MEANING OF AMALGMATION

In an Amalgamation, two or more companies are combined into one by the merger of one
taking over the other. Therefore, the term ‘amalgamation’ contemplates two kinds of activities:
(i) two or more companies join to form a new company or
(ii) absorption i.e blending of one by the other. Thus, Amalgamation includes absorption.
The purpose of companies joining together is to secure various advantages such as the
economics of large-scale production, avoiding competition, increasing efficiency expansion,
etc.
The companies going into liquidation or merged companies are called vendor companies
or transferor companies. The new company formed to take over the liquidated companies or
the company with which the transferor company is merged is called the transferee or vendee.
In the case of Amalgamation, the assets and liabilities of transferor company(s) are
Amalgamated company and the transferee becomes vested with all such assets and liabilities.
Whenever an undertaking is being carried out by a company and is in substance
transferred, not to an outsider, but to another company consisting substantially of the same
shareholders with a view to it being continued by the transferee company, there is an external
reconstruction. Such external reconstruction is essentially covered under the category
‘amalgamation’ like a merger in AS-14.
Basic Amalgamation Absorption External
reconstruction
Meaning Two or more companies In this case, an In this case, a newly
are wound up and a new existing company formed company
company is formed to takes over the takes over the
take over their business business of one or business of an
more existing existing company.
companies
Minimum At least three companies At least two Only two companies
number of are involved. companies are are involved.
companies involved.
involved
Number of Only one resultant No new resultant Only one resultant
new company is formed. company is formed. company is formed.
resultant Two companies are In this case, a newly
companies wound up to form a formed company
single resultant takes over the
company. business of an
existing company.
Objective Amalgamation is done Absorption is done to External
to cut competition & cut competition & reconstruction is
reap the economics on a reap the economics on done to recognize
large scale. a large scale. the financial structure
of the company.

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 Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to
amalgamation to from C business of another take over the business
Ltd. existing company B of an existing
Ltd. company A Ltd.

TYPES OF AMALGAMATION

The Institute of Chartered Accountants of India has introduced Accounting Standard -14
(AS 14) on 'Accounting for Amalgamation’. The standard recognizes two types of
amalgamation –

Type of Amalgamation

Amalgamation like Merger

Amalgamation like purchase

Amalgamation in the nature of a merger is an amalgamation that 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% after 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
are their nominees) become equity shareholders transferee company by 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.

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 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.
If any or more of the above conditions are not satisfied in an Amalgamation, such
Amalgamation is called Amalgamation purchase.

PURCHASE CONSIDERATION

To account for amalgamations, we are essentially guided by AS-14 'Accounting for

Amalgamations'. Para 3(g) of AS 14 defines the term purchase consideration as the "aggregate
of the shares and other securities issued and the payment made in the form of cash or other
assets by the transferee company to the shareholders of the transferor company". In simple
words, it is the price payable by the transferee company to the transferor company for taking
over the business of the transferor company.
Notably, purchase consideration does not include the sum that the transferee company
will directly pay to the creditors of the transferor company.
The Purchase consideration essentially depends upon the fair value of its elements. For
example, when the consideration includes securities, the value fixed by the statutory authority
may be taken as the fair value. In the case of other assets, the fair value may be determined by
reference to the market value of the assets given up or in the absence of market value, the book
value of the assets is considered.
Sometimes adjustments may have to be made in the Purchase consideration in the light of
one or more future events. When the additional payment is probable and can be reasonably
estimated it is to be included in the calculation of purchase consideration.
Methods of Purchase Consideration: (1) Net Asset method (2) Net Payment method
1. Net Asset Method:
Under this method, purchase consideration is calculated by adding up the values of various
assets taken over by the purchasing company and then deducting them from the values of
various liabilities taken over by the purchasing company. The values of assets and liabilities
for calculation of purchase consideration are those that are agreed upon between the purchasing
company and the vendor company and not the values at which the various assets and liabilities
appear in the Balance Sheet of the vendor company.
(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net Assets
Illustration
Calculate purchase consideration under Asset Method from the following given Balance
Sheet:
Liability Rs. Assets Rs.
Share Capital 3,00,000 Goodwill 80,000
6% Debentures 1,00,000 Land and Building 1,00,000

