Amalgmation of Company

CHAPTER 5
AMALGAMATION
OF COMPANIES
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ Understand the term “Amalgamation” and the methods of
accounting for amalgamations.
❑ Appreciate the concept of transferee Company and the transferor
company.
❑ Calculate purchase consideration under both the methods of
amalgamation as per AS 14.
❑ Pass the entries to close the books of the vendor company.
❑ Pass the journal entries in the books of purchasing company to
incorporate the assets and liabilities of the vendor company and
also giving effect to other adjustments.
© The Institute of Chartered Accountants of India

5.2 ADVANCED ACCOUNTING
This chapter deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant to
the provisions of the Companies Act 2013 or any other statute which may be
applicable to companies. The accounting for amalgamation depends on whether
amalgamation is in the nature of merger or in the nature of purchase.
Types of Amalgamation
Amalgamation in the nature of Amalgamation in the nature of

merger purchase
1. INTRODUCTION
In today’s modern world, we are witnessing, the rise of different business ideas
every other day. This has attributed to the immense increase in the competition.
Some of the shrewd businesses survive through this cut throat competition,
whereas some of them are wiped out due to the dynamics of this very competition.
Like the strategies to set up businesses, there has been wide increase in realizing
the need to stay in the business through the different difficult market situations.
Hence, the business world has also seen the growing importance of business-saving
strategies.
There can be different strategies to ensure the business continues to exist, or
existing companies find ways to increase market share by eliminating the
competitors or to come out of financial crisis by restructuring the present capital
structure and the like.
Such strategies are termed using different words like “corporate marriages”,
“strategic alliances”, “business partnering”, etc. The same has been defined in the
Accounting Standard 14 (AS 14).
In this chapter we shall understand the terms, meanings, method, accounting
treatments related to amalgamation in detail.

AMALGAMATION OF COMPANIES 5.3
2. MEANING OF AMALGAMATION
Amalgamation refers to the process of merger of two or more companies into a
single entity or where one company takes over the other by outright purchase. .
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:
(i) two or more companies join to form a new company or
(ii) absorption and blending of one by the other.
As discussed, this arrangement is sought by companies to receive various
advantages such as economies of large-scale production, avoiding competition,
increasing efficiency, expansion, increase in market share, etc.
In amalgamation we have generally two companies called as – 1) vendor or
Transferor Company and 2) Vendee or Transferee Company. Let us understand the
concepts through the following examples-
Example 1- Company A and Company B amalgamate to form Company C. Company
A and Co B are called transferor companies and Company C is called as the
transferee company- this strategy is called as AMALGAMATION.
Example 2- Company A is taken over by Company B (purchased). Here, Company A
is called as Transferor Company and Company B is Transferee Company. This
strategy is called as ABSORPTION.
Example 3- Company A has been suffering from losses for past 5 years, a new
Company B is floated to take over the existing Company A. Here, Company A is the
transferor company and Company B is Transferee Company. This strategy is termed
as EXTERNAL RECONSTRUCTION.
The concept of the examples given above can be understood from the following
table of differences-
Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case an In this case, a newly
companies are existing company formed company
wound up and a takes over the takes over the
new company is business of one or business of an
formed to take over more existing existing company.
their business. companies.

Minimum At least three At least two Only two

number of companies are companies are companies are
Companies involved. involved. involved.
involved
Number of Only one resultant No new resultant Only one resultant
new resultant company is formed. company is formed. company is formed.
companies Two companies are Under this case a
wound up to form a newly formed
single resultant company takes over
company. the business of an
existing company.
Objective Amalgamation is Absorption is done External
done to cut to cut competition & reconstruction is
competition & reap reap the economies done to reorganize
the economies in in large scale. the financial
large scale. structure of the
company.
In every type of amalgamation, the assets and liabilities of the transferor company
are amalgamated or transferred to the transferee company. The accounting
treatment in the books of both the transferor and transferee is given in further
sections.
3. TYPES OF AMALGAMATION
The Institute of Chartered Accountants of India has introduced Accounting
Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The standard recognizes
two types of amalgamation –
Amalgamation in the nature of merger is an amalgamation where there is a
genuine pooling not only of assets and liabilities of the transferor and transferee
companies but also of the shareholders’ interests and of the businesses of the
companies. The accounting treatment of such amalgamations should ensure that
the resultant figures of assets, liabilities, capital and reserves more or less represent
the sum of the respective figures of the transferor and transferee companies.

Amalgamation in the nature of merger is an amalgamation, as per para 3(e) of

AS-14, which satisfies all the following conditions:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity
of accounting policies. For example, if transferor company is following
weighted average method for inventory valuation, the book value of the
inventory of the transferor company will be revised by applying the FIFO
method (if the transferee company follows FIFO method for inventory
valuation).
If any one or more of the above conditions are not satisfied in an amalgamation,
such amalgamation is called amalgamation in the nature of purchase.
Difference between amalgamation in the nature of merger and amalgamation
in the nature of purchase
Best of Distinction Amalgamation in the Amalgamation in the

Nature of Merger Nature of Purchase
(a) Transfer of Assets There is transfer of all There need not be transfer
and Liabilities assets & liabilities. for all assets & liabilities.

(b) Shareholders of Equity shareholders Equity shareholders need

transferor holding 90% equity not become shareholders
company shares in transferor of transferee company.
company become
shareholders of
transferee company.
(c) Purchase Purchase consideration is Purchase consideration
Consideration discharged wholly by need not be discharged
issue of equity shares of wholly by issue of equity
transferee company shares.
(except cash only for
fractional shares)
(d) Same Business The same business of the The business of the
transferor company is transferor company need
intended to be carried on not be intended to be
by the transferee carried on by the
company. transferee company.
(e) Recording of The assets & liabilities The assets & liabilities
Assets & taken over are recorded taken over are recorded at
Liabilities at their existing carrying their existing carrying
amounts except where amounts or the basis of
adjustment is required to their fair values.
ensure uniformity of
accounting policies.
(f) Method of Journal entries for Journal entries for
Accounting recording the merger are recording the purchase of
passed by pooling of business are passed by
interest method. purchase method.
4. PURCHASE CONSIDERATION
For purpose of accounting for amalgamations, we are essentially guided by AS 14
‘Accounting for Amalgamations’. Para 3(g) of AS 14 defines the term purchase
consideration as the “aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company”.

In simple words, it is the price payable by the transferee company to the transferor
company for taking over the business of the transferor company.
The important point to be noted here is the amount paid towards the equity
shareholders and preference shareholders is only considered as part of the
purchase consideration as per the definition under AS-14. Hence, it should be
noted that purchase consideration does not include the sum which the transferee
company will directly pay to the debenture-holders or creditors of the transferor
company. If a certain liability of the transferor company has not been taken over by
the transferee company it will be discharged by the transferor company.
The purchase consideration can be computed in the following methods-
1. Lumpsum method- Under this method, the transferee company agrees to
pay a lumpsum/fixed amount to shareholders of the transferor company.
2. Net payment method- Under this method the transferee company makes
individual payments to the equity shareholders and preference shareholders
either by way of cash, issue of shares and debentures.
3. Net assets method- Under this method, the purchase consideration is
arrived based on the value of the Assets less the outside liabilities (excluding
share capital and reserves) taken over by the transferee company. As per AS
14, the value of the assets and liabilities shall be at the value as agreed
between the two parties. If there is no value agreed, then assets and liabilities
taken at the book value.
The purchase consideration essentially depends upon the fair value of its
elements. For example, when the consideration includes securities, the value
fixed by the statutory authority may be taken as the fair value. In case of other
assets, the fair value may be determined by reference to the market value of
the assets given up or in the absence of market value, net book value of the
assets (i.e. cost less accumulated depreciation) are considered.
4. Intrinsic value or share exchange method – Under this method, the
purchase consideration is calculated at the intrinsic value of shares of the
transferor or transferee company. The ratio of shares to be issued is
computed and multiplied with intrinsic value. Total share capital of the
transferor company shall be divided by the total number of shares
Sometimes adjustments may have to be made in the purchase consideration in the
light of one or more future events. When the additional payment is probable and

can be reasonably estimated it is to be included in the calculation of purchase

consideration.
Any of the methods or a combination of the above methods can be used by the
companies to calculate the purchase consideration.
The above methods have been explained in the following illustrations.
Illustration 1
Let us consider the Balance Sheet of X Ltd. as at 31st March, 20X1:
Particulars Notes ` (000)

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 100,00
B Reserves and Surplus 2 12,50
2 Non-current liabilities
A Long-term borrowings 3 40,00
3 Current liabilities
A Trade Payables 20,00
Total 172,50
Assets
1 Non-current assets
A Property, Plant and Equipment 4 105,50
B Non-current investments 5 5,00
2 Current assets
a Inventories 23,00
b Trade receivables 24,00
c Cash and Cash equivalents 15,00
Total 172,50

Notes to accounts
1 Share Capital ` in (‘000)

Equity share capital
7,50,000 Equity Shares of ` 10 each 75,00
25,000 14% Preference Shares of ` 100 each 25,00
100,00
2 Reserves and Surplus
General reserve 12,50
12,50
3 Long-term borrowings
Secured
14% Debentures 40,00
40,00
4 Property, plant and Equipment
Land and Building 50,00
Plant and machinery 45,00
Furniture 10,50
105,50
5 Non-current investments
Investments at cost 5,00
5,00
Other Information:
(i) Y Ltd. takes over X Ltd. on 10th April, 20X1.
(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing
15% own debentures of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by
issuing necessary number of 15% Preference Shares of Y Ltd. (Face value ` 100 each).
(iv) Intrinsic value per share of X Ltd. is ` 20 and that of Y Ltd. ` 30. Y Ltd. will issue
equity shares to satisfy the equity shareholders of X Ltd. on the basis of intrinsic

value. However, the entry should be made at par value only. The nominal value
of each equity share of Y Ltd. is ` 10.
Compute the purchase consideration.
Solution
Computation of Purchase consideration (` in ’000) Form

For Preference Shareholders of X Ltd. 3,000 30,000
15% Preference
shares in Y Ltd.
For equity shareholders of X Ltd. 5,000 5,00,000 Equity
(20/30 × 7,50,000) × ` 10 shares of Y Ltd.
of ` 10 each
Total Purchase consideration 8,000
Note: According to AS 14, amount paid to the debenture holders should not be
included in the purchase consideration calculation. Such debentures will be taken
over by Y Ltd. and then discharged by them later.
Illustration 2
S. Ltd. is absorbed by P. Ltd. S ltd. gives the following information on the date of
absorption:
`
Sundry Assets 13,00,000
Share capital:
2,000 7% Preference shares of ` 100 each (fully paid-up) 2,00,000
5,000 Equity shares of ` 100 each (fully paid-up) 5,00,000
Reserves 3,00,000
6% Debentures 2,00,000
Trade payables 1,00,000
Additional information:
P. Ltd. has agreed:
(i) to issue 9% Preference shares of ` 100 each, in the ratio of 3 shares of P. Ltd.
for 4 preference shares in S. Ltd.

