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CHAPTER – 1
AMALGAMATION OF COMPANIES

TABLE OF CONTENTS
1. Introduction 2. Understanding the Terms
3. Types of Amalgamations 4. Calculation of Purchase Consideration
5. Accounting Entries – Books of T’ror Co. 6. Accounting Entries – Books of T’ree Co.
7. Inter Company Owings or Debts 8. Unrealized Profit on Inter-Co. purchases
9. Bare Text of AS-14 10. Summary of AS-14
11. Reconstruction – External Reconstruction 12. Practical Problems

1. PRELIMINARY

Modern era is an era of cut-throat competition, companies are striving for survival and growth, where survival
is must and growth is essence. With the increased amount of capital infusion, increased expectations of investors,
it becomes very difficult for companies to stand strong in such competitive environment on standalone basis and
hence they enter so called “Commercial Marriages” – sometimes happily sometimes hostile.
In order to survive, an organization should grow over a period of time. Growth is measured in terms of sales or
revenue, profits and assets. The competitive forces, globalization and liberalization of economics, change in
technology, momentum for strategic alliance has gained lot of importance. The usual form of business
combination takes place by way of “Mergers and Acquisitions i.e. M&A’s” and hence Amalgamations,
Absorptions and Acquisitions.

1. 1

& Many more…

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2. UNDERSTANDING THE TERMS

Amalgamation refers to the process of merger of two or more companies into a single entity or where one
company takes over the other by outright purchase.
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:
(i) two or more companies join to form a new company or
(ii) absorption and blending of one by the other.

1. Amalgamations: When businesses of two or more companies are being taken over by a newly
formed company, the way of merger is called as 'Amalgamation'.
Weak Ltd. Strong Ltd.

Giant Ltd.

Weak Ltd. and Strong Ltd. merged together by way of formation of new company Giant Ltd.
Amalgamating companies Weak Ltd.
or : and
Transferor companies Strong Ltd.

Amalgamated company
or : Giant Ltd.
Transferee company
In an amalgamation, it is necessary to wind all the transferor companies. Therefore, in the above
referred example, it is necessary to wind up Weak Ltd. as well as Strong Ltd.

2. Absorption: When businesses of one or more companies are taken over by another existing
company the way of merger is called as 'Absorption'.
Weak Ltd.

Strong Ltd.

Weak Ltd. is merged into Strong Ltd.

Absorbed company
or : Weak Ltd
Transferor company

Absorbing company
or : Strong Ltd.
Transferee company
In an absorption, it is necessary to wind only transferor company. In the above referred example, it
is necessary to wind up Weak Ltd. only. The company who takes over the business is a continuing
one.

Note: AS-14 covers accounting of Amalgamation & Absorption only that too in Books of
1. 2

Transferee Company only.

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3. Acquisition: If one company acquires the controlling interest in another company, it is a case of
'Acquisition' or 'Take over.'
Diagrammatic Presentation

Strong Ltd.

60% Equity shares

Weak Ltd.

Strong Ltd. takes over 60% shares of Weak Ltd.

Holding company
or : Strong Ltd.
Controlling company

Subsidiary company
or : Weak Ltd.
Controlled company
In an acquisition both companies maintain their separate identity even after take over. In the above
referred example, it is not necessary to wind up any company.
Accounting of Acquisition in Books of Strong is covered in AS-13. Strong will have to also prepare
consolidated Financial Statements under AS-21.
This case of Acquisition is not addressed by AS-14.

4. Reconstruction: The term reconstruction mainly refers to reorganisation or restructuring of a

company, which has suffered heavy losses or is over capitalised. It may cover both internal and
external.
Discussed as a
separate topic
Internal External
Weak Ltd. Sunset Ltd.

Restructured Wound up by way of formation of

Weak Ltd. Strong Ltd.

Shareholders and creditors Sunset Ltd. is wound up

interests are altered

In case of internal reconstruction, the rights of investors as well as of creditors are altered. The
company is merely restructured and does not go into liquidation.
In case of external reconstruction, a new company is formed to take over the business of a company
under reconstruction, which is then wound up. In the above referred example, it is necessary to wind
up Sunset Ltd.
In case of reconstruction, substantially same business is carried on by the same persons.

LEGAL PROVISIONS GOVERNING AMALGAMATION:

1. 3

Accounting Standard-14 “Accounting for Amalgamations” issued by ASB of ICAI

Section 230-232 of Companies Act 2013.

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3. TYPES OF AMALGAMATIONS

TYPES OF AMALGAMATIONS

Amalgamation in the Nature of Amalgamation in the Nature of

“MERGER” “PURCHASE”

4. CALCULATION OF PURCHASE CONSIDERATION

1. The process of amalgamation is the result of agreement and contract between the transferor and
transferee companies. The essential element of such contract is 'Consideration' from the side of
transferor company, the assets and liabilities are transferred, while from the side of transferee
company, purchase price is paid. Thus, consideration is the sum payable by transferee company to
transferor company for net assets taken over. The consideration for the amalgamation may consist
of securities, costs and other assets.

2. As per para 3 (g) of AS 14, Consideration for the 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.
In simple words, it is the price payable by the transferee company to the transferor company for
taking over the business of the transferor company.
However, it should be specifically noted that the amount paid towards the equity shareholders and
preference shareholders is only considered as part of the purchase consideration as defined in AS-
14. Hence, any consideration paid to debenture-holders or creditors shall not form part of the
purchase consideration. If a certain liability of the transferor company has not been taken over by
the transferee company it will be discharged by the transferor company before getting amalgamated.

3. Methods adopted for computation of purchase consideration:

(A) LUMPSUM/FIXED PAYMENT METHOD:
Under this method purchase consideration is agreed upon in totality without attaching
individual valuation to assets or liabilities taken over. It is a total value of the business taken
over.

(B) NET PAYMENTS METHOD:

Under this method the transferee company makes individual payments to the equity
shareholders and preference shareholders either by way of cash, issue of shares and
debentures.

(C) NET ASSETS METHOD:

Under this method, the purchase consideration is determined by calculating the ‘NET ASSETS
/ NET WORTH’ of the transferor company. The consideration is arrived at by adding the value
of assets taken over (at Agreed Value or Book Value) minus value of liabilities taken over (at
Agreed Value or Book Value) by the transferee company (Outside liabilities excluding Share
Capital and Reserved and Surplus).
Purchase Consideration =
Assets taken over at an agreed value ……………..
Less: Liabilities taken over at an agreed value. ……………..
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While calculating the purchase consideration the following factors to be considered:
- Only agreed value of the assets taken over from the vendor company should be added.
- Fictitious assets, Expenditure to be written off, Profit and Loss A/c debit balance,
Preliminary expenses, Discount or Commission on issue of shares and debentures will
not be taken into consideration for computation of assets taken over.
- Only agreed value of those liabilities which are assumed by the purchasing company are
to be deducted.
- Undistributed profits like Credit balance of Profit and Loss Account, General Reserve,
Reserve Fund, Securities Premium Account, Sinking Fund, Capital Reserve A/c are not to
be deducted.
- Staff Provident Fund, Employees Profit Sharing Fund and other liabilities to employees
of the company are treated as liabilities to outsiders.

(D) INTRINSIC VALUE / SHARE EXCHANGE METHOD:

The word INTRINSIC means INHERENT. Under this method the transferee company
determines the purchase consideration payable to the transferor company on the basis of
“Intrinsic Value of their shares” by calculating Total Number of shares to be issued on the
basis of “Share Exchange Ratio”.

Note: Consideration for equity shareholders may be agreed upon the basis of Book Value or
Intrinsic Value or Agreed Value per share.
Net Assets - Sum due to preference shareholders
Book Value per equity share =
Total Number of Equity shares
OR
Equity Share Capital + Re serve & Surplus - Miscellaneous Expenditure
=
Total Number of Equity Shares
Market Value of Net Assets - Sum due to Pr ef. Shareholders
Intrinsic Value Per share =
Total Number of Equity shares

“Any of the methods or a combination of the above methods can be used by the companies
to calculate the purchase consideration.”

Transferee
Transferor 1. 5

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5. ACCOUNTING ENTRIES – IN THE BOOKS OF TRANSFEROR COMPANY

The books of company being wound up will be closed by opening a 'Realisation Account'. AS 14
does not deal with accounting entries in the books of transferor company.

Since the Transferor company is being wound up, the accounting in the books of a transferor company is
done on the similar principles as done in case of “Dissolution of a Partnership Firm”.
The accounting entries are as follows:

Books of transferor company:

Sr. Note
Particulars Accounting Entry
No. Ref.
Phase I: Decomposition of Balance Sheet
1. Transfer of book value of the assets i & ii Realisation A/c. ………….Dr.
To Sundry Assets A/c.
(Individually)
2. Transfer of Liabilities ii Sundry Liabilities A/c. ………….Dr.
(Individually)
To Realisation A/c.
3. Transfer of amount of Debentures - Debentures A/c. ………….Dr.
To Realisation A/c.
(face value transferred)
4. Transfer of amount due to preference - Preference Share Capital A/c. ……Dr.
shareholders Realisation A/c. ………….Dr.
(Arrears of dividend/premium payable /
Excess payable over Face Value)
To Preference shareholders A/c.
5. Transfer of Equity Share Capital, Reserves - Equity Share Capital A/c. ………….Dr.
and surplus balances Reserves A/c (Individually). ………….Dr.
Profit and Loss A/c. ………….Dr.
To Sundry Shareholders A/c.
6. Transfer of fictitious assets, write off, - Sundry shareholders A/c. ………….Dr.
accumulated losses etc To Profit and Loss A/c.
To Discount on Issue of shares A/c.
To Preliminary Expenses A/c.
To Other Accounts (Individually)
Phase II: Purchase Consideration Accounting
7. Purchase Consideration due - Transferee Company’s A/c. ………….Dr.
To Realisation A/c
8. Discharge of Purchase Consideration iii Cash / Bank A/c. ………….Dr.
Equity shares in Transferee
Company A/c. ………….Dr.
Preference shares in Transferee
Company A/c. ………….Dr.
Other Securities / Assets A/c. ………….Dr.
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To Transferee Company’s A/c

Phase III: Assets/Liabilities not taken over & Liquidation Expenses Accounting

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Sr. Note
Particulars Accounting Entry
No. Ref.
9. Disposal of assets not taken over by - Cash / Bank A/c. ………….Dr.
the Transferee Company. To Realisation A/c.
10. Discharge of liabilities not - Realisation A/c. ………….Dr.
taken over by Transferee company To Cash / Bank A/c.
11. Settlement of debentureholders dues - Realisation A/c. ………….Dr.
(Only if debentures not taken over by To Cash / Bank A/c.
Transferee Company) (Principal + Premium (if any))
12. Liquidation Expenses iv. Realisation A/c. ………….Dr.
To Cash/Bank A/c.
Phase IV: Settlement
13. Transfer of profit or loss on realisation -
Profit Realisation A/c. ………….Dr.
To Sundry shareholders A/c
Loss Sundry shareholders A/c. …………..Dr.
To Realisation A/c.
14. Settlement of preference shareholders - Preference shareholders A/c. ………….Dr.
dues To Cash / Bank A/c.
To Preference Shares in Transferee
Company A/c.
To Equity Shares in Transferee
Company A/c.
To Other Securities / Other Assets
15. Settlement of Equity shareholders - Sundry shareholders A/c. …………..Dr.
accounts To Cash / Bank A/c.
(dividend under liquidation) To Preference Shares in Transferee
Company A/c.
To Equity Shares in Transferee
Company A/c.
To Other Securities / Other Assets
Notes:
i. If Cash and Bank balances are not taken over by the transferee company, these should not be
transferred to Realisation A/c. In that case open separate Cash / Bank Account. The term ‘Assets’
does not include expenses and losses appearing in the Balance Sheet, not yet written off.
ii. Transfer debtors and creditors to Realisation A/c with gross sum. Provision for Bad and Doubtful
debts or Provision for discounts are separate accounts and hence should be separately transferred
to realisation account. Similar treatment is also required for Gross Fixed Assets and Accumulated
Depreciation thereon.
iii. Value the shares received in transferee company at its issue price.
iv. When the transferor company bears the liquidation expenses, Realisation Account is debited.
However, if the expenses are to be borne by transferee company, the payment of expenses may be
made directly by the transferee company or transferor company will get the expenses reimbursed
from the transferee company. If transferee company agrees to incur expenses but they are paid by
transferor company first, then entry in books of transferor is as follows
Transferee Company A/c. ……………… Dr.
To Cash / Bank A/c.
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6. ACCOUNTING ENTRIES – IN THE BOOKS OF TRANSFEREE COMPANY

When a company takes over a business, accounting entries to be recorded in the books are as follows -
1. Amalgamation in the nature of Merger - Pooling of Interest Method:
Sr.
Particulars Accounting Entry
No.
1. Purchase of business Business Purchase A/c. ………..Dr.
To Liquidator of Transferor Company A/c.
2. Recording of assets and Respective Asset A/c. ………..Dr.
Liabilities Reserve (May be Revenue or Capital) A/c. # …....Dr.
To Respective Liability A/c
To Respective Reserve A/c
To Business Purchase A/c
To Capital Reserve A/c #
# Difference between purchase consideration and
paid up capital of transferor company.

3. Discharge of purchase Liquidator of Transferor Company A/c. ………..Dr.

consideration To Cash / Bank A/c (For fractional shares)
To Equity Share Capital A/c
To Securities Premium A/c
4. Liquidation Expenses (if to be
borne by transferee company)
a) Paid by Transferee Company Reserve A/c. ………..Dr.
To Cash / Bank A/c

b) Paid by Transferor Company i. Reserve A/c. ………..Dr.

To Liquidator of Transferor Company
A/c
ii. Liquidator of Transferor Company A/c. …..Dr.
To Cash / Bank A/c
5. Adjustment of value of assets or i. Reserves A/c. ………..Dr.
liabilities to bring in conformity To Asset / Liability A/c.
with accounting policy of ii. Assets / Liability A/c. ………..Dr.
transferee To Reserves A/c.
Company

2. Amalgamation in the nature of purchase - Purchase Method:

Sr.
Particulars Accounting Entry
No.
1. Purchase of business Business Purchase A/c. ………..Dr.
1. 8

To Liquidator of Transferor Company A/c.

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Sr.
Particulars Accounting Entry
No.
2. Recording of assets and Liabilities Respective Assets A/c. ………..Dr.
Goodwill A/c.* ………..Dr.
To Respective Liability A/c
To Business Purchase A/c
To Capital Reserve A/c*
[Assets and Liabilities at fair value]
*Difference between purchase consideration and
fair value / Book Value of net assets of Transferor
Company.
3. Discharge of purchase Liquidator of Transferor Company A/c. ………..Dr.
consideration To Cash / Bank A/c
To Equity Share Capital A/c
To Preference Share Capital A/c
To Securities Premium A/c
4. Liquidation Expenses (if to be
borne by transferee company)
a) Paid by Transferee Company Goodwill or Capital Reserve A/c. ………..Dr.
To Cash / Bank A/c
b) Paid by Transferor Company i. Goodwill or Capital Reserve A/c. ………..Dr.
To Liquidator of Transferor Company
A/c
ii. Liquidator of Transferor Company A/c.
………Dr.
To Cash / Bank A/c
5. Statutory Reserves of Transferor Amalgamation Adjustment A/c. ………..Dr.
Company to be recorded in the To Respective Statutory Reserve A/c
books of Transferee Company

7. INTER COMPANY OWINGS OR DEBTS

When business transactions took place between the Transferor Company and Transferee Company before
the effective date of amalgamation, it may lead to Debtor - Creditor relationship. When the transferor
company's Balance Sheet shows Sundry Debtors balance owing from Transferee Company, the Balance-
sheet of Transferee Company also shows sundry creditors balance owing to transferor company and vice
- versa. On amalgamation after recording all assets and liabilities taken over (including inter company
debts), these balances are in the nature of mutual indebtedness and the common debts are to be eliminated
by passing the following accounting entries in the books of Transferee Company.
Sr. No. Balances Accounting Entry
1. Sundry Debtors-Sundry Creditors Sundry Creditors A/c. ………….Dr.
To Sundry Debtors A/c
1. 9

2. Bills Receivable - Bills Payable Bills Payable A/c. ………….Dr.

To Bills Receivable A/c.

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Sr. No. Balances Accounting Entry

3. Current Accounts Current A/c. (Credit balance). ………….Dr.

To Current A/c. (Debit balance)
4. Inter Company loans Loan Payable A/c. ………….Dr.
To Loan Receivable A/c
5. Interest receivable-Interest payable Interest Payable A/c. ………….Dr.
To Interest Receivable A/c

It can be observed from the above that liability of one company is to be set off against an asset of another
company
The following points may be noted in this connection:
1. Bills discounted with bankers or endorsed to third party will continue to appear as a liability, since
the company which has accepted the bills will have to pay to an outsider on the due date. Thus inter-
company owings relating to bills will be eliminated only to the extent of undiscounted / unendorsed
bills.
2. Contingent Liabilities after amalgamation are shown only to the extent relating to outsiders.
3. It is worthwhile to note that no adjustment entry need be passed in the books of Transferor
Company.

8. UNREALISED PROFITS ON INTER COMPANY PURCHASES

The transferor company might have acquired stocks from the Transferee company at inflated price i.e.
inclusive of profit. After amalgamation the stocks of Transferor company would become stocks of
transferee company and this would lead showing stocks at a price higher than cost, since unrealised profit
is included in the stocks that are transferred from Transferor company.
The Transferee company might have alternatively acquired stocks from the Transferor company at inflated
prices. The transferee company's stock would lead showing stocks at a price higher than cost, since
unrealised profit is included in the stocks that are transferred from Transferor Company.
Such unrealised profits are eliminated by passing the following adjustment entry in the books of transferee
company.
Sr. No. Type of Amalgamation Accounting Entry
1. Amalgamation in the nature of Merger Reserves / Profit and Loss A/c. …………Dr.
To Stock A/c
2. Amalgamation in the nature of Purchase Goodwill/Capital Reserve A/c. …………Dr.
To Stock A/c.
It is worthwhile to note that no adjustment entry need be passed in the books of Transferor company,
expect transfer of stocks to Realisation Account at its book values.
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9. BARE TEXT OF AS-14 AS ISSUES BY ASB OF ICAI

Accounting for Amalgamations
This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal
authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be
read in the context of the General Instructions contained in part A of the Annexure to the Notification.

Introduction:
1. This standard deals with accounting for amalgamations and the treatment of any resultant goodwill
or reserves. This standard is directed principally to companies although some of its requirements
also apply to financial statements of other enterprises.
2. This standard does not deal with cases of acquisitions which arise when there is a purchase by one
company (referred to as the acquiring company) of the whole or part of the shares, or the whole or
part of the assets, of another company (referred to as the acquired company) in consideration for
payment in cash or by issue of shares or other securities in the acquiring company or partly in one
form and partly in the other. The distinguishing feature of an acquisition is that the acquired
company is not dissolved and its separate entity continues to exist.

Definitions:
3. The following terms are used in this standard with the meanings specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 2013
or any other statute which may be applicable to companies.
(b) Transferor company means the company which is amalgamated into another company.
(c) Transferee company means the company into which a transferor company is amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other
than a provision for depreciation or diminution in the value of assets or for a known liability.
(e) Amalgamation in the nature of merger is an amalgamation which satisfies all the following
conditions.
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity 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.
(iii) 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 paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) 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.
(f) Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or
more of the conditions specified in sub-paragraph (e) above.
(g) Consideration for the amalgamation means 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.
(h) Fair value is the amount for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
1.11

(i) Pooling of interests is a method of accounting for amalgamations the object of which is to
account for the amalgamation as if the separate businesses of the amalgamating companies

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were intended to be continued by the transferee company. Accordingly, only minimal changes
are made in aggregating the individual financial statements of the amalgamating companies.

Explanation:
Types of Amalgamations
4. Generally speaking, amalgamations fall into two broad categories. In the first category are those
amalgamations where there is a genuine pooling not merely of the assets and liabilities of the
amalgamating companies but also of the shareholders’ interests and of the businesses of these
companies. Such amalgamations are amalgamations which are in the nature of ‘merger’ and the
accounting treatment of such amalgamations should ensure that the resultant figures of assets,
liabilities, capital and reserves more or less represent the sum of the relevant figures of the
amalgamating companies. In the second category are those amalgamations which are in effect a
mode 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 the business of the company which is acquired is not intended to be
continued. Such amalgamations are amalgamations in nature of Purchase.
5. An amalgamation is classified as an ‘amalgamation in the nature of merger’ when all the conditions
listed in paragraph 3(e) are satisfied. There are, however, differing views regarding the nature of any
further conditions that may apply. Some believe that, in addition to an exchange of equity shares, it
is necessary that the shareholders of the transferor company obtain a substantial share in the
transferee company even to the extent that it should not be possible to identify any one party as
dominant therein. This belief is based in part on the view that the exchange of control of one company
for an insignificant share in a larger company does not amount to a mutual sharing of risks and
benefits.
6. Others believe that the substance of an amalgamation in the nature of merger is evidenced by
meeting certain criteria regarding the relationship of the parties, such as the former independence
of the amalgamating companies, the manner of their amalgamation, the absence of planned
transactions that would undermine the effect of the amalgamation, and the continuing participation
by the management of the transferor company in the management of the transferee company after
the amalgamation.

Methods of Accounting for Amalgamations

7. There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
8. The use of the pooling of interests method is confined to circumstances which meet the criteria
referred to in paragraph 3(e) for an amalgamation in the nature of merger.
9. The object of the purchase method is to account for the amalgamation by applying the same
principles as are applied in the normal purchase of assets. This method is used in accounting for
amalgamations in the nature of purchase.

The Pooling of Interests Method

10. Under the pooling of interests method, the assets, liabilities and reserves of the transferor company
are recorded by the transferee company at their existing carrying amounts (after making the
adjustments required in paragraph 11).
11. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies are reported in accordance
with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies.

The Purchase Method

12. Under the purchase method, the transferee company accounts for the amalgamation either by
1. 12

incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the basis

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of their fair values at the date of amalgamation. The identifiable assets and liabilities may include
assets and liabilities not recorded in the financial statements of the transferor company.
13. Where assets and liabilities are restated on the basis of their fair values, the determination of fair
values may be influenced by the intentions of the transferee company. For example, the transferee
company may have a specialised use for an asset, which is not available to other potential buyers.
The transferee company may intend to effect changes in the activities of the transferor company
which necessitate the creation of specific provisions for the expected costs, e.g. planned employee
termination and plant relocation costs.

Consideration:
14. The consideration for the amalgamation may consist of securities, cash or other assets. In
determining the value of the consideration, an assessment is made of the fair value of its elements. A
variety of techniques is applied in arriving at fair value. For example, when the consideration
includes securities, the value fixed by the statutory authorities may be taken to be 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. Where the market value of the assets given up cannot be reliably assessed, such assets may
be valued at their respective net book values.
15. Many amalgamations recognise that adjustments may have to be made to the consideration in the
light of one or more future events. When the additional payment is probable and can reasonably be
estimated at the date of amalgamation, it is included in the calculation of the consideration. In all
other cases, the adjustment is recognised as soon as the amount is determinable [see Accounting
Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date].

Treatment of Reserves on Amalgamation:

16. If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is
preserved and they appear in the financial statements of the transferee company in the same form
in which they appeared in the financial statements of the transferor company. Thus, for example, the
General Reserve of the transferor company becomes the General Reserve of the transferee company,
the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee
company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve
of the transferee company. As a result of preserving the identity, reserves which are available for
distribution as dividend before the amalgamation would also be available for distribution as
dividend after the amalgamation. 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 the transferor company is adjusted
17. If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves, other
than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the
consideration is deducted from the value of the net assets of the transferor company acquired by the
transferee company. If the result of the computation is negative, the difference is debited to goodwill
arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the
computation is positive, the difference is credited to Capital Reserve.
18. Certain reserves may have been created by the transferor company pursuant to the requirements of,
or to avail of the benefits under, the Income-tax Act, 1961; for example, Development Allowance
Reserve, or Investment Allowance Reserve. The Act requires that the identity of the reserves should
be preserved for a specified period. Likewise, certain other reserves may have been created in the
financial statements of the transferor company in terms of the requirements of other statutes.
Though, normally, in an amalgamation in the nature of purchase, the identity of reserves is not
preserved, an exception is made in respect of reserves of the aforesaid nature (referred to hereinafter
as ‘statutory reserves’) and such reserves retain their identity in the financial statements of the
transferee company in the same form in which they appeared in the financial statements of the
transferor company, so long as their identity is required to be maintained to comply with the relevant
statute. This exception is made only in those amalgamations where the requirements of the relevant
statute for recording the statutory reserves in the books of the transferee company are complied
1.13

with. In such cases the statutory reserves are recorded in the financial statements of the transferee
company by a corresponding debit to a suitable account head (e.g., ‘Amalgamation Adjustment
Account’) which is disclosed as a part of ‘miscellaneous expenditure’ or other similar category in the

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balance sheet. When the identity of the statutory reserves is no longer required to be maintained,
both the reserves and the aforesaid account are reversed.

Treatment of Goodwill Arising on Amalgamation:

19. Goodwill arising on amalgamation represents a payment made in anticipation of future income and
it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful
life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable
certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered
appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer
period can be justified.
20. Factors which may be considered in estimating the useful life of goodwill arising on amalgamation
include:
(a) the foreseeable life of the business or industry;
(b) the effects of product obsolescence, changes in demand and other economic factors;
(c) the service life expectancies of key individuals or groups of employees;
(d) expected actions by competitors or potential competitors; and
(e) legal, regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account:

21. In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company is aggregated with the
corresponding balance appearing in the financial statements of the transferee company.
Alternatively, it is transferred to the General Reserve, if any.
22. In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company, whether debit or credit, loses its
identity.

Treatment of Reserves Specified in A Scheme of Amalgamation:

23. The scheme of amalgamation sanctioned under the provisions of the Companies Act, 2013 or any
other statute may prescribe the treatment to be given to the reserves of the transferor company after
its amalgamation. Where the treatment is so prescribed, the same is followed. In some cases, the
scheme of amalgamation sanctioned under a statute may prescribe a different treatment to be given
to the reserves of the transferor company after amalgamation as compared to the requirements of
this Standard that would have been followed had no treatment been prescribed by the scheme. In
such cases, the following disclosures are made in the first financial statements following the
amalgamation:
(a) A description of the accounting treatment given to the reserves and the reasons for following
the treatment different from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed by the scheme of
amalgamation sanctioned under the statute as compared to the requirements of this Standard
that would have been followed had no treatment been prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.

Disclosure:
24. For all amalgamations, the following disclosures are considered appropriate in the first financial
statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
25. For amalgamations accounted for under the pooling of interests method, the following additional
disclosures are considered appropriate in the first financial statements following the amalgamation:
(a) description and number of shares issued, together with the percentage of each company’s
1. 14

equity shares exchanged to effect the amalgamation;

(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.

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26. For amalgamations accounted for under the purchase method, the following additional disclosures
are considered appropriate in the first financial statements following the amalgamation:
(a) consideration for the amalgamation and a description of the consideration paid or contingently
payable; and
(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof including the period of amortisation of any goodwill
arising on amalgamation.

Amalgamation after the Balance Sheet Date:

27. When an amalgamation is effected after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure is made in accordance with AS 4,
‘Contingencies and Events Occurring After the Balance Sheet Date’, but the amalgamation is not
incorporated in the financial statements. In certain circumstances, the amalgamation may also
provide additional information affecting the financial statements themselves, for instance, by
allowing the going concern assumption to be maintained.

Main Principles:
28. An amalgamation may be either –
(a) an amalgamation in the nature of merger, or
(b) an amalgamation in the nature of purchase.
29. An amalgamation should be considered to be an amalgamation in the nature of merger when all the
following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity 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.
(iii) 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 paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) 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.
30. An amalgamation should be considered to be an amalgamation in the nature of purchase, when any
one or more of the conditions specified in paragraph 29 is not satisfied.
31. When an amalgamation is considered to be an amalgamation in the nature of merger, it should be
accounted for under the pooling of interests method described in paragraphs 33–35.
32. When an amalgamation is considered to be an amalgamation in the nature of purchase, it should be
accounted for under the purchase method described in paragraphs 36–39.

The Pooling of Interests Method

33. In preparing the transferee company’s financial statements, the assets, liabilities and reserves
(whether capital or revenue or arising on revaluation) of the transferor company should be recorded
at their existing carrying amounts and in the same form as at the date of the amalgamation. The
balance of the Profit and Loss Account of the transferor company should be aggregated with the
corresponding balance of the transferee company or transferred to the General Reserve, if any.
34. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies should be adopted following the
amalgamation. The effects on the financial statements of any changes in accounting policies should
1.15

be reported in accordance with Accounting Standard (AS)

5 Net Profit or Loss for the Period, Prior Period Items and Changes in

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35. 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 the transferor
company should be adjusted in reserves.

The Purchase Method

36. In preparing the transferee company’s financial statements, the assets and liabilities of the transferor
company should be incorporated at their existing carrying amounts or, alternatively, the
consideration should be allocated to individual identifiable assets and liabilities on the basis of their
fair values at the date of amalgamation. The reserves (whether capital or revenue or arising on
revaluation) of the transferor company, other than the statutory reserves, should not be included in
the financial statements of the
37. Any excess of the amount of the consideration over the value of the net assets of the transferor
company acquired by the transferee company should be recognised in the transferee company’s
financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower
than the value of the net assets acquired, the difference should be treated as Capital Reserve.
38. The goodwill arising on amalgamation should be amortised to income on a systematic basis over its
useful life. The amortisation period should not exceed five years unless a somewhat longer period
can be justified.
39. Where the requirements of the relevant statute for recording the statutory reserves in the books of
the transferee company are complied with, statutory reserves of the transferor company should be
recorded in the financial statements of the transferee company. The corresponding debit should be
given to a suitable account head (e.g., ‘Amalgamation Adjustment Account’) which should be
disclosed as a part of ‘miscellaneous expenditure’ or other similar category in the balance sheet.
When the identity of the statutory reserves is no longer required to be maintained, both the reserves
and the aforesaid account should be reversed.

Common Procedures
40. The consideration for the amalgamation should include any noncash element at fair value. In case of
issue of securities, the value fixed by the statutory authorities may be taken to be 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. Where the market value of the assets given up cannot be reliably assessed, such assets may
be valued at their respective net book values.
41. Where the scheme of amalgamation provides for an adjustment to the consideration contingent on
one or more future events, the amount of the additional payment should be included in the
consideration if payment is probable and a reasonable estimate of the amount can be made. In all
other cases, the adjustment should be recognised as soon as the amount is determinable [see
Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date].

Treatment of Reserves Specified in A Scheme of Amalgamation

42. Where the scheme of amalgamation sanctioned under a statute prescribes the treatment to be given
to the reserves of the transferor company after amalgamation, the same should be followed. Where
the scheme of amalgamation sanctioned under a statute prescribes a different treatment to be given
to the reserves of the transferor company after amalgamation as compared to the requirements of
this Standard that would have been followed had no treatment been prescribed by the scheme, the
following disclosures should be made in the first financial statements following the amalgamation:
(a) A description of the accounting treatment given to the reserves and the reasons for following
the treatment different from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed by the scheme of
amalgamation sanctioned under the statute as compared to the requirements of this Standard
that would have been followed had no treatment been prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.

Disclosure
1. 16

43. For all amalgamations, the following disclosures should be made in the first financial statements
following the amalgamation:
(a) names and general nature of business of the amalgamating companies;

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(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
44. For amalgamations accounted for under the pooling of interests method, the following additional
disclosures should be made in the first financial statements following the amalgamation:
(a) description and number of shares issued, together with the percentage of each company’s
equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.
45. For amalgamations accounted for under the purchase method, the following additional disclosures
should be made in the first financial statements following the amalgamation:
(a) consideration for the amalgamation and a description of the consideration paid or contingently
payable; and
(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof including the period of amortisation of any goodwill
arising on amalgamation.

Amalgamation after the Balance Sheet Date

46. When an amalgamation is effected after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure should be made in accordance with AS 4,
‘Contingencies and Events Occurring After the Balance Sheet Date’, but the amalgamation should not
be incorporated in the financial statements. In certain circumstances, the amalgamation may also
provide additional information affecting the financial statements.

10. SUMMARY OF AS-14

1. The Institute of Chartered Accountants of India has issued AS 14 'Accounting for Amalgamations'
which states the procedure for accounting for amalgamation in the books of transferee company. AS
14 also does not recognise difference between amalgamation and absorption. This standard is
mandatory in nature and is applicable in respect of accounting period commencing on or after
1.4.1995.

2. The following terms are used in this standard:

i Amalgamation: Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 2013 or any other statute which may be applicable to the companies.
ii. Transferor company: Transferor company means the company which amalgamated into
another company.
iii. Transferee company: Transferee company means the company into which a transferor
company is amalgamated.
iv. Reserves: Reserve means the portion of earnings, receipts or other surplus of the enterprise
(whether capital or revenue) appropriated by the management for a general or a specific
purpose other than a provision for depreciation or diminution in the value of assets or for a
known liability.

3. Amalgamation for accounting purpose can be classified into two categories:

i Amalgamation in the nature of merger.
ii Amalgamation in the nature of purchase.

4. Amalgamation in the nature of merger:

An amalgamation which satisfies all the following conditions is classified as 'Amalgamation in the
nature of merger:
1. All the assets and liabilities of the transferor company become, after amalgamation, the assets
1.17

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 (other than the equity shares already held therein, immediately before the

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amalgamation, by the transferee company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
3. 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 paid in respect of any fractional shares.
4. The business of the transferor company is intended to be carried on, after the 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.
5. Amalgamation in the nature of purchase:
If any one or more of the conditions relating to 'Amalgamation in the nature of merger' are not
satisfied, it is classified as 'Amalgamation in the nature of purchase'.
6. Accounting Methods:
AS 14 deals with the accounting methodology to be followed by the transferee company. The
accounting standard has recognised the following two methods for amalgamation of companies.
1. Pooling of Interests Method - applicable to 'Amalgamation' in the nature of merger'.
2. Purchase method - applicable to 'Amalgamation' in the nature or purchase'.
7. Pooling of Interests Method:
- While preparing of financial statements of Transferee company, the assets, the liabilities and
reserves of the Transferor company should be recorded at their existing carrying amounts and
in the same form as at the date of amalgamation.
- The balance of the Profit and Loss account of the Transferor company should be aggregated
with that of the transferee company or may be transferred to General Reserve.
- The difference between purchase consideration paid to the Transferor company over and
above its own share capital is adjusted in reserves.
- In case of conflicting accounting policies of Transferor and Transferee company, a uniform set
of accounting policies should be adopted following the amalgamation and any effects of it on
financial statements should be reported in accordance with AS 5 ' Net Profit and Loss for the
Period, Prior Period Items and Changes in Accounting Policies.''
8. Purchase Method:
- The items of equity such as reserves and Profit and Loss A/c balances are never incorporated
into the financial statements of Transferee company.
- The assets and liabilities are either recorded at their respective carrying amount or
consideration should be allocated to individual assets in proportion to their fair values at the
date of amalgamation.
- If the Transferee company paid consideration in excess over the net assets acquired it is treated
as 'Goodwill' and if consideration paid is less than net assets acquired, it is treated as 'Capital
Reserve'.
- If the Transferee company has to carry forward any statutory reserve for legal compliance,
then incorporate statutory reserve of Transferor company with corresponding debit to
'Amalgamation Adjustment Account'. The balance in 'Amalgamation Adjustment Account will
be shown on the Assets side of the Balance Sheet of the transferee company under the head
Other Current / Non Current Asset.
- The goodwill arising from amalgamation should be amortised on a systematic basis over its
useful life. The amortisation period should not exceed five years, unless a longer period is
justified. AS 26 ' Intangible Assets' need not be complied for amortisation of goodwill arising
in amalgamation.
1. 18

