6

AMALGAMATION

BASIC CONCEPTS AND STEPS TO SOLVE THE PROBLEMS

¾ Amalgamation means joining of two or more existing companies into one company, the
joined companies lose their identity and form themselves into a new company.
¾ In absorption, an existing company takes over the business of another existing company.
Thus, there is only one liquidation and that is of the merged company.
¾ A company which is merged into another company is called a transferor company or a
vendor company.
¾ A company into which the vendor company is merged is called transferee company or
vendee company or purchasing company.
¾ In amalgamation in the nature of merger there is genuine pooling of:
• Assets and liabilities of the amalgamating companies,
• Shareholders’ interest, Also the business of the transferor company is intended to be
carried on by the transferee company.
¾ In amalgamation in the nature of purchase, one company acquires the business of
another company.
¾ Purchase Consideration can be defined as the aggregate of the shares and securities
issued and the payment made in form of cash or other assets by the transferee company
to the share holders of the transferor company.
¾ There are two main methods of accounting for amalgamation:
• The pooling of interests method, and
• The purchase method.
¾ Under pooling of interests method, the assets, liabilities and reserves of the transferor
company will be taken over by transferee company at existing carrying amounts.
¾ Under purchase method, the assets and liabilities of the transferor company should be
incorporated at their existing carrying amounts or the purchase consideration should be
allocated to individual identifiable assets and liabilities on the basis of their fair values at
the date of amalgamation.

© The Institute of Chartered Accountants of India

Accounting

Question 1

What are the conditions, which, according to AS 14 on Accounting for Amalgamations, must
be satisfied for an amalgamation in the nature of merger? (May, 2001)
Answer

According to AS 14 on Accounting for Amalgamations; the following conditions must be

satisfied for an amalgamation in the nature of merger:
(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% 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 by virtue of the 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.
(vi) All reserves & surplus of the transferor company shall be preserved by the transferee
company.
If any one of the condition is not satisfied in a process of amalgamation, it cannot be treated
as amalgamation in the nature of merger.

Question 2

Distinguish between (i) the pooling of interests method and (ii) the purchase method of
recording transactions relating to amalgamation. (May, 2002)

Answer
The following are the points of distinction between (i) the pooling of interests method and (ii)
the purchase method of recording transactions relating to amalgamation:
(i) The pooling of interests method is applied in case of an amalgamation in the nature of
merger whereas purchase method is applied in the case of an amalgamation in the
nature of purchase.
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(ii) In the pooling of interests method all the reserves of the transferor company are also
recorded by the transferee company in its books of account while in the purchase
method the transferee company records in its books of account only the assets and
liabilities taken over, the reserves, except the statutory reserves, of the transferor
company are not aggregated with those of the transferee company.
(iii) Under the pooling of interests method, the difference between the consideration paid
and the share capital of the transferor company is adjusted in the general reserve or
other reserves of the transferee company. Under the purchase method, the difference
between the consideration and net assets taken over is treated by the transferee
company as goodwill or capital reserve.
(iv) Under the pooling of interests method, the statutory reserves are recorded by the
transferee company like all other reserves without opening amalgamation adjustment
account. In the purchase method, while incorporating statutory reserves the transferee
company has to open amalgamation adjustment account debiting it with the amount of
the statutory reserves being incorporated.
Question 3
The following are the Balance Sheets of Yes Ltd. and No Ltd. as on 31st October, 2011:
Yes Ltd. No Ltd.
Rs. Rs.
(in crores) (in crores)
Sources of funds:
Share capital:
Authorised 25 5
Issued and Subscribed :
Equity Shares of Rs. 10 each fully paid 12 5
Reserves and surplus 88 10
Shareholders funds 100 15
Unsecured loan from Yes Ltd. — 10
100 25
Funds employed in :
Fixed assets: Cost 70 30
Less: Depreciation 50 24
20 6
Written down value
Investments at cost:
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30 lakhs equity shares of Rs. 10 each of No Ltd. 3

Long-term loan to No. Ltd. 10
Current assets 100 34
Less : Current liabilities 33 67 15 19
100 25
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of
Yes Ltd. issued at a premium of Rs. 2 per share for every five equity shares held by them in
No Ltd. The necessary approvals are obtained.

