MERGERS AND ACQUISITION OF COMPANIES

Meaning
Mergers: According to Indian Companies Act, “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.
TYPES OF MERGERS-

(I)Horizontal Merger- When organizations who are in the same industry combine to form a single
entity. The principle aim behind such type of mergers is to achieve economies of scale by widening
of product lines, decreasing working capital and fixed assets investment, minimizing
advertisement expenses, etc. which will thereby enable them to gain a dominant position in the
market.

E.g.-Merger between Idea Cellular and Vodafone India in 31.8.18, post which the entity is known
by the name Vodafone Idea Ltd., Merger between Ranbaxy and Sun Pharmaceuticals, Merger
between Bank of Baroda, Vijaya Bank and Dena Bank.

(II)Vertical Merger-When two combines in different stages of production of the same end product
or related end product. Thus, in this category a product manufacturer merges with the supplier of
inputs or raw materials. The reason behind such type of merger is- reduction of uncertainty
regarding quality of inputs and demand for products, achieve economies of integration,
streamlining of indirect expenses like distribution and production expenses.

E.g., Merger between Reliance and Flag Telecom group in 2004.

(III)Conglomerate- This involves two companies who are into different lines of business.The
importance of the conglomerate lies in the fact that they enable the merging companies to be better
than before as they will be diversify their lines of operations. The reason behind such type of
merger is that- it will add to the share of the market that is owned by the company thereby giving
rise to cross-selling and also reduce the exposure towards risk.

E.g. - Procter & Gamble and Gillette Conglomerate Merger( P&G previously held a good share
with respect to women personal care products, in 2005 it merged with Gillette who was leader
terms of personal care product for men).

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Assistant Professor, Dept. of Commerce Page 1
Acquisition: It 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
Takeover.
Examples- Acquisition of Instagram by Facebook, Acquisition of LinkedIn by Microsoft,
Acquisition WhatsApp by Facebook.

AS-14 prescribes according treatment for Mergers by recognizing it as Amalgamation. However,

acquisition does not call for conventional accounting treatment and therefore it is not covered
under AS-14.

Amalgamation
According to AS-14 issued by the Institute of Chartered Accountants of India, there are two
types of amalgamation viz.
A. Amalgamation in the nature of merger: It 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 the equity shares already 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 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 paid in respect of any fractional shares.
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 or accounting policies.

B. Amalgamation in the nature of purchase: It is an amalgamation which does not satisfy one
or more of the above conditions. An amalgamation can be considered as amalgamation in the
nature of purchase when –
a) All the assets and liabilities of the transferee company does not become the assets and
liabilities of the transferor company after amalgamation
b) Shareholders not holding 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.
c) 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

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Assistant Professor, Dept. of Commerce Page 2
 d) The transferee company is not intending to carry on the business of the transferor
company, after amalgamation.
e) The assets and liabilities of the transferor company are incorporated in the books of the
transferee company at adjusted values.
The company which is acquired is called ‘Transferor Company or Amalgamating Company’
and the acquiring company is called ‘Transferee Company or Amalgamated Company’.

Variants of Amalgamation
1. Acquisition of an existing company by another existing company. That is, assets and
liabilities of an existing company are 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.
Difference between amalgamation, acquisition and external reconstruction

Amalgamation Acquisition External

reconstruction
1. Liquidation of Two or more One or more Only one company
companies companies will be companies will be will be liquidated
liquidated liquidated
2. Formation of a A new company will No new company A new company will
new company be formed will be formed be formed
3. Combination Results in Results in Does not result in
of companies combination of combination of combination of
companies companies companies

Absorption, acquisition and external reconstruction are all used colloquially. For accounting
purpose all are termed as Amalgamation. Amalgamation can be in any of these cases.
Case 1 – When one or more existing companies are acquired by an existing company and the
Transferee Company continues with its existing identity.
Case 2 - When two or more existing companies are acquired by a newly formed company.
Case 3 - When an existing company is acquired by a newly formed company.

