisation a/c Dr.
To Cash a/c.

6) Capital a/c /Equity share capital a/c, Reserves-Surpluses, P&L a/c (Cr.), Realisation a/c (Cr.)
etc. will be transferred (Credited) to Partners/Equity shareholders A/c.
P & L a/c(Dr.), Miscellaneous Expenses & Balance of Realisation a/c(Dr.) will also be
transferred(Debited) to Partners/Equity shareholders a/c.
Note: The Profit, Reserves and Surplus or losses etc. of a Company belongs to its equity
shareholders in proportion to the No. of shares held by them.

7) Preference Share Capital & Debenture Capital if any will be transferred to Preference Share
Holder/ Debenture Holders a/c. Whenever the preference shares or debentures of the Vendor
Co. are to be settled at premium that means they will be paid something more than their
capital. In such cases, while transferring this capital to the holder a/c following entry to be
passed.
Preference share/Debentures A/c Dr. (nominal value)
Realisation A/c Dr. (amount of premium payable)
To Preference shareholders/Debenture holders A/c. (with total amount due to them).

8) On receipt of Purchase consideration.

Shares a/c Dr.
Debentures a/c Dr.
Cash a/c Dr.
To Purchasing Co. a/c

9) Preference Shareholder/Debenture holders A/c. will be settled by giving them share,

Debentures or Cash as may be given in the question.

10) Balance Shares, Debentures and Cash will be distributed to Partners/Equity Shareholders.
With this all the accounts will get closed.
As per AS-14 payments to debenture holders by purchasing (transferee) co. will not form part of
purchase consideration therefore instead of accounting as per 7) & 9) above the debenture capital
will also be transferred to realisation account and will be directly paid by purchasing company.

576
 Amalgamation

Illustration 5: Using the figures of illustration 4 Show the necessary Accounts in the books of the
Indo-Gulf Co. Ltd. and show the necessary journal entries recording the transactions.
Solution:
In the Journal of Indo Gulf Ltd (Vendor Company)
1. Realisation A/c Dr. 3,50,000
To Freehold Property a/c 1,50,000
To Plant a/c 83,000
To Stock a/c 35,000
To Bills Receivable a/c 4,500
To Debtors a/c 27,500
To Goodwill a/c 50,000
(Asset transferred to realisation a/c)

2. Debenture a/c Dr. 1,00,000

Creditor a/c Dr. 30,000
To Realisation a/c 1,30,000
(Liabilities transferred to realisation a/c)

3. Equity Share Capital a/c Dr. 2,00,000

Reserves a/c Dr. 50,000
Profit & Loss a/c Dr. 20,000
To Equity Shareholder a/c 2,70,000
(Capital & Profit reserves transferred to shareholders a/c)

4. Continental Ltd a/c Dr. 2,45,000

To Realisation a/c 2,45,000
(Purchase consideration due)

5. Equity shares in Continental ltd a/c Dr. 1,65,000

Cash / Bank a/c Dr. 80,000
To Continental Ltd. a/c 2,45,000
(Purchase consideration received)

6. Realisation a/c Dr. 3,000

To Cash/Bank a/c 3,000
(Realisation expense paid)

7. Realisation a/c Dr. 30,000

To Cash/Bank a/c 30,000
(Creditors paid)

8. Equity Share holders a/c Dr. 8,000

To Realisation a/c 8,000
(Loss on realisation transferred to shareholders)

9. Equity Share holders a/c Dr. 2,62,000

To Equity shares in Continental ltd a/c 1,65,000
To Cash/Bank a/c 97,000
(Final dues paid to shareholders)

In the Ledger of Indo Gulf ltd. (Vender Company)

Realisation a/c
Particulars Rs. Particulars Rs.