You are asked to pass journal entries in the books of the two companies to give effect to the
above. (November, 1999)

Answer
Journal Entries in the books of No Ltd.
(Rupees in crores)
Dr. Cr.
Rs. Rs.
Realisation Account Dr. 64.00
To Fixed Assets Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realisation Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realisation Account 49.00
(Being the transfer of liabilities and provision to
Realisation Account)
Yes Ltd. Dr. 1.2
To Realisation Account 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realisation Account)

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Equity Shareholders Account Dr. 13.80

To Realisation Account 13.80
(Being the the loss on realisation transferred to equity share-
holders account)
Equity Share Capital Account Dr. 5.00
Reserves and Surplus Account Dr. 10.00
To Equity Shareholders Account 15.00
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)
Equity Shareholders (Yes Ltd.) Account Dr. 0.72
To Yes Ltd. 0.72
(Being the 3/5th of the consideration due from Yes
Ltd. adjusted against the amount due to Yes Ltd. for shares
held by it)
Equity shares of Yes Ltd. Dr. 0.48
To Yes Ltd. 0.48
(Being the receipt of 4 lakhs equity shares of
Rs. 10 each at Rs. 12 per share for allotment to
outside shareholders
Equity Shareholders Account Dr. 0.48
To Equity Shares of Yes Ltd. 0.48
(Being the distribution of equity shares received from Yes
Ltd. to shareholders)
Journal Entries in the Books of Yes Ltd.
(Rupees in crores)
Dr. Cr.
Rs. Rs.
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)

© The Institute of Chartered Accountants of India

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Fixed Assets Dr. 6.00

Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Capital Reserve 13.80
(Being the assets and liabilities taken over and the surplus
transferred to capital reserve)
Liquidator of No Ltd. Dr. 0.72
Capital Reserve Dr. 2.28
To Investments in Equity Shares of No Ltd. 3.00
(Being the investments in the equity shares of No Ltd.
cancelled and the resultant loss recorded)
Liquidator of No Ltd. Dr. 0.48
To Equity Share Capital Account 0.40
To Securities Premium Account 0.08
(Being the allotment to outside shareholders of No Ltd.
4 lakhs equity shares of Rs. 10 each at a premium of
Rs. 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)

Working Note:
Purchase Consideration Rs. in crores
50lakhs
× Rs. 12
5
i.e., 10 lakhs equity shares at Rs. 12 per share 1.20

Less: Belonging to Yes Ltd. ⎡⎢ 3 × 1.20 ⎤⎥ 0.72

⎣5 ⎦

Payable to other equity shareholders 0.48

Number of equity shars of Rs. 10 each to be issued ⎡⎢ 48lakhs ⎤⎥ = 4 lakhs

⎣ 12 ⎦
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Question 4
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form
a new company named Super Fast Express Ltd. The summarized balance sheets of both the
companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 2012
Rs. Rs.
20,000 Equity shares of Buildings 10,00,000
Rs. 100 each 20,00,000 Machinery 4,00,000
Provident fund 1,00,000 Stock 3,00,000
Sundry creditors 60,000 Sundry debtors 2,40,000
Insurance reserve 1,00,000 Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000

Fast Express Ltd.

Balance Sheet as at 31st December, 2012
Rs. Rs.
10,000 Equity shares of Goodwill 1,00,000
Rs. 100 each 10,00,000 Buildings 6,00,000
Employees profit sharing Machinery 5,00,000
account 60,000 Stock 40,000
Sundry creditors 40,000 Sundry debtors 40,000
Reserve account 1,00,000 Cash at bank 10,000
Surplus 1,00,000 Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at their
book values. The companies were allotted equity shares of Rs. 100 each in lieu of purchase
consideration.
Prepare opening balance sheet of Super Fast Express Ltd. (May 2000)
Answer

Balance Sheet of Super Fast Express Ltd

as at 1st Jan., 2013
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
© The Institute of Chartered Accountants of India

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b Reserves and Surplus 2 3,60,000

2 Non-current liabilities
a Long-term provisions 3 1,00,000
3 Current liabilities
a Trade Payables 1,00,000
Total 35,60,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 25,00,000
Intangible assets 5 1,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000

Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued, subscribed and paid up
30,000 Equity shares of Rs. 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
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4 Tangible assets
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000

The above solution is based on pooling of interests method.