Accounting for amalgamation

a) The pooling of interest method: When amalgamation is in the nature of merger, pooling
of interest method is adopted for accounting. Under this method, all assets and liabilities
and reserves of the transferor company will be recorded by the transferee company at book

Dr. Aruna P
Assistant Professor, Dept. of Commerce Page 3
 values unless any adjustment is required due to different accounting policies followed by
these companies.
b) The purchase method: When amalgamation is in the nature of purchase, purchase method
is adopted for accounting. Under this 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 reserves (other than statutory reserves) of the transferor company will be
taken over/recorded in the books of transferee company.
Difference between pooling of interest method and purchase method.

Pooling of interest method Purchase method

All assets and liabilities of transferor Only assets and liabilities taken over by
company will be incorporated in the books of transferee company will be incorporated in
transferee company. its books.
All reserves of transferor company will be Other than statutory reserves, no other
recorded in the books of transferee company. reserves of the transferor company will be
recorded in the books of transferee company.
The assets and liabilities of transferor The assets and liabilities of transferor
company will be recorded in the books of the company will be recorded in the books of
transferee company at book values. transferee company at agreed values.
Any difference between purchase Any difference between purchase
consideration and value of assets and consideration and value of assets and
liabilities taken over must be adjusted liabilities taken over must be treated as
against general reserves. goodwill or capital reserves, as the case
may be.

Statutory reserves: It refers to the reserves to be maintained as per the requirements of any
law or legislation only in case of Amalgamation in the nature of purchase. For example,
Investment Allowance Reserve, Development Rebate reserve, workmen compensation fund,
foreign project reserve, export profit reserve, etc.,
REASONS BEHIND MERGERS AND ACQUISITIONS

• Expansion and Diversification

• Optimum Economic Benefit
• De-risking Strategy
• Scaling up of operation for competitive advantages
• Increase the Market capitalization
• Cost reduction by reducing overheads
• Increasing the efficiencies of operations
• Tax benefits

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Assistant Professor, Dept. of Commerce Page 4
 • Access foreign markets

WHO CAN FILE THE APPLICATION FOR MERGER & AMALGAMATION:

An application for Merger & Amalgamation can be file with Tribunal (NCLT). Both the transferor
and the transfereecompany shall make an application in the form of petition to the Tribunal under
section 230-232 of the Companies Act, 2013 for the purpose of sanctioning the scheme of
amalgamation.

ADVANTAGES

• The most common reason for firms to enter into merger and acquisition is to merge their
power and control over the markets.
• Another advantage is Synergy that is the magic power that allow for increased value
efficiencies of the new entity and it takes the shape of returns enrichment and cost savings.
• Economies of scale is formed by sharing the resources and services. Union of 2 firm’s leads
in overall cost reduction giving a competitive advantage, that is feasible as a result of raised
buying power and longer production runs.
• Decrease of risk using innovative techniques of managing financial risk.
• To become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M&A of a small business with unique
technologies, a large company will retain or grow a competitive edge.
• The biggest advantage is tax benefits. Financial advantages might instigate mergers and
corporations will fully build use of tax- shields, increase monetary leverage and utilize
alternative tax benefits.

DISADVANTAGES

• Loss of experienced workers aside from workers in leadership positions. This kind of loss
inevitably involves loss of business understand and on the other hand that will be worrying
to exchange or will exclusively get replaced at nice value.

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Assistant Professor, Dept. of Commerce Page 5
 • As a result of M&A, employees of the small merging firm may require exhaustive re-
skilling.
• Company will face major difficulties thanks to frictions and internal competition that may
occur among the staff of the united companies. There is conjointly risk of getting surplus
employees in some departments.
• Merging two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
• Increase in costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
• The uncertainty with respect to the approval of the merger by proper assurances.
• In many events, the return of the share of the company that caused buyouts of other
company was less than the return of the sector as a whole.