577
Amalgamation
To Fixed Deposit a/c 1,50,000 By Debentures a/c 1,00,000
To Goodwill a/c 50,000 By Creditors a/c 30,000
To Plant a/c 83,000 By Continental Ltd. a/c (purchase 2,45,000
To Stock a/c 35,000 consideration due)
To Bills Receivable a/c 4,500 By loss on Realization tr. to shareholders 8,000
To Debtors a/c 27,500 a/c
To Cash Bank a/c (expenses paid) 3,000
To Cash Bank a/c (creditors paid) 30,000
3,83,000 3,83,000

Equity Shareholders a/c

Particulars Rs. Particulars Rs.
To Realization loss 8,000 By Share Capital a/c 2,00,000
To Cash 97,000 By Reserves 50,000
To Share in Continental Ltd. a/c 1,65,000 By Profit & Loss a/c 20,000
2,70,000 2,70,000

Continental Ltd. a/c

Particulars Rs. Particulars Rs.
2,45,000 By Shares a/c 1,65,000
To Realization a/c
By Cash Bank a/c 80,000 2,45,000
2,45,000 2,45,000

Cash / Bank a/c

Particulars Rs. Particulars Rs.
50,000 By Realization a/c (expenses) 3,000
To Balance b/f
80,000 By Realization a/c (creditors) 30,000
To Continental Ltd. a/c
By Shareholders a/c 97,000
1,30,000 1,30,000

Shares in continental ltd. a/c

Particulars Rs. Particulars Rs.
To Continental Ltd a/c 1,65,000 By Share holders a/c 1,65,000
1,65,000 1,65,000

15.15. Explain INTEREST TO VENDORS:

 If the settlement is not done immediately then if agreed, interest at given rate may be paid from
the Date of purchase till the date of settlement, on the amount of purchase consideration.
 It will be Debited to Interest to vendors A/c & will be transferred to Profit & Loss a/c. Vendor
company will credit it to realisation a/c as income.

15.16. Explain accounting for INTER COMPANY OWINGS:

 Sometimes it happens that the Purchasing Company owes to the Vendor Company or Vendor
Company owes to the Purchasing Company in either case, after the take-over the Purchasing
Company will have equal amount in debtors and creditors, or Bill Receivable & Bills payable
relating to the inter company owings which is cancelled by passing following entry in the books of
Purchasing Company.
Creditors A/c./B.P. A/c. Dr. With the amount relating to inter co-owings.
To Debtors A/c/B.R. A/c.

Illustration 6: Ajanta Limited agreed to acquire the business of Elora Limited as on 31 st December,
2011. Debtors of Elora Limited included Rs. 10,000 due from Ajanta Limited. Pass entry.
Solution:

578
 Amalgamation
Entry in the Books of Ajanta Ltd. (Purchaser)
Creditor a/c Dr. 10,000
To Debtor a/c 10,000
(Mutual debt cancelled)

15.17. Explain adjustment for INTER COMPANY STOCK:

Give the journal entry to be passed for accounting unrealized profit on stock, under amalgamation. [May,2009]

At the time of takeover it is possible that:

(1) Vendor Company has in stock goods purchased from Purchasing Company which are at selling
price i.e. it includes profit of purchasing company this stock will now be taken over by the
Purchasing Company or
(2) Purchasing company may have in stock goods purchased from Vendor comapny which includes
profit element of vendor company. In either case the closing stock is valued at a higher price
i.e. it includes unrealised profit, such unrealised profit is eliminated from stock by passing
following entry in Purchasing Co.’s books.
In case of Pooling of Interest Method
General Reserve/ Profit & Loss A/c. Dr.
To Stock Reserve A/c or Stock A/c. with the amount of unrealised profit
In case of Purchase Method
Goodwill/Capital Reserve A/c. Dr.
To Stock Reserve or Stock A/c. with the amount of unrealised profit

