9

Amalgamation, Absorption and External Reconstruction

In the globalization era, the most commonly used term in the corporate sector is “Merger, Acquisition”. In simple terms, it is nothing but the joining together of companies. The underlying motive behind such combination of companies is to enhance the resources of capital, to enjoy the fruits of economies of large-scale production, to reduce competition, to increase efficiency and so on. The combination of joint stock companies may take place in the following methods:

1. Amalgamation
2. Absorption
3. (External) Reconstruction
   In this chapter, each of these ways of combination of companies is explained in detail with a number of illustrations.

9.1 MEANING

There are different meanings in vogue for the terms amalgamation, absorption and external reconstruction.

9.1.1 Common Meaning

Amalgamation: When two or more companies that exist as on date combine together to form a new company, then it is called “amalgamation”.

In this case, all the combining companies will get liquidated. A new company will be formed to take over their business.

To illustrate, X Ltd. and Y Ltd., the two existing companies, combine together to form Z Ltd., a new company. X Ltd. and Y Ltd. will get liquidated. A new company Z Ltd. is formed to run the business.

Absorption: When one existing company takes over the business of two or more older existing companies, it is called “absorption”. The other two or more existing companies (i.e., companies whose business are taken over) will get liquidated. At the same time, no new company will be floated.

To illustrate, X Ltd., one existing company, takes over other two existing companies Y Ltd. and Z Ltd. Y Ltd. and Z Ltd. will get liquidated. X Ltd. continues to do its business and no new company will be formed. In other words, X Ltd. absorbs the other two companies Y Ltd. and Z Ltd. X Ltd. continues to do its business whereas Y Ltd. and Z Ltd. will be liquidated.

External reconstruction: When an existing company is liquidated and in its place a new company is floated but with the same shareholders, it is known as “external reconstruction”. Shareholders will remain unaltered but company’s name and structure will be new.

To illustrate, X Ltd. is liquidated. But the existing shareholders continue their status as shareholders and a new company Y Ltd. is formed.

9.1.2 Legal Basis

The Companies Act, 1956 remain silent on this, i.e., the term “amalgamation” has not been defined specifically. However, the Courts have interpreted the term to include amalgamation as well as absorption. In S. Somayajulu vs. Hop Prudhommee and Company Ltd., (1963, Com. L.J61), amalgamation has been defined as “a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blended with another”.

According to Halsburg’s laws of England, amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders of the company which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company.

Sections 390 to 396(A) of the Companies Act envisage certain provisions relating to amalgamation.

Accordingly, any scheme of amalgamation necessitates the approval of the Court. The Court wields enormous powers on this matter.

Section 494 of the Companies Act facilitates amalgamation, absorption and reconstruction of a company. It provides that the liquidator of a company can accept shares, policies or other like interests in the transferee company for distribution among the members of the transferor company, provided, the following two conditions are satisfied:

1. A special resolution is passed by the Company to the effect
2. The liquidator purchases the interest of any dissenting member at a price to be determined by agreement or by arbitration

9.1.3 Accounting Basis

Accounting for amalgamation: Standard AS-14, issued by the Institute of Chartered Accountants of India, deals with the accounting for amalgamation and the treatment of any resultant goodwill or reserves. This standard was issued in 1994. This is mandatory to all companies with effect from the accounting year commencing on or after 1 April 1995.

According to AS-14, amalgamation means an amalgamation pursuant to the provisions of the Companies Act 1956, or any other statute which may be applicable to companies.

The Standard uses the term “transferor company” for the company which is amalgamated into another company.

The Company selling its business is also called “vendor company”.

The Company into which a transferor company is amalgamated is called “transferee company”.

The Company which acquires the business is also called the “vendee company”.

It is important to note that:

1. The term amalgamation includes “absorption” also
2. The term amalgamation does not apply to acquisitions in the nature of controlling interest (Because in such cases, the acquired company will not be dissolved and its separate entity will continue to exist).

9.2 TYPES OF AMALGAMATION

The Standard AS-14 classifies amalgamation into two categories:

1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase

9.2.1 Amalgamation in the Nature of Merger

Amalgamation should be considered to be an amalgamation in the nature of merger if the following conditions are satisfied:

1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation.
2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than equity shares already held therein, immediately before the amalgamation of the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of an amalgamation.
3. The consideration to the shareholders of the transferor company (willing to become equity shareholders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.
4. The business of the transferee company is intended to be carried on after amalgamation by the transferee company.
5. 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.

9.2.2 Amalgamation in the Nature of Purchase

The amalgamation is in the nature of purchase, if any one or more of the conditions stipulated for the merger are not satisfied.

Hence, in the amalgamation in the nature of purchase:

1. Selling company’s business will not be carried on in future
2. Shareholders holding 90% of the transferor company will not become shareholders of the transferee company
3. All the assets and liabilities of the selling company will not be taken over by the transferee company
4. Consideration payable to shareholders of transferor company may be in the form of shares or cash or in any other agreed form
5. Assets and liabilities taken over by the transferee company may be shown at values other than book values at the discretion of the transferee company

Note: Transferor company is the “selling company” and transferee company is the “purchasing company”.

The Accounting Standard, for the purpose of accounting, recommends the “pooling of interests method” in the case of “amalgamation in the nature of merger” and the “purchase method” for “amalgamation in the nature of purchase”. These methods will be discussed in detail later.

9.3 ACCOUNTING TREATMENT AS PER AS-14

Notwithstanding the fact that amalgamation, absorption and external reconstruction differ in many aspects, all have some common accounting problems.

They are as follows:

1. In all the cases, the transferor company and the transferee company must first agree the purchase consideration, i.e., the purchase price that should be acceptable by both parties
2. In all the cases, accounting entries have to be passed in the books of companies that will be liquidated in order to close the accounting books.
3. In all the cases, accounting entries have to be passed in the books of the transferee (purchasing) company to record the transactions pertaining to acquisition of business.
4. In all the cases, if the amalgamation is in the nature of merger “pooling of interest” method has to be adopted and if it is in the nature of purchase “purchase method” has to be adopted.

Before trying to solve problems relating to amalgamation, one has to understand some of the important terms associated with amalgamation, absorption and external reconstruction. They are discussed as follows:

Taking over the business: This term refers to take over of all the assets and liabilities of the business entity.

All assets: This term comprises fixed assets, current assets, goodwill, prepaid expenses, cash (in hand and at bank). But this term does not include fictitious assets shown on the assets side of the balance sheet under the heading “Miscellaneous Expenditure”.

Example: Preliminary expenses, profit and loss account (debit balance), discount on the issue of shares or debentures.

Trade liabilities: Example: Creditors, bills payable—They are to be grouped under liabilities.

Liabilities: This term is used to refer all liabilities to third parties. First party is the company and second party is the shareholders. Liabilities include the following:

1. Creditors
2. Trade creditors
3. Bills payable
4. Bank overdraft
5. Loans
6. Outstanding expenses
7. Unclaimed dividends
8. Provision for taxation
9. Provision for gratuity
10. Pension fund
11. Provident fund
12. Superannuation fund
13. Workmen savings bank accounts (Deposit)
14. Workmen profit sharing fund
15. Workmen compensation
16. Debentures
17. Employees’ deposit
18. Public deposits
19. Creditors for expenses

Provisions: Provisions for certain items may be shown separate item on the liabilities side of the balance sheet. But mostly, provisions are shown as deduction from respective assets on the assets side of the balance sheet. Both the assets and the provision on the assets are to be transferred to realization account.

Example: Provision for depreciation, provision for doubtful debts, provision for repairs and renewals, investment fluctuation fund.

Accumulated profits and losses: Undistributed profits of both revenue and capital nature are shown on the liabilities side of the balance sheet. Accumulated losses appear on the assets side of the balance sheet.

The purchasing company (transferee company) is neither entitled to accumulated profit nor accumulated loss. They belong to the equity shareholders of the transferor company (selling or vendor company). They should be transferred to the equity shareholders. Accumulated profits would be credited and accumulated losses would be debited to that account.

Accumulated profits include the following:

1. Profit and loss A/c—credit balance
2. General reserve
3. Capital reserve
4. Capital redemption reserve
5. Dividend equalization reserve
6. Sinking fund
7. Development rebate reserve
8. Investment allowance reserve
9. Securities premium
10. Share forfeited account
11. Fund—some items only, e.g., insurance fund
12. Revaluation reserve
13. Export profit reserve
14. Project export reserve
15. Contingency reserve

Accumulated losses include the following items:

1. Profit & loss A/c (Debit balance)
2. Preliminary expenses
3. Discount on issue of shares and debentures
4. Deferred revenue expenditure
5. Underwriting commission
6. Fictitious assets

Fund: Fund items may belong to any category— assets or liabilities, depending on its nature.

1. Fully accumulated profits category:
   1. Sinking fund
   2. Insurance fund
   3. Dividend equalization fund
   4. Debenture redemption fund
2. Purely liabilities category:
   1. Employee’s provident fund
   2. Employee’s profit sharing fund
   3. Employee’s pension fund
   4. Employee’s superannuation fund
3. Partly profit and partly liability funds:
   1. Employees compensation fund
   2. Contingency fund
   3. Employee insurance fund

If there is any balance in the workmen compensation fund, insurance fund and accident fund (after completely meeting out the liability), it should be transferred to equity shareholders account.

Important note:

1. In case, when some of the assets are not taken over, they are not to be included in take over even if the term “business” is given in the question.
2. In case, if any liability is not taken over, it will not form part of net assets method. Now, we will discuss the first stage: purchase consideration.

9.3.1 Purchase Consideration

In general, “purchase consideration” means the cash and non-cash payments made to the shareholders of the transferor (vendor) company. Accounting Standard AS-14, issued by the ICA1, defines the term consideration as, “Consideration for the amalgamation means the aggregate of shares and other securities issued and the payment made in the form of cash and other assets by the transferee company to the shareholders of the transferor company”.

9.3.1.1 Salient Features of “Purchase Consideration”

The following are the salient features of purchase consideration:

1. Purchase consideration is confined to payments (cash and non-cash) to the shareholders of the transferor company (Selling company).
2. This amount payable has to be made by the transferee company which is to be treated as consideration for the acquisition of business.
3. Any amount paid to debenture holders, creditors and cost of absorption should not be included in purchase consideration.
4. Non-cash elements of purchase consideration should be determined at the fair value.
5. AS-14 recognizes the consideration payable to equity as well as preference shareholders of the transferor company.

9.3.1.2 Computation of Purchase Consideration

The following are the different methods of computing purchase consideration:

1. Lumpsum method
2. Net payments method
3. Net assets method
4. Ratio of exchange method

It is to be noted that as per AS-14, purchase consideration means only payment made to shareholders, irrespective of the method applied to compute purchase consideration.

9.3.1.2.1 Lumpsum Method

At times, the purchase consideration is mentioned (as a lump sum) straightaway in the agreement. In such a case, no necessity arises to compute purchase consideration.

9.3.1.2.2 Net Payment Method

Only those agreed payments specified in the agreement have to be added to determine the purchase consideration. That means, the quantum of amount payable in cash or shares or debentures are all to be added. The aggregate of the amount is referred to as “net payment” made by the purchasing company. It has to be paid to shareholders of the selling company.

Some of the important factors to be observed while determining the purchase consideration are as follows:

1. Only the agreed amount specified in the agreement should be included in the consideration.
2. In general, purchase consideration will not include payments to debenture holders and creditors. For this, a separate adjustment has to be made: such liabilities should be transferred to the books of the transferee company and then payment of liabilities should be shown in the books of the transferee company.
3. Liquidation expenses of the transferor company are met by the transferee company. Accountants differ in the treatment of liquidation expenses. If they are payable by the purchasing company, it is to be added to purchase consideration. But some accountants exclude the liquidation expenses in determining purchase consideration.
4. Shares issued by the transferee company should be valued at market price if the “purchase method” is adopted and at par value (fully paid only) if “the pooling of interests” method is adopted.

Illustration 9.1

Model: Net payment method

X Ltd. agreed to take over the business of Y Ltd. on the following terms:

1. The shareholders of Y Ltd. are to be paid 20 in cash and the offer of five shares of 10 each in X Ltd. for every share of Y Ltd. Y Ltd. had 60,000 equity shares outstanding
2. The debenture holders holding 10,000 debentures of 100 each are to be redeemed at a premium of 20%
3. Costs of liquidation amounting to 40,000 are to be borne by X Ltd.
   Compute the purchase consideration.

Solution

Note:

1. Debenture holders payment will be excluded.
2. Payment in cash and in shares have to be added.
3. Liquidation expenses are to be included, as they are to be borne by X Ltd.

   Computation of Purchase Consideration (Under Net Payment Method)

Step 1:	Cash Payment 60,000 Equity Shares × 20
	(Outstanding) (Given)	12,00,000
Step 2:	Payment by Shares Shares Issued 5 Shares for 1 Share
	∴ Total Shares = 5 × 60,000 = 3,00,000
	Total Amount = 3,00,000 × 10	30,00,000
Step 3:	Cash Payment for Liquidation Expenses:	40,000
Step 4:	Purchase Consideration
	(Step 1 + Step 2 + Step 3):	42,40,000

9.3.1.2.3 Net Assets Method

This method will be used if the “net payment method” cannot be used. When payment made is not crystal clear for various items, this method can be used. That means, if some form of cash payment is missing in the problem, this method can be adopted.

Under this method, purchase consideration is to be determined by adding the agreed values of assets taken over and deducting the agreed value of liabilities. This can be put in the form of equation as:

 

Some of the important factors to be observed while determining purchase consideration under this method are:

1. The term “Assets” includes cash and bank balances.
2. The term “Assets” excludes items such as preliminary expenses, profit & loss A/c (Dr.), discount on issue of shares.
3. Items shown on the assets side of balance sheet under the head “Miscellaneous Expenditure” should not be included in the category of assets.
4. Any other asset specially mentioned as “not taken over” should not be included.
5. Similarly, liabilities not taken over should not be included.
6. All credit balances should be excluded.
7. Items shown on the liabilities side of the balance sheet under the head “Reserves & Surplus” should not be included.
8. Accumulated profits are not liabilities. They should be excluded.
9. Liabilities included are amounts to third parties.
10. Any “fund”—for example, workmen’s savings, profit sharing fund, PF—should be included under liabilities category.
11. “Trade creditors” comprises only creditors and bills payable. All other liabilities such as tax payable overdraft, any outstanding expenses are not a form of liability.

Illustration 9.2

Model: Net assets method

The following is the balance sheet of Maa Ltd. as on 31 March 2011:

On the date of balance sheet, the company was taken over by Pappa Ltd. on the following terms:

1. Fixed assets are revalued at 12,00,000
2. Investments have a market value of 1,50,000
3. Current assets are agreed at 3,50,000 for the purpose of absorption
4. Pappa Ltd. has agreed to pay the tax liability, which is estimated at 1,75,000
5. Dividends are to be paid before absorption by Maa Ltd.

Compute the purchase consideration.

Solution

Purchase Consideration payable to the Shareholders of Maa Ltd. = 12,25,000.

This amount, i.e., 12,25,000, may be paid by Pappa Ltd. either in the form of cash or shares or debentures or in the combined form of cash and securities.

Note: As dividends are to be paid before absorption, the proposed dividend has to be deducted from current assets. It may also be shown as a liability to be deducted combined with other liabilities, if it is agreed to be taken over by Pappa Ltd.

9.3.1.2.4 Share Exchange Method (or) Intrinsic Value Method

Under this method, the purchase consideration is determined on the basis of the ratio in which the shares of the transferee company are exchanged with those of the transferor company. The ratio of exchange is to be decided on the basis of intrinsic or market value of the shares concerned. To illustrate, X Ltd. merged with Y Ltd. and allotted 7 shares for every 25 shares held by shareholders of X Ltd. If a shareholder holds 500 shares in X Ltd., he receives in exchange 140 shares in Y Ltd. ( i.e., × 7 = 140 shares ).

Intrinsic value is determined by using the formula:

Then purchase consideration is determined by using the formula:

Purchase consideration = Number of shares issued to the shareholders of the transferor company × Intrinsic value of the shares of the transferee company

At this juncture, one has to understand how fractional shares will have to be treated. Take the case illustrated in the share exchange method above. One Mr. Khan holds 60 shares in X Ltd. He is entitled to have × 7 = 16.8 shares. As shares will have to be issued in whole numbers only, 16 shares can be issued to him. Mr. Khan will have to be compensated in cash for 0.8 share. It is based on market price. The transferee company sells such shares at the market price and remits the proceeds to the shareholders of the transferor company.

Illustration 9.3

Model: Intrinsic value method & treatment of fractional shares

A Ltd. takes over B Ltd. in pursuance of the scheme of amalgamation and it was agreed that the shareholders of B Ltd. must be issued shares in A Ltd. and the exchange is to be determined on the basis of intrinsic values of the shares of the two companies concerned. The capital of B Ltd. comprises 75,000 equity shares of 10 each. The intrinsic values were: A Ltd.: 80 and B Ltd.: 50. In allotment, fractional shares are aggregate to 375. The market value of A Ltd. was 90. You are required to compute the purchase consideration payable to B Ltd.

