6 Amalgamation ‘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. ‘+ ass 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. | Meaning of Amalgamation In an amalgamation, two or more companies are combined into one by merger or by one taking over the other. Therefore, the term ‘amalgamation’ contemplates two kinds of activities (}) two oF more companies join to form a new company or (1) absorption and blending of one by the other. Thus, amalgamations include absorption. The purpose of companies joining together is to secure various advantages such as economies of large scale production, avoiding competition, increasing efficiency, expansion ele The companies going into liquidation or merged companies are called vendor companies or transferor companies. The new company which Is formed to take over the liquidated companies or the company with which the transferor company is merged is called transferee or vendee. In the case of amalgamation the assets and liabillies of transferor company(s) are amalgamated and the transferee company becomes vested with all such assets and liabilities, © The Institute of Chartered Accountants of India‘Accounting ‘Wherever an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to Its being continued by the transferee company, there is external reconstruction Such external reconstruction is essentially covered under the category ‘amalgamation in the nature of merger’ in AS 14 Basis ‘Amalgamation ‘Absorption External Reconstruction Meaning | Two or more companies In this case an existing| In this case, a newly ‘are wound up and a| company lakes over the | formed company takes new — company —_is| business of one or more | over the business of an formed to take over existing companies. | existing company their business. Minimum |Atleast three companies | Atleast two companies | Only two companies are number of are involved. are involved involved. ‘Companies involved Number of|Only one resullant/No new —_resullant|Only one resultant new company is formed. | company is formed. company is _ formed resultant |Two companies are Under this case a newly ‘companies |wound up to form a formed company takes single resultant cover the business of an | company. | existing company. [Objective [Amalgamation is done| Absorplion is done to cut| External. reconstruction to cut competition &| competition & reap the|is done to reorganise Teap the economies in| economies in large | the financial structure of large scale. scale. the company. Example [A Lid. and B Ltd./A Lid takes over the|B Ltd. Is formed to take amalgamate to form C|business of —another| over the business of an [uta [existing company B Ltd. | existing company A Ltd 2._ Types of Amalgamation The Companies Act, 1956 has not specifically defined the term ‘amalgamation’. However, from several legal decisions, the definition of amalgamation may be inferred. The Institute of Chartered Accountants of India has introduced Accounting Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The standard recognizes two types of amalgamation ~Amalgamation 6.3 Types of Amalgamation Amalgamation in the nature of merget | Amalgamation in the nature of purchase Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions: (J All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities ofthe transferee company. (i) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equily 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. (ii) 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 pai in respect of any fractional shares. (i) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. If any one or more of the above conditions are not satisfied in an amalgamation, such amalgamation is called amalgamation in the nature of purchase. 3._ Purchase Consideration For the purpose of accounting for amalgamations, we are essentially guided by AS-14 ‘Accounting for Amalgamations’. Para 3(q) 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, its the price payable by the transferee company to the transferor company for taking over the business of the transferor company. It is notable that purchase consideration does not include the sum which the transferee company will directly pay to the creditors of the transferor company.64 Accounting The purchase consideration essentially depends upon the fair value of its elements. For example, when the consideration includes securities, the value fixed by the statutory authority may be taken as the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up or in the absence of market value, book value of the assets are considered Sometimes adjustments may have to be made in the purchase consideration inthe light of one of more future events. When the additional payment Is probable and can be reasonably estimated it isto be included in the calculation of purchase consideration. Illustration 1 Let us consider the dralt Balance Sheet of X Lid. as on 31st March, 2011: Liabilities % (000) Assets # (000) ‘Share Capital: Land & Buildings 50,00 Equity Shares of € 10 each 75,00 Plant & Machinery 45,00 14% Preference Shares of Furniture 1050 100 each 25,00 Investments 5.00 General Reserve 12,50 Inventory 23,00 12% Debentures 40,00 Trade receivables 24,00 Trade payables and other Cash & Bank balance 15,00 Curent labililes: 20.00 __ 172.50 172.50 Other Information: () YLtd. takes over X Ltd. on 10th Apri, 2011. (i) Debentureholders of X Lid. are discharged by Y Lid. at 10% premium by issuing 15% ‘own debentures of ¥ Lid. (ii) 14% Preference Shareholders of X Ltd. are alscharged at a premium of 20% by issuing necessary number of 15% Preference Shares of Y Lid. (Face value ® 100 each). (Wu) Intrinsic value per share of X Ltd. is € 20 and that of ¥ Lid. ® 30. ¥ Ltd. wil issue equity shares lo salisty the equily shareholders of X Lid. on the basis of intrinsic value. However, the