Illustration 7: Ajanta Limited agreed to acquire the business of Elora Limited as on 31st December,
2011. Stock of Elora Ltd. includes Goods worth Rs. 50,000/- purchased from Ajanta Ltd., which
invoices the same at Cost + 25%. Pass entry.
Solution:
Entry in the Books of Ajanta Ltd. (Purchaser)
Goodwill a/c / Capital Reserve a/c Dr. 10,000
To Stock Reserve a/c 10,000
(Unrealised profit in inter-co. stock adjusted)
50,000 ÷ 125 x 25 = 10,000

1. Inter company owing &/or inter co. stock will make no change in the accounting in the books of
Vendor where all assets and liabilities will be transferred to realisation a/c. at its book value.
2. If the bill received from the other company, is got discounted, then it no more remains an inter
company debt.

ENTRIES WHEN SAME BOOKS OF A/C. IS CONTINUED

(i.e. Vendor’s books of accounts are used by the Purchasing Co.)

15.18. What will happen if purchaser continued the Books of Accounts of

vendor
 Assets and liabilities taken at different values are adjusted (i.e. brought up to that agreed value)
by giving the other effect to P & L Adj. A/c./Revaluation A/c. which is then transferred to Partners
Capital A/c./ Share holders A/c.
(1) Assets and Liabilities not take-over are either sold/settled separately or are transferred to
Partners Capital A/c. in the ratio of their capital, but worthless assets are transferred in the
profit sharing ratio. In case Vendor is a Co. such assets will be realised and liabilities will be
paid and ultimate balance in this A/cs. will be transferred to Shareholders A/c. Reserves/ P &

579
Amalgamation
L A/c. balance/ Preliminary/other expenses not yet Written off etc. will also be transferred to
Partners Capital A/c./Share holders A/c.
(2) On the payment of purchase consideration Partners Capital A/c, Shareholders A/c. will be
debited & Cash Bank A/c., Share Capital A/c., Debenture A/c. etc. will be credited.
Note:
1. In this case there will be no need to close Vendor CO’s. Books.
2. In case of pooling of interest method only share capital account should be transferred to
shareholders account and P.C. should be debited to this account. Any difference debit/credit will
be adjusted in profit & loss / General reserve account.

Illustration 8: Atul and Behari, who have been carrying on a partnership business sharing in 2:1
ratio, agree on conversion of the firm into a private limited company with effect from April 1, 2011.
The agreement, among other things, includes the following terms:
(a) Goodwill of the firm is to be valued at Rs.1,20,000.
(b) Certain assets are to be revalued at their current realisable values as indicated below:
Furniture’s Rs.39,000
Car Rs.13,000
Plant and Equipment Rs.4,00,000
(c) The new company to be called Atul Behari (P) Ltd. Shall issue shares of Rs.10 each to the
partners in consideration of take-over of the business.
The Balance Sheet of Atul and Behari on 31st March, 2011 immediately before putting the agreement
into effect, reads as below:
Balance Sheet as at 31-3-2011
Liabilities Rs. Assets Rs.
Sundry Creditors 1,60,000 Cash and Bank 50,000
Sundry Debtors 60,000
Cash Credit from Bank 1,52,000 Stock and Stores 2,00,000
Partners’ Capitals: Furniture 50,000
Atul 2,30,000 Motor Car 12,000
Behari 1,30,000 Plant and Machinery 3,00,000
6,72,000 6,72,000
You are required:
(a) to calculate the number of shares to be allotted by the new company by way of purchase
consideration and suggest the equitable distribution thereof between the partners;
(b) Company wants to continue the same books of account of Vendor firm and
(c) to prepare the Balance Sheet of the new company assuming the agreement is implemented.
Solution:
Calculation of Purchase consideration
Assets taken over
Cash and bank (assumed to have been taken over) 50,000
Debtors 60,000
Stock and stores 2,00,000
Furniture 39,000
Motor car 13,000
Plant & Machinery 4,00,000
Goodwill 1,20,000
8,82,000
Less: Liabilities taken over
Creditors 1,60,000
Cash credit from Bank 1,52,000
Purchase consideration 5,70,000

580
 Amalgamation
No. of equity shares to be issued = 5,70,000  10 = 57,000
This shares should be distributed among the partners in their profit sharing ratio i.e. in 2:1, so as to
maintain their profit sharing rights in company as well. Thus 38,000 shares amounting to Rs.3,80,000
to Atul & 19,000 shares amounting to Rs.1,90,000 to Behari be distributed and difference if any in
their account can be settled by them mutually in cash etc.