(ii) to issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at ` 96 in

lieu of 6% Debentures in S. Ltd. which are to be redeemed at a premium of 20%;
(iii) to pay ` 20 per share in cash and to issue six equity shares of ` 100 each issued
at the market value ` 125 in lieu of every five shares held in S. Ltd.; and
(iv) to assume the liability to trade payables.
You are required to calculate the purchase consideration.
Solution
The purchase consideration will be

` Form
Preference shareholders: 2,000 × 3/4 × 100 1,50,000 9% Pref. shares
Equity shareholders: 5,000 × 20 1,00,000 Cash
5,000 × 6/5 × 125 7,50,000 Equity shares
10,00,000
Note- 1. According to AS 14, ‘consideration’ excludes the any amount payable

to debenture-holders. The liability in respect of debentures of S Ltd. will be taken
by P Ltd., which will then be settled by issuing new 8% debentures.
2. The issue of the equity shares is done at ` 125 (market value) as it has been
mentioned in the question. The face value shall not be considered for this purpose.
Illustration 3
Y Ltd. decides to absorb X Ltd. X Ltd. gives you the following information on the date
of absorption:
`
Net assets 2,90,000
Profit and Loss Account (Dr. balance) 70,000
Share capital: 3,000 Equity shares of ` 100 each (fully paid) 3,00,000
Preference shares 60,000
Y Ltd. agrees to take over the net assets of X Ltd.
The terms of the purchase consideration payable is as follows-
1. An equity share in X Ltd., for purposes of absorption, is valued @ ` 70. Y Ltd
shall issue equity shares at value of ` 120 each for the equity shareholders of X
Ltd.

2. Y ltd. agrees to pay ` 60,000 in cash for payment to preference shareholders.

Calculate purchase consideration to be paid by Y Ltd. and how will it be discharged?
Solution
Value of 3,000 shares of X Ltd. @ ` 70 = ` 2,10,000
The purchase consideration will be:
= ` 2,10,000 for equity shares + ` 60,000 for Liability towards preference
shareholders
= ` 2,70,000 (` 60,000 out of the this will be in cash and ` 2,10,000 in the
form of equity shares of Y Ltd., issued at ` 120 per share; the number of shares that
will be issued = 2,10,000/120 = 1,750 equity shares).
Illustration 4
Neel Ltd. and Gagan Ltd. amalgamated to form a new company on 1.04.20X1.
Following is the Balance Sheet of Neel Ltd. and Gagan Ltd. as at 31.3.20X1:
Particulars Notes Neel Gagan

A Share capital 7,75,000 8,55,000
2 Current liabilities 6,23,500 5,57,600
Total 13,98,500 14,12,600
Assets
A Property, Plant and Equipment 1 12,35,000 12,54,000
2 Current assets 1,63,500 1,58,600
Total 13,98,500 14,12,600
Notes to accounts:

Land and Building 7,50,000 6,40,000
Plant and machinery 4,85,000 6,14,000
12,35,000 12,54,000

Following is the additional information:

(i) The assets of Neel Ltd. and Gagan Ltd. are to be revalued as under:
Neel Gagan
` `
Building 7,75,000 6,48,000
(ii) The purchase consideration is to be discharged as under:
(a) Issue 24,000 equity shares of ` 25 each fully paid up in the proportion of
their profitability in the preceding 2 years.
(b) Profits for the preceding 2 years are given below:
Neel Gagan
` `
1st year 2,62,800 2,75,125
nd
II year 2,12,200 2,49,875
Total 4,75,000 5,25,000
(c) Issue 12% preference shares of ` 10 each fully paid up at par to provide
income equivalent to 8% return on net assets in the business as on
31.3.20X1 after revaluation of assets of Neel Ltd. and Gagan Ltd.
respectively.
You are required to compute the
(i) Equity and preference shares issued to Neel Ltd. and Gagan Ltd.,
(ii) Purchase consideration.
Solution
(i) Calculation of equity shares to be issued to Neel Ltd. and Gagan Ltd.
Profits of Neel Gagan

` `
I year 2,62,800 2,75,125
II year 2,12,200 2,49,875
Total 4,75,000 5,25,000

The total profits- ` 4,75,000+ ` 5,25,000= ` 10,00,000

No. of shares to be issued = 24,000 equity shares in the proportion of the
preceding 2 years’ profits.
Neel Gagan
24,000 x 475/1000 11,400 equity shares
24,000 x 525/1000 12,600 equity shares
Calculation of 12% Preference shares to be issued to Neel Ltd. and
Gagan Ltd.
Neel Gagan
` `
Net assets (Refer working note) 8,40,000 9,24,000
8% return on Net assets 67,200 73,920
12% Preference shares to be issued 56,000 shares
 100 
67,200  12  = 5,60,000 @ ` 10 each
 
 100  61,600 shares
73,920  12  = 6,16,000 @ ` 10 each
 
(ii) Total Purchase Consideration
Neel Gagan
` `
Equity shares @ of ` 25 each 2,85,000 3,15,000
12% Preference shares @ of ` 10 each 5,60,000 6,16,000
Total 8,45,000 9,31,000
Working Note:
Calculation of Net assets as on 31.3.20X1
Neel Gagan
` `
Building 7,75,000 6,48,000
Current assets 1,63,500 1,58,600

Less: Current liabilities (6,23,500) (5,57,600)

8,40,000 9,24,000
Note- Since the income from the preference shares shall be equal to the 8% return
on assets, the shares are computed in such way that 12% dividend on them shall
be equal to 8% of the return on Net assets.
5. METHODS OF ACCOUNTING FOR

AMALGAMATIONS
There are two main methods of accounting for amalgamation viz,
Methods of accounting for Amalgamation
Pooling of interests method Purchase method
The first method is used in case of amalgamation in the nature of merger where the
conditions as per para 3(e) of AS-14, required are fulfilled and the second method is
used in case of amalgamation in the nature of purchase.
Pooling of Interest Method
Under pooling of interests method, the assets, liabilities and reserves of the
Transferor Company will be taken over by Transferee Company at existing carrying
amounts unless any adjustment is required due to different accounting policies
followed by these companies.
As a result the difference between the amount recorded as share capital issued
(plus any additional consideration in the form of cash or other assets) and the
amount of share capital of Transferor Company should be adjusted in the reserves
of the financial statements of Transferee company (recorded as deduction from the
reserves where the capital issued is more than the capital of the transferor
company).
In simple terms, where in case of pooling method- the amount to be adjusted
against the reserves- can be computed in the following 3 steps-

Step I- Equity Share capital + Preference share capital issued+ any other additional
consideration in form of cash and other assets by the Transferee Company.
Step II- Existing Equity share capital + Existing Preference share capital in the books
of Transferor Company.
Step III- Step I- Step II= amount to be adjusted from the reserves of Transferee
company.
Purchase Method
Assets and Liabilities: the assets and liabilities of the transferor company should
be incorporated at their existing carrying amounts or the purchase consideration
should be allocated to individual identifiable assets and liabilities on the basis of
their fair values at the date of amalgamation.
Difference between the Purchase Consideration and Net Assets transferred: Any
excess of the amount of purchase consideration over the value of the net assets of the
transferor company acquired by the transferee company should be recognized as
goodwill in the financial statement of the transferee company. Any short fall should be
shown as capital reserve. Goodwill should be amortized over period of five years unless
a somewhat longer period can be justified.
In simple terms, where in case of purchase method- the amount to be transferred to
capital reserve or to be recorded as Goodwill- can be computed in the following 3 steps-
Step I- Find out the Net assets amount using the following formula- Total assets-
Outside liabilities (Non-current liabilities + Current Liabilities)
Step II- Compute the purchase consideration using any of the methods as given
under Purchase consideration computation.
Step III- (a) If Step I- Step II= Positive amount- then it is capital reserve- since the assets
received more than the amount paid as purchase consideration to acquire them.
(b) If Step I- Step II= Negative amount- then it is to be recorded as Goodwill
(intangible asset) - since the amount paid for acquiring business is more than the
Net assets, which is technically due to its goodwill.
Treatment of reserves under purchase method-
No reserves, other than statutory reserves, of the transferor company should
be incorporated in the financial statements of transferee-company.
The balance of Profit and Loss account, general reserves of the transferor company
are not recorded at all.

Though, normally, in an amalgamation in the nature of purchase, the identity of

reserves is not preserved, an exception is made only in respect of statutory reserves
and such reserves shall retain their identity in the financial statements of the
transferee company in the same form in which they appeared in the financial
statements of the transferor company, till the time their identity is required to be
maintained to comply with the relevant statute.
This exception is made only in those amalgamations where the requirements of the
relevant statute for recording the statutory reserves in the books of the transferee
company are complied with. Statutory reserves of the transferor company should
be incorporated in the balance sheet of transferee company by way of the following
journal entry.
Amalgamation Adjustment Reserve A/c Dr.
To Statutory Reserves
‘Amalgamation Adjustment Reserve’ is debited to bring in the statutory reserves
of the transferor company. This is represented as deduction from the reserves of
the transferee company after amalgamation.
Once after the time period to show such statutory reserves is over, both the
reserves and the aforesaid account are reversed. Amalgamation Adjustment
Reserve’ has to be shown as a separate line item - which implies, that this debit
"cannot be set off against Statutory reserve taken over" and therefore, the
presentation will be as follows:
Reserves
Description Amount Amount

(Current year) (Previous Year)
Statutory Reserve (taken over from
transferor company)
General Reserve
Retained Earnings
Amalgamation Adjustment Reserve (--) (--)
(negative balance)

Illustration 5
Consider the following balance sheets of X Ltd. and Y Ltd. as at 31st March, 20X1:
Particulars Notes ` X Ltd ` Y Ltd.

