GROUP - I PAPER - 1 ACCOUNTING V1 CHAPTER 6

6 A MALGAMATION Learning Objectives After studying this chapter, you will be able to ♦ Understand the term amalgamation and the methods of accounting for amalgamations. ♦ Appreciate the concept of transferee Company and the transferor company. ♦ Calculate purchase consideration under both the methods of amalgamation as per AS 14. ♦ Pass the entries to close the books of the vendor company. ♦ Pass the journal entries in the books of purchasing company to incorporate the assets and liabilities of the vendor company and also giving effect to other adjustments. 1. Meaning of Amalgamation In an amalgamation, two or more companies are combined into one by merger or by 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 and blending of one by the other. Thus, amalgamations include absorption. The purpose of companies joining together is to secure various advantages such as economies 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 which is formed to take over the liquidated companies or the company with which the transferor company is merged is called transferee or vendee. In the case of amalgamation the assets and liabilities of transferor company(s) are amalgamated and the transferee company becomes vested with all such assets and liabilities. © The Institute of Chartered Accountants of India Accounting Wherever an undertaking is being carried on 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 its being continued by the transferee company, there is external reconstruction. Such external reconstruction is essentially covered under the category ‘amalgamation in the nature of merger’ in AS 14. Basis Amalgamation Absorption External Reconstruction Meaning Two or more companies In this case an existing In this case, a newly are wound up and a new company takes over the formed company takes company is formed to business of one or more over the business of take over their business existing companies an existing company. Number of Two or more companies An existing company Newly formed Companies are wound up takes over the business company takes over involved of one or more existing the business of the companies existing company Number of Two companies are No new resultant Under this case a newly resultant wound up to form a company is formed formed company takes companies single resultant company over the business of an existing company Example A ltd and B ltd A ltd takes over the B ltd is formed to take amalgamate to form C ltd business of another over the business of an existing company B ltd existing company A ltd 2. Types of Amalgamation The Companies Act, 1956 has not specifically defined the term ‘amalgamation’. However, from several legal decisions, the definition of amalgamation may be inferred. The Institute of Chartered Accountants of India has introduced Accounting Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The standard recognizes two types of amalgamation – (a) Amalgamation in the nature of merger and (b) Amalgamation in the nature of purchase. Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions: (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90% 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 6.2 © The Institute of Chartered Accountants of India Amalgamation nominees) become equity shareholders of the transferee company 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. If any one or more of the above conditions are not satisfied in an amalgamation, such amalgamation is called amalgamation in the nature of purchase. 3. Purchase Consideration For the purpose of accounting 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. It is notable that purchase consideration does not include the sum which 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 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, book value of the assets are 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. Illustration 1 Let us consider the Balance Sheet of X Ltd. as on 31st March, 2011: Liabilities Rs.(‘000) Assets (Rs.‘000) Share Capital: Land & Buildings 50,00 Equity Shares of Rs. 10 each 75,00 Plant & Machinery 45,00 14% Preference Shares of Furniture 10,50 6.3 © The Institute of Chartered Accountants of India Accounting Rs. 100 each 25,00 Investments 5,00 General Reserve 12,50 Stock 23,00 12% Debentures 40,00 Debtors 24,00 Sundry Creditors and other Cash & Bank balance 15,00 Current liabilities 20,00 172,50 172,50 Other Information: (i) Y Ltd. takes over X Ltd. on 10th April, 2011. (ii) Debentureholders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing 15% own debentures of Y Ltd. (iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by issuing necessary number of 15% Preference Shares of Y Ltd. (Face value Rs. 100 each). (iv) Intrinsic value per share of X Ltd. is Rs. 20 and that of Y Ltd. Rs. 30. Y Ltd. will issue equity shares to satisfy the equity shareholders of X Ltd. on the basis of intrinsic value. However, the entry should be made at par value only. The nominal value of each equity share of Y Ltd. is Rs. 10. Compute the purchase consideration. Solution Computation of Purchase consideration (Rs. in ’000) Form For Preference Shareholders of X Ltd. 3,000 30,000 15% preference Share in Y Ltd. For equity shareholders of Y Ltd. 5,000 5,00,000 equity (2/3 × 7,50,000) × Rs. 10 shares of Y Ltd. of Rs. 10 each Total Purchase consideration 8,000 Note : Consideration for debenture holders should not be included above. Such debentures will be taken over by Y Ltd. and then discharged. 4. Methods of Accounting for Amalgamations There are two main methods of accounting for amalgamation: (a) The pooling of interests method, and (b) The purchase method. The first method is used in case of amalgamation in the nature of merger and the second method is used in case of amalgamation in the nature of purchase. 