Common Meaning

Amalgamation: When two or more companies that exist as on date combine together to form a new
company, then it is called “amalgamation”.
In this case, all the combining companies will get liquidated. A new company will be formed to take
over their business.
To illustrate, X Ltd. and Y Ltd., the two existing companies, combine together to form Z Ltd., a new
company. X Ltd. and Y Ltd. will get liquidated. A new company Z Ltd. is formed to run the business.
Absorption: When one existing company takes over the business of two or more older existing
companies, it is called “absorption”. The other two or more existing companies (i.e., companies whose
business are taken over) will get liquidated. At the same time, no new company will be floated.
To illustrate, X Ltd., one existing company, takes over other two existing companies Y Ltd. and Z
Ltd. Y Ltd. and Z Ltd. will get liquidated. X Ltd. continues to do its business and no new company will
be formed. In other words, X Ltd. absorbs the other two companies Y Ltd. and Z Ltd. X Ltd. continues to
do its business whereas Y Ltd. and Z Ltd. will be liquidated.
External reconstruction: When an existing company is liquidated and in its place a new company is
floated but with the same shareholders, it is known as “external reconstruction”. Shareholders will remain
unaltered but company’s name and structure will be new.
To illustrate, X Ltd. is liquidated. But the existing shareholders continue their status as shareholders
and a new company Y Ltd. is formed.
Accounting Basis
Accounting for amalgamation: Standard AS-14, issued by the Institute of Chartered Accountants of
India, deals with the accounting for amalgamation and the treatment of any resultant goodwill or reserves.
This standard was issued in 1994. This is mandatory to all companies with effect from the accounting
year commencing on or after 1 April 1995.
According to AS-14, amalgamation means an amalgamation pursuant to the provisions of the
Companies Act 1956, or any other statute which may be applicable to companies.
The Standard uses the term “transferor company” for the company which is amalgamated into
another company.
The Company selling its business is also called “vendor company”.
The Company into which a transferor company is amalgamated is called “transferee company”.
The Company which acquires the business is also called the “vendee company”.
It is important to note that:
(i) The term amalgamation includes “absorption” also
(ii) The term amalgamation does not apply to acquisitions in the nature of controlling interest
(Because in such cases, the acquired company will not be dissolved and its separate entity will
continue to exist).
TYPES OF AMALGAMATION
The Standard AS-14 classifies amalgamation into two categories:
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase

Amalgamation in the Nature of Merger

Amalgamation should be considered to be an amalgamation in the nature of merger if the following
conditions are satisfied:
1. All the assets and liabilities of the transferor company become the assets and liabilities of the
transferee company after amalgamation.
2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than equity shares already held therein, immediately before the amalgamation of the
transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of an amalgamation.
3. The consideration to the shareholders of the transferor company (willing to become equity
shareholders of the transferee company) is discharged by the transferee company wholly by issue of
equity shares in the transferee company except that cash may be paid in respect of any fractional
shares.
4. The business of the transferee company is intended to be carried on after amalgamation by the
transferee company.
5. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor
company when they are incorporated in the financial statements of the transferee company except to
ensure uniformity of accounting policies.

Amalgamation in the Nature of Purchase

The amalgamation is in the nature of purchase, if any one or more of the conditions stipulated for the
merger are not satisfied.
 Hence, in the amalgamation in the nature of purchase:
1. Selling company’s business will not be carried on in future
2. Shareholders holding 90% of the transferor company will not become shareholders of the transferee
company
3. All the assets and liabilities of the selling company will not be taken over by the transferee company
4. Consideration payable to shareholders of transferor company may be in the form of shares or cash or
in any other agreed form
5. Assets and liabilities taken over by the transferee company may be shown at values other than book
values at the discretion of the transferee company
NOTE: Transferor company is the “selling company” and transferee company is the “purchasing
company”. The Accounting Standard, for the purpose of accounting, recommends the “pooling of
interests method”
in the case of “amalgamation in the nature of merger” and the “purchase method” for “amalgamation in the
nature of purchase”. These methods will be discussed in detail later.

ACCOUNTING TREATMENT AS PER AS–14

Notwithstanding the fact that amalgamation, absorption and external reconstruction differ in many
aspects, all have some common accounting problems.
They are as follows:
(i) In all the cases, the transferor company and the transferee company must first agree the purchase
consideration, i.e., the purchase price that should be acceptable by both parties
(ii) In all the cases, accounting entries have to be passed in the books of companies that will be
liquidated in order to close the accounting books.
(iii) In all the cases, accounting entries have to be passed in the books of the transferee (purchasing)
company to record the transactions pertaining to acquisition of business.
(iv) In all the cases, if the amalgamation is in the nature of merger “pooling of interest” method has to
be adopted and if it is in the nature of purchase “purchase method” has to be adopted.
Before trying to solve problems relating to amalgamation, one has to understand some of the
important terms associated with amalgamation, absorption and external reconstruction. They are
discussed as follows:
Taking over the business: This term refers to take over of all the assets and liabilities of the business
entity.