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 Sundry Creditors 50,000 Plant 70,000
General Reserve 35,000 Stock 80,000
Profit and Loss Account 15,000 Debtors 60,000
Cash 75,000
Preliminary Expenses 20,000
Discount on Shares A/c 15,000
5,00,000 5,00,000
The transferee company takes over the business of the transferor company on the
following terms and valuation
The value placed on the various assets is Rs.
Goodwill 60,000
Land and Buildings 1,20,000
Plant 60,000
Stock 75,000
Debtors 55,000
Cash has not taken over
Creditors to be satisfied at Rs. 40,000
Solution:
Value of assets taken over Rs.
Goodwill 60,000
Land and Buildings 1,20,000
Plant 60,000
Stock 75,000
Debtors 55,000
3,70,000
Less: Trade liabilities 40,000
Purchase consideration 3,30,000
2. Net Payment Method
The agreement between the selling company and the purchasing company may specify the
amount payable to the shareholders of the selling company in the form of cash shares or
debentures in the purchasing company. AS – -14 states that consideration for amalgamation
means the aggregate of shares and other securities issued and the payment made in the form of
cash or other assets by the transferee company to the shareholders of the transferor company.
Thus, under the net payment method purchase consideration is the total of shares, debentures,
and cash that are to be paid for claims of Equity and Preference shareholders of the transferor
company.
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 The following points are to be noted while ascertaining the purchase price under the net
payment method:
(i) The assets and liabilities taken over by the transferee company and the values at
which they are taken over are not relevant to computing the purchase consideration.
(ii) All payments agreed upon should be added, whether it is for equity shareholders or
preference shareholders.
(iii) If any liability is taken over by the purchasing company to be discharged later on,
such amount should not be deducted or added while computing purchase
consideration.
(iv) When liabilities are not taken over by the transferee company, they are neither added
nor deducted while computing consideration.
(v) Any payment made by the transferee company to some other party on behalf of the
transferor company is to be ignored.
Illustration (Net Payment Method):
Following in the Balance Sheet of Abi Ltd.
Liabilities Rs. Assets Rs.
Share Capital : Fixed Assets 16,25,000
10% Preference share of Rs. 3,75,000 Investment 3,00,000
100 each
Equity Share of Rs. 10 each 7,50,000 Current 2,50,000
General Reserve 4,50,000
7% Debentures 3,50,000
Current Liabilities 2,50,000
21,75,000 21,75,000
Calculate purchase consideration under the Net Payments Method on the following basis:
1. The purchasing company agrees to discharge the 7% debentures at a premium of 10% by
issuing 9% debentures of the purchasing company.
2. Preference shares are discharged at a premium of 10% by issuing 15% Preference Shares
of Rs. 100 each in the purchasing company.
3. For every 2 Equity shares in Abi Ltd. 3 Equity shares of Rs. 10 each in vendee company
will be issued, in addition to cash payment of Rs. 3 per Equity share in Abi Ltd.
Amt (Rs.) Form
1. For Preference Shareholder :
15% Preference shares are purchasing 4,12,500 Preference
company share
Rs. 3,75,000 × 10 
 
 100 

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 2. For Equity shareholders
Equity shares in purchasing company 11,25,000 Equity
shares
75,000 × 3 × Rs. 10
 
 2 
3. Cash 75,000 × Rs. 3
Purchase consideration 2,25,000 Cash
Note:
1. Under the net payment method, purchase consideration is the total of shares and cash that
are to be paid for the claims of Equity and Preference shareholders of the transferor
company.
2. The claims of debenture-holders met by the purchasing company.
Q1) (Purchase consideration) Home Ltd. and Gomer Ltd. Propose to amalgamate.
All the assets and liabilities were taken over by the amalgamated Company. Goodwill may be
taken at ₹ 96,000 for Homer Ltd. and ₹ 38,000 for Gomer Ltd. The stock of Homer Ltd. and
Gomer Ltd. is to be taken at ₹ 2,04,000 and ₹ 1,42,000 respectively. You are required to find
out the purchase consideration receivable by both companies based on the Net Assets
Method. Their financial position as on December 31, 2023, was:
Liabilities Homer Gomer Assets Homer Gomer
Share Capital : Fixed Assets
Equity Shares of ₹ 10 each 5,00,000 2,00,000 (at cost less depreciation) 4,00,000 1,00,000
Reserve & Surplus Investment 1,00,000 -
General Reserves 2,00,000 20,000
P & L A/c 1,00,000 30,000 Current Assets: 2,00,000 1,30,000
Stock
Current Liabilities : Debtors 1,70,000 60,000
Creditors 1,00,000 50,000
Cash & Bank 30,000 10,000
9,00,000 3,00,000 9,00,000 3,00,000