6.4 © The Institute of Chartered Accountants of India Amalgamation Pooling of Interest Method 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 unless any adjustment is required due to different accounting policies followed by these companies. As a result the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves. Purchase Method Assets and Liabilities: 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. Reserves: no reserves, other than statutory reserves, of the transferor company should be incorporated in the financial statements of transferee company. Statutory reserves of the transferor company should be incorporated in the balance sheet of transferee company by way of the following journal entry. Amalgamation Adjustment A/c Dr. To Statutory Reserves When the above statutory reserves will no longer be required to be maintained by transferee company, such reserves will be eliminated by reversing the above entry. The balance of Profit and Loss account of the transferor company is not recorded at all. Difference between the Purchase Consideration and Net Assets transferred: any excess of the amount of purchase consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statement of the transferee company. Any short fall should be shown as capital reserve. Goodwill should be amortised over period of five years unless a somewhat longer period can be justified. Illustration 2 Consider the following balance sheets of X Ltd. and Y Ltd. Balance Sheet as on 31st March, 2012 Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd. Rs.’000 Rs.’000 Rs.’000 Rs.’000 Equity Share Capital 50,00 30,00 Land & Building 25,00 15,50 (Rs. 10 each) Plant & Machinery 32,50 17,00 6.5 © The Institute of Chartered Accountants of India Accounting 14% Preference Share 22,00 17,00 Furniture & Fittings 5,75 3,50 Capital (Rs. 100 each) Investments 7,00 5,00 General Reserve 5,00 2,50 Stock 12,50 9,50 Export Profit Reserve 3,00 2,00 Debtors 9,00 10,30 Investment Allowance 1,00 Cash & Bank 7,25 5,20 Reserve Profit & Loss A/c 7,50 5,00 13% Debentures 5,00 3,50 (Rs. 100 each) Trade Creditors 4,50 3,50 Other Current Liabilities 2,00 1,50 99,00 66,00 99,00 66,00 X Ltd. takes over Y Ltd. on 1st April, 2012. X Ltd. discharges the purchase consideration as below: (i) Issued 3,50,000 equity shares of Rs. 10 each at par to the equity shareholders of Y Ltd. (ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Y Ltd. at 10% premium. The debentures of Y Ltd. will be converted into equivalent number of debentures of X Ltd. The statutory reserves of Y Ltd. are to be maintained for 2 more years. Show the balance sheet of X Ltd. after amalgamation on the assumption that: (a) the amalgamation is in the nature of merger. (b) the amalgamation is in the nature of purchase. Solution: (a) Amalgamation in the nature of merger: Balance Sheet of X Ltd. Rs. in '000 Particulars Notes Equity and Liabilities 1 Shareholders' funds 12,570 a Share capital 1 1,930 b Reserves and Surplus 2 6.6 © The Institute of Chartered Accountants of India Amalgamation 2 Non-current liabilities 850 a Long-term borrowings 3 3 Current liabilities 800 a Trade Payables 350 b Other current liabilities 16,500 Total Assets 1 Non-current assets a Fixed assets 9,925 Tangible assets 4 1,200 b Non-current investments 2 Current assets 2,200 a Inventories 1,930 b Trade receivables 1,245 c Cash and cash equivalents 16,500 Total Notes to accounts Rs. in ‘000 1 Share Capital Equity share capital 85,000 Equity Shares of Rs. 100 each 8,500 Preference share capital 18,700 15% Preference Shares of Rs. 100 each 1,870 22,000 14% Preference Shares of Rs. 100 each 2,200 Total 12,570 2 Reserves and Surplus General Reserve* 750 Adjustment for amalgamation (670) 80 Export Profit Reserve 500 Investment Allowance Reserve 100 Surplus (Profit & Loss A/c) 1,250 Total 1,930 6.7 © The Institute of Chartered Accountants of India Accounting 3 Long-term borrowings Secured 8,500 13% Debentures of Rs. 100 each 850 Total 850 4 Tangible assets Land & Buildings 4,050 Plant & Machinery 4,950 Furniture & Fittings 925 Total 9,925 *The difference between the amount recorded as share capital issued and the amount of share capital of transferor company should be adjusted in reserves. Thus, General Reserve = Rs. ’000 [7,50 – (53,70 – 47,00)] = Rs. (’000) 80 (b) Amalgamation in the nature of purchase : Balance Sheet of X Ltd. Rs. in'000 Particulars Notes Equity and Liabilities 1 Shareholders' funds 12,570 a Share capital 1 2,230 b Reserves and Surplus 2 2 Non-current liabilities 850 a Long-term borrowings 3 3 Current liabilities 800 a Trade Payables 350 b Other current liabilities 16,800 Total Assets 1 Non-current assets a Fixed assets 9,925 Tangible assets 4 1,200 b Non-current investments 300 c Other non-current assets 5 6.8 © The Institute of Chartered Accountants of India Amalgamation 2 Current assets 2,200 a Inventories 1,930 b Trade receivables 1,245 c Cash and cash equivalents 16,800 Total Notes to accounts Rs. in'000 1 Share Capital Equity share capital 85,000, Equity Shares of Rs. 100 each 8,500 Preference share capital 18,700, 15% Preference Shares of Rs. 100 each 1,870 22,000, 14% Preference Shares of Rs. 100 each 2,200 Total 12,570 2 Reserves and Surplus Capital Reserve 380 General Reserve 500 Export Profit Reserve 500 Investment Allowance Reserve 100 Surplus (Profit & Loss A/c) 750 Total 2,230 3 Long-term borrowings Secured 8,500 13% Debentures of Rs. 100 each 850 Total 850 4 Tangible assets Land & Buildings 4,050 Plant & Machinery 4,950 Furniture & Fittings 925 Total 9,925 6.9 © The Institute of Chartered Accountants of India Accounting 5. Other non-current asset Amalgamation adjustment account (assumed to be 300 maintained for more than a year) Workings: Capital Reserve arising on Amalgamation: (A) Net Assets taken over : Rs. (’000) Rs. (’000) Sundry Assets 66,00 Less : 13% Debentures 3,50 Trade Creditors 3,50 Other current liabilities 1,50 8,50 57,50 (B) Purchase consideration : To Equity Shareholders of Y Ltd. 35,00 To Preference Shareholders of Y Ltd. 18,70 53,70 (C) Capital Reserve (A – B) 3,80 Illustration 3 S. Ltd. is absorbed by P. Ltd. The balance sheet of S. Ltd. is as under : Balance Sheet Share Capital : Rs. Rs. 2,000 7% Preference