All assets: This term comprises fixed assets, current assets, goodwill, prepaid expenses, cash (in hand and
at bank). But this term does not include fictitious assets shown on the assets side of the balance sheet
under the heading “Miscellaneous Expenditure”.
Example: Preliminary expenses, profit and loss account (debit balance), discount on the issue of shares or
debentures.
Trade liabilities: Example: Creditors, bills payable—They are to be grouped under liabilities.
Liabilities: This term is used to refer all liabilities to third parties. First party is the company and second
party is the shareholders. Liabilities include the following:
1. Creditors
2. Trade creditors
3. Bills payable
4. Bank overdraft
5. Loans
 6. Outstanding expenses
7. Unclaimed dividends
8. Provision for taxation
9. Provision for gratuity
10. Pension fund
11. Provident fund
12. Superannuation fund
13. Workmen savings bank accounts (Deposit)
14. Workmen profit sharing fund
15. Workmen compensation
16. Debentures
17. Employees’ deposit
18. Public deposits
19. Creditors for expenses
Purchase Consideration
In general, “purchase consideration” means the cash and non-cash payments made to the shareholders
of the transferor (vendor) company. Accounting Standard AS-14, issued by the ICA1, defines the term
consideration as, “Consideration for the amalgamation means the aggregate of shares and other securities
issued and the payment made in the form of cash and other assets by the transferee company to the
shareholders of the transferor company”.
Salient Features of “Purchase Consideration”
The following are the salient features of purchase consideration:
1. Purchase consideration is confined to payments (cash and non-cash) to the shareholders of the transferor
company (Selling company).
2. This amount payable has to be made by the transferee company which is to be treated as
consideration for the acquisition of business.

3. Any amount paid to debenture holders, creditors and cost of absorption should not be included in
purchase consideration.
4. Non-cash elements of purchase consideration should be determined at the fair value.
AS-14 recognizes the consideration payable to equity as well as preference shareholders of the transferor
company

Computation of Purchase Consideration

The following are the different methods of computing purchase consideration:
1. Lumpsum method
2. Net payments method
3. Net assets method
4. Ratio of exchange method
It is to be noted that as per AS-14, purchase consideration means only payment made to shareholders,
irrespective of the method applied to compute purchase consideration.
Lumpsum Method
At times, the purchase consideration is mentioned (as a lump sum) straightaway in the agreement. In such
a case, no necessity arises to compute purchase consideration.
Net Payment Method
Only those agreed payments specified in the agreement have to be added to determine the purchase
consideration. That means, the quantum of amount payable in cash or shares or debentures are all to be
added. The aggregate of the amount is referred to as “net payment” made by the purchasing company. It
has to be paid to shareholders of the selling company.
Some of the important factors to be observed while determining the purchase consideration are as
follows:
1. Only the agreed amount specified in the agreement should be included in the consideration.
2. In general, purchase consideration will not include payments to debenture holders and creditors. For
this, a separate adjustment has to be made: such liabilities should be transferred to the books of the
transferee company and then payment of liabilities should be shown in the books of the transferee
company.
3. Liquidation expenses of the transferor company are met by the transferee company. Accountants
differ in the treatment of liquidation expenses. If they are payable by the purchasing company, it is to
be added to purchase consideration. But some accountants exclude the liquidation expenses in
determining purchase consideration.
Shares issued by the transferee company should be valued at market price if the “purchase method” is adopted
and at par value (fully paid only) if “the pooling of interests” method is adopted

Model: Net payment method

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

NOTE:

1. Debenture holders payment will be excluded.

2. Payment in cash and in shares have to be added.
3. Liquidation expenses are to be included, as they are to be borne by X Ltd.
Computation of Purchase Consideration (Under Net Payment Method)
Step 1: Cash Payment 60,000 Equity Shares × ` 20 `
(Outstanding) (Given) 12,00,000
Step 2: Payment by Shares Shares Issued 5 Shares for 1 Share
∴Total Shares = 5 × 60,000 =
3,00,000 Total Amount = 3,00,000 × ` 30,00,000
10
Step 3: Cash Payment for Liquidation Expenses: 40,000
Step 4: Purchase Consideration
(Step 1 + Step 2 + Step 3): 42,40,000
[Link].3 Net Assets Method
This method will be used if the “net payment method” cannot be used. When payment made is not crystal
clear for various items, this method can be used. That means, if some form of cash payment is missing in
the problem, this method can be adopted.
Under this method, purchase consideration is to be determined by adding the agreed values of assets
taken over and deducting the agreed value of liabilities. This can be put in the form of equation as:
Sum of value of net assets = Agreed value of assets taken over – Sum of agreed value of liabilities
taken over
Some of the important factors to be observed while determining purchase consideration under this
method are:
1. The term “Assets” includes cash and bank balances.
2. The term “Assets” excludes items such as preliminary expenses, profit & loss A/c (Dr.), discount on
issue of shares.
3. Items shown on the assets side of balance sheet under the head “Miscellaneous Expenditure” should
not be included in the category of assets.
4. Any other asset specially mentioned as “not taken over” should not be included.
5. Similarly, liabilities not taken over should not be included.
6. All credit balances should be excluded.
7. Items shown on the liabilities side of the balance sheet under the head “Reserves & Surplus” should
not be included.
8. Accumulated profits are not liabilities. They should be excluded.
9. Liabilities included are amounts to third parties.
10. Any “fund”—for example, workmen’s savings, profit sharing fund, PF—should be included under
liabilities category.
11. “Trade creditors” comprises only creditors and bills payable. All other liabilities such as tax payable
overdraft, any outstanding expenses are not a form of liability.
 Net assets method
The following is the balance sheet of Maa Ltd. as on 31 March 2011:
Liabilities ` Assets `
5,000 Equity Shares of ` 100 Each Fully 5,00,000 Fixed Assets 10,00,000
Paid Investments 2,00,000
General Reserve 7,00,000 Current Assets 3,00,000
Profit & Loss Account 1,50,000 Preliminary Expenses 1,80,000
Trade Creditors 2,00,000 Share Issue Expenses 1,20,000
Provision for Taxation 1,50,000
Proposed Dividends 1,00,000
18,00,000 18,00,000
On the date of balance sheet, the company was taken over by Pappa Ltd. on the following terms:
(a) Fixed assets are revalued at ` 12,00,000
(b) Investments have a market value of ` 1,50,000
(c) Current assets are agreed at ` 3,50,000 for the purpose of absorption
(d) Pappa Ltd. has agreed to pay the tax liability, which is estimated at ` 1,75,000
(e) Dividends are to be paid before absorption by Maa Ltd.
Compute the purchase consideration.
Solution
Step 1 : Assets Taken Over by Pappa Ltd.: ` `
(i) Fixed Assets (Ref: Terms): 12,00,000
(ii) Investments (Ref: Terms): 1,50,000
(iii) Current Assets: 3,50,000
Less: Dividend Paid: 1,00,000 2,50,000
Step 2 : Add [(i) + (ii) + (iii)]: 16,00,000
Step 3 : Liabilities Taken Over:
(i) Trade Creditors 2,00,000
(ii) Tax Liability 1,75,000
Step 4 : Add [(i) + (ii)] 3,75,000 3,75,000
Step 5 : (Step 2 – Step 4) Purchase Consideration}: 12,25,000
Purchase Consideration payable to the Shareholders of Maa Ltd. = ` 12,25,000.
This amount, i.e., ` 12,25,000, may be paid by Pappa Ltd. either in the form of cash or shares or
debentures or in the combined form of cash and securities.
NOTE: As dividends are to be paid before absorption, the proposed dividend has to be deducted from
current assets. It may also be shown as a liability to be deducted combined with other liabilities, if it is
agreed to be taken over by Pappa Ltd.
Purchase consideration—Net assets method
The balance sheet of ABC Ltd. as at 31 March 2011 is as follows:

Liabilities ` Assets `
Equity Share Capital 5,00,000 Building 2,00,000
10% Preference Share Capital 1,50,000 Plant & Machinery 3,00,000
12% Debentures 1,00,000 Furniture 70,000
Reserve Fund 40,000 Investment (MV ` 80,000) 90,000
Securities Premium 30,000 Stock 75,000
 Profit & Loss A/c 10,000 Debtors 2,80,000
Workmen Compensation Fund 45,000 Bills Receivable 25,000
Bills Payable 25,000 Cash in Hand 15,000
Creditors 1,70,000 Cash at Bank 85,000
Provident Fund 80,000 Goodwill 20,000
Provision for Tax 20,000 Preliminary Expenses 10,000
11,70,000 11,70,000

XYZ Ltd. intends to take over the business on the following terms and valuation:
(i) Building at ` 1,70,000; plant & machinery at ` 2,50,000; furniture at ` 15,000; stock at
` 1,00,000; debtors subject to a provision of 10% for doubtful debts; goodwill found to be nil
(ii) There was a liability of ` 15,000 against workmen compensation fund
(iii) Actual tax liability is ` 25,000
(iv) Realization expenses estimated at ` 10,000 to be borne by XYZ Ltd.
(v) Preference shareholders are to be paid in cash
(vi) Balance to be paid in equity shares of XYZ Ltd. of ` 10 shares
Solution
Computation of Purchase Consideration:

Step 1: Assets Taken Over (At Agreed Value) ` `

(i) Building (At Agreed Value) 1,70,000
(ii) Plant & Machinery (At Agreed Value) 2,50,000
(iii) Furniture (At Agreed Value) 15,000
(iv) Stock (At Agreed Value) 1,00,000
(v) Debtors: ` 2,80,000
2,52,000
Less: Provision @ 10% ` 28,000
 (vi) Investments (At Market Value) 80,000
(vii) Bills Receivable (As in B/S) 25,000
(viii) Cash in Hand (As in B/S) 15,000
(ix) Cash at Bank (As in B/S) 85,000
Step 2: Add (i) to (ix) 9,92,000
Step 3: Liabilities Taken Over:
(i) Creditors (As Shown in B/S) 1,70,000
(ii) Bills Payable (As Shown in B/S) 25,000
(iii) Provident Fund (As Shown in B/S) 80,000
(iv) Workmen Compensation Fund (Agreed Value) 15,0000
(v) Provision for Tax (Agreed Value) 25,000
(vi) 12% Debentures 1,00,000
Step 4: Add: Step 3 (i) to (vi) 4,15,000
Step 5: Purchase Consideration (Step 2 – Step 4) = 5,77,000
Payment of Purchase Consideration (As per Directions Given in the Problem):
`
For Preference Share holders in Cash: 1,50,000
Balance in 42,700 Equity Shares (of ` 10 Each) 4,27,000
(` 5,77,000 − ` 1,50,000 = 4,27,000)
Total 5,77,000

NOTE:

1. Realization expenses are not included.

If realization expenses will be paid by the transferor company, then it will be included and the value of purchase
consideration will be reduced to that extent