Alternative solution under the purchase method is given below :
Balance Sheet of Super Fast Express Ltd.
as at 1st Jan., 2013
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 32,00,000
b Reserves and Surplus 2 60,000
2 Non-current liabilities
a Long-term provisions 3 1,00,000
3 Current liabilities
a Trade Payables 1,00,000
Total 34,60,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 25,00,000
Intangible assets 5 0
2 Current assets
Inventories 3,40,000
© The Institute of Chartered Accountants of India

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Accounting

Trade receivables 2,80,000

Cash and cash equivalents 6 3,40,000
Total 34,60,000

Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued, subscribed and paid up
32,000 Equity shares of Rs. 100 each 32,00,000
Total 32,00,000
2 Reserves and Surplus
Employees profit sharing account 60,000
Total 60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
4 Tangible assets
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Less: Adjustment under scheme of amalgamation (1,00,000) 0
Total 0
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
Working Notes :
Calculation of Purchase Consideration
Super Express Ltd. Fast Express Ltd.
Total assets on 31.12.2012 (excluding goodwill) 22,60,000 12,00,000
Less: Provident fund 1,00,000 –
© The Institute of Chartered Accountants of India

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Employees profit sharing account – 60,000

Sundry creditors 60,000 40,000
Net assets taken over 21,00,000 11,00,000
Question 5
The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31st March,
2012:
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Bills Payable 120
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at Bank 1,114 609
Bills Receivable — 80
Cost of Issue of Debentures — 50
33,400 12,500

All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

© The Institute of Chartered Accountants of India

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On 1st April 2012, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was
agreed that in discharge of consideration for the business P Ltd. would allot three fully paid
equity shares of Rs. 10 each at par for every two shares held in V Ltd. It was also agreed that
12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the same
amount and denomination.

Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.

You are required to :

(i) Pass journal entries in the books of P Ltd. and

(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger. (November, 1999)

Answer
Books of P Ltd.
Journal Entries
Dr. Cr.
(Rs. in Lacs) (Rs. in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000
Furniture & Fittings Dr. 1,700
Stock Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 - 50) 775
To 12% Debentures 1,000
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To Sundry Creditors 463

To Sundry Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
General Reserve A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)

Balance Sheet of P Ltd. as at 1st April, 2012 (after merger)

Particulars Notes Rs. (in lakhs)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 24,000
b Reserves and Surplus 2 16,654
2 Non-current liabilities
a Long-term borrowings 3 1,000
3 Current liabilities
a Trade Payables (1,543 + 40) 1,583
b Short-term provisions 2,532
Total 45,769
© The Institute of Chartered Accountants of India

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Accounting

Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 29,004
2 Current assets
a Inventories 11,903
b Trade receivables 3,140
c Cash and cash equivalents 1,722
Total 45,769

Notes to accounts
Rs.
1. Share Capital
Equity share capital
Authorised, issued, subscribed and paid up
24 crores equity shares of Rs. 10 each
(Of the above shares, 9 crores shares have been issued for
consideration other than cash) 24,000
Total 24,000
2. Reserves and Surplus
General Reserve 9,699
Securities Premium 3,000
Foreign Project Reserve 310
Surplus (Profit and Loss Account) 3,645
Total 16,654
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004

© The Institute of Chartered Accountants of India

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Working Notes :
1. Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd.
for every two equity shares held in V Ltd.
3
Purchase consideration = Rs. 6,000 lacs × = Rs. 9,000 lacs.
2
Note :The question is silent regarding the treatment of fictitious assets and therefore
they are not transferred to the amalgamated company. Thus the cost of issue of
debentures shown in the balance sheet of the V Ltd. company is not transferred to the P
Ltd. company.
Question 6
The following are the summarised Balance Sheets of X Ltd. and Y Ltd :
X Ltd. Y Ltd.
Rs. Rs.
Liabilities :
Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 –
Creditors 25,000 5,000
Loan X Ltd. — 15,000
1,35,000 70,000
Assets :
Sundry Assets 1,20,000 60,000
Loan Y Ltd. 15,000 –
Profit & Loss A/c — 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and creditors of X Ltd. and Y
Ltd. and for this purpose, the sundry assets of X Ltd. are revalued at Rs. 1,00,000. The debt
due to X Ltd. is also to be discharged in shares of XY Ltd.