shares Sundry Assets 13,00,000 of Rs. 100 each (fully paid-up) 2,00,000 5,000 Equity shares of Rs. 100 each (fully paid-up) 5,00,000 Reserves 3,00,000 6% Debentures 2,00,000 Trade creditors 1,00,000 13,00,000 13,00,000 P. Ltd. has agreed : (i) to issue 9% Preference shares of Rs. 100 each, in the ratio of 3 shares of P. Ltd. for 4 preference shares in S. Ltd. 6.10 © The Institute of Chartered Accountants of India Amalgamation (ii) to issue to the debenture-holders in S. Ltd. 8% Mortgage Debentures∗ at Rs. 96 in lieu of 6% Debentures in S. Ltd. which are to be redeemed at a premium of 20%; (iii) to pay Rs. 20 per share in cash and to issue six equity shares of Rs. 100 each (market value Rs. 125) in lieu of every five shares held in S. Ltd.; and (iv) to assume the liability to trade creditors. Solution The purchase consideration will be Rs. Form Preference shareholders : 2,000 × 3/4 × 100 1,50,000 9% Pref. Shares Equity shareholders : 5,000 × 20 1,00,000 Cash 5,000 × 6/5 × 125 7,50,000 Equity Shares 10,00,000 Supposing the total number of fractions arising on exchange aggregate to 20 shares (equivalent to equity shares in P. Ltd.) each will have to be paid for them @ Rs. 125 per share; the remaining amount will be settled by the issue of equity shares. Alternatively, fraction certificates are issued; these are converted into shares on presentation - the holder of the fraction certificates must buy more such certificates or sell those held by him. Illustration 4 Y Ltd. decides to absorb X Ltd. The Balance Sheet of X Ltd. is as follows: Rs. Rs. 3,000 Equity shares of Net Assets 2,90,000 Rs. 100 each (fully paid) 3,00,000 Profit and Loss Account 70,000 Preference shares 60,000 3,60,000 3,60,000 Y Ltd. agrees to take over the net assets of X Ltd. An equity share in X Ltd., for purposes of absorption, is valued @ Rs. 70. Y Ltd. agrees to pay Rs. 60,000 in cash for payment to preference ∗ According to AS 14, ‘consideration’ for the amalgamation means 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. Therefore, debentures issued to the debenture holders will not be included in purchase consideration. Like trade creditors, the liability in respect of debentures of S. Ltd. will be taken by P Ltd., which will then be settled by issuing new 8% debentures. 6.11 © The Institute of Chartered Accountants of India Accounting shareholders and the balance in the form of its equity shares valued at Rs. 120 each. Calculate purchase consideration to be paid by Y Ltd. and how will it be discharged? Solution Value of 3,000 shares of X Ltd. @ Rs. 70 = Rs. 2,10,000 The purchase consideration will be: = Rs. 2,10,000 for equity shares + Rs. 60,000 for Liability towards preference shareholders = Rs. 2,70,000 Rs. 60,000 out of the above will be in cash and Rs. 2,10,000 in the form of equity shares of Y Ltd., issued at Rs. 120 per share; the number of shares that will be issued = 2,10,000/120 = 1,750 equity shares. 5. Journal Entries to close the books of vendor company The journal entries will be illustrated with the following case. Wye Ltd. acquires the business of Z Ltd. whose balance sheet on 31st December, 2008 is as under : Liabilities Rs. Assets Rs. Share capital divided into Goodwill 2,00,000 shares of Rs. 100 each Land & Buildings 4,00,000 6% Preference share capital 4,00,000 Plant and Machinery 6,00,000 Equity share capital 8,00,000 Patents 50,000 Capital Reserve 1,00,000 Stock 1,50,000 Profit & Loss A/c 50,000 Books Debts 1,80,000 6% Debentures 2,00,000 Cash at Bank 70,000 Interest outstanding on above 12,000 Underwriting Commission 40,000 Workmen’s Compensation Reserve (Expected liability Rs. 5,000) 8,000 Trade Creditors 1,20,000 16,90,000 16,90,000 Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest due on debentures) and to pay following amounts : (i) Rs. 2,00,000 7% Debentures (Rs. 100 each) in Wye Ltd. for the existing debentures in Zed Ltd.; for the purpose, each debenture of Wye Ltd. is to be treated as worth Rs. 105. (ii) For each preference share in Zed Ltd. Rs. 10 in cash and one 9% preference share of Rs. 100 each in Wye Ltd. 6.12 © The Institute of Chartered Accountants of India Amalgamation (iii) For each equity share in Zed Ltd. Rs. 20 in cash and one equity share in Wye Ltd. of Rs. 100 each having the market value of Rs. 140. (iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the extent of Rs. 10,000. Actual expenses amounted to Rs. 12,500. Wye Ltd. valued Land and building at Rs. 5,50,000 Plant and Machinery at Rs. 6,50,000 and patents at Rs. 20,000. Purchase Consideration: Rs. Form (i) Preference Shares: Rs. 10 per share 40,000 Cash Preference shares 4,00,000 4,40,000 Preference shares (ii) Equity shares: Rs. 20 per share 1,60,000 Cash 8,000 equity shares in Wye Ltd. @ Rs. 140 11,20,000 12,80,000 Equity shares 17,20,000 Steps to close the Books of the Vendor Company 1. Open Realisation Account and transfer all assets at book value. Exception: If cash is not taken over by the purchasing company, it should not be transferred. Note: Profit and Loss Account (Dr.) and expenses not written off are not assets and should not be transferred to the Realisation Account. The journal entry in the above case is: Rs. Rs. Realisation A/c Dr. 15,80,000 To Sundries — Goodwill 2,00,000 Land & Building 4,00,000 Plant & Machinery 6,00,000 Patents 50,000 Stock 1,50,000 Book debts 1,80,000 (Transfer of assets to Realisation Account on sale of business to Wye Ltd.) 6.13 © The Institute of Chartered Accountants of India Accounting 2. Transfer to the Realisation Account the liabilities which the purchasing company is to take over. In case of the provisions, the portion which represents liability expected to arise in future should be so transferred and the portion which is not required (i.e., the reserve portion) should be treated as profit. Accordingly, the following entry will be recorded: Rs. Rs. 6% Debentures in Wye Ltd. Dr. 2,00,000 Workmen’s Compensation Reserve Dr. 5,000 Trade Creditors Dr. 1,20,000 To Realisation A/c 3,25,000 (Transfer of liabilities taken over by Wye Ltd. to Realisation A/c) For liabilities not take over by the purchasing company, the profit or loss on discharge of such liabilities shall be transferred to Realisation Account.3. Debit purchasing company and credit Realisation Account with the purchase consideration. Wye Ltd.