Model: Net assets method—Two companies agree to amalgamate

The following are the balance sheets of A Co. Ltd. and B. Co. Ltd. as on 31 March 2011:
Liabilities A Ltd. ` B Ltd. `
Rs
Assets A Ltd. ` B Ltd. `
Equity Share Capital ` 10 2,00,000 1,00,000 Land & Building 50,000 —
per Share Plant & Machinery 2,30,000 80,000
10% Debentures of ` 10 30,000 — Stock 20,000 14,000
Each Debtors 14,000 12,000
Reserve Fund 50,000 — Cash 6,000 4,000
Dividend Equalization 5,000 —
Fund
Employees Provident 10,000 —
Fund
Trade Creditors 20,000 10,000
Profit & Loss Account 5,000 —
3,20,000 1,10,000 3,20,000 1,10,000
 The two companies agree to amalgamate and form a new company called C Co Ltd., which takes
over the assets and liabilities of the two companies. The authorized capital of C Ltd. is ` 15,00,000
consisting of 1,50,000 equity shares of ` 10 each. The assets of A Ltd. are taken over at a reduced
valuation of 20% with the exception of land and buildings and cash which are accepted at book
value. Both companies are to receive 10% of the net valuation of their respective as goodwill. The entire
purchase price is to be paid by C Ltd. in fully paid shares. In return for debentures of A Ltd., debentures
of the same amount and denomination are to be issued by C Ltd.
You are required to compute purchase consideration.
Solution
Computation of Purchase Consideration:
A Ltd. B Ltd.
` `
Step 1: Assets Taken Over at their Respective Book Value:
(As Shown in B/S) 3,20,000 1,10,000
Step 2: To be Adjusted as per Agreed Value, i.e., 20% Reduction in 52,800
Respect of Assets Except Land & Building and Cash —
` 3,20,000 – (50,000 + 6,000) = 20% of ` 2,64,000
= ` 52,800 2,67,200
Step 3: Less: Liabilities Taken Over: ` —
(i) Employees PF 10,000
(ii) Trade Creditors 20,000 … (10,000)
(iii) 10% Debentures 30,000 (60,000) —
2,07,200 1,00,000
Step 4: Add: Goodwill: 10% of Net Valuation 20,720 10,000
Step 5: Purchase Consideration 2,27,920 1,10,000