Show the Ledger Accounts to close the books of X Ltd. (May, 2000)
Answer
Books of X Ltd.
Realisation Account
Rs. Rs.
To Sundry Assets 1,20,000 By Creditors 25,000
© The Institute of Chartered Accountants of India

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By XY Ltd. (Purchase consideration) 75,000

By Shareholders (Loss on realisation) 20,000
1,20,000 1,20,000
Shareholders Account
Rs. Rs.
To Realisation Account (Loss) 20,000 By Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000

Loan Y Ltd.
Rs. Rs.
To Balance b/d 15,000 By Shares in XY Ltd. 15,000

Shares in XY Ltd.
Rs. Rs.
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000

XY Ltd.
Rs. Rs.
To Realisation Account 75,000 By Shares in XY Ltd. 75,000
Question 7

The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 2012 was
as under:

Assets Hari Ltd. (Rs.) Vayu Ltd. (Rs.)

Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Stock 2,50,000 1,75,000
Debtors 2,00,000 1,00,000
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Cash at Bank 50,000 20,000

Preliminary Expenses 30,000 10,000
13,80,000 5,80,000
Liabilities

Share Capital: Hari Ltd. (Rs.) Vayu Ltd. (Rs.)

Equity Shares of Rs. 10 each 10,00,000 3,00,000
9% Preference Shares of Rs. 100 each 1,00,000 –
10% Preference Shares of Rs. 100 each – 1,00,000
General Reserve 1,00,000 80,000
Retirement Gratuity fund 50,000 20,000
Sundry Creditors 1,30,000 80,000
13,80,000 5,80,000

Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference
Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000 and
the Machinery at Rs. 1,60,000.
(c) Stock to be taken over at 10% less value and Reserve for Bad and Doubtful Debts to be
created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition
entries in the books of Hari Ltd. Also draft the Balance Sheet after absorption as at
31st March, 2012. (May, 2001)

Answer

In the Books of Vayu Ltd.

Realisation Account

Rs. Rs.
To Sundry Assets (5,80,000 – 5,70,000 By Gratuity Fund 20,000
10,000)
To Preference Shareholders By Sundry Creditors 80,000
(Premium on Redemption) 10,000 By Hari Ltd.
© The Institute of Chartered Accountants of India

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To Equity Shareholders (Purchase 5,30,000

Consideration)
(Profit on Realisation) 50,000 _______
6,30,000 6,30,000

Equity Shareholders Account

Rs. Rs.
To Preliminary Expenses 10,000 By Share Capital 3,00,000
To Equity Shares of Hari Ltd. 4,20,000 By General Reserve 80,000
By Realisation Account
_______ (Profit on Realisation) 50,000
4,30,000 4,30,000

Preference Shareholders Account

Rs. Rs.
To 9% Preference Shares of Hari 1,10,000 By Preference Share 1,00,000
Ltd. Capital
By Realisation Account
(Premium on
Redemption of
Preference Shares) 10,000
1,10,000 1,10,000

Hari Ltd. Account

Rs. Rs.
To Realisation Account 5,30,000 By 9% Preference Shares 1,10,000
_______ By Equity Shares 4,20,000
5,30,000 5,30,000
In the Books of Hari Ltd.
Journal Entries

Dr. Cr.
Rs. Rs.
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000
Machinery Account Dr. 1,60,000
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Stock Account Dr. 1,57,500

Debtors Account Dr. 1,00,000
Bank Account Dr. 20,000
To Gratuity Fund Account 20,000
To Sundry Creditors Account 80,000
To Provision for Doubtful Debts Account 7,500
To Liquidators of Vayu Ltd. Account 5,30,000
(Being Assets and Liabilities taken over as per agreed
valuation).
Liquidators of Vayu Ltd. A/c Dr. 5,30,000
To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as above).

Balance Sheet of Hari Ltd. (after absorption)

as at 31st March, 2012

Particulars Notes Rs.