(‘000) (‘000)
A Share capital 1 72,00 47,00
B Reserves and Surplus 2 15,50 10,50
A Long-term borrowings 3 5,00 3,50
A Trade Payables 4,50 3,50
B Other current liabilities 2,00 1,50
Total 99,00 66,00
Assets
A Property, Plant and 4 63,25 36,00
Equipment
B Non-current investments 5 7,00 5,00
2 Current assets
A Inventories 12,50 9,50
B Trade receivables 9,00 10,30
C Cash and Cash equivalents 7,25 5,20
Total 99,00 66,00
Notes to accounts
X Ltd (‘000) Y Ltd (‘000)

1 Share Capital
Equity share capital (` 10 each) 50,00 30,00
14% Preference Shares capital 22,00 17,00
` 100 each
72,00 47,00


General reserve 5,00 2,50
Export profit reserve 3,00 2,00
Investment allowance reserve - 1,00
Profit and loss account 7,50 5,00
15,50 10,50
13% Debentures of ` 100 each 5,00 3,50
5,00 3,50
4 Property, Plant and Equipment
Land and Building 25,00 15,50
Plant and machinery 32,50 17,00
Furniture 5,75 3,50
63,25 36,00
Investments at cost 7,00 5,00
7.00 5,00
X Ltd. takes over Y Ltd. on 1st April, 20X1. X Ltd. discharges the purchase
consideration as below:
(i) Issued 3,50,000 equity shares of ` 10 each at par to the equity shareholders of
Y Ltd.
(ii) Issued 15% preference shares of ` 100 each to discharge the preference
shareholders of Y Ltd. at 10% premium.
The debentures of Y Ltd. will be converted into equivalent number of debentures of X
Ltd. The statutory reserves of Y Ltd. are to be maintained for 2 more years.
Show the balance sheet of X Ltd. after amalgamation on the assumption that:
(a) the amalgamation is in the nature of merger.
(b) the amalgamation is in the nature of purchase.

Solution
(a) Amalgamation in the nature of merger:
Balance Sheet of X Ltd.
Particulars Notes ` in '000

1 Shareholders' funds
a Share capital 1 12,570
b Reserves and Surplus 2 1,930
a Long-term borrowings 3 850
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200
2 Current assets
a Inventories 2,200
c Cash and cash equivalents 1,245
Total 16,500
Notes to accounts
` in ‘000
1 Share Capital

Preference share capital

18,700, 15% Preference Shares of ` 100 each 1,870
Total 12,570
General Reserve of X Ltd. 500
Add: General reserve of Y Ltd. 250 750
Less: Adjustment for amalgamation* (670) 80
Export Profit Reserve of X Ltd. 300
Add: Export Profit Reserve of Y Ltd. 200 500
Investment Allowance Reserve 100
Profit & Loss A/c of X Ltd. 750
Add: Profit & Loss A/c of Y Ltd. 500 1,250
Total 1,930
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
Land & Buildings 4,050
Plant & Machinery 4,950
Furniture & Fittings 925
Total 9,925
*The difference between the amount recorded as share capital issued and the
amount of share capital of transferor-company should be adjusted in
reserves. Thus, Adjustment for amalgamation = ` ’000 (53,70 – 47,00) =
` (’000) 670

(b) Amalgamation in the nature of purchase:

Balance Sheet of X Ltd.
Particulars Notes ` in'000
a Long-term borrowings 3 850
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200
2 Current assets
a Inventories 2,200
c Cash and cash equivalents 1,245
Total 16,500
Notes to accounts
` in'000
1 Share Capital


Total 12,570
Capital Reserve 380
General Reserve 500
Amalgamation adjustment reserve (300)
Export Profit Reserve 500
Investment Allowance Reserve 100
Surplus (Profit & Loss A/c) 750
Total 1,930
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
Furniture & Fittings 925
Total 9,925
Workings Notes: Capital Reserve arising on Amalgamation:
(A) Net Assets taken over: ` (’000) ` (’000)

Sundry Assets 66,00
Less: 13% Debentures 3,50
Trade payables 3,50
Other current liabilities 1,50 (8,50)
57,50
(B) Purchase consideration:
To Equity Shareholders of Y Ltd. 35,00

To Preference Shareholders of Y Ltd. 18,70

53,70
(C) Capital Reserve (A – B) 3,80
6. JOURNAL ENTRIES TO CLOSE THE BOOKS OF

VENDOR COMPANY
In case of amalgamation under any of the above methods, there shall be an
accounting treatment both in the books of vendor (transferor) and vendee
(transferee) companies.
We will now, understand the treatment in the books of vendor under this section-
Since the books of the vendor will be closed upon amalgamation- the assets and
the liabilities at the book values are transferred to a separate account called as the
“Realization account”.
The purchase consideration receivable is credited to the Realization account. On
the receipt of the purchase consideration, it is debited to equity shareholders and
preference shareholders’ account. The balance of realization account (either
profit/loss) is transferred to the equity shareholders’ account.
Those assets and liabilities which are not taken over by vendee company but settled
by the vendor company are also shown in the books of the vendor only.
The journal entries have been explained with the following illustration:
Illustration 6
Wye Ltd. acquires the business of Zed Ltd. whose balance sheet as at 31st March, 20X1
is as under:
Particulars Notes `
A Share capital 1 12,00,000
B Reserves and Surplus 2 1,58,000
A Long-term borrowings 3 2,00,000

A Trade Payables 1,20,000
B Other current liabilities 12,000
(Interest payable on debentures)
Total 16,90,000
Assets
A Property, Plant and Equipment 4 10,00,000
B Intangible assets 5 2,90,000
2 Current assets
A Inventories 1,50,000
B Trade receivables 1,80,000
C Cash and Cash equivalents 70,000
Total 16,90,000
Notes to accounts:
`
1 Share Capital
Equity Share capital (` 100 each) 8,00,000
6% Preference Share capital (` 100 each) 4,00,000
12,00,000
Capital reserve 1,00,000
Profit and loss A/c 50,000
Workmen compensation reserve
(Expected liability ` 5,000) 8,000
1,58,000
2,00,000


Land and Building 4,00,000
Plant and machinery 6,00,000
10,00,000
5 Intangible assets
Goodwill 2,40,000
Patents 50,000
2,90,000
Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest
due on debentures) and to pay following amounts:
(i) ` 2,00,000 7% Debentures (` 100 each) in Wye Ltd. for the existing debentures
in Zed Ltd.; for the purpose, each debenture of Wye Ltd. is to be treated as
worth ` 105.
(ii) For each preference share in Zed Ltd. ` 10 in cash and one 9% preference
share of ` 100 each in Wye Ltd.
(iii) For each equity share in Zed Ltd. ` 20 in cash and one equity share in Wye
Ltd. of ` 100 each having the market value of ` 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the
extent of ` 10,000. Actual expenses amounted to ` 12,500.
Wye Ltd. valued Land and building at ` 5,50,000 Plant and Machinery at ` 6,50,000
and patents at ` 20,000 of Zed Ltd for the purpose of amalgamation.
Purchase Consideration:
` Form
(i) Preference Shares: ` 10 per share 40,000 Cash
Preference shares 4,00,000 4,40,000 Preference shares
(ii) Equity shares: ` 20 per share 1,60,000 Cash
8,000 equity shares in
Wye Ltd. @ ` 140 11,20,000 12,80,000 Equity shares
17,20,000
Steps to close the Books of the Vendor Company
1. Open Realization Account and transfer all assets at book value.

Exception: If cash is not taken over by the purchasing company, it should not
be transferred.
Note: Profit and Loss Account (Dr.) and expenses not written off are not assets
and should not be transferred to the Realization Account.
The journal entry in the above case is: ` `

Realization A/c Dr. 16,20,000
To Sundries —
Goodwill 2,40,000
Land & Building 4,00,000
Plant & Machinery 6,00,000
Patents 50,000
Inventory 1,50,000
Trade receivables 1,80,000
(Transfer of assets to Realization Account on sale of business to Wye Ltd.)
2. Transfer to the Realization Account the liabilities which the purchasing company
is to take over. In case of the provisions, the portion which represents liability
expected to arise in future should be so transferred and the portion which is not
required (i.e., the reserve portion) should be treated as profit. Accordingly, the
following entry will be recorded:
` `
6% Debentures in Wye Ltd. Dr. 2,00,000
Workmen’s Compensation Reserve Dr. 5,000
Trade payables Dr. 1,20,000
To Realization A/c 3,25,000
(Transfer of liabilities taken over by Wye Ltd.
to Realization A/c)
For liabilities not take over by the purchasing company, the profit or loss on
discharge of such liabilities shall be transferred to Realization Account.

3. Debit purchasing company and credit Realization Account with the purchase
consideration.
Wye Ltd.- Dr. 17,20,000
To Realization A/c 17,20,000
(Amount receivable from Wye Ltd. for sale of business)
4. On receipt of the purchase consideration debit what is received (cash,
debentures, shares etc.) and credit the purchasing company. Thus —
Cash Dr. 2,00,000
9% Preference shares in Wye Ltd. Dr. 4,00,000
Equity shares in Wye Ltd. Dr. 11,20,000
To Wye Ltd. 17,20,000
(Receipt of purchase consideration from
the purchase company)
5. Expenses of liquidation have to be dealt with according to the circumstances of
each case.
(a) If the vendor company has to bear and pay them:
Realization Account should be debited and Cash Account credited.
(b) If the expenses are to be borne by the purchasing company, the
question may be dealt within one of the two ways mentioned below:
(i) It may be ignored in the books of the vendor company.
(ii) If the expenses are to be paid first by the vendor company and
afterwards reimbursed by the purchasing company, the following
two entries will be passed:
(a) Debit Purchasing company and credit Cash Account when
expenses are paid by the vendor company; and
(b) Debit Cash Account and credit purchasing company (on the
expenses being reimbursed).