Accounting Procedure
Accounting Treatment in the Books of Transferor (Selling or Vendor) Company
Important note: The accounting procedure is SAME for all types of amalgamation, whether it is in the
nature of “merger” or “purchase”, in the books of the transferor (vendor) company.
 Journal
Date Particulars L.F. Dr. Cr.
` `
Step 1: Transfer of Assets:
Realization A/c Dr. …
To Assets (Individually) Account …
[Important Hints for transfer of assets:
(i) All assets, whether taken over or not must be transferred to
realization a/c at book value.
(ii) Provisions should not be deducted, but to be shown
separately by crediting realization a/c.
(iii)Agreed values should be ignored.
(iv) Each and every asset has to be transferred individually.
(v) Fictitious assets are to be ignored. (They should not be
transferred to realization a/c)
(vi) When amalgamation is in the nature of purchase, cash in
hand and cash at bank are to be transferred to realization a/c
if they are taken over by the transferee company.
When amalgamation is in the nature of merger, these accounts
MUST be transferred to realization a/c.
(vii)All intangible accounts such as goodwill, patent copyrights
are to be transferred to realization a/c. In case, they are
mentioned as worthless, then they have to be transferred to
shareholders A/c as “loss”.]
Step 2: Transfer of Liabilities:
Liabilities (Individually) A/c Dr. …
To Realization A/c …
[Important Hints for Transfer of Liabilities:
(i) Liabilities not taken over and liabilities to be settled by
immediate payment are not to be transferred to realization
a/c.
(ii)Liabilities should be transferred as their respective book values.
(iii)All the items shown under the heads “Secured Loans” and
“Unsecured Loans” are to be transferred whether they are
taken over or not by the transferee (purchasing) company.
This also includes “Debentures”, irrespective of the method of
calculating purchase consideration.
(iv) Any amount in the nature of reserve should not be
transferred to realization a/c.
Example: Accumulated profits (P&L A/c credit balance),
sinking fund, dividend equalization fund, debenture redemption
fund, i.e., all funds in the nature of profits.
(v) Funds which are not reserves are to be transferred to
realization A/c. Example: Pension fund, PF., superannuation
fund.
(vi) Funds which are partly profit and partly liability—only
liability part is to be transferred to realization A/c and the
other part is to be transferred to shareholders A/c.
Step 3: Purchase Consideration—DUE:
(Purchasing) Transferee Co’s A/c Dr. …
To Realization A/c …
Step 4: Realization Expenses :
(a) If (a) If Liquidation Expenses Are Paid and Borne by the
Transferor Company (Selling/Vendor)
Realization A/c Dr. …
To Bank A/c …
(b) If the Transferor Pays and Later Gets Reimbursed by Transferee
Company:
(i) Transferee Company’s A/c Dr. …
To Bank A/c
(ii) Bank A/c Dr. …
To Transferee Company’s A/c
Note: At times, actual expenses paid and the reimbursement
amount may vary. In such cases, the difference will be adjusted
with realization A/c.
(c) If Liquidation Expenses Are Paid and Borne by the Purchasing
(Transferee) Company, then No Need to Enter in the Books
of the Vendor (Transferor) Company.
(However, the Liquidation Expenses Reimbursable Are Not at
All to Be Included in the Purchase Consideration According to
AS-14)
Step 5: Realization of Assets Not Taken Over by the
Purchasing Company (Recorded or Not Recorded):
Bank A/c [Amount Realized] Dr …
To Realization A/c …
Step 6: Payment of Liabilities Not Taken Over:
Realization A/c Dr. …
To Bank A/c …
[Note: In the settlement of iability, if there is premium, realization
A/c is to be debited or credited in case of discount.]
Step 7: Discharge of Preference Share Capital:
(a) When Payable at Premium:
Preference Share Capital A/c [Face Value] Dr. …
…
Realization A/c (Premium) Dr.
…
To Preference Shareholders A/c [Total]
(b) When Payable at Discount:
Preference Share Capital A/c (Face Value) Dr. …
To Preference Shareholders A/c (Net Amount Payable) …
To Realization A/c (Amount of Discount) …
(c) When Payable at Par:
Preference Share Capital A/c (Face Value) Dr. …
To Preference Shareholders A/c (Face Value) …
[Note: At times, on amalgamation, may be paid as premium or
discount. In such cases, they have to be adjusted in realization
A/c first and only then their profit/loss is to be determined.]
 Step 8: Profit/Loss on Realization:
(a) When There Is Profit on Realization:
Realization A/c [With Profit Amount] Dr. …
To Equity Shareholders A/c …
(b) When There is Loss on Realization:
Equity Shareholders A/c (With Loss Amount) Dr. …
To Realization A/c
Step 9: On Receipt of Purchase Consideration:
Bank A/c (In the Form of Cash) Dr. …
Preference Shares in Transferee Company’s …
A/c (In the Form of Equity Shares) Dr. …
Equity Shares in Transferee Company’s A/c Dr. …
(In the Form of Equity Share)
To Transferee Company’s A/c (Total)
[Purchasing Company’s A/c Will Be Closed with This Entry]
Step 10: Transfer of Equity Share Capital, Accumulated Profits &
Reserves:
Equity Shares Capital A/c Dr. …
Capital/Revenue A/c Dr. …
General Reserve A/c Dr. …
Any Other Reserve A/c Dr. …
Profit & Loss A/c Dr. …
To Equity Shareholders A/c …
Step 11: Transfer of Accumulated Losses and Fictitious Assets:
Equity Shareholders A/c Dr. …
To Preliminary Expenses A/c …
To Underwriting Commission A/c …
To Discount on Issue of Shares/Debentures A/c …
To Profit & Loss A/c …
Step 12: Final Settlement of Claims to Preference Shareholders.
Preference Shareholders A/c (Amount Due) Dr. …
To Bank A/c (Cash Paid) …
To Preference Share in Transferee Company …
A/c (Paid in the Form of Pref. Shares) …
Step 13: Final Payment to Equity Shareholders:
Equity Shareholders A/c (Amount Due) Dr. …
To Bank A/c (Cash Paid) …
To Equity Share in Transferee Company A/c …
(Paid in the Form of Equity Shares)
[Note: Vendor company’s account will get closed after payment is
made to equity shareholders.]

Model: Accounting in the books of transferor company

The balance sheets of X Ltd. and Y Ltd. were as follows on 31 March 2011:
 (` in 000’s)
X Ltd. ` Y Ltd. `
Assets:
Goodwill — 350
Patents 1,000 —
Land & Buildings 3,000 —
Plant & Machinery 7,750 —
Motor Vehicles — 200
Furniture — 125
Investments 0,575 —
Stocks 1,750 1,195
Debtors 400 310
Cash at Bank 225 85

14,700 2,265
Liabilities:
Share Capital: 25,000 Pref. Shares of ` 100 Each 2,500 —
7,50,000 Equity Shares of ` 10 Each 7,500 —
2,00,000 Equity Shares of ` 10 Each — 2,000
10,000 2,000
General Reserve 4,000 —
Profit and Loss A/c 450 160
Creditors 250 105

14,700 2,265

A new company Z Ltd. was formed to acquire the assets and liabilities of X Ltd. and Y Ltd. The terms of
acquisition of business were as follows:
(i) Z Ltd. to have an authorized capital of ` 1,75,00,000 divided into 25,000 12% preference shares of
` 100 each and 15,00,000 lakh equity shares of ` 10 each
(ii) Business of X Ltd. valued at ` 1,50,00,000; settlement being ` 30,00,000 cash and balance by
issue of fully paid equity shares of ` 12 each
(iii) Business of Y Ltd. valued at ` 24,00,000 to be settled by issue of fully paid equity shares of
` 12 each
(iv) Preference shares of X Ltd. were redeemed
You are required to make journal entries in the books of X Ltd. and Y Ltd. to close their books of
account and also show the necessary ledger Accounts.
[C.S. (Inter). Modified]
Solution

