Purchase Consideration:

Method of Calculating Purchase Consideration:

The amount of purchase consideration can be computed under any of the following four methods:-

1. Lump Sum Method 2. Net Payment Method 3. Net Worth or Net Assets Method 4. Intrinsic Value Method (Shares Exchange
Method).

1. Lump sum Method

Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation.

E.g. 1.

A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.

2. A purchasing company agreed to take over a business of selling company for Rs. 5, 00,000. In such a case, the purchase
consideration is Rs. 5,00,000. No calculations are needed.

2. Net Payment Method:

‘Purchase Consideration’ under this method is taken as the aggregate of all payments made in the form of shares, debentures,
other securities and cash to the shareholders of the transferor company.

The agreement between selling company and purchasing company may specify the amount payable to the share-holders of the selling
company in the form of cash or shares or debentures in purchasing company.

AS – 14 states that consideration for amalgamation means the aggregate of shares and other securities issued and the payment
made in the form of cash or other assets by transferee company to the share-holders of transferor company.

The following points are to be noted while ascertaining the purchase price under net payment method:

(i) The assets and liabilities taken over by the transferee company and the values at which they are taken over are not relevant to
compute the purchase consideration.

(ii) All payments agreed upon should be added, whether it is for equity shareholders or preference share-holders.

(iii) If any liability is taken over by purchasing company to be discharged later on, such amount should not be deducted or added while
computing purchase consideration.

(iv) When liabilities are not take over by the transferee company, they are neither added nor deducted while computing consideration.

(v) Any payment made by Transferee Company to some other party on behalf of Transferor Company are to be ignored.

3. Net Assets Method:

Net Assets Method is used when all the modes of discharging the purchase consideration (e.g. Pref. Shares, Equity shares or cash
payable to shareholders of transferor company) are not given and hence where Net Payment Method cannot be adopted. Under this
Method, purchase consideration is ascertained by aggregating the agreed values of only those assets which have been taken over by
the transferee company and deducting it from the agreed value of liabilities taken over.

(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net Assets
The following relevant points are to be noted while ascertaining the purchase price under this method:

(i) If the transferee company agrees to take over all the assets of the transferor company, it would mean inclusive of cash and Bank
balances.

(ii) The term all assets, however, does not include fictitious assets, like Debit balance of Profit and Loss Account, Preliminary
Expenses Account, Discount and other expenses on issue of shares and Debentures, Heavy Advertising Expenses Account etc.

(iii) Any specific asset, not taken over by transferee companyTransferee Company, should be ignored while computing the purchase
price,

(iv) If there is any goodwill, pre-paid expenses etc. the same are to be included in the assets taken over unless otherwise stated,

(v) The term liabilities will always signify all liabilities to third parties. Trade liabilities are those incurred for the purchase of goods
such as Trade Creditors or Bills Payable,

(vi) Other liabilities like Bank Overdrafts, Tax payable, Outstandingoutstanding expenses etc. are not a part of trade liabilities.

(vii) Liabilities do not include accumulated or undistributed profits like, General Reserve, Securities Premium, Workmen Accident
Fund, Insurance Fund, Capital Reserve, Dividend EquilisationEqualization Fund etc.

4. Intrinsic Value Method (Shares Exchange Method).: Method # 4. Intrinsic Value Method (Shares Exchange Method):

Under this method, Intrinsic Value of shares is calculated using Net asset method and then the Share Proportion is computed net value
of assets is calculated according to net assets method and it is divided by the value of one share of transferee company which gives the
total number of shares to be received by the share-holders of transfer or company from the transferee company. When the number of
shares to be received by the transferor company is known then it is divided by the existing shares of the transferor company and thus
the ratio of shares can be found out.

Intrinsic Value = Assets available for equity shareholders / Number of equity shares

Suppose, in exchange of 50 shares of transfer or company, 100 shares of transferee company is available, then every one share in the
transferor company, two shares in the transferee company is available. Therefore, the ratio is 1: 2. This method is also known as Share
Proportion Method.

Intrinsic Value = Assets available for equity shareholders/Number of equity shares

Fractional Shares:

Sometimes owing to certain ratio in which shares are to be given, it is not possible to find the whole number of shares. Any fraction
of shares so arrived at, in the absence of any agreement, is always settled in cash at market value.

The choice of method depends on availability of information. If information is available on all modes of discharging the purchase
consideration (e.g. preference shares, equity shares or cash payable to shareholders of Transferor Company) along-with their amounts,
then Net Payment Method should be used. In other cases ‘Net Assets’ Method should be used.
Problems:

Illustration 1:

X Ltd. agrees to acquire the business of Y Ltd. on the following terms:

1. The shareholders of Y Ltd. are to be paid Rs. 25 in cash and are offered four shares of Rs. 10 each in X Ltd. for every share in Y

Ltd.

Y Ltd. has 50,000 equity shares outstanding as on the date of amalgamation.

2. The debenture holders holding 5,000 debentures of Rs. 100 each are to be redeemed at a premium of 10%.

3. Cost of liquidation amounting to Rs. 25,000 are to borne by X Ltd.

Calculate the value of purchase consideration.

Illustration 2:

A Ltd. agrees to absorb B Ltd., the consideration being:

1. The assumption of trade liabilities of Rs. 50,000.

2. The payment of the costs of liquidation Rs. 2,000.

3. The redemption of 80% debentures of Rs. 6, 00,000 at a premium of 10%.

4. The payment of Rs. 20 p.aper share. share in cash and the exchange of two fully paid Rs. 10 shares in A Ltd. for every share of Rs.

25 in B Ltd. The share capital of the vendor company consists of 20,000 shares of Rs. 25 each fully paid.

Calculate the purchase consideration as per AS-14.

Illustration 3:

X Ltd. is acquired by Y Ltd., the consideration being the takeover of liabilities; the payment of cost of acquisition as a part of purchase

consideration not exceeding Rs. 20,000 (actual cost Rs. 17,000); the payment of the debentures Rs. 1,00,000 at a premium of 10% in

9% debentures issued at par; and the payment of Rs. 16 per share in cash and allotment of one 14% 0 preference share of Rs. 10 each

and 6 equity shares of Rs. 10 each fully paid for every 4 shares in X Ltd. The number of shares of the vendor company (X Ltd.) is 2,

00,000 of Rs. 10 each fully paid.

Calculate purchase consideration as per AS-14.

Ans:
Illustration 4:
Following in the Balance Sheet of Abi Ltd.:
1. The vendee company agrees to discharge the 7% debentures at a premium of 10% by issuing 9% debentures of vendee company.

2. Preference shares are discharged at a premium of 10% by issuing 15% Preference Shares of Rs. 100 each in vendee company.

3. For every 2 Equity shares in Abi Ltd. 3 Equity shares of Rs. 10 each in vendee company will be issued, in addition to cash payment
of Rs. 3 per Equity share in Abi Ltd.

Calculate purchase consideration under Net Payments Method on the following basis:assuming all the assets and liabilities are taken
over by the vendor company

1. The vendee company agrees to discharge the 7% debentures at a premium of 10% by issuing 9% debentures of vendee

company.

2. Preference shares are discharged at a premium of 10% by issuing 15% Preference Shares of Rs. 100 each in vendee

company.
3. For every 2 Equity shares in Abi Ltd. 3 Equity shares of Rs. 10 each in vendee company will be issued, in addition to cash

payment of Rs. 3 per Equity share in Abi Ltd.

Illustration 5: The Balance Sheet of Digvijay Ltd. on 31st March, 2013 was as under:

Sumant Ltd. absorbs Digvijay Ltd. on the following terms:

1. Sumant Ltd. to take over sundry creditors.

2. It will also take over land and buildings, Plant and Machinery and investments at 120% of book values, sundry debtors at 90% of
book values and goodwill at Rs. 70,800.

3. Liability to debentures including interest to be met by issue of Rs. 5,00,000, 15% debentures by Sumant Ltd.

Calculate purchase consideration.

Illustration 6:
Calculate purchase consideration from the following given Balance Sheet:
Illustration 7:
Gunjan Ltd. agreed to acquire the business of Konar Ltd. as on December 31, 2012 on which date the balance sheet of Konark Ltd.
was summarized as follows:

Liabilities Rs Assets Rs
Capital ( in fully paid shares of Rs 10 each ) 6,00,000 Goodwill 1,00,000
General Reserve 1,70,000 Plant & Buildings 6,40,000
Profit & Loss Account 1,10,000 Stock 1,68,000
6% Debentures 1,00,000 Debtors 36,000
Creditors 20,000 Cash 56,000
10,00,000 10,00,000

The consideration payable by Gunjan Ltd was,

1. A cash payment of Rs 2.50 for every share in Konark Ltd.

2. The issue of 90,000 Rs 10 shares at an agreed value of Rs 15 per share and

3. The issue of such an amount of fully paid 5% debentures in Gunjan Ltd as is sufficient to discharge 6% debentures in Konark Ltd

at a premium of 20%.

The directors of Gunjan Ltd valued Plant and Buildings at Rs 12,00,000 and stock at Rs 1,42,000 and created a provision of 5% on

debtors against doubtful debts. Cash , and Creditors are taken over at book values. The expenses of liquidation came to Rs 5,ooo.

Compute the amount of Purchase Consideration under Net payment method and Net asset method and explain for difference in the

amounts under both methods

Illustration 8:

BK Ltd is formed to take over Bunty Ltd and Kuber Ltd. Their Summary Balance Sheets on the date of amalgamation are as below :
Balance Sheets as on 31st March, 2012.

Liabilities Bunty Kuber Assets Bunty Kuber Ltd

Ltd Ltd Ltd Rs
Rs Rs Rs
Share Capital of Rs 10 each 2,40,000 1,60,000 Goodwill - 25,000
Equity Shares 2,40,000 1,60,000 Buildings 1,50,00 1,40,000
0
11% Preference Shares 1,50,000 1,00,000 Machinery 80,000 60,000
General Reserve 45,000 40,000 Furniture 10,000 5,000
Profit & Loss A/c 30,000 21,000 Investments 1,40,00 80,000
0
9% Debentures 1,00,000 1,00,000 Debtors 1,65,00 60,000
0
Sundry Creditors 60,000 40,000 Stock 75,000 90,000
Other Liabilities 40,000 24,000 Cash & Bank 13,000 8,000
Other Current Assets 20,000 10,000
Share Issue Expenses 12,000 7,000
6,65,000 4,85,000 6,65,00 4,85,000
0
BK issued 10,000 equity shares of Rs 10 each to the public at a premium of 10%. Bunty Ltd and Kuber Ltd were taken over by BK ltd
on the following terms:

BUNTY LTD

(a ) Equity Shareholders are to be issued 7 Equity Shares of Rs 10 at par in BK Ltd and are to be paid Rs 5 in cash for surrender of
each 6 shares.

(b) Preference shareholders are to be paid at 10% premium by 12.50% preference shares in BK Ltd issued at par.

(c) All Assets and Liabilities are valued at book value except Machinery which is valued at 10% below book value and Debtors are
worth Rs 1,60,000.

(d) Liquidation expenses of Rs 12,500 are to be borne by BK Ltd

(e ) Discharge the debentures of Bunty Ltd at a discount of 10% by the issue of 13% debentures of Rs 100 each in BK Ltd.

KUBER LTD

(a ) Cash Rs 3,000 is to be retained for liquidation expenses.

(b ) Debtors and Investments are valued at 90% of cost.

(c ) Machinery and stock are valued at 10% above cost and other assets and liabilities are valued at book value except Fictitious
Assets.

(d ) Preference Shareholders are to be paid at 10% premium by 12.50% preference shares in BK Ltd issued at par.

(e ) Balance of Purchase consideration is payable in equity shares at par.

(f ) Discharge the debentures of Kuber Ltd. At Par by the issue of 13% Debentures of RS 100 each in BK Ltd.

The Face value of Equity Shares and Preference shares in BK Ltd is Rs 10 each.

Calculate Purchase Consideration

Illustration 9:

A Ltd and B Ltd carrying on similar business decided to amalgamate and for this purpose a new company AB Ltd. was formed to take
over all assets and liabilities of both the companies. It is agreed that fully paid shares of Rs 100 each shall be issued by the new
Company to the value of net assets of each of old companies.

Summary Balance Sheet of A Ltd. as at 31st March 2012.

Liabilities Rs Assets Rs
Shares of Rs 50 each 50,000 Goodwill 5,000
General Reserve 20,000 Land & Buildings 17,000
Profit & Loss A/c 3,000 Plant & Machinery 24,000
Sundry Creditors 4,000 Stock 10,000
Bills Payable 4,000 Debtors 12,000
Furniture & Fittings 5,000
Cash at Bank 8,000
81,000 81,000
Summary Balance Sheet of B Ltd. as at 31st March 2012.

Liabilities Rs Assets Rs
800 Shares of Rs 50 each 40,000 Goodwill 2,000
Bank Overdraft 8,000 Land & Buildings 10,000
Sundry Creditors 8,000 Plant & Machinery 16,000
Stock 7,500
Furniture & Fittings 7,500
Debtors 7,000
Cash 300
Profit & Loss A/c 5,700
56,000 56,000
The following is the accepted scheme of valuation of business of the two companies:

A Ltd : (a ) to provide for reserve for bad debts at the rate of 5% on debtors,

(b) to write off Rs 400 from stock and

(c ) to write off 33 1/ 3 % from Plant and Machinery

B Ltd : (a ) to eliminate its goodwill and profit & Loss A/c balances.,

(b) to write off Bad debts Rs 1,000 and to provide reserve of 5% on the balance of debtors,

(c ) to write down Plant & Machinery by 10% and

(d ) to write off Rs 1,400 from the value of stock.

Calculate Purchase Consideration

Illustration 10:

S. Ltd. is absorbed by P. Ltd. S ltd. gives the following information on the date of absorption: Calculate purchase consideration
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:

Additional information:

P Ltd. has agreed:

(i) to issue 9% Preference shares of Rs.100 each, in the ratio of 3 shares of P. Ltd. for 4 preference shares in S. Ltd.

(ii) to issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at Rs.96 in lieu of 6% Debentures in S. Ltd. which are to

be redeemed at a premium of 20%;

(iii) to pay Rs.20 per share in cash and to issue six equity shares of Rs.100 each issued at the market value Rs.125 in lieu of every

five shares held in S. Ltd.; and

(iv) to assume the liability to trade payables.

Illustration 11:

Particulars Notes ` (000)

Equity and Liabilities
1 Shareholders’ funds
AB Share capital 1 22,50
Reserves and Surplus 2 9,00
2 AA Non-current liabilities
Long-term borrowings 3 7,00
3 AB Current liabilities
Trade Payables 5,00
Total 43,50
abc Assets
1 Non-current assets
Property, Plant and Equipment 4 32,50
Non-current investments 5 6,00
2 Current assets
Inventories 2,00
Trade receivables 2,00
Cash and Cash equivalents 1,00
Total 43,50
Notes to accounts
1 Share Capital ` in (‘000)
Equity share capital
1,50,000 Equity Shares of ` 10 each 15,00
7,500 14% Preference Shares of ` 100 each 7,50
22,50
2 Reserves and Surplus
General reserve 9,00
3 Long-term borrowings
Secured
15% Debentures 7,00
4 Property, plant and Equipment
Land and Building 32,50
5 Non-current investments
Investments at cost 6,00

B Ltd agreed to take over the assets and liabilities on the following terms and conditions:

(a) Discharge 15% debentures at a premium of 10% by issuing 15% debentures of X Ltd.

(b) PPE at 10% above the book value and investments at par value.

(c) Current assets at a discount of 10% and Current liabilities at book value.

(d) Preference shareholders are discharged at a premium of 10% by issuing 15% preference shares of Rs.100 each.

(e) Issue 3 equity shares of ` 10 each for every 2 equity shares in B Ltd. and pay the balance in cash.

Calculation of Purchase Consideration (Net Asset value Method)

Illustration 12:

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

S 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

` in (‘000)
1 Share Capital
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.