In the above mentioned case Wye Ltd. has to pay maximum of ` 10,000 only
whereas, the amount spent is ` 12,500. Hence ` 2,500 is to be borne by Zed
Ltd.; the entries required will be :
` `
Wye Ltd. Dr. 10,000
Realization A/c Dr. 2,500
To Cash A/c 12,500
(Liquidation expenses out of which
` 10,000 is payable by Wye Ltd.)
Cash A/c Dr. 10,000
To Wye Ltd. 10,000
(Account reimbursed by Wye Ltd. for expense)
6. Liabilities not assumed by the purchasing company, have to be paid off. On
payment, debit the liability concerned and credit cash. Any difference between
the amount actually paid and the book figure must be transferred to the
Realization Account. Zed Ltd. shall pass the following entries in this respect:
` `
Interest Outstanding Dr. 12,000
To Debentureholders A/c 12,000
(Amount due to debenture holders
for debentures interest)
Debentureholders Dr. 12,000
To Cash A/c 12,000
(Debentureholders paid cash ` 12,000
for outstanding interest)

7. Credit the preference shareholders with the amount payable to them,

debiting Preference Share Capital with the amount shown in the books,
transferring the difference between the two, if any, to the Realization Account.
Thus —
6% Pref. Share Capital A/c Dr. 4,00,000
Realization A/c Dr. 40,000
To Preference Shareholders A/c 4,40,000
(The amount due to preference
shareholders for capital and the extra
amount payable under the scheme of
absorption)
Note: In the absence of any indication to the contrary, preference

shareholders will be entitled only to the capital contributed by them. But if
funds available after paying off creditors are not sufficient to satisfy the claim
of preference shareholders fully, they will have to suffer a loss to the extent
of the deficit.
8. Pay off preference shareholders by debiting them and crediting whatever is
given to them. The entry in the above case is :
` `
Preference shareholders A/c Dr. 4,40,000
To Cash A/c 40,000
To 9% Preference shares in Wye Ltd. 4,00,000
(Cash and preference shares in Wye Ltd.
given to preference shareholders)
9. Transfer equity share capital and account representing profit or loss (including
the balance in Realization Account) to Equity Shareholders Account. This will
determine the amount receivable by the equity shareholders. Zed Ltd. shall pass
the following entries in this regard :
` `
Equity Share Capital A/c Dr. 8,00,000
Capital Reserve A/c Dr. 1,00,000

Profit and Loss A/c Dr. 50,000

Workmen’s Compensation Reserve A/c Dr. 3,000
Realization A/c Dr. 4,22,500
To Sundry Equity Shareholders A/c 13,75,500
(Various accounts representing capital and
profit transferred to Equity Shareholders Account)
10. On satisfaction of the claims of the equity shareholders, debit their account
and credit whatever is given to them. Hence:
Equity Shareholders A/c Dr. 13,35,500
To Equity Shares in Wye Ltd. 11,20,000
To Cash A/c (W.N.2) 2,15,500
Working Notes
1. Realization Account
` `
To Sundry Assets 16,20,000 By Sundry Liabilities 3,25,000
To Cash (excess expenses of liquidation) 2,500 By Wye Ltd. 17,20,000
To Preference Shareholders 40,000
To Equity Shareholders A/c -
profit transferred 3,82,500
20,45,000 20,45,000
2. Cash Account
` `
To Balance b/d 70,000 By Realization 2,500
To Wye Ltd. 2,00,000 By Wye Ltd. 10,000
(consideration for amalgamation)
To Wye Ltd. 10,000 By Debenture-holders 12000
(liquidation expenses reimbursed) By Preference shareholder 40000
By Equity Shareholder (B/F) 215500
280000 280000

7. ENTRIES IN THE BOOKS OF PURCHASING

COMPANY
In the books of the purchasing/ vendee/ transferee company, the assets and
liabilities which are taken overs are recorded at the agreed values and where there
is no agreed value then at the book values.
Continuing with the information given in Illustration 6:
1. Debit Business Purchase Account and Credit Liquidator of the vendor
company with the account of the purchase consideration. Thus -
` `
Business Purchase A/c Dr. 17,20,000
To Liquidator of Zed Ltd. 17,20,000
(Amount payable to Zed Ltd. as per agreement dated....)
2. (i) Debit assets acquired (except goodwill) at the value placed on them by
the purchasing company;
(ii) Credit liabilities taken over at agreed values and credit Business
Purchase Account with the amount of purchase consideration; and
(iii) Credit the account showing shares held in the company, if any, with the
cost of such shares.
(iv) If the creditors as per (ii) and (iii) above exceed debits as per (i) above,
the difference should be debited to Goodwill Account, in the reverse
case, the difference should be credited to Capital Reserve.
Note : The amount of Goodwill or Capital Reserve that shall be included will
be the amount as has been arrived at only in foregoing manner.
In the above case the entry to be passed shall be:
` `
Land and Building A/c Dr. 5,50,000
Plant and Machinery A/c Dr. 6,50,000
Patents A/c Dr. 20,000
Inventory A/c Dr. 1,50,000
Trade receivables Dr. 1,80,000
Goodwill Dr. 5,05,000

To
Provision for Workmen’s Compensation A/c 5,000
Trade payables 1,20,000
Debentures in Z Ltd. 2,10,000
Business Purchases Account 17,20,000
(Various assets and liabilities
taken over from Zed Ltd. Goodwill
ascertained as a balancing figure)
3. On the payment to the vendor company the balance at its credit, the entry to
be made by Wye Ltd. shall be:
` `
Liquidator of Zed Ltd. Dr. 17,20,000
To Cash 2,00,000
To 9% Preference Share Capital A/c 4,00,000
To Equity Share Capital A/c 8,00,000
To Securities Premium A/c 3,20,000
(Payment of cash and issue of shares in
satisfaction of purchase consideration)
4. Debentures in Z Ltd. A/c Dr. 2,10,000
To 7% Debentures A/c 2,00,000
To Premium on Debentures A/c 10,000
(Debentures issued)
5. If the purchasing company is required to pay the expenses of liquidation of the
vendor company, the amount should be debited to the Goodwill or Capital
Reserve Account, as the case may be. In the instant case, the entry shall be:
Goodwill Account Dr. 10,000
To Cash Account 10,000
(Amount paid towards liquidation expenses
on Zed Ltd.)

Typical adjustments which shall be noted while working out the problems -
Entries at par value - The students will note that purchasing company is left with
a large debit in the Goodwill Account (Step No. 2) accompanied by quite a large
amount in the Securities Premium Account (Step No. 3). The two cannot be
adjusted. However, it would be permissible to negotiate on the basis to the market
value of the shares but to make entries only on the basis of par of shares of
purchasing company. This will mean that Goodwill Account (or Capital Reserve) will
be automatically adjusted for the securities premium.
Inter Company-owing - Should the purchasing company owe an amount to the
vendor company or vice versa, the amount will be included in the book debts of
one company and trade payables of the other. This should be adjusted by the entry:
Trade payables Dr.
To Trade receivables
The entry should be made after the usual acquisition entries have been passed. At
the time of preparing the Realization Account and passing the business purchase
entries, no attention need be paid to the fact that the two companies involved
owed money mutually.
Adjustment of the value of stock - Inter-company owings arise usually from
purchase and sale of goods; it is likely, therefore, that at the time, of the sale of
business, the debtor company also has goods in stock which it purchased from the
creditor company - the cost of the debtor company will include the profit made by
the creditor company. After the takeover of the business it is essential that such a
profit is eliminated. The entry for this will be made by the purchasing company. If
it is the vendor company which has such goods in stock, at the time of passing the
acquisition entries, the value of the stock should be reduced to its cost to the
company which is acquiring the business; automatically goodwill or capital reserve,
as the case may be, will be adjusted. But if the original sale was made by the vendor
company and the stock is with the company acquiring the business, the latter
company will have to debit Goodwill (or Capital Reserve) and credit stock with the
amount of the profit included in the stock.
Inter-company Loans- Where there is any loan taken by the transferor company
from the transferee company then the amount of the loan shall be taken over by
the transferee company and adjustment entry to be passed as follows-
Loan (liability of Transferor co) A/c Dr XXX

To Loans and advances (assets) XXX

(Elimination of the inter-company loans taken by the transferor from transferee
company).
Illustration 7
The following Balance Sheets are given as at 31st March, 20X1:
Particulars ` Best Ltd. ` Better Ltd.

(in lakhs) (in lakhs)
A Share capital 20 10
(shares of ` 100 each, fully pad)
B Reserves and Surplus 10 8
2 Current liabilities 20 2
Total 50 20
Assets
A Property, Plant and Equipment 25 15
B Non-current investments 5 -
2 Current assets 20 5
Total 50 20
The following further information is given —

(a) Better Limited issued bonus shares on 1st April, 20X1, in the ratio of one share
for every two held, out of Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the
basis of the latter’s Balance Sheet, the consideration taking the form of
allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be ` 150 and the shares in
Better Ltd. were valued at ` 100 after the issue of the bonus shares. The
allotment of shares is to be made on the basis of these values.