- Dr. 17,20,000 To Realisation A/c 17,20,000 (Amount receivable from Wye Ltd. for sale of business) 4. On receipt of the purchase consideration debit what is received (cash, debentures, shares etc.) and credit the purchasing company. Thus — Cash Dr. 2,00,000 9% Preference shares in Wye Ltd. Dr. 4,00,000 Equity shares in Wye Ltd. Dr. 11,20,000 To Wye Ltd. 17,20,000 (Receipt of purchase consideration from the purchase company) 5. Expenses of liquidation have to be dealt with according to the circumstances of each case. (a) If the vendor company has to bear and pay them: Realisation Account should be debited and Cash Account credited. (b) If the expenses are to be borne by the purchasing company, the question may be dealt within one of the two ways mentioned below: (i) It may be ignored in the books of the vendor company. 6.14 © The Institute of Chartered Accountants of India Amalgamation (ii) If the expenses are to be paid first by the vendor company and afterwards reimbursed by the purchasing company, the following two entries will be passed : (a) Debit Purchasing company and credit Cash Account when expenses are paid by the vendor company; and (b) Debit Cash Account and credit purchasing company (on the expenses being reimbursed). In the above mentioned case Wye Ltd. has to pay maximum of Rs. 10,000 only whereas, the amount spent is Rs. 12,500. Hence Rs. 2,500 is to be borne by Zed Ltd.; the entries required will be : Rs. Rs. Wye Ltd. Dr. 10,000 Realisation A/c Dr. 2,500 To Cash A/c 12,500 (Liquidation expenses out of which Rs. 10,000 is payable by Wye Ltd.) Cash A/c Dr. 10,000 To Wye Ltd. 10,000 (Account reimbursed by Wye Ltd. for expense) 6. Liabilities not assumed by the purchasing company, have to be paid off. On payment, debit the liability concerned and credit cash. Any difference between the amount actually paid and the book figure must be transferred to the Realisation Account. Zed Ltd. shall pass the following entries in this respect : Rs. Rs. Interest Outstanding Dr. 12,000 To Debentureholders A/c 12,000 (Amount due to debenture holders for debentures interest) Debentureholders Dr. 12,000 To Cash A/c 12,000 (Debentureholders paid cash Rs. 12,000 for outstanding interest) 7. Credit the preference shareholders with the amount payable to them, debiting Preference Share Capital with the amount shown in the books, transferring the difference between the two, if any, to the Realisation Account. Thus — 6% Pref. Share Capital A/c Dr. 4,00,000 Realisation A/c Dr. 40,000 6.15 © The Institute of Chartered Accountants of India Accounting To Preference Shareholders A/c 4,40,000 (The amount due to preference shareholders for capital and the extra amount payable under the scheme of absorption) Note : In the absence of any indication to the contrary, preference shareholders will be entitled only to the capital contributed by them. But if funds available after paying off creditors are not sufficient to satisfy the claim of preference shareholders fully, they will have to suffer a loss to the extent of the deficit.8. Pay off preference shareholders by debiting them and crediting whatever is given to them. The entry in the above case is : Rs. Rs. Preference shareholders A/c Dr. 4,40,000 To Cash A/c 40,000 To 9% Preference shares in Wye Ltd. 4,00,000 (Cash and preference shares in Wye Ltd. given to preference shareholders) 9. Transfer equity share capital and account representing profit or loss (including the balance in Realisation Account) to Equity Shareholders Account. This will determine the amount receivable by the equity shareholders. Zed Ltd. shall pass the following entries in this regard : Rs. Rs. Equity Share Capital A/c Dr. 8,00,000 Capital Reserve A/c Dr. 1,00,000 Profit and Loss A/c Dr. 50,000 Workmen’s Compensation Reserve A/c Dr. 3,000 Realisation A/c Dr. 4,22,500∗ To Sundry Equity Shareholders A/c 13,75,500 (Various accounts representing capital and profit transferred to Equity Shareholders Account) ∗The Realisation Account will appear as follows : Realsation Account Rs. Rs. To Sundry Assets 15,80,000 By Sundry Liabilities 3,25,000 To Cash (excess expenses of liquidation) 2,500 By Wye Ltd. 17,20,000 To Preference Shareholders 40,000 To Equity Shareholders A/c - profit transferred 4,22,500 20,45,000 20,45,000 6.16 © The Institute of Chartered Accountants of India Amalgamation Equity Shareholders A/c Dr. 40,000 To Underwriting Commission A/c 40,000 (Underwriting Commission A/c closed by transfer to Equity Shareholders A/c) 10. On satisfaction of the claims of the equity shareholders, debit their account and credit whatever is given to them. Hence: Equity Shareholders A/c Dr. 13,35,500 To Equity Shares in Wye Ltd. 11,20,000 To Cash A/c∗∗ 2,15,500 6. Entries in the books of Purchasing Company 1. Debit Business Purchase Account and Credit Liquidator of the vendor company with the account of the purchase consideration. Thus - Rs. Rs. Business Purchase A/c Dr. 17,20,000 To Liquidator of Zed Ltd. 17,20,000 (Amount payable to Zed Ltd. as per agreement dated....) 2. (i) Debit assets acquired (except goodwill) at the value placed on them by the purchasing company; (ii) Credit liabilities taken over at agreed values and credit Business Purchase Account with the amount of purchase consideration; and (iii) Credit the account showing shares held in the company, if any, with the cost of such shares. (iv) If the creditors as per (ii) and (iii) above exceed debits as per (i) above, the difference should be debited to Goodwill Account, in the reverse case, the difference should be credited to Capital Reserve. Note : The amount of Goodwill or Capital Reserve that shall be included will be the amount as has been arrived at only in foregoing manner. In the above case the entry to be passed shall be: Rs. Rs. Sundries Dr. Land and Building A/c 5,50,000 Plant and Machinery A/c 6,50,000 ∗∗ The students should prepare Cash Account to ascertain the cash balance. 