Entry when Company wants to continue the same books of account of Vendor firm
Particulars Dr. Rs. Cr. Rs.
Goodwill A/c Dr. 1,20,000
Machinery A/c Dr. 1,00,000
Motor Car A/c Dr. 1,000
To Furniture A/c 11,000
To Atul A/c 1,40,000
To Behari A/c 70,000
(Asset, liabilities brought at the agreed value and resulting profit
credited to partners in 2:1 ratio)

Atul A/c Dr. 3,80,000

Behari A/c Dr. 1,90,000
To Equity Share Capital A/c 5,70,000
(Shares allotted as purchase consideration in 2:1 ratio)

Behari A/c Dr. 10,000

To Atul A/c 10,000
(Balance in partners account is mutually settled by them)

Capital Account
Particulars Atul Behari Particulars Atul Behari
To Equity Share Capital 3,80,000 1,90,000 By Balance b/f 2,30,000 1,30,000
To Atul A/c -- 10,000 By Profit on revaluation 1,40,000 70,000
By Behari A/c 10,000 --
3,80,000 2,00,000 3,80,000 2,00,000

Balance Sheet of M/S Atul Behari (P) Ltd.

As On 01.04.2011
Particulars Notes Rs.
1 3 4 5
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital 5,70,000
(2) Share application money pending allotment --
(3) Non-current liabilities
Long-term borrowings: Loans

(4) Current liabilities

Short term Borrowing: Cash credit 1,52,000
Trade Payables 1,60,000 3,12,000
TOTAL 8,82,000
II. ASSETS
(1) Non-current assets
Fixed assets
Tangible : Plant & Machinery 4,00,000
Motor Car 13,000
Furniture 39,000 4,52,000

581
Amalgamation
Intangible : Goodwill 1,20,000 5,72,000

(2) Current assets

Stock in trade 2,00,000
Trade receivables 60,000
Cash and cash equivalents 50,000 3,10,000
TOTAL 8,82,000

DISTRIBUTION OF SHARES/DEBENTURES ETC. BETWEEN PARTNERS

WHEN VENDOR IS A FIRM
15.19. How shares will be distribution among the partners
 The ultimate balances in the Capital A/c. after transferring Profit/Loss on realisation are to be
settled by distributing shares, debentures cash etc. among partners. Generally, the objective is to
make distribution in such a way so as to maintain same rights between them as to profit sharing,
interest etc. in the Company as was in the firm.
(1) Partners Capital are to be adjusted according to profit sharing ratio, taking that partners
capital as base, who has minimum capital as compared to his profit sharing ratio & excess
capital of the other partners is to be found out. Equity shares are to be issued equal to the
amount of adjusted capital. For the excess capital pref. shares to be issued bearing such rate
of dividend as was the rate of interest on capital. But if the No. of Equity shares to be issued
is already given then these are to be distributed to the partners in their profit sharing ratio
and for the balance of Capital, Pref. Share/Cash may be distributed.
(2) If Partners loan A/c. is also there then that much debentures may be issued bearing the
same rate of interest as was payable on loan.

Illustration 9: Ram, Rahim and Rogers carry on business in partnership under the style of M/s. R &
Co. sharing Profits & Losses in the ratio of 5:3:2. They have floated R Pvt. Ltd. for the purpose of
takeover of their business. The following is the Balance Sheet of the firm as on 30 th September,
2011:

M/s. R & Co.