(d) Liabilities of Better Ltd., included ` 1 lakh due to Best Ltd., for purchases from
it, on which Best Ltd., made profit of 25% of the cost. The goods of ` 50,000 out
of the said purchases, remained in stock on the date of the above Balance Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries in
the Books of Best Ltd., and prepare the Balance Sheet as at 1st April, 20X1 after the
takeover.
Solution
LEDGER OF BETTER LIMITED
Property, Plant and Equipment (PPE) Account
` `
To Balance b/d 15,00,000 By Realization A/c (transfer)15,00,000
Current Assets Account
` `
To Balance b/d 5,00,000 By Realization A/c (transfer)5,00,000
Liabilities Account
` `
To Realization A/c 2,00,000 By Balance b/d 2,00,000
Realization Account
` `
To PPE A/c 15,00,000 By Liabilities A/c 2,00,000
” Current Assets A/c 5,00,000 ” Best Limited 15,00,000
(Purchase Consideration)
” Shareholders’ A/c 3,00,000

(Loss on Realization)
20,00,000 20,00,000

Share Capital Account
` `
To Sundry shareholders By Balance b/d 10,00,000
A/c - (transfer) 15,00,000 ” Reserves & Surplus A/c
(Bonus issue) 5,00,000
15,00,000 15,00,000
Reserves & Surplus Account
` `
To Share Capital (Bonus issue) 5,00,000 By Balance b/d 8,00,000
” Sundry Shareholders 3,00,000
8,00,000 8,00,000
Best Ltd.
` `
To Realization A/c - Purchase By Shares in Best Ltd 15,00,000
Consideration 15,00,000
15,00,000 15,00,000
Shares in Best Ltd.
` `
To Best Ltd. 15,00,000 By Sundry Shareholders A/c15,00,000
Sundry Shareholders Account
` `
To Realization A/c 3,00,000 By Share Capital A/c 15,00,000
(Loss) ” Reserves & Surplus A/c3,00,000
” Share in Best Ltd. 15,00,000
18,00,000 18,00,000

Journal of Best Ltd.
Dr. Cr.
20X1 ` `
Apr. 1 Property, Plant and Equipment A/c Dr. 15,00,000
Current Assets A/c Dr. 5,00,000
To Liabilities A/c 2,00,000
To Liquidator of Better Ltd. 15,00,000
To Capital Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over for
an agreed purchase consideration of ` 15,00,000
as per agreement dated....)
Liquidator of Better Ltd. Dr. 15,00,000
To Share Capital A/c 10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the
issue of equity shares of ` 10,00,000 at a
premium of ` 50 per share as per agreement)
Trade payables A/c Dr. 1,00,000
To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in
its creditors taken over, cancelled against own
Trade receivables)
Capital Reserve A/c Dr. 10,000
To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current
assets of Better Ltd. written off to Reserve
Account. 20% on sale value of `50,000 shall be
eliminated as unrealized profit)

Working Note :
Calculation of Purchase consideration:
Issued Capital of Better Ltd. (after bonus issue) at ` 100 per share ` 15,00,000
Purchase consideration has been discharged by Best Ltd. by the issue of shares for
` 10,00,000 at a premium of ` 5,00,000. This gives the value of ` 150 per share.
Balance Sheet of Best Ltd. (After absorption)
Particulars Notes `
a Share capital 1 30,00,000
b Reserves and Surplus 2 17,90,000
2 Current liabilities 21,00,000
Total 68,90,000
Assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2 Current assets 23,90,000
Total 68,90,000
Notes to accounts
`
1 Share Capital
Issued & Subscribed
30,000 shares of ` 100 (of the above 10,000
shares have been issued for consideration 30,00,000
other than cash)
Total 30,00,000


Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
PPE 25,00,000
Acquired during the year 15,00,000 40,00,000
Total 40,00,000
Illustration 8
K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position
of these two companies as at the date of amalgamation was as under:
Particulars Notes ` K Ltd. ` L Ltd.
A Share capital 1 12,00,000 6,00,000
B Reserves and Surplus 2 3,71,375 1,97,175
A Long-term borrowings 3 2,00,000 2,00,000
A Trade Payables 1,00,000 2,10,000
Total 18,71,375 12,07,175
Assets
B Intangible assets 5 80,000 -
2 Current assets
A Inventories 2,25,000 1,40,000
B Trade receivables 2,75,000 1,75,000
C Cash and Cash equivalents 6 1,61,375 72,175
Total 18,71,375 12,07,175

Notes to accounts
1 Share Capital K Ltd. L Ltd.

Equity shares of ` 100 each 8,00,000 3,00,000
7% Preference Shares of ` 100 each 4,00,000 3,00,000
12,00,000 6,00,000
General reserve - 1,00,000
Profit and loss account 3,71,175 97,175
3,71,175 1,97,175
5% Debentures 2,00,000 -
Secured loan -________ 2,00,000
2,00,000 2,00,000
Furniture and fittings 60,000 20,000
11,30,000 8,20,000
5 Intangible assets
Goodwill 80,000 -
80,000 -
6 Cash and Cash Equivalents
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
1,61,375 72,175
The terms of amalgamation are as under:

(A) (1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ` 20 each in LK Ltd. @ ` 18 paid up at premium
of ` 4 per share for each preference share held in both the Companies.

(3) Issue of 6 Equity shares of ` 20 each in LK Ltd. @ ` 18 paid up at a

premium of ` 4 per share for each equity share held in both the
Companies. In addition, necessary cash should be paid to the Equity
Shareholders of both the Companies as is required to adjust the rights of
shareholders of both the Companies in accordance with the intrinsic
value of the shares of both the Companies.
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to
discharge the 5% debentures in K Ltd. at a discount of 5% after takeover.
(B) (1) The assets and liabilities are to be taken at book values inventory and
trade receivables for which provisions at 2% and 2 ½ % respectively to
be raised.
(2) The trade receivables of K Ltd. include ` 20,000 due from L Ltd.
(C) The LK Ltd. is to issue 15,000 new equity shares of ` 20 each, ` 18 paid up at
premium of ` 4 per share so as to have sufficient working capital. Prepare
ledger accounts in the books of K Ltd. and L Ltd. to close their books.
Solution
Books of K Ltd.
Realization Account
` `
To Goodwill 80,000 By 5% Debentures 2,00,000
To Land & Building 4,50,000 By Trade payables 1,00,000
To Plant & Machinery 6,20,000 By LK Ltd. 15,60,000
To Furniture & Fitting 60,000 (Purchase consideration)
To Trade receivables 2,75,000 By Equity shareholders A/c 51,375
To Stores & inventory 2,25,000 (loss)
To Cash at Bank 1,20,000
To Cash in hand 41,375
To Preference shareholders
(excess payment) 40,000
19,11,375 19,11,375

Equity Shareholders Account

` `
To Realization A/c (loss) 51,375 By Share capital 8,00,000
To Equity Shares in LK Ltd. 10,56,000 By Profit & Loss A/c 3,71,375
To Cash 64,000
11,71,375 11,71,375
7% Preference Shareholders Account
` `
To Preference Shares in LK Ltd. 4,40,000 By Share capital 4,00,000
By Realization A/c 40,000
4,40,000 4,40,000
LK Ltd. Account
` `
To Realization A/c 15,60,000 By Equity Shares in LK Ltd.
For Equity 10,56,000
Pref. 4,40,00014,96,000
By Cash 64,000
15,60,000 15,60,000
Books of L Ltd.
Realization Account
` `
To Land & Building 3,00,000 By Trade payables 2,10,000
To Plant & Machinery 5,00,000 By Secured loan 2,00,000
To Furniture & Fittings 20,000 By LK Ltd. (Purchase
To Trade receivables 1,75,000 consideration) 7,90,000
To Inventory of stores 1,40,000 By Equity shareholders A/c—
To Cash at bank 55,000 Loss 37,175
To Cash in hand 17,175

To Pref. shareholders 30,000

12,37,175 12,37,175
` `
To Equity shares in LK Ltd. 3,96,000 By Share Capital 3,00,000
To Realization 37,175 By Profit & Loss A/c 97,175
To Cash 64,000 By Reserve 1,00,000
4,97,175 4,97,175
7% Preference Shareholders Account
` `
To Preference Shares in LK Ltd. 3,30,000 By Share capital 3,00,000
By Realization A/c 30,000
3,30,000 3,30,000
LK Ltd. Account
` `
To Realization A/c 7,90,000 By Equity shares in LK Ltd.
For Equity 3,96,000
Preference 3,30,000 7,26,000
By Cash 64,000
7,90,000 7,90,000
Working Notes:
(i) Purchase consideration
K Ltd. L Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 per share 4,40,000 3,30,000
Equity Shares at ` 22 per share 10,56,000 3,96,000
Cash [See W.N. (ii)] 64,000 64,000
15,60,000 7,90,000

(ii) Value of Net Assets

K Ltd. L Ltd.
` `
Goodwill 80,000
Land & Building 4,50,000 3,00,000
Plant & Machinery 6,20,000 5,00,000
Furniture & Fittings 60,000 20,000
Trade receivables less 2.5% 2,68,125 1,70,625
Inventory less 2% 2,20,500 1,37,200
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
18,60,000 12,00,000
Less : Debentures 2,00,000 –
Trade payables 1,00,000 2,10,000
Secured Loans – (3,00,000) 2,00,000 (4,10,000)
15,60,000 7,90,000
Payable in shares 14,96,000 7,26,000
Payable in cash 64,000 64,000
Illustration 9
The following are the Balance Sheets of A Ltd. and B Ltd. as at 31.3.20X1:
Particulars Notes ` A Ltd ` B Ltd

(in‘000) (in’000)
B Reserves and Surplus 2 1,000 (800)
A Long-term borrowings 3 750 450
A Trade Payables 300 300
B Short term Borrowings –
Bank overdraft -- 50
Total 4,050 1,000

Assets
A Property, Plant and Equipment 2,700 850
B Non-current investments 700 --
2 Current assets
A Trade receivables 400 150
B Cash and Cash equivalents 250 --
(cash at bank)
Total 4050 1000
Notes to accounts
1 Share capital A Ltd. (‘000) B Ltd. (‘000)

Equity shares of ` 100 each 2000 1000
2000 1000
General reserve 1000 --
Profit and loss A/c (debit balance) -- (800)
1000 (800)
3 Long term borrowings
10% debentures 500 --
Loan from banks 250 450
750 450
B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved:
(i) Banks agreed to waive off the loan of ` 60 thousands of B Ltd.
(ii) B Ltd. will reduce its shares to ` 10 per share and then consolidate 10 such
shares into one share of ` 100 each (new share).
(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of
every share held in A Ltd.
(iv) Trade payables of B Ltd. includes ` 100 thousands payable to A Ltd.
Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger.

Solution
Calculation of purchase consideration
One share of B Ltd. will be issued in exchange of every share

of A Ltd. (i.e. 20,000 equity shares of B Ltd. will be issued
against 20,000 equity shares of A Ltd.) 20,000 shares
Journal Entries in the books of B Ltd.