ACCOUNTING ENTRIES IN THE BOOKS OF TRANSFEROR COMPANY

The books of the transferor company being wound up will be closed in the same way as
the books of a partnership firm being dissolved. Following Entries are made:
1.For transferring assets taken over by the transferee company
Realisation A/c Dr
To Various Assets (individually at book value)
Note: Assets which are not taken over by the purchasing company such as Cash, Bank
balance will not be transferred to Realisation Account. Fictitious assets like
preliminary expense, discount or commission or expenses on issue of shares or
debentures, debit balance of Surplus account are not to be transferred to Realisation
Account. Assets on which some provision has been made are to be transferred to
Realisation account at their gross figures and provision made should be transferred
along with liabilities.
2. For transferring liabilities taken over by the transferee company
Various Liabilities (Individually at book value) Dr
To Realisation A/c
Note: Only those liabilities are to be transferred which have been assumed by the
transferee company. Accumulated profits like credit balance of Profit and loss account,
general reserve, dividend equalization reserve, sinking fund, capital reserve are not
transferred to Realisation account. If there is any fund which partially represents
liability and partially undistributed profit, then that portion which represents liability
should be transferred to Realisation.
3. For purchase consideration
Transferee Company’s A/c Dr
To Realisation A/c

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Assistant Professor, Dept. of Commerce Page 6
 4.For receiving purchase consideration from the transferee company
Bank A/c Dr
Shares in Transferee Company A/c Dr
To Transferee Company’s A/c
5. For assets sold by the transferor company not taken over by the transferee company
Bank A/c Dr
Realisation A/c (If loss on sale of assets) Dr
To Assets A/c
To Realisation A/c (If profit on sale of assets)
6. For liquidation expenses
(a) If the expenses are to be met by the transferor company
Realisation A/c
To Bank
(b) If the expenses are to be met by the purchasing company, there are two
alternatives
First Alternative – no entry
Second Alternative – Following two entries will be passed
i) Purchasing Co’s A/c Dr
To Bank A/c
ii) Bank A/c Dr
To Purchasing Co’s A/c
(c) If liquidation expenses are included in the purchase consideration and not paid
separately by the purchasing company
Realisation A/c Dr
To Bank A/c
7. For liabilities not taken over by the transferee company when paid by the transferor
company
Various Liabilities A/c Dr
Realisation A/c (If excess payment is made) Dr
To Bank or Shares in Transferee Co. A/c
To Realisation A/c (if less payment is made)
8. For Closing Realisation Account
(a) If Profit on Realisation Dr
Realisation A/c
To Equity Shareholders A/c
(b) If Loss on Realisation
Equity Shareholders Dr
To Realisation A/c
9. For transferring Preference share capital
Preference Share Capital A/c
To Preference Shareholders A/c
NOTE: If arrears of dividend are to be paid to preference shareholders, then such
excess amount should be debited to Realisation Account and credited to Preference
Shareholders Account, If the preference shareholders have agreed to get less than the
amount of capital, then reverse entry is to be passed.
10. For transferring equity share capital and accumulated profits
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Assistant Professor, Dept. of Commerce Page 7
 Equity Share Capital A/c Dr
General Reserve A/c Dr
Debenture Redemption Reserve A/c Dr
Dividend Equalisation Reserve A/c Dr
Securities Premium Reserve A/c Dr
Surplus A/c Dr
Accident Compensation Fund A/c Dr
(to the extent it does not denote liability)
Share Forfeited A/c Dr
Any Other Reserve or Fund A/c Dr
To Equity Shareholders A/c
11.For transferring accumulated loss and expenses not written off
Equity Shareholders A/c
To Surplus A/c (Dr. Balance)
To Discount or Expenses on Issue of Shares or Debentures A/c
To Underwriting Commission A/c
12. For paying shareholders
Preference Shareholders A/c Dr
Equity Shareholders A/c Dr
To Bank or Shares in Purchasing company

ACCOUNTING ENTRIES IN THE BOOKS OF ACQUIRER/TRANSFEREE

COMPANY
Following Journal entries are passed in the books of transferee company for incorporation
of the financial statement of the transferor company:

1.For Purchase of business from the Transferor company

Business Purchase A/c Dr (For Purchase consideration)
To Liquidator of the Transferor Company
2. For recording assets and liabilities taken over
Various Assets A/c Dr (at revised value if any, otherwise at book value)
To Various Liabilities (with the figures at which they are taken over)
To Business Purchase A/c
NOTE: i) If Credit is more than debit, the difference is debited to Goodwill account
ii) If Debit is more than credit, the difference is credited to Capital Reserve A/c
3.For making payment to the liquidator of the vendor company
Liquidator of the Transferor Company Dr
To Bank A/c
To Share Capital A/c
To Securities Premium reserve A/c (if any)
4. When statutory reserve is maintained
Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
5. If liquidation expenses are paid by the transferee company
Goodwill A/c Dr

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Assistant Professor, Dept. of Commerce Page 8
 To Bank
6. For formation expenses of the transferee company, if any
Preliminary expenses A/c Dr
To Bank
7. When goodwill is written off against capital reserve
Capital Reserve A/c Dr
To Goodwill A/c
8. If any liability is discharged by the transferee company
Respective Liability A/c Dr
To Share Capital/Debentures/Bank A/c
(as the case may be)

Purchase consideration:
Methods:
Lumpsum method – value of PC is given in the question
Net payment – Total of Cash and Share capital paid
Net Asset method – Assets taken over less liabilities taken over

PROBLEMS

1. The following are the balance sheets of P Ltd and Q Ltd as on 31-3-2015
LIABILITIES P LTD Q ASSETS P LTD Q LTD
LTD
Equity share capital 15000 6000 Land and building 6000 -
(fully paid shares of
Rs.10each)
Securities premium 3000 - Plant and 14000 5000
machinery
Foreign projects reserve - 310 Furniture, fixtures 2304 1700
and fittings
General reserve 9500 3200 stock 7862 4041
Profit and loss account 2870 825 debtors 2120 1020
12% debentures - 1000 Cash at bank 1114 609
Bills payable 120 - Bills receivable - 80
Sundry creditors 1080 463 Cost of issue of - 50
debentures
Sundry provisions 1830 702
33400 12500 33400 12500
On 1-4-2016 P Ltd, took over q ltd. in an amalgamated. It was agreed that in discharge
of consideration for the business, P ltd, would allot 3 fully paid equity shares of Rs.10
each at par for every 2 shares held in q ltd. It was also agreed that 12% debenture in Q
ltd, would be converted into 13% debentures in P Ltd. Of the same amount and
denomination.

Dr. Aruna P
Assistant Professor, Dept. of Commerce Page 9
 Expenses of amalgamation amounting to Rs.10 lakh were borne by P ltd.
All the bills receivable held by q ltd were Pltd acceptances.
You are required to: close the books of q ltd. Pass the journal entries in the books of P ltd
and prepare balance sheet immediately after the merger.

2. The following are the balance sheets of X Ltd and Y Ltd as on 31-3-2015
LIABILITIES X LTD Y LTD ASSETS X LTD Y LTD
Equity share 5000000 3000000 Land and building 2500000 1550000
capital( Rs.10
each)
14% preference 2200000 1700000 Plant and 3250000 1700000
share capital (Rs. machinery
100 each)
General reserve 500000 250000 Furniture and 575000 350000
fittings
Export profit 300000 200000 investments 700000 500000
reserve (required
under income tax
act)
Investment -- 100000 stock 1250000 950000
allowance reserve
(statutory)
Profit and loss 750000 500000 debtors 900000 1030000
account
13% debentures 500000 350000 Cash at bank 725000 520000
(Rs.100 each)
Trade creditors 450000 350000
Other current 200000 150000
liabilities
9900000 6600000 9900000 6600000
XY Ltd is formed to take over Xltd and Y ltd for the following consideration
X LTD
1. Issue of 480000 equity shares of Rs.10 each of XY Ltd at par to the equity
shareholders.
2. Issue of 15% preference shares of Rs.100 each of XY ltd. To discharge the preference
shareholders of x ltd at 10% premium.