Balance Sheet as on 30-9-2011

Liabilities Rs. Assets Rs.

Creditors 50,000 Cash 6,000
Bank 14,000
Capitals: Debtors 60,000
Ram 1,01,00 Less: Prov. for doubtful debts 2,000 58,000
Rahim 0 Stock 42,000
Rogers 1,51,00 Fixed Assets:
0 3,85,000
Written Down Value 3,00,000
1,33,00 Expenditure in relation to R Pvt. Ltd.:
0
Formation Expenses 12,000

Bank A/c. in the name of R Pvt. Ltd.

Deposit of par value of 300 equity shares
of Rs.10 each subscribed equally by Ram,
Rahim and Rogers as subscribers to the
Memorandum of Articles of
Association 3,000 15,000

582
 Amalgamation

4,35,000 4,35,000
On that day R Pvt. Ltd. took over the business for a total consideration of Rs.5,00,000. The purchase
consideration was to be discharged by the allotment of equity shares of Rs.10 each at par in the
profit sharing ratio and 15% debentures of Rs.100 each at par for surplus capital.
The Directors of R Pvt. Ltd. revalued the fixed assets of R & Co. at Rs. 4,00,000.
You are asked to:
(a) State the number of equity shares and debentures allotted by R Pvt. Ltd. to Ram, Rahim and
Rogers.
(b) Show journal entries in connection with the above transactions in the books of R Pvt. Ltd.

Solution:
Calculation of Shares and Debentures to be allotted:
Ram Rahim Roger Total
1. Capital Balance 1,01,00 1,51,000 1,33,000 3,85,000
0
2. (+) Profit on realization (W.N.1) 57,500 34,500 23,000 1,15,000
3. Total 1,58,50 1,85,500 1,56,000 5,00,000
0
4. Profit sharing Ratio 5 3 2
5. Capital per share of profit (3 ÷ 4) 31,700 61,833 78,000
6. Adjusted Capital for which
Equity shares given (W.N.2 & 3) 1,58,50 95,100 63,400 3,17,000
0
7. Surplus Capital (3 - 6) for which –– 90,400 92,600 1,83,000
15% debentures of Rs.100 each at
par value to be given.
8. Number of Equity share (6 ÷ Rs.10) 15,850 9,510 6,340 31,700
9. Number of Debentures (7 ÷ Rs.100) -- 904 926 1,830

W.N.1 :- Capital Rs. 3,85,000 means net assets as per books is Rs. 3,85,000 and purchase
consideration is Rs. 5,00,000 thus there is profit on realization of Rs. 1,15,000.

W.N.2 :- Adjusted capital is calculated taking lowest capital i.e. Rams capital as base like Rahims
adjusted capital is = 31,700 x 3 = 95,100. Lowest is taken as base so that we can get surplus/excess
capital of other partners.

W.N.3 :- Equity shares will be given equal to the amount of Adjusted capital so that their profit
sharing will remain same as was in the firm. For surplus/excess capital Preference share or
Debenture can be given.
In the Books of R Pvt. Ltd. (Purchaser Co.)

583
Amalgamation
1. Business Purchase a/c Dr. 5,00,000
To R & Co. a/c 5,00,000
(Purchase consideration due)

2. Cash a/c Dr. 6,000

Bank a/c Dr. (14,000 + 3,000) 17,000
Debtors a/c Dr. 60,000
Stock a/c Dr. 42,000
Fixed Asset a/c Dr. 4,00,000
Preliminary expense a/c Dr. 12,000
Goodwill a/c Dr. (Balancing figure) 15,000
To Business Purchase a/c 5,00,000
To Creditors a/c 50,000
To Provision for Bad Debt a/c 2,000
(Assets, liabilities acquired recorded)

3. R & Co. a/c Dr. 5,00,000

To Equity share Capital a/c 3,17,000
To 15% Debentures a/c 1,83,000
(Purchase consideration paid)

Balance Sheet of M/S R Pvt. Ltd.

