AMALGAMATION OF COMPANIES

SECTION A - CONCEPTS
1. BASICS

(1) What’s the Difference between Absorption & Merger?

(a) Absorption (also called Take Over or Acquisition) can be of two types:
(i) Business Takeover/Acquisition: A Ltd. absorbs B Ltd. i.e. taken over the Business of B
Ltd., Here B Ltd. is getting liquidated.
(ii) Takeover through Shares (Voting Rights): A Ltd. acquired Control over the Business of B
Ltd. by Purchasing more than 50% Equity Shares of B Ltd. A Ltd. is called Holding co. & B
Ltd. is called Subsidiary co. (No company is getting liquidated)
(b) Merger takes place when two companies Merge their businesses and New Company is creating
which is controlled by the Management of both the Companies. For Example, A Ltd. and B Ltd.
Merged and form a New Company AB Ltd. in which Directors of both the Companies have
common decision making.

(2) The entity who acquires or takes over the Business is called Transferee (Buyer) Company.

(3) The entity whose Business is getting Taken over is called Transferor (Seller) Company.

(4) Transferee company gets Net Assets (Assets and Liabilities) of Transferor company as a result of
Acquisition/Absorption.

(5) Transferee company pay the Consideration against business taken over.
Here A Ltd. shall pay consideration (PC) against acquiring of Net Asset of B Ltd. to the shareholders of
B Ltd. in the form of:
● Cash
● Equity Shares
● Preference shares.
● Debenture etc.
 AMALGAMATION OF COMPANIES

2. DIFFERENCE BETWEEN AMALGAMATION, ABSORPTION AND EXTERNAL

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

Minimum number At least three companies are At least two Companies are Only two Companies are
of Companies involved. involved. involved.
involved

Number of new Only one resultant company is No new resultant company is Only one resultant company
resultant formed. Two companies are formed. is formed. Under this case a
companies wound up to form a single newly formed company
resultant company. takes over the business of an
existing company.

Objective Amalgamation is done to cut Absorption is done to cut External reconstruction is

competition & reap the competition & reap the done to reorganize the
economies in large scale. economies in large scale. financial structure of the
company.

Example Jai Ltd. and Ravi Ltd. Jai Ltd. takes over the Jai Ltd. is formed to take over
amalgamate to form Vishal business of another existing the business of an existing
Ltd. company Ravi Ltd. company Ravi Ltd.

3. TYPES OF AMALGAMATION (AS 14)

1) For the Purpose of Accounting, Amalgamation is classified into Two Types: (for Transferee Company)
(a) Amalgamation in the nature of Purchase: Here one Entity has absorbed the business of other
Entity i.e., One Entity is able to control Another Entity (A Ltd. + B Ltd. = A Ltd.)
(b) Amalgamation in the nature of Merger: It is an amalgamation where there is a genuine pooling not
merely of assets and liabilities of the transferor and transferee companies but also of the
shareholders’ interests and of the businesses of the companies. All Entities are agreed to work
together in the name of new entity. No one is dominating to each other.
Note: The accounting treatment of such amalgamations in the nature of Merger 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 OF COMPANIES

2) According to AS 14, on satisfaction of all the following conditions, then only Amalgamation will be treated
as Nature of Merger:
(a) All the assets and liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(Sab ki Sab A/L, Matlab kuch bhi nai chodne ka)
(b) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company become equity shareholders of the transferee company by virtue of the amalgamation.
(Above 90% should not include the shares already held by transferee company)
(c) The consideration to Equity Shareholders of Transferor Company is discharged by the issue of
equity shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
(Owner banao sabko)
(d) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(Purana Business continue karna jaruri hai)
(e) 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.
(Arry bhai same book values pe hi record karne ka hai A/L ko)
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.

EXAMPLE 1:
A Ltd. and B Ltd. decided to amalgamate and form a New Company AB Ltd.
Balance Sheet (Extract)
A B

Fixed Assets 50 Lacs 40 Lacs

Current Assets 30 Lacs 25 Lacs

Liabilities 27 Lacs 18 Lacs

● Market Value of PPE 66 Lacs (A Ltd.) & 47 Lacs (B Ltd)

● Market Value of Current Asset are same as Book Value
● Fair value of Liabilities are same as Book Value.
● Purchased consideration (Market Value) = 69 Lacs (for A Ltd.) and 54 Lacs for B Ltd.
● It was decided to record Net Assets at Fair Value
 AMALGAMATION OF COMPANIES

PPE a/c Dr. 113

Current Asset a/c Dr. 55
To Liability A/c 45
To Purchase Consideration A/c* 123

Conclusion – This is not Merger.

Note: Purchase consideration is always based on Market Values.

EXAMPLE 2:
A Ltd. has 1,00,000 no. Outstanding, B Ltd is taking over A Ltd.
B Ltd. is also holding 15,000 shares in A Ltd. Other Share Holders holding 75,000 no. are giving their consent in favor of
Amalgamation.
Total no of Outstanding Shares = 1,00,000 No.
(a) Shares already Held by B Ltd. = 15,000 No.
(b) Others Shareholders holding = 85,000 No.
Out of which, shareholders holding 75,000 No. of shares gave their Consent, which means 88.24% (75000/85,000 x
100). Hence, it’s not a Merger.

4. PURCHASE CONSIDERATION
PC includes PC does not include

Payment in any form such as- Any payment made by transferee company to the
● Shares or Other Securities Debenture holders or Creditors of Transferor
● Cash company.
● Other Assets etc.
To the Shareholders of Transferor company to acquire the
Business.