Date (` in
thousands)
20X1 Dr. Cr.
March,31 Loan from bank A/c Dr. 60
To Capital reduction A/c 60
(Being loan from bank waived off to the
extent of ` 60 thousand)
Equity share capital A/c (` 100) Dr. 1,000
To Equity share capital A/c (` 10) 100
To Capital reduction A/c 900
(Being equity shares of ` 100 each
reduced to ` 10 each)
Equity share capital A/c (` 10) Dr. 100
To Equity share capital A/c (` 100 100
each)
(Being 10 equity shares of ` 10 each
consolidated to one share of ` 100 each)
Capital reduction A/c Dr. 960
To Profit and loss A/c 800
To Capital reserve A/c 160
(Being accumulated losses set off against
reconstruction A/c and balance
transferred to capital reserve account)
Property, plant and equipment A/c Dr. 2,700
Investment A/c Dr. 700

Trade receivables A/c Dr. 400

Cash at bank A/c Dr. 250
To Trade payables A/c 300
To Loans from bank A/c 250
To 10% Debentures A/c 500
To Liquidator of A Ltd. A/c 2,000
To Reserves A/c 1,000
(Being assets, liabilities and reserves
taken over under pooling of interest
method and amount due to Liquidator)
Liquidator of A Ltd. A/c Dr. 2,000
To Equity share capital A/c 2,000
(Being payment made to liquidators of A
Ltd. by allotment of 20,000 new equity
shares)
Trade payables A/c Dr. 100
To Trade receivables A/c 100
(Being mutual owing cancelled)
Balance Sheet of B Ltd. after merger as at 31.3.20X1
Particulars Notes ` in ‘000

a Long term borrowings 3 1,140
a Trade payables 500
b Short term borrowings 4 50
Total 4,950

Assets
a Property, Plant and Equipment 3,550
b Non-current investments 700
2 Current assets
a Trade receivables 450
b Cash and cash equivalents 250
Total 4,950
Notes to accounts
` in ‘000
1 Share Capital
21,000, Equity shares of ` 100 each fully paid 2,100
(Out of the above, 20,000 shares have been issued
for consideration other than cash)
Capital reserve 160
General reserve 1,000
Total 1,160
3 Long Term Borrowings
10% Debentures 500
Loan from Bank (250+450-60) 640 1,140
4 Short term borrowings
Bank overdraft 50
Illustration 10
The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 20X1:
Particulars Notes ` P Ltd ` Q Ltd

A Share capital 1 8,00,000 4,00,000

B Reserves and Surplus 3,00,000 2,00,000

A Long-term borrowings 2 2,00,000 1,50,000
A Trade Payables 2,50,000 1,50,000
Total 15,50,000 9,00,000
Assets
A Property, Plant and Equipment 7,00,000 2,50,000
B Non-current investments 80,000 80,000
2 Current assets
A Inventories 2,40,000 3,20,000
C Cash and Cash equivalents 1,10,000 40,000
Total 15,50,000 9,00,000
Notes to accounts
P Ltd. Q Ltd.
1 Share Capital
10% Preference Shares of ` 100 each 2,00,000 1,00,000
8,00,000 4,00,000
12% Debentures 2,00,000 1,50,000
2,00,000 1,50,000
Details of Trade receivables and trade payables are as under:
P Ltd. ( `) Q Ltd. ( `)
Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
4,20,000 2,10,000

Trade payables
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000
2,50,000 1,50,000
Property, plant and equipment of both the companies are to be revalued at 15%
above book value. Both the companies are to pay 10% Equity dividend, but Preference
dividend having been already paid.
After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the
following terms:
(i) 8 Equity Shares of ` 10 each will be issued by P Ltd. at par against 6 shares of
Q Ltd.
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of
10% Preference Shares of ` 100 each at par in P Ltd.
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12%
Debentures in P Ltd. issued at a discount of 10%.
(iv) ` 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry
Creditors of Q Ltd. include ` 10,000 due to P Ltd.
(v) Inventory in Trade and Debtors are taken over at 5% lesser than their book
value by P Ltd.
Prepare:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.
Solution
(a) Journal Entries in the Books of P Ltd.
Dr. Cr.
` `
Property, Plant and Equipment Dr. 1,05,000
To Revaluation Reserve 1,05,000
(Revaluation of PPE at 15% above book value)
Reserve and Surplus Dr. 60,000

To Equity Dividend 60,000

(Declaration of equity dividend @ 10%)
Equity Dividend Dr. 60,000
To Bank Account 60,000
(Payment of equity dividend)
Business Purchase Account Dr. 4,90,000
To Liquidator of Q Ltd. 4,90,000
(Consideration payable for the business taken over
from Q Ltd.)
Property, Plant and Equipment (115% of ` 2,50,000) Dr. 2,87,500
Inventory (95% of ` 3,20,000) Dr. 3,04,000
Debtors Dr. 1,90,000
Bills Receivable Dr. 20,000
Investment Dr. 80,000
Cash at Bank Dr. 10,000
(` 40,000 –` 30,000 dividend paid)
To Provision for Bad Debts (5% of ` 1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in Q Ltd. 1,62,000
To Bills Payable 25,000
To Business Purchase Account 4,90,000
To Capital Reserve (Balancing figure) 80,000
(Incorporation of various assets and liabilities taken
over from Q Ltd. at agreed values and difference of
net assets and purchase consideration being credited
to capital reserve)
Liquidator of Q Ltd. Dr. 4,90,000
To Equity Share Capital 4,00,000
To 10% Preference Share Capital 90,000
(Discharge of consideration for Q Ltd.’s business)
12% Debentures in Q Ltd. (` 1,50,000 × 108%) Dr. 1,62,000

Discount on Issue of Debentures Dr. 18,000

To 12% Debentures 1,80,000
(Allotment of 12% Debentures to debenture holders
of Q Ltd. at a discount of 10%)
Sundry Creditors of Q Ltd. Dr. 10,000
To Sundry Debtors of P Ltd. 10,000
(Cancellation of mutual owing)
Goodwill Dr. 30,000
To Bank 30,000
(Being liquidation expenses reimbursed to Q Ltd.)
Capital Reserve Dr. 30,000
To Goodwill 30,000
(Being goodwill set off)
(b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment

method)
30,000
Shares to be allotted  8 = 40,000 shares of P Ltd.
6
Issued 40,000 shares of ` 10 each i.e. ` 4,00,000 (i)
For 10% preference shares, to be paid at 10% discount
1,00,000×90
` ` 90,000 (ii)
100
Consideration amount [(i) + (ii)] ` 4,90,000
Illustration 11
The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March,
20X1 was as under:
Particulars Notes Hari Ltd. Vayu Ltd.
A Share capital 1 11,00,000 4,00,000

A Long term provisions 3 50,000 20,000
A Trade Payables 1,30,000 80,000
Total 13,50,000 5,70,000
Assets
B Intangible assets 5 50,000 25,000
2 Current assets
A Inventories 2,50,000 1,75,000
C Cash and Cash equivalents 50,000 20,000
Total 13,50,000 5,70,000
Notes to accounts
Hari Ltd. Vayu Ltd.

1 Share Capital
9% Preference Shares of ` 100 each 1,00,000 --
10% Preference Shares of ` 100 each -- 1,00,000
11,00,000 4,00,000
70,000 70,000
3 Long term Provisions
Retirement gratuity fund 50,000 20,000
50,000 20,000


8,00,000 2,50,000
5 Intangible assets
Goodwill 50,000 25,000
50,000 25,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at ` 1,50,000
and the Machinery at ` 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts
to be created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the
acquisition entries in the books of Hari Ltd. Also draft the Balance Shee t after
absorption as at 31st March, 20X1.
Solution
In the Books of Vayu Ltd.
Realization Account
` `
To Sundry Assets 5,70,000 By Retirement 20,000
Gratuity Fund
To Preference Shareholders By Trade payables 80,000
(Premium on Redemption) 10,000 By Hari Ltd. (Purchase
To Equity Shareholders Consideration) 5,30,000
(Profit on Realization) 50,000 _______
6,30,000 6,30,000

` `
To Equity Shares of Hari Ltd. 4,20,000 By Share Capital 3,00,000

By General Reserve 70,000

By Realization
Account
(Profit on
_______ realization) 50,000
4,20,000 4,20,000
Preference Shareholders Account

` `
To 9% Preference Shares of 1,10,000 By Preference Share 1,00,000
Hari Ltd. Capital
By Realization
Account
(Premium on
Redemption of
Preference
Shares) 10,000
1,10,000 1,10,000
Hari Ltd. Account
` `
To Realization Account 5,30,000 By 9% Preference Shares 1,10,000
_______ By Equity Shares 4,20,000
5,30,000 5,30,000
In the Books of Hari Ltd.

Journal Entries
Dr. Cr.
` `
Business Purchase A/c Dr. 5,30,000
To Liquidators of Vayu Ltd. Account 5,30,000
(Being business of Vayu Ltd. taken over)
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000

Machinery Account Dr. 1,60,000

Inventory Account Dr. 1,57,500
Trade receivables Account Dr. 1,00,000
Bank Account Dr. 20,000
To Retirement Gratuity Fund Account 20,000
To Trade payables Account 80,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 5,30,000
(Being Assets and Liabilities taken over as per
agreed valuation).
Liquidators of Vayu Ltd. A/c Dr. 5,30,000
To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as
above).
Balance Sheet of Hari Ltd. (after absorption)

as at 31st March, 20X1
Particulars Notes `
A Share capital 1 16,10,000
A Long-term provisions 3 70,000
A Trade Payables 2,10,000
B Short term provision 7,500
Total 19,87,500

Assets
A Property, Plant and Equipment 4 11,10,000
B Intangible assets 5 1,00,000
2 Current assets
A Inventories 4,07,500
B Trade receivables 6 3,00,000
C Cash and cash equivalents 70,000
Total 19,87,500
Notes to accounts
`
1 Share Capital
1,40,000 Equity Shares of ` 10 each fully paid 14,00,000
(Out of above 40,000 Equity Shares were
issued in consideration other than for cash)
2,100 9% Preference Shares of ` 100 each 2,10,000
(Out of above 1,100 Preference Shares were
issued in consideration other than for cash)
Total 16,10,000
Securities Premium 20,000
General Reserve 70,000
Total 90,000
3 Long-term provisions
Retirement Gratuity fund 70,000
Total 70,000
4 Short term Provisions
Provision for Doubtful Debts 7,500


Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
6 Intangible assets
Goodwill 1,00,000
7 Trade receivables 3,00,000
Working Notes:
Purchase Consideration: `
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Inventory 1,57,500
Trade receivables 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity Fund (20,000)
Trade payables (80,000)
Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of
40,000 Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

SUMMARY
1. Amalgamation means joining of two or more existing companies into one
company, the joined companies lose their identity and form themselves into
a new company.
2. Amalgamation includes- absorption and external reconstruction within its
scope as per AS 14.
3. In absorption, an existing company takes over the business of another
existing company. Thus there is only one liquidation and that is of the
merged company.
4. A company which is merged into another company is called a transferor
company or a vendor company.
5. A company into which the vendor company is merged is called transferee
company or vendee company or purchasing company.
6. Amalgamation is of two types- in the nature of merger and in the nature of
purchase.
7 In amalgamation in the nature of merger there is genuine pooling of:
(a) Assets and liabilities of the amalgamating companies,
(b) Shareholders’ interest.