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 16,10,000
b Reserves and Surplus 2 1,20,000
2 Non-current liabilities
a Long-term provisions 3 70,000
3 Current liabilities
a Trade Payables 2,10,000
Total 20,10,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 11,10,000
Intangible assets 5 1,00,000

© The Institute of Chartered Accountants of India

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2 Current assets
a Inventories 4,07,500
b Trade receivables 6 2,92,500
c Cash and cash equivalents 70,000
d Other current assets (Preliminary expenses) 30,000
Total 20,10,000
Notes to accounts

1 Share Capital
Equity share capital
140,000 Equity Shares of Rs. 10 each fully paid 14,00,000
(Out of above 40,000 Equity Shares were issued in
consideration other than for cash)
Preference share capital
2,100 9% Preference Shares of Rs.100 each 2,10,000
(Out of above 1,100 Preference Shares were issued
in consideration other than for cash)
Total 16,10,000
2 Reserves and Surplus
Securities Premium 20,000
General Reserve 1,00,000
Total 1,20,000
3 Long-term provisions
Gratuity fund 70,000
Total 70,000
4 Tangible assets
Buildings 450,000
Machinery 660,000
Total 11,10,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
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6 Trade receivables
Trade receivables 3,00,000
Less: Provision for Doubtful Debt (7,500) 2,92,500

Working Notes:

Purchase Consideration:
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Stock 1,57,500
Debtors 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities
Gratuity 20,000
Sundry Creditors 80,000
Net Assets 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd.
to be satisfied by issue of 40,000
Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000
Question 8

The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2012:
Liabilities Rs. Assets Rs.
8,000 equity shares of Rs.100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenses 34,000
17,60,000 17,60,000
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B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

(1) B Ltd. would take over all Assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year’s purchase of superprofits, assuming that the normal
rate of return be 8% on the combined amount of share capital and general reserve.
(2) B Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the
balance in fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs.1,24,400. The liquidation expenses amounted to Rs.16,000. B
Ltd. sold prior to 31st March, 2012 goods costing Rs.1,20,000 to A Ltd. for Rs.1,60,000.
Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2012. Creditors of A
Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the
Balance Sheet of B Ltd. as at 1st April, 2012 after the takeover. (November, 2001)
Answer
Books of A Limited

Realisation Account

Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders (Loss) 76,000
To Debtors 2,60,000
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
10% Debentures Account
To Bank 4,00,000 By Balance b/d 4,00,000
4,00,000 4,00,000
© The Institute of Chartered Accountants of India

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 Amalgamation

Loan from A Account

To Bank 1,60,000 By Balance b/d 1,60,000
1,60,000 1,60,000
Misc. Expenses Account
To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
General Reserve Account
To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at Rs.125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in B Ltd. Account
To B Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account
To Realisation 76,000 By Equity share capital 8,00,000
To Misc. Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd
Balance Sheet as on 1st April, 2012 (An extract)∗

Particulars Notes Rs.

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,88,000
b Reserves and Surplus 2 1,07,000
2 Current liabilities
a Trade Payables 3 2,80,000

∗
In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Balance Sheet of B
Ltd. after takeover©
cannot
Thebe prepared.of Chartered Accountants of India
Institute

6.23
Accounting

b Bank overdraft 6,00,000

Total 14,75,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 8,82,000
Intangible assets 5 2,16,000
2 Current assets
a Inventories 6 1,83,000
b Trade receivables 7 1,94,000
14,75,000

Notes to accounts
Rs.
1 Share Capital
Equity share capital
4,880 Equity shares of Rs.100 each 4,88,000
(Shares have been issued for consideration other
than cash)

Total 4,88,000

2 Reserves and Surplus (an extract)

Securities Premium 1,22,000
Profit and loss account …..
Less: Unrealised profit (15,000) …..
Total …..
3 Trade payables
Opening balance 3,20,000
Less: Intercompany transaction cancelled upon (40,000) 2,80,000
amalgamation
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
© The Institute of Chartered Accountants of India

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 Amalgamation

5 Intangible assets
Goodwill 2,16,000
Total 2,16,000

6 Inventories
Opening balance 1,98,000
Less: Cancellation of profit upon amalgamation (15,000) 1,83,000

7 Trade receivables
Opening balance 2,60,000
Less: Intercompany transaction cancelled upon
(40,000)
amalgamation
Less: Provision for bad debts (26,000) 1,94,000

Working Notes:

1. Valuation of Goodwill Rs.

Average profit 1,24,400
Less: 8% of Rs.8,80,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000
Less: Creditors 3,20,000
Provision for bad debts 26,000 3,46,000
Net Assets 12,10,000
Out of this Rs.6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000)
Rs. 6,10,000 in shares of Rs.125/-. Thus, the number of shares to be allotted 6,10,000/125 =
4,880 shares.
© The Institute of Chartered Accountants of India

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Accounting

3. Unrealised Profit on Stock Rs.

The stock of A Ltd. includes goods worth Rs.1,00,000 which was sold by
40,000
B Ltd. on profit. Unrealized profit on this stock will be ×1,00,000 25,000
1,60,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the stock i.e., 10% of Rs.1,00,000. (10,000)
Amount of unrealized profit 15,000
Question 9

The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2012:

Liabilities Rs. Assets Rs.

14,000 Equity shares of Sundry assets 18,00,000
Rs.100 each fully paid 14,00,000 Discount on issue of
General reserve 10,000 debentures 10,000
10% Debentures 2,00,000 Preliminary expenses 30,000
Sundry creditors 2,00,000 P & L A/c 60,000
Bank overdraft 50,000
Bills payable 40,000
19,00,000 19,00,000
‘R’ Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under
Net Assets method on the basis of the following:

The market value of 75% of the sundry assets is estimated to be 12% more than the book
value and that of the remaining 25% at 8% less than the book value. The liabilities are taken
over at book values. There is an unrecorded liability of Rs.25,000. (November, 2002)
Answer

Calculation of Purchase Consideration under Net Assets Method

Sundry assets Rs.

75 112
18,00,000 × × = 15,12,000
100 100
25 92
18,00,000 × × = 4,14,000 19,26,000
100 100

© The Institute of Chartered Accountants of India

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 Amalgamation

Less: Liabilities:
10% Debentures 2,00,000
Sundry creditors 2,00,000
Bank overdraft 50,000
Bills payable 40,000
Unrecorded liability 25,000 5,15,000
Purchase consideration 14,11,000

Question 10

Following is the summarized Balance Sheet of X Co. Ltd. as at 31st March, 2012:

Balance Sheet as at 31st March, 2012

Liabilities Rs. Assets Rs.

Equity share capital 15,00,000 Land and building 10,00,000
(Rs. 100 each)
11% Pref. share capital 5,00,000 Plant and machinery 7,00,000
General reserve 3,00,000 Furniture and fittings 2,00,000
Sundry creditors 2,00,000 Stock in trade 3,00,000
Sundry debtors 2,00,000
Cash in hand and at bank 1,00,000
25,00,000 25,00,000
Y Co. Ltd. agreed to take over X Co. Ltd. on the following terms:
(i) Each equity share in X Co. Ltd. for the purpose of absorption is to be valued at Rs. 80.
(ii) Equity shares will be issued by Y Co. Ltd. by valuing its each equity share of Rs. 100
each at Rs. 120 per share.
(iii) 11% Preference shareholders of X Co. Ltd. will be given 11% redeemable debentures
of Y Co. Ltd. at equivalent value.
(iv) All the Assets and Liabilities of X Co. Ltd. will be recorded at the same value in the
books of Y Co. Ltd.
(a) Calculate Purchase consideration.
(b) Pass Journal entries in the books of Y Co. Ltd. for absorbing X Co. Ltd.
(November, 2006)

© The Institute of Chartered Accountants of India

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Accounting

Answer

Computation of Purchase Consideration

Rs.
Value of 15,000 equity shares @ Rs.80 per share = Rs.12,00,000
Shares to be issued by Y Co. Ltd. (Rs,12,00,000/120 per share = 10,000
shares @ Rs.120 each) 12,00,000
11% Preference shareholders to be issued equivalent 11% Redeemable
Debentures by Y Co. Ltd. 5,00,000
Total Purchase consideration 17,00,000
Journal Entries in the books of Y Co. Ltd.