Books of X
Ltd.
Journal
(` in 000’s)
Date Particulars L.F. Dr. Dr.
` `
Step 1: For Assets Taken Over by Z Ltd.
Realization A/c Dr. 14,700
To Patents 1,000
To Land & Buildings 3,000
To Plant & Machinery 7,750
To Investment 575
To Stock 1,750
To Debtors 400
To Bank 225
(Transfer of All Assets Taken Over by Z Ltd.)
Step 2: For Liabilities Taken
Over: Creditors A/c Dr. 250
To Realization A/c 250
(Transfer of Creditors to Realization A/c)
Step 3: Purchase Consideration Due (Given)
Z Ltd. A/c Dr. 15,000
To Realization A/c 15,000
(Purchase Consideration Due from Z Ltd.)
Step 4: Profit on Realization (Ref: Realization A/c—
Ledger) Realization A/c Dr. 550
To Equity Shareholders A/c 550
(Profit on Realization Transferred to Shareholders A/c)
Step 5: On Receipt of Purchase Consideration:
Equity Shares in Z Ltd. Dr. 12,000
Bank A/c Dr. 3,000
To Z Ltd. A/c 15,000
(Purchase Consideration Received in Shares and Cash)
Step 6: Amount Due to Preference Shareholders:
Preference Share Capital A/c Dr. 2,500
To Preference Shareholders A/c 2,500
(Amount Due to Preference Shareholders)
Step 7: Settlement of Claim to Pref. Shareholders
Preference Shareholders A/c Dr. 2,500
To Bank A/c 2,500
(Payment Made to Pref. Shareholders)
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 60

3. Equity Shares in Z Ltd.

Step 8: Amount Due to Equity shareholders

Equity Share Capital A/c Dr. 7,500
General Reserve A/c Dr. 4,000
Profit & Loss A/c Dr. 450
To Equity Shareholders A/c 11,950
(Amount Due to Equity Shareholders)
Step 9: Settlement of Claims to Equity Shareholders:
Equity Shareholders A/c Dr. 12,500
To Equity Shares in Z Ltd. 12,000
To Bank A/c 500
(Payment Made to Equity Shareholders in Cash & Shares)

Books of Y Ltd.

Journal
(` in 000’s)
Date Particulars L.F. Dr. ` Cr. `
Step 1: Assets Taken
Over: Realization A/c Dr. 2,265
To Goodwill 350
To Motor Vehicles 200
To Furniture 125
To Stocks 1,195

To Debtors 310

To Bank 85
(Transfer of All Assets Taken Over by Z Ltd.)
Step 2: Liabilities Taken Over:
Sundry Creditors A/c Dr. 105
To Realization A/c 105
(Transfer of Liabilities Taken Over)
Step 3: Purchase Consideration Due (Given):
Z Ltd. A/c Dr. 2,400
To Realization A/c 2,400
(Purchase Consideration Due)
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

3. Equity Shares in Z Ltd.

Step 4: Realization Profit (Ref : Realization A/c):

Realization A/c Dr. 240
To Equity Shareholders A/c 240
+(Realization Profit Transferred to Equity Shareholders A/c)
Step 5: Amount Due to Equity Shareholders:
Equity Shares Capital A/c Dr. 2,000 2,160
Profit and Loss A/c Dr. 160
To Equity Shareholders A/c
(Amount Due to Equity Shareholders)
Step 6: On Receipt of Purchase Consideration:
Equity Shares in Z Ltd. Dr. 2,400
To Z Ltd. A/c 2,400
(Purchase Consideration Received)
Step 7: Settlements to Equity Shareholders:
Equity Shareholders A/c Dr. 2,400
To Shares in Z Ltd. 2,400
(Amount Paid to Equity Shareholders in the Form of Shares)

Accounting Treatment in the Books of Transferee (Purchasing) Company

Accounting treatment in the books of purchasing company is based on the nature of amalgamation.
Accounting Standard AS-14 stipulates two methods of accounting for amalgamation:
1. Pooling of interest methods
2. Purchase method
When the amalgamation is in the nature of merger, the transferee company has to apply “pooling of
interests method”. When the amalgamation is in the nature of purchase, the transferee company has to
apply “purchase method”.
Pooling of Interests Method
Pooling of assets, liabilities, capital, reserves and business of both companies takes place in this method:
1. The assets, liabilities and reserves of the transferor company are recorded by the transferee company
at their existing carrying amounts (i.e., book values). That means no adjustment is made in the book
values of assets and liabilities of the transferor company. Further, fictitious assets are not assets and
hence should not be incorporated in the books of transferee company.
2. The effects on the financial statements of any changes in accounting policies are to be reported as per
AS-5.
3. The purchase consideration under this method is to be valued at par value of shares issued.
4. The balance in the profit and loss account of the transferor company should be aggregated with the
corresponding balance of the transferee company or transferred to general reserve.
5. The difference between the amount recorded as share capital issued + additional consideration in
form of cash or other assets and the amount of share capital is to be adjusted in reserves in financial
statements of the transferee company.
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

3. Equity Shares in Z Ltd.

The Expert Advisory Committee of ICAI Recommends:
(a) The difference between the issued share capital of the transferee company and share capital of
transferor company should be treated as CAPITAL RESERVE.
(b) Reserve created on amalgamation is not available for dividend and/or bonus shares issued.
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

Journal Entries in the

3. Equity Books
Shares in Zof Transferee
Ltd.
Company (Pooling of Interest
Method)
Date Particulars L.F. Dr. Cr.
` `
Step 1: Purchase of Business:
Business Purchase A/c Dr. …
(With the Amount of Purchase Consideration.)
To Liquidators of Transferor Company …

Step 2: Take Over of the Assets, Liabilities and Reserves of the

Transferor Company:
Sundry Assets A/c (Individually) Dr. …
To Sundry Liabilities A/c (Individually) …
To Profit and Loss A/c …
To Reserves A/c (Individually) …
To Business Purchase A/c …
[Note: All assets and liabilities are to be recorded at their
book values separately. But at times, book value gets adjusted
according to the accounting policy of purchasing company.]
Step 3: Settlement of Purchase Consideration:
(i) When Shares Are Issued at Par:
Liquidators of Transferor Company A/c Dr. …
To Equity Share Capital A/c …
To Preference Share Capital. …
A/c To Bank A/c …
(ii) When Shares Are Issued at Premium:
Liquidators of Transferor Company A/c Dr. …
To Equity Share Capital A/c …
To Preference Share Capital …
A/c To Securities Premium A/c …
To Bank A/c ….
(iii)When Shares Are Issued at Discount:
Liquidators of Transferor Company A/c ….
Dr.
….
Discount on Issue of Shares A/c Dr.
….
To Equity Share Capital A/c
…..
To Preference Share Capital
…..
A/c To Bank A/c

Step 4: Discharge of Liabilities:

(i) When Debentures Are Issued at Par:
Debentures of Transferor Company A/c Dr. …
To Debentures (of Transferee Company) A/c …
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

(ii) When Debentures Are Issued at

Premium: Debentures of Transferor Dr. …
Company A/c ….
To Debentures (of Transferee Company) A/c
To Securities Premium A/c
(iii)When Debentures Are Issued as Dr. ….
Discount: Debentures of Transferor Dr. ….
Company A/c Discount on Issue of ….
Debentures A/c
To Debentures (of Transferor Company) A/c
Step 5: Liquidation Expenses:
(i) Liquidation Expenses A/c Dr. …
To Bank A/c …
(ii) General Reserve/P&L A/c Dr. …
To Liquidation Expenses A/c …
Step 6: Formation Expenses:
Preliminary Expenses A/c Dr. …
To Bank A/c …
[Note: At times, preliminary expenses are not written off
against general reserve or P&L A/c. In such cases, it will be
shown on the assets side of B/S under “Miscellaneous
Expenditure”.]

Purchase Method
Accounting for amalgamation: When amalgamation is in nature of purchase, “purchase method” will
have to be applied, in accordance with AS-14.
Accounting Entries in the Books of Transferee
Company (Purchase Method)
Date Particulars L.F. Dr. Cr.
` `
Step 1: Business Purchase: (Purchase of Business)
Business Purchase A/c Dr.
To Liquidators of Transferor Company A/c
Step 2: Taken Over of Assets of Liabilities:
All Assets A/c (Individually) Dr. …
at Agreed Values
To Liabilities A/c (Individually) at Agreed Values ….
To Debentures in Vendor’s Company A/c …
To Business Purchase A/c …
[Important Hints & Notes:
Case 1: If total amount of credit accounts is greater than
the total amount of debit accounts, the difference is to be
treated as a capital loss and is to be debited to goodwill A/c.
Then entry
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61
will be:
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

Goodwill A/c (Balancing Figure) Dr. ….

Assets A/c (Individually) Dr. …
To Liabilities A/c …
(Individually) To Business …
Purchase A/c
Case 2: On the other hand, if total amount of debit
accounts is greater than the total amount of credit
accounts, then the difference is to be treated as a capital
profit and is to be credited to capital reserve A/c. Then entry …
will be:
Assets A/c (Individually) Dr. …
(Excluding Goodwill A/c) …
To Liabilities A/c (Individually) …
To Business Purchase A/c
To Capital Reserve A/c (Balancing Figure)
Case 3: If there are both goodwill & capital reserve, then only
net amount has to be shown in the B/S].
Step 3: Payment of Purchase Consideration: …
(i) When Securities Are Issued at Par: …
Liquidators of Transferor Company A/c Dr. …
To Bank A/c …
To Equity Share Capital A/c …
To Preference Share Capital
A/c To Debentures A/c …
(ii) When Securities Are Issued at Premium: …
Liquidators of Transferor Company A/c Dr. …
To Bank A/c …
To Equity Share Capital A/c …
To Preference Share Capital …
A/c To Debentures A/c
To Securities Premium A/c
…
(iii)When Securities Are Issued at Discount:
…
Liquidator of Transferor Company A/c Dr.
…
Discount on Issue of Shares A/c Dr. …
Discount on Issue of Debentures A/c Dr.
…
To Bank A/c
…
To Equity Share Capital A/c
…
To Preference Share Capital
A/c To Debentures A/c
…
Step 4: Statutory Reserves:
Amalgamation Adjustment A/c Dr. …
(Total Amount of Statutory Reserves)
To Particular Statutory Reserve A/c (Individually)
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

Step 5: Discharge of Debentures:

Debentures in Transferor Company A/c Dr. …
To Debentures in Transferee Company A/c …
To Securities Premium A/c …
To Bank A/c …
To Equity Share Capital A/c …
To Pref. Share Capital A/c …
Step 6: Liquidation Expenses (Paid and Borne by Transferee
Company:
Goodwill A/c Dr. …
To Bank A/c …
Step 7: Formation Expenses (In Case of a New Company)
Preliminary Expenses A/c Dr. …
To Bank A/c …
[Note: If both goodwill A/c and capital reserve appear in the
books of transferee company, then goodwill A/c should be set
off against the capital reserve A/c. The entry will be:
Capital Reserve A/c Dr. …
To Goodwill A/c] …
The following table shows the differences between “pooling of interests method” and “purchase
method”:
Basis of Distinction Pooling of Interests Method Purchase Method
1. Applicability Applicable to amalgamation in This is applicable to amalgamation
the nature of merger. in the nature of purchase.
2. Recording of assets & liabilities All assets and liabilities are They are to be recorded as
incorpo- rated as their book values. agreed or fair or market values.
3. Treatment of reserves All reserves are to be taken Reserves are ignored. except statu-
over by the purchasing company tory reserves.
along with assets & liabilities.
4. Status of shareholders At least 90% of equity Shareholders of transferor compa-
shareholders of transferor ny may or may not become share-
company will become shareholders holders of transferee company.
of transferee com- pany.
5. Difference between consider- Such difference is to be adjusted in The difference is to be adjusted
ation and sharecapital of ven- capital reserve, revenue reserve or in goodwill or capital reserve.
dor company P&L A/c.
6. Writing off goodwill It does not arise in this method. It should be written off within
5 years.
7. Liquidation expenses Liquidation expenses are written Liquidation expenses are to be
off to general reserve or P&L A/c of debited to goodwill A/c.
the purchasing company.
8. Amalgamation adjustment A/c No necessicity of such account Statutory reserves of selling com-
in this method. pany should be debited to “amal-
gamation adjustment A/c”. It is
to be shown on assets side of B/S.

Model: Journal entries in the books of transferee company—amalgamation in the nature of merger
On 31 March 2011, the balance sheet of AX Ltd stood as follows:
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61
Liabilities ` Assets `
Share Capital: Plant & Machinery 8,05,000
75,000 Equity Shares of `10 Fully Paid 7,50,000 Furniture & Fixtures 97,200
Securities Premium 75,000 Stock 3,52,750
General Reserve 3,12,750 Debtors 99,220
Profit & Loss A/c 92,650 Cash at Bank 56,600
Creditors 1,80,370
14,10,770 14,10,770
On this date AX Ltd. took over the business of BY Ltd. for ` 3,30,000 payable in the form of its fully
paid equity shares of ` 10 each at par. Shareholders of BY Ltd. get 110 shares of AX Ltd. for every 100
shares held in BY Ltd. The scheme of amalgamation also provided that 1,500 12% debentures of BY Ltd.
would be converted into equal number of 14% debentures of AX Ltd. of ` 100 each. The balance sheet of
BY Ltd. on the date of amalgamation was as follows:

Liabilities ` Assets `
Share Capital: Machinery 2,75,000
30,000 Equity Shares of ` 10 Each Fully 3,00,000 Furniture 67,600
Paid Stock 1,57,900
Capital Reserve 6,500 Debtors 64,650
Foreign Projects Reserve 4,850 Cash at Bank 37,180
General Reserve 37,675
Profit & Loss A/c 12,065
1,500 12% Debentures of ` 100 Each 1,50,000
Creditors 91,240
6,02,330 6,02,330
You are required to pass journal entries in the books of AX Ltd. assuming that the amalgamation is in
the nature of merger.
[C.S. (Inter). Modified]

Solution
WORKING NOTES:

Treatment of Reserve:
Method 1:General Reserve (Given in B/S of BY Ltd.) = ` 37,675
Less:Difference Between Purchase Consideration and Share
Capital of Vendor Company: ` 3,30,000 — ` 3,00,000
(Purchase Consideration Given) (Share Capital Face Value
of Shares of BY Ltd.) = ` 30,000
∴General Reserve of BY Ltd. to Be Shown in AX Ltd. Books = ` 7,675
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61

Method 2:

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

Books of AX Ltd.
Journal

Date Particulars L.F. Dr. Cr.

` `
Step 1: Business Purchase:
Business Purchase A/c Dr. 3,30,000
To Liquidator of BY Ltd. 3,30,000
(Purchase Price of Business Payable)

Step 2: Assets & Liabilities Taken Over:

(Reserve Adjusted)
Machinery A/c Dr. 2,75,000
Furniture A/c Dr. 67,600
Stock A/c Dr. 1,57,900
Debtors A/c Dr. 64,650
Cash at Bank A/c Dr. 37,180
To 12% Debentures (BY Ltd.) A/c 1,50,000
To Creditors 91,240
To Capital Reserve 6,500
4,850
To Foreign Projects Reserve
7,675
To General Reserve (Ref: Working Notes Method I)
12,065
To Profit and Loss A/c
3,30,000
To Business Purchase A/c
[Assets & Liabilities Taken Over and Reserves of BY Ltd. After
Adjusted (as Shown in Working Notes)]
Step 3: Discharge of Purchase Consideration:
Liquidator of BY Ltd. A/c Dr. 3,30,000
To Equity Share Capital A/c 3,30,000
(Purchase Consideration Paid in the Form of Shares)
Step 4: Discharge of Debentures:
12% Debentures (BY Ltd.) A/c Dr. 1,50,000
To 14% Debentures (AX Ltd.) A/c 1,50,000
(Issue of Debentures to Settle Debenture Holders of BY Ltd.)
AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 61
 AMALGAMATION, ABSORPTION AND EXTERNAL RECONSTRUCTION 62

5. .