Also the business of the transferor company is intended to be carried on by
the transferee company. The conditions as laid down in para 3(e) of AS-14
should be satisfied in full. Even if one condition is not satisfied, then it will
be called as amalgamation in nature of purchase.
8. In amalgamation in the nature of purchase, one company acquires the
business of another company.
9. Purchase Consideration can be defined as the aggregate of the shares and
securities issued and the payment made in form of cash or other assets by
the transferee company to the shareholders of the transferor company.
10. There can be different methods to compute the purchase consideration-
Lumpsum payment method, Net Payment method, Net assets method,
Intrinsic value or share exchange method.

11. There are two main methods of accounting for amalgamation:

(a) The pooling of interests method, and
(b) The purchase method.
12. Under pooling of interests method, the assets, liabilities and reserves of the
transferor company will be taken over by transferee company at existing
carrying amounts and the difference between the share capital issued by
the transferee company to the transferor and the actual existing share
capital is adjusted with the reserves.
13. Under purchase method, the assets and liabilities of the transferor company
should be incorporated at their existing carrying amounts or the purchase
consideration should be allocated to individual identifiable assets and
liabilities on the basis of their fair values at the date of amalgamation .
14. The difference between the purchase consideration and the net assets (at
agreed values) of the transferor company shall be recorded as goodwill or
capital reserve in the books of the transferee company.
15. All inter-company adjustments shall be eliminated from the books of the
transferee company after the amalgamation.

TEST YOUR KNOWLEDGE

MCQs
1. In case of amalgamation, the entry for elimination of unrealized profit or loss
on stock is made
(a) By the vendor company
(b) By the purchasing company
(c) By the third party
2. Under the ‘pooling of interests’ method, the difference between the purchase
consideration and share capital of the transferee company should be adjusted
to
(a) General reserve.
(b) Amalgamation adjustment account.
(c) Goodwill or capital reserve.
3. At the time of amalgamation, purchase consideration does not include
(a) The sum which the transferee company will directly pay to the creditors
of the transferor company
(b) Payments made in the form of assets by the transferee company to the
shareholders of the transferor company
(c) Preference shares issued by the transferee company to the preference
shareholders of the transferor company
4. As per AS 14, purchase consideration is the amount agreed payable to
(a) Shareholders
(b) Shareholders, debenture holders and creditors
(c) Shareholders and debenture holders
5 If expenses of liquidation of the vendor company are paid by the purchasing
company then, in purchasing company’s book, the account debited is
(a) Goodwill account.
(b) Liquidation expense account.
(c) Vendor company account.

6. Amalgamation adjustment reserve is opened in the books of the

amalgamating company to incorporate
(a) Assets of the amalgamating company
(b) Non- Statutory reserves of the amalgamating company
(c) Statutory reserves of the amalgamating company
7. Amalgamation Adjustment Reserve is presented in the financial statements
of the transferee company as
(a) Other current asset.
(b) Separate line item with a negative sign under the head ‘Reserves and
Surplus’.
(c) Other non-current assets.
8. A company into which the vendor company is merged is called
(a) Transferee company.
(b) Transferor company.
(c) Selling company.
9. If the purchase consideration is more than net assets (at agreed values) of the
transferor company, difference shall be recorded as __________ in the books of
the transferee company.
(a) Goodwill.
(b) Capital Reserve.
(c) Profit/loss.
Theoretical Questions
Question 1
What are the conditions, which, according to AS 14 on Accounting for
Amalgamations, must be satisfied for an amalgamation in the nature of merger?
Question 2
Distinguish between (i) the pooling of interests method and (ii) the purchase
method of recording transactions relating to amalgamation.

Practical Questions
Question 1
The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 20X1:
Particulars Notes ` Yes Ltd ` No Ltd
(in crores) (in crores)
A Share capital 1 12 5
B Reserves and Surplus 88 10
A Long term borrowings 2 -- 10
3 Current liabilities 33 15
Total 133 40
Assets
A Property, Plant and Equipment 3 20 6
B Non-current investments 4 13 --
2 Current assets 100 34

Total 133 40
Notes of accounts
Yes Ltd. No Ltd.

1 Share Capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of ` 10 each fully paid 12 5
12 5
Unsecured loan from Yes Ltd. -- 10
-- 10


Gross value 70 30
Depreciation (50) (24)
20 6
30 lakhs equity shares of ` 10 each 3 --
Long term loan to No Ltd. 10 --
13 --
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one
equity share of Yes Ltd. issued at a premium of ` 2 per share for every five equity
shares held by them in No Ltd. The necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give
effect to the above.
Question 2
The following are the Balance Sheets of X Ltd. and Y Ltd :
Particulars Notes ` X Ltd. ` Y Ltd.
A Share capital 1 1,00,000 50,000
B Reserves and Surplus 2 10,000 (10,000)
A Long term borrowings 3 -- 15,000
Total 135,000 60,000
Assets
Property, Plant and 1,20,000 60,000
A Equipment
B Non-current investments 4 15,000 --
Total 135,000 60,000

Notes to accounts
1 Share Capital X Ltd. Y Ltd.

Equity share capital 1,00,000 50,000
1,00,000 50,000
Profit and loss A/c 10,000 --
Profit and loss A/c (debit balance) -- (10,000)
10,000 (10,000)
Loan from X Ltd. -- 15,000
Loan to Y Ltd. 15,000 --
15,000 --
A new company XY Ltd. is formed to acquire the sundry assets and trade payables
of X Ltd. and Y Ltd. and for this purpose, the sundry assets of X Ltd. are revalued at
` 1,00,000. The debt due to X Ltd. is also to be discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.
Question 3
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided
to form a new company named Super Fast Express Ltd. The balance sheets of both
the companies were as under:
Particulars Notes Super Fast Express
Express Ltd. Ltd.
` `
A Share capital 1 20,00,000 10,00,000
B Reserves and Surplus 2 1,00,000 2,60,000
A Long term provisions 3 1,00,000 --

Total 22,60,000 13,00,000
Assets
A Property, Plant and 4 14,00,000 11,00,000
Equipment
B Intangible assets 5 -- 1,00,000
2 Current assets
A Inventories 3,00,000 40,000
B Trade receivables 2,40,000 40,000
C Cash and Cash equivalents 6 3,20,000 20,000
Total 22,60,000 13,00,000
Notes to accounts
Super Express Fast Express

Ltd. ` Ltd.`
1 Share Capital
Insurance reserve 1,00,000 --
Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000
1,00,000 2,60,000
3 Long term provisions
Provident fund 1,00,000 --
Total 1,00,000 --
14,00,000 11,00,000

5 Intangible assets
Goodwill -- 1,00,000
-- 1,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Cash in hand 1,00,000 10,000
3,20,000 20,000
The assets and liabilities of both the companies were taken over by the new
company at their book values. The companies were allotted equity shares of ` 100
each in lieu of purchase consideration amounting to ` 30,000 (20,000 for Super-
Fast Express Ltd and 10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd. considering pooling
method.
Question 4
The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March, 20X1:
Particulars Notes ` P Ltd ` V Ltd
(` in Lakhs) (` in Lakhs)
Long term borrowings 3 -- 1,000
A Trade Payables 1,200 463
B Short term provisions 1,830 702
Total 33,400 12,500
Assets
A Property, Plant and 4 22,304 6,750
Equipment

2 Current assets
A Inventories 7,862 4,041
B Trade receivables 2,120 1,100
C Cash and Cash equivalents 1,114 609
Total 33,400 12,500
Notes to accounts
` P Ltd ` V Ltd
(` in Lakhs) (` in Lakhs)
1 Share Capital 15,000 6,000
Securities premium 3,000 --
Foreign project reserve -- 310
Profit and loss account 2,870 825
15,370 4,335
12% debentures -- 1,000
-- 1,000
Land and Building 6,000 --
Plant and machinery 14,000 5,000
Furniture and fixtures 2,304 1,750
22,304 6,750
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of
merger. It was agreed that in discharge of consideration for the business P Ltd.
would allot three fully paid equity shares of ` 10 each at par for every two shares
held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be converted
into 13% debentures in P Ltd. of the same amount and denomination.