entry should be made at par value only. The nominal value of each equity share of ¥ Lid. is & 10. Compute the purchase consideration. Solution Computation of Purchase consideration (%in'000) ‘Form For Preference Shareholders of X Ltd 3,000 30,000 18% Preference itute of Chartered Accountants of IndiaAmalgamation 6.5. shares in Y Ltd. For equity shareholders of Y Ltd. 5,000 5,00,000 Equity (23 x 7,50,000) x € 10 shares of Y Ltd. of 10 each __ Total Purchase consideration 8,000 Note : Consideration for debenture holders should not be included above. Such debentures. will be taken over by Y Ltd. and then discharged. ‘© The Institute of Chartered Accountants of India‘© The Institute of Chartered Accountants of IndiaAmalgamation 6.7. There are two main methods of accounting for amalgamation viz, Methods of accounting for Amalgamation es Pooling of interests method | Purchase method The first method is used in case of amalgamation in the nature of merger and the second ‘methodis used in case of amalgamation in the nature of purchase. ‘© The Institute of Chartered Accountants of India68 Accounting Pooling of Interest Method Under pooling of interests method, the assets, liabilities and reserves of the transferor company will be taken over by Transferee Company at existing carrying amounts unless any adjustment is required due to different accounting policies followed by these companies. As a result the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves. Purchase Method ‘Assets and Liabilities: the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation Reserves: No reserves, other than statutory reserves, of the transferor company should be incorporated in the financial statements of transferee company. Statutory reserves of the transferor company should be incorporated in the balance sheet of transferee company by ‘way of the following journal entry. Amalgamation Adjustment Ac or. To Statutory Reserves When the above statutory reserves will no longer be required to be maintained by transferee company, such reserves will be eliminated by reversing the above entry The balance of Profit and Loss account of the transferor company is not recorded at all, Difference between the Purchase Consideration and Net Assets transferred: Any excess of the amount of purchase consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statement of the transferee company. Any short fall should be shown as capital reserve, Goodwill should be ~amortised over period of five years unless a somewhat longer period can be justified. llustration 3 Consider the following summarized balance sheets of X Ltd. and ¥ Ltd. Balance Sheet as on 31st March, 2012 Labilties XUid——YUtd Assets XUid Ld. 7000 000 7000 % 000 Equity Share Capital 50,00 30,00 Land & Building 25,00 «15,50 (@ 10 cach) Plant & Machinery 32,50 17.00 14% Preference Share 2200 17,00 Future & Fitings § 5,75 3.50 © The Institute of Chartered Accountants of IndiaAmalgamation 6.9. Capital (@ 100 each) Investments 7.00 5,00 General Reserve 500 250 Inventory 1250 9.50 Export Profit Reserve 300 2.00 Traderecelvables 9.00 10,30 Investment Allowance 1.00 Cash & Bank 725-520 Reserve Profit & Loss Alc 750 500 13% Debentures 500 3.50 (#100 each) Trade Creditors 450 3.50 Other Current Liabilties 200 150 —_ 9900 __ 66.00 9900 66,00 Xd. lakes over ¥ Lid. on 1st Apri, 2072. X Lid. discharges the purchase consideration as below: (Issued 3,50,000 equity shares of @ 10 each at par to the equily shareholders of ¥ Lid (i) Issued 15% preference shares of € 100 each to discharge the preference shareholders of ¥ Lid. at 10% premium. The debentures of Y Ltd. will be converted into equivalent number of debentures of X Lid. The statutory reserves of Y Ltd. are to be maintained for 2 more years. Show the balance sheet of X Lid. after amalgamation on the assumption that: (@) the amalgamation Is inthe nature of merger. (0) the amalgamation Is inthe nature of purchase. Solution: (Amalgamation in the nature of merger: Balance Sheet of X Ltd Particulars Notes in'000 Equity and Liabilities 1 _ | Shareholders’ funds Share capital 1 12570 b| Reserves and Surplus 2 1,930 2| | Non-current liabilities a | Long-term borrowings 3 850 itute of Chartered Accountants of India6.10 _ Accounting 3| | Current liabilities a| Trade Payables 800 b | Other current liabilities 350 Total 16,500 Assets 1] | Non-current assets a] Fixed assets Tangible assets 4 9,925 b | Non-current investments. 1,200 2) | Current assets | Inventories 2,200 b| Trade receivables 1,930 | Cash and cash equivalents 1.245 Total 16,500 Notes to accounts in 000 1 Share Capital Equity share capital 85,00, Equily Shares of & 10 each 8,500 Preference share capital 18,700, 15% Preference Shares of € 100 each 1.870 22,000, 14% Preference Shares of ® 100 each 2,200 Total 12,570 2. Reserves and Surplus General Reserve" of X Lid 500 ‘Adi. General reserve of Y Li. 250 750 Less, Adjustment for amalgamation (670) 80 Export Profit Reserve of X Lid 300 ‘Adio. Export Profit Reserve of Y Lid. 200 500 Investment Allowance Reserve 100 © The Institute of Chartered Accountants of IndiaAmalgamation 6.11 Profit & Loss Alc of X Ltd. 750 Add: Profit & Loss Alc of ¥ Ltd. 500 1,250 Total 1,930 3. Long-term borrowings Secured 8,500 13% Debentures of & 100 each 850 Total 850 4 Tangible assets Land & Buildings 4,050 Plant & Machinery 4,950 Furmture & Fittings 925, Total 9,925 “The difference between the amount recorded as share capital issued and the amount of share capital of transferor company should be adjusted in reserves. Thus, General Reserve = & 000 [7,50 - (53,70 - 47,00)| = % ('000) 80 (b) Amalgamation in the nature of purchase : Balance Sheet of X Ltd. Particulars Notes | __ = in'000 Equity and Liabilities 1| | Shareholders’ funds Share capital 12,570 b | Reserves and Surplus 2 2,230 2) | Non-current liabilities | Long-term borrowings 3 850 3) | Current liabilities a| Trade Payables 800 b | Other current fabiities 350 Total 16,800 Assets 1) | Non-current assets a| Fixed assets Tangible assets 4 9,925 itute of Chartered Accountants of India6.12__Accounting b | Non-current investments 1,200 | Other non-current assets 5 300 2| | Current assets a | Inventories 2,200 b| Trade receivables 1.930 | Cash and cash equivalents 1.245 Total 16,800 Notes to accounts in'000 1 Share Capital Equity share capital 85,00, Equity Shares of @ 10 each 8500 Preference share capital 18,700, 15% Preference Shares of & 100 each 1.870 22,000, 14% Preference Shares of & 100 each 2,200 Total 12,570 2. Reserves and Surplus Capital Reserve 380 General Reserve 500 Export Profit Reserve 500 Investment Allowance Reserve 100 Surplus (Profit & Loss A/c) 750 Total 2,230 3. Long-term borrowings Secured 8,500 13% Debentures of ® 100 each 850 Total 850 4 Tangible assets, Land & Buildings 4,050 Plant & Machinery 4,950 Furniture & Fittings 925 Total 9,925 © The Institute of Chartered Accountants of IndiaAmalgamation 6.13 5. Other non-current asset Amalgamation adjustment account (assumed to be maintained for more than a year) Workings: Capital Reserve arising on Amalgamation (A) __ Net Assets taken over = (000) = (000) Sundry Assets 66,00 Less 13% Debentures 350 Trade payables 3.50 Other current iabilties 150 (8.50) 51.50 ®) To Equity Shareholders of ¥ Ltd 35,00 To Preference Shareholders of Y Lid 18,70 53.70 (C) Capital Reserve (A~B) 3.80 Illustration 4 S. Lid. is absorbed by P. Ltd. The draft balance sheet ofS. Lid. fs as under. Balance Sheet e e ‘Share Capital 2,000 7% Preference shares Sundry Assets 13,00,000 of ® 100 each (tuly paie-up) 200,000 5.000 Equity shares of ® 100 each (fly paid-up) $00,000 Reserves 300,000 6% Debentures 200,000 Trade payables 1,00,000 13,00,000 13,00,000 Lid. has agreed. Oto issue 9% Preference shares of % 100 each, in the ratio of 3 shares of P. Lid. for 4 preference shares in S. Lid. itute of Chartered Accountants of India6.14 Accounting (i) 0 issue to the debenture-holders in S. Ltd. 8% Morlgage Debentures’ at 96 in liew of 6% Debentures in S. Ld. which are to be redeemed at a premium of 20%; (i) to pay ® 20 per share in cash and to issue six equity shares of * 100 each (market value % 125) in lieu of every five shares held in S. Ltd.: and (iv) to assume the labilly to trade creditors. Solution The purchase consideration will be z Form Preference shareholders : 2,000 x 3/4 x 100 1,50,000 9% Pref. shares Equity shareholders: 5,000 x 20 1,00,000 Cash 5,000 x 645 « 125 7,50,000 _Equily shares 10,00,000 Supposing the otal number of fractions arising on exchange aggregate to 20 shares (equivalent to equity shares in P. Lid) each wil have to be paid for them @ @ 125 per share: the remaining amount will be setied by the issue of equily shares. Alternatively, fraction certificates are issued: these are converted into shares on presentation - the holder of the fraction certificates must buy more such certificates or sell those held by him. Illustration 5 Y-Lid. decides to absorb X Ltd. The draft Balance Sheet of X Ltd. is as follows: z z 3.000 Equity shares of Nel assets 2,90,000 100 each (lly pal) 300,000 Profit and Lass Account 70,000 Preference shares 90,000 360,000 3,60,000 Y Lid. agrees to lake over the net assels of X Ltd. An equily share in X Ltd, for purposes of absorplion, is valued @ ® 70. Y Lid. agrees lo pay % 60,000 in cash for payment lo preference * According to AS 14, consideration forthe amalgamation means the aggregate of the shares and other secures, issued andthe payment made inthe frm of cash or other assets bythe transferee company tothe shareholders of the transferor company. Thetefoe, debentures issued to the debenture holders will not be included in purchase ‘consideration. Like trade creo, the lab in respec of debentures of S. Lid. wil be taken by P Lid. which wil then be settled by issuing new 8% debentures © The Institute of Chartered Accountants of IndiaAmalgamation 6.15 shareholders and the balance in the form of its equily shares valued al % 120 each. Calculate ‘purchase consideration to be paid by Y Lid. and how will it be alscharged? 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 above willbe in cash and & 2,10,000 in the form of equity shares of Y Ld. issued at & 120 per share; the numberof shares that wil be issued = 2,10,000/120 = 1.750 equity shares, ._ Journal Entries to close the books of Vendor Compan: The journal entries will be ilustrated with the following case, Wye Ltd. acquires the business of Z Lid. whose summarised balance sheet on 31st December, 2072s as under Liabilities = Assets z ‘Share capital divided into Goodwill! 2,00,000 shares of @ 100 each Land & Buildings 4,00,000 6% Preference share capital 4,00,000 Plant and Machinery 6,00,000 Equity share capital 00.000 Patents 50,000 Capital Reserve 700.000 Inventory 1,50,000 Profit & Loss Alc 50.000 Trade receivables 1,80,000 6% Debentures 200000 Cashat bank 70,000 Interest outstanding on above 12,000 Underwriting commission 40,000 Workmen's compensation reserve (Expected latilty @ 5,000) 8,000 Trade payables 120,000 eee 16,90,000 16,90,000 Wye Ltd. was to take over all assets (except cash) and labilties (except for interest de on debentures) and to pay folowing amounts () % 2,00,000 7% Debentures (# 100 each) in Wye Ltd. for the existing debentures in Zed Ltd. for the purpose, each debenture of Wye Lid. is to be treated as worth ® 105. (i) For each preference share in Zed Lid. 10 in cash and one 9% preference share of # 100 each in Wye Ltd. itute of Chartered Accountants of India6.16 _ Accounting (ii) 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. (iy) Expense of liquidation of Zed Lid. are to be reimbursed by Wye Lid. to the extent of % 10,000. Actual expenses amounted fo € 12,500. Wye Lid. valued Land and uilaing at 5,50,000 Plant and Machinery at ® 6,50,000 and patents at 720,000, Purchase Consideration: = Form () Preference Shares: & 10 per share 40,000 Cash Preference shares 4,00,000 4,40,000 Preference shares (@ Equity shares: & 20 per share 160,000 Cash 8,000 equity shares in Wye Lid. @ & 140 11,20,000 12,80,000 Equity shares. 17,20,000 Steps to close the Books of the Vendor Company 1. Open Realisation Account and transfer all assets at book value. Exception: If cash is not taken over by the purchasing company, it should not be transferred. Note: Profit and Loss Account (Dr.) and expenses not written off are not assets and should not be transferred to the Realisation Account. The journal entry in the above case i z Realisation Alc Or. 15,80,000 To Sundries — Goodwill 2,00,000 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 Realisation Account on sale of business to Wye Ltd 2. Transfer to the Realisation Account the liabilities which the purchasing company is to take cover. In case of the provisions, the portion which represents ibility expected to arse in future itute of Chartered Accountants of India———Airaigamation 6.17 should be so transferred and the portion which is not required (Je, the reserve portion) should be treated as profit. Accordingly, the following entry will be recorded: @ z 6% Debentures in Wye Lid or 2,00,000 ‘Workmen's Compensation Reserve Or. 5,000 Trade payables Dr. 120,000 To Realisation Alc 3,25,000 (Transfer of ibites taken over by Wye Ltd. io Realisation Al For liabilities not take over by the purchasing company, the profit or loss on discharge of such liabilities shall be transferred to Realisation Account 3. Debit purchasing company and credit Realisation Account with the purchase consideration, ‘Wye Lid.- Or. 17,20,000 To Realisation Alc 17,20,000 (Amount receivable from W) sale of busi 4, On receipt of the purchase consideration debit what is received (cash, debentures, shares etc.) and credit the purchasing company. Thus — Cash or. 2,00,000 9% Preference shares in Wye Ltd Or, 4,00,000 Equity shares in Wye Lid. Dr 11,20,000, To Wye Lid. 17,20,000 (Receipt of purchase consideration from he purchase company) 5. Expenses of liquidation have to be dealt with according to the circumstances of each case. (@)_ Ifthe vendor company has to bear and pay them: Realisation Account should be debited and Cash Account credited. (b) If the expenses are to be borne by the purchasing company, the question may be dealt within one ofthe two ways mentioned below: (i It may be ignored in the books of the vendor company. (i) Mf 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 itute of Chartered Accountants of India6.18__ Accounting (@ Debit Purchasing company and credit Cash Account when expenses are paid by the vendor company: and (8) 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 fs to be borne by Zed Ltd. the entries required will be a - ‘Wye Ltd. Dr. 10,000 Realisation Alc Or. 2,500 To Cash Alc 12,500 (Liquidation expenses out of which 210,000 is payable by Wye Ltd. Cash ic Or. 10,000 To Wye Ltd. 10,000 (Account reimt Lid. for ex 6. Liabilities not assumed by the purchasing company, have to be paid off. On payment, debit the liabilly concerned and credit cash. Any difference between the amount actually paid and the book figure must be transferred to the Realisation Account, Zed Ltd. shall pass the following entries in this respect - z Interest Outstanding or. 12,000 To Debentureholders Nc 12,000 (Amount due to debenture holders. {for debentures interest) Debentureholders or. 12,000 To Cash Alc 12,000 (Debentureholders paid cash & 12,000 {or outstanding interest) 7. Credit the preference shareholders with the amount payable to them, debiting Preference Share Capital with the amount shown in the books, transferring the difference between the two, if any, to the Realisation Account. Thus — 6% Pref. Share Capital Ac Or 4,00,000, Realisation Alc Or 40,000 To Preference Shareholders Alc 4,40,000 (The amount due to preference shareholders for capital and the extra amount payable ‘under the scheme of absorption) __ itute of Chartered Accountants of IndiaAmalgamation _ 6.19 Note : In the absence of any indication to the contrary, preference shareholders will be enlitled only to the capital contributed by them. But if funds available after paying off creditors are nat 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 e z Preference shareholders Ac Or. 4,40,000 To Cash Alc 40,000 ‘To 9% Preference shares in Wye Ltd, 4,00,000 (Cash and preference shares in Wye Ld. siven to preference shareholders) 9. Transfer equity share capital and account representing profit or loss (Including the balance in Realisation Accoun!) to Equity Shareholders Account. This will determine the amount receivable by the equity shareholders. Zed Ltd, shall pass the following entries in this regard = 7 Equity Share Capital Ale Dr, 8,00,000 Capital Reserve Alc Dr. 1,00,000 Profit and Loss Alc Dr 50,000 ‘Workmen's Compensation Reserve Alc Or. 3,000 Realisation Nic Or. 4,22,500" To Sundry Equity Shareholders Alc 13,75,500 (Various accounts representing capital and profit transferred to Equity Shareholders Account) Equity Shareholders Alc or 40,000 To Underwriting Commission Alc 40,000 (Underwriting Commission Ac closed by transfer to Equity Shareholders A/c) “The Realisation Account wl appa as flows Realisation Account . . To. Suny Assets 1580000 By Sundy abies 325,000 To. Cash (excess expenses of iquidation) 2500 ByWyelid. 1720000 To reference Sharetades 000 To. Equiy Shareholders Ae prot ranstered 4.22800 0.000 aS itute of Chartered Accountants of India0__ Accounting 10. On satisfaction of the claims of the equity shareholders, debit their account and credit whatever is given to them. Hence: Equity Shareholders Alc Or. 13,35,500 To Equity Shares in Wye Ltd 11,20,000 To Cash Alc™ 2,15,500 6. Entries in the books of Purchasing Company 1. Debit Business Purchase Account and Credit Liquidator of the vendor company with the account of the purchase consideration, Thus z z Business Purchase Ac or. 17,20,000 To Liquidator of Zed Li. 17.20.00 (Amount payable to Zed Lid. as pet m1 2 (Debit assets acquired (except goodwill) at the value placed on them by the purchasing company: (i) Credit liabilities taken over at agreed values and credit Business Purchase ‘Account with the amount of purchase consideration: and (ii) Credit the account showing shares held in the company, if any, with the cost of such shares (i) If the creditors as per (i) and (ii) above exceed debits as per () above, the difference should be debited 1o Goodwill Account, in the reverse case, the difference should be credited to Capital Reserve. Note : The amount of Gooduill 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 Ac Or. 550,000 Plant and Machinery Alc Or. 6,50,000 Patents Alc Dr. 20,000 Inventory Alc Dr. 1,50,000 Trade receivables Or. 1,80,000 ‘Goodwill Dr. 5,05,000 To Provision for Workmen's Compensation Alc 5,000 Trade payables 1,20,000 “The students should prepare Cash Account to ascertain the cash balance, ntants of IndiaAmalgamation 6.21 Debentures in Z Lid 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 Ld. shall be: . e Liquidator of Zed Lt. Dr. 17,20,000 ToCash 2,00,000 To 9% Preference Share Capital Alc 400,000 To Equity Share Capital Ac 8,00,000 To Securities Premium Alc 3,20,000 (Payment of cash and issue of shares in satisfaction of purchase consideration) 4. Debentures in Z Lid. Alc Or. 2,10,000 To 7% Debentures Alc 2,00,000 ——1o Premium on Debentures Ac __ 10,000 5. If the purchasing company is required to pay the expenses of liquidation of the vendor company, the amount should be debited to the Goodwill or Capital Reserve Account, as the case may be. Inthe instant case, the entry shall be: Goodwill Account Dr 10,000 To Cash Account 10,000 (Amount paid towards liquidation expenses onZed Lid Entries at par value - The students will note that purchasing company is left with a large debit in the Gooduil 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 entties 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 secures premium. Inter Company-owing - Should the purchasing company owe an amount to the vendor company or vice versa, the amount willbe included in the book debts of one company and trade payables of the other. This should be adjusted by the entry. Trade payables Or. To Trade receivables itute of Chartered Accountants of India622 Accounting ‘The entry should be made after the usual acquisition entries have been passed. At the time of preparing the Realisation Account and passing the business purchase entries, no attention need be paid to the fact that the two companies involved owed money mutually. Adjustment of the value of stock - Inter-company owings arise usually from purchase and sale of goods: itis likely, therefore, that at the ime, of the sale of business, the debtor company also has goods in stock which it purchased from the creditor company - the cost of the deblor company will include the profit made by the creditor company. After the takeover of the business itis essential that such a profit is eliminated. The entry for this will be made by the purchasing company. If itis the vendor company which has such goods in stock, a the lime of passing the acquisition entries, the value of the stock should be reduced 10 its cost to the company which is acquiring the business; automatically goodwill or capital reserve, as the case may be, will be adjusted. But i the original sale was made by the vendor company and the stock is with the company acquiing the business, the latter company will have to debit Goodwill (or Capital Reserve) and credit stock with the amount of the proft included in the stock. IMustration 6 The following drah Balance Sheels are given as on 31st March, 2012: (in lakhs) (in lakhs) Best Better Best Better Lid, Ud. Ud. Ud. @ z Pa z ‘Share Capita: Fixed Assets a 15 Shares of ® 100, each Investments 5 - ally paid 2 10 Current Assets 2 Reserve and Surplus 10 8 Other Litilties 2 2 50 20 50 2 The folowing further information is given — (a) Better Limited issued shares on 1st April, 2012, in the ratio of one share for every two held, out of Reserves and Surplus. (0) It was agreed that Best Ltd. will lake over the business of Better Ld, on the basis of the latter's Balance Sheet, the consideration taking the form of allotment of shares in Best Ltd, (©) The value of shares in Best Lia. was considered to be € 150 and the shares in Better Ltd. were valued at ® 100 afler the issue of the bonus shares. The allotment of shares is to be ‘made on the basis of these values. (@) Liabilties of Better Lid, included @ 1 lakh due to Best Ltd., for purchases from it, on which Best Lid., 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. itute of Chartered Accountants of IndiaAmalgamation _ 6.23 ‘Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best Lid, and prepare the Balance Sheet as at 1st Apri, 2012 afler the takeover. Solution LEDGER OF BETTER LIMITED Fixed Assets Account z z To Balance bid 15,00.000 By Realisation Alc (transfer) 15,00,000 Current Assets Account z z To Balance b/d 5,00,000 By Realisation Alc (transfer) —_§,00,000 Liabilities Account z z To Realisalion Alc 200,000 By Balance b/d 2,00,000 Realisation Account z z To Fived Assets Alc 15,00,000 By Liabilities Ac 2,00,000 "Current Assets Ac 5,00,000 * Best Limited 15,00,000 (Purchase Consideration) * Shareholders’ Alc 3,00,000 (Loss on Realisation) ‘Share Capital Account = z To Sundry shareholders By Balance b/d 10,00,000 Alc - (transfer) 15,00,000 " Reserves & Surplus Alc (Bonus issue) 5,00,000 15,00,000 +15,00,000, Reserves & Surplus Account z z 5,00,000 By Balance bid 8,00,000 To Share Capital (Bonus issue) © The Institute of Chartered Accountants of India6.24 Accounting Sundry Shareholders 3,90,000 a 8,00,000 8,00,000 Best Ltd = @ To Realisation 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 Lid. 15,00,000 By Sundry Shareholders Ac 15,00,000 Sundry Shareholders Account z z To Realisation Alc 300,000 By Share Capital Alc 15,00,000 (Loss) * Reserves & Surplus Ac 3,00,000 * Share in Best Ltd. 15,00,000 18,00,000 18,00,000 Journal of Best Ltd Dr cr. 2012 € & ‘Apr. 1 Fixed Assets Alc Or. 15,00,000 Current Assets Alc Or. 5,00,000 To Liatilties Alc 2,00,000 To Liquidator of Better Ltd. 15,00,000 To Capital Reserve Alc 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 Alc 10,00,000 To Securities Premium Alc 5,00,000 (Discharge of Purchase consideration by the issue of equity shares of € 10,00,000 at a premium of € 50 per jsf De: oesTeil Eseenerseenereeesreereiees Trade payables Ac Or. 1,00,000 To Trade receivables Alc 1,00,000 (Amount due from Better Ltd,, and included in its creditors taken over, cancelled against own Trade receivables) © The Institute of Chartered Accountants of IndiaAmalgamation 6.25 Capital Reserve Alc Or. 10,000 To Current Asset (Stock) Alc 10,000 (Unrealized proft on stock included in current assets of Better Ltd. written off to Reserve Account) 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 Lid. 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 z Equity and Liabilities 1| | Shareholders’ funds 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 1| | Non-current assets a) Fixed assets Tangible assets ‘) 40,00,000 b | Non-current investments 5,00,000 2| | Current assets 23,90,000 Total {68,90,000 Notes to accounts z 1 Share Capital Equity share capital Issued & Subscribed 30,000 shares of & 100 (Of the above 10,000 shares have been issued for 30,00,000, ‘consideration other than cash) Total 30,00,000 © The Institute of Chartered Accountants of India6.26 Accounting 2. Reserves and Surplus 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 3. Tangible assets Fixed Assets 25,00,000 Acquired during the year 15,00,000 | __40,00,000 Total 40,00,000 Illustration 7. K Lid, and L Ltd. amalgamate to form a new company LK Ltd. The financial posiion of these two ccampanies on the date of amalgamation was as under: Kid Lid. Klid LL. z z @ z ‘Share Capital Goodwill 60,000 Equily Shares Land & Building ——-4,50,000 300,000 of? 100 each 800,000 3.00000 Plant & Machinery — 6,20.000 5,00,000 7% Preference Share Fumiture and of & 100 each 400.000 3.00.00 Filings 60,000 20,000 5% Debentures 200,000 — Trade receivables. 2,75,000 1,75,000 General Reserve = 1,00,000 Stores & inventory —2.25,000 1,40,000 Profit and Loss Cash at Bank 120,000 $5,000 Account 371375 97,175 Cashin hand 4,375 17.175 Trade payables 100,000 2,10,000 ‘Secured Loan 2,00,000 a 18 71,375_12,07,175 1871,375 12,07,175 The lerms of amalgamation are as under: (A) (1) The assumption of labilies of both the Companies. (2) Issue of 5 Preference shares of & 20 each in LK Lid. @ & 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 Lid. @ & 18 paid up at a premium of & 4 ‘per share for each equily share held in both the Companies. in addition, necessary cash should be paid to the Equity Shareholders of both the Companies as is requited to adjust the rights of shareholders of both the Companies in accordance with the intrinsic value of the shares of both the Companies. itute of Chartered Accountants of IndiaAmalgamation 6.27 (4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to ‘discharge the 5% debentures in K Lid. at a discount of 5% after takeover. (8) (1) The assets and liabilifles are to be taken at book values inventory and trade receivables for which provisions at 2% and 2 #s % respectively fo be raised. (2) The trade receivables of K Lid. include # 20,000 due from L Ltd. (C) The LK Lid. Is to issue 15,000 new equity shares of ® 20 each, & 18 paid up at premium of & 4 per share so as fo have sufficient working capital. Prepare ledger accounts in the books of K Lid. and L Lid. to close their Books. Solution Books of K Lid Realisation Account z z To Goodwill 80,000 By 5% Debentures 2,00,000 To Land & Building 450,000 By Trade payables 1,00,000 To Plant & Machinery 620000 By LK Lid 15,60,000, To Fumiture & Fitting 60,000 (Purchase consideration) To Trade receivables 275,000 By Equity shareholders Alc 51,375 To. Stores & inventory 225,000 (oss) To Cash al Bank 1,20,000 To Cash in hand 41,375 To. Preference shareholders (excess payment) 40,000 19.11,375 19.1375, Equity Shareholders Account z z To. Realisation Alc (loss) 51,375 By Share capital 8,00,000 To Equity Shares in LK Lid 10,56,000 By Profit & Loss Alc 3,.71,375 To Cash — 64,000 1.01375 11375 LK Ltd. Account z z To Realisation Alc 15,60,000 By Equity Shares in LK Lid For Equity 10,56,000 Pref. 4,40,000 14,96,000 By Cash 64,000 15,60,000 15,60,000 © The Institute of Chartered Accountants of India6.28 Accounting Books of L Ltd. Realisation Account z z 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 Fumiture & Fittings 20,000 By LK Lid. (Purchase To. Trade receivables 1,75,000 consideration) 7,90,000 To Inventory of stores 1,40,000 By Equity shareholders Alc— To Cash al bank 55,000 Loss, 31,175 To Cash inhand 1195 To. Pref. shareholders 30,000 1237.17 1237,175 Equity Shareholders Account = = To. Equily shares in LK Lid 3,96,000 By Share Capital 3,00,000 To. Realisation 37,175 By Profit & Loss Alc 97,175 To Cash 64,000 By Reserve 1,00,000 497.175 497.175 LK Ltd. Account is ei To. Realisation Alc 7,90,000 By Equity shares in LK Ltd For Equity Preference 330,000 7,26,000 By Cash 64,000 1,90,000 1,90,000 Working Notes: () Purchase consideration KU. Lid, z z Payable to preference shareholders Preference shares at 22 per share 4,40,000 3,30,000 Equity Shares al @ 22 per share 10,56,000 3,96,000 Cash [See W.N. (i)] 64,000 64,000 15,60,000 7,90,000 itute of Chartered Accountants of IndiaAmalgamation 6.29 (ii) Value of Net Assets Kd. lid, = z Goodwill 80,000 Land & Building 4,50,000 3,00,000 Plant & Machinery 6,20,000 5,00,000 Furiture & Fitings 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 56,000 Cash in hand 41,375 75 18,60,000 12,00,000 Less: Debentures 2,00,000 - Trade payables 1,00,000 2,10,000 Secured Loans — (3.00.00) 2,00,000 —(4,10,000) 15,60,000 7,90,000 Payable in shares 14,96,000 1,26,000 Payable in cash (64,000 64,000 Illustration 8 The following are the summarized Balance Sheets of A Lid. and B Lid. as on 31.3.2012: (in thousands) Liabilities At. B Lid Share capital: Equity shares of 100 each fully paid up 2,000 1,000 Reserves 800 - 10% Debentures 500 = Loans from Banks 250 450 Bank overdratts - 50 Trade payables (300 300 Proposed dividend 200 — Total 4,050 1,800. Assets Tangible assetsMfixed assets 2,700 850 Investments 700 - Trade receivables 400 150 Cash at bank 250 _ Accumulated foss - 800 Total 4,050 1,800. itute of Chartered Accountants of India6.30 Accounting B Lid, has acquired the business of A Ltd. The following scheme of merger was approved: (Banks agreed to waive off the loan of ® 60 thousands of B Ltd. (i) B Ltd, will reduce its shares to € 10 per share and then consolidate 10 such shares into one share of ® 100 each (new share). (ii) Shareholders of A Lid. will be given one share (new) of B Lid. in exchange of every share ‘held in A Ltd. (iy) Proposed dividend of A Ltd. will be paid after merger lo shareholders of A Lid. (W) Trade payables of B Lid. includes ® 100 thousands payable to A Ltd. Pass necessary entries in the books of B Ld. and prepare Balance Sheel afler merger. Solution Calculation of purchase consideration ‘One share of B Ltd. will be issued in exchange of every share of A Lid. (Le. 20,000 equity shares of 8 Ltd. wil be issued against 20,000 equity shares of A Ltd.) 20,000 shares Journal Entries in the books of B Ltd. Date @in thousands) 2012 De] Gr. March.31_| Loan from bank Alc Dr. | 60 To Reconstruction Alc 6 (Being loan from bank waived off to the extent of 60 thousand) Equity share capital Alc (@ 100) br. | 1.000 To Equity share capital Alc (& 10) 100 To Reconstruction Alc 900 (Being equity shares of € 100 each reduced to € 10 each) Equity share capital Alc (@ 10) Dr. | 100 To Equity share capital Alc (& 100 each) 100 (Being 10 equity shares of @ 10 each consolidated to one share of € 100 each) Reconstruction A/c Dr. 960 To Profit and loss A/c 800 itute of Chartered Accountants of IndiaAmalgamation 6.31 To Capital reserve Alc 160 (Being accumulated losses set off against reconstruction Alc and balance transferred to capital reserve accoun!) Business purchase Alc Dr. | 2,000 To Liquidator of A Lt. 2,000 (Being purchase of business of A Ltd.) Fixed asset Alc Dr. | 2,700 Investment Ac Dr. | 700 Trade receivables Alc Dr. | 400 Cash at bank Ale Dr} 250 To Trade payables Alc 300 To Proposed dividend Alc 200 To Loans from bank Alc 250 To 10% Debentures Alc 500 To Business purchase Alc 2,000 To Reserves Alc 800 (Being assets, liabilities and reserves taken over under pooling of interest method) Liquidator of A Ltd. Alc Dr. | 2,000 To Equity share capital Alc 2,000 (Being payment made to liquidators of A Ltd. by allotment of 20,000 new equity shares) Trade payables Alc Dr. | 100 To Trade receivables Alc 100 (Being mutual owing cancelled) Proposed dividend Alc Dr. | 200 To Bank Alc 200 (Being dividend paid off) Balance Sheet of B Ltd. after merger as on 31.3.2012 Particulars Notes | @in-000 Equity and Liabilities 1| | Shareholders’ funds Share capital 1 2,100 Reserves and Surplus 2 960 itute of Chartered Accountants of India6.32__ Accounting 2| | Non-current liabilities a| Long term borrowings 3 1,140 3| | Current liabilities Trade payables 500 Short term borrowings 4 50 Total 4,750 Assets 1| | Non-current assets a| Fixed assets Tangible assets 3.550 b | Non-current investments 700 2| | Current assets a| Trade receivables 450 b| Cash and cash equivalents 50 Total 4,750 Notes to accounts in 000 1. Share Capital 21,000, Equity shares of & 100 each fully paid 2100 (Out of the above, 20,000 shares have been issued for consideration other than cash) 2 Reserves and Surplus Capital reserve 160 General reserve 800 Total 960 3 Long Term Borrowings 10% Debentures 500 Loan from Bank (250+450-60) 640 1140 4 Short term borrowings Bank overdraft 50 itute of Chartered Accountants of IndiaAmalgamation 6.33 Illustration 9 Given below are the summarized balance sheets of Huge Ltd and Big Ltd. as on 31.12.2012. Big Lid. was merged with Huge Ltd. with effect from 1.1.2013. Balance Sheets as on 31.12.2012 «@) Liabilities | Huge Lid | Big Lid Assets Huge Lid. | Big Lid. ‘Share capital: Sundry fixed 950,000 | 4,00,000 assets Equity shares of | 7,00,000 | 2.50,000 | investments (Non- | 2,00,000) 50,000 @10each trade) Generalreserve | 3,50,000| 1,20,000 | Inventory 120,000] 50,000 Proftandioss A/c | 2,00,000| 65,000 Trade receivables | 75,000] 80,000 Exportprofit reserve | 70,000 40,000 | Advance tax 80,000] 20,000 12% Debentures 1,00,000 | 1,00,000 | Cash and bank 2,75,000 | 1,30,000 Trade payables 40,000 | 45,000 Provision for 7,00,000 | 60,000 taxation Proposed Dividend 140,000 | __50.000 “17.00.00 | 7.30.00 “17.00.0009 | 730.000 Huge Lid. would issue 12% debentures to discharge the claims of the debenture holders of Big Lid. at par. Non-trade investments of Huge Lid. fetched @ 25% while those of Big Ltd. felched @ 18%. Profit of Huge Lid. and Big Ld. during 2010, 2011 and 2012 were as follows: Year Hugelid| Big Ltd z 7 2010 §,00,000 | 1,50,000 2011 6,50,000| 210,000 2012 5,75,000 1,80,000 Goodwill may be calculated on the basis of capitalization method taking 20% as the normal rate of return. Purchase consideration is discharged by Huge Ltd. on the basis of intrinsic value per share. Both companies decided to cancel the proposed dividend. Pass Journal Eniries and prepare the balance sheet of Huge Ltd. after the merger. © The Institute of Chartered Accountants of India6.34 Accounting Solution Balance Sheet of M/s. Huge Ltd. after merger Particulars Notes z Equity and Liabilities 1| | Shareholders’ funds ‘Shate capita 1 9,24,000 Reserves and Surplus 2 14,80,960 2| | Non-current liabilities a} Long termborrowings 3 2,00,000 3| | Current abilities Trade payables 85,000 Short term provisions 4 1,60,000 Total 28,49,960 Assets 1| | Non-current assets a) Fixed assets Tangible assets 13,50,000 Intangible assets 5 3,80,000 b | Non-current investments 2,50,000 | Other non-current assets 7 40,000 2| | Current assets a Inventories 1,70,000 b Trade receivables 1,58,000 c Cash and cash equivalents, 4,04,960 d Short term loans and advances 6 1,00,000 Total 28,49,960 Notes to accounts, 1 Share Capital 92,400 Equity shares of & 10 each 9,24,000 (of which 22,400 shares were issued for consideration other than cash) itute of Chartered Accountants of IndiaAmalgamation 6.35 2. Reserves and Surplus Securities premium 6,80,960 General reserve 3,50,000 Profit and loss Alc 2,00,000 Add. Proposed dividend Cancelled 140,000 | 3,40,000 Export profit reserve (70,000 + 40,000) 1,10,000 Total 14,80,960 3° Long Term Borrowings Secured 12% Debentures (1,00,000+1,00,000) 2,00,000 4 Short term provisions Provision for tax (1,00,000+60,000) 160,000 5 Intangible assets Gooduill (W.N.3C) 380,000 6 Short term loans and advances ‘Advance tax (80,000+20,000) 100,000 7 Other non-current asset Amalgamation Adjustment Alc 40,000 Working Notes: 1. Calculation of purchase consideration: Equity shares of Big Ltd. 25,000 shares Intrinsic value per share of Big Ltd. (W.N.2) 7362 Value of shares 9,05,000 Intrinsic value per share of Huge Ltd. (W.N.2) 2404 No, of shares to be issued by Huge Ltd. € 9,05,000/% 40.4 = 22,400.99 shares i.e 22,400 shares and cash for fraction i.e. 0.99 x % 40.4= % 40, Purchase consideration i 22,400 shares @ 40.4 Capital [2 10/ Share} 2,24,000 Premium [% 30.4 / Share] 680,960, Z 9,04,960 i, Cash for fraction i 40 ii, Total purchase consideration payable = 905,000 itute of Chartered Accountants of India6.36 Accounting 2. _ Intrinsic value per share: Huge Lid. Big Ltd z z z z Assets i. Goodwill (W.N.3) 13,685,000 3,80,000 ‘Sundry fixed assets 9,50,000 4,00,000 Investments 2,00,000 50,000 iv. Inventory 1,20,000 50,000 v. Trade receivables 75,000 80,000 vi. Advance tax 80,000 20,000 vii. Cash and bank balance 2,15,000 | 30,65,000 | 1,30,000 | 11,10,000 Liabilities i. 12% Debentures, 100,000 100,000 il Trade payables 40,000 45,000 ili. Provision for tax 1,00,000 | (2,40,000) 60,000 | (2,05,000) Net assets 28.25,000 9.05,000 No. of shares 70,000 25,000 Intrinsic value per share (upto one 40.4 362 decimal) 3. Valuation of goodwill ‘A. Capital Employed Huge Utd. Big Lid. z z z z Assets i. Sundry fixed assets 9,50,000 4,00,000 Investment (Non-trade) 7 - Inventory 120,000 50,000 Trade receivables 75,000 80,000 v. Advance tax 80,000 20,000 vi. Cash and bank balance | 2.75,000 | 15,00,000 | 1,30,000 | 6,80,000 Liabilities: 12% Debentures 1,00,000 1,00,000. Sundry creditors 40,000 45,000 Provision for tax 1,00,000 | (2,40,000) | 60,000 | (2,05,000) Capital employed 12,60,000 4,75,000 © The Institute of Chartered Accountants of IndiaAmalgamation _6.37 B. Average pre-tax profit: Particulars, Huge Lid. | Big Lid z z 2010 5,00,000 | 1,50,000 2011 6,50,000 | 2,10,000 2012 515,000 | 1,80,000 Total (axb+c) 11,.25,000 | 5,40,000 ‘Simple Average [total «3] 5,75,000 | 1,80,000 Less: Non-trading income (2,00,000 @ 25%) (60,000) (80,000 @ 18%) (9,000) Average profit 5,25,000 | 1,71,000 C. Computation of goodwill: z Particulars Huge Ltd. | Big Ltd Capitalised value of average profits 5,25,000,1.71.000 26,25,000 | 8,55,000 [ 20 20 | Capital employed +12,60,000 | 4,75,000 Goodwill 113,65,000 | 3,80,000 1, Amalgamation means joining of two or more existing companies into one company, the joined companies lose ther identity and form themselves into a new company. 2. In absorption, an existing company takes over the business of another existing company. Thus there is only one liquidation and that is of the merged company. 3. A company which is merged into another company is called a transferor company or a vendor company. 4. A company into which the vendor company is merged is called transferee company or vendee company or purchasing company, 5 In amalgamation in the nature of merger there is genuine pooling of: itute of Chartered Accountants of India6.38 Accounting a) Assets and labiltes of the amalgamating companies, b) Shareholders’ interest, ‘Also the business of the transferor company Is intended to be car transferee company. don by the 6. In amalgamation in the nature of purchase, one company acquires the business of another company. 7. Purchase Consideration can be defined as the aggregate of the shares and securities issued and the payment made in form of cash or other assets by the transferee company to the share holders of the transferor company. 8. There are two main methods of accounting for amalgamation: a) The pooling of interests method, and b) The purchase method. 9. Under pooling of interests method, the assets, labiliies and reserves of the transferor company will be taken over by transferee company at existing carrying amounts. 10. Under purchase method, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identtfable assets and liabilities on the basis oftheir fir values at the date of amalgamation © The Institute of Chartered Accountants of India