6.17 © The Institute of Chartered Accountants of India Accounting Patents A/c 20,000 Stock A/c 1,50,000 Sundry Debtors 1,80,000 Goodwill 5,05,000 To Sundries Provision for Workmen’s Compensation A/c 5,000 Trade Creditors 1,20,000 Debentures in Z Ltd. 2,10,000 Business Purchases Account 17,20,000 (Various assets and liabilities taken over from Zed Ltd. Goodwill ascertained as a balancing figure) 3. On the payment to the vendor company the balance at its credit, the entry to be made by Wye Ltd. shall be: Rs. Rs. Liquidator of Zed Ltd. Dr. 17,20,000 To Cash 2,00,000 To 9% Preference Share Capital A/c 4,00,000 To Equity Share Capital A/c 8,00,000 To Securities Premium A/c 3,20,000 (Payment of cash and issue of shares in satisfaction of purchase consideration) 4. Debentures in Z Ltd. A/c Dr. 2,10,000 To 7% Debentures A/c 2,00,000 To Premium on Debentures A/c 10,000 5. If the purchasing company is required to pay the expenses of liquidation of the vendor company, the amount should be debited to the Goodwill or Capital Reserve Account, as the case may be. In the instant case, the entry shall be: Goodwill Account Dr. 10,000 To Cash Account 10,000 (Amount paid towards liquidation expenses on Zed Ltd.) Entries at par value - The students will note that purchasing company is left with a large debit in the Goodwill Account (Step No. 2) accompanied by quite a large amount in the Securities Premium Account (Step No. 3). The two cannot be adjusted. However, it would be permissible to negotiate on the basis to the market value of the shares but to make entries only on the basis of par of 6.18 © The Institute of Chartered Accountants of India Amalgamation shares of purchasing company. This will mean that Goodwill Account (or Capital Reserve) will be automatically adjusted for the share premium. Inter Company-owing - Should the purchasing company owe an amount to the vendor company or vice versa, the amount will be included in the book debts of one company and creditors of the other. This should be adjusted by the entry: Sundry Creditors Dr. To Sundry Debtors The entry should be made after the usual acquisition entries have been passed. At the time of preparing the Realisation Account and passing the business purchase entries, no attention need be paid to the fact that the two companies involved owed money mutually. Adjustment of the value of stock - Inter-company owings arise usually from purchase and sale of goods; it is likely, therefore, that at the time, of the sale of business, the debtor company also has goods in stock which it purchased from the creditor company - the cost of the debtor company will include the profit made by the creditor company. After the takeover of the business it is essential that such a profit is eliminated. The entry for this will be made by the purchasing company. If it is the vendor company which has such goods in stock, at the time of passing the acquisition entries, the value of the stock should be reduced to its cost to the company which is acquiring the business; automatically goodwill or capital reserve, as the case may be, will be adjusted. But if the original sale was made by the vendor company and the stock is with the company acquiring the business, the latter company will have to debit Goodwill (or Capital Reserve) and credit stock with the amount of the profit included in the stock. Illustration 5 The following Balance Sheets are given as on 31st March, 2012: (Rs. in lakhs) (Rs. in lakhs) Best Better Best Better Ltd. Ltd. Ltd. Ltd. Rs. Rs. Rs. Rs. Share Capital: Fixed Assets 25 15 Shares of Rs. 100, each Investments 5 – fully paid 20 10 Current Assets 20 5 Reserve and Surplus 10 8 Other Liabilities 20 2 50 20 50 20 The following further information is given — (a) Investments of Best Ltd. includes Rs. 3 lakhs representing shares in Better Ltd. having a face value of Rs. 2 lakhs. 6.19 © The Institute of Chartered Accountants of India Accounting (b) Better Limited issued shares on 1st April, 2012, in the ratio of one share for every two held, out of Reserves and Surplus. (c) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s Balance Sheet, the consideration taking the form of allotment of shares in Best Ltd. (d) The value of shares in Best Ltd. was considered to be Rs. 150 and the shares in Better Ltd. were valued at Rs. 100 after the issue of the bonus shares. The allotment of shares is to be made on the basis of these values. (e) Liabilities of better Ltd., included Rs. 1 lakh due to Best Ltd., for purchases from it, on which Best Ltd., made profit of 25% of the cost. The goods of Rs. 50,000 out of the said purchases, remained in stock on the date of the above Balance Sheet. Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best Ltd., and prepare the Balance Sheet as at 1st April, 2012 after the takeover. Solution LEDGER OF BETTER LIMITED Fixed Assets Account Rs. Rs. To Balance b/d 15,00,000 By Realisation A/c (transfer) 15,00,000 Current Assets Account Rs. Rs. To Balance b/d 5,00,000 By Realisation A/c (transfer) 5,00,000 Liabilities Account Rs. Rs. To Realisation A/c 2,00,000 By Balance b/d 2,00,000 Realisation Account To Fixed Assets A/c 15,00,000 By Liabilities A/c 2,00,000 ” Current Assets A/c 5,00,000 ” Best Limited 15,00,000 (Purchase Consideration) ” Shareholders’ A/c 3,00,000 (Loss on Realisation) 20,00,000 20,00,000 6.20 © The Institute of Chartered Accountants of India Amalgamation Share Capital Account To Sundry shareholders By Balance b/d 10,00,000 A/c - (transfer) 15,00,000 ” Reserves & Surplus A/c (Bonus issue) 5,00,000 15,00,000 15,00,000 Reserves & Surplus A/c To Share Capital (Bonus issue) 5,00,000 By Balance b/d 8,00,000 ” Sundry Shareholders 3,00,000 8,00,000 8,00,000 Best Ltd. To Realisation A/c - Purchase By Sundry Shareholders (1/5 Consideration 15,00,000 of Purchase Consideration) 3,00,000 ” Shares in Best Ltd. 12,00,000 15,00,000 15,00,000 Shares in Best Ltd. To Best Ltd. 12,00,000 By Sundry Shareholders A/c 12,00,000 Sundry Shareholders A/c To Realisation A/c 3,00,000 By Share Capital A/c 15,00,000 (Loss) ” Reserves & Surplus A/c 3,00,000 ” Best Ltd. 3,00,000 ” Share in Best Ltd. 12,00,000 18,00,000 18,00,000 Journal of Best Ltd. Dr. Cr. 2012 Rs. Rs. Apr. 1 Fixed Assets A/c Dr. 15,00,000 Current Assets A/c Dr. 5,00,000 To Liabilities A/c 2,00,000 To Liquidator of Better Ltd. 12,00,000 To Capital Reserve A/c 3,00,000 To Shares in Better Ltd. 3,00,000 (Assets & Liabilities of Better Ltd. taken over for an agreed purchase consideration of Rs. 12,00,000 and cancellation of investments, held in Better Ltd., at Rs. 3,00,000 as per agreement dated....) 