Y LTD

1. Issue OF 350000 equity shares of Rs. 10 each of XY LTD at par. To the equity
shareholders.
2. Issue of 15% preference shares of Rs.100 each of XY ltd. To discharge the preference
shareholders of x ltd at 10% premium.

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Assistant Professor, Dept. of Commerce Page 10
 The debentures of X ltd and Y ltd will be converted into equivalent number of
debentures of XY Ltd. The statutory reserves are to be maintained for two more years.
Close the books of X ltd and Y ltd and show the opening entries and balance sheet of
XY ltd on the assumption that the amalgamation is in the nature of Purchase.

3. The Balance Sheet of Novelty Company as on 31-12-2011 was as follows:

Liabilities Rs. Assets Rs.
2000 shares at Rs.100 each 200000 Goodwill 35000
Reserve fund 20000 Buildings 85000
5% Debentures 100000 Machineries 160000
Loan from X ( A Director) 40000 Stock on hand 55000
Creditors 80000 Debtors 65000
Cash at bank 34000
Discount on Debentures 6000
440000 440000
This company was agreed to be purchased by Marvel company on the following terms:
a. Marvel co. to acquire all assets at book value less 10% except cash, which is retained in
the Novelty co. The goodwill is to be valued on the following lines:
The Goodwill is to be valued at 4 years purchase of the excess average profit of 5 years
over 8% of the combined Share capital and reserve fund.
b. Marvel co. to take over creditors at 5% discount
c. The purchase consideration to be paid as to Rs.150000 in cash and the balance in shares
of Rs.10 each, valued at 12.50 each.

The average profits for the last 5 years is Rs.30100, the expenses of realization are Rs.4000.

Prepare the necessary ledger accounts in the books of Novelty Company and Journal entries
in the books Marvel Company

4. X company Ltd and Y company Ltd have agreed to amalgamate and to form a new company
called Z co. ltd which has taken over both the companies as per their balance sheets given
below.

Balance sheet of X co. ltd as on 31-03-2015

LIABILTIES Rs. ASSETS Rs.

Share capital Land and building 200000
Subscribed and paid up capital 500000 Plant and machinery 150000
50,000 share of Rs. 10 each
Reserve and surplus furniture 50000
General reserve Investment in govt. securities 200000
150000

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Assistant Professor, Dept. of Commerce Page 11
 Surplus 200000 Stock 90000
50000
Development rebate reserve 30000 Debtors 80000
Creditors 50000 Bank 30000
Bills payable 20000
800000 800000

LIABILITIES Rs. ASSETS Rs.

Share capital: Land and building 300000
Subscribed and paid up capital 800000 Plant and machinery 250000
shares of Rs. 10 each
Reserves and surplus: Patents 150000
General reserve Furniture 50000
300000
Surplus 400000 Investment in other securities 450000
100000
Secured loans 150000 Stock 120000
Unsecured loans 50000 Debtors 90000
Creditors 60000 Bank 90000
Bills payable 40000
1500000 1500000
Prepare ledger accounts in the books of transferor company’s and opening entries in the books
of transferee company under: amalgamation in the nature of purchase.

Assume that development rebate reserve is continued in the transferee company.

In the nature of purchase

5. The following is the balance sheet of Ashwini company ltd on 31-3-2015

LIABILITIES Rs. ASSETS Rs.

Share capital(shares of Rs.10 each) 200000 Land and building 120000
Debentures 100000 Plant and machinery 150000
Creditors 30000 Work in progress 30000
Reserve fund 25000 Stock 60000
Workmen compensation fund 10000 Furniture 2500
Dividend rebate reserve 10000 Debtors 25000
Profit and loss account 5100 Cash at bank 12500
Depreciation fund (land and 20000 Cash in hand 100
building)
400100 400100
The company is absorbed by jashwant co. ltd 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 Rs.7 in cash and one share of the face value of Rs.5 in jashwant co. ltd.(Market

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Assistant Professor, Dept. of Commerce Page 12
value Rs.8 per share) in exchange for one share in Ashwini co. ltd. The cost of liquidation
Rs.500 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.