Solution

Step 1: Determine the Ratio of Exchange:

• It Is Based in Intrinsic Value of Shares as per the Direction Given in the Question.
• Intrinsic Value of Shares Ratio A:B = 80: 50, i.e., 8:5
• Hence, the Ratio of Exchange Will be for Every 8 Shares of B, 5 Shares of A Ltd.

Step 2: Determine the Number of Shares to Be Issued by

      A Ltd. = × 5 = 46,875 Shares

Step 3: Actual Number of Shares to Be Issued Is Determined by Deducting Fractional

 

       Shares, i.e., 46,875 − 375 = 46,500 Shares.

Step 4: Determination of Purchase Consideration:

 

(i) Number of Shares to Be Issued × Intrinsic Value
46,500 × 80	=	37,20,000
(ii) Add: Fractional Shares 375 × 80	=	30,000
Total:		37,50,000

 

But, according to established accounting procedure, 375 shares representing fractional shares will have to be sold at market price. In this question, market price per share as given as 90. Then the total amount for fractional shares will be 375 × 90 = 33,750. This amount, 33,750, will be remitted to individual shareholders. The shareholder will get his amount as per the fraction of the share he is entitled to. To illustrate, if one Mr. X will be getting for his fractional share, say 0.6, 0.6 × 90 = 54, and if the other one, Y for his fractional share 0.3 will be getting 0.3 × 90 = 27 and so on. However, the total amount so remitted for fractional shares will be equal to 33,750.

Some more illustrations on computation of purchase consideration are given in the following:

Illustration 9.4

Model: Purchase consideration—Net assets method

The balance sheet of ABC Ltd. as at 31 March 2011 is as follows:

XYZ Ltd. intends to take over the business on the following terms and valuation:

1. Building at 1,70,000; plant & machinery at 2,50,000; furniture at 15,000; stock at 1,00,000; debtors subject to a provision of 10% for doubtful debts; goodwill found to be nil
2. There was a liability of 15,000 against workmen compensation fund
3. Actual tax liability is 25,000
4. Realization expenses estimated at 10,000 to be borne by XYZ Ltd.
5. Preference shareholders are to be paid in cash
6. Balance to be paid in equity shares of XYZ Ltd. of 10 shares

Solution

Computation of Purchase Consideration:

Payment of Purchase Consideration (As per Directions Given in the Problem):

 

For Preference Share holders in Cash:	1,50,000
Balance in 42,700 Equity Shares (of 10 Each) 4,27,000
( 5,77,000 − 1,50,000 = 4,27,000)
Total	5,77,000

 

Note:

1. Realization expenses are not included.
2. If realization expenses will be paid by the transferor company, then it will be included and the value of purchase consideration will be reduced to that extent.

Illustration 9.5

Model: Net assets method—Two companies agree to amalgamate

The following are the balance sheets of A Co. Ltd. and B. Co. Ltd. as on 31 March 2011:

The two companies agree to amalgamate and form a new company called C Co Ltd., which takes over the assets and liabilities of the two companies. The authorized capital of C Ltd. is 15,00,000 consisting of 1,50,000 equity shares of 10 each. The assets of A Ltd. are taken over at a reduced valuation of 20% with the exception of land and buildings and cash which are accepted at book value. Both companies are to receive 10% of the net valuation of their respective as goodwill. The entire purchase price is to be paid by C Ltd. in fully paid shares. In return for debentures of A Ltd., debentures of the same amount and denomination are to be issued by C Ltd.

You are required to compute purchase consideration.

Solution

Computation of Purchase Consideration:

Illustration 9.6

Model: Net payment method or total payment method—Purchase consideration

A Ltd. is absorbed by B Ltd., the consideration being the take over of liabilities; the payment of cost of absorption as a part of purchase consideration not exceeding 30,000 (actual cost 22,000); the payment of the debentures of 1,75,000 at a premium of 10% in 12% debentures issued at par; and the payment of 15 per share in cash and allotment of 15% preference share of 10 each and 5 equity shares of 10 each fully paid for every 2 shares in A Ltd. The number of shares of the vendor company are 3,00,000 of 10 each fully paid.

You are required to calculate the purchase consideration as per Accounting Standard-14 assuming it is an absorption in the nature of purchase.

Solution

Important notes:

1. Under net payments method, payments made by the transferee (purchasing) company in any form to discharge or pay the debenture holders, creditors, contingent liabilities, expenses of realization (cost of absorption) should not be included in the purchase consideration as per AS-14. The reason is that all such liabilities will have to be transferred by the selling (vendor) company to the purchasing company and it will have to be paid by the purchasing company after the absorption.
2. Under this method, not even a single item will be deducted while determining purchase consideration.
3. Under this method, the agreed values at which all the assets/liabilities to be transferred should be ignored.
4. The thrust is on the amount payable to the shareholders of the transferor (selling or vendor) company.
5. To sum up, the purchase consideration under the net payment (total payment) will be determined by adding up (i) payments made in the form of cash; (ii) money value of equity shares, if payments are made in the form of equity sharesand (iii) money value of the preference shares, if payments are in the form of preference shares.

These factors should be borne in mind while computing purchase consideration under net payment method.

Computation of Purchase Consideration:

(Net Payment Method in Accordance with AS-14)

Step 1:	Cash Payment: Number of Shares ×
	Value of Share 3,00,000 × 15	45,00,000
Add:
Step 2:	Payment in the Form of Equity Shares: 5 Equity Shares of 10 Each for Every 2 Equity Shares Held in A Ltd:
(Add:	(3,00,000 Shares × × 10 − 75,00,000))	75,00,000
		1,20,00,000
Step 3:	Payment in the Form of Preference Shares: 15% Preference Shares of 10 Each for Every 2 Shares Held in A Ltd:
	× 10 = 15,00,000	15,00,000
Step 4:	Purchase Consideration:	1,35,00,000

Illustration 9.7

Model: Total payment method

The following is the balance sheet of VR Ltd. as on 31 March 2011:

Additional information:

1. SR Ltd. takes over VR Ltd. on 6 April 2011.
2. 12% Preference shareholders of VR Ltd. are discharged at a premium of 15% by issuing 13% preference shares of 100 each.
3. The net assets value of VR Ltd. equity share is 30 per share and that of SR Ltd. equity share is 50 per share. SR Ltd. will issue equity shares to satisfy the equity shareholders of VR Ltd. on the basis of intrinsic value. But the purchase consideration is to be based on the basis of par value only. The face value of equity share of SR Ltd. is 10.
4. Debentures of VR Ltd. are to be discharged at a premium of by issuing 15% debentures of SR Ltd.

Compute the purchase consideration.

Solution

Note:

1. Equity share value is to be determined on its face value only. All other values are to be ignored in this method.
2. Debentures of VR Ltd. are not to be included as they are to be taken over by SR Ltd. and then paid.

Computation of Purchase Consideration:

Step 1:	Payment for Preference Shareholders of VR Ltd: Discharged at a Premium of 15% of 100 Each, i.e., 11,500 Pref. shares × 100	11,50,000
Add:		3,60,00,000
Step 2:	Payment for Equity Shareholders of VR Ltd. (60,00,000 × × 10 ) (i.e., 3,60,00,000 Shares of SR Ltd. of 10 Each)
Step 3:	Purchase Consideration	3,71,50,000

Illustration 9.8

Model: Net assets method and net payments method

The balance sheet of PQ Ltd. as on 31 March 2011 is as follows:

RS Ltd. signified their agreement to take over the assets and liabilities of PQ Ltd. as per the following terms & conditions:

1. Fixed assets at 80% of book value
2. Investments at 20% above the par value
3. Current assets and liabilities at book value except that stock-in-trade at cost amounting to 10 lakh was agreed to be taken over at a discount of 25%
4. 10% Debentures are to be discharge at a premium of 10% by issuing 10% debentures of Ltd.
5. Preference shareholders are to be discharged at a premium of 10% by issuing 12% preference shares of 100 each
6. The equity shareholders in PQ Ltd. are to be issued 6 equity shares of 10 each in RS Ltd. for every 2 shares held by them

Workout the consideration for the take over under:

(a) Net assets method and (b) Net payment method

 

[C.S. (Inter). Modified]

Solution

 

(a) Net Assets Method:Under this method, values of assets and liabilities are to be adjusted as per agreed terms. If no such thing is mentioned, values have to be taken as shown in the balance sheet.

Computation of Purchase Consideration:

		in Lakhs
Step 1:	Value of Assets Taken Over:
	(i) Fixed Assets: 80% of BV (As per Agreed Terms)	160.00
	(ii) Investments: 20% Above Par Value (As per Agreed Terms) Current Assets:	36.00
	(iii) Stock in Trade: Discount at 25% (As per Agreed Terms) (i.e., 75% of 10 lakh)	7.50
	(iv) Other CAs: At Par Value (BV)	10.00
Step 2:	Total Assets Taken Over (Add: Step 1 (i) to (iv))	213.50
Step 3:	Total Liabilities Taken Over:
	(i) 10% Debentures to Be Discharged at 10% Premium	22.00
	(ii) Current Liabilities (At Par, i.e., BV)	20.00
Step 4:	Total Liabilities to Be Taken Over (Add: Step 3 (i) + (ii))	42.00
Step 5:	Purchase Consideration (Step 2 – Step 4)	171.50

(b) Net Payment Method:Under this method, amount payable to shareholders is to be determined as follows:

Computation of Purchase Consideration:

		in Lakhs
Step 1:	Payment for Preference Shareholders (50 lakh at 10% Premium)	55.00
Add:
Step 2:	Payment for Equity Shareholders: 6 Equity Shares for Every 2 Shares: 10 lakh Shares × × 10 = 300 lakh	300.00
Step 3:	Purchase Consideration (Step 1 + Step 2)	355.00

Illustration 9.9

Model: Intrinsic value of shares

The following are the balance sheets of AB Ltd. & CD Ltd. as on 31 March 2011:

AB Ltd. agrees to take over CD Ltd. Find out the ratio of exchange of shares on the basis of book value.

[B.Com (Hons) Modified]

Solution

Ratio of exchange:

LCM (Lowest Common Multiple) of Intrinsic Values of Shares of 2 Companies = 600

Ratio = AB Ltd.:CD Ltd.

2:3

∴ 2 Shares of AB Ltd. = 600

3 Shares of CD Ltd. = 600

Illustration 9.10

Model: Intrinsic worth method

JK Ltd. is absorbed by LM Ltd. Following are the balance sheets of these two companies as on 31 March 2011:

It was decided that the holder of every 3 shares in JK Ltd. was to receive 5 shares in LM Ltd. plus as much cash as in necessary to adjust the rights of shareholders of both the companies in accordance with the intrinsic value of shares as per respective balance sheets.

Calculate purchase consideration.

Solution

STAGE I: Computation of Intrinsic Value of Shares

Particulars	JK Ltd.	LM Ltd.
Step 1:   Value of Assets (At BV)
(i) Sundry Assets	10,15,000	49,05,000
(ii) Cash	10,000	1,35,000
Step 2:   Value of Total Assets [Step 1 (i) + (ii)]	10,25,000	50,40,000
Step 3:   Value of Liabilities (At BV): Creditors	1,00,000	90,000
Step 4:   Value of Net Assets (Step 2 – Step 3)	9,25,000	49,50,000
Step 5:   Number of Equity Shares	5,000 Shares	50,000 Shares
Step 6:   Intrinsic Value of Shares (Step 4 + Step 5)	185	99

STAGE II: Difference Payable—Computation of:

Step 1:   Intrinsic Value of 3 Shares in JK Ltd: 3 × 185 (Step 6)	=	555
Step 2:   Intrinsic Value of 5 Shares in LM Ltd: 5 × 99 (Step 6)	=	495
Step 3:   Difference Payable in Cash (Step 1 – Step 2)}	=	60

STAGE III: Computation of Purchase Consideration Under Net Payments Method:

Step 1:	Payment for Equity Shareholders: (In Shares) Number of Shares to Be Allotted = 5,000 × = 8,333,333 Value of Payment for 8,333 Shares: 8,333 × 99	8,24,967
Add:
Step 2:	Payment in Cash:
	(i) For Fractional Shares: 0.333 × 99 = 32.967}	33
	(ii) Difference Payable in Cash: × 60 (Stage II: Step 3)	1,00,000
Step 3:	Purchase Consideration (Step 1 + Step 2 (i) & (ii)]	9,25,000

STAGE IV: Calculation of Shares Allotted to Shareholders of JK Ltd:

 

(i)   Paid-up Value = 8,333 Shares × 75	=	6,24,975
(ii)   Value of Premium: ( 99 − 75) 24
: 8,333 Shares × 24	=	1,99,992
Total		8,24,967

 

9.3.2 Accounting Procedure

9.3.2.1 Accounting Treatment in the Books of Transferor (Selling or Vendor) Company

Important note:The accounting procedure is SAME for all types of amalgamation, whether it is in the nature of “merger” or “purchase”, in the books of the transferor (vendor) company.

 

Illustration 9.11

Model: Accounting in the books of transferor company

The balance sheets of X Ltd. and Y Ltd. were as follows on 31 March 2011:

 

( in 000’s)

	X Ltd.	Y Ltd.
Assets:
Goodwill	—	350
Patents	1,000	—
Land & Buildings	3,000	—
Plant & Machinery	7,750	—
Motor Vehicles	—	200
Furniture	—	125
Investments	0,575	—
Stocks	1,750	1,195
Debtors	400	310
Cash at Bank	22	85
	14,700	2,265
Liabilities:
Share Capital: 25,000 Pref. Shares of 100 Each	2,500	—
7,50,000 Equity Shares of 10 Each	7,500	—
2,00,000 Equity Shares of 10 Each	—	2,000
	10,000	2,000
General Reserve	4,000	—
Profit and Loss A/c	450	160
Creditors	250	105
	14,700	2,265

A new company Z Ltd. was formed to acquire the assets and liabilities of X Ltd. and Y Ltd. The terms of acquisition of business were as follows:

1. Z Ltd. to have an authorized capital of 1,75,00,000 divided into 25,000 12% preference shares of 100 each and 15,00,000 lakh equity shares of 10 each
2. Business of X Ltd. valued at 1,50,00,000; settlement being 30,00,000 cash and balance by issue of fully paid equity shares of 12 each
3. Business of Y Ltd. valued at 24,00,000 to be settled by issue of fully paid equity shares of 12 each
4. Preference shares of X Ltd. were redeemed
   You are required to make journal entries in the books of X Ltd. and Y Ltd. to close their books of account and also show the necessary ledger Accounts.

[C.S. (Inter). Modified]

Solution

 

9.3.2.2 Accounting Treatment in the Books of Transferee (Purchasing) Company

Accounting treatment in the books of purchasing company is based on the nature of amalgamation. Accounting Standard AS-14 stipulates two methods of accounting for amalgamation:

1. Pooling of interest methods
2. Purchase method

When the amalgamation is in the nature of merger, the transferee company has to apply “pooling of interests method”. When the amalgamation is in the nature of purchase, the transferee company has to apply “purchase method”.

9.3.2.2.1 Pooling of Interests Method

Pooling of assets, liabilities, capital, reserves and business of both companies takes place in this method:

1. The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (i.e., book values). That means no adjustment is made in the book values of assets and liabilities of the transferor company. Further, fictitious assets are not assets and hence should not be incorporated in the books of transferee company.
2. The effects on the financial statements of any changes in accounting policies are to be reported as per AS-5.
3. The purchase consideration under this method is to be valued at par value of shares issued.
4. The balance in the profit and loss account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to general reserve.
5. The difference between the amount recorded as share capital issued + additional consideration in form of cash or other assets and the amount of share capital is to be adjusted in reserves in financial statements of the transferee company.
   The Expert Advisory Committee of ICAI Recommends:
   1. The difference between the issued share capital of the transferee company and share capital of transferor company should be treated as CAPITAL RESERVE.
   2. Reserve created on amalgamation is not available for dividend and/or bonus shares issued.

9.3.2.2.2 Purchase Method

Accounting for amalgamation: When amalgamation is in nature of purchase, “purchase method” will have to be applied, in accordance with AS-14.

 

The following table shows the differences between “pooling of interests method” and “purchase method”:

Basis of Distinction	Pooling of Interests Method	Purchase Method
1. Applicability	Applicable to amalgamation in the nature of merger.	This is applicable to amalgamation in the nature of purchase.
2. Recording of assets & liabilities	All assets and liabilities are incorporated as their book values.	They are to be recorded as agreed or fair or market values.
3. Treatment of reserves	All reserves are to be taken over by the purchasing company along with assets & liabilities.	Reserves are ignored. except statutory reserves.
4. Status of shareholders	At least 90% of equity shareholders of transferor company will become shareholders of transferee company.	Shareholders of transferor company may or may not become shareholders of transferee company.
5. Difference between consideration and sharecapital of vendor company	Such difference is to be adjusted in capital reserve, revenue reserve or P&L A/c.	The difference is to be adjusted in goodwill or capital reserve.
6. Writing off goodwill	It does not arise in this method.	It should be written off within 5 years.
7. Liquidation expenses	Liquidation expenses are written off to general reserve or P&L A/c of the purchasing company.	Liquidation expenses are to be debited to goodwill A/c.
8. Amalgamation adjustment A/c	No necessicity of such account in this method.	Statutory reserves of selling company should be debited to “amalgamation adjustment A/c”. It is to be shown on assets side of B/S.

Illustration 9.12

Model: Journal entries in the books of transferee company—amalgamation in the nature of merger

On 31 March 2011, the balance sheet of AX Ltd stood as follows:

On this date AX Ltd. took over the business of BY Ltd. for 3,30,000 payable in the form of its fully paid equity shares of 10 each at par. Shareholders of BY Ltd. get 110 shares of AX Ltd. for every 100 shares held in BY Ltd. The scheme of amalgamation also provided that 1,500 12% debentures of BY Ltd. would be converted into equal number of 14% debentures of AX Ltd. of 100 each. The balance sheet of BY Ltd. on the date of amalgamation was as follows:

You are required to pass journal entries in the books of AX Ltd. assuming that the amalgamation is in the nature of merger.

[C.S. (Inter). Modified]

Solution

WORKING NOTES:

Treatment of Reserve:

 

Method 1: General Reserve (Given in B/S of BY Ltd.)	= 37,675
Less: Difference Between Purchase Consideration and Share
Capital of Vendor Company: 3,30,000 — 3,00,000
(Purchase Consideration Given) (Share Capital Face Value
of Shares of BY Ltd.)	= 30,000
∴ General Reserve of BY Ltd. to Be Shown in AX Ltd. Books	=    ________        7,675       ________

Method 2:

 

First, the Difference 30,000 May Be Adjusted Against P&L A/c	= 30,000 − 12,065
	= 17,935
Next, This 17,935 May Be Adjusted from General Reserve	= 37,675 − 17,935
	= 19,740
∴ General Reserve balance	= 19,740
P&L A/c Balance (Entire Amount Adjusted)	= NIL

 

Illustration 9.13

Model: Accounting entries in the books of transferee company—Amalgamation in the nature of purchase

The balance sheets of P Ltd. and Q Ltd. as at 31 March 2011 is as follows:

On 1 April 2011, R Ltd. was formed by amalgamation P Ltd. and Q Ltd. on the following terms:

1. R Ltd. to issue 2,400 14% debentures of 100 each to debenture holders of P Ltd.
2. The debentures of Q Ltd. insisted that they should be allotted equity shares in R Ltd. Accordingly, they were allotted 30,000 equity shares of 10 each and as 12 per share.
3. Preference shareholders of P Ltd. insisted for allotment 3,600 12% redeemable preference shares of 100 each.
4. The equity shareholders of P Ltd. are to be allotted 10 equity shares at par for 7 equity shares held by them. The shares of P Ltd. are of 10 each
5. The assets of P Ltd. are taken over at book value.
6. The assets & liabilities of Q Ltd. are valued as follows:

Goodwill	1,20,000
Land	6,00,000
Building	1,80,000
Plant	4,80,000
Other Fixed Assets	60,000
All Current Assets	6,00,000
All Current Liabilities	6,00,000

 

The balance of consideration is to be paid by allotment of equity shares at par to Q Ltd.

You are required to show:

1. Purchase consideration payable to P Ltd. and Q Ltd.
2. Opening entries in the books of R Ltd.

Assume that R Ltd. does not intend to carry on the same business of P Ltd.

Solution

Computation of Purchase Consideration:

 

I: To P Ltd: Net Payment Method:
(i) 3,600 12% Preference Shares of 100 Each		3,60,000
Add:
(ii) 1,00,000 Equity Shares (84,000 × ) of 10 each		12,00,000
		15,60,000
II: To Q Ltd: Net Assets Method:
(i) Assets (After Revaluation)		20,40,000
Less:
(i) Current Liabilities	6,00,000
(ii) 9% Debentures	3,60,000	9,60,000
		10,80,000

 

This Purchase Consideration Is to Be Discharged

by Issue of 1,08,000 Equity Shares of 10 Each = 10,80,000

 

Illustration 9.14

Model: Amalgamation in the nature of merger and purchase—Preparation of balance sheet

The following are the abridged balance sheets of C Ltd. and D Ltd. as on 31 March 2011:

On 1 April 2011, C Ltd. takes over D Ltd. on the following terms:

1. C Ltd. will issue 1,75,000 equity shares of 100 each at par to equity shareholders of D Ltd.
2. C Ltd. will issue 55,000 12% preference shares of 100 each at par to the preference shareholders of D Ltd.
3. The debentures of D Ltd. will be converted into an equal number of 15% debentures of the same denomination. You are informed that the statutory reserves of D Ltd. are to be maintained for two more years.

You are required to show the balance sheet of C Ltd. immediately after the above-mentioned scheme of amalgamation has been implemented assuming that:

1. The amalgamation is in the nature of merger
2. The amalgamation is in the nature of purchase

[C.S. (Inter). Modified]

Solution

(a) When the amalgamation is in the nature of merger:

 

STAGE I: Computation of General Reserve:
Step 1:	C Ltd.’s General Reserve:	2,30,50,000
Add:
Step 2:	D Ltd.’s General Reserve:	49,00,000
		2,79,50,000
Less:
Step 3:	Difference Between Purchase Consideration and Share Capital of D Ltd.
	= 2,30,00,000 − 2,00,00,000	30,00,000
Step 4:	General Reserve (To Be Shown in B/S	2,49,50,000

STAGE II: Balance Sheet of C Ltd. as on 1 April 2011:

(b) When amalgamation is in the nature of purchase:

 

STAGE I: Computation of Capital Reserve/Goodwill:		( in 000’s)
Step 1:   Assets of D Ltd. Taken Over by C Ltd.		33,500
Less:
Step 2:   Debentures of D Ltd.		1,250
		32,250
Less:
Step 3:   Current Liabilities of D Ltd.		4,950
		27,300
Less:
Step 4:   Contribution Payable to:
Equity Shareholders	17,500
Pref. Shareholders	5,500	23,000
Step 5:   Capital Reserve to Be Shown in B/S =		4,300

 

STAGE II:

 

Hence, an equal amount is to be shown under the head “Amalgamation Adjustment A/c” on the assets side of the balance sheet.

When the conditional period is over, both can be eliminated from the balance sheet.

Illustration 9.15

Model: Preparation of balance sheet—Amalgamationby “pooling of interest” method

V Ltd. and R Ltd. were amalgamated on and from 1 April 2011. A new company S Ltd. was formed to take over the business of existing companies. The balance sheets of V Ltd. and R Ltd. as on 31 March 2011 are given in the following:

Other information:

1. 12% Debenture holders of V Ltd. and R Ltd. are discharged by S Ltd. by issuing adequate number of 16% debentures of 100 each to ensure that they continue to receive the same amount of interest.
2. Preference shareholders of V Ltd. and R Ltd. have received the same number of 10% preference shares of 100 each of S Ltd.
3. S Ltd. has issued 7.5 lakh equity shares for each equity share of V Ltd. and 5 lakh equity shares for each share of R Ltd. The face value of shares issued by S Ltd. is 100 each.

   Prepare the balance sheet of S Ltd. as on 1 April 2011, after the amalgamation has been carried out using the “pooling of interest method”.

[C.A. Modified]

Solution

BASIC CALCULATIONS:

STAGE I: Amalgamation Is in the Nature of Merger. First, Purchase Consideration Has to Be Determined as Follows:

STAGE IV: Total Difference	= ( 2,500 lakh − 220 lakh)
	(Stage II)      (Stage III)
	= 2,280 lakh.

STAGE V: Adjustment of Difference Against Reserve:

STAGE VI: Preparation of Balance Sheet:

 

Illustration 9.16

Model: Preparation of balance sheet—Amalgamation in the nature of merger

X Ltd. and Y Ltd. were amalgamated on and from 1 April 2011. A new company Z Ltd. was formed to take over the business of existing companies. The balance sheets of X Ltd. and Y Ltd. as on 31 March 2011 are shown in the following:

Other information:

1. Preference shareholders of the two companies are issued equipment number of 12% preference shares of Z Ltd .
2. Z Ltd. will issue one equity share of 100 each for every share of X Ltd. and Y Ltd.

You are required to prepare the balance sheet of Z Ltd. on the assumption that the amalgamation is in the nature of merger.

Solution

STAGE I: Computation of Purchase Consideration:

Particulars	X Ltd.	Y Ltd.
Step 1:   Payment to Preference Shareholders:
9,000 Shares of 100 Each—X Ltd.	900	—
6,000 Shares of 100 Each—Y Ltd.	—	600
Add:
Step 2:   Payment to Equity Shareholders:
18,000 Shares of 100 Each—X Ltd.	1,800	—
12,000 Shares of 100 Each—Y Ltd.	—	1,200
Step 3:   Purchase Consideration (Step 1 + Step 2)	2,700	1,800

STAGE II: Ascertainment of Difference Between Purchase Consideration and Share Capital:

 

(i) Pref. Share Capital + Equity Share Capital	2,700     1,800
(ii)Purchase Consideration (Ref: Stage I Step 3)	2,700     1,800
(iii) Difference [(i) – (ii)]	____________ Nil          Nil ____________

Hence, no amount is to be adjusted against reserves, since the difference between purchase consideration and share capital is NIL.

∴ Capital reserve and general reserve are to be shown in the balance sheet of Z Ltd. at their original values shown in the balance sheets of P Ltd. and Q Ltd. with out any adjustments.

STAGE III: Preparation of Balance Sheet:

 

Illustration 9.17

Model: Preparation of balance sheet—Amalgamation in the nature of purchase

Given below are the balance sheets of Strong Ltd. and Weak Ltd. as on 31 March 2011. Weak Ltd. was merged with Strong Ltd. on 1 April 2011.

 

Other information:

1. Strong Ltd. would issue sufficient number of debentures at par to the debenture holders of Weak Ltd.
2. For every share of Weak Ltd, Strong Ltd. would issue one share at a premum of 20 per share. You are required to prepare the balance sheet of Strong Ltd. after merger assuming it to be in the nature of purchase.

Solution

Note: As per AS-14, payments made to debenture holders are not to be considered while determining the purchase consideration.

 

STAGE I: Computation of Purchase Consideration:		( in 000’s)
Payments to Equity Shareholders
(15,000 Shares × 100 + 20	=	1,800 thousand
∴ Purchase Consideration	=	1,800 thousand
STAGE II: Computation of Goodwill/Capital Reserve

 

		( in 000’s)
Step 1:   Assets Acquired (Total as Shown in Problem)	=	4,050
Less:
Step 2:   Liabilities:		( in 000’s)
(i) 10% Debentures	625
(ii) Trade Creditors	300
(iii) Tax Provision	250
(iv) Proposed Dividend	300
		1,475
Step 3:   Net Assets (Step 1 – Step 2) =		2,575
Step 4:   Less: Purchase Consideration (Stage 1)		1,800
Step 5:   Capital Reserve		775

[As net assets value is greater than purchase consideration, this results in capital reserve.]

STAGE III: Preparation of Balance Sheet:

 

9.4 ABSORPTION

9.4.1 Meaning

If an existing company takes over the business of another existing company or companies, it is termed as absorption. Merger is also absorption. To illustrate, when the business an existing company—say P Ltd.—is taken over by another existing company—Q Ltd.—it is absorption. In this case of absorption, P Ltd. will be liquidated and Q Ltd. will retain its identity.

9.4.2 Mean Features of Absorption

The following are the main features of absorption:

1. No new company will be formed.
2. At least one merged (absorbed) company will get liquidated. That means, more than one existing company can be merged with an existing company. The existing company is called the purchasing company (vendee company) and the merged company is called the vendor company (transferor company or absorbed company or liquidated company).

9.4.3 Accounting Treatment

1. Accounting entries in the books of vendor (transferor) Company:
   The procedure is same as that of adopted in the case of amalgamation.
2. Accounting entries in the books of purchasing (Transferee) Company:
   The procedure is same as explained in amalgamation. However, here it is immaterial whether the absorption is in the nature of merger or purchase. For both types, procedure is common in absorption unlike amalgamation.

9.4.4 Specific Problems (Issues) in Absorption

9.4.4.1 Intercompany Owings

It is natural to note that transferee company and transferor company are debtors and creditors of each other while absorption occurs. The reason is due to any of the following transactions:

1. Purchase of goods
2. Sale of goods
3. Loans
4. Advances
5. Bills of exchange given by one company to another company

After absorption, both the companies, i.e., the absorbing company as well as the absorbed company, become one single enterprise. The result being that the amounts involved in the above-mentioned transactions are neither receivable nor payable. Then, how can these be dealt with? One such account has to be set off against the other. To illustrate, sundry debtors account have to be set off against sundry creditors. For such inter-company owings, the following journal entries are to be recorded in the books of the purchasing company (transferee or absorbing):

 

(i) Cancellation of Inter-company Debtors and Creditors
Sundry Creditors A/c (Amount Payable)      Dr.	.…
To Sundry Debtors A/c (Amount Receivable)		.…
(ii) Cancellation of Inter-company Loans:
Loans Payable A/c (Amount Payable)            Dr.	.…
To Loans Receivable A/c (Amount Receivable)		…
(iii) Cancellation of Inter-company Bills:
Bills Payable A/c                                            Dr.	.…
To Bills Receivable A/c		.…

Note:

1. Bills payable to third parties cannot be cancelled.
2. No special treatment is needed for transactions with respect to inter-company owings. Such accounts are to be transferred to realization A/c.

9.4.4.2 Inter-company Stock (Unrealized Profit

Case 1: Goods Sold by Transferor Company (Vendor):

It is found that some goods sold by the vendor company to the purchasing company may form a part of stock of the purchasing company when absorption takes place. Such goods are generally at sale price of the vendor company. They include the profit element. As stock is to be shown at cost, the profit part must be cancelled. For this, the following entries should be passed:

 

(a) When Absorption (Amalgamation) Is in the “Nature of Merger”:
Profit and Loss A/c	Dr.    …
(With the Amount of Unrealized Profit)
Or General Reserve A/c	Dr    .…
To Stock A/c		…
(b) When Absorption Is in the “Nature of Purchase”:
Goodwill A/c	Dr.    …
(With the Amount of Unrealized Profit)
To Stock A/c		…

Case 2: Goods Sold by the Purchasing Company:

The stock of goods of the transferor company may include some goods sold by transferee company to it. In such a situation, at the time of absorption, vendors stock will become the stock of purchasing company and the value of such stock will be as sale price. This includes the unrealized profit also.

Treatment: At times of absorption, the purchasing company will have to record such stock at its cost price.

9.4.4.3 Payment of Dividend Before Absorption

• When the company (transferor or transferee) pays dividend to its shareholders, the entry to be passed will be:

   

  Profit & Loss Appropriation A/c	Dr.     .…
  [Amount with the Dividend]
  (Or) General Reserve A/c	Dr.    .…
  To Bank A/c		.…

   

• When the proposed dividend A/c appears in the balance sheet, the entry to be passed will be:

   

  Proposed Dividend A/c	Dr.    .…
  To Bank A/c		…

Case 1: When the dividend is paid by the transferor company, then it is to be treated as dividend paid before absorption. In that case, reduced cash balance (dividend paid is to be deducted) is transferred to realization A/c. Similarly, the reduced balance of P&L appropriation A/c is transferred to equity shareholders account of the transferor company.

Case 2: When the dividend is paid by the purchasing company, the P&L appropriation A/c balance and cash (Bank) balances are reduced by the amount of dividend paid but after absorption, to be made in balance sheet.

9.4.4.4 Sale of Shares Received Towards Purhase Consideration

At times, the shareholders of the transferor company may seek the assistance of shareholders to sell some of the shares received as part of purchase consideration. The journal entries will be:

 

Case 1: Sale of Share in the Purchasing Company:
Bank A/c (With the Sale Value)	Dr.    .…
To Shares in Purchasing Company		.…
Case 2: Profit on Sale of Shares:
Shares in Purchasing Company A/c	Dr.    .…
(With Profit)
To Equity Shareholders A/c		.…
Case 3: Loss on Sale of Shares:
Equity Shareholders A/c (Loss)	Dr.    .…
To Shares in Purchasing Company		.…

9.4.4.5 Distribution of Balance Shares

The remaining shares (after purchase consideration is discharged) will be distributed among the equity shareholders. They will get the balance in the form of cash. The entry will be:

 

Equity Shareholders A/c	Dr.   …
To Shares in Purchasing Company
To Bank A/c

Illustration 9.18

Model: Absorption—by way of merger

The following were the balance sheets of X Ltd. and Y Ltd. as on 31 March 2011:

 

On the above-mentioned date, X Ltd. merged with Y Ltd. The absorption by way of merger took place on the following conditions:

(i) Y Ltd. allotted to X Ltd. 2,25,000 15% fully paid preference shares of 100 each and 84,00,000 equity shares of 10 each to satisfy the claims of X Ltd’s preference shareholders and equity shareholders respectively. Y Ltd. also agreed to convert 10% debentures of X Ltd. into 12% debentures at a discount of 10%.

(ii) Expenses of liquidation of X Ltd.— 45,000—were borne by Y Ltd. You are required to:

1. Prepare necessary ledger accounts with respect to X Ltd.
2. Pass journal entries in the books of Y Ltd.
3. Prepare a post-absorption balance sheet in the books of Y Ltd.

Solution

STAGE I: Calculation of Purchase Consideration:

 

Step 1: Payment to Pref. Shareholders:	( in 000’s)
2,25,000 Pref. Shares of 100 each:	22,500
Add
Step 2: Payment to Equity Shareholders:
84,00,000 Equity Shares of 10 Each	84,000
Step 3: Purchase Consideration:	1,06,500

STAGE II: Preparation of Ledger Accounts:

 

STAGE III: Preparation of Balance Sheet:

WORKING NOTES:

1. Calculation of Amount to Be Adjusted in Reserve: Share Capital Taken Over

 

	( in 000’s)
Share Capital Taken Over	1,12,500
Less: Share Capital Issued	1,06,500
Surplus on Taken Over of Share Capital =	6,000
This has to be adjusted with capital reserve.

 

Illustration 9.19

Model: Absorption—Nature of purchase: Net payment method

The following is the balance sheet of P Ltd. as on 31 March 2011:

The company was absorbed by Q Ltd. on the above date. The consideration for absorption is the discharge of the debentures at a premium of 5%, taking over the liability in respect of sundry creditors and a payment of 7 in cash and one share of 5 in Q Ltd. at the market value of 8 per share for every share in P Ltd. The cost of liquidation is to be met by the purchasing company amounts to 7,500. You are required to close the books of P Ltd. and pass the journal entries in the books of Q Ltd.

 

[Madras University Modified]

Solution

 

I. Computation of Purchase Consideration:
(i) Payment by Cash 1,00,000 Shares × 7 :	7,00,000
Add
(ii) Payment in Shares : 1,00,000 shares × 1 × 8 :	8,00,000
∴ Purchase Consideration	15,00,000

 

Important notes:

1. Purchase price includes payment to shareholder’s only in accordance with AS-14.
2. Debentures are to be taken over by Q Ltd. and then settled.
3. Cost of liquidation met by the purchasing company is to be shown as reimbursement.

II:

 

Illustration 9.20

Model: Absorption—Pooling of interests; Method—Net payment method

B Ltd. agreed to acquire the assets of C Ltd. except its investments as on 31 December 2010. Balance sheet of C Ltd. as on that date is given in the following:

B Ltd. Nil:

1. Discharge the debentures at 8% premium by issue of 7% debentures in B Ltd. at 10% discount
2. Issue of 3 shares of B Ltd. at a valuation of 11 for every 2 shares in C Ltd.
3. Pay 2 in cash for each share of C Ltd.
4. Pay absorption expenses of 15,000

C Ltd. sells its investments for 1,60,000. One-third of the shares received from B Ltd. are sold at 10.50 each. Tax liability was determined at 1,20,000. Before the absorption, C Ltd, declares and pays 10% dividend to its shareholders.

You are required to given the required journal entries and the ledger accounts in the books of the vendor company.

Solution

STAGE I: Computation of Purchase Consideration:

 

Step 1:   Payment to Shareholders in Cash:
(80,000 × 2) :	1,60,000
Add:
Step 2:   Payment by Shares in B Ltd.:
( × 80,000 Shares) × 11:	13,20,000
∴   Purchase Consideration =	14,80,000

 

Illustration 9.21

Model: Absorption—Net assets method

The financial position of two companies R Ltd. and S Ltd. as on 31 March 2011 was as follows:

R Ltd. absorbs S Ltd. on the following terms:

1. 10% Preference shareholders are to be paid at 10% premium by issue of 9% preference shares of R Ltd.
2. Goodwill of S Ltd. is valued at 250 thousand, buildings are valued at 750 thousand and machinery at 800 thousand
3. Stock to be taken over at 10% less value; and reserve for bad and doubtful debts to be created at 7.5%
4. Equity shareholders of S Ltd. will be issued equity shares @ 5% premium

You are required to:

1. Prepare necessary ledger accounts to close the books of S Ltd.
2. Show the acquisition entries in the books of R Ltd.
3. Construct the balance sheet after absorption as at 31 March 2011

Solution

STAGE I: Computation of Purchase Consideration:

(All Values at Agreed Terms)

 

Step 1:   Add: (All Assets:)		( in’ 000)
Goodwill		250
Building		750
Machinery		800
Stock (10% Less)		787.5
Debtors (creation of 7.5% DD)		462.5
Cash at Bank		100
		3,150.0
Step 2:   Less: Liabilities:
Gratuity	100
Creditors	400	500
Step 3:   Net Assets (Purchase Consideration):		2,650

 

STAGE II: Discharge of Purchase Consideration:

 

		( in 000’s)
Step 1:	Payment to 10% Preference Shareholders of S Ltd.	500
Add:	Premium @ 10% (As per Direction in Question)	50
		550
Step 2:	Payment to 9% Pref. Shares of S Ltd. 5,500 Shares × 100:	550
Step 3:	Payment to Equity Shareholders of S Ltd. by Issuing 2 lakh
	Equity Shares of S Ltd. at 5% Premium (2 lakh × 10.50):	2,100
Step 4:	Pref. + Equity Shareholders Total =	2,650

STAGE III: Ledger Accounts in the Books of S Ltd

 

STAGE IV: Journal Entries (in the Books of R Ltd.)

STAGE V:

Illustration 9.22

Model: Absorption—Purchase and merger

The following are the balance sheets of A Ltd. and B Ltd. as on 31 March 2011:

A Ltd. takes over B Ltd. on 1 April 2011. A Ltd. discharges the purchase consideration as follows:

1. Issued 2,10,000 equity shares of 10 each at par to the equity shareholders of B Ltd.
2. Issued 15% preference shares of 100 each to discharge the preference shareholders of B Ltd. at 10% premium
3. The debentures of B Ltd. will be converted into equivalent number of debentures of A Ltd.
4. The statutory reserves of B Ltd. (Export profit reserve and investment allowance reserve) are to be maintained for three more years

   You are required to prepare the balance sheet of A Ltd. assuming that:

   1. The amalgamation is in the nature of merger
   2. The amalgamation is in the nature of purchase

[B.Com (Hons) Delhi Modified]

Solution

Computation of Purchase Consideration:

 

		( in 000’s)
Step 1:	Payment to Preference Shareholders:
	(11,220 Preference Shares × 100) + Including Premium at 10%	1,122
Add:
Step 2:	Payment to Equity Shareholders:
	2,10,000 lakh equity Shares × 10	2,100
Step 3:	Purchase Consideration               =	3,222
	(a) Amalgamation in the “nature of merger”:

 

Profit and Loss A/c may also determined and verified by means of journal entry as follows:

Computation of Capital Reserve:

 

Step 1:   Total Assets of B Ltd. Taken Over		3,960
Step 2:   Less: 13% Debentures:	210
Current Liabilities:	300	510
Step 3:   Net Assets Taken Over		3,450
Step 4:   Less: Purchase Consideration		3,222
Step 5:   ∴ Capital Reserve		228

(b) Amalgamation in the “nature of purchase”:

 

*Capital Reserve may be determined and even verified through the entry as follows:

Illustration 9.23

Model: Absorption in the nature of purchase

The summarized balance sheet of Veer Ltd. on 30 June 2010 was as follows:

Karat Ltd. agreed to absorb the business of Veer Ltd. with effect from 1 July 2010. The purchase consideration payable by Karat Ltd. was agreed as follows:

1. A cash payment equivalent to 2.50 for every 10 share in Veer Ltd.
2. The issue of 2,70,000 equity shares of 10 each fully paid in Karat Ltd. having an agreed value of 15 per share
3. The issue of such an amount of fully paid 14% debentures in Karat Ltd. at 96% is sufficient to discharge 12% debentures in Veer Ltd. at a premium of 20%
4. When computing purchase consideration, Karat Ltd. valued land, Building and plans at 36,00,000; stock at 4,26,000 and debtors at their face value subject to a reserve of 5% for doubtful debts.

   You are required to:

   1. Close the books of Veer Ltd. by preparing realization A/c, Karat Ltd. A/c, shareholders’ A/c and debentures A/c
   2. Pass journal entries in the books of Karat Ltd. regarding acquisition of business

[C.A. (Inter). Modified]

Solution

Computation of Purchase Consideration:

Step 1:	Cash Payment of Shareholders: 1,80,000 × 2.50	4,50,000
Add:
Step 2:	Payment to Equity Shareholders: 2,70,000 × 15	40,50,000
Step 3:	Purchase Consideration	45,00,000

 

 

WORKING NOTES:

1. As per AS-14, the purchase consideration means payment for shareholders. Shareholders of Veer Ltd. will get 45,00,000.
2. For expenses on liquidation, the existing cash is utilized.
3. Value of 10% debentures is determined as:

   Amount Payable = 3,60,000

   Issue Price = 96

∴ Number of Debentures	=
Face Value of Debentures
3,750 × 100	=	3,75,000
Less: Discount @ 4%	=	15,000
	=	3,60,000

 

Illustration 9.24

Model: Absorption—Intrinsic value method

The balance sheets of ‘L’ Ltd. and ‘M’ Ltd. as on 31 March 2011 were as follows:

It was proposed that L Ltd. should be taken over by M Ltd. The following terms were agreed upon by both the companies:

1. Goodwill of L Ltd. is considered worthless.
2. Arrears of depreciation in L Ltd. amounted to 60,000.
3. The holder of every 2 shares in L Ltd. was to receive:
   1. As fully paid, at par, 10 shares in M Ltd.
   2. So much cash as is necessary to adjust the rights of shareholders of both the companies in accordance with the intrinsic values of the values of the shares as per their balance sheets after the adjustments mentioned above.

You are required to:

1. Determine the purchase consideration
2. Show the balance sheet of M Ltd. after the absorption, if the amalgamation is in the nature of purchase.

Solution

STAGE I: Computation of Intrinsic Value of Shares:

STAGE II: Ascertainment of Cash to Be Paid as Part of Purchase Price:

 

Step 1:   Intrinsic Value of 2 Shares in L Ltd: 115 × 2	=	230
Less:
Step 2:   Intrinsic Value of 10 Shares in M Ltd. = 20 × 10	=	200
Step 3:   Cash to Be Paid for Every 2 Shares	=	30
Step 4:   Cash to Be Paid per Share in L Ltd. ( 30 ÷ 2)	=	15

STAGE III: Computation of Purchase Consideration:

 

Step 1:	Payment in Cash: 15,000 Shares × 15 :	2,25,000
Add:
Step 2:	Payment by Shares: 15,000 Shars × 20 ×	15,00,000
Step 3:	Purchase Consideration:	17,25,000

 

STAGE IV: Balance Sheet of M Ltd. as at 31 March 2011:

Note:

 

(i)	Face value of shares issued: 15,000 × × 10	7,50,000
(ii)	Premium on the share issued: 15,000 × × 10	7,50,000
		15,00,000

Illustration 9.25

Model: Absorption—Fraction of shares

The following are the balance sheets of X Ltd. and Y Ltd. as on 31 March 2011:

Y Ltd. agreed to absorb X Ltd. on the following terms:

1. Y Ltd. to give one share of 10 each as an agreed value of 30 per share for every three shares in X Ltd. The shares of Y Ltd. are quoted in the market at 45 per share.
2. The trade liability is to be taken over.

You are required to prepare:

1. Journal entries in the books of Y Ltd.
2. Balance sheet of Y Ltd. after absorption assuming the amalgamation is in nature of purchase

Solution

STAGE I: Computation of Purchase Consideration:

 

Step 1:	Calculation of Number of Shares to Be Received from Y Ltd:
	Number of Shares in X Ltd.:	80,000 Shares
	Number of Shares to Be Received from Y Ltd. = 80,000 ÷ 3 =	26,666 Shares
Step 2:	Payment to Shareholders as:
	Agreed Value = 26,666 Shares × 30 =	7,99,980
Step 3:	Cash for Fractional Value of Shares = × 45 = 30
Step 4:	Purchase Consideration:	_________   8,00,010

Note: As fractions of shares with respect to individual shareholders are not given, it is ignored. Always fractions are to be valued at market price.

STAGE II:

STAGE III:

Illustration 9.26

Model: Absorption—inter-company owings

A Ltd. agreed to acquire the business of D Ltd. as on 31 March 2011. The balance sheet of D Ltd. as on that date was as follows:

The consideration payable by A Ltd. was agreed as follows:

1. The preference shareholders of D Ltd. were to be allotted 14% preference shares of 4,40,000
2. Equity shareholders to be allotted six equity shares of 10 each issued at a premium of 10% and 3 cash against every five shares held
3. 12% of D Ltd. to be paid @ 8% premium by issue of 14% debentures at 10% discount

While arriving at the agreed consideration, the directors of A Ltd. valued land & building at 10,00,000; stock at 8,80,000; debtors at their book value subject to an allowance of 5% to cover doubtful debts. Debtors of D Ltd. included 40,000 due from A Ltd. The machineries were valued at book value. It was agreed that before acquisition, D Ltd. will pay dividend at 10% on equity shares. Liquidation expenses are 20,000.

You are required to draft journal entries necessary to close the books of D Ltd. and to record acquisition in the book of A Ltd.

 

[C.A. (Inter). Modified]

Solution

Computation of Purchase Consideration:

STAGE II:

STAGE III:

Illustration 9.27

Model: Absorption—Issue of bonus shares

ABC Ltd. want to acquire the business of XYZ Ltd. as on 31 December 2010. The balance sheets of two companies as that date are given below:

The shares of both companies are quoted on the Stock Exchange. Such values on 31 December 2010 are:

ABC Ltd.— 160 per share

XYZ Ltd.— 45 per share

The terms of absorption are as follows:

1. ABC Ltd. to take over all the sundry assets and liabilities of XYZ Ltd. except cash and bank balances.
2. The values of sundry assets of XYZ Ltd. to be fixed at 90% of their book values.
3. The purchase consideration is to be met by ABC Ltd. by the allotment of one equity share at the market value for every five equity share held in XYZ Ltd. and the balance, if any, to be met by cash payment.
4. On acquisition of the business by ABC Ltd., the directors of ABC Ltd. decide to capitalize the reserve by allotting bonus shares in the preparation of one share for every two shares held.
5. The authorized capital of ABC Ltd. is increased to 50,00,000 in 100 shares.
6. The balance of unissued shares has now been issued at a premium of 40 per share. All the allottees have fully met their obligations.
7. Out of the moneys received, the sundry creditors are paid off in full.

You are required to draw up the balance sheet of ABC Ltd. as it would stand after making due adjustments for carrying out the above scheme under purchase method.

Solution

STAGE I: Computation of Purchase Consideration:

 

(i) Sundry Assets (At Agreed, i.e. 90% of Book Value)	4,50,000
(ii) Less: Liabilities:	1,25,000
(iii) Net Assets Available for Shareholders:	3,25,000

STAGE II: Discharge of Purchase Consideration:

 

(i) By Issue of Shares: 10,000 ×× 160:	3,20,000
(ii) Balance ( 3,25,000 − 3,20,000) 5,000 in Cash:	5,000
	3,25,000

STAGE III:Treatment of Shares:

 

(i) Existing Number of Shares:	25,000	Shares
Add
(ii) Issued to Vendor Company:	2,000	Shares
(iii) Total Number of Shares:	27,000	Shares
(iv) Out of 27,000 Shares, Issued on Bonus Shares:
27,000 ÷ 2 (One Share for Every 2 Shares):	13,500	Shares
(v) Shares Issued for Cash
(50,000 Shares – (i to iv)
40,500 Shares = 9,500):	9,500	shares
(vi) Total Number of Shares:	50,000	shares

STAGE IV: Calculation of Cash and Bank Balances:            

 

(i) Balances as per B/S:		5,00,000
Add:
(ii) By Issue of 9,500 Shares at 140 per Shares:		13,30,000
		18,30,000
Less: Paid to Vendor Company:	5,000
Paid to Sundry Creditors:	3,75,000	3,80,000
		14,50,000

STAGE V: Calculation of Securities Premium:

 

(i) On Issue of Shares to Vendor Company 2,000 × 60 :		1,20,000
(ii) On Issue of Shares for Cash 9,500 × 40:		3,80,000
		5,00,000

STAGE VI:

Illustration 9.28

Model: Absorption—Dissenting shareholders

AB Ltd. agrees to absorb CD Ltd. on the [img] basis of the following balance sheet ason 31 March 2011

AB Ltd. took over all the assets and liabilities of CD Ltd. subject to the retention of 120 thousand cash to provide for costs of liquidation, and to satisfy the dissenting shareholders.

The consideration for the sale is the allotment of one share of 100 ( 50 paid up) in AB Ltd. for every two shares in CD Ltd. The market value of the 50 paid-up share of AB Ltd. on that date was 70 per share.

The liquidator of CD Ltd. has paid out of 120 thousand retained, the cost of liquidation of 60 thousand and dissenting shareholders of 800 shares at 32.50 per share totaling 26,000.

You are required to prepare ledger accounts in the books of CD Ltd. and give journal entries in the books of AB Ltd.

Solution

Illustration 9.29

Model: Purchase consideration—NIL

The following are the balance sheets of G Ltd. and H Ltd. as on 31 March 2011:

On that day, G Ltd. absorbed H Ltd. taking over all the assets and liabilities. The consideration was NIL. You are required to

1. Pass journal entries in the books of G Ltd.
2. Prepare the balance sheet of G Ltd. after absorption under purchase method

Solution

(ii)

9.5 EXTERNAL RECONSTRUCTION

9.5.1 Meaning of Reconstruction

Generally “reconstruction” means the reorganization of financial (Capital) structure of the existing company. Such reorganization may be carried out by winding up or not winding up the existing company.

9.5.2 Types of Reconstruction

Reconstruction may broadly be categorized into:

1. External reconstruction
2. Internal reconstruction

   Internal reconstruction is discussed in Chapter 11.

9.5.3 External Reconstruction

9.5.3.1 Meaning

When reorganization of a company’s financial structure involves winding up of a company and a floatation of a new company (with the same assets and shareholders), then it is referred to as “external reconstruction”.

External reconstruction is more or less like “amalgamation in the nature of purchase”.

External reconstruction necessitates:

1. Winding up of an existing company
2. Formation of new company

   That means, the old company is restructured to form a new company.

In external reconstruction, the new company takes over the assets and liabilities of the old company at its true values. The share capital issued also will reveal the true value of net assets.

Under external reconstruction, the company acquires the status of new legal entity. All the shareholders of the old company need not be the shareholders of the new company. The old company is called the transferor or vendor company and the new company is termed “transferee company” or purchasing company.

9.5.3.2 Accounting Treatment

As per AS-14, under external reconstruction, the assets and liabilities of the old company are taken over by the new company at their true or revised values and not at their book values.

Accounting entries in the books of account of vendor company (old company):

The accounting entries are made to close the books of vendor company in the same method as discussed in the amalgamation process.

Accounting entries in the books of account of the new company or purchasing company:

The same accounting procedure explained in the case of “amalgamation in the nature of purchase” is to be followed here.

Some Special Items:

1. Payment to creditors of the old company: Creditors should be transferred to Realization A/c. After that, they should be paid off by the new company after take over.
2. Contingent liability: Contingent liability need not be transferred to Realization A/c. They should be recorded in the books of the purchasing company as taken over and paid off by the new company.

The following table shows the difference between amalgamation and external reconstruction:

Basis of Distinction	External Reconstruction	Amalgamation
1. Number of companies	In external reconstruction, only one is involved	In amalgamation, two or more companies are involved.
2. Formation	New Company is a restructured old company	Two or more companies are merged or taken over by a new company
3. Types for accounting purposes	It is like amalgamation in the nature of purchase	Here two types: (i) Amalgamationof purchase.in the nature of merger and (2)amalgamation in the nature are followed

Illustration 9.30

Model: External reconstruction—Net payment method

The books of Hari Ltd. contained the following balances as on 30 November 2010:

Particulars	Debit	Credit
Equity Share Capital ( 10 Each)	—	4,800
Creditors	—	5,600
Patents & Trademarks	4,800	—
Plant & Machinery	1,600	—
Stock	1,200	—
Debtors	2,000	—
Cash	50	—
Preliminary Expenses	290	—
Profit & Loss A/c	460	—
	10,400	10,400

The patents & trademarks are considerably overvalued The company is also not in a position to raise any further capital.

The following scheme of reconstruction has therefore been framed:

1. The company will go into voluntary liquidation. A new company Gopal Ltd. will be formed with an authorized capital of 80 lakh to take over the assets.
2. Liability will be discharged by the new company to the creditors by payment of 25 paise in a rupee in cash and 50 paise in a rupee by issue of 9% debentures.
3. 4.8 lakh shares of 10 each ( 5 per share paid) will be issued to shareholders of Hari Ltd.; the balance 5 per share be paid on allotment.
4. Expenses of liquidation amounting to 70,000 will be paid by Gopal Ltd.

The scheme was approved by all concerned. You are required to:

1. Close the ledger of Hari Ltd.
2. Pass journal entries to open the books of Gopal Ltd.
3. Show the Balance Sheet of Hari Ltd.

[Madras University Modified]

Solution

I: Books of Hari Ltd.

II:

III: Computation of Purchase Consideration Shares in Gopal Ltd: 4,80,000 Shares × 5 = 24,00,000 = 2,400 thousand

IV:

Illustration 9.31

Model: External reconstruction–Dissenting shareholders

The abridged balance sheet of H Ltd. as at 31 December 2010 is as follows:

 

The following scheme of reconstruction was approved by the Court:

1. A new company L Ltd. is to be formed to take over the entire business of H Ltd.
2. L Ltd. to issue one equity share of 100, 60 to be paid up in exchange of every two shares in H Ltd. to the shareholders who agree with the scheme; shareholders who do not agree with the scheme are to be paid @ 20 per share in cash. Such shareholders hold 1,600 equity shares.
3. Preference shareholders to get 15, 11% preference shares of 10 each in exchange of two preference shares of H Ltd.
4. Liability in respect of 15% debentures and interest accrued thereon to be taken over and discharged directly by L Ltd. by issue of equity shares of 100 each fully paid up.
5. The creditors of H Ltd. will get from L Ltd. 50% of their dues in cash and 25% in equity shares of 100 each and the balance to be forgone by them.
6. The freehold premises to be revalued at 20% more. The value of machinery to be reduced by and to 6,40,000. Patents to have no value.
7. The preliminary expenses amounted to 20,000.

You are required to:

1. Open realization account in the books of H Ltd.
2. Pass journal entries in the books of L Ltd.

[B.Com (Hons) Delhi Modified]

Solution

STAGE I: Computation of Purchase Consideration:

Step 1: Payment to Equity Shareholders × 60 (2 Shares for Every 1 Shares)	5,52,000
Step 2: Payment of Cash for Dissenting Shareholders: 1,600 × 20	32,000
Step 3: For Preference Shareholders × 15 × 10 (15 Shares for Every 2 Shares)	6,00,000
Step 4: Purchase Consideration (Add: Step 1 + Step 2 + Step 3)	11,84,000

STAGE II:

STAGE III:

9.5.3.3 Inter-company Holdings

Sometimes, companies in the scheme of combination (merger or acquisition or absorption) have financial interest in other companies. Companies’ moneys would have interlocked in shares and debentures of other companies. In such cases, the accounting treatment is a tricky affair. For the convenience of accounting, they may be divided into three broad categories as follows:

1. When purchasing company holds shares in vendor company (absorbed company)
2. When the vendor (absorbed) company holds shares in the purchasing company
3. When both the companies hold shares in each other

   Let us discuss one by one.

9.5.3.3.1 When Purchasing Company Holds Shares in Vendor Company

In this case, the purchasing company is also a shareholder of the vendor company. Legally, it has rights to have a proportionate amount in the net assets. Hence, the problem arises in the treatment of amount due to shareholders. Because for the amount due to combination, it cannot receive its own shares. The absorbing company, in this case, can buy only the net assets belonging to outside shareholders. Then what can be done with respect to absorbing company for its part of securities in the vendor company. This problem of accounting can be resolved as follows:

Books of Vendor (Absorbed) Company:

 

Step 1:	Purchase consideration should be computed for the entire business concern. This may be under net assets or payments method, depending on the case
Step 2:	Debit the purchasing company with the full price.
Step 3:	Credit with the amount that is received relating to outsiders.
Step 4:	There will be a debit balance. This represents the amount to be received from purchasing company as the part of purchase consideration.
Step 5:	Similarly, in the shareholders’ A/c there will be a credit balance. This amount represents the quantum payable to purchasing company. This is neither paid by the vendor company nor received by it in the capacity as a shareholder.
Step 6:	These two accounts are to be closed by the set-off entry as:

 

Shareholders’ A/c	Dr.……
Purchasing Company’s A/c		……

Books of Purchasing Company:

The same problem is tackled by passing the following entry in the books of the purchasing company as:

 

Liquidator of Vendor Company (With Full Purchase Price)	Dr.
To Share Capital/Debenture/Bank (With Amount Payable to Outsiders)
To Shares in the Vendor Company (With Amount Due to Purchasing Company)

 

Note: Any difference in shares in the vendor company A/c is to be transferred to goodwill or capital reserve depending on the case.

Illustration 9.32

Model: Inter-company holdings—when purchasing company holds shares in vendor company

The following are the balance sheets of A Ltd. and B Ltd. as on 31 March 2011:

A Ltd. agrees to absorb B Ltd. on the following terms:

1. It is assessed that net assets of B Ltd. may be taken at 10,87,500 which is to be satisfied by the issue of fully paid shares of 100 each by A Ltd. at par.
2. A Ltd’s Investments include 20% of the shares in B Ltd. at a cost of 1,80,000.

Close the books of B Ltd. and give journal and balance sheet in the books of A Ltd.

[C.S. (Inter). Modified]

Solution

Next, investment A/c is to be prepared to arrive at the figure to be transferred to balance sheet.

 

9.5.3.3.2 When Vendor (Transferor/Selling) Company Having (Holds) Shares in Purchasing (Transferee) Company

Net Payment Method:

1. Under this method, the number of shares already held by the vendor company should be deducted from the shares agreed to be issued.
2. The investment of the vendor company in shares of the purchasing company should not be taken over by the purchasing company. That means investments in purchasing company are not to be transferred to realizsation A/c.
3. This method is explained in the following illustration:

Illustration 9.33

Model: When the vendor company holds shares in purchasing company—Net payment method X Ltd. absorbs Y Ltd. by payment of 5 shares of 10 each at a premium of 10% for every 4 shares in Y Ltd. The balance sheet of Y Ltd. as on the date of absorption is shown in the following:

You are required to:

1. Prepare necessary ledger accounts in the books of Y Ltd.
2. Give acquisition entries in the books of X Ltd.

Solution

I: Computation of Purchase Consideration:

 

Step 1:	Number of Shares to Be Issued by X Ltd.
		= 50,000 Shares
Step 2:	Number of Shares Already in Y Ltd. (Given)	= 8,000 Shares
Step 3:	Total Number of Shares to be Issued by X Ltd. (Step 1 – Step 2)	= 42,000 Shares
Step 4:	Purchase Consideration	= 42,000 Shares × ( 10 + 1)
		= 4,62,000

 

II: Some Important Notes: To Be Observed While Preparing the Ledger Accounts:

1. While preparing realization A/c, shares in X Ltd. should not be transferred to realization A/c
2. While preparing shareholders’ A/c, profit on revaluation is to be determined as:

(i) Value of 8,000 shares already held	=	80,000
(ii) Revalued at the price with premium	=	88,000
(iii) Difference in profit	=	_______     8,000
(iv) This profit on revaluation, i.e., 8,000, has to be transferred to shareholders’ A/c

III: Preparation of Ledger Accounts:

 

II: Net Assets Method:

1. Under this method, the assets in the form of “investment in shares of the purchasing company” should not be taken into account for computing the purchase consideration.
2. This method is explained in the following illustration:

Illustration 9.34

Model: When the vendor company holds shares in purchasing company—Net assets method

Basu Ltd. and Vasu Ltd. had the following financial position as on 31 March 2011:

It was decided that on that date, Basu Ltd. will take over the business of Vasu Ltd. on the basis of the respective share value, adjusting, wherever necessary, the book values of assets and liabilities on the strength of the information given below:

1. Investment of Vasu Ltd. included 4,000 shares in Basu Ltd., acquired at a cost of 150 per share. The other investment of Vasu Ltd. have a market value of 1,00,000.
2. Investment allowance reserve was in respect of additions made to fixed assets by Vasu Ltd. during the year 2009-10, on which income tax relief has been obtained. In terms of Income Tax Act, the company has to carry forward till 2014, reserve of 6,00,000 for utilization.
3. Goodwill of Basu Ltd. and Vasu Ltd. are to be taken at 1,600 thousand and 800 thousand, respectively.
4. The market value of investment of Basu Ltd. was 800 thousand.
5. Current assets of Basu Ltd. included 320 thousand of stock in trade obtained from Vasu Ltd., which normally sold goods at a profit of 25% over cost.
6. Fixed assets of Basu Ltd. & Vasu Ltd. are valued at 2,000 thousand and 3,000 thousand, respectively.

   Suggest the scheme of absorption and show the journal entries in the books of Basu Ltd. Also prepare the balance sheet of that company after take over of the business of Vasu Ltd.

[C.A. (Inter) Modified]

Solution

STAGE I: Computation of Net Assets:

 

		Basu Ltd. ( in 000’s) Vasu Ltd. ( in 000’s)
(i) Goodwill	1,600	800
(ii) Fixed Assets	2,000	3,000
(iii) Investments at Market Value	800	100
		500
(iv) Current Assets	1,200	1,000

 

A: Gross Assets [Add: (i) to (iv)]	5,600	5,400
B: Liabilities	1,600	600
C: Net Assets [A − B]	4,000	4,800

 

STAGE II: Determination of Value of Shares:

 

D: Number of Shares:	32,000	24,000
E:Value of Equity Share (C ÷ D):	125	200
STAGE III: Ratio of Exchange:	125:200
	5:8

That means that for every 5 shares in Vasu Ltd., 8 shares of Basu Ltd. will be exchanged.

∴ Market Value of 5 Shares of Vasu Ltd. = 5 × 200 = 1,000

Market Value of 8 Shares of Basu Ltd. = 8 × 125 = 1,000

STAGE IV: Computation of Purchase Consideration:

 

Step 1:	Number of Shares to Be Issued = 24,000 × = 38,400 Shares
	(for Every 5 Shares in Vasu Ltd. 8 Shares in Basu Ltd.)
Step 2:	Shares Already Held by Vasu Ltd.:	4,000 Shares
Step 3:	Actual Shares to Be Issued (Step 1 – Step 2):	34,400
Step 4:	Purchase Consideration 34,400 Shares × 125 per Share (Ref: Stage III) Or 4,300 Thousand

STAGE V:

STAGE VI:

 

9.5.3.3.3 When Shares are Held by the Companies in Each Other

(i)Net Payment Method:

Under this method, the purchase consideration is to be computed under the following steps:

 

Step 1:	The Number of Shares to Be Issued to Outside Shareholders in the Absorbed Company	=…
Step 2:	Number of Shares Due to Purchasing Company as Shareholder in the Vendor Company	=…
Step 3:	Total Number of Shares (Step 1 + Step 2)	= …
Step 4:	Less: Number of Shares Already Held by the Absorbed Company	= …
Step 5:	Purchase Consideration (Number of Share as per Step 4 × Issue Price per Share) =	…

Illustration 9.35

Model: When shares are held by both the companies in each other—Net payment method

X Ltd. is to absorb Y Ltd. by issuing 5 shares of 10 each at a premium of 10% for every 4 shares held in Y Ltd. On the date of absorption, the balance sheets were as follows:

You are required to show (i) the important ledger accounts in the books of Y Ltd. and (ii) the acquisition entries in the books of X Ltd.

Solution

STAGE I: Computer of Purchase Consideration:

STAGE II: Preparation of Ledger Accounts:

 

STAGE III:

(ii) Net Assts Method:

Net Assets of a Company Should Be Ascertained by Using Simultaneous Equations.

Step 1:	Total Value of Assets of Each Company (Applying Algebraic Equation):
Less:
Step 2:	Proportionate Value of Assets (Shares):
Less:
Step 3:	Shares of the Purchasing Company Held by Vendor Company:

Illustration 9.36

Model: When shares are held by both the companies in each other—Net assets method

Following are the balance sheets of C Ltd. and D Ltd.:

It was decided that C Ltd. will absorb D Ltd. You are required to compute the purchase consideration.

Solution

Step 1: Computation of Total Assets of Each Company:

1. Assumption: Let the Total Assets of C Ltd. be C; Let the Total Assets of D Ltd. be d.
2. ∴

   C = 12,00,000 + × d            (1)

   d = 6,00,000 + × C            (2)

3. *Substitute the Value of d in equation (1), We Get:

   C = 12,00,000 + (6,00,000 + × C) = C = 13,46,938

4. Value of Each Share of C Ltd. = = 44.897 or 44.90
5. Substitute the Value of C in equation (2), We Get:

   Value of Each Share of D Ltd.

       = (6,00,00 + + 13,46,938)

       = 6,00,000 + 13,469

       = 6,13,469

6. Total Value of Assets of the Absorbed Company = 6,13,469.

Step 2: Computation of Purchase Consideration:

(i) Total Value of Assets in D Ltd:	6,13,469
(ii) Less: Already belonging to C Ltd. ( of 6,13,469):	1,22,694
	4,90,765
This Will Be Further Reduced by:
For Making Payment of 44.90 C Ltd. Issues =	1 Share
∴ For Making Payment of 4,90,765 () C Ltd. Issues =	10,930.178 Shares
Shares to Be Issued by C Ltd. =	10,930.178 Share
Less: Already Held by D Ltd. =	3,000 Shares
New Shares to Be Issued =	7,930.178 Shares
∴ Purchase Consideration Is to Be Paid by
(a) Issuing 7,930 Shares of 10 Each       =	79,300
(b) Fraction Share 0.178 × 44.90           =	7.99
Purchase Consideration                        =	79,307.99

 

*Step 1 (iii) is explained below:

Amalgamation: When two or more existing companies combine to form a new company, it is amalgamation.

Absorption: When one existing company takes over the business of one or more existing companies, it is absorption.

External reconstruction: When one existing company is wound up and a new company is floated with the same shareholders, it is external reconstruction.

Legally, amalgamation includes absorption. AS-14 deals with accounting for amalgamation.

Reorganization of a company without winding up (liquidating) the company is internal reconstruction. On the other hand, if it involves the liquidation of the existing company, it is external reconstruction.

Types of amalgamation: (i) Amalgamation in the nature of merger and (ii) Amalgamation in the nature of purchase.

Purchase consideration: It refers to the total amount payable to the shareholders of transferor company.

Methods of computation of purchase consideration: (i) Lump sum method (ii) Net payment method (iii) Net assets method and (iv) Intrinsic value method. Each method is explained with a sufficient number of illustrations (Ref: The text).

Items that are to be treated as liabilities, trade liabilities, provisions, accumulated profits and accumulated losses are explained clearly. (Ref: the text for detail)

Methods of accounting for amalgamation: (i) The pooling of interest method and (ii) Purchase method.

Accounting treatment: Whatever may be the form of combination (i.e., amalgamation, absorption or external reconstruction), the books of the transferor (selling, vendor) company have to be closed. This has to be made by passing necessary entries in the books of journal and preparing the relevant ledger accounts. At the same time, journal entries have to be passed in the books of purchasing company (transferee).

These are all explained by way of illustrations (Ref: text).

Some of the following factors should be taken into account while accounting for amalgamation, absorption and external reconstruction is carried out:

1. Amalgamation adjustment A/c
2. Amalgamation after balance sheet date
3. Dissenting shareholders
4. Inter-company owings
5. Unrealized profit in stock

Accounting treatment for Inter-company holdings:

1. When shares are held by the transferee company in the transferor company
2. When shares are held by the transferor company in the transferee company
3. When shares are held by both the companies in each other (cross holdings)

Each type is explained with illustrations (Ref: text)

Amalgamation: A form of business combination in which two or more companies combine together to form a new company.

Absorption: A form of business combination in which one existing company takes over the business of one or more existing companies.

External Reconstruction: A form of reorganization in which an existing company is liquidated and a new company floated with the same shareholders.

Purchase Consideration: It refers to the total amount payable to the shareholders of the transferor company by the purchasing company.

Amalgamation Adjustment A/c: An account to which any statutory reserve (of the selling company that is to be continued for a few years) should be debited to and to be shown as asset in the balance sheet. Applicable only when purchase method is adopted.

Dissenting Shareholders: Shareholders of the transferor company who have not given their asset to the proposed scheme of amalgamation (or any reorganization scheme).

QUESTION BANK

I: State whether the following statements are true or false

1. In absorption, no new company is formed.
2. A new company is floated with new shareholders in “external reconstruction”.
3. As per Sections 390 & 396 (A) of the Companies Act, any scheme of amalgamation requires the approval of a court.
4. As per AS-14, amalgamation differs from absorption.
5. Internal reconstruction requires the winding up of an existing company.
6. External reconstruction is more or less same as that of “amalgamation in the nature of purchase”.
7. In the case of amalgamation in the nature of merger, all the assets and liabilities of the selling company will become the assets and liabilities of the purchasing company.
8. Adjustment has to be made in the book values of the assets and liabilities of the transferor company when they are transferred to the financial statements of the purchasing company, when amalgamation is in the nature of merger.
9. Under amalgamation in the nature of merger, purchase consideration should be discharged to the shareholders only in the form of cash.
10. When amalgamation is in the nature of purchase, less than 90% of the selling company’s shareholders may become shareholders in the purchasing company.
11. When amalgamation is in the nature of purchase, assets and liabilities taken over by the purchasing company should be shown only at their book values.
12. While computing the purchase consideration, amount agreed to be paid to debenture holders and creditors should be taken into consideration.
13. Liquidation expenses can be treated as reimbursement while ascertaining purchase price.
14. The aggregate of agreed payments represents the “net payment method”.
15. Under “net assets” method, assets taken over should not include cash and bank balances.
16. Under net assets method, accumulated profits should not form part of liabilities.
17. Under “shares exchange method”, the exchange ratio is determined on the basis of “intrinsic value of shares” of the respective companies’ shares.
18. When the amalgamation is in the nature of merger, purchase consideration should be made in the form of “cash” only.
19. While recording transactions in the books of the companies, provisions should be transferred to realization account and losses should be transferred to the shareholders’ account.
20. “Amalgamation adjustment account” is to be shown on the liabilities side of the balance sheet.
21. If the purchase consideration agreed to be paid is greater than the net assets taken over, the difference should be treated as “capital reserve”.
22. “Pooling of interests method” is confirmed to amalgamations in the nature of merger.
23. Under pooling of interests method, goodwill account should be written off within a period of 5 years.
24. In the books of the transferor company, for unrealized profit in stock, no adjustment is needed.
25. If the amalgamation is in the nature of purchase, the amount of unrealized profit is to be debited to goodwill/capital reserve A/c.

Answers:

1. True
2. False
3. True
4. False
5. False
6. True
7. True
8. False
9. False
10. True
11. False
12. False
13. True
14. True
15. False
16. True
17. True
18. False
19. True
20. False
21. False
22. True
23. False
24. True
25. True

II: Fill in the blanks with apt word(s)

1. When two or more companies combine together to form a new company, it is called _______.
2. When one existing company takes over the business of one or more existing companies, it is known as_______.
3. When an existing company is liquidated and a new company is formed (with the same shareholders mostly), it is termed_______.
4. In the eyes of law, amalgamation includes _______ also.
5. The Accounting Standard _______, issued by the ICAI, specifies the procedure of accounting for amalgamations.
6. If the reorganization is carried out without liquidating the company, it is _______.
7. In a reorganization, if a company gets liquidated and a new company is floated with the same shareholders, it is called _______.
8. Amalgamations may broadly be divided into two categories: (i)_______ and (ii)_______.
9. When amalgamation is in the nature of merger, _______ assets and liabilities are to be taken over by the purchasing company.
10. When amalgamation is in the nature of merger, assets and liabilities taken over should be shown at their ______ values.
11. When amalgamation is in the nature of purchase, all assets and liabilities _______ over by the purchasing company.
12. When amalgamation is in the nature of purchase, assets and liabilities taken over may be shown at values_______.
13. As per AS-14, purchase consideration means the total amount payable to the _______ of the transferor company.
14. In the purchase price, amount paid to _______ and _______ should not be included.
15. The total of the agreed payments represents _______ made by the purchasing company to the shareholders of transferor (selling) company.
16. “Net assets” taken over by the purchasing company represent the _______ under “net assets” method.
17. Agreed value of “assets” taken over - Agreed value of liabilities taken over = _______.
18. 
19. One method of accounting for amalgamation is “the pooling of interests method”; and the other one is_______.
20. When amalgamation is in the nature of merger, _______ method of accounting is used.
21. The pooling of interests method has no specific effect on the books of the _______ company.
22. _______ method of accounting is used when amalgamation is in the nature of purchase.
23. When the purchase price agreed to be paid exceed the net assets taken over, such excess amount should be debited to _______ A/c.
24. When the purchase consideration is less than the amount of net assets taken over, such difference should be credited to _______ A/c.
25. In purchase method, “statutory reserves” of the transferor company should be _______.
26. All statutory reserves should be debited to A/c if they are continued for some more years.
27. Shareholders of transferor company who have not given their assent for amalgamation are called _______.
28. Amalgamation effected after the balance sheet date should be in accordance with the standard _______.
29. Inter-company owings, due to purchase and or sale of goods, will create a problem of _______.
30. If the amalgamation is in the nature of merger, the amount of unrealized profit is to be debited to ________.

Answers:

1. Amalgamation
2. Absorption
3. External reconstruction
4. Absorption
5. AS-14
6. Internal reconstruction
7. External reconstruction
8. Amalgamation in the nature of merger
9. Amalgamation in the nature of purchase
10. All
11. Book values
12. May not be taken
13. Other than book values
14. Shareholders
15. Debenture holders; creditors
16. Net payment
17. Purchase consideration
18. Intrinsic value
19. The purchase method
20. The pooling of interests
21. Transferor/selling
22. The purchase
23. Goodwill
24. Capital reserve
25. Continued
26. Amalgamation adjustment
27. Dissenting shareholders
28. AS-14
29. Unrealized profit in stock
30. General reserve
31. P&L A/c

III: Multiple choice questions—Choose the correct answer

1. In which of the following are all the combining companies liquidated:
   1. amalgamation
   2. absorption
   3. external reconstruction
   4. internal reconstruction
2. When an existing company is liquidated and a new company is formed with the same shareholder to run the business, it is referred to as
   1. amalgamation
   2. external reconstruction
   3. absorption
   4. internal reconstruction
3. Assets and liabilities taken over should be shown in purchasing company at their (amalgamation in the nature of merger)
   1. sales value
   2. market value
   3. book value
   4. costs
4. In amalgamations in the nature of purchase, consideration payable to shareholders of the transferor company may be in the form of
   1. shares
   2. cash
   3. any agreed form
   4. all of these
5. Intrinsic value of shares means
   1. dividing the assets available by number of equity shares
   2. face value
   3. market value
   4. none of these
6. While recording transactions in the books of companies for reorganization, “underwriting commission” is treated as
   1. trade liabilities
   2. accumulated losses
   3. accumulated profits
   4. provisions
7. “Investment fluctuation fund” is treated as
   1. trade liabilities
   2. accumulated profits
   3. provision
   4. accumulated losses
8. “Workmen’s compensation fund” is treated as
   1. liabilities
   2. provisions
   3. accumulated losses
   4. accumulated profit
9. Pooling of interests method is used
   1. when amalgamation is in the nature of merger
   2. when amalgamation is in the nature of purchase
   3. for internal reconstruction scheme only
   4. none of these
10. In purchase method, excess of purchase consideration over the net assets taken over is treated as
    1. capital reserve
    2. revenue reserve
    3. statutory reserve
    4. goodwill

Answers:

 

1. (a)	2. (b)	3. (c)	4. (d)
5. (a)	6. (b)	7. (c)	8. (d)
9. (a)	10. (d)

1. What do you mean by “amalgamation”?
2. Explain the term “absorption”.
3. What is “external reconstruction”?
4. What is the main difference between external reconstruction and internal reconstruction?
5. What is the legal meaning of amalgamation?
6. Explain the term “amalgamation” as per AS-14.
7. “External construction is like old wine in new bottle”—Comment.
8. Name the two types of amalgamation.
9. Mention the important features in amalgamation in the nature of merger.
10. What are the salient features in amalgamation in the nature of purchase?
11. Explain “purchase consideration”.
12. Mention the methods of computing purchase consideration.
13. What does AS-14 stipulate with respect to “consideration”?
14. What do you mean by net payment method?
15. How would you determine “net assets”?
16. How will the “intrinsic value” of shares be determined?
17. What is the main difference between “provision” and “loss” while recording transactions in the books of companies?
18. How will you treat “accumulated profits”?
19. Name the items that are included in “trade liabilities”.
20. Name the methods of accounting for amalgamation.
21. What method is used in merger type of amalgamation?
22. Name the method that is used in purchase type of amalgamation.
23. What is AS-14 concerned with?
24. Explain “dissenting shareholders”.
25. Write short notes on “amalgamation adjustment account”.
26. How does goodwill arise? How will it be treated?
27. What is “capital reserve”? How would you treat it?
28. What is “unrealized profit in stock”?
29. What do you mean by “inter-company owings”? Why does it arise?
30. Mention the possible situations that may arise in “inter-company holdings”?

1. Explain the different types of meaning for: (a) amalgamation (b) absorption and (c) external reconstruction.
2. How do amalgamation, absorption and external reconstruction differ from each other? Illustrate your answer.
3. Explain the salient features of AS-14.
4. What are the types of amalgamation? Elucidate the salient features of each such type. How do they differ from each other?
5. Define “purchase consideration”. Name the methods of computation of purchase consideration. Explain “net payment method” with an example of your own.
6. Explain “net assets method”. Explain the relevant factors to be considered while determining purchase consideration.
7. What is meant by intrinsic value method? Explain with suitable illustration.
8. Discuss the various factors that are to be taken into account while recording transactions in the books of both transferor and transferee companies.
9. What are the methods of accounting for amalgamations? Discuss the salient features of each method. How do they differ from each other?
10. What do you mean by “inter-company holdings”? How will you treat:
    1. If shares are held by the transferee company in the vendor company
    2. If shares are held by the vendor company in the purchasing company
    3. If shares are held by both the companies in each other
11. Write short notes on:
    1. Amalgamation adjustment A/c
    2. Amalgamation after balance sheet date
    3. Dissenting shareholders
    4. Inter-company owings
    5. Unrealized profit in stock

 

[Model: Computation of purchase consideration]

1. Vivek Ltd. is absorbed by Abhishek Ltd., the consideration being:

1. The taking over of trade liabilities of 1,20,000
2. The payment of cost of absorption 45,000
3. The payment of ‘Y’ Debentures of Vivek Ltd. of 6,00,000 at par
4. The discharge of ‘X’ debentures of 9,00,000 in the vendor company at a premium of 10% by the issue of 8% debentures in Abhishek Ltd. at par
5. A payment of 20 per share in cash and the exchange of 4 fully paid 10 shares in Abhishek Ltd. at a market price of 15 per share for every 50 share in Vivek Ltd. which were 1,20,000 in number

You are required to find out the purchase consideration

[B.Com Osmania University Modified]

[Ans: Purchase consideration: 96,00,000]

[Model: Amalgamation in the nature of merger]

2. A Ltd. and B Ltd. have agreed to amalgamate. A new company C Ltd. has been formed to take over the combined concern as on 31 December 2010. After negotiations, the assets of two companies have been agreed upon as shown in the following:

Prepare the balance sheet of C Ltd. assuming:

1. The entire purchase price is paid off in the form of equity shares of 100 each in C Ltd.
2. The amalgamation is in the nature of merger

[B.Com Madras University Modified]

[Ans: Purchase price: A Ltd.— 21,00,000, B Ltd.— 12,00,000; Excess of purchase consideration adjusted against reserves: 3,00,000; Balance sheet total: 35,60,000]

[Model: Amalgamation in the nature of merger]

3. The following are the balance sheets of X Ltd. and Y Ltd. as on 31 March 2011:

Z Ltd. was formed to take over the business of X Ltd. and Y Ltd. for the agreed purchase consideration of 58,50,000 and 13,40,000, respectively, which is payable in the form of 100 per shares at par. Y Ltd’s debentures are to be converted into 10% debentures of Z Ltd.

Amalgamation expenses of 45,000 are to be borme by the transferee company.

Close the books of the transferor companies and give journal entries and balance sheet in the transferee company’s books.

[Ans: Realization loss: X Ltd.— 13,48,080, Y Ltd.— 1,15,41; Balance sheet total: 1,00,42,590]

[Model: Amalgamation in the nature of purchase]

4. P Ltd. and Q Ltd. agree to amalgamate as from 31 December 2010 on which date their respective balance sheets were as follows:

Draw up the balance sheet of the new company PQ Ltd., which was incorporated to take over the amalgamated concerns, and state the number of shares in the new company, which will be allotted to the shareholders of the old companies. (Assume the same face value)

[Ans: Number of shares to allotted in PQ Ltd: 45,000 shares to be allotted to P Ltd. and 15,000 shares to be allotted to Q Ltd. shareholders; Balance sheet total: 7,20,000]

5. R Ltd. and S Ltd. are two companies carrying on business in the same lines of activity. Their balance sheets as on 31 March 2011 are as follows:

The two companies decided to amalgamate into T Ltd. The following further information is as follows:

1. All assets and liabilities of the two companies are taken over
2. Each share in S Ltd. is valued at 25 for the purpose of amalgamation
3. Shareholders of S Ltd. and R Ltd. are paid off by issue of sufficient number of equity shares of 10 each in T Ltd. as fully paid at par
4. Each share in R Ltd. is valued at 15 for the purpose of amalgamation

Show the journal entries to close the books of both the companies.

[Ans: Realization loss to R Ltd.: 4,00,000; Realization profit to S Ltd.: 4,00,000; Purchase consideration R Ltd.: 36,00,000; Purchase consideration S Ltd.: 20,00,000]

6. M Ltd. and N Ltd. propose to amalgamate. Their balance sheets as on 31 December 2010 were as follows:

Goodwill may be taken at 4 years purchase of average super profits of 3 years from trading on the basis of 10% normal trading profit on closing capital invested.

Q Ltd. is formed for the purpose of amalgamation of both companies.

Prepare balance sheet of Q Ltd. as on 31 December 2010.

[Ans: Purchase consideration: M Ltd. = 33,04,000; N Ltd. = 9,84,00; Total of balance sheet: 48,04,000]

7. X Ltd. and Y Ltd. agree to amalgamate as from 31 December 2010 on which date their balance sheets were as follows:

Z Ltd. was formed to take over the concerns of both X Ltd. and Y Ltd. Purchase price is to be discharged as follows:

For shareholders of X Ltd., 30,000 shares of 1 each in Z Ltd.

For shareholders of Y Ltd., 12,500 shares of 1 each in Z Ltd.

Debenture holders are to be settled by issue of 15% debentures in Z Ltd.

You are required to close the books of X Ltd. and Y Ltd. and give journal entries and balance sheet in the books of Z Ltd. assuming the amalgamation is in the nature of purchase.

[Ans: Realization Profit in X Ltd.: 1,000; Realization Loss in Y Ltd.: 500; Balance sheet total of Z Ltd.: 62,500]

[Model: Absorption]

8. Akash Ltd. having a capital of 70,00,000 divided into 70,000 shares of 100 each ( 75 paid up) and a reserve fund of 17,50,000 was absorbed by Rishi Ltd. having a capital of 2,80,00,000 divided into 2,80,000 shares of 100 each ( 6 paid up) and a reserve fund of 1,12,00,000 on the terms that for every four shares in Akash Ltd., Rishi Ltd. was to give five shares partly paid as its original ones.

Prepare ledger accounts to close the books of Akash Ltd.

[Ans: Purchase consideration: 52,50,000; Loss on realization: 17,50,000; Payment to shareholders (value of shares): 52,50,000]

9. The following is the balance sheet of Bhama Ltd. on 31 March 2011:

The Company is absorbed by Rita Ltd. on the above date. The consideration for the absorption is the discharge of debentures at a premium of 5% taking over the liability in respect of the sundry creditors and payment of 70 in cash and one share of 50 in Rita Ltd. at the market value of 80 per share in exchange for one share in Bhama Ltd. The cost of liquidation of 30,000 is to be met by the purchasing company.

Pass journal entries in the books of both the companies. Show how the purchase price is arrived at.

[Ans: Purchase price: 2,99,400; Payment to shareholders: Cash— 6,84,000, Shares— 9,60,000]

10. The balance sheet of AB Ltd. as on 31 December 2010 was as follows:

CD Ltd. absorbed the AB Ltd. and took over all the assets for 14,40,000 payable 10,00,000 in shares of 10 each and 4,40,000 in cash (in order to enable AB Ltd. to pay off its liabilities and cost of winding up).

Show realization A/c, shareholders A/c and cash A/c in the books of AB Ltd.

[Ans: Realization loss: 6,00,000; Purchase price: 10,00,000; Payment to share holders: 10,00,000]

11. A Co Ltd. agreed to acquire the assets excluding cash as on 31 December 2010 of B Co Ltd.

The balance sheet of B Co Ltd. as on that day was as follows:

The consideration was as follows:

1. A cash payment of 4 for every share of B Co Ltd.
2. The issue of one share of 10 each at market value of 12.50 in the A Co Ltd. for every share in B Co Ltd.
3. The issue of 6,600 debentures of 50 each in A Co Ltd. to enable B Co Ltd. to discharge its debentures at 10% premium
4. The expenses of liquidation of B Co Ltd. amounting to 24,000 were to be met by themselves

Give the journal entries in the books of both the companies.

[Ans: Purchase consideration: 29,70,000; Realization profit: 3,06,000; Payment to shareholders: Cash— 6,96,000, Shares— 22,50,000]

Note: Cash is not taken over, it is utilized to pay creditors.

12. The position of two companies L and R is as follows:

R Ltd. agreed to absorb L Ltd. upon the following terms:

1. The shares in L Ltd. are to be considered as worth 6 each. The shareholders of L Ltd. are to be paid one quarter in cash and the balance in shares of R Ltd. at 12.50 each.
2. The debenture holders in L Ltd. agreed to take 95 of 7% debentures in R Ltd. for every 100 of 5% debentures held in L Ltd.
3. L Ltd. is to be wound up.

Show the journal entries to record the above in both companies and draw the balance sheet showing the position of R Ltd. after the absorption.

[Ans: Purchase consideration: 36,00,000; Realization loss: 6,00,000; B/S total: 2,00,40,000]

13. The following is the balance sheet of Weak Ltd. as on 30 June 2010:

Weak Ltd. was absorbed by Strong Ltd. on the above date on the following terms:

1. Assume all liabilities and to acquire all assets except investments which were sold by Weak Ltd. for 1,80,000
2. Discharge the debenture at a discount of 5% by issue of 7% debentures in Strong Ltd.
3. Issue two shares of 60 each in Strong Ltd. at 65 per share and also pay 2 in cash to the shareholders of Weak Ltd. in exchange for one share in Weak Ltd.
4. Pay the cost of absorption of 6,000

With the consent of the shareholders, the liquidator of Weak Ltd. sold off in open market one-fourth of the shares received from Strong Ltd. at an average price of 63 per share.

You are required to prepare:

1. Statement of surchase consideration
2. Important ledger accounts in the books of Weak Ltd.

[B.Com Bombay University Modified]

[Ans: Purchase consideration: 21,12,0000; Realization profit: 3,57,600; Payment to shareholders: Cash— 7,16,000, Shares — 15,60,000]

14. A Ltd. agreed to acquire the business of B Ltd. as on 31 December 2010. The balance sheet of B Ltd. on that date was as follows:

 

The consideration payable by A Ltd. was agreed upon as follows:

1. A cash payment equivalent to 2.50 for every 10 share in B Ltd.
2. The issue of 4,50,000 10 shares fully paid in A Ltd. having an agreed value of 15 per share.
3. The issue of such an amount of fully paid 5% debentures of A Ltd. at 96% is sufficient to discharge the 6% debentures of B Ltd. at a premium of 20%. While computing the consideration, the directors of A Ltd. valued land & buildings at 60,00,000, the stock at 7,10,000 and the debtors at their face value subject to an allowance of 5% to cover doubtful debts. The cost of liquidation of B Ltd. came to 25,000 which is to be paid by A Ltd.

Close the books of B Ltd. and give journal entries in the books of A Ltd.

[Madras University Modified]

[Ans: Purchase consideration: 75,00,000; Profit on realization: 31,00,000; Payment to shareholders: Cash— 7,50,000, Shares— 67,50,000]

[Model: Intrinsic value (Absorption)]

15. Balance Sheet of X Ltd. as on 31 March 2011 is as follows:

X Ltd. is amalgamated with Y Ltd. as on 31 March 2011, on which date the balance sheet of Y Ltd. is as follows:

For the purpose of amalgamation, the goodwill of X Ltd. is considered to be of no value. There are also arrears of depreciation in X Ltd. amounting to 20 lakh. The shareholders in X Ltd. are allotted in full satisfaction of their claims, shares in Y Ltd. in the same proportion that the respective intrinsic values of the shares of the companies bear to each other.

Pass journal entries in the books of both companies to give effect to the above.

[Ans: Intrinsic value of the shares of X Ltd.: 180; Intrinsic value of the shares of Y Ltd.: 22.50; Purchase consideration: 450 lakh]

[Model: Fractions]

16. Vincent Ltd. acquired the business of Stephen Ltd. on 31 March 2011, whose balance sheet as on that date was as given in the following:

All the assets except the bank balances were taken over along with the trade liability. The purchase consideration was agreed at the exchange of five shares of 10 each in Vincent Ltd. at an agreed price of 12 per share for every 6 shares held. Vincent Ltd’s share was quoted in the market at 15.

In addition, the expenses of liquidation of 50,000 were agreed to be paid by Vincent Ltd. You are required to give:

1. Realization A/c & shareholders’ A/c in the vendor company
2. Journal entries to record the acquisition in the purchasing company

[Ans: Purchase consideration: 20,00,005; 25 cash for fractions & shares: 19,99,980; Profit on realization: 50,005; Goodwill in Vincent Ltd.: 1,00,005]

[Model: Dissenting shareholders (Absorption)]

17. R Ltd. agreed to absorb the business of V Ltd. on the basis of the following balance sheet as on 31 December 2010:

R Ltd. took over all the assets and liabilities of V Ltd. subject to the retention of 90,000 cash to provide for costs of liquidation, and to satisfy any dissenting shareholders.

The consideration for the sale is the allotment of one share of 100 (? 50 paid up) in R Ltd. for every two shares in V Ltd. The market value of the 50 paid-up share of R Ltd. on that date was 70 per share.

The liquidator of V Ltd. has paid, out of 90,000 retained, the cost of liquidation of 60,000 and dissenting shareholders of 600 shares at 32.50 per share, totalling 19,500.

Prepare ledger accounts in the books of V Ltd. and give journal entries in the books of R Ltd.

[Ans: Purchase consideration: 29,85,000; Realization loss: 16,96,500]

[Model: External reconstruction]

18. The creditors and shareholders having agreed upon a scheme of reconstruction, A Ltd. went into voluntary liquidation. The balance sheet as at that date of reconstruction stood as follows:

The scheme of reconstruction provided as under:

1. A new company called A New Ltd. to be formed with a share capital of 20,00,000 in 2,00,000 shares of 10 each to take over from the above company, stock and debtors at 20% less than the book value and building and machinery at 3,08,000 and 4,00,000, respectively.
2. The shareholders agreed to receive 1,00,000 equity shares of 10 each credited with 5 per share paid up, with a call of 2.50 per share to be made forthwith.
3. The debenture holders were to be satisfied by the issue of 6% mortgage debentures of 6,00,000 in the new company in exchange for old debentures.
4. The trade creditors agreed to receive 1,40,000 from the new company in full settlement of their claims.
5. The bank balance was utilized in payment of reconstruction expenses.

Give the journal entries in the books of A Ltd. and A New Ltd.

[B.Com Osmania University Modified]

[Ans: Purchase consideration: 5,00,000; Loss on realization: 1,88,000]

19. Leela Co Ltd. decided to reconstruct and went into liquidation with the following assets and liabilities:

A new company called Mala Co Ltd. was formed to acquire the fixed assets and stock of Leela Co Ltd. at 6,80,000 and 1,20,000, respectively. The purchase price is to be paid by issue of 10% preference shares and equity shares of 10 each for equal amounts.

Debtors realized 2,45,500 and creditors were paid 1,62,680 in full satisfaction. Bank loan was paid in full. The expenses of liquidation came to 21,420.

Close the books of Leela Co Ltd. and give the balance sheet of Mala Co Ltd.

[Ans: Purchase price: 8,00,000; Loss on realization: 3,73,800 Payment to equity shareholders: Cash— 25,000 and Equity shares in Mala Ltd.— 4,00,000; Balance sheet of Mala Ltd. total: 8,00,000]

20. The balance sheet of Govind Ltd. as on 31 December 2010 is given as follows:

Khan Company Ltd. was formed to take over the business of Govind Ltd. With a nominal capital of 5,00,000 divided into 2,500 9% preference shares of 100 each and 2,500 equity shares of 100 each on the following basis:

1. The debenture holders in Govind Ltd. are to accept 1,750 preference shares
2. The shareholders in Govind Ltd. are to receive one equity share in Khan Ltd. for every two shares held by them
3. Cost of liquidation met by Khan Ltd. was 3,000
4. The balance of preference shares has been issued which are taken up by the public

Give important ledger accounts to close the books of Govind Ltd. and journal entries in the books of Khan Ltd.

[Ans: Purchase consideration: 2,50,000; Realization loss: 1,90,000; Capital reserve in Khan Ltd. (after paying expenses): 2,12,000] [Model: External reconstruction]

21. On 31 March 2011, the following was the balance sheet of Coral Ltd

A new company Ruby Ltd. was incorporated which took over fixed assets and stock of Coral Ltd. for 6,30,000 payable as to 4,50,000 in the form of 90,000 equity share of 5 each and 1,80,000 in the form of 1,800 12% mortgage debentures of 100 each. Loan creditors accepted the debentures of Ruby Ltd. in discharge of the loan. Sundry Debtors realized 1,02,500. Expenses of liquidation amounted to 4,000 and were met by Coral Ltd. The available cash was distributed among sundry creditors in full satisfaction of their claim.

Close the book of Coral Ltd. and draw initial balance sheet of Ruby Ltd.

[Ans: Realization A/c loss: 1,05,000; Capital reserve: 95,000; B/S total: 7,25,000]

22. Express Ltd. has just recovered from a great financial difficulty. Its balance sheet as on 31 December 2010 is as follows:

Express (2011) Ltd. is formed to take over buildings at 1,50,000; plant & machinery at 70,000 and Stock at 30,000.

Purchase consideration is to be satisfied by 7% preference shares ( 100) and equity shares ( 10) of Express (2011) Ltd. in the ration of 3:2. Preference shareholders are to be settled in full by allotment of the new preference shares.

Sundry debtors realized 75,000, and 55,000 was paid to creditors in full settlement. There is no other current asset except stock and debtors. Cost of winding up amounted to 5,000.

Show ledger accounts in the books of Express Ltd. and journal entries in the books of Express (2011) Ltd. Also draft the balance sheet of Express (2011) Ltd.

Assume that the value of assets taken over is exclusively paid to equity shareholders.

[B.Com Mysore University Modified]

[Ans: Purchase price: 4,50,000; Realization profit: 1,40,000]

[Model: External reconstruction share fraction]

23. Lal Co. Ltd. went into liquidation on 31 December 2010 and its whole undertaking was sold to Gupta co Ltd., the terms agreed to by the parties being:

1. The discharge of debentures outstanding by the issue of 95 of 9% debentures stock in Gupta Ltd. for each 100 Lal Ltd. debentures
2. The assumption by the transfer of all other liabilities of the transferor
3. The exchange of five 1 fully paid shares in Gupta Ltd. at an agreed value of 1.25 a share, for every eight shares in Lal Ltd.
4. Gupta Ltd. also undertook to pay the liquidator of Lal Ltd. a sum of money, on the basis of 1 per share, to enable him to deal with fraction of shares; the number of shares represented by the addition of the fraction was 470.

Five days after the day of transfer, one of the discounted bills for 500 fell due and was dishonored.

Show journal entries to close the book of Lal Ltd. Ignore the costs of liquidation:

[Ans: Hint: Agreed value of shares in Gupta Ltd. after deducting shares for fraction 3,11,912.50. Purchase consideration: 3,12,382.50]

[Model: Ratio of exchange of shares]

24. The following are the balance sheets of Verma Ltd. and Sharma Ltd. as on 31 March 2011:

 

Verma Ltd. agrees to take over Sharma Ltd. Find out the ration of exchange of shares on the basis of book values.

[Ans: Ration of exchange is 1,800 shares of Verma Ltd. for 2,700 shares of Sharma Ltd. 2:3; Two shares of Verma Ltd. for every 3 shares of Sharma Ltd.]

[Model: Inter-company owings and unrealized profit in stock]

25. The following are the balance sheets of Big Ltd. & Small Ltd. as on 31 December 2010:

Big Ltd. agreed to absorb the business of Small Ltd. for an agreed price of 15,00,000 payable in fully paid equity shares of 10 each of Big Ltd. as a premium of 10 per share.

Trade debtors of Small Ltd. include 60,000 payable by Big Ltd. Stock of Big Ltd. includes 60,000 purchased from Small Ltd. which was supplied as a profit of 25% on sale price. Stock of Small Ltd. also includes goods supplied by Big Ltd. as profit of 20% on the sale price of 30,000.

Give journal entries and balance sheet in the books of Big Ltd, assuming that the amalgamation is in the nature of purchase.

[Ans: Hint: Stock: 1,14,000; Unrealized profit: 15,000. Purchase price: 15,00,000; Balance sheet total: 34,50,000]

 

26. Two companies A Ltd. and B Ltd. amalgamate and form a new company C Ltd. The position of two companies is as follows:

The average profits of A Ltd. and B Ltd. have been 90,000 and 60,000, respectively. C Ltd. agrees to take over both the concerns for a sum of 18,00,000 and in addition to discharge all liabilities; 3,00,000 to be paid in cash and the balance in shares at face value.

It is agreed that before being taken over by C Ltd., the debtors of A Ltd. and B Ltd. will be written off to the extent of 10% of their respective book figures.

The profit on conversion is to be divided between the shareholders of A Ltd. and B Ltd. in the same proportion as to the profits previously earned by them.

Draw up the purchases A/c on the completion of the transfer in the book of C Ltd. Also show how the share capital Accounts in A Ltd. and B Ltd. should be closed.