6.21 © The Institute of Chartered Accountants of India Accounting Liquidator of Better Ltd. Dr. 12,00,000 To Share Capital A/c 8,00,000 To Securities Premium A/c 4,00,000 (Discharge of Purchase consideration by the issue of equity shares of Rs. 8,00,000 at a premium of Rs. 50 per share as per agreement) Sundry Creditors A/c Dr. 1,00,000 To Sundry Debtors A/c 1,00,000 (Amount due from Better Ltd., and included in its creditors taken over, cancelled against own sundry debtors) Capital Reserve A/c Dr. 10,000 To Current Asset (Stock) A/c 10,000 (Unrealized profit on stock included in current assets of Better Ltd. written off to Reserve Account) Working Note : Calculation of Purchase consideration: Rs. Issued Capital of Better Ltd. (after bonus issue) at Rs. 100 per share 15,00,000 Less : held by Best Ltd. 3,00,000 Held by outsiders, valued at Rs. 100 per share 12,00,000 Purchase consideration has been discharged by Best Ltd. by the issue of shares for Rs. 8,00,000 at a premium of Rs. 4,00,000. This gives the value of Rs. 150 per share. Balance Sheet of Best Ltd. (After absorption) Particulars Notes Rs. Equity and Liabilities 1 Shareholders' funds a Share capital 1 28,00,000 b Reserves and Surplus 2 16,90,000 2 Current liabilities 21,00,000 Total 65,90,000 Assets 1 Non-current assets a Fixed assets Tangible assets 3 40,00,000 6.22 © The Institute of Chartered Accountants of India Amalgamation b Non-current investments 2,00,000 2 Current assets 23,90,000 Total 65,90,000 Notes to accounts Rs. 1 Share Capital Equity share capital Issued & Subscribed 28,000 shares of Rs. 100 (Of the above 8,000 shares have been issued for 28,00,000 consideration other than cash) Total 28,00,000 2 Reserves and Surplus Capital Reserve 2,90,000 Securities Premium 4,00,000 Other reserves and surplus 10,00,000 Total 16,90,000 3 Tangible assets Fixed Assets 25,00,000 Acquired during the year 15,00,000 40,00,000 Total 40,00,000 Illustration 6 K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two companies on the date of amalgamation was as under: K Ltd. L Ltd. K Ltd. L Ltd. Rs. Rs. Rs. Rs. Share Capital Goodwill 80,000 Equity Shares Land & Building 4,50,000 3,00,000 of Rs. 100 each 8,00,000 3,00,000 Plant & Machinery 6,20,000 5,00,000 7% Preference Share Furniture and of Rs. 100 each 4,00,000 3,00,000 Fittings 60,000 20,000 5% Debentures 2,00,000 — Sundry Debtors 2,75,000 1,75,000 General Reserve — 1,00,000 Stores & Stock 2,25,000 1,40,000 Profit and Loss Cash at Bank 1,20,000 55,000 6.23 © The Institute of Chartered Accountants of India Accounting Account 4,31,375 97,175 Cash in hand 41,375 17,175 Sundry Creditors 1,00,000 2,10,000 Preliminary Secured Loan — 2,00,000 Expenses 60,000 19,31,375 12,07,175 19,31,375 12,07,175 The terms of amalgamation are as under: (A) (1) The assumption of liabilities of both the Companies. (2) Issue of 5 Preference shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at premium of Rs. 4 per share for each preference share held in both the Companies. (3) Issue of 6 Equity shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at a premium of Rs. 4 per share for each equity share held in both the Companies. In addition, necessary cash should be paid to the Equity Shareholders of both the Companies as is required to adjust the rights of shareholders of both the Companies in accordance with the intrinsic value of the shares of both the Companies. (4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5% debentures in K Ltd. at a discount of 5% after takeover. (B) (1) The assets and liabilities are to be taken at book values stock and debtors for which provisions at 2% and 2 ½ % respectively to be raised. (2) The sundry debtors of K Ltd. include Rs. 20,000 due from L Ltd. (C) The LK Ltd. is to issue 15,000 new equity shares of Rs. 20 each, Rs. 18 paid up at premium of Rs. 4 per share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. and L Ltd. to close their books. Solution Books of K Ltd. Realisation Account Rs. Rs. To Goodwill 80,000 By 5% Debentures 2,00,000 To Land & Building 4,50,000 By Sundry creditors 1,00,000 To Plant & Machinery 6,20,000 By LK Ltd. 15,60,000 To Furniture & Fitting 60,000 (Purchase consideration) To Sundry debtors 2,75,000 By Equity shareholders A/c 51,375 To Stores & Stock 2,25,000 (loss) To Cash at Bank 1,20,000 To Cash in hand 41,375 To Preference shareholders (excess payment) 40,000 19,11,375 19,11,375 6.24 © The Institute of Chartered Accountants of India Amalgamation Equity Shareholders A/c Rs. Rs. To Preliminary Expenses 60,000 By Share capital 8,00,000 To Realisation A/c (loss) 51,375 By Profit & Loss A/c 4,31,375 To Equity Shares in LK Ltd. 10,56,000 To Cash 64,000 12,31,375 12,31,375 LK Ltd. A/c Rs. Rs. To Realisation A/c 15,60,000 By Equity Shares in LK Ltd. For Equity 10,56,000 Pref. 4,40,000 14,96,000 By Cash 64,000 15,60,000 15,60,000 Books of L Ltd. Realisation Account Rs. Rs. To Land & Building 3,00,000 By Sundry creditors 2,10,000 To Plant & Machinery 5,00,000 By Secured loan 2,00,000 To Furnitures & Fittings 20,000 By LK Ltd. (Purchase To Sundry debtors 1,75,000 consideration) 7,90,000 To Stock of stores 1,40,000 By Equity shareholders A/c— To Cash at bank 55,000 Loss 37,175 To Cash in hand 17,175 To Pref. shareholders 30,000 12,37,175 12,37,175 Equity Shareholders Account Rs. Rs. To Equity shares