Details of trade receivables and trade payables as under:
P Ltd. V Ltd.
(` in lakhs) (` in lakhs)
Trade payables
Bills Payable 120 -

Trade Creditors 1,080 463
1,200 463
Trade receivables
Trade receivables 2,120 1,020
Bills Receivable — 80
2,120 1,100
Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.
You are required to :
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger considering that
the cost of issue of debentures shown in the balance sheet of the V Ltd.
company is not transferred to the P Ltd. company.
Question 5
Sun and Neptune had been carrying on business independently. They agreed to
amalgamate and form a new company Jupiter Ltd. with an authorised share capital
of ` 4,00,000 divided into 80,000 equity shares of ` 5 each. On 31st March, 20X3 the
respective information of Sun and Neptune were as follows:
Sun (`) Neptune (`)

Share capital 3,65,000 3,52,500
Current liabilities 5,97,000 1,80,250
Property, Plant and Equipment 6,35,000 3,65,000
Current assets 3,27,000 1,67,750

Additional Information:
(a) Revalued figures of non-current and Current assets were as follows:
Sun (`) Neptune (`)

Property, Plant and Equipment 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
(b) The debtors and creditors include ` 43,350 owed by Sun to Neptune.
The purchase consideration is satisfied by issue of the following shares and
debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the
proportion to the profitability of their respective business based on the
average net profit during the last three years which were as follows:
Sun (`) Neptune (`)

20X1 Profit 4,49,576 2,73,900
20X2 (Loss)/Profit (2,500) 3,42,100
20X3 Profit 3,77,924 3,59,000
(ii) 15% debenture in Jupiter Ltd. at par to provide an income equivalent to

8% return business as on capital employed in their respective business
as on 31st March, 20X3 after revaluation of assets.
You are required to:
(1) Compute the amount of debentures and shares to be issued to Sun and
Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after
amalgamation.
ANSWERS/HINTS
MCQs
1. (b), 2. (a), 3. (a), 4. (a), 5. (a), 6. (c),
7. (b) 8. (a), 9. (a)

Theoretical Questions
Answer 1
Refer Para 3 of chapter.
Answer 2
Refer Para 5 of chapter.
Practical Questions
Answer 1
Journal Entries in the books of No Ltd.
(Rupees in crores)
Dr. Cr.
Realization Account Dr. 64.00
To Property, plant and equipment Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realization Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realization Account 49.00
(Being the transfer of liabilities and provision to
Realization Account)
Yes Ltd. Dr. 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realization Account)
Equity Shareholders Account Dr. 13.80


(Being the loss on Realization transferred to equity share-
holders account)
Equity Share Capital Account Dr. 5.00
Reserves and Surplus Account Dr. 10.00
To Equity Shareholders Account 15.00
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)
Equity shares of Yes Ltd. Dr. 1.20
To Yes Ltd. 1.20
(Being the receipt of 10 lakhs equity shares of
` 10 each at ` 12 per share for allotment to shareholders)
Equity shareholders Account Dr. 1.20
To Equity shares of Yes Ltd. 1.20
(Being the distribution of equity shares received from Yes
Ltd. to shareholders)
Journal Entries in the books of Yes Ltd.
(Rupees in crores)
Dr. Cr.
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)
Property, plant and equipment Dr. 6.00
Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00

To Business Purchase Account 1.20

To Reserve & Surplus A/c 10.00
To Profit & loss A/c  3.80
(Being the assets and liabilities taken over and the surplus
transferred to Profit and loss account)
Liquidator of No Ltd. Dr. 1.20
To Equity Share Capital Account 1.00
To Securities Premium Account 0.20
(Being the allotment to shareholders of No Ltd.
10 lakhs equity shares of ` 10 each at a premium of
` 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)
Working Note:
Purchase Consideration ` in crores
50lakhs
× ` 12 i.e., 10 lakhs equity shares at ` 12 per share 1.20
5
Number of equity shares of ` 10 each to be issued 1.20 crores  = 10 lakhs.

 12 
 
Answer 2
Books of X Ltd.
Realization Account
` `
To Sundry Assets 1,20,000 By Trade payables 25,000

As amalgamation in the nature of merger so balancing figure will be transferred to Profit
& Loss account.

By XY Ltd. (Purchase consideration) 75,000

By Shareholders (Loss on realization) 20,000
1,20,000 1,20,000
Shareholders Account
` `
To Realization Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000
Loan Y Ltd.
` `
To Balance b/d 15,000 By Shares in XY Ltd. 15,000
Shares in XY Ltd.
` `
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000
XY Ltd.
` `
To Realization Account 75,000 By Shares in XY Ltd. 75,000
Answer 3
Balance Sheet of Super Fast Express Ltd
Particulars Notes `
a Share capital 1 30,00,000
b Reserves and Surplus 2 3,60,000

a Long-term provisions 3 1,00,000
a Trade Payables 1,00,000
Total 35,60,000
Assets
a Property, Plant and Equipment 4 25,00,000
b Intangible assets 5 1,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to Accounts
`
1 Share Capital
Issued, subscribed and paid up
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
Buildings 16,00,000

Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
Answer 4
Books of P Ltd.
Journal Entries
Dr. Cr.
(` in Lacs) (` in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for
Consideration settled as per agreement)
Plant and Machinery Dr. 5,000
Furniture & Fittings Dr. 1750
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 ) 825
To Liability for 12% Debentures 1,000
To Creditors 463

To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the
form of equity shares)
Goodwill A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd debited to Goodwill Ac)
Profit and loss A/c Dr 1
To Goodwill A/c 1
(being the Goodwill charged to Profit and loss account)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of
13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)
Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes ` (in lakhs)
A Share capital 1 24,000
A Long-term borrowings 3 1,000

A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,769
Assets
A Property, Plant and Equipment 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
`
1. Share Capital
Authorized, issued, subscribed and paid up
24 crores equity shares of ` 10 each 24,000
(Of the above shares, 9 crores shares have been issued for
consideration other than cash)
Total 24,000
2. Reserves and Surplus
General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured

13% Debentures 1,000

4. Property, Plant and Equipment
Furniture & Fittings 4,004
Total 29,004
Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity
shares of P Ltd. for every two equity shares held in V Ltd.
3
Purchase consideration = ` 6,000 lacs × = ` 9,000 lacs.
2
Answer 5
(1) Computation of Amount of Debentures and Shares to be issued:
Sun Neptune
(i) Average Net Profit
` (4,49,576-2,500+3,77,924)/3 = 2,75,000
` (2,73,900+,3,42,100+3,59,000)/3 = 3,25,000
(ii) Equity Shares Issued
(a) Ratio of distribution
Sun: Neptune
275 325
(b) Number
Sun : 27,500
Neptune: 32,500
60,000

(c) Amount
27,500 shares of ` 5 each = 1,37,500
32,500 shares of ` 5 each = 1,62,500
(iii) Capital Employed (after revaluation of assets) ` `
Property, plant and equipment 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
10,09,500 5,47,750
Less: Current Liabilities (5,97,000) (1,80,250)
4,12,500 3,67,500
(iv) Debentures Issued
8% Return on capital employed 33,000 29,400
15% Debentures to be issued to provide
equivalent income:
100
Sun: 33,000 × = 2,20,000
15
100
Neptune: 29,400 × = 1,96,000
15
(2) Balance Sheet of Jupiter Ltd.
As at 31st March 20X3 (after amalgamation)
Particulars Note No `
I. Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 64,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 4,16,000
(3) Current Liabilities
(a) Other current liabilities 7,33,900
Total 15,13,900

II. Assets
(1) Non-current assets
(a) PPE 11,00,000
(2) Current assets
(a) Other current assets 4,13,900
Total 15,13,900
Notes to Accounts
`
1 Share Capital
Authorized
80,000 Equity Shares of ` 5 each 4,00,000
Issued and Subscribed
60,000 Equity Shares of ` 5 each 3,00,000
(all the above shares are allotted as fully paid-up
pursuant to a contract without payment being received
in cash)
2 Reserve and Surplus
Capital Reserve 64,000
Secured Loans
Working Notes:
Sun Neptune Total

` ` `
(1) Purchase Consideration
Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000
3,57,500 3,58,500 7,16,000

(2) Capital Reserve

(a) Net Assets taken over
Property, plant & equipment 7,10,000 3,90,000 11,00,000
Current Assets 2,99,500 1,14,400* 4,13,900
10,09,500 5,04,400 15,13,900
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900)
4,55,850 3,24,150 7,80,000
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000
(c) Capital Reserve [(a) - (b)] 98,350
(d) Goodwill [(b) - (a)] 34,350
(e) Capital Reserve 64,000
[Final Figure(c) -(d)]
* 1,57,750–43,350= 1,14,400
** 5,97,000–43,350= 5,53,650

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CHAPTER 5

© The Institute of Chartered Accountants of India

Amalgamation in the nature of Amalgamation in the nature of

© The Institute of Chartered Accountants of India

Basis Amalgamation Absorption External

© The Institute of Chartered Accountants of India

Minimum At least three At least two Only two

© The Institute of Chartered Accountants of India

Amalgamation in the nature of merger is an amalgamation, as per para 3(e) of

Best of Distinction Amalgamation in the Amalgamation in the

© The Institute of Chartered Accountants of India

(b) Shareholders of Equity shareholders Equity shareholders need

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

can be reasonably estimated it is to be included in the calculation of purchase

Let us consider the Balance Sheet of X Ltd. as at 31st March, 20X1:

Particulars Notes ` (000)

© The Institute of Chartered Accountants of India

1 Share Capital ` in (‘000)

© The Institute of Chartered Accountants of India

Computation of Purchase consideration (` in ’000) Form

© The Institute of Chartered Accountants of India

(ii) to issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at ` 96 in

The purchase consideration will be

Note- 1. According to AS 14, ‘consideration’ excludes the any amount payable

© The Institute of Chartered Accountants of India

2. Y ltd. agrees to pay ` 60,000 in cash for payment to preference shareholders.

Particulars Notes Neel Gagan

1 Property, plant and Equipment

© The Institute of Chartered Accountants of India

Following is the additional information:

Profits of Neel Gagan

© The Institute of Chartered Accountants of India

The total profits- ` 4,75,000+ ` 5,25,000= ` 10,00,000

© The Institute of Chartered Accountants of India

Less: Current liabilities (6,23,500) (5,57,600)

5. METHODS OF ACCOUNTING FOR

Methods of accounting for Amalgamation

Pooling of interests method Purchase method

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Though, normally, in an amalgamation in the nature of purchase, the identity of

Description Amount Amount

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Particulars Notes ` X Ltd ` Y Ltd.

X Ltd (‘000) Y Ltd (‘000)

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2 Reserves and Surplus

© The Institute of Chartered Accountants of India

(a) Amalgamation in the nature of merger:

Balance Sheet of X Ltd.

Particulars Notes ` in '000

© The Institute of Chartered Accountants of India

Preference share capital

© The Institute of Chartered Accountants of India

(b) Amalgamation in the nature of purchase:

© The Institute of Chartered Accountants of India

Preference share capital

Workings Notes: Capital Reserve arising on Amalgamation: