AGURCHAND MANMULL JAIN COLLEGE

(A Unit of Sri S.S. Jain Educational Society)

Meenambakkam, Chennai – 600061
CO-EDUCATION
A Jain Minority Institution - Affiliated to University of Madras
Reaccredited by NAAC
Shift-II
_____________________________________________________________________________________________________________________________

DEPARTMENT OF COMMERCE (Accounting & Finance)

NOTES FOR “ADVANCED CORPORATE ACCOUNTING”

UNIT II: Amalgamation, Absorption & External Reconstruction

Introduction
There are many forms of business combinations to obtain the economies of large scale production
or to avoid the cut throat competition. They are amalgamation, absorption, external reconstruction
etc.
The term amalgamation is used when two or more existing companies go into liquidation and a
new company is formed to take over the business of liquidated companies. The term absorption is
used when an existing company takes over the business of one or more existing companies which
go into liquidation. In external reconstruction, one existing company goes into liquidation and a
new company is formed to take over the former company.
Definitions as per Accounting Standard 14 (AS‐14)
1. Amalgamation – means an amalgamation pursuant to the provisions of the Companies Act 1956
or any other statute which may be applicable to companies.
2. Transferor Company – means the company which is amalgamated into another company.
3. Transferee Company – means the company to which a transferor company is amalgamated.
4. Reserve – means the portion of earnings, receipts or other surpluses of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other than
provision for depreciation or diminution in the value of assets or for a known liability.

Types of Amalgamation
As per AS‐14 there are two types of amalgamation
(1) Amalgamation in the nature of merger and

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(2) Amalgamation in the nature of purchase.

1. Amalgamation in the nature of Merger (Pooling Interest Method)

An amalgamation should be considered to be an amalgamation in the nature of merge when all the
following conditions are satisfied:
1. All the assets and liabilities of the Transferor Company or companies before amalgamation
should become the assets and liabilities of the transferee company.
2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (excluding the proportion held by the transferee company) should become the
shareholders of the transferee company.
3. The consideration payable to the above mentioned shareholders should be discharged by the
transferee company by the issue of the equity shares and cash can be payable in respect of
fractional shares.
4. The business of the Transferor Company/ companies is intended to be carried on 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/ companies when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.
An amalgamation should be considered to be an amalgamation in the nature of purchase, when
any one or more of the conditions specified for amalgamation in the nature of merger is not
satisfied.
2. Amalgamation in the nature of purchase.
In the second category are those amalgamation which are in effect amode by which one company
acquires another company and as a consequence, the shareholders of the company which is
acquired normally do not continue to have a proportionate share in the equity of the combined
company or te business of the company which is acquired is not intended to be continued. Such
amalgamations are amalgamations in the nature of purchase.
So, amalgamations which do not satisfy one or more conditions specified for amalgamations in the
nature of merger should be treated as ‘amalgamations in the nature of purchase’.
Thus, in the amalgamations in the nature of purchase,
1. All the assets and liabilities of the selling company may not be taken over.

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2. Less than 90% of the selling company’s shareholders may become shareholders in the
purchasing company.
3. Consideration payable to shareholders of selling company may be in the form of shares or cash
or in any other agreed form.
4. Selling company’s business may or may not be carried on in future.
5. Assets and liabilities taken over by the purchasing company may be shown at values other than
book values at the discretion of the purchasing company.
Purchase Consideration
Purchase consideration is the amount which is paid by the transferee company for the purchase
the business of Transferor Company. As per AS‐14, consideration for amalgamation means the
aggregate of shares and other securities issued and the payment made in the form of cash or
other assets by the transferee company to the shareholders of the transferor company. Purchase
consideration does not include any payment to outsiders including debenture holders. The
following are the different methods for calculating the amount of purchase price:
a. Lump Sum Method
Under this method, the purchase consideration is specified at a particular figure which is paid by
the Purchasing Company. And no calculation is required under this method.
b. Net Payment Method
Under this method, the purchasing price is calculated by adding the various payments made by the
purchasing company in the form of cash, shares or debentures. That is, the purchasing price is the
total of all payments made in cash or shares or debentures.
c. Net Assets Method (Net worth Method)
When the full details of purchase consideration are not given, as discussed above, the purchase
consideration should be calculated by adding value of only those assets which have been taken
over by the purchasing company and deduct there from the agreed value of only those assets
liabilities which have been taken over by the Purchasing Company.
d. Value of Share Method
Under this method the purchase consideration is ascertained on the ratio in which the shares of new
company are exchanged for the shares of Vendor Company.

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Accounting Entries in the books of Vendor Company
A liquidator is appointed on the liquidation of a company and he represents the vendor company
(liquidating company) with the new company. The following entries are made to close books of the
company that goes into liquidation:
1. When assets are taken over by Realisation A/c Dr.
purchasing company(at book value) To Assets A/c

2. When all liabilities except reserves and Liabilities A/c Dr.

shareholder’s fund are transferred. To Realisation A/c

3. Entry for purchase consideration receivable Purchasing company’s A/c Dr.

To Realisation A/c
4. Entry for liquidation expenses paid by the Realisation A/c Dr.
vendor company To Bank A/c
5. When the liquidation expenses are paid by Purchasing Company’s A/c Dr.
the Purchasing Company, there will be not To Bank Account
entry to be passed or there will be two entries

6. Entry for the deposal of the assets not Bank A/c Dr.
taken over To assets A/c
7. Entry for the payment of liabilities not Liabilities A/c Dr.
taken over by purchasing To Bank A/c
company
8. If there is any gain or loss on transaction (6
and 7 of above), it should be transferred to Realisation A/c Dr.
realisation To Assets/Liabilities A/c
a. Loss on transaction (payment of liabilities or Assets/Liabilities A/c Dr.
sale of assets) To Realisation A/c
b. Gain on transaction (payment of liabilities or
sale of assets)

9. Realisation Account is closed by transferring Realisation A/c Dr.

the profit or loss to shareholders account To Shareholders A/c
(a) If there is profit
(b) If there is a loss Shareholders A/c Dr. To Realisation
A/c
10. When the purchases price is received in Bank A/c Dr.
cash or kinds Shares in Purchasing Co. A/c Dr.
Debentures in purchasing Co. A/c Dr.
To purchasing company A/c
11. For transferring share capital Share capital A/c Dr.
account To Shareholders A/c
12. For transferring fictitious assets Shareholder’s A/c Dr.

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 To P&L A/c
To Preliminary Expenses A/c
To Accumulated Loss A/c
13. To transferring profits and reserves Reserve of the above entry (12)
14. Shareholders are now paid off Shareholders A/c Dr.
To Cash A/c
To Shares in purchasing Co. A/c
To Debentures in purchasing Co. A/c

Accounting Entries in the Books of Purchasing Company

The journal entries in the books of purchasing company are the same as under business
acquisition. The purchase consideration is paid to the vendor company by the purchasing company.
When the purchase consideration pays more than the value of the net assets than the net assets
taken over, the difference in value will represent capital reserve. Goodwill is the capital loss and
capital gain to the purchasing company. The journal entries are:
1. Entry for the business purchase Business Purchase A/c Dr
To Liquidator of vendor Co. A/c

2. Entry for assets and liabilities are taken Various assets A/c Dr To
over various liabilities A/c
To Business purchase A/c
3. Entry for the Payment of purchase Liquidators of vendor Co. A/c Dr To
consideration Bank A/c
To Debentures A/c
To Share Capital A/c
4. Entry for the purchasing company paid Goodwill A/c Dr
liquidation expenses
To Bank A/c

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 UNIT-II
Amalgamation, Absorption & External Reconstruction
PROBLEMS & SOLUTIONS

1. A Purchasing company agrees to issue three shares of Rs. 10 each paid up at market value of Rs.
15 per share for every 5 shares in the vendor company.

Find out the number and number of shares to be issued by the purchasing company if the vendor
company has 1,00,000 shares of Rs. 10 each Rs.5 paid up.

Solution:

No. of shares to be issued by the purchasing company =

1,00,000 ÷ 5 × 3 = 60,000 shares

Number of shares issued by the purchasing company:

Amount of share capital = 60,000 X 10 = 6,00,000

Amount of share Premium = 60,000 X 5 = 3,00,000

Total Purchase Consideration 9,00,000/-

2. A purchasing company agrees to issue 3 shares of Rs.10 each, Rs. 8 paid up for every 5 shares in
Vendor Company.

Find the number of shares and number of shares to be issued by the purchasing company if the
vendor company has Rs. 5,00,000 paid up share capital of Rs. 10 each Rs. 5 paid up.

Solution:

No. of shares in vendor company

₹ 5,00,000/ ₹ 5= 1,00,000 shares

No. of shares to be issued by the purchasing company

=> 1,00,000 ÷ 5 × 3 = 60,000 shares

Amount of share capital = 60,000 X Rs. 8 = ₹ 4,80,000/-

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3. The capital of A, B and C partnership firm at the date of purchase by the limited company were Rs.
10,000 Rs. 6,000 Rs. 5,000. The partnership firm was converted into a limited company and assets
and liabilities were sold to the company agreed to pay Rs. 8,000 more than the book value and
machinery which was taken at Rs. 1,000 less than the book value. Calculate Total Purchase
Consideration.

Solution:

Net Assets = Assets – Liabilities = Capital employed Purchase consideration = Total Capital of A, B&
C

Calculation of Purchase consideration

A‘s capital 10,000

B‘s capital 6,000

C‘s capital 5,000

Less:

Increases in value of liabilities (8,000)

Decrease in value of assets (1,000)

Purchase consideration ₹ 12,000/-

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4. B Ltd. agreed to absorb A Ltd. upon the following terms:

Shares of A Ltd. are to be considered as worth ₹ 12/- each of which shareholders are to be paid one
quarter in cash and the balance in ₹ 100 share of B Ltd. which are to be issued at 25% premium.
Total shares were: 10,000 in B Ltd., and 20,000 in A Ltd. Ascertain the number of shares to be issued
by B Ltd. and Purchase Consideration.

Solution:

Particulars Amount (in ₹)

Shares of A Ltd. is ₹ 12/- of which:

1. 1/4th is cash,
= 12 × ¼
= ₹ 3 × 20,000 shares [A Ltd. has 20,000 shares] 60,000

2. Remaining ¾ is issue of B Ltd. shares [purchasing company shares] @ ₹

100/- per share with 25% premium.
¾ is shares
= 12 × ¾
= ₹ 9 × 20,000 shares [A Ltd. has 20,000 shares] 1,80,000

Number of shares
Total share value is ₹ 1,80,000
Per share 100
(+) 25% Premium 25
= 1,80,000 ÷ 125 = 1,440 Shares

TOTAL PURCHASE CONSIDERATION ₹ 2,40,000/-

5. X Ltd. is negotiating to sell its business to Y Ltd. Its assets are agreed to be worth ₹ 40,00,000. Its
share capital consists of 10,000 equity shares of ₹ 10/- each and it has reserves of ₹ 50,000.
Workmen’s compensation fund amounts to ₹ 25,000 (estimated liability 10,000) and Provident fund ₹
20,000.

Employees security deposits amount to ₹ 10,000, and trade creditors amounted to ₹ 80,000.
Ascertain the purchase consideration, if it is paid 75% in ₹ 10 equity shares of the transferee
company of Y Ltd. and the balance in cash.

Solution:

Particulars Amount (in ₹)

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NET ASSET METHOD:

Total Asset Value 40,00,000

Less: External Liabilities

a. Workmen’s Compensation – Estimated liability (10,000)
b. Provident Fund (20,000)
c. Employees Security Deposit (10,000)
d. Trade Creditors (80,000)

TOTAL PURCHASE CONSIDERATION ₹ 38,80,000/-

Shares @ Rs. 10/- each [75% of ₹ 38,80,000/-] 29,10,000
Balance in Cash 9,70,000
Total 38,80,000

6. Raman Ltd. agrees to purchase the business of Krishnan Ltd. on the following terms:

a. For each of the 10,000 shares of ₹ 10 each in Krishnan Ltd. 2 shares in Raman Ltd. of ₹ 10 each
will be issued at an agreed value of ₹ 12 per share. In addition, ₹ 4 per share, cash also will be paid.

b. 8% debentures worth ₹ 80,000/- will be issued to settle the ₹ 60,000, 9% debentures in Krishnan
Ltd.

c. ₹ 10,000 will be paid towards expenses of winding up.

Calculate the Purchase Consideration.

Solution:

Particulars Amount (in ₹)

1. Issue of 2 shares in Raman Ltd. for every one shares in Krishnan Ltd. @
₹ 10/- each at an agreed value of ₹ 12/- each

Total shares in Krishnan Ltd. is 10,000

= 2 ‚ 1 × 10,000 × ₹ 12 2,40,000

2. Payment of Cash @ ₹ 4/- per share by Raman Ltd. to Krishnan Ltd.

For 10,000 shares @ ₹ 4/- in Cash
40,000
TOTAL PURCHASE CONSIDERATION
₹ 2,80,000/-
Notes:
 Issue of debentures by Raman Ltd. to Krishnan Ltd. is assumed that after taken over of
debentures, it is directly settled by Raman Ltd.
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  Expenses of liquidation of ₹ 10,000/- is also assumed that the expenses are directly paid by
Krishnan Ltd. (purchasing company)

7. S Ltd. presents following summarized Balance Sheet as on 31.03.2006

Liabilities ₹ Assets ₹
Share Capital (@₹ 10/- each) 12,00,000 Fixed Assets 12,75,000
5% Debentures Current Assets 7,65,000
Accrued Interest 7,50,000 P&L a/c 3,75,000
Creditors 37,500
4,27,500
24,15,000 24,15,000

The company is absorbed by P Ltd. who holds 25% of share capital (Purchased by them for ₹
2,77,500) and all debentures (at par) by S Ltd. The purchase consideration being taking over all
assets and liabilities at book value subject to fixed assets revalued at ₹ 10,50,000/-

The payments to other shareholders to be made on the basis of such shares being worth ₹ 15 per
share and shares in S Ltd., being worth ₹ 5 per share show the entries in books of S Ltd. after
determining purchase consideration.

Solution:

CALCULATION OF PURCHASE CONSIDERATION

Total number of shares in S Ltd. = 12,00,000 ÷ 10 = 1,20,000 Shares

₹ 15/- worth shares are being issued @ ₹ 5/- per share for every shares in S Ltd.

S Ltd. shares is 1,20,000 Shares

Total value of issue: [1,20,000 × 5] 6,00,000

Less: P Ltd. hold 25% shares [6,00,000 × 25÷100] (1,50,000)

Total Purchase Consideration to outsiders ₹ 4,50,000/-

Number of shares = 4,50,000 ÷ 15 = 30,000 shares [worth of each share is ₹ 15/- given]

Finally 30,000 shares @ ₹ 15/- worth issue @ ₹ 5/- per share for total value of ₹
4,50,000/-

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Journal Entry in the Books of S Ltd:

S. No. Particulars Debit (in ₹) Credit (in ₹)

1. Realisation a/c Dr. 20,40,000
To Fixed assets a/c 12,75,000
To Current assets a/c 7,65,000
[Being the assets transferred to realisation a/c]
2. 5% Debenture a/c Dr. 7,50,000
Accrued Interest a/c Dr. 37,500
Creditors a/c Dr. 4,27,500
To Realisation a/c 12,15,000
[Being the external liabilities are transferred to
Realisation a/c]
3. P Ltd. a/c Dr. 4,50,000
To Realisation a/c 4,50,000
[Being the purchase consideration is due]
4. Share Capital a/c Dr. 12,00,000
To Shareholder a/c [75%] 9,00,000
To Realisation a/c [25%] 3,00,000
[Being the 25% share capital held by P Ltd is cancelled
and transferred to realisation a/c and the balance 75%
outsiders are transferred to their shareholders a/c]
5. Shareholders a/c Dr. 75,000
To Realisation a/c 75,000
[Being the loss in realisation a/c is transferred to
shareholder a/c]
6. Shareholder a/c Dr. 3,75,000
To P&L a/c 3,75,000
[Being the debit balance in P&L a/c transferred to
shareholder a/c]
7. Shares in P Ltd. a/c 4,50,000
To P Ltd. a/c 4,50,000
[Being the receipt of purchase consideration from P
Ltd.]
8. Shareholders a/c Dr. 4,50,000
To Shares in P Ltd. 4,50,000
[Being the payment to shareholder and their account
settled]

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LEDGER ACCOUNT:

 REALISATION ACCOUNT
Particulars ₹ Particulars ₹
To Fixed Assets 12,75,000 By 5% Debentures 7,50,000
To Current Assets 7,65,000 By Accrued Interest 37,500
By Creditors 4,27,500
By P Ltd 4,50,000
By Share Capital [25%] 3,00,000
By Shareholder a/c [Loss] 75,000
[Bal. Fig.]
20,40,000 20,40,000

 SHAREHOLDER ACCOUNT
Particulars ₹ Particulars ₹
To Realization a/c [P Ltd. hold 3,00,000 By Share Capital 12,00,000
25% is transferred]
To Realisation a/c [Loss in 75000
Realisation a/c]
To P&L a/c [Loss in asset side] 3,75,000
To Shares of P Ltd. [Purchase
Consideration] 4,50,000

12,00,000 12,00,000

8. Following is the Balance Sheet of S Ltd. as on 31.03.2014

Liabilities ₹ Assets ₹
 Share Capital:  Fixed Assets 16,25,000
a. 8% Preference shares of ₹ 100 3,75,000  Investments 3,00,000
each  Current Assets 2,50,000
b. Equity shares of ₹ 10 each 7,50,000
 General Reserves 4,50,000
 7% Debentures 3,50,000
 Current Liabilities 2,50,000
21,75,000 21,75,000
R Ltd. agreed to take over the business of S Ltd.,

1. Calculate purchase consideration under Net Asset Method on the basis of the
following:

a. R Ltd. agreed to discharge 7% debentures at a premium of 10% by issuing 9% debentures of R

Ltd.
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b. Fixed assets are to be valued at 10% above the book value, the investment at par, current assets
at 10% discount and current liabilities at book value.

2. Calculate purchase consideration under Net Payment Method on the basis of the
following:

a. R Ltd. agrees to discharge the 7% debentures at a premium of 10% by issuing 9% debentures of

R Ltd.

b. Preference shares are discharged at a premium of 10% by issuing 10% Preference shares of ₹ 100
each in R Ltd.

c. For every 2 equity shares in S Ltd. 3 equity shares of ₹ 10 each in R Ltd. will be issued in addition
to cash payment of ₹ 3 per equity share in S Ltd.

Solution:

CALCULATION OF PURCHASE CONSIDERATION

a. Net Assets Method

Particulars ₹
 Value of Assets taken over:
a. Fixed Assets [16,25,000+1,62,500] 17,87,500
b. Investments 3,00,000
c. Current Assets [2,50,000-25,000] 2,25,000

TOTAL ASSETS 23,12,500

Less: 7% Debentures [3,50,000+35,000] (3,85,000)

Less: Current Liabilities (2,50,000)

PURCHASE CONSIDERATION ₹ 16,77,500/-

b. Net Payment Method

Particulars Cash Preference SH Equity SH Total

a. For Preference SH:
8% Preference shares - 4,12,500 - 4,12,500
[3,75,000+37,500]

b. For Equity SH:

For every 2 shares, 3 shares will be - - 11,25,000 11,25,000
issued at ₹ 10
75,000 × 3 / 2 = 1,12,500 shares
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= 1,12,500 × ₹ 10

c. Cash:
75,000 shares × ₹ 3 2,25,000 - - 2,25,000

PURCHASE CONSIDERATION 17,62,500/-

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