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9. Distinction between Amalgamation in the nature of merger and amalgamation in the nature
of purchase.
No. Amalgamation in the nature of merger Amalgamation in the nature of purchase
1. Type of Amalgamation:
Satisfying all the five conditions laid down in Failure to satisfy any or more condition, it
AS- 14 , it will be treated as "Amalgamation will be an "Amalgamation in the nature of
in the nature of Merger" Purchase'"
2. Accounting method:
Accounuting method followed is "Pooling of Accounting method followed is Purchase
Interests method". method
3. Incorporation of Assets, Liability and
Reserves: Assets and liablities taken over are
Transferee company incorporates assets, incorporated either at carrying or at fair
Liabilities and Reserves at its carrying values. Reserves of transferor company are
amount in the books of transferor company. not incorporated.
4. Adjustment of Purchase consideration:
Difference between purchase consideration Difference between purchase consideration
and paid up capital of transferor company is and net assets taken over is adjusted against
adjusted against ' Reserves.' "Goodwill or Capital Reserve."
5. Incorporation of Statutory Reserves:
Statutory as well as non-Statutory Reserves Statuory reserve of transferor company
of transferor company are incorporated at which are required to be maintained by
its carrying amount, while incorporating transferee company are incorporated in the
assets and liabilities. books with corresponding debit to
'Amalgamation Adjustment Account.'
6. Liquidation Expenses of transferor
company:
Liquidation expenses of transferor company Liquidation expenses of transferor company
to be borne by transferee company are to be borne by transferee comapny are
adjusted against Reserves. adjusted against Goodwill / Capital Reserve.
7. Unrealised profit on stock held out of
inter company purchases:
To the extent of unrealised profit on stock To the exetent of unrealised profit on stock
held out of inter company purchases, stock held out of inter company purchases, stock
valuation is reduced by making adjustments valuation is reduced by making adjustments
against Reserves. against Goodwill / Capital Reserve.
10. Disclosure requirements:
The following disclosures shall be made in the first financial statements of Transferee company
following amalgamation-
- The names and general nature of business of Transferee and Transferor company.
- The effective date of amalgamation for accounting purposes.
- The method of accounting used.
- The particulars and details of amalgamation scheme sanctioned under the statute.
- In case of Pooling of Interests Method:
- The description and class and number of shares issued.
- The amount of difference between the consideration and the value of net identifiable
assets acquired and the treatment thereof.
- In case of Purchase Method
- Consideration for amalgamation and a description of the consideration paid or
contingently payable
- The amount of difference between consideration and net assets acquired and treatment
thereof including the period of amortisation of goodwill.
1.19

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11. Disclosure requirement in case of an amalgamation is effected after Balance -Sheet done but
before issuance of financial statements of either party:
If the amalgamation is effected after the Balance Sheet date but before insurance of financial
statements of either party.
- The disclosure should be made in accordance with AS 4 ' Contingencies and Events Occurring
After the Balance Sheet Date.'
- The amalgamation should not be incorporated in the financial statements.

11. RECONSTRUCTION OF COMPANIES – EXTERNAL RECONSTRUCTION

When a company has huge accumulated losses or when company finds itself over-capitalised, which means
either that the value placed on assets is too much as compared to their earning capacity or that profits as
a whole are insufficient to pay a proper dividend. It is felt that in the normal course, the past losses cannot
be recouped. Under this situation a company has only two alternatives:
i. Reconstruction
ii. Winding - up
If the company has turned its corner and after reconstruction now expects to earn sufficient profits to
satisfy all concerned, it can proceed ahead for reconstruction either internally or externally.
Internal reconstruction means that the scheme will be carried out by means of reduction of capital
i.e. the approval of the Court. External Reconstruction means that the scheme will be carried out by
liquidating the existing company and incorporating immediately another company to take over the
business of the outgoing company.
The internal reconstruction is preferred due to the following advantages:
1. Loan and other creditors will continue their association. However, if the company is formally
liquidated, it will involve payment of claim and company may suffer on account of paucity of funds.
2. The company will be able to set-off its past losses against future profits for income tax purposes,
which may not be possible in case of external reconstruction (except the scheme of amalgamation
sanctioned by the Central Government under Sec. 72 A of the Income Tax Act)
The external reconstruction is preferred due to the following:
1. It helps in raising more finance much easily as compared to internal reconstruction. This is even
possible by issuing partly paid shares to the existing shareholders and calling up a balance amount.
2. Deadlock in the management may be removed through external reconstruction by diluting the equity
amongst debentureholders, preference shareholders and public.

External reconstruction means floating of a new company to take over the business of an existing company.
Accounting entries are similar to that of absorption. External reconstruction differs from absorption in the
following aspects -
1. In absorption an existing company may take over the business, however, in case of external
reconstruction a new company is floated for the purpose.
2. The background behind absorption is to purchase the business while in case of external
reconstruction is to reorganise the business.
3. In absorption accounting, problems of inter company dues, inter-company holdings, unrealised
profit on stock held out of inter company purchases etc. may have dealt with, which do not exist in case of
external reconstruction.
_______________________________________________________________________________________________________________________________

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1. 20

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12. PRACTICAL PROBLEMS

IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. Calculation of Purchase Consideration (ICAI SM Illu.1) REG. PAGE NO.

Let us consider the Balance Sheet of X Ltd. as at 31st March, 2021
NOTE AMOUNT
PARTICULARS
REF. (000)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 10,000
(B) Reserves & Suplus 2 1,250
2. Non Current Liabilities
Long Term Borrowings 3 4,000
3. Current Liabilities
Trade Payables 2,000
TOTAL 17,250

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 10,550
(B) Non-Current Investments 5 500
2. Current Assets
(A) Inventories 2,300
(B) Trade Receivables 2,400
(C) Cash & Cash Equivalents 1,500
TOTAL 17,250
Notes to Accounts
AMOUNT
PARTICULARS
(000)
1. Shareholder’s Funds
Equity Share Capital
7,50,000 Equity Shares of Rs. 10 each 7,500
25,000 14% Pref. Shares of Rs. 100 each 2,500
TOTAL 10,000
2. Reserves & Surplus
General Reserves 1,250
TOTAL 1,250
3. Long Term Borrowings
Secured – 14% Debentures 4,000
TOTAL 4,000
4. Property, Plant & Equipments
Land & Building 5,000
Plant & Machinery 4,500
Furniture 1,050
TOTAL 10,550
5. Non Current Investments
1.21

Investments at Cost 500

TOTAL 500

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Other Information:
(i) Y Ltd. takes over X Ltd. on 10th April, 2021.
(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing 15% own debentures
of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by issuing necessary
number of 15% Preference Shares of Y Ltd. (Face value Rs. 100 each).
(iv) Intrinsic value per share of X Ltd. Is Rs. 20 and that of Y Ltd. Rs. 30. Y Ltd. will issue equity shares to
satisfy the equity shareholders of X Ltd. on the basis of intrinsic value. However, the entry should be made
at par value only. The nominal value of each equity share of Y Ltd. Is Rs. 10.
Compute the purchase consideration.

Q2. Calculation of Purchase Consideration (ICAI SM Illu.2) REG. PAGE NO.

S. Ltd. is absorbed by P. Ltd. S ltd. gives the following information on the date of absorption:
Sundry Assets 13,00,000
Share Capital:
2,000 7% Preference shares of Rs. 100 each (fully paid-up) 2,00,000
5,000 Equity shares of Rs. 100 each (fully paid-up) 5,00,000
Reserves 3,00,000
6% Debentures 2,00,000
Trade Payables 1,00,000
Additional information:
P. Ltd. has agreed:
(i) To issue 9% Preference shares of Rs. 100 each, in the ratio of 3 shares of P. Ltd. for 4 preference
shares in S. Ltd.
(ii) To issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at Rs. 96 in lieu of 6%
Debentures in S. Ltd. which are to be redeemed at a premium of 20%;
(iii) To pay Rs. 20 per share in cash and to issue six equity shares of Rs. 100 each issued at the market
value Rs. 125 in lieu of every five shares held in S. Ltd.; and
(iv) To assume the liability to trade payables.
You are required to calculate the purchase consideration

Q3. Calculation of Purchase Consideration (ICAI SM Illu.3) REG. PAGE NO.

Y Ltd. decides to absorb X Ltd. X Ltd. gives you the following information on the date of absorption:
Net Assets 2,90,000
Profit & Loss A/c (Debit Balance) 70,000
Share capital: 3,000 Equity shares of Rs. 100 each (fully paid) 3,00,000
Preference Shares 60,000
Y Ltd. agrees to take over the net assets of X Ltd.
The terms of the purchase consideration payable is as follows-
1. An equity share in X Ltd., for purposes of absorption, is valued @ Rs. 70. Y Ltd. shall issue equity shares
at value of Rs. 120 each for the equity shareholders of X Ltd.
2. Y ltd. agrees to pay Rs. 60,000 in cash for payment to preference shareholders.
Calculate purchase consideration to be paid by Y Ltd. and how will it be discharged?
1. 22

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Q4. Calculation of Purchase Consideration (ICAI CA-Inter New Dec 2021) REG. PAGE NO.
Moon Limited is absorbed by Sun Limited; the consideration, being the takeover of liabilities, the payment
of cost of absorption not exceeding Rs. 10,000 (actual cost Rs. 9000); the payment of 9% Debentures of
Rs. 50,000 at a premium of 20% through 8% debentures issued at a premium of 25% of face value; the
payment of Rs. 18 per share in cash; allotment of two 11% preference shares of Rs. 10/- each and one
equity share of Rs. 10/- each at a premium of 30% fully paid for every three shares in Moon Limited
respectively. The number of shares of the vendor company is 1,50,000 of Rs. 10/- each fully paid.
Calculate purchase consideration as per AS-14.

Q5. Calculation of Purchase Consideration (ICAI SM Illu.4) REG. PAGE NO.

Neel Ltd. and Gagan Ltd. amalgamated to form a new company on 1.04.2021. Following is the Balance Sheet
of Neel Ltd. and Gagan Ltd. as at 31.3.2021:
NOTE
PARTICULARS NEEL GAGAN
REF.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 7,75,000 8,55,000
2. Current Liabilities 6,23,500 5,57,600
TOTAL 13,98,500 14,12,600

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 1 12,35,000 12,54,000
2. Current Assets 1,63,500 1,58,600
TOTAL 13,98,500 14,12,600
Notes to Accounts
PARTICULARS NEEL GAGAN
1. Property, Plant & Equipments
Land & Building 7,50,000 6,40,000
Plant & Machinery 4,85,000 6,14,000
TOTAL 12,35,000 12,54,000
Following is the additional information:
(i) The assets of Neel Ltd. and Gagan Ltd. are to be revalued as under:
Plant & Machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000
(ii) The purchase consideration is to be discharged as under:
(a) Issue 24,000 equity shares of Rs. 25 each fully paid up in the proportion of their profitability in the
preceding 2 years.
(b) Profits for the preceding 2 years are given below:
PARTICULARS NEEL GAGAN
1st Year 2,62,800 2,75,125
2nd Year 2,12,200 2,49,875
TOTAL 4,75,000 5,25,000
(c) Issue 12% preference shares of Rs. 10 each fully paid up at par to provide income equivalent to 8%
return on net assets in the business as on 31.3.2021 after revaluation of assets of Neel Ltd. and Gagan Ltd.
respectively.
You are required to compute the
1.23

(i) Equity and preference shares issued to Neel Ltd. and Gagan Ltd.,
(ii) Purchase consideration.

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Q6. Balance Sheet of T’ree Co. (Merger & Pur.) (ICAI SM Illu.5) REG. PAGE NO.
Consider the following balance sheets of X Ltd. and Y Ltd. as at 31 st March, 2021:
NOTE X LTD. Y LTD.
PARTICULARS
REF. (000) (000)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 72,00 47,00
(B) Reserves & Suplus 2 15,50 10,50
2. Non Current Liabilities
Long Term Borrowings 3 5,00 3,50
3. Current Liabilities
Trade Payables 4,50 3,50
Other Current Liabilities 2,00 1,50
(Interest payable on debentures)
TOTAL 99,00 66,00

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 63,25 36,00
(B) Non Current Investments 5 7,00 5,00
2. Current Assets
(A) Inventories 12,50 9,50
(B) Trade Receivables 9,00 10,30
(C) Cash & Cash Equivalents 7,25 5,20
TOTAL 99,00 66,00
Notes to Accounts
X LTD. Y LTD.
PARTICULARS
(000) (000)
1. Shareholder’s Funds
Equity Share Capital (Rs. 10 each) 50,00 30,00
14% Pref. Share Capital (Rs. 100 each) 22,00 17,00
TOTAL 72,00 47,00

2. Reserves & Surplus

General Reserve 5,00 2,50
Export Profit Reserve 3,00 2,00
Investment Allowance Reserves - 1,00
Profit & Loss A/c 7,50 5,00
TOTAL 15,50 10,50

3. Long Term Borrowings

13% Debentures of Rs. 100 each 5,00 3,50
TOTAL 5,00 3,50

4. Property, Plant & Equipments

Land & Building 25,00 15,50
Plant & Machinery 32,50 17,00
Furniture 5,75 3,50
TOTAL 63,25 36,00
1. 24

5. Non Current Investments

Investment at Cost 7,00 5,00
TOTAL 7,00 5,00

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X Ltd. takes over Y Ltd. on 1st April, 2021. X Ltd. discharges the purchase consideration as below:
(i) Issued 3,50,000 equity shares of Rs. 10 each at par to the equity shareholders of Y Ltd.
(ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Y Ltd. at
10% premium.
The debentures of Y Ltd. will be converted into equivalent number of debentures of X Ltd. The statutory
reserves of Y Ltd. are to be maintained for 2 more years.
Show the balance sheet of X Ltd. after amalgamation on the assumption that:
(a) the amalgamation is in the nature of merger.
(b) the amalgamation is in the nature of purchase

Q7. Accounting in the Books of T’ree Co. (ICAI SM Illu.9) REG. PAGE NO.
The following are the Balance Sheets of A Ltd. and B Ltd. as at 31.3.2021:
NOTE A LTD. B LTD.
PARTICULARS
REF. (000) (000)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 2,000 1000
(B) Reserves & Surplus 2 1,000 (800)
2. Non Current Liabilities
(A)Long Term Borrowings 3 750 450
3. Current Liabilities
(A)Trade Payables 300 300
(B)Short Term Borrowings -- 50
Bank Overdraft

TOTAL 4,050 1,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 2,700 850
(B) Intangible assets 700 -
2. Current Assets
(B) Trade Receivables 400 150
(C) Cash & Cash Equivalents 250 --
TOTAL 4,050 1000
Notes to Accounts
A LTD. B LTD.
PARTICULARS
(000) (000)
1. Share Capital
Equity Share Of Rs. 100 each 2,000 1,000
TOTAL 2,000 1,000

2. Reserves & Surplus

General Reserve 1000 --
Profit & Loss A/c -- (800)
TOTAL 1,000 (800)

3. Long Term Borrowings

1.25

10% Debentures of 500 --

Loan from Banks 250 450
TOTAL 750 450

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B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved:
(i) Banks agreed to waive off the loan of Rs. 60 thousand of B Ltd.
(ii) B Ltd. will reduce its shares to Rs. 10 per share and then consolidate 10 suchshares into one
share of Rs. 100 each (new share).
(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of every share held
in A Ltd.
(iv) Trade payables of B Ltd. includes Rs. 100 thousand payable to A Ltd.
Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger.

Q8. Accounting in the Books of T’ree Co. + PC (ICAI SM Illu.10) REG. PAGE NO.
The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 2021:
PARTICULARS NOTE REF. P LTD. Q LTD.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 8,00,000 4,00,000
(B) Reserves & Surplus 3,00,000 2,00,000
2. Non Current Liabilities
(A)Long Term Borrowings 2 2,00,000 1,50,000
3. Current Liabilities
(A)Trade Payables 2,50,000 1,50,000

TOTAL 15,50,000 9,00,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 7,00,000 2,50,000
(B) Non-current investments 80,000 80,000
2. Current Assets
(A) Inventories 2,40,000 3,20,000
(B) Trade Receivables 4,20,000 2,10,000
(C) Cash & Cash Equivalents 1,10,000 40,000
TOTAL 15,50,000 9,00,000
Notes to Accounts
PARTICULARS P LTD. Q LTD.
1. Share Capital
Equity Share Of Rs. 10 each 6,00,000 3,00,000
10% Preference Shares Of Rs. 100 each 2,00,000 1,00,000
TOTAL 8,00,000 4,00,000
2. Long Term Borrowings
12% Debentures 2,00,000 1,50,000
TOTAL 2,00,000 1,50,000

Details of Trade receivables and trade payables are as under:

P LTD. Q LTD.
1. Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
TOTAL 4,20,000 2,10,000
2. Trade payables
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000
1. 26

TOTAL 2,50,000 1,50,000

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Property, plant and equipment of both the companies are to be revalued at 15% above book value. Both
the companies are to pay 10% Equity dividend, but Preference dividend having been already paid.
After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms:
(a) 8 Equity Shares of Rs.10 each will be issued by P Ltd. at par against 6 shares ofQ Ltd.
(b) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of10% Preference
Shares of Rs.100 each at par in P Ltd.
(c) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued
at a discount of 10%.
(d) Rs.30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. SundryCreditors of Q Ltd.
include Rs.10,000 due to P Ltd.
(e) Inventory in Trade and Debtors are taken over at 5% lesser than their bookvalue by P Ltd.

After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.

Q9. Accounting in the Books of T’ree Co. + PC (Purchase) (ICAI SM Q3) REG. PAGE NO.
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new company
named Super Fast Express Ltd. The balance sheets of both the companies were as under:
Super express Fast express
NOTE
PARTICULARS LTD. LTD.
REF.
(Rs.) (Rs.)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 20,00,000 10,00,000
(B) Reserves & Surplus 2 1,00,000 2,60,000
2. Non Current Liabilities
(A)Long Term Provisions 3 1,00,000 --
3. Current Liabilities
(A)Trade Payables 60,000 40,000

TOTAL 22,60,000 13,00,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 14,00,000 11,00,000
(B) Intangible Assets 5 -- 1,00,000
2. Current Assets
(A) Inventories 3,00,000 40,000
(B) Trade Receivables 2,40,000 40,000
(C) Cash & Cash Equivalents 3,20,000 20,000
TOTAL 22,60,000 13,00,000
Notes to Accounts
Super Fast Express
PARTICULARS
Express LTD. LTD.
1. Share Capital
Equity Share Of Rs. 100 each 20,00,000 10,00,000
TOTAL 20,00,000 10,00,000
2. Reserves & Surplus
1.27

Insurance Reserve 1,00,000 --

Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000

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TOTAL 1,00,000 2,60,000
3. Long Term Provisions
Provident fund 1,00,000 --
TOTAL 1,00,000 --
4. Property, Plant & Equipments
Land & Building 10,00,000 6,00,000
Plant & Machinery 4,00,000 5,00,000
TOTAL 14,00,000 11,00,000
5. Intangible Assets
Goodwill -- 1,00,000
TOTAL -- 1,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Cash in Hand 1,00,000 10,000
TOTAL 3,20,000 20,000
The assets and liabilities of both the companies were taken over by the new company at their book values.
The companies were allotted equity shares of Rs. 100 each in lieu of purchase consideration amounting
to Rs.30,00,000 (20,000 shares for Super- Fast Express Ltd and 10,000 shares for Fast Express Ltd.).
Prepare opening balance sheet of Super-Fast Express Ltd. considering pooling method.

Q10. Accounting in the Books of T’ree Co. (Merger) (ICAI SM Q4) REG. PAGE NO.
The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March, 2021:
NOTE P LTD. V LTD.
PARTICULARS
REF. (in lakhs) (in lakhs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 15,000 6,000
(B) Reserves & Surplus 2 15,370 4,335
2. Non Current Liabilities
(A)Long Term Borrowings 3 -- 1,000
3. Current Liabilities
(A)Trade Payables 1,200 463
(B)Short term provisions 1,830 702

TOTAL 33,400 12,500

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 22,304 6,750
2. Current Assets
(A) Inventories 7,862 4,041
(B) Trade Receivables 2,120 1,100
(C) Cash & Cash Equivalents 1,114 609
TOTAL 33,400 12,500

Notes to Accounts
PARTICULARS P LTD. V LTD.
1. Share Capital 15,000 6,000
2. Reserves and Surplus
Securities premium 3,000 --
Foreign project reserve -- 310
1. 28

General reserve 9,500 3,200

Profit and loss account 2,870 825
TOTAL 15,370 4,335

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2. Long Term Borrowings
12% debentures -- 1,000
TOTAL -- 1,000
3. Property, Plant & Equipments
Land and building 6,000 --
Plant and machinery 14,000 5,000
Furniture and fixtures 2,304 1,750
TOTAL 22,304 6,750
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 2021, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed that
in discharge of consideration for the business P Ltd. would allot three fully paid equity shares of Rs. 10
each at par for every two sharesheld in V Ltd. It was also agreed that 12% debentures in V Ltd. would be
converted into 13% debentures in P Ltd. of the same amount and denomination.

Details of trade receivables and trade payables as under:

P LTD. V LTD.
PARTICULARS
(in lakhs) (in lakhs)
1. Trade Payable
Bills payable 120 --
Trade creditors 1,080 463
TOTAL 1,200 463
2. Trade Receivables
Trade debtors 2,120 1,020
Bills receivable -- 80
TOTAL 2,120 1,100
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
You are required to: (i) pass journal entries in the books of P Ltd. and (ii) prepare P Ltd.’s Balance Sheet
immediately after the merger.

Q11. Accounting in the Books of T’ree Co. (Merger & Pur.) (ICAI SM Q5) REG. PAGE NO.
Sun and Neptune had been carrying on business independently. They agreed to amalgamate and form a
new company Jupiter Ltd. with an authorized share capital of Rs. 4,00,000 divided into 80,000 equity
shares of Rs. 5 each. On 31st March, 2023 the respective information of Sun and Neptune were as follows:
Sun Neptune
(Rs) (Rs)
Share capital 3,65,000 3,52,000
Current Liabilities 5,97,000 1,80,250
Property, plant and equipment 6,35,000 3,65,000
Current assets 3,27,000 1,67,750

Additional information:
(i) Revalued figures of non-current and Current assets were as follows:
Sun Neptune
(Rs) (Rs)
Property, plant and equipment 7,10,000 3,90,000
Current assets 2,99,500 1,57,750

(i) The debtors and creditors include Rs. 43,350 owed by Sun to Neptune.
The purchase consideration is satisfied by issue of the following shares and debentures.
a. 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profitability
of their respective business based on the average net profit during the last three years which
1.29

were as follows.

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Sun Neptune
(Rs) (Rs)
2021 4,49,576 2,73,900
2022 (Loss)/Profit (2,500) 3,42,100
2023 Profit 3,77,924 3,59,000

b. 15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return business
as on capital employed in their respective businessas on 31st March, 2023 after revaluation
of assets.

You are required to:

(i) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(ii) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation.

Q12. Accounting in the Books of T’ree Co. (Merger & Pur.) (ICAI New May 2019) REG. PAGE NO.
The following are the summarized Balance Sheet of VT Ltd. and MG Ltd. as on 31st March, 2018:
NOTE
PARTICULARS VT LTD. MG LTD.
REF.
I. EQUITY & LIABILITIES
(A) Equity Shares of Rs. 10 each 1 12,00,000 6,00,000
(B) 10% Preference Shares of Rs.100 each 3 4,00,000 2,00,000
(C) Reserve and Surplus 4 6,00,000 4,00,000
(D) 12% Debentures 5 4,00,000 3,00,000
(E) Trade Payables 6 5,00,000 3,00,000
TOTAL 31,00,000 18,00,000

II. ASSETS
(A) Fixed assets 14,00,000 5,00,000
(B) Investment 1,60,000 1,60,000
(C) Inventory 4,80,000 6,40,000
(E) Trade Receivables 8,40,000 4,20,000
(F) Cash at Bank 2,20,000 80,000
TOTAL 31,00,000 18,00,000

Details of Trade receivables and trade payables are as under:

VT LTD. MG LTD.
PARTICULARS
(Rs) (Rs)
1. Trade Receivable
Debtors 7,20,000 3,80,000
Bills Receivable 1,20,000 40,000
TOTAL 8,40,000 4,20,000

2. Trade Payable
Sundry Creditors 4,40,000 2,50,000
Bills Payable 60,000 50,000
TOTAL 5,00,000 3,00,000
Fixed Assets of both the companies are to be revalued at 15% above book value.
Inventory in Trade and Debtors are taken over at 5% lesser than their book value.
Both the companies are to pay 10% equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, VT Ltd. will absorb MG Ltd. on the following terms:
1. 30

i) VT Ltd. will issue 16 Equity Shares of Rs. 10 each at par against 12 Shares of MG Ltd.
ii) 10% Preference Shareholders of MG Ltd. will be paid at 10% discount by issue of 10% Preference
Shares of Rs. 100 each, at par, in VT. Ltd.