Q2) (Purchase consideration)

The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2015:
Liabilities Rs Assets Rs
192600014,000 Equity 14,00,000 Sundry assets 18,00,000
shares of Rs 100 each fully
paid
General reserve 10,000 Discount on issue of debentures 10,000
10% Debentures 2,00,000 P & L A/c 90,000
Trade payables 2,40,000
Bank Overdraft 50,000

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 19,00,000 19,00,000
‘R’ Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration
under the Net Assets method based on 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.

Q3) (Purchase consideration)

Calculate the amount of purchase consideration payable by Mini Limited to Maxi Limited.
The Summary Balance Sheet of Maxi Limited as of March 31, 2012, is as follows:
Liabilities ₹ Assets ₹
Equity Share Capital 1,50,000 Goodwill 30,000
(Share of ₹ 10)
8% Pref. Share Capital 60,000 Land 35,000
(Share of ₹ 10)
Capital Reserve 8,000 Building 40,000
General Reserve 14,000 Machinery 1,00,000
Profit & Loss A/c 3,000 Investment 25,000
7.5% Debentures(₹ 100 each) 30,000 Stock 24,000
Sundry Creditors 12,000 Debtors 15,000
Outstanding Expenses 8,000 Cash & Bank 13,000
Share issue expenses 3,000
2,85,000 2,85,000
Mini Limited decided to take over Maxi Limited by issuing 6 Equity Shares of ₹ 10 each
fully paid and ₹ 6.50 in cash for every 5 Equity Shares held in Maxi Ltd. The Preference
Shareholders are to be paid a premium of 15% by issuing of 10% Preference Share in Mini
Ltd. Debenture holders of Maxi Ltd., will be paid 9.5% Debentures of Mini Ltd. for equal
value. Realization expenses of ₹ 7,500 are to be borne and paid by Mini Ltd. to Maxi Ltd.
Q4) (Purchase consideration)
Following in the Balance Sheet of Abi Ltd.
Liabilities Rs. Assets Rs.
Share Capital : Fixed Assets 16,25,000
10% Preference share of Rs. 3,75,000 Investment 3,00,000
100 each
Equity Share of Rs. 10 each 7,50,000 Current 2,50,000
General Reserve 4,50,000
7% Debentures 3,50,000
Current Liabilities 2,50,000
21,75,000 21,75,000
Calculate purchase consideration under the Net Payments Method on the following basis:

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1. The purchasing company agrees to discharge the 7% debentures at a premium of 10% by
issuing 9% debentures of the purchasing company.
2. Preference shares are discharged at a premium of 10% by issuing 15% Preference Shares
of Rs. 100 each in the purchasing company.
3. For every 2 Equity shares in Abi Ltd. 3 Equity shares of Rs. 10 each in vendee company
will be issued, in addition to cash payment of Rs. 3 per Equity share in Abi Ltd.

No. Transaction / Entry Amount

A. Closing Assets & Liabilities Accounts
(1) Assets transferred
Realization A/c Dr. [Total of assets]
To various Asset Accounts [Balance as per B/S]
(2) Liabilities transferred
Various outside Liabilities Accounts Dr. [Balance as per B/S]
To Realisation A/c [Total]
B Realization of Assets and Payment of Liabilities
(3) Purchase consideration due
Purchase Company’s A/c Dr. [Purchase Consideration]
To Realisation A/c
(4) Sale of an asset not taken over (recorded/unrecorded)
Bank A/c Dr. [Sale Price]
To Realisation A/c
(5) Payment of a liability not taken over (recorded/unrecorded)
Realisation A/c Dr. [Amount paid]
To Bank A/c
(6) Dissolution expenses paid & borne by the vendor company
Realisation A/c Dr. [Amount of Expenses]
To Bank A/c
(7) Dissolution expenses paid by vendor company but re-imbrued by purchasing
company
7.1 On payment of expenses by vendor company
Purchasing Company’s A/c Dr. [Agreed Amount]
To Bank A/c [Expenses Paid]
7.2 On re-instrument y purchasing company
Bank A/c Dr. [Amount Received]
To Purchasing Company’s A/c
(8) Dissolution expenses paid as well as borne by the purchasing company
If the expenses are paid and borne by the purchasing company, no entry is passed in
the books of the vendor company.
C. Settlement of Capital Accounts
(9) Amount due to preference shareholders
Preference Share Capital A/c Dr. [As Per Balance Sheet]
To Pref. Shareholders A/c [Amount Payable]
(10) Profit n realisation
Realisation A/c Dr. [Amount of Profit]
To Equity Shareholders A/c