6. The following is the balance sheet of Chandra Ltd. as on 31.3.2015

Liabilities Amt Assets Amt
Shares of Rs. 30 each 300000 Buildings 160000
General reserve 30000 Machinery 180000
Workmen’s profit sharing fund 15000 Furniture 10000
Debentures 100000 Patents 50000
Creditors 25000 Stock 40000
Debtors 20000
Cash at bank 10000
470000 470000
The above company is absorbed by Ravindra Ltd. the PC beings the discharge of debentures
at a premium of 5% by the issue of debentures in Ravindra Ltd. taking over the liabilities and
a payment of Rs. 5 in cash and 2 shares of Rs.10 each fully paid at the market value of Rs. 16
per share in exchange for every one share in Chandra Ltd. the expenses of liquidation
amounting to Rs. 1000 are to be borne by Ravindra Ltd. Pass JE in both the companies under
amalgamation in the nature of purchase method.
7. A company ltd. Is adsorbed by B company ltd. The consideration being:
A. Assumption of liabilities.
B. Discharge of debentures at a premium of 5% by the issue of 5% debentures in B
company ltd.
C. A payment of cash of Rs.30 per share.
D. To exchange 3 shares of Rs.10 each in B company ltd. At an agreed value of Rs.15
pershare, for every share in A company ltd.

Balance sheet of A company ltd. As on 31-03-2015

LIABILITIES Rs. ASSSETS Rs.
Share capital Good will 250000
60,000 equity shares of Rs.50 300000 Land and buildings 765000
each fully paid
General reserve 320000 Plant and machinery 2200000
Profit and loss account 180000 Patents 50000
5% debentures 1500000 Patterns 25000
Creditors 200000 Investments 50000
Stock 1060000
Debtors 450000
Bank 350000
5200000 5200000

Dr. Aruna P
Assistant Professor, Dept. of Commerce Page 13
 Pass journal entries to close the books of A company ltd. Together with necessary ledger
accounts. Under amalgamation in the nature of purchase method.

8. Following is the balance sheet of A company as on 31-03-2015

LIABILITIES Rs. ASSETS Rs.
120000 shares of Rs.10 1200000 Buildings 750000
each
Reserve fund 600000 Machinery 364500
Development rebate 12500 Stock 455750
reserve
Creditors 200000 Debtors 382500
Profit and loss account 65280 Bank 125030
2077780 2077780
The concern is acquired by B Company. The purchase consideration being the
payment of Rs.1000000 in cash and allotment of 2 fully paid shares of Rs.10 each
at an agreed price of Rs.12.50 in exchange for every 3 shares of A company. The
liquidation expenses of the vendor company is Rs.15000.
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 3 more years in Transferee Company.

9. The balance sheet of Amina company on 1-04-2015 was as under

LIABILITIES Rs. ASSETS Rs.
Capital: Buildings 700000
50000 preference shares of 500000 Patents 300000
Rs.10 each
90000 ordinary shares of 900000 Stock 225000
Rs.10 each
5% debentures 100000 Debtors 160000
Interest outstanding on above 20000 Cash 25000
Sundry creditors 110000 Profit and loss account 220000
1630000 1630000
On 1-04-2015 “Pharma” company agreed to acquire “Amina” company on the following
terms:
1. Two shares of Rs.5 each fully paid in Pharma Company to be issued for every 3 shares in
Amia Company.
2. Six shares of Rs. 5 Each fully paid in Pharma Company to be issued for every 5
preference shares in Amina Company.
3. Debenture holders to be paid in full in ordinary shares of Rs.5 each and for the interest
outstanding in cash.
4. The creditors to receive 75% of sums due to them in fully paid shares of Rs.5 each and
25% of the balance in cash in full settlement.

Dr. Aruna P
Assistant Professor, Dept. of Commerce Page 14
 Prepare realization account and shareholders account in the books of AminaCompany
and pass entries in the books of Pharma co. under business purchase method.

10. Following is the balance sheet of Bharat co. ltd as on 31-03-2015.

LIABILITIES Rs. ASSETS Rs.
Equity share capital(5000 500000 Goodwill 30000
shares of Rs.100 each)
Reserve fund 100000 Building 300000
P & L account 50000 Machinery 270000
10% debentures 200000 Investments 150000
Creditors 100000 Stock 200000
Dividend equalization reserve 50000 Debtors 60000
Tax provision 50000 Cash 40000
1050000 1050000
India co. ltd. purchased the business of Bharat co. ltd on the following terms:
1. All the assets except cash and goodwill are taken over.
2. 800 shares of Rs.100 each of India co. are issued at an agreed value of Rs.125 per
share in full settlement of accounts of creditors.
3. 5 equity shares of Rs.100 each in India co. are issued to equity shareholders at an
agreed value of Rs.125 per share for every 4 share held in Bharat co.
4. Cash Rs.40 per share held in Bharat ltd is paid to equity shareholders.
5. 10% debentures are discharged at 20% premium by issue of necessary amount of
12% debentures in India ltd at 4 % discount.
Close the books of Bharat co. ltd and pass opening journal entries in the books of
India co. ltd. Under business purchase method.

11. The following is the balance sheet of D Ltd as on 31.3.2015

Liabilities Amt Assets Amt
4000 shares of Rs. 100 each 400000 Buildings 170000
General reserve 50000 Plant and Machinery 400000
Profit and loss a/c 5600 Investments 50600
Creditors 128700 Debtors 140500
5% debentures 250000 Stock 80700
Dividend equalization fund 24000 Cash at bank 16500
858300 858300

Dltd was acquired by N ltd on the above date

a) N ltd to assume all liabilities and assets except investments which were sold by D Ltd for
Rs. 45500.
b) Discharge the debenture debt at a discount of 5% by the issue of 7% debentures in N Ltd.

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Assistant Professor, Dept. of Commerce Page 15
 c) Issue of two shares of Rs. 60 each in N ltd at Rs. 65 per share and also to pay Rs. 2 in
cash to the shareholders of D ltd in exchange for one share in D ltd.
d) Pay the cost of acquisition Rs. 1500
e) D Ltd sold in the open market one fouth of the shares received from N Ltd. at the average
rate of Rs. 63 per share.
Show realization account, bank account and shareholders account in the books of D Ltd
under purchase method.
12. Fortunate Ltd decided to acquire unfortunate Ltd. The balance sheet of the two companies as
on 31st March 2015.
Liabilities Fortunate Unfortunate Assets Fortunate Unfortunate
Ltd Ltd Ltd Ltd
5% pref shares of - 40000 Goodwill 40000 40000
Re.1 each
Equity shares of 252000 80000 Copy rights 20000
Re. 1 each
Capital reserve 120000 Land and 100000 60000
buildings
General reserve 120000 Plant 140000
Development 20000 Debtors 40000 40000
rebate reserve
Creditors 8000 40000 Stock 40000 20000
Bank overdraft 20000 Cash in 120000
hand
Profit and 40000
loss a/c
500000 200000 500000 200000

1. Fortunate Ltd to take over both assets and liabilities of Unfortunate Ltd.
2. Pref shareholders of Unfortunate Ltd. to get one 5% pref share of Re.1 in Fortunate Ltd.,
for every 2 shares held.
3. Equity shareholders of Unfortunate Ltd. to receive one new share of Re. 1 of Fortunate
Ltd for every 10 shares held.
4. An amount of Rs. 20,000 to be paid by Fortunate Ltd. for meeting liquidation expenses,
in addition to Rs. 10,000 paid by it directly.
5. Land and buildings of Fortunate Ltd. to be valued at Rs. 1,40,000 and a provision of Rs.
1000 is to be made for doubtful debts in case of Unfortunate Ltd.
Close the books of Unfortunate Ltd. and prepare balance sheet in the books of Fortunate
Ltd., after acquisition under purchase method. Assume that Development rebate reserve
is required to be continued in the books of fortunate ltd.

Dr. Aruna P
Assistant Professor, Dept. of Commerce Page 16