in LK Ltd. 3,96,000 By Share Capital 3,00,000 To Realisation 37,175 By Profit & Loss A/c 97,175 To Cash 64,000 By Reserve 1,00,000 4,97,175 4,97,175 LK Ltd. Account Rs. Rs. To Realisation A/c 7,90,000 By Equity shares in LK Ltd. 6.25 © The Institute of Chartered Accountants of India Accounting For Equity 3,96,000 Preference 3,30,000 7,26,000 By Cash 64,000 7,90,000 7,90,000 Working Notes: (i) Purchase consideration K Ltd. L Ltd. Rs. Rs. Payable to preference shareholders: Preference shares at Rs. 22 per share 4,40,000 3,30,000 Equity Shares at Rs. 22 per share 10,56,000 3,96,000 Cash [See W.N. (ii)] 64,000 64,000 15,60,000 7,90,000 (ii) Value of Net Assets K Ltd. L Ltd. Rs. Rs. Goodwill 80,000 Land & Building 4,50,000 3,00,000 Plant & Machinery 6,20,000 5,00,000 Furniture & Fittings 60,000 20,000 Debtors less 2.5% 2,68,125 1,70,625 Stock less 2% 2,20,500 1,37,200 Cash at Bank 1,20,000 55,000 Cash in hand 41,375 17,175 18,60,000 12,00,000 Less : Debentures 2,00,000 – Creditors 1,00,000 2,10,000 Secured Loans – 3,00,000 2,00,000 4,10,000 15,60,000 7,90,000 Payable in shares 14,96,000 7,26,000 Payable in cash 64,000 64,000 Illustration 7 The following are the summarized Balance Sheets of A Ltd. and B Ltd. as on 31.3.2012: (Rs. in thousands) Liabilities A Ltd. B Ltd. Share capital: Equity shares of 100 each fully paid up 2,000 1,000 6.26 © The Institute of Chartered Accountants of India Amalgamation Reserves 800 --- 10% Debentures 500 --- Loans from Banks 250 450 Bank overdrafts --- 50 Sundry creditors 300 300 Proposed dividend 200 --- Total 4,050 1,800 Assets Tangible assets/fixed assets 2,700 850 Investments (including investments in B Ltd.) 700 --- Sundry debtors 400 150 Cash at bank 250 --- Accumulated loss --- 800 Total 4,050 1,800 B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved: (i) Banks agreed to waive off the loan of Rs.60 thousands of B Ltd. (ii) B Ltd. will reduce its shares to Rs.10 per share and then consolidate 10 such shares into one share of Rs.100 each (new share). (iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of every share held in A Ltd. (iv) Proposed dividend of A Ltd. will be paid after merger to shareholders of A Ltd. (v) Sundry creditors of B Ltd. includes Rs.100 thousands payable to A Ltd. (vi) A Ltd. will cancel 20% holding in B Ltd. as investment, which was held at a cost of Rs.250 thousands. Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger. Solution Calculation of purchase consideration One share of B Ltd. will be issued in exchange of every share of A Ltd. (i.e. 20,000 equity shares of B Ltd will be issued against 20,000 equity shares of A Ltd.) 20,000 shares Less: Shares already held (20% of 10,000 shares) 2,000 shares converted in new equity shares 200 shares Number of shares to be issued by B Ltd to shareholders of A Ltd. 19,800 shares 6.27 © The Institute of Chartered Accountants of India Accounting Journal Entries in the books of B Ltd. Date (Rs. in thousands) 2012 Dr. Cr. March,31 Loan from bank A/c Dr. 60 To Reconstruction A/c 60 (Being loan from bank waived off to the extent of Rs. 60 thousand) Equity share capital A/c (Rs.100) Dr. 1,000 To Equity share capital A/c (Rs.10) 100 To Reconstruction A/c 900 (Being equity shares of Rs. 100 each reduced to Rs.10 each) Equity share capital A/c (Rs.10) Dr. 100 To Equity share capital A/c (Rs.100 each) 100 (Being 10 equity shares of Rs. 10 each consolidated to one share of Rs.100 each) Reconstruction A/c Dr. 960 To Profit and loss A/c 800 To Capital reserve A/c 160 (Being accumulated losses set off against reconstruction A/c and balance transferred to capital reserve account) Business purchase A/c Dr. 1,980 To Liquidator of A Ltd. 1,980 (Being purchase of business of A Ltd.) Fixed asset A/c Dr. 2,700 Investment A/c (700 – 250) Dr. 450 Sundry debtors A/c Dr. 400 Cash at bank A/c Dr. 250 To Sundry creditors A/c 300 To Proposed dividend A/c 200 To Loans from bank A/c 250 To 10% Debentures A/c 500 6.28 © The Institute of Chartered Accountants of India Amalgamation To Business purchase A/c 1,980 To Reserves A/c (800 – 230) 570 (Being assets, liabilities and reserves taken over under pooling of interest method) Liquidator of A Ltd. A/c Dr. 1,980 To Equity share capital A/c 1,980 (Being payment made to liquidators of A Ltd. by allotment of 19,800 new equity shares) Sundry creditors A/c Dr. 100 To Sundry debtors A/c 100 (Being mutual owing cancelled) Proposed dividend A/c Dr. 200 To Bank A/c 200 (Being dividend paid off) Balance Sheet of B Ltd. after merger as on 31.3.2012 Particulars Notes Rs. in ‘000 Equity and Liabilities 1 Shareholders' funds a Share capital 1 2,080 b Reserves and Surplus 2 730 2 Non-current liabilities a Long term borrowings 3 1,140 3 Current liabilities a Trade payables 500 b Short term borrowings 4 50 Total 4,500 Assets 1 Non-current assets a Fixed assets Tangible assets 3,550 b Non-current investments 450 2 Current assets a Trade receivables 450 6.29 © The Institute of Chartered Accountants of India Accounting b Cash and cash equivalents 50 Total 4,500 Notes to accounts Rs. 1 Share Capital 20,800, Equity shares of Rs.100 each fully paid 2,080 (Out of the above, 19,800 shares have been issued for consideration other than cash) 2 Reserves and Surplus Capital reserve 160 General reserve 570 Total 730 3 Long Term Borrowings 10% Debentures 500 1,140 Loan from Bank (250+450-60) 640 4 Short term borrowings 50 Bank overdraft Illustration 8 Given below are the summarized balance sheets of Huge Ltd and Big Ltd. as on 31.12.2012. Big Ltd. was merged with Huge Ltd. with effect from 1.1.2013. Balance Sheets as on 31.12.2012 (Rs.) Liabilities Huge Ltd. Big Ltd. Assets Huge Ltd. Big Ltd. Share capital : Sundry fixed 9,50,000 4,00,000 assets Equity shares of 7,00,000 2,50,000 Investments 2,00,000 50,000 Rs. 10 each (Non-trade) General reserve 3,50,000 1,20,000 Stock 1,20,000 50,000 Profit and loss A/c 2,10,000 65,000 Debtors 75,000 80,000 Export profit reserve 70,000 40,000 Advance tax 80,000 20,000 12% Debentures 1,00,000 1,00,000 Cash and bank 2,75,000 