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(11) Loss on realization
Equity Shareholders A/c Dr. [Amount of Loss]o
To Realisation A/c
(12) Transfer equity share capital
Equity Share Capital A/c Dr. [Credit Balance]
To Equity Shareholders A/c
(13) Accumulated losses
Equity Shareholders A/c Dr. [Total]
To Profit & Loss A/c (Dr. Balance) [Balance as per B/S]
To Deferred Revenue Exp. A/c [Balance as per B/S]
(14) Accumulated profits/reserves
Profit & Loss A/c (Cr.) Dr. [Balance as per B/S]
General Reserve A/c Dr. [Balance as per B/S]
To Equity Shareholders A/c
(17) Settle Equity shareholder's accounts
Equity Shareholders A/c Dr. [Due]
To Bank A/c [Paid in Cash]
To Equity Shares in Purchasing Co. A/c
(4) Settle Equity shareholder's accounts
Equity Shareholders A/c Dr. [Due]
To Bank A/c [Paid in cash]
To Equity Shares in Purchasing Co. A/c

Entries (Purchasing Company – Purchase Method)

No. Transaction / Entry Amount
(1) Acquisition of business of vendor company
Business Purchase A/c Dr. [Purchase Consideration (PC)]
To the Liquidator of the vendor company
(2) Incorporating assets/liabilities of vendor company taken over
Various Asset Accounts Dr. [Agreed Values]
Goodwill A/c (Note 1) Dr. [PC Less Net Assets]
To Various Liabilities or Provision [Agreed Values]
To Debentures in Vendor Co. [Take-over Value]
To Business Purchase A/c [PC]
To Capital Reserve A/c (Note 1) [Net Assets Less PC]
Notes:
(1) If purchase Consideration (PC) is ascertained under the Net Assets method, the Net Assets
will be equal to the PC and this will not give rise to any Goodwill or Capital Reserve. However,
if PC is ascertained under the Net Payment method, the above entry may not tally directly; i.e.
there may be some difference between the PC and Net Assets(=Assets Less Liabilities). If so, the
excess (PC – Net assets) is debited to Goodwill A/c, or the deficit (Net assets – PC) is credited to
Capital Reserve A/c.
(2) Alternatively entries (1) and (2) may be combined, by eliminating Business Purchase A/c
from both entries, i.e.
Various Asset A/cs Dr.
To Various Liabilities A/c
To Liquidator of Vendor Co.
(Difference i.e. the balancing figure is debited to Goodwill or credited to Capital Reserve.)

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 (3) Create Statutory Reserve
Amalgamation Adjustment Reserve Dr. [Required Amount]
To [Statutory Reserve Name] Account
Note: Under the Revised Schedule VI, Amalgamation Adjustment Reserve is shown under
‘Reserves’ as a separate item (negative amount) in the Balance Sheet.
(4) (Discharge Purchase Consideration)
Liquidator of Vendor Co. Dr. [Purchase Consideration]
Discount on Issue of Shares Dr. [Discount, if any, on issue]
To Equity Share Capital A/c [Paid-up value of Sh. issued
To Pref. Share Capital A/c [Paid-up value of Pref. Sh.]
To Security Premium A/c [Premium, if any, on issue]
To Cash/Bank A/c [Paid, if any]
(5) Discharge Debentures of Vendor Co.
Debentures in Vendor Co. Dr. [Take-over Value]
Discount on Issue of Deb. In Purchasing Co. Dr. [Discount, if any, on issue]
To Debentures in Purchasing Co. A/c [Nominal value issued]
To Security Premium A/c [Premium, if any, on issue]
To Cash/Bank A/c [Paid, if any]
Note: Debentures in Vendor Co. are recorded at the value t which they are to be settled, in entry
(2) above. Thus, if debentures of ₹ 50,000 are agreed to be settled for ₹ 60,000, entries in (2) and
(5) will be for ₹ 60,000.
(6) Share Issue Expenses Paid
Share Issue Expenses Dr. [Amount of expenses]
To Bank
(7) Dissolution expenses are paid & borne by the purchasing company
Goodwill A/c Dr. [Amount of expenses]
To Cash/Bank A/c
(8) Set off Goodwill and Capital Reserve
Capital Reserve A/c Dr.
To Goodwill A/c