PC shall always be measured at Fair Value of Shares/Other

Securities issued/Assets Given.

But if Fair Value (Market Values) are not given then we can
take Book Values of Assets.

PC also includes any additional payment which is probable

in future and can be estimated reasonably. its contigent consideraation
 AMALGAMATION OF COMPANIES

CALCULATION OF PURCHASE CONSIDERATION

Purchase Consideration can be calculated in different ways. However, the most methods are as under:
(a) Exchange Ratio Method
(b) Net Assets Method
Exchange Ratio Method: Purchase consideration based on Net Asset value:
Here we need Exchange Ratio (Swap Ratio) for calculation ● If Some Asset/Liabilities are not taken over then we
of PC. Exchange ratio is a ratio for exchange of No. of shall not consider such Asset or Liabilities while
Shares. It can be given in the question. calculating Purchase consideration
If it is missing in question, then we shall use Deemed (Refer Example 6)
Exchange Ratio as under: ● If there are any unrecorded Asset/Liabilities they may
Fair Value of Share of Transferor ÷ Fair Value of Share also be taken over & to be considered in calculation of
of Transferee Purchase Consideration.
(Refer Example 6)
The above Fair values can be Intrinsic Values, Market If Goodwill value is given in the Question then Goodwill
Values or any other values given in the question. shall also be taken for the purpose of calculation of
In absence of any Information, we will use Intrinsic Purchase Consideration.
Values. (Refer Example 8)
● Sometimes Question asks to calculate Purchase
consideration based on Intrinsic Values, If so then we
shall assume that all Asset & all liabilities are being
taken over.
● How to Calculate Intrinsic Value: (Refer Q.204)
Market Value of All Assets
(+) Goodwill if Any
(-) All Liabilities
(-) PC to PSH
= Net Assets for Equity Shareholders ÷ No of Equity
Shares

EXAMPLE 3: - (Purchase Consideration based as Exchange Ratio)

A Ltd. (Transferee) acquired business of B Ltd. (Transferor)
B Ltd. has total Outstanding equity shares of 2,00,000 no.
A Ltd. offered 3 shares of its own Company in exchange of every 2 shares of B Ltd. @ Market Price of 25/- per share
 AMALGAMATION OF COMPANIES

SOLUTION:
Calculation of Purchased Share
Payment to Payment in Working Amount

Equity Share Holder of B Equity Shares of A Ltd. 2,00,000/2 x 3 75,00,000/-

Ltd. 3,00,000 x 25/-

EXAMPLE 4: (Purchased Consideration as Exchange of Shares)

B Ltd.

Equity Shares 1,50,000 no.

Preference Shares 80,000 no.

A ltd. is taking over Business of B Ltd Exchange Ratio is 5:4 for equity & 3:4 for Preference shares. Market Price per
share of A: - Equity Share - 60/-, Preference Share - 20/- matlab 4 ka badla panch read ulta
SOLUTION:
Payment to Payment in Working Amount

Equity Share Holders of B Ltd. Equity Shares of A Ltd. (1,50,000/4X5) x 60/- 1,12,50,000

Preference Share Holders of B Ltd. Preference Share A Ltd. (80,000/4X3) x 20/- 12,00,000

Total Purchase Consideration 1,24,50,000

EXAMPLE 5:
B Ltd. is Transferor having Outstanding equity shares are 3,00,000 No.
A Ltd. taking over Business of B Ltd. by issuing 4 shares for every 7 shares of B. Market Price Per share of A is 30/-
SOLUTION:
Payment to Payment in Working Amount

Equity Shareholders of B Ltd. Equity Shares of A Ltd. 3,00,000 x 4/7 x 30 51,42,840/-

Equity Shareholders of B Ltd. Cash 0.571 x 30/- 17/-

51,42,857/-

when shares come in point share cant be issued

in point for decimals 1st 3 digit pay in cash
EXAMPLE 6: (PC based on Assets/Liabilities Value)
Balance Sheet of Q Ltd.
Equity Share Capital (10/-) 10,00,000

Reserves & Surplus 12,00,000

Loan 17,50,000

Current Liabilities 20,50,000

60,00,000

Building 30,00,000

Plant and Machinery 16,00,000

 AMALGAMATION OF COMPANIES

Inventory 4,00,000

Debtors 6,50,000

Cash and Bank 3,50,000

60,00,000

P Ltd. is taking over the Business of Q Ltd. P Ltd. will taken over all Assets and Liabilities except Cash/Bank subject to
following measurements:
a. Building at 25% higher than book value
b. P&M at 70% of book value
c. Debtors at Same value subject to 5% Provision for doubtful debts
d. There is an unrecorded tax liability of Q Ltd. of 85000/-, it is accepted by P Ltd.
Calculate Purchase Consideration
SOLUTION
Calculation of PC
Particulars Amount

Building (at Agreed Value) 37,50,000

Plant and Machinery (at agreed value) 11,20,000
Inventory 4,00,000
Debtors 6,50,000

Less:
Provision for Doubtful debts 32,500
Loans 17,50,000
Current Liability 20,50,000
Tax Liability 85,000

Total Purchase 20,02,500

EXAMPLE 7:
In above Example 6, Purchase Consideration to be discharge in form of Equity Shares of P Ltd. having MP per share
25/- each, Calculate No. of Equity Shares and Pass Journal Entries for Acquisition.
SOLUTION:
No. of shares to be Issued as Purchase Consideration = 20,02,500 ÷ 25 = 80,100 No.
Business Purchase Dr. 20,02,500
To Liquidator of Q Ltd. 20,02,500