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iii) 12% Debenture holders of MG Ltd. are to be paid at 8% premium, by 12% Debentures in VT Ltd.,
issued at a discount of 10%.
iv) Rs.60,000 is to be paid by VT Ltd. to MG Ltd. for Liquidation expenses.
v) Sundry Debtors of MG Ltd. includes Rs. 20,000 due from VT Ltd.
You are required to:
(i) Journal entries in the books of VT Ltd. (ii) Statement of consideration payable by VT Ltd.

Q13. Accounting in the Books of T’ree Co. (ICAI New Jan 2021) REG. PAGE NO
Galaxy Ltd. and Glory Ltd., are two companies engaged in the same business of chemicals. To mitigate
competition, a new company Glorious Ltd, is to be formed to which the assets and liabilities of the existing
companies, with certain exception, are to be transferred. The summarized Balance Sheet of Galaxy Ltd. and
Glory Ltd. as at 31st March, 2020 are as follows:
NOTE Galaxy LTD. Glory LTD.
PARTICULARS
REF. (Rs) (Rs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital
Equity shares of Rs. 10 each 1 8,40,000 4,55,000
(B) Reserves & Surplus
General Reserve 2 4,48,000 40,000
Profit & Loss 3 1,12,000 72,000
2. Non Current Liabilities
(A)Secured Loan
6% Debentures 4 -- 3,30,000
3. Current Liabilities
(A)Trade Payables 4,20,000 1,83,000
TOTAL 18,20,000 10,80,000
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments
Freehold property, at cost 5,88,000 3,36,000
Plant & machinery, at cost less 1,40,000 84,000
depreciation
Motor vehicles, at cost less depreciation 56,000 --
1. Non-Current Assets
Inventories 3,36,000 4,38,000
Trade Receivables 4,62,000 1,18,000
Cash at bank 2,38,000 1,04,000
TOTAL 18,20,000 10,80,000
Assets and Liabilities are to be taken at book value, with the following exceptions:
(i) The Debentures of Glory Ltd. are to be discharged, by the issue of 8% Debentures of Glorious Ltd. at
a premium of 10%.
(ii) Plant and Machinery of Galaxy Ltd. are to be valued at Rs. 2,52,000.
(iii) Goodwill is to be valued at: Galaxy Ltd. Rs. 4,48,000 and Glory Ltd. Rs. 1,68,000
(iv) Liquidator of Glory Ltd. is appointed for collection from trade debtors and payment to trade
creditors. He retained the cash balance and collected Rs. 1,10,000 from debtors and paid Rs.
1,80,000 to trade creditors. Liquidator is entitled to receive 5% commission for collection and 2.5%
for payments. The balance cash will be taken over by new company.

You are required to:

(i) Compute the number of shares to be issued to the shareholders of Galaxy Ltd. and Glory Ltd,
1.31

assuming the nominal value of each share in Glorious Ltd. is Rs. 10.
(ii) Prepare Balance Sheet of Glorious Ltd., as on 1st April, 2020 and also prepare notes to the accounts
as per Schedule III of the Companies Act, 2013.

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Q14. Accounting in the Books of T’ror Co. + PC (ICAI SM Illu.6) REG. PAGE NO.
Wye Ltd. acquires the business of Zed Ltd. whose balance sheet as at 31 st March, 2021 is as under:
NOTE
PARTICULARS AMOUNT
REF.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 12,00,000
(B) Reserves & Suplus 2 1,58,000
2. Non Current Liabilities
Long Term Borrowings 3 2,00,000
3. Current Liabilities
Trade Payables 1,20,000
Other Current Liabilities 12,000
(Interest payable on debentures)
TOTAL 16,90,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 10,00,000
(B) Intangible Assets 5 2,90,000
2. Current Assets
(A) Inventories 1,50,000
(B) Trade Receivables 1,80,000
(C) Cash & Cash Equivalents 70,000
TOTAL 16,90,000
Notes to Accounts
AMOUNT
PARTICULARS
(000)
1. Shareholder’s Funds
Equity Share Capital (Rs. 100 each) 8,00,000
6% Pref. Share Capital (Rs. 100 each) 4,00,000
TOTAL 12,00,000

2. Reserves & Surplus

Capital Reserves 1,00,000
Profit & Loss A/c 50,000
Workmen Compensation Reserves 8,000
(Expected Liability Rs. 5,000)
TOTAL 1,58,000

3. Long Term Borrowings

6% Debentures 2,00,000
TOTAL 2,00,000

4. Property, Plant & Equipments

Land & Building 4,00,000
Plant & Machinery 6,00,000
TOTAL 10,00,000

5. Intangible Assets
1. 32

Goodwill 2,40,000
Patents 50,000
TOTAL 2,90,000

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Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest due on debentures)
and to pay following amounts:
(i) Rs. 2,00,000 7% Debentures (Rs. 100 each) in Wye Ltd. for the existing debentures in Zed Ltd.; for
the purpose, each debenture of Wye Ltd. is to be treated as worth Rs. 105.
(ii) For each preference share in Zed Ltd. Rs. 10 in cash and one 9% preference share of Rs. 100 each in
Wye Ltd.
(iii) For each equity share in Zed Ltd. Rs. 20 in cash and one equity share in Wye Ltd. of Rs. 100 each
having the market value of Rs. 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the extent of Rs. 10,000. Actual
expenses amounted to Rs. 12,500.
Wye Ltd. valued Land and building at Rs. 5,50,000 Plant and Machinery at Rs. 6,50,000 and patents at Rs.
20,000 of Zed Ltd for the purpose of amalgamation.
Calculate Purchase Consideration and close the books of vendor company.

Q15. Accounting in the Books of T’ror Co. (ICAI SM Illu.8) REG. PAGE NO.
K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position
of these two companies as at the date of amalgamation was as under:
NOTE
PARTICULARS K LTD. L LTD.
REF.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 12,00,000 6,00,000
(B) Reserves & Surplus 2 3,71,375 1,97,175
2. Non Current Liabilities
(A)Long Term Borrowings 3 2,00,000 2,00,000
3. Current Liabilities
(A)Trade Payables 1,00,000 2,10,000

TOTAL 18,71,375 12,07,175

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 11,30,000 8,20,000
(B) Intangible assets 5 80,000 -
2. Current Assets
(A) Inventories 2,25,000 1,40,000
(B) Trade Receivables 2,75,000 1,75,000
(C) Cash & Cash Equivalents 1,61,375 72,175
TOTAL 18,71,375 12,07,175
Notes to Accounts
PARTICULARS K LTD. L LTD.
1. Share Capital
Equity Share Of Rs. 100 each 8,00,000 3,00,000
7% Pref. Share Capital (Rs. 100 each) 4,00,000 3,00,000
TOTAL 12,00,000 6,00,000
2. Reserves & Surplus
General Reserve -- 1,00,000
Profit & Loss A/c 3,71,375 97,175
1.33

TOTAL 3,71,375 1,97,175

3. Long Term Borrowings
5% Debentures of 2,00,000 --

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Secured Loan -- 2,00,000
TOTAL 2,00,000 2,00,000
4. Property, Plant & Equipments
Land & Building 4,50,000 3,00,000
Plant & Machinery 6,20,000 5,00,000
Furniture & Fittings 60,000 20,000
TOTAL 11,30,000 8,20,000
5. Intangible Assets
Goodwill 80,000 --
TOTAL 80,000 --
6. Cash and Cash Equivalents
Cash at Bank 120,000 55,000
Cash in Hand 41,375 17,175
TOTAL 1,61,375 72,175

The terms of amalgamation are as under:

(A)
(a) The assumption of liabilities of both the Companies.
(b) Issue of 5 Preference shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at premium of Rs. 4 per share
for each preference share held in both the Companies.
(c) Issue of 6 Equity shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at a premium of Rs. 4 per share
for each equity share held in both the Companies. In addition, necessary cash should be paid to
the Equity Shareholders of both the Companies as is required to adjust the rights of shareholders
of both the Companies in accordance with the intrinsic value of the shares of both the
Companies.
(d) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient todischarge the 5%
debentures in K Ltd. at a discount of 5% after takeover.

(B)
(b) The assets and liabilities are to be taken at book values inventory and trade receivables for
which provisions at 2% and 2 ½ % respectively to be raised.
(c) The trade receivables of K Ltd. include Rs. 20,000 due from L Ltd.
(C)
(a) The LK Ltd. is to issue 15,000 new equity shares of Rs.20 each, Rs.18 paid up at premium of Rs.
4 per share so as to have sufficient working capital.
Prepare ledger accounts in the books of K Ltd. and L Ltd. to close their books.

Q16. Accounting in the Books of T’ror Co. & T’ree Co. (ICAI SM Illu.7) REG. PAGE NO.
The following Balance Sheets are given as at 31st March, 2021:
NOTE BEST LTD. BETTER LTD.
PARTICULARS
REF. (Rs. Lakhs) (Rs. Lakhs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 20 10
(B) Reserves & Suplus 10 8
2. Current Liabilities 20 2
TOTAL 50 20
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 25 15
1. 34

(B) Non Current Investments 5 -

2. Current Assets 20 5
TOTAL 50 20

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The following further information is given —
(a) Better Limited issued bonus shares on 1st April, 2021, in the ratio of one share for every two held,
out of Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s
Balance Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be Rs. 150 and the shares in Better Ltd. were valued
at Rs. 100 after the issue of the bonus shares. The allotment of shares is to be made on the basis of
these values.
(d) Liabilities of Better Ltd., included Rs. 1 lakh due to Best Ltd., for purchases from it, on which Best Ltd.,
made profit of 25% of the cost. The goods of Rs. 50,000 out of the said purchases, remained in stock
on the date of the above Balance Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best
Ltd., and prepare the Balance Sheet as at 1st April, 2021 after the takeover.

Q17. Accounting in the Books of T’ror & T’ree Co. (ICAI SM Illu.11) REG. PAGE NO.
The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March,2021 was as under:
NOTE
PARTICULARS Hari LTD. Vayu LTD.
REF.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 11,00,000 4,00,000
(B) Reserves & Surplus 2 70,000 70,000
2. Non Current Liabilities
(A)Long Term Provisions 3 50,000 20,000
3. Current Liabilities
(A)Trade Payables 1,30,000 80,000
TOTAL 13,50,000 5,70,000
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 4 8,00,000 2,50,000
(B) Intangible Assets 5 50,000 25,000
2. Current Assets
(A) Inventories 2,50,000 1,75,000
(B) Trade Receivables 2,00,000 1,00,000
(C) Cash & Cash Equivalents 50,000 20,000
TOTAL 13,50,000 5,70,000
Notes to Accounts
PARTICULARS Hari LTD. Vayu LTD.
1. Share Capital
Equity share of Rs. 10 each 10,00,000 3,00,000
9% Pref. Share Capital (Rs. 100 each) 1,00,000 --
10% Pref. Share Capital (Rs. 100 each) -- 1,00,000
TOTAL 11,00,000 4,00,000
2. Reserves & Surplus
General Reserve 70,000 70,000
TOTAL 70,000 70,000
3. Long Term Provisions
Retirement Gratutity Fund 50,000 20,000
1.35

TOTAL 50,000 20,000

4. Property, Plant & Equipments
Land & Building 3,00,000 1,00,000
Plant & Machinery 5,00,000 1,50,000

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TOTAL 8,00,000 2,50,000
5. Intangible Assets
Goodwill 50,000 25,000

Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%Preference Shares
of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000and the Machinery
at Rs.1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debtsto be created @
7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued necessary Equity Shares @ 5%premium.

Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March, 2021.
Q18. Accounting in the Books of T’ror Co. & T’ree Co. (Merger) (ICAI SM Q1) REG. PAGE NO.
The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 2021:
NOTE Yes LTD. No LTD.
PARTICULARS
REF. (in crores) (in crores)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 12 5
(B) Reserves & Surplus 88 10
2. Non Current Liabilities
(A)Long Term Borrowings 2 -- 10
3. Current Liabilities 33 15
TOTAL 133 40
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 3 20 6
(B) Non-current Investments 4 13 --
2. Current Assets 100 34
TOTAL 133 40
Notes to Accounts
PARTICULARS Yes LTD. No LTD.
1. Share Capital
Equity share capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of Rs. 10 each fully paid 12 5
TOTAL 12 5
2. Long Term Borrowings
Unsecured loan from Yes Ltd. -- 10
TOTAL -- 10

3. Property, Plant & Equipments

Gross Value 70 30
Depreciation (50) (24)
TOTAL 20 6
4. Non-current Investments
1. 36

30 lakhs equity shares of Rs. 10 each 3 --

Long Term loan to No Ltd. 10 --
TOTAL 13 --

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On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get oneequity share of Yes Ltd.
issued at a premium of Rs.2 per share for every five equity shares held by them in No Ltd. The necessary
approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above if
the amalgamation is in the nature of merger.

Q19. Accounting in the Books of T’ror Co. (ICAI SM Q2) REG. PAGE NO.
The following are the Balance Sheets of X Ltd. and Y Ltd:
NOTE
PARTICULARS X LTD. Y LTD.
REF.
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 1,00,000 50,000
(B) Reserves & Surplus 2 10,000 (10,000)
2. Non Current Liabilities
(A)Long Term Borrowings 3 -- 15,000
3. Current Liabilities
(A) Trade Payables 25,000 5,000
TOTAL 1,35,000 60,000
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 1,20,000 60,000
(B) Non-current Investments 4 15,000 --
TOTAL 1,35,000 60,000
Notes to Accounts
PARTICULARS X LTD. Y LTD.
1. Share Capital
Equity Share 1,00,000 50,000
TOTAL 1,00,000 50,000
2. Reserves & Surplus
Profit & Loss A/c 10,000 --
Profit & Loss A/c (debit balance) -- (10,000)
TOTAL 10,000 (10,000)
3. Long Term Borrowings
Loan from X Ltd. -- 15,000
4. Non-current Investments
Loan to Y Ltd. 15,000 --
TOTAL 15,000 --

A new company XY Ltd. is formed to acquire the sundry assets and trade payablesof X Ltd. and Y Ltd.
and for this purpose, the sundry assets of X Ltd. are revalued at Rs.1,00,000. The debt due to X Ltd. is also
to be discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.

Q20. Accounting in the Books of T’ror & T’ree Co. (ICAI New May 2018) REG. PAGE NO.
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
NOTE
PARTICULARS X LTD. Y LTD.
REF.
I. EQUITY & LIABILITIES
(A) Equity Shares of Rs. 10 each 1 30,00,000 9,00,000
(B) 9% Preference Shares of Rs.100 each 2 3,00,000 --
1.37

(C) 10% Preference Shares of Rs.100 each 3 -- 3,00,000

(D) General Reserve 4 2,10,000 2,10,000
(E) Retirement Gratuity Fund (long term) 5 1,50,000 60,000

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(F) Trade Payables 6 3,90,000 2,40,000
TOTAL 40,50,000 17,10,000
II. ASSETS
(A) Goodwill 7 1,50,000 75,000
(B) Land & Buildings 8 9,00,000 3,00,000
(C) Plant & Machinery 9 15,00,000 4,50,000
(D) Inventories 10 7,50,000 5,25,000
(E) Trade Receivables 11 6,00,000 3,00,000
(F) Cash and Bank 12 1,50,000 60,000
TOTAL 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shares are to be paid at 10% premium by issue of 9% Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of preceding
three financial years (2016-17: Rs. 90,000; 2015-16: Rs.78,000 and 2014-15: Rs. 72,000). The profits
of 2014 -15 included credit of an insurance claim of Rs. 25,000 (fire occurred in 2013-14 and loss by
fire Rs. 30,000 was booked in Profit and Loss Account of that year). In the year 2015 -16, there was
an embezzlement of cash by an employee amounting to Rs. 10,000.
(iii) Land & Buildings are valued at Rs. 5,00,000 and the Plant & Machinery at Rs. 4,00,000.
(iv) Inventories are to be taken over at 10% less value & Provision for Doubtful Debts is to be created @
2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to Rs. 15,000
and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs. 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to:
(i) Prepare Realization A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.

Q21. Accounting in the Books of T’ree Co. (Purchase) (ICAI New Dec 2021) REG. PAGE NO
Dark Ltd. and Fair Ltd. were amalgamated on and from 1st April, 2021. A new company Bright Ltd. was
formed to take over the business of the existing companies. The balance Sheets of Dark Ltd. and Fair Ltd.
as at 31st March, 2021 are given below:
NOTE Dark LTD. Fair LTD.
PARTICULARS
REF. (Rs. Lakhs) (Rs. Lakhs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 1,650 1,425
(B) Reserves & Surplus 2 630 495
2. Non-Current Liabilities
(A)Long term borrowings -- --
10% debentures of Rs. 100 each 90 45
3. Current Liabilities
(A)Trade Payables 630 285
TOTAL 3,000 2,250
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 1,350 975
(B) Non current investments 225 75
2. Current Assets
(A) Inventories 525 375
(B) Trade Receivables 450 525
1. 38

(C) Cash & Cash Equivalents 450 300

TOTAL 3,000 2,250
Notes to Accounts

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Dark LTD. Fair LTD.
PARTICULARS
(Rs. Lakhs) (Rs. Lakhs)
1. Share Capital
Equity shares of Rs. 100 each 1,200 1,125
14% preference of Rs. 100 each 450 300
TOTAL 1,650 1,425
2. Reserve & Surplus
Revaluation reserve 225 150
General reserve 255 225
Investment allowance reserve 75 75
Profit & loss account 75 45
TOTAL 630 495
Additional information:
i. Bright Limited will issue 5 equity shares for each equity share of Dark Limited and 4 equity shares
for each equity share of Fair Limited. The shares are to be issued @ Rs. 35 each having a face value
of Rs. 10 per share.
ii. Preference shareholders of the two companies are issued equivalent number of 16% preference
shares of Bright Limited at a price of Rs. 160 per share (face value Rs. 100).
iii. 10% Debenture holders of Dark Limited and Fair Limited are discharged by Bright Limited, issuing
such number of its 16% Debentures of Rs. 100 each so as to maintain the same amount of interest.
iv. Investment allowance reserve is to be maintained for 4 more years.
v. Liquidation expenses are for Dark Limited Rs. 6,00,000 and for Fair Limited Rs. 3,00,000. It is decided
that these expenses would be borne by Bright Limited.
vi. All the assets and liabilities of Dark Limited and Fair Limited are taken over at book value.
vii. Authorized equity share capital of Bright Limited is Rs. 15,00,00,000 divided into equity share of Rs.
10 each. After issuing required number of shares to the liquidators of Dark Limited and Fair
Limited, Bright Limited issued balance shares to public. The issue was fully subscribed.
You are required to prepare Balance Sheet of Bright Limited as at 1st April, 2021 after amalgamation has
been carried out on the basis of Amalgamation in the nature of purchase.

Q22. Accounting in the Books of T’ree Co. (RTP May 2022) REG. PAGE NO
The following are the Balance Sheets of Aakash Limited and Ganga Limited as at March 31, 2021:
NOTE Aakash LTD. Ganga LTD.
PARTICULARS
REF. (Rs) (Rs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 80,00,000 20,00,000
(B) Reserves & Surplus 2 (3,24,00,000) 56,00,000
2. Non Current Liabilities
(A)Secured Loans 3 3,20,00,000 1,60,00,000
(B)Unsecured Loans 4 1,72,00,000 --
3. Current Liabilities
(A)Trade Payables 56,00,000 36,00,000
(B)Other Current Liabilities 5 2,04,00,000 56,00,000

TOTAL 5,08,00,000 3,28,00,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 68,00,000 1,36,00,000
2. Current Assets
(A) Inventories 3,68,00,000 --
1.39

(B) Other Current Assets 72,00,000 1,92,00,000

TOTAL 5,08,00,000 3,28,00,000

Notes to Accounts:

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Aakash LTD Ganga LTD
PARTICULARS
(Rs) (Rs)
1. Share Capital
Authorized, issued, subscribed & paid up
6,00,000 equity shares of Rs. 10 each 60,00,000 --
20,000 Pref. shares of Rs. 100 each 20,00,000 --
2,00,000 equity shares of Rs. 10 each -- 20,00,000
TOTAL 80,00,000 20,00,000
2. Reserves & Surplus
General Reserve 8,00,000 56,00,000
Surplus (3,32,00,000) --
TOTAL (3,24,00,000) 56,00,000
3. Secured Loans
(Secured loans of Aakash Ltd. are secured 3,20,00,000 1,60,00,000
against pledge of inventories)
4. Unsecured Loans 1,72,00,000 --
5. Other Current Liabilities
Statutory Liabilities 1,44,00,000 20,00,000
Liability to Employees 60,00,000 36,00,000
TOTAL 2,04,00,000 56,00,000
Both the companies go into liquidation and a new company ‘AakashGanga Limited’ is formed to take over
their business. The following information is given:
1) All Current Assets of two companies, except pledged inventory are taken over by Aakash Ganga
Limited. The realizable value of all the Current Assets (including pledged inventory) is 80% of book
value in case of Aakash Limited and 70% for Ganga Limited.
2) Property, Plant and Equipment of both the companies are taken over at book value by Aakash Ganga
Limited.
3) Secured Loans include Rs. 32,00,000 accrued interest in case of Ganga Limited.
4) 4,00,000 Equity Shares of Rs. 10 each are allotted by Aakash Ganga Limited at par against cash payment
of entire face value to the shareholders of Aakash Limited and Ganga Limited in the ratio of shares held
by them in Aakash Limited and Ganga Limited.
5) Preference Shareholders in Aakash Limited are issued Equity Shares in Aakash Ganga Ltd. worth Rs.
4,00,000 in lieu of their present holdings.
6) Secured Loan agree to continue the balance amount of their loans to Aakash Ganga Limited after
adjusting realizable value of pledged asset in case of Aakash Limited and after waiving 50% of interest
due in the case of Ganga Limited.
7) Unsecured Loans are taken over by Aakash Ganga Limited at 25% of loan amounts.
8) Employees are issued fully paid Equity Shares in Aakash Ganga Limited in full settlement of their dues.
9) Statutory Liabilities are taken over by Aakash Ganga Limited at full value and Trade Payables are taken
over at 80% of the book value.
You are required to prepare the opening Balance Sheet of Aakash Ganga Limited as at 1.4.2021.
1. 40

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IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. Calculation Based Question (ICAI New July 2021 Q5a 10M) REG. PAGE NO
The summarized Balance Sheets of Black Limited and White Limited as on 31st March, 2020 is as follows:
NOTE Black LTD. White LTD.
PARTICULARS
REF. (Rs. 000) (Rs. 000)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 6,000 3,600
(B) Reserves & Surplus 2 1,080 660
2. Current Liabilities
(A)Trade Payables 600 360
TOTAL 7,680 4,620
II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 3,600 2,400
2. Current Assets
(A) Inventories 960 720
(B) Trade Receivables 1,680 1,080
(C) Cash & Cash Equivalents 1,440 420
TOTAL 7,680 4,620

Black LTD. White LTD.

PARTICULARS
(Rs. 000) (Rs. 000)
1. Share Capital
Equity shares of Rs. 100 each 6,000 3,600
2. Reserve & Surplus
General reserve 360 180
Profit & loss account 720 480
TOTAL 1,080 660

Black Limited takes over White Limited on 1st July, 2020.

No Balance Sheet of White Limited is available as on that date. It is, however estimated that White Limited
earned profit of Rs. 2,40,000 after charging proportionate depreciation @ 10% p.a. on Property Plant and
Equipment, during April-June, 2020. Estimated profit of Black Limited during these 3 months was Rs.
4,80,000 after charging proportionate depreciation @ 10% p.a. on Property Plant and Equipment. Both the
companies have declared and paid 10% dividend within this 3 months' period. Goodwill of White Limited
is valued at Rs. 2,40,000 and Property Plant and Equipment are valued at Rs. 1,20,000 above the
depreciated book value on the date of takeover. Purchase consideration is to be satisfied by Black Limited
by issuing shares at par.
Ignore income tax. You are required to:
a) The Debentures of Glory Ltd. are to be discharged, by the issue of 8% Debentures of Glorious Ltd. at a
premium of 10%.
b) Calculate the balance of Net Current Assets of Black Limited and White Limited as on 1st July, 2020.
c) Give balance of Profit or Loss of Black Limited as on 1st July, 2020.
Give balance of Property Plant and Equipment as on 1st July, 2020 after takeover.
1.41

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Q2. Accounting in the Books of T’ree Co. (Pur.) (ICAI New May 2022 Q2) REG. PAGE NO
The summarized balance sheet of A Ltd. And B Ltd. As at 31st March, 2022 are as under:
A LTD. B LTD.
PARTICULARS
(Rs) (Rs)
I. EQUITY & LIABILITIES
(A) Equity Shares of Rs. 10 each, fully paid up 30,00,000 24,00,000
(B) Share premium account 4,00,000 --
(C) General reserve 6,20,000 5,00,000
(D)Profit & loss account 3,60,000 3,20,000
(E) Retirement gratuity fund account 1,00,000 --
(F) 10% Debentures 20,00,000 --
(G) Unsecured loan (including loan from A ltd.) 6,00,000 8,20,000
(H) Trade Payables 1,00,000 3,40,000
TOTAL 71,80,000 43,80,000
II. ASSETS
(A) Land and buildings 28,00,000 21,00,000
(B) Plant and machinery 20,00,000 7,60,000
(C) Long term advance to B Ltd. 2,20,000 --
(D) Inventory 10,40,000 7,00,000
(E) Trade Receivables 8,20,000 5,20,000
(F) Cash at Bank 3,00,000 3,00,000
TOTAL 71,80,000 43,80,000
B Ltd. is to declare and pay per equity share as dividend, before the Marks following amalgamation takes
place with Z Ltd.

Z Ltd. was incorporated to take over the business of both A Ltd. and B Ltd.
(a) The authorized share capital of Z Ltd. is 60 lakhs divided into 6 lakhs equity shares of 10 each.
(b) As per Registered Valuer the value of equity shares of A Ltd. is 18 per share and of B Ltd. is Rs.12 per
share respectively and agreed by respective shareholders of the companies.
(c) 10% Debentures of A Ltd. to be issued 12% Debentures of Z Ltd. at par in consideration of their holdings.
(d) A contingent liability of A Ltd. of Rs. 2,00,000 is to be treated as actual liability.
(e) Liquidation expenses including Registered Valuer fees of A Ltd. Rs.50,000 and B Ltd. Rs.30,000
respectively to be borne by Z Ltd.
(f) The shareholders of A Ltd and B Ltd. is to be paid by issuing sufficient number of fully paid up equity
shares of 10 each at a premium of 10 per share.

Assuming amalgamation in the nature of purchase, you are required to pass the necessary journal entries
(narrations not required) in the books of Z Ltd. and Prepare Balance Sheet of Z Ltd. immediately after
amalgamation of both the companies.

Q3. Accounting in the Books of T’ror & T’ree Co. (RTP Nov 2019) REG. PAGE NO
The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2019:
A LTD.
PARTICULARS
(Rs)
I. EQUITY & LIABILITIES
(A) 8,000 Equity Shares of Rs. 100 each 8,00,000
(C) 10% debentures 4,00,000
(D) Loans 1,60,000
(E) Trade payables 3,20,000
(F) General reserve 80,000
TOTAL 17,60,000
II. ASSETS
1. 42

(A) Buildings 3,40,000

(B) Machinery 6,40,000
(C) Inventory 2,20,000

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(D) Trade receivables 2,60,000
(E) Bank 1,36,000
(F) Patent 1,30,000
(G) Share issue expenses 34,000
TOTAL 17,60,000

B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

1) B Ltd. would take over all assets, except bank balance and Patent at their book values less 10%.
Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal rate of return
be 8% on the combined amount of share capital and general reserve.
2) B Ltd. is to take over trade payables at book value.
3) The purchase consideration is to be paid in cash to the extent of Rs. 6,00,000 and the balance in fully
paid equity shares of Rs. 100 each at Rs. 125 per share.

The average profit is Rs. 1,24,400. The liquidation expenses amounted to Rs. 16,000. B Ltd. sold prior to
31st March, 2018 goods costing Rs. 1,20,000 to A Ltd. for Rs. 1,60,000. Rs. 1,00,000 worth of goods are still
in Inventory of A Ltd. on 31st March, 2018. Trade payables of A Ltd. include Rs. 40,000 still due to B Ltd.

Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B Ltd.
as at 1st April, 2019 after the takeover.

Q4. Accounting in the Books of T’ror Co. (RTP May 2020) REG. PAGE NO
P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized balance
sheets of both the companies on the date of amalgamation stood as below:
P LTD. Q LTD.
PARTICULARS
(Rs) (Rs)
I. EQUITY & LIABILITIES
(A) Equity Shares of Rs. 100 each 8,20,000 3,20,000
(B) 9% Pref. shares of Rs. 100 each 3,80,000 2,80,000
(C) 8% debentures 2,00,000 1,00,000
(D) General reserve 1,50,000 50,000
(E) Profit & loss A/c 3,52,000 2,05,000
(F) Unsecured loan -- 1,75,000
(G) Trade Payables 88,000 1,60,000
TOTAL 19,90,000 12,90,000
II. ASSETS
(A) Land and buildings 4,50,000 3,40,000
(B) Furniture & fittings 1,00,000 50,000
(B) Plant and machinery 6,20,000 4,50,000
(C) Trade receivables 3,25,000 1,50,000
(D) Inventory 2,33,000 1,05,000
(E) Cash at bank 2,08,000 1,75,000
(F) Cash in hand 54,000 20,000
TOTAL 19,90,000 12,90,000

B Ltd. agreed to absorb A Ltd. on the following terms and conditions: PQ Ltd. took over the assets and
liabilities of both the companies at book value after creating provision @ 5% on inventory and trade
receivables respectively and depreciating Furniture & Fittings by @ 10%, Plant and Machinery by @ 10%.
The trade receivables of P Ltd. include Rs. 25,000 due from Q Ltd.

PQ Ltd. will issue:

1) 5 Preference shares of Rs. 20 each @ Rs. 18 paid up at a premium of Rs. 4 per share for each pref. share
1.43

held in both the companies.

2) 6 Equity shares of Rs. 20 each @ Rs. 18 paid up a premium of Rs. 4 per share for each equity share held
in both the companies.

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3) 6% Debentures to discharge the 8% debentures of both the companies.
4) 20,000 new equity shares of Rs. 20 each for cash @ Rs. 18 paid up at a premium of Rs. 4 per share.
PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the
intrinsic value of the shares of both the companies.
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books.

IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. Accounting in the Books of T’ree Co. (RTP May 2018) REG. PAGE NO
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the
combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings of
the two companies in exchange for share in PQ Ltd.

The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation)
are given below:
P LTD. Q LTD.
PARTICULARS
(Rs) (Rs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 6,00,000 8,40,000
(B) Reserves & Surplus 10,20,000 6,00,000
2. Current Liabilities
(A)Bank overdraft -- 5,40,000
(B)Trade Payables 2,40,000 5,40,000

TOTAL 18,60,000 25,20,000

II. ASSETS
1. Non-Current Assets
(A)Fixed assets (excluding goodwill) 7,20,000 10,80,000
2. Current Assets
(A) Inventories 3,60,000 6,60,000
(B) Trade Receivables 4,80,000 7,80,000
(C) Cash at bank 3,00,000 --
TOTAL 18,60,000 25,20,000

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets,
but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of
net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-
15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.

The profit had been:

2014-15 Rs. 3,00,000; 2015-16 Rs. 5,25,000 and 2016-17 Rs. 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.

In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of Rs. 10 each at the same rate
of premium as issued for discharging purchase consideration to P Ltd. And Q Ltd.
You are required to:
1. 44

(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries.

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Q2. Accounting in the Books of T’ree Co. (Merger & Pur.) (RTP May 2022) REG. PAGE NO
The following are the Balance Sheets of Aakash Limited and Ganga Limited as at March 31, 2021:
NOTE Aakash LTD. Ganga LTD.
PARTICULARS
REF. (Rs) (Rs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 80,00,000 20,00,000
(B) Reserves & Surplus 2 (3,24,00,000) 56,00,000
2. Non Current Liabilities
(A)Secured Loans 3 3,20,00,000 1,60,00,000
(B)Unsecured Loans 4 1,72,00,000 --
3. Current Liabilities
(A)Trade Payables 56,00,000 36,00,000
(B)Other Current Liabilities 5 2,04,00,000 56,00,000

TOTAL 5,08,00,000 3,28,00,000

II. ASSETS
1. Non-Current Assets
(A) Property, Plant & Equipments 68,00,000 1,36,00,000
2. Current Assets
(A) Inventories 3,68,00,000 --
(B) Other Current Assets 72,00,000 1,92,00,000
TOTAL 5,08,00,000 3,28,00,000

Notes to Accounts:
Aakash LTD Ganga LTD
PARTICULARS
(Rs) (Rs)
1. Share Capital
(a) Authorized, issued, subscribed & paid up
6,00,000 equity shares of Rs. 10 each 60,00,000 --
20,000 Pref. shares of Rs. 100 each 20,00,000 --
2,00,000 equity shares of Rs. 10 each -- 20,00,000
TOTAL 80,00,000 20,00,000

2. Reserves & Surplus

General Reserve 8,00,000 56,00,000
Surplus (3,32,00,000) --
TOTAL (3,24,00,000) 56,00,000

3. Secured Loans
(Secured loans of Aakash Ltd. are secured against 3,20,00,000 1,60,00,000
pledge of inventories)

4. Unsecured Loans 1,72,00,000 --

5. Other Current Liabilities

Statutory Liabilities 1,44,00,000 20,00,000
Liability to Employees 60,00,000 36,00,000
TOTAL 2,04,00,000 56,00,000
1.45

Both the companies go into liquidation and a new company ‘AakashGanga Limited’ is formed to take over
their business. The following information is given:

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1) All Current Assets of two companies, except pledged inventory are taken over by Aakash Ganga
Limited. The realizable value of all the Current Assets (including pledged inventory) is 80% of book
value in case of Aakash Limited and 70% for Ganga Limited.
2) Property, Plant and Equipment of both the companies are taken over at book value by Aakash Ganga
Limited.
3) Secured Loans include Rs. 32,00,000 accured interest in case of Ganga Limited.
4) 4,00,000 Equity Shares of Rs. 10 each are allotted by Aakash Ganga Limited at par against cash payment
of entire face value to the shareholders of Aakash Limited and Ganga Limited in the ratio of shares held
by them in Aakash Limited and Ganga Limited.
5) Preference Shareholders in Aakash Limited are issued Equity Shares in Aakash Ganga Ltd. worth Rs.
4,00,000 in lieu of their present holdings.
6) Secured Loan agree to continue the balance amount of their loans to Aakash Ganga Limited after
adjusting realizable value of pledged asset in case of Aakash Limited and after waiving 50% of interest
due in the case of Ganga Limited.
7) Unsecured Loans are taken over by Aakash Ganga Limited at 25% of loan amounts.
8) Employees are issued fully paid Equity Shares in Aakash Ganga Limited in full settlement of their dues.
9) Statutory Liabilities are taken over by Aakash Ganga Limited at full value and Trade Payables are taken
over at 80% of the book value.
You are required to prepare the opening Balance Sheet of Aakash Ganga Limited as at 1.4.2021.
1. 46

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