Q5) A Ltd. and B Ltd. carrying on similar business decided to amalgamate and for this
purpose, a new company AB Ltd. was formed to take over the assets and liabilities of both
companies. It is agreed that fully paid shares of ₹ 100 each shall be issued by the new Co. to
the value of net assets of each of the old companies/
Summary Balance Sheet of A Ltd. as of 31st March 2012
Liabilities ₹ Assets ₹
Shares of ₹ 50 each 50,000 Goodwill 5,000
General Reserve 20,000 Land and Building 17,000
Profit & Loss A/c 3,000 Plant & Machinery 24,000
Sundry Creditors 4,000 Stock 10,000
Bills Payable 4,000 Debtors 12,000
Furniture & Fittings 5,000
Cash at Bank 8,000
81,000 81,000

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 Summary Balance Sheet of B Ltd. as at 31st March 2012
Liabilities ₹ Assets ₹
800 Shares of ₹ 50 each 40,000 Goodwill 2,000
Bank Overdraft 8,000 Land and Building 10,000
Sundry Creditors 8,000 Plant & Machinery 16,000
Stock 7,500
Furniture & Fittings 7,500
Debtors 7,000
Cash 300
Profit & Loss A/c 5,700
81,000 81,000
The following is the accepted scheme of valuation of the business of the two companies:
A Ltd: a) to provide for reserve for bad debts at the rate of 5% on debtors;
b) To write off ₹ 400 from stock; and
c) To write off 33 – 1/3% from Plant & Machinery
B Ltd. a) To eliminate its goodwill and profit & loss a/c balances;
b) To write off bad debts ₹ 1,000 and to provide a reserve of 5% on the
balance of debtors;
c) To write down plant & machinery by 10% and
d) To write off ₹ 1,400 from the value of the stock.
You are required to pass the Journal entries and prepare the Ledger Accounts in the books of
A Ltd. & B Ltd. giving effect to the above transactions. Also, pass the journal entries in the
books of AB Ltd. and prepare the opening Balance Sheet of AB Ltd.
Q6) The following is the Summary Balance Sheet as on 31-3-3012 of Nisha Ltd. and Usha
Ltd.
Liabilities Nisha Usha Assets Nisha Usha
Equity Share Capital Land and Building 70,000 --
(₹ 100 per share) 2,00,000 1,20,000
15% Debentures 40,000 -- Plant & Machinery 2,20,000 1,00,000
Reserve Fund 76,000 5,000 Stock 35,000 18,000
Employee’s provident fund 6,000 -- Debtors 25,000 16,000
Sundry Creditors 30,000 16,000 Bank 6000 2000

Profit & Loss A/c 4,000 -- Misc. Exp. Not W/o -- 5,000
Advertisement Exp.
3,56,000 1,41,000 3,56,000 1,41,000
The two companies agree to amalgamate and form a new company M/s—Ujala Ltd. which
takes over the assets and liabilities of both the companies.
The authorised capital of Ujala Ltd. is ₹ 20,00,000 consisting of 2,00,000 Equity shares of ₹
10 each.
The assets of Nisha Ltd. are taken over at 90% of the book value except land and buildings
which are accepted at book value.

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Both companies are to receive 10% of the net valuation of their respective business as
Goodwill.
The purchase consideration is to be satisfied by Ujala Ltd. in its fully paid shares at a 10%
premium. In return for Debentures of Nisha Ltd., Debentures of the same amount and
denomination are to be issued by Ujala Ltd.
Close the books of Nisha Ltd. and Usha Ltd. and show the Opening Balance Sheet of Ujala
Ltd. under the Purchase Method.

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