As On 30.09.2011
Particulars Notes Rs.
1 3 4 5
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital 3,17,000
Reserves & Surplus: P&L A/c (Dr. Balance) (-)12,000 4,05,000
(2) Share application money pending allotment --
(3) Non-current liabilities
Long-term borrowings: Debenture 1,83,000

(4) Current liabilities

Trade Payables 50,000
TOTAL 5,38,000
II. ASSETS
(1) Non-current assets
Fixed assets : Tangible 4,00,000
Intangible : Goodwill 15,000 4,15,000

(2) Current assets

Stock in trade 42,000
Trade receivables 60,000
Less Provision 2,000 58,000
Cash and cash equivalents (6,000 + 17,000) 23,000 1,23,000
TOTAL 5,38,000
* As per AS-26 Preliminary Expense should be written off. Hence Profit & Loss A/c (Dr. balance) is
shown in Reserve & Surplus.

DEBTORS & CREDITORS TAKEN OVER ON VENDOR’S BEHALF

584
 Amalgamation

15.20. Explain accounting if vendor’s Debtors & creditors are being settled
on behalf of vendor by purchaser
 Sometimes Purchasing Co. doesn’t take over the debtors and creditors but agrees to collect debts
and pay creditors on behalf of Vendor then entries will be as follows in the books of Purchaser Co.
(1) At the time of acquisition
Vendor’s Debtor A/c. Dr. with Book value of debtors
To Vendor’s Creditors A/c. with Book value of creditor
To Vendor’s A/c with difference
(2) On Collection from debtors
Cash/Bank A/c. Dr. Actual Amount collected
To Vendors Debtors A/c
(3) On Payments to Creditors
Vendors Creditors A/c. Dr.
To Cash/Bank A/c Amount Paid
(4) Ultimate balance in Debtors/Creditors A/c is transferred to Vendors A/c (Balance will be due
to Discount/ Bad debts etc.)
(5) Commission if any, company is entitled to get from Vendors for this services.
Vendors A/c. Dr.
To Commission A/c.
(6) Ultimate balance in Vendors A/c. is settled.
Vendors A/c. Dr.
To Cash/Bank A/c
To Share Capital A/c
To Debenture A/c

Illustration 10: Atul and Behari, who have been carrying on a partnership business, agree on
conversion of the firm into a private limited company with effect from April 1, 2011.
The agreement, among other things, includes the following terms:
The new company shall not assume the debtors and the creditors but shall assist the vendor-firm in
realisation and settlement and will be entitled for commission of 3% on collection from debtors and
2% on amount paid to creditors.
Debtors were Rs.2,20,000 but ultimate collection was Rs.2,00,000
Creditors aggregated to Rs.1,60,000 which were settled at Rs.1,50,000.
Pass necessary entries for above in the books of Company.

Solution:
Entry in the books of Company for Vendor’s Debtor & Creditor
Particulars Dr. Rs. Cr. Rs.
Vendor Debtor A/c Dr. 2,20,000
To Vendor Creditor A/c 1,60,000
To Vendor A/c (Balancing figure) 60,000
(Vendors debtor creditor recorded for collection & settlement)

Bank A/c Dr. 2,00,000

Vendor A/c Dr. (Bad debt/Discount) 20,000
To Vendor Debtors A/c 2,20,000
(Vendors debtor realised)

Vendor Creditor A/c Dr. 1,60,000

To Bank A/c 1,50,000
To Vendor A/c (Discount) 10,000
(Vendor creditors settled)

585
Amalgamation
Vendor A/c Dr. 9,000
To Commission A/c 9,000
(Commission due 2,00,000 X 3% + 1,50,000 X 2%)

Vendor A/c Dr. 41,000

To Bank A/c 41,000
(Vendor’s account settled)



586