1,30,000 Sundry creditors 40,000 45,000 Preliminary 10,000 expenses Provision for 1,00,000 60,000 taxation Proposed Dividend 1,40,000 50,000 17,10,000 7,30,000 17,10,000 7,30,000 6.30 © The Institute of Chartered Accountants of India Amalgamation Huge Ltd. would issue 12% debentures to discharge the claims of the debenture holders of Big Ltd. at par. Non-trade investments of Huge Ltd. fetched @ 25% while those of Big Ltd. fetched @ 18%. Profit of Huge Ltd. and Big Ltd. during 2010, 2011 and 2012 were as follows: Year Huge Ltd. Big Ltd. Rs. Rs. 2010 5,00,000 1,50,000 2011 6,50,000 2,10,000 2012 5,75,000 1,80,000 Goodwill may be calculated on the basis of capitalization method taking 20% as the normal rate of return. Purchase consideration is discharged by Huge Ltd. on the basis of intrinsic value per share. Both companies decided to cancel the proposed dividend. Pass Journal Entries and prepare the balance sheet of Huge Ltd. after the merger. Solution Balance Sheet of M/s. Huge Ltd. after merger Particulars Notes Rs. Equity and Liabilities 1 Shareholders' funds a Share capital 1 9,24,000 b Reserves and Surplus 2 14,90,960 2 Non-current liabilities a Long term borrowings 3 2,00,000 3 Current liabilities a Trade payables 85,000 b Short term provisions 4 1,60,000 Total 28,59,960 Assets 1 Non-current assets a Fixed assets Tangible assets 13,50,000 Intangible assets 5 3,80,000 b Non-current investments 2,50,000 c Other non-current assets 8 40,000 2 Current assets a Inventories 1,70,000 6.31 © The Institute of Chartered Accountants of India Accounting b Trade receivables 1,55,000 c Cash and cash equivalents 4,04,960 d Short term loans and advances 6 1,00,000 e Other current assets 7 10,000 Total 28,59,960 Notes to accounts Rs. 1 Share Capital 9,24,000 92,400 Equity shares of Rs. 10 each (of which 22,400 shares were issued for consideration other than cash) 2 Reserves and Surplus Securities premium 6,80,960 General reserve 3,50,000 Profit and loss A/c 2,10,000 Add: Proposed dividend Cancelled 1,40,000 3,50,000 Export profit reserve (70,000 + 40,000) 1,10,000 Total 14,90,960 3 Long Term Borrowings Secured 2,00,000 12% Debentures (1,00,000+1,00,000) 4 Short term provisions 1,60,000 Provision for tax (1,00,000+60,000) 5 Intangible assets 3,80,000 Goodwill (W.N.3C) 6 Short term loans and advances 1,00,000 Advance tax (80,000+20,000) 7 Other current assets 10,000 Preliminary expenses 6.32 © The Institute of Chartered Accountants of India Amalgamation 8 Other non-current asset 40,000 Amalgamation Adjustment A/c Working Notes: 1. Calculation of purchase consideration: Equity shares of Big Ltd. 25,000 shares Intrinsic value per share of Big Ltd. (W.N.2) Rs. 36.2 Value of shares Rs. 9,05,000 Intrinsic value per share of Huge Ltd. (W.N.2) Rs. 40.4 No. of shares to be issued by Huge Ltd. Rs. 9,05,000/Rs.40.4 = 22,400.99 shares i.e 22,400 shares and cash for fraction i.e. .99 x Rs.40.4= Rs.40 Accounting for Amalgamations and Corporate Restructuring Purchase consideration i. 22,400 shares @ Rs. 40.4 Capital [Rs.10 / Share] 2,24,000 Premium [Rs. 30.4 / Share] 6,80,960 Rs. 9,04,960 ii. Cash for fraction Rs. 40 iii. Total purchase consideration payable Rs. 9,05,000 2. Intrinsic value per share: Huge Ltd. Big Ltd Rs. Rs. Rs. Rs. Assets i. Goodwill (W.N.3) 13,65,000 3,80,000 ii. Sundry fixed assets 9,50,000 4,00,000 iii. Investments 2,00,000 50,000 iv. Stock 1,20,000 50,000 v. Debtors 75,000 80,000 vi. Advance tax 80,000 20,000 vii. Cash and bank balance 2,75,000 30,65,000 1,30,000 11,10,000 Liabilities i. 12% Debentures 1,00,000 1,00,000 ii. Sundry creditors 40,000 45,000 iii. Provision for tax 1,00,000 (2,40,000) 60,000 (2,05,000) Net assets 28,25,000 9,05,000 6.33 © The Institute of Chartered Accountants of India Accounting No. of shares 70,000 25,000 Intrinsic value per share (upto 40.4 36.2 one decimal) 3. Valuation of goodwill A. Capital Employed Huge Ltd. Big Ltd. Rs. Rs. Rs. Rs. Assets i. Sundry fixed assets 9,50,000 4,00,000 ii. Investment (Non-trade) - - iii. Stock 1,20,000 50,000 iv. Debtors 75,000 80,000 v. Advance tax 80,000 20,000 vi. Cash and bank balance 2,75,000 15,00,000 1,30,000 6,80,000 Liabilities: i. 12% Debentures 1,00,000 1,00,000 ii. Sundry creditors 40,000 45,000 iii. Provision for tax 1,00,000 (2,40,000) 60,000 (2,05,000) Capital employed 12,60,000 4,75,000 B. Average pre-tax profit: Particulars Huge Ltd. Big Ltd. Rs. Rs. 2007 5,00,000 1,50,000 2008 6,50,000 2,10,000 2009 5,75,000 1,80,000 Total (a+b+c) 17,25,000 5,40,000 Simple Average [(a) ÷3] 5,75,000 1,80,000 Less: Non-trading income (2,00,000 @ 25%) (50,000) (50,000 @ 18%) (9,000) Average profit 5,25,000 1,71,000 6.34 © The Institute of Chartered Accountants of India Amalgamation C. Computation of goodwill: Rs. Particulars Huge Ltd. Big Ltd. Capitalised value of average profits ⎡5,25,000 1,71,000⎤ 26,25,000 8,55,000 ; ⎢ ⎥ ⎣ .20 .20 ⎦ Capital employed 12,60,000 4,75,000 Goodwill 13,65,000 3,80,000 Summary 1. 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. 2. 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. 3. A company which is merged into another company is called a transferor company or a vendor company. 4. A company into which the vendor company is merged is called transferee company or vendee company or purchasing company. 5. In amalgamation in the nature of merger there is genuine pooling of: a) Assets and liabilities of the amalgamating companies, b) Shareholders’ interest, Also the business of the transferor company is intended to be carried on by the transferee company. 6. In amalgamation in the nature of purchase, one company acquires the business of another company. 7. 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. 8. There are two main methods of accounting for amalgamation: a) The pooling of interests method, and b) The purchase method. 6.35 © The Institute of Chartered Accountants of India Accounting 9. 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. 10. 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 6.36 © The Institute of Chartered Accountants of India