Rs. Rs.
Business Purchase A/c Dr. 17,00,000
To Liquidator of X Co. Ltd. 17,00,000
(Being the amount payable to X Co. Ltd’s liquidator)
Land & Building A/c Dr. 10,00,000
Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Stock in Trade A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Sundry Creditors 2,00,000
To Capital Reserve (Balancing figure) 6,00,000
To Business Purchase 17,00,000
(Being the value of assets and liabilities taken over from
X Co. Ltd.)
Liquidators of X Co. Ltd. Account Dr. 17,00,000
To Equity Share Capital 10,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)

© The Institute of Chartered Accountants of India

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 Amalgamation

Question 11
Summarised Balance Sheets as on 31st March, 2012
Liabilities Gee Ltd. Pee Ltd Assets Gee Ltd. Pee Ltd.
` ` ` `
Equity share capital 25,00,000 15,00,000 Buildings 12,50,000 7,75,000
(` 10 per share) Plant and machinery 16,25,000 8,50,000
14% Preference 11,00,000 8,50,000 Furniture and fixtures 2,87,500 1,75,000
share capital
(` 100 each) - - Investments 3,50,000 2,50,000
General reserve 2,50,000 2,50,000 Stock 6,25,000 4,75,000
Export profit reserve 1,50,000 1,00,000 Debtors 4,00,000 4,60,000
Investment - 50,000 Bills receivables 50,000 55,000
allowance reserve
Profit and loss 3,75,000 1,25,000 Cash at bank 3,62,500 2,60,000
account
15% Debentures 2,50,000 1,75,000
(` 100 each)
Trade creditors 1,50,000 75,000
Bills payables 75,000 1,00,000
Other current
liabilities 1,00,000 75,000
49,50,000 33,00,000 49,50,000 33,00,000
All the bills receivables of Pee Ltd. were having Gee Ltd.’s acceptances.
Gee Ltd. takes over Pee Ltd. on 1st April, 2012. The purchase consideration is discharged as
follows:
(i) Issued 1,65,000 equity shares of ` 10 each at par to the equity shareholders of Pee Ltd.
(ii) Issued 15% preference shares of ` 100 each to discharge the preference shareholders
of Pee Ltd. at 10% premium.
(iii) The debentures of Pee Ltd. will be converted into equivalent number of debentures of
Gee Ltd.
(iv) The statutory reserves of Pee Ltd. are to be maintained for two more years.
(v) Expenses of amalgamation amounting to ` 10,000 will be borne by Gee Ltd.
Show the opening Journal entries and the opening balance sheet of Gee Ltd. as at 1st April,
2012 after amalgamation, on the assumption that the amalgamation is in the nature of the
merger. (November, 2010)
© The Institute of Chartered Accountants of India

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Accounting

Answer
In the books of Gee Ltd.
Journal Entries
Particulars Debit Credit
` `
Business purchase A/c (W.N.1) Dr. 25,85,000
To Liquidator of Pee Ltd. 25,85,000
(Being business of Pee Ltd. taken over)
Building A/c Dr. 7,75,000
Plant and machinery A/c Dr. 8,50,000
Furniture and fixtures A/c Dr. 1,75,000
Investments A/c Dr. 2,50,000
Stock A/c Dr. 4,75,000
Debtors A/c Dr. 4,60,000
Bills receivables A/c Dr. 55,000
Cash at bank A/c Dr. 2,60,000
To General reserve A/c (W.N.2) 15,000
(2,50,000-2,35,000)
To Export profit reserve A/c 1,00,000
To Investment allowance reserve A/c 50,000
To Profit and loss A/c 1,25,000
To 15% Debentures A/c (` 100 each) 1,75,000
To Trade creditors A/c 75,000
To Bills payables A/c 1,00,000
To Other current liabilities A/c 75,000
To Business purchase A/c 25,85,000
(Being assets and liabilities taken over)
Liquidator of Pee Ltd. Dr. 25,85,000
To Equity share capital A/c 16,50,000
To 15% Preference share capital A/c 9,35,000
(Being purchase consideration discharged)

© The Institute of Chartered Accountants of India

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 Amalgamation

General Reserve A/c Dr. 10,000

To Cash at bank 10,000
(Being expenses of amalgamation paid)
15% Debentures in Pee Ltd. A/c Dr. 1,75,000
To 15% Debentures A/c 1,75,000
(Being debentures in Pee Ltd. discharged by
issuing own 15% debentures)
Bills payables A/c Dr. 55,000
To Bill receivables A/c 55,000
(Cancellation of mutual owing on account of bills of
exchange)
Opening Balance Sheet of Gee Ltd. (after absorption)
as on 1st April, 2012
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 61,85,000
b Reserves and Surplus 2 10,55,000
2 Non-current liabilities
a Long-term borrowings 3 4,25,000
3 Current liabilities
a Trade Payables 4 3,45,000
b Other current liabilities 5 1,75,000
Total 81,85,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 6 49,62,500
b Investments 7 6,00,000
2 Current assets
a Inventories 8 11,00,000
b Trade receivables 9 9,10,000
c Cash and cash equivalents 10 6,12,500
Total 81,85,000
© The Institute of Chartered Accountants of India