Building A/c Dr. 37,50,000

Plant & Machinery A/c Dr. 11,20,000
Inventory A/c Dr. 4,00,000
Debtors A/c Dr. 6,50,000
To Provision for doubtful debts A/c 32,500
To Loan A/c 17,50,000
 AMALGAMATION OF COMPANIES

To Current Liabilities A/c 20,50,000

To Tax Liability A/c 85,000
To Business Purchase A/c 20,02,500

Liquidator of Q A/c Dr. 20,02,500

To Equity Share Capital A/c 8,01,000
To Security Premium A/c 12,01,500

EXAMPLE 8: (PC based on Intrinsic Value or Market Value per share)

Balance Sheet of Transferor as on 31/3/2024
Equity Share Capital (10/-) 12,00,000

Reserves & Surplus 7,00,000

Liabilities 21,00,000

40,00,000

Non-Current Asset (Tangible) 25,00,000

Current Asset 15,00,000

40,00,000

● Goodwill is valued at 6,00,000

● Market Value of NCA = 28,50,000
● Current Assets & Liabilities are at their Proper Value.
● Purchase Consideration shall be discharged based as Intrinsic Value of Transferor & Transferee.
● Intrinsic Value per Share of Transferee is 30/-
SOLUTION:
Intrinsic Value Calculation
Market Value of NCA 28,50,000

Value of Current Asset 15,00,000

Value of Goodwill 6,00,000

(-) Liabilities (21,00,000)

Net Assets for Equity share Holders 28,50,000

(÷) No of Equity Shares 1,20,000 no.

Intrinsic Value Per share (Transferor) 23.75/-

Intrinsic Value per Share (Transferee) 30/-(given)

Payment to Payment in Working Amount

Equity Shareholders of Equity Share in Transferee 1,20,000 X 23.75 / 30 28,50,000

Transferor 95,000 No. x 30/-
 AMALGAMATION OF COMPANIES

EXAMPLE 9: (PC based on Intrinsic Value)

Balance Sheet of Transferor as on 31/3/24
Equity Share Capital (10/-) 12,00,000

Reserves & Surplus 7,00,000

Liabilities 21,00,000

Preference Share Capital (100/-) 10,00,000

50,00,000

Non-Current Asset (Tangible) 30,00,000

Current Asset 20,00,000

50,00,000

(1) Goodwill is values at 8,50,000

(2) Intrinsic values of Transferee = 50/- Per Share
(3) Preference Share Holders of Transferor will get new shares of Transferee in the ratio of 3:2 of 100 each.
Calculate Total Purchase Consideration
SOLUTION:
Working Note: Calculation of Intrinsic value of Transferor
Market Value Non-Current Asset 30,00,000

Value of Current Asset 20,00,000

Goodwill 8,50,000

(-) Liabilities (21,00,000)

(-) Purchase Consideration to Preference Share Holder (15,00,000)

Net Asset available for Equity Share Holder 22,50,000

Intrinsic value = 22,50,000/1,20,000 = 18.75

Working Note 2:
Payment to Payment in Working Amount

Preference Share Holder In Preference share of 10,000/2 x 3 = 15,00,000

of Transferor Transferee 15,000 x 100/-

Equity Share of Transferor Equity Shares of Transferee 1,20,000 x 18.75/50 22,50,000

= 45,000 x 50/-

37,50,000
 AMALGAMATION OF COMPANIES

5. PAYMENT TO DEBENTURE HOLDERS

Purchase Consideration is payable to Equity Shareholders & Preference Shareholders only. Anything payable to
Debenture holders or any other party is not Purchase Consideration.

EXAMPLE 10: (Discharge of Purchased Consideration)

B/S (extract) of Transferor
Equity Share Capital (10/-) 2,00,000 no. 20,00,000

9% Preference Share Capital (100/-) 2,500 no. 2,50,000

11% Debenture (100/-) 15,00,000

Transferee shall discharge following:

(1) Cash ₹ 3,00,000 to Equity Share Holders
(2) 3 Equity Share against every 10 equity share of Transferor. Market Value Per share of Transferee = 18/-
(3) New 12% Debenture to given to Equity shareholders of Transferor of 5,00,000/-
(4) Preference share of Transferor will get equal no of preference share in Transferee to be issued at 10% premium
(Face Value 100/-)
(5) 11% Debenture of Transferor will get new 12% Debenture of Transferee at a value at which same Interest Amount
should be received.
Calculate Purchased Consideration
SOLUTION:
Calculation Purchased Consideration
Payment to Payment In Working Amount

(a) Equity Shareholders (i) Cash - 3,00,000

(ii) Equity Shares 2,00,000/10 x 3 10,80,0000

(iii) 12:1 Debenture -

(b) Preference Shareholders Preference Share 2,500 x 110 2,75,000

Total 21,55,000

Payment to Debenture holders: (Not a part of PC)

Issue of new 12% Debenture = Old Interest amount/New Rate = 1,65,000÷12% = 13,75,000

EXAMPLE 11:
Transferor has an outstanding 7% Debenture of Rs. 12,00,000. Transferee will settle these Debenture at 20% Premium
by Issue of New 8% Debenture at 25% premium.
SOLUTION:
Settlement Value to Debenture holders of Trasferor = 12,00,000 + 20% = 14,40,000 (Payable Value)
No. of New 8% Debenture to be issue against settlement = 14,40,000/125 = 11,520 no.
2nd Entry
Asset A/c Dr.
 AMALGAMATION OF COMPANIES

To Debenture Holders 14,40,000

(Payable value always)

4th Entry (Settlement)

Debenture Holders Dr. 14,40,000
To 8% Debenture 11,52,000
To Securities Premium 2,88,000

EXAMPLE 12:
9% Debenture of 10,00,000 to be settled at 20% premium, by issue of new 10% Debenture to be issued at 25%
Discount.
SOLUTION:
Payable value = 10,00,000 + 20% = 12,00,000
New 10% Debenture no. against settlement = 12,00,000 ÷ 75 = 16,000 no.
Debenture holders A/c Dr. 12,00,000

Discount A/c Dr. 4,00,000

To 10% Debentures 16,00,000

EXAMPLE 13:
6% Debenture of ₹ 7,20,000 to be discharged at 10% Discount by issue of equity share @ 12/- per share. Face Value =
10/-
SOLUTION:
Payable Value to Debenture holders = 72,00,00 – 10% = 6,48,000
New Equity No. to be settled = 6,48,000/12 = 54,000

Debenture Holder Dr. 6,48,000

To Equity Share Capital 5,40,000
To Securities Premium 1,08,000
 AMALGAMATION OF COMPANIES

6. DIFFERENCE BETWEEN AMALGAMATION IN THE NATURE OF MERGER AND

AMALGAMATION IN THE NATURE OF PURCHASE.

Best of Distinction Amalgamation in the Nature of Merger Amalgamation in the Nature of

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

b) Shareholders of Equity shareholders holding 90% equity shares Equity shareholders need not become
transferor company in transferor company become shareholders of shareholders of transferee company.
transferee company.

c) Purchase Purchase consideration is discharged wholly Purchase consideration need not be

Consideration by issue of equity shares of transferee discharged wholly by issue of equity
company (except cash only for fractional shares.
shares)

d) Same Business The same business of the transferor company The business of the transferor company
is intended to be carried on by the transferee need not be intended to be carried on by
company. the transferee company.
e) Recording of The assets & liabilities taken over are The assets & liabilities taken over are
Assets & Liabilities recorded at their existing carrying amounts recorded at their existing carrying
except where adjustment is required to amounts or the basis of their fair
ensure uniformity of accounting policies. values.
f) Method of Journal entries for recording the merger are Journal entries for recording the
Accounting passed by pooling of interest method. purchase of business are passed by
purchase method.
All Reserves & Surplus of Transferor are also No R&S are required to be maintained
taken up by Transferee. except Statutory Reserves EG.
IAR/EPR
Ex. GR, CR, P&L A/C, IAR , EPR, CRR, DRR,
etc.

ACCOUNTING ENTRIES
IN THE BOOK OF TREE
In the Nature of Purchase In the Nature of Merger
(Purchase Method) (Pooling of Interest Method)

Business Purchase A/c (PC) Dr. Business Merger A/c (PC) Dr.
To Liq. of Transferor Co. A/c (PC) To Liq. of Transferor Co. A/c (PC)
 AMALGAMATION OF COMPANIES

Sundry Assets A/c (Agreed value) Dr. All Sundry Assets A/c (Book value) Dr.
Goodwill A/c (Bal. Fig) Dr. Gen. Res or P&L A/c (Bal. Fig) Dr.
To Liabilities A/c (Payable Value) To All Liabilities A/c (Payable Value)
To Business Purchases A/c To Business Merger A/c (PC)
To CR (Bal. Fig) To Reserves and Surplus (Book value)

Payment of PC: Payment of PC:

Liquidator A/c Dr. Liquidator A/c Dr.
To Cash A/c To Cash A/c
To Equity Share Capital A/c To Equity Share Capital A/c
To Pref. Share Capital A/c To Pref. Share Capital A/c
To Security Premium A/c To Security Premium A/c

Cancellation of Receivables and Payables Cancellation of Receivables and Payables

Payables A/c Dr. Payables A/c Dr.
To Receivables A/c To
Receivables A/c
For Payment of Liability:
Liability A/c (e.g., Debenture holder’s A/c) Dr. For Payment of Liability:
To Cash A/c Liability A/c (e.g., Debenture holder’s A/c) Dr.
To New Liability A/c To Cash A/c
(Debentures are taken over at agreed value and settled To New Liability A/c
by issue of new debentures in above entry) (Debentures are taken over at agreed value and settled by
issue of new debentures in above entry)
For Payment of Expenses/Unrecorded Liability:
CR / Goodwill A/c Dr. For Payment of Expenses/Unrecorded Liability:
To Cash A/c Gen. Res. or P&L A/c Dr.
(In balance sheet goodwill and CR should set off to show To Cash A/c
net figure)

For creation of Statutory Reserves:

Amalgamation Adjustment Reserve Dr. No Statutory reserve to be created separately, Since
To Statutory Reserves A/c they are already recorded in 2nd Entry above.
(Following are statutory reserves:
1. Invst. Allowance Res.
2. Export Profit Res.
3. Foreign Project Res.
4. Tea Development Res.
 AMALGAMATION OF COMPANIES

5. Shipping Res.
6. Site Restoration Fund
*Amalg. Adjust. Reserve should be shown as a
separate line item under the head R & S

For Unrealised Profit:

Upstream Transaction:
Goodwill A/c Dr. For Unrealised Profit:
To Stock A/c Upstream and Downstream Transaction:
Downstream Transaction: General Reserve A/c Dr.
General Reserve A/c Dr. To Stock A/c
To Stock A/c

It is important to note that in case of Amalgamation in the nature of merger question may specify revalued figures
or Market values of Assets, such values would be used for the purpose of calculation of PC.

EXAMPLE 14: (Accounting for Transferee Books – Purchase Method) (Master Problem)
Balance Sheet as on 31/3/24
Particulars Transferee Transferor

Equity Share Capital (10/-) 12,00,000 8,00,000

9% Preference Share Capital (10/-) 8,00,000 -

8% Preference Share Capital (10/-) - 6,00,000

General Reserve 5,00,000 3,00,000

Profit & Loss A/c 3,50,000 2,50,000

Export Profit Reserve - 50,000

7% Debenture (100/-) 7,50,000 -

6% Debenture (100/-) - 6,00,000

Creditors 4,00,000 4,00,000

40,00,000 30,00,000

PPE 13,00,000 9,00,000

Investments 9,00,000 7,00,000

Inventory 10,00,000 7,00,000

Trade Receivables 5,00,000 6,00,000

Cash & Bank Balance 3,00,000 2,00,000

40,00,000 30,00,000

(1) 8% Preference Shareholders shall be given New 9% Preference Shares at 20% Increase in value (Shares to be
issued at Par)
(2) Purchased Consideration to Equity Share Holder shall be discharged as under:
 AMALGAMATION OF COMPANIES

Cash = 3,00,000
Equity Shares of Transferee in 5:4
(3) Market Value per share of Transferee is 28/-
(4) Market Value of PPE & Investments of Transferor are 11,50,000 & 6,20,000
(5) Trade Receivable shall be subject to a Provision on Doubtful Debts @2%
(6) 6% Debenture Holder will get new 7% Debenture at an adequate amount. So that Interest Amount would be
same
(7) EPR to be maintained for 2 Years more years.
(8) There is unrecorded Liabilities of Transferor towards creditor for goods of ₹ 30,000 which is also assumed by
Transferee.
Required:
(a) Calculate Purchase Consideration.
(b) Pass Journal entries in the Books of Transferee.
(c) Prepare Balance Sheet after takeover of Transferee.
Assume Amalgamation in the nature of Purchase.
SOLUTION:
Working Note: – 1 Calculation of Purchase Consideration
Payment to Payment in Working Amount

Equity Shareholders Cash - 3,00,000

Equity Shareholders Equity shares of Transferee 80,000 X 5/4 28,00,000

Preference Shareholder 9% Preference Shares 6,00,000 + 20% 7,20,000

Total 38,20,000

Working Note-2 Settlement of 6% Debentures

● 6% Debenture of Transferor = 6,00,000
● Interest Amount @ 6% = 36,000/-
● New Debenture Interest Rate 7%
● Therefore, New Debenture Value = 36,000 ÷ 7%
● 7% Debenture = 5,14,286/- (Payable Value)

Important Facts (Not a Part of Solution in Exam)

a) All Assets and Liabilities to be Recorded.
b) Assets to be recorded at Market Value if given.
c) Provision for doubtful debts to be credited separately.
d) Export Profit Reserve (EPR) is not a liability therefore will not come under 2nd Entry of Assets/Liabilities taken over.
 AMALGAMATION OF COMPANIES

Journal entries (Books of Transferee)

Business Purchase A/c Dr. 38,20,000
To Liability of Transferor A/c 38,20,000
(Being Business taken over)

PPE A/c Dr. 11,50,000

Investment A/c Dr. 6,20,000
Inventory A/c Dr. 7,00,000
Trade Receivable Dr. 6,00,000
Cash & Bank Dr. 2,00,000
Goodwill A/c Dr. (BF) 15,06,286
To Provision for DD A/c 12,000
To Creditors A/c 4,30,000
To Debenture Holder of Transferor A/c 5,14,286
To Business Purchase A/c 38,20,000
(Being Assets & Liabilities are recognised & Goodwill
recorded

Liquidator of Transferor A/c Dr. 38,20,000

To 9% Preference Share Capital 7,20,000
To Cash A/c 3,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 18,00,000
(Being Purchase Consideration Discharged)

Debenture Holder of Transferor A/c Dr. 5,14,286

To 7% Debenture A/c 5,14,286
(Being Outstanding Debenture are issued New with 7%
Interest)

Amalgamation Adjustable Reserve Dr. 50,000

To Expenses Profit Reserve 50,000
(Being EPR maintained)

Balance Sheet (after Amalgamation)

Shareholders Fund

(I) Share Capital 1 37,20,000

(II) Reserve & Surplus 2 26,50,000

Non-Current Liabilities

(I) Long Term Borrowings 3 12,64,286

Current Liability

(i) Trade Payable 4 8,30,000

84,64,286

Assets
 AMALGAMATION OF COMPANIES

Non-current Assets:

(a) PPE Tangible & Intangible 5 40,56,286

(b) Investment 6 15,20,000

Current Assets:

(a) Inventory 7 16,00,000

(b) Trade Receivable 8 10,88,000

(c) Cash & Cash equity 9 2,00,000

Total 84,64.286

Notes to Accounts:
Share Capital

(a) Equity Share Capital of 10/- each 12,00,000

+ Issue of Purchase consideration 10,00,000 22,00,000

(b) 9% Purchased Share Capital of 10/- each + Issue of 8,00,000

Purchase Consideration 72,00,000 15,20,000

37,20,000

Reserve & surplus 26,50,000

General Reserve 5,00,000

Profit & Loss 3,50,000

Securities Premium 18,00,000

EPR 50,000

(-) AAR (50,000)

Long TERM Borrowings 12,64,286

(a) 7 % Debenture 7,50,000

+ New Issue of 7% Debentures 5,14,286

Trade Payable 8,30,000

Creditor of Transferee 4,00,000

Creditors Recorded Transferor 4,30,000

PPE

(a) Tangible 13,00,000 24,00,000

Transferee 11,00,000

Transferor

(b) Intangible

Goodwill 16,06,286

40,56,286

Investments

Transferee 9,00,000

Transferor 6,20,000 15,20,000

 AMALGAMATION OF COMPANIES

Inventory

Transferee 10,00,000

Transferor 6,00,000 16,00,000

Trade Receivable

Transferee 5,00,000

Transferor 6,00,000

(-) Provision (12,000) 10,88,000

Cash & Bank 2,00,000

Transferee 3,00,000

Transferor 2,00,000

(-) Purchase Consideration (3,00,000)

EXAMPLE 15: (Amalgamation in the nature of Merger)

Balance Sheet
X ltd. Y ltd.

Equity Share Capital (10/-) 15,00,000 12,00,000

General Reserve 3,00,000 2,00,000

Securities Premium 1,00,000 50,000

Revaluation Reserve 50,000 20,000

Liabilities 2,50,000 1,30,000

22,00,000 16,00,000

Property Plant & Equipment 9,00,000 7,00,000

Investments 4,00,000 2,00,000

Current Assets 9,00,000 7,00,000

22,00,000 16,00,000

(1) X Ltd. & Y Ltd. decided to merge their Business & form a New Company XY Ltd.
(2) XY Ltd. shall issue new equity share to Shareholders of X Ltd. & Y Ltd. at 10/- each (at Par)
(3) Exchange Ratio for issue of New shares is 4:5
Required:
(a) Calculate Purchase Consideration
(b) Journal entries in the books of XY Ltd.
SOLUTION:
WN 1 - Calculation of PC
(i) For Shareholders of X Ltd.
Equity Shares in XY Ltd. = 1,50,000/5X4 = 1,20,000 no.
PC Value = 1,20,000 X 10 = 12,00,000
(ii) For Share Holder of Y Ltd.
Equity Shares in XY Ltd. = 1,20,000/5X4
 AMALGAMATION OF COMPANIES

PC Value = 9,60,000
Journal Entries in the Books of XY Ltd. (Transferee)
Business Purchase A/c Dr. 21,60,000
To Liquidator of X Ltd. A/c 12,00,000
To Liquidator of Y Ltd A/c 9,60,000

PPE A/c Dr. 16,00,000

Investment A/c Dr. 6,00,000
Current Asset A/c Dr. 16,00,000
To Liabilities 3,80,000
To Business Purchase 21,60,000
To Revaluation Reserve 70,000
To Securities Premium 1,50,000
To General Reserve (Bal. Fig.) 10,40,000

Liquidator of X Ltd. Dr. 12,00,000

Liquidator of Y Ltd. Dr. 9,60,000
To Equity Share Capital 21,60,000

Balance of XY Ltd.
Equity Share Capital 10/- each 21,60,000

General Reserve 10,40,000

Securities Premium 1,50,000

Revenue Reserve 70,000

Liabilities 3,80,000

38,00,000

PPE 16,00,000

Investment 6,00,000

Current Asset 16,00,000

38,00,000

EXAMPLE 16:
Same as Example 15 But Exchange Ratio is 9:8 for calculation of PC
Calculate Purchase Consideration & Pass Journal entries in the Books of XY Ltd. (Pooling of Interest Method)
SOLUTION:
WN 1 - Calculation of PC
For Shareholders of X Ltd.
Equity Shares in XY Ltd. = 1,50,000 x 9/8 = 1,68,750 no.
PC Value = 1,68,750 X 10 = 16,87,500
For Share Holder of Y Ltd.
Equity Shares in XY Ltd. = 1,20,000 x 9/8 = 1,35,000
 AMALGAMATION OF COMPANIES

PC Value = 1,35,000 X 10 = 13,50,000

PPE A/c Dr. 16,00,000

Investment A/c Dr. 6,00,000

Current Asset A/c Dr. 16,00,000

General Reserve (Bal. Fig.) Dr. 3,37,500

To Liabilities 3,80,000

To B/P 30,37,500

To Revaluation Reserve 70,000

To Securities Premium Reserve 1,50,000

To General Reserve 5,00,000

 AMALGAMATION OF COMPANIES

7. Books of Transferor Company

1. Transfer all the Assets and Liabilities to Realisation A/c

2. EQ Share Capital, Reserves, Losses, Dividend Payable, Fict. Assets shall be transferred to ESH A/c

3. PSC is to be transferred to PSH A/c

4. Cash and Bank – If taken over then transfer it to Realisation A/c otherwise Make it separately

5. Raise PC in Credit side of Realisation A/c

6. Before closing Realisation A/c, close Pref. Share Holder A/c after discharging PC to them so that if there
remains any difference in PSH A/c it will be transferred to Realisation A/c

7. Close Realisation A/c, Balance of this account will be transferred to ESH A/c

8. Discharge PC (In the form of Cash and Shares) to ESH.

EXAMPLE 17:
In Above Example No. 15, Close the books of X Ltd.
SOLUTION:
Closing the Books of X Ltd.
Target = To Close All Assets Ledger Balance and all Liabilities Ledger Balance through Realization A/c
To Close Equity Share Capital and R&S Ledger through Equity Shareholders A/c

Realization A/c
Particular Amount Particular Amount

To PPE 9,00,000 By Liabilities 2,50,000

To Investment 4,00,000 By XY Ltd. (PC) 12,00,000

To Current Asset 9,00,000 By Equity Shareholders A/c (b/f Loss) 7,50,000

Equity Shareholders A/c

Particular Amount Particular Amount

To Realisation A/c (Loss) 7,50,000 By Equity Share Capital 15,00,000

To Equity Share of XY Ltd. 12,00,000 By General Reserve 3,00,000

(final settlement)

By Securities Premium Reserve 1,00,000

By Revaluation Reserve 50,000

 AMALGAMATION OF COMPANIES

For Purchase Consideration due (Receivable from XY Ltd.)

XY Ltd. A/c Dr. 12,00,000
To Realization 12,00,000

For receiving Purchase Consideration

Equity Share of XY Ltd A/c Dr. 12,00,000
To XY Ltd 12,00,000

For Distributing Purchase consideration to Equity share Holder

Equity share Holders A/c Dr. 12,00,000
To equity shares of XY Ltd. 12,00,000

EXAMPLE 18: (Takeover of selected Asset & Liabilities)

Balance Sheet
A Ltd. B Ltd.

Equity Share Capital (10/- each) 10,00,000 7,00,000

GR 3,00,000 4,00,000

Bank Loan 9,00,000 8,00,000

Creditors 4,00,000 3,00,000

26,00,000 22,00,000

Land & Building 8,00,000 6,00,000

Plant & Machinery 5,00,000 4,00,000

Investments 3,00,000 5,00,000

Goodwill 1,00,000 1,00,000

Debtors 6,00,000 5,00,000

Cash & Bank 3,00,000 1,00,000

26,00,000 22,00,000

(1) A Ltd acquired The Business of B except Creditors, Investment & Cash at Bank.
(2) Investments will be realised by B @ 10% above Book Value.
(3) Creditors to be paid Rs. 2,80,000 by B in full settlement.
(4) Liquidation expenses to be borne by B ₹ 1,00,000.
(5) Goodwill value of B is useless.
(6) Market Value of Land & Building of B = 9,00,000
Required:
(a) Calculate Purchased consideration (Purchased Consideration shall be discharged in form of Equity Shares @
30/- each)
(b) Close Books of B Ltd.
(c) Prepare B/s of A Ltd after Amalgamation.
 AMALGAMATION OF COMPANIES

SOLUTION:
Purchase Consideration Calculation
Land Building 9,00,000

Plant & Machinery 4,00,000

Debtors 5,00,000

(-) Bank Loan (8,00,000)

Purchase Consideration 10,00,000

Purchase consideration to be discharged in Equity Shares @ 30/-

Therefor No. Equity shares to be Issued = 10,00,000/30 = 33,333no X 30/-
Remaining to be paid in cash = 0.33 X 30/- = 10/-
Realization A/c Dr. 5,00,000
To Investment A/c 5,00,000

Bank A/c Dr. 5,50,000

To Realization 5,00,000

Creditors A/c Dr. 3,00,000

To Realization 3,00,000

Realization A/c Dr. 2,80,000

To Bank 2,80,000

Realization A/c
Particular Amount Particular Amount

To Land & Building 6,00,000 By Bank Loan 8,00,000

To Plant & Machinery 4,00,000 By Creditors 3,00,000

To Investment 5,00,000 By A Ltd. (PC) 10,00,000

To Debenture 5,00,000 By Bank 5,50,000

To Goodwill 1,00,000

To Bank 2,80,000

To Bank 1,00,000

To Equity Shareholders 1,7,0000

Cash at Bank A/c

To Balance B/d 1,00,000 By Realization 2,80,000

To Realization 5,50,000 By Realization 1,00,000

To A Ltd 10 By Equity Shares 2,70,010

6,50,010 6,50,010
 AMALGAMATION OF COMPANIES

Equity Shareholders A/c

Particular Amount Particular Amount

To Equity Shares (PC) 9,99,990 By Equity Share Capital 7,00,000

To Cash (b/f) 2,70,010 By General Reserve 4,00,000

By Realization 1,70,000

12,70,000 12,70,000
 AMALGAMATION OF COMPANIES

8. ELIMINATION OF UNREALISED PROFIT/LOSS ON UNSOLD STOCK IN INTER CO.

TRANSACTION
Transaction between Transferee co. and Transferor co. for sale purchase of goods/assets may be made at more than
actual cost (i.e. at Profit margin). In that case, unrealized profit on unsold stock shall be eliminated while Preparing
Final Balance Sheet of Transferee Co. Such Inter company transactions can be of two types:
1. Downstream Transaction – Sale of Goods/Assets by Transferee Co. to Transferor co.
2. Upstream Transaction – Sale of Goods/Assets by Transferor co. to Transferee co.
Downstream Transaction Upstream Transaction

Profit is earned by Transferee co. and unsold stock is Profit is earned by Transferor co. and unsold stock is
laying with Transferor co. laying with Transferee Co.

Such profit is to be eliminated from Profit and Loss A/c of Such profit is to be eliminated from Profit & Loss A/c of
Transferee co. as under: Transferor co. (in case of Merger) or Capital
Profit and Loss A/c Dr. Reserve/Goodwill A/c (in case of Purchase) as under:
To Stock A/c (Merger) Profit and Loss A/c Dr.
To Stock A/c

(Purchase) Goodwill/CR A/c Dr.

To Stock A/c

Note: Above entries are based on Profit Elimination. In case of Loss elimination Profit and Loss A/c or Goodwill/CR
A/c shall be credited and Stock shall be debited.

EXAMPLE 19:
A Ltd. sold goods costing 1,20,000 to B Ltd. @ 1,50,000. After some time, A Ltd. acquired Business of B Ltd. Inventory
of B Ltd. includes 30,000/- goods purchased from A & not yet sold. Calculate unrealized profit and pass Journal Entry
for elimination of unrealized Profit.
SOLUTION:
Profit Margin included in the above transaction = 30,000/1,50,000 X 100 = 20% as sale
Profit element in Unsold Inventory with B = 30,000 X 20% = 6000
Journal Entry (Books of A Ltd. Transferor)
GR/ Profit & Loss A/c Dr. 6,000
To Stock 6,000

Example 20:
Case 1: Downstream Transaction
Transferee sold goods to Transferor Costing ₹ 5,00,000 at ₹ 7,50,000
 AMALGAMATION OF COMPANIES

In Balance sheet of Transferor Total inventory is appearing at 12,00,000. Which includes goods from transferee ₹
3,00,000
Inventory is taken over at Book Value
Calculate Unrealised Profit to be eliminated
Cost Sale Profit

Total 5,00,000 7,50,000 2,50,000

Unsold ? 3,00,000 1,00,000

Unrealised Profit to be Eliminated = 1,00,000/-

Case 2:
Same as Case 1 but Inventory is taken over at 15% less than Book Value
Total Unrealised Profit to be eliminated 5,00,000

(-) already eliminated @15% of 3,00,000 (45,000)

Unrealised Profit shall be eliminated Separately 55,000

 AMALGAMATION OF COMPANIES

9. OTHER IMPORTANT ADJUSTMENTS

1. DIVIDEND DECLARED & Dividend declared: It is declared out of free Profit & Loss A/c Dr.
PAID reserve i.e. General Reserve or Profit & Loss General Reserve A/c Dr.
(Refer Q203 & 208) a/c. To Dividend Payable A/c
Dividend in form of %: Such % is always
applied as paid up share capital. Dividend Payable A/c Dr.
To Bank A/c

2. REVALUATION OF PPE If question asks for revaluation of PPE of PPE A/c Dr.
(FIXED ASSETS) Transferor and Transferee: To Revaluation Reserve
(Refer Q203 & 208)
Profit & Loss A/c Dr.
To PPE a/c

3. SETTLEMENT OF ● Sometimes it is not clear whether New

PREFERENCE SHARES Preference shares to be issued by Refer Example 21
OF TRANSFEROR AT Transferee will be at Par OR @
PREMIUM Premium.
● In that case, check premium % given in
the question is attached with
preference shares of Transferor or with
preference shares of Transferee.
● If premium % is attached with New
Issue of Transferee, then only New
Issue Price will be at premium
otherwise at par.

4. PURCHASE ● Transferee Company is issuing partly

CONSIDERATION paid-up shares to discharge Purchase Refer Example 22
ISSUED IN FORM OF Consideration.
PARTY PAID UP SHARES ● When partly paid-up shares are being
(Refer Q402) issued, transferee Company may
announce premium separately.
● In such case, the issue price of share
would be Partly Paid-up Value +
Premium Amount.

5. GOODWILL Sometimes question require us to calculate Goodwill by following methods:

CALCULATION 1. Avg. Profit Method normal profit = capital employed * nrr
capital employed is net asset that is PC
2. Super Profit Method actual profit - normal profit
 AMALGAMATION OF COMPANIES

(Refer Q204) 3. Capitalisation Method avg porofi/nrr -actual capital employed

One common observation in all above methods is we should always exclude

following items while calculating Goodwill:
a) Non-Trade Investments from Capital Employed working
b) Non-Trade Incomes, Non-recurring Incomes/Expenses and Abnormal
Items from Past Profits.

EXAMPLE 21:
CASE 1: 12% preference share of Transferor will be paid by issue of new 14% preference shares at 20% premium. B/S
of Transferor shows PSC O/s = 1,50,000
Therefore, Settlement of Rs 1,50,000 @ 120/- per (No of new issue = 1,50,000/20 = 1,250 no.)
Case 2: 2,50,000/- 10% preference share capital will be discharged @ 20% premium by issue of new 9% preference
shares of Transferee
Therefore, Settlement value = 2,50,000+20% = 3,00,000
By issue of New 9% preference share @ 100/- (No. of new issue = 3,000 no.)
Case 3: Rs. 1,00,000, 9% preference shareholders will be paid @ 10% premium by issue of new preference share at
10% premium.
Settlement value = 1,10,000
By issue of new share @110 (No. = 1,10,000/110 = 1000 no.)

EXAMPLE 22:
Transferor has 1,20,000 no. of shares outstanding. Transferee shall issue Rs. 100 share at 80% paid up with 30/-
premium in the ratio of 3:4
SOLUTION:
New No. to be issued = 1,20,000 X ¾ = 90,000 no.
Purchase Consideration = 90,000 No. X 110/- = 99,00,000/-
Conclusion: Purchase Consideration is discharged in form of shares at Issued price always.
Issued price = Paid up Price (+) Premium OR (-) Discount

YEAR 1 2 3 4
NP 120000 150000 130000 140000 avg profit= 84000+
(36000) (36000) (36000) (36000) 126000+114000+1040
12000 00/4=102000

12% investment 500000 out of 60% is non trade investment

abnormal loos on 3rd year 12000