[C.A. (Inter). Modified]

[Ans: Purchase consideration: A Ltd.— 10,80,000, B Ltd.— 7,20,000; Realization A/c: A Ltd. (Profit)— 30,000, B. Ltd. (Loss)— 6,000; Profit on takeover: 1,50,000; Share of A Ltd.: 90,000; Share of B Ltd.— 60,000]

[Model: Absorption]

27. The balance sheets of C Ltd. and D Ltd. as on 31 March 2011 are as follows:

Investments of C Ltd. represent 10,00,000 shares of D Ltd. Investments of D Ltd. are considered worth 270 lakh.

D Ltd. is taken over by C Ltd. on the basis of the intrinsic value of shares in their respective books of account.

Prepare a statement showing the number of shares to be allotted by C Ltd. to D Ltd. and the balance sheet of C Ltd. after absorption of D Ltd.

[C.A. (Final). Modified]

[Ans: Purchase consideration: 450 lakh; Outside shareholders balance sheets of C Ltd. total: 1,936 lakh]

[Model: Absorption (Net assets method)]

28. The following are the balance sheets of Emerald Ltd. & Diamond Ltd. as at 31 March 2011:

Emerald Ltd. agreed to absorb Diamond Ltd. as on 31 March 2011 on the following terms:

1. Emerald Ltd. agreed to repay 10% debentures of Diamond Ltd.
2. Emerald Ltd. revalue its fixed assets at 9,75,000 to be incorporated in the books
3. Share of both the companies to be valued on net assets basis, after considering 2,50,000 towards the value of goodwill of Diamond Ltd.
4. The cost of absorption of 15,000 are met by Emerald Ltd.

You are required to prepare:

1. Ratio of exchange of shares
2. Journal entries in the books of Emerald Ltd.
3. Bank A/c to arrive at the balance sheet on absorption

[I.C.W.A. (Final). Modified]

[Ans: Ration of exchange: For every 4 shares in Diamond Ltd. 3 shares in Emerald Ltd.; Intrinsic values 20 & 15; Purchase consideration: 9,00,000]

[Model: Pooling of interests method]

29. The following were the balance sheets of P Ltd. and Q Ltd. as at 31 December 2010:

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

On 1 January 2011, P Ltd. took over Q Ltd. in an amalgamature 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 10 each at par for every two shares held in Q Ltd. It was agreed that 12% debentures in Q Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.

Expenses of amalgamation amounting to 3 lakh were borne by P Ltd.

You are required to prepare:

1. Journal entries in the book of P Ltd.
2. P Ltd.’s balance sheet immediately after the merger

[C.A. (Inter). Modified]

[Ans: Purchase consideration: 27,000 lakh; Balance sheet total: 1,37,307 lakh]

30. The following is the balance sheet of ABC Ltd. on 31 December 2010:

The Company is absorbed by XYZ Ltd. on the above date. The consideration for the absorption is the discharge of the debentures at a premium of 5%, taking over the trade liability and a payment of 7 in cash and one share of 5 in XYZ Ltd. at the market value of 8 per share in exchange for one share in ABC Ltd. The cost of liquidation of 2,000 is to be met by the purchasing company. Pass journal entries in the books of both the companies show how the purchase price is arrived at.

[C.S. (Inter). Modified]

[Ans: Profit on realization: 1,99,600; Purchase consideration: 12,00,000]

31. ABC Ltd. decided to absorb XYZ Ltd. as on 30 September 2010. The summarized balance sheet of XYZ Ltd. was as follows:

ABC Ltd. agreed to take over all the assets and liabilities including debentures of XYZ Ltd. The current assets were to be taken over at their book value but the fixed assets were revalued as follows:

 

	( in 000’s)
Land & Buildings	2,100
Furniture	90
Plant and Machinery	3,600
Goodwill to Be Valued at	300

The purchase consideration was paid at 1,530 thousand in cash and the balance in fully paid equity shares of ABC Ltd.

The absorption was duly carried out on 1 October 2010 and the expenses of absorption amounted to 30,000 paid by XYZ Ltd.

You are required to show the journal entries in the books of XYZ Ltd.

[Ans: Purchase consideration: 60,30,000; Profit on realization: 7,80,000]

32. The following are the balance sheets of A Ltd. and B Ltd. as on 31 December 2010:

Fixed assets of both the companies are to be revalued at 15% above book value. Stock in trade and debtors are taken over at 15% lesser than their book value. Both the companies are to pay 10% equity dividend; preference dividend having been already paid.

After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following terms:

1. 8 Equity shares of 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
2. 10% Preference shareholders of B Ltd. will be paid at 10% discount by issue of 10% preference shares of 100 each at par in A Ltd.
3. 12% Debenture holders of B Ltd. are to be paid at 8% premium by 12% debenture in A Ltd. issued at a discount of 10%.
4. 60,000 is to be paid for liquidation expenses by A Ltd. Sundry Creditors of B Ltd. include 20,000 due to A Ltd.

Prepare (a) Absorption entries in the books of A Ltd. and (b) Statement of consideration payable by A Ltd.

[C.A. (Final). 2002 Modified]

[Ans: Purchase consideration: 7,20,000; Consideration payable by A Ltd:

 

(i)	For Equity Shares Held by Out-
	siders: 54,000 Shares × 10	= 5,40,000
(ii)	For Pref. Shares to be
	Paid at 10% Discount	= 1,80,000
	Total Consideration Amount	= 7,20,000]

[Model: Dissentient shareholders]

33. With a view to effect economy in working, Modern Mills Ltd. agreed to take over the business of the Ancient Mills Ltd. from 1 November 2010. The following is the balance sheet/S of the Modern Mills Ltd. as on that date:

The purchasers took over all the assets and liabilities of the vendor company except a sum of 30,000 to provide for cost of liquidation and payment to any dissent shareholders. The purchase price was to be discharged by the allotment to the shareholders of the vendor company of the share of 100 ( 90 paid up) of the modern Mills Ltd. for every two shares in Ancient Mills Ltd. The expenses of liquidation amount to 9,000. Dissentient shareholders of 300 shares are paid out at 70 per share, i.e. 21,000.

Pass the necessary journal entries in the books of the respective companies to give effect to the above transactions.

[Ans: Purchase consideration: 16,06,500 (Before payment of 6,000 to dissentient shareholders) Loss on realization: 7,27,500; Capital reserve 7,18,500]

[Model: Absorption—Vendor company holding shares in vendee company]

34. A Ltd. absorbs B Ltd. by issue of 6 shares of 10 each at a premium of 10% for every 5 shares of B Ltd. For the purpose of absorption, it was agreed that trade investment held by B Ltd. will realize their book value and goodwill of B Ltd. will be 1,00,000.

The balance sheets of the two companies were as follows:

Prepare the balance sheet of A Ltd. after absorption of B Ltd.

[C.A. (Inter). Modified]

[Ans: Purchase consideration: 19,80,000; B/S total: 55,30,000]

[Model: Absorption—Purchasing company holding shares in vendor company]

35. X Ltd. presents the following summarized balance sheet as on 31 December 2010:

 

The Company is absorbed by Y Ltd. who holds 25% of share capital (Purchased by their for 11,10,000 and all debentures issued (at par) by X Ltd.

The purchase consideration being taking over all assets and liabilities as book value, subject to fixed assets revalued at 42,00,000.

The payments to other shareholders to be made on the basis of such share being worth 15 per share and shares in X Ltd. being worth 5 per share.

Show the entries in the books of X Ltd. after determining purchase consideration.

[I.C.W.A. (Final). Modified]

[Ans: Loss on realization: 3,00,000; Number of shares issued by Y Ltd.: 1,20,000]

[Model: Absorption—Cross holdings]

36. S Ltd. and T Ltd. have the following balance sheets on 31 March 2011:

If S Ltd. is to acquire the business of T Ltd. and if the fixed and current assets are expected to realize twice the values at which they stand in the balance sheet.

Workout the purchase consideration and the number of shares of S Ltd. to be issued to meet the consideration if the face value of shares of both companies is 10 each.

[I.C.W.A. (Final). Modified]

[Ans: S Ltd. has to issue 1,39,950 shares to external share holders of T Ltd.; Value of shares of S Ltd.: 21.131; T Ltd.: 16.786]

[Model: Amalgamation: Cross holdings]

37. The following are the abridged balance sheets of C Ltd. and D Ltd. as at 31 December 2010:

C Ltd. holds 4,000 shares in D Ltd. at cost of 1,00,000 and D Ltd. holds 200 shares in C Ltd. at cost of 2,80,000 in each case included in the sundry assets. The shares of C Ltd. are 100 each fully paid; the shares of D Ltd. are 50 each 30 paid. The two companies agree to amalgamate and form a new company CD Ltd. on the basis that:

1. The shares which each company holds in the other are to be valued at book value having regard to the goodwill valuation given in (ii)
2. The goodwill values are C Ltd.: 6,00,000; D Ltd.: 1,00,000
3. The new shares are to be of a nominal value of 50 each, credited as 25 paid.

You are required to prepare:

1. A balance sheet resulting from merger
2. A statement showing shareholdings in the new company attributable to the members of merged companies

[Model: Inter-company owings]

[C.A. (Final). Modified]

[Ans: Book values of assets of C Ltd.: 23,20,852; D Ltd.: 4,10,256; Balance sheet total: 33,60,000]

38. The balance sheets of X Ltd. and A Ltd. as on 31 December 2010 are given as follows:

A Ltd. proposes to takeover X Ltd. on the following terms:

1. A Ltd. will issue sufficient number of its shares of 11 each and pay 0.50 each per share held by the members of X Ltd.
2. 9% Debentures of X Ltd. are to be paid at 8% premium by issue of sufficient number of 100 10% debentures of A Ltd. at 90 each

Show journal entries in the ledger accounts in the books of the companies and draft the balance sheet in the books of A Ltd.

[M.Com Madras University Modified]

[Ans: Purchase consideration: 11,50,000; Realization loss 50,000; Balance sheet total 48,10,000]

[Model: Inter-company holdings]

39. X Ltd. absorbs Y Ltd. by payment of 5 shares of 10 each at a premium of 10% for every 4 shares held in Y Ltd. The balance sheet of Y Ltd. as on the date of absorption is given below:

Show the important ledger accounts in the books of Y Ltd. and the acquisition entries in the books of X Ltd.

[M.Com Madras University Modified]

40. The following are the summarized balance sheets of P Ltd. and Q Ltd. as on 31 March 2011:

You are required to ascertain:

1. The intrinsic value of shares of both companies individually as their respective net worth
2. Purchase consideration if P Ltd. acquires the business of Q Ltd.
3. Purchase consideration if Q Ltd. acquires the business of P Ltd.
4. Purchase consideration if a new company R Ltd. acquires the amalgamated concerns of P Ltd. and Q Ltd.

[Ans:

1. P: 148.48; Q: 188.18; Net worth: P Ltd— 53,45,452, Q Ltd.— 60,21,816
2. Purchase price: 45,16,320
3. Purchase price: 35,63,636
4. Purchase prices: 35,63,636 to P Ltd.; Outsiders: 45,16,328]

41. The following is the balance sheet of X Ltd. as on 31 March 2011:

Other information:

1. Y Ltd. takes over X Ltd. on 1 April 2011. Debenture holders of X Ltd. are discharged by Y Ltd. by issuing 15% debentures at a premium of 60 each (Nominal value of debentures: 100).
2. 14% Preference shares of X Ltd. are to be discharged at a premium of 20% by issuing necessary number of 15% pref. shares of Y Ltd.
3. Intrinsic value per share of X Ltd. is 150 and that of Y Ltd. 300. Y Ltd.
   will issue equity shares to satisfy the equity shareholders of X Ltd. on the basis of intrinsic value. However, entry should be made at par value only. The nominal value of each equity share of Y Ltd. is 100.
4. Y Ltd. revalues stock of X Ltd. at 9,00,000.

You are required to:

1. Close the books of X Ltd.
2. Give opening entries in the books of Y Ltd.

[B.Com (Hons) Delhi 2007 Modified]

[Ans: Purchase consideration: 27,00,000; Books of Y Ltd.—Capital Reserve A/c: 17,80,000]

42. The following is the balance sheet of Unfortunate Ltd. as at 31 March 2011:

The following scheme of external reconstruction was approved:

1. A new company by the name of Unfortunate (2011) Ltd. to be formed to take over the entire business of Unfortunate Ltd.
2. One equity share of 10 6 paid up is to be given in exchange of every two equity shares of Unfortunate Ltd.
3. One 11% pref. share of 100 each is to be given in exchange for 15 pref. shares of Unfortunate Ltd.
4. The claims of 12% debenture holders of Unfortunate Ltd. would be discharged by the issue of equity shares of 10 each fully paid.
5. The creditors will receive 60% of their dues in cash and 25% in equity shares of 10 each and the balance to be foregone.
6. The party paid equity shares are to be made fully paid by receiving cash from the shareholders.
7. Furniture is subject to depreciation by 25%.
8. The freehold premises were revalued at 20% more while the stock was revalued at 12,80,000. The investments are to be brought upto market value of 7,20,000 and debtors reduced by 10%. Preliminary expenses amounted to 40,000.

You are required to:

1. Close the accounts in the books of Unfortunate Ltd.
2. Opening entries in the books of Unfortunate (2011) Ltd.

[B.Com (Hons) Delhi 2008 Modified]

[Ans: Purchase consideration: 28,00,000; Profit on realization: 40,000; Capital reserve A/c: 5,00,000]

43. M/S XYZ Ltd. agreed to acquire the business except cash of M/S KLM Ltd. as on 31 March 2011. The summarized balance sheet of M/S KLM Ltd. as on that date was as follows:

The consideration payable by M/S XYZ Ltd. was agreed as follows:

1. A cash payment of 5 for each share of 10 in M/S KLM Ltd.
2. The issue of 1,80,000 shares of 10 each was fully paid at an agreed value of 15 per share.
3. The issue of such as amount of 14% debentures of M/S XYZ Ltd. at 4% discount is sufficient to discharge 12% debentures of M/S KLM Ltd. at a premium of 20%. While computing the agreed consideration the management of M/S XYZ Ltd. valued land and building at 9,00,000; plant & machinery at 10,50,000; stock in trade at 2,10,000 and debtors at their face value subject to an allowance of 4% to cover doubtful debts.

Prepare realization account and equity shareholders account in the books of M/S KLM Ltd. and pass acquisition entries in the books of M/S XYZ Ltd.

[B.Com (Hons) Delhi 2009 Modified]

[Ans: Purchase consideration: 31,50,000; Profit on realization: 19,20,000; Equity Shareholders A/c (Total): 32,40,000; Goodwill A/c 11,43,600 (XYZ Ltd. Books)]

44. Jindal Usha Ltd. agreed to acquire the business of Ankur Ltd. The balance sheet of Ankur Ltd. is as follows:

The consideration payable was agreed as follows:

1. The preference shareholders of Ankur Ltd. are to be discharged at a premium of 10% by issue of 15% preference shares in Jindal Usha Ltd.
2. Equity shareholders are to be allotted six equity shares of 10 each at a premium of 10% and are to be paid 3 in cash against every five shares held.
3. Debenture holders of Ankur Ltd. are to be discharged by Jindal Usha Ltd. at 8% premium by issue of 10% debentures at 10% discount.

While arriving at agreed consideration, the directors of Jindal Usha Ltd. valued land at 37,50,000, stock at 33,00,000 and debtors at book value subject to an allowance of 5% for doubtful debts. Debtors of Ankur Ltd. include 20,000 due from Jindal Usha Ltd. It was agreed that before acquisition, Ankur Ltd. will pay dividend at 20% on equity shares. The preference dividends had already been paid before acquisition. Prepare necessary ledger accounts in the books of Ankur Ltd. and draft journal entries in the books of Jindal Usha Ltd.

[B.Com (Hons) Delhi 2010 Modified]

[Ans: Purchase consideration: 57,90,000; Realization account profit: 12,15,000; Goodwill A/c: 4,61,250]

[Model: External reconstruction—Dissenting share holders balance sheet in vertical form]

45. The balance sheet of F Ltd. as on 31 December 2010 was as follows:

The shareholders of the company resolved to take the company into voluntary liquidation and to form G Ltd., a new company with an authorized capital of 40 lakh to take over the business on the following terms:

1. Preferential creditors of 60,000 are to be paid in full.
2. Unsecured creditors to receive 0.50 in a rupee in full settlement of their claims or par value of their claim in 7% debentures of G Ltd.
3. 10,000 Equity shares of 100 each 60 paid to be distributed pro rata to existing shareholders.

Five shareholders holding 800 shares dissented and their interest was purchased at 50 per share by an assenting shareholder to whom the shares were transferred.

Half the unsecured creditors opted to be paid in cash, and funds for this purpose were procured by calling up the balance of 40 per share. Cost of liquidation amounting to 14,000 paid by G Ltd. as part of purchase consideration.

Journalize the above transactions in the books of G Ltd. and prepare the balance sheet in Vertical form thereafter assuming that plants & machinery, stock and debtors were acquired at their book values and land & building is to be taken at 2,72,000.

[Ans: Hint: After preparing B/S in vertical form, schedules forming past of balance sheet should be shown. Purchase consideration: 6,00,000; Capital reserve: 14,000; Balance sheet total: 12,34,000]