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Accounting

Notes to accounts
Rs.
1 Share Capital
Equity share capital
415,000 Equity shares of Rs. 10 each
(Out of above, 165,000 shares were issued for 41,50,000
consideration other than cash)
Preference share capital
9,350 15% Preference Shares of Rs.100 each
(Out of above, 9,350 shares were issued for 9,35,000
consideration other than cash)
11,000 14% Preference Shares of Rs.100 each 11,00,000
Total 61,85,000
2 Reserves and Surplus
General Reserve
Opening balance 2,50,000
Add: Adjustment under scheme of amalgamation 15,000
Less: Amalgamation expense paid (10,000) 2,55,000
Export profit reserve
Opening balance 1,50,000
Add: Adjustment under scheme of amalgamation 1,00,000 2,50,000
Investment allowance reserve 50,000
Profit and loss account
Opening balance 3,75,000
Add: Adjustment under scheme of amalgamation 1,25,000 5,00,000
Total 10,55,000
3 Long-term borrowings
Secured
15% Debentures (2,50,000+1,75,000) 2,50,000
Add: Adjustment under scheme of amalgamation 1,75,000 4,25,000
Total 4,25,000
4 Trade payables
Creditors: Opening balance 1,50,000
Add: Adjustment under scheme of amalgamation 75,000 2,25,000
Bills Payables: Opening balance 75,000
© The Institute of Chartered Accountants of India

6.32
 Amalgamation

Add: Adjustment under scheme of amalgamation 1,00,000

Less: Cancellation of mutual owning upon
(55,000) 1,20,000
amalgamation
3,45,000
5 Other current liabilities
Opening balance 1,00,000
Add: Adjustment under scheme of amalgamation 75,000 1,75,000
6 Tangible assets
Buildings- Opening balance 12,50,000
Add: Adjustment under scheme of amalgamation 7,75,000 20,25,000
Plant and machinery- Opening balance 16,25,000
Add: Adjustment under scheme of amalgamation 8,50,000 24,75,000
Furniture and fixtures- Opening balance 2,87,500
Add: Adjustment under scheme of amalgamation 1,75,000 4,62,500
Total 49,62,500
7 Investments (350,000 + 250,000)
Opening balance 3,50,000
Add: Adjustment under scheme of amalgamation 2,50,000 6,00,000
8 Inventories
Opening balance 6,25,000
Add: Adjustment under scheme of amalgamation 4,75,000 11,00,000

9 Trade receivables
Debtors: Opening balance 4,00,000
Add: Adjustment under scheme of amalgamation 4,60,000 8,60,000
Bills Payables: Opening balance 50,000
Add: Adjustment under scheme of amalgamation 55,000
Less: Cancellation of mutual owning upon
(55,000) 50,000
amalgamation
Total 9,10,000
10 Cash and cash equivalents
Opening balance 3,62,500
Add: Adjustment under scheme of amalgamation 2,60,000
Less: Amalgamation expense paid (10,000) 6,12,500

© The Institute of Chartered Accountants of India

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Accounting

Working Notes:
1. Calculation of purchase consideration
`
Equity shareholders of Pee Ltd. (1,65,000 x ` 10) 16,50,000
Preference shareholders of Pee Ltd. (8,50,000 x 110%) 9,35,000
Purchase consideration would be 25,85,000
2. Amount to be adjusted from general reserve
The difference between the amount recorded as share capital issued and the amount of
share capital of transferor company should be adjusted in General Reserve.
Thus, General reserve will be adjusted as follows:
`
Purchase consideration 25,85,000
Less: Share capital issued (` 15,00,000 + ` 8,50,000) (23,50,000)
Amount to be adjusted from general reserve 2,35,000

© The Institute of Chartered Accountants of India

6.34