STUDY MATERIAL FOR B.

COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

UNIT CONTENT PAGE Nr

I SHARE 02

II FINAL ACCOUNTS OF COMPANIES 10

III UNDERWRITING 13

IV VALUATION GOODWLL 19

V AMALGAMATOIN & ABSORBTION 29

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

UNIT - I
SHARE

Share:
A company’s owned is spilt up into numerous of equal parts, each such part being called
as a share.

Types of shares:
Equity shares:- An equity share, normally known as ordinary share is a part ownership
where each member is a fractional owner and initiates the maximum entrepreneurial liability
related with a trading concern. These types of shareholders in any organization possess the
right to vote.

Preference Shares:-Preference shares are shares having preferential rights to claim

dividends during the lifetime of the company and to claim repayment of capital on wind up. In
case of preference shares, the percentage of dividend is fixed i.e. the holders get the fixed
dividend before any dividend is paid to other classes of shareholders.

Types of preference shares

Cumulative Preference Shares:
Shares having right of dividend even in those years in which it makes no profit are
known as cumulative preference shares. In case the companies do not declare dividends for a
particular year then they are treated as arrears and are carried forward to next year. When the
arrears pertaining to dividend are cumulative in nature and such arrears are cleared before any
dividend payment to equity shareholders then it is said to be as cumulative preference shares.

Non-cumulative Preference Shares:

A non-cumulative preference share does not accumulate any dividend. In case the
dividend by the company is not paid then they have the right to avail dividends from the profits
earned from the particular year. Dividends are paid only from the net profit of each year. In
case there is no profit accumulated for a particular year then the arrears of dividends cannot be
claimed in subsequent years.
Participating Preference Shares
These shares have the right to participate in surplus profits of the company during
liquidation after the company had paid to other shareholders. The preferential shareholders
receive stipulated rate of dividend and also participate in the additional earnings of the
company along with the equity shareholders.
Non-participating Preference Shares:
Preference shares having no right to participate in the surplus profits or in any surplus
on liquidation of the company are referred to as non-participating preference shares. Here,
preference shareholders receive only stated dividend and nothing more.
Convertible Preference Shares:
These shares are those which are converted into equity shares at a specified rate on the
expiry of a stated period. The shareholders have a right to convert their shares into equity
shares within a specified period.

Non-convertible Preference Shares:

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

The shares that cannot be converted to equity are referred to as non-convertible shares.
These can also be redeemed.

Redeemable Preference Shares:

Redeemable preference shares are referred to as shares that can be redeemed or repaid
after the fixed period as issued by the company or even before that.

Non-Redeemable Preference Shares:

Non-redeemable preference shares are referred to as shares that cannot be redeemed
during the lifetime of the company.

Types of share capital

Authorised/Nominal/Registered Capital:
At the time of registration of a company, the Memorandum of Association mentions the
amount of capital a company is authorised to raise from the public by selling shares which is
known as Authorised Capital or Normal Capital or Registered Capital.

It is the maximum amount of share capital that a company can issue. In the case of a
limited company, the Memorandum shall contain the amount of Capital by which a company is
proposed to be registered and the division thereof into shares of fixed amount. In short, it is the
maximum amount of capital which a company will have during its lifetime—unless it is
increased.

Issued Capital:
Generally, a part of the authorised capital is issued to the public for subscription which
is known as issued capital, i.e., it is the nominal value of the shares which are offered to the
public for subscription. Usually, a company does not issue all its capital at a time, i.e., issued
capital is less than the authorised capital. If all shares are issued, issued capital and authorised
capital will be the same.

Subscribed Capital:
A part of the issued capital which is subscribed by the public is known as subscribed
capital. It does not necessarily mean that all the shares which have been issued will be taken
over by the public.
In other words, the share capital of the number of shares which are taken over by the
public is called subscribed capital, i.e., the portion of issued share capital which is
paid/subscribed by the shareholder is known as subscribed capital.

Called-Up Capital:
Generally, the shareholders pay the price of the shares by installments, viz., application,
allotment, First call, Final call etc. Therefore, the portion of the face value of the shares which
the shareholders are called upon to pay or the company has demanded to pay is called Called-
up capital.

Uncalled Capital:
The unpaid portion of the subscribed capital is called Uncalled Capital. In other words, it is the
remainder of the issued Capital which has not been called. However, the company may call this
amount at any time but that must be subject to the terms of issue of shares.

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Paid Up Capital:
The amount actually paid by the shareholders is known as Paid-up Capital.

Reserve Capital:
According to Sec. 99 of the Companies Act, 1956, Reserve Capital is that part of uncalled
capital of a company which can be called only in the event of its winding-up. A limited company
may, by special resolution, determine that any portion of its share capital which has not been
called-up, shall be called up, except in the event of the company being wound-up, such capital
is known as Reserve Capital.It is available only for the creditors on the winding-up of the
company.

What are calls in advance and arrears?

Calls in arrears is when the shareholders fail to pay the amount of share capital called
up within the stipulated time. Calls in advance is when the shareholders pays the amount for
the part of share capital that has not been called up yet.

What forfeited shares?

A forfeited share is a share in a company that the owner loses (forfeits) by failing to
meet the purchase requirements. Requirements may include paying an allotment or call money
owed, or avoiding selling or transferring shares during a restricted period.

Definition of 'Bonus Share'

Bonus shares are additional shares given to the current shareholders without any
additional cost, based upon the number of shares that a shareholder owns. These are
company's accumulated earnings which are not given out in the form of dividends, but
are converted into free shares.

What does right issue mean?

A rights offering (rights issue) is a group of rights offered to existing shareholders to
purchase additional stock shares, known as subscription warrants, in proportion to their
existing holdings. Rights are often transferable, allowing the holder to sell them in the open
market.

Give the meaning of Issue of Shares

A company can issue its shares either at par, at a premium or even at a discount.
The shares will be at par is when the shares are sold at their nominal value. Shares sold at
a premium cost more than their nominal value, and the amount in excess of the face value is
the premium. The issue of shares at a discount means the issue of the shares at a price less
than the face value of the share.

1. S Ltd invited the public to subscribe 10,000 equity shares of Rs.100 each at a premium
of Rs.10 per share. Payment was to be made as follows- on application Rs.20, on allotment
40(including premium), on first call 30, on final call 20.

Applications totaled for 13000 shares, applications for 2000 shares were rejected and
allotment was made proportionately to the remaining applicants. The directors made both the
calls and all the moneys were received except the final call on 300 shares which were forfeited.

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Later 200 of these forfeited shares were issued as fully paid at Rs.85 per share. Journalise these
transactions.

Particulars Debit Credit

Bank a/c Dr.
To share application a/c 2,60,000
2,60,000
(being application money received)
Share application a/c Dr
To share capital a/c 2,00,000
2,00,000
(being application money transferred to capital a/c)
Share application a/c Dr
To bank a/c 40,000
40,000
(being application money refunded)
Share allotment a/c Dr
To share capital a/c
4,00,000 3,00,000
To share premium a/c
1,00,000
Being the allotment due
Bank a/c Dr
Share application a/c Dr 3,80,000
To share allotment a/c 20,000
4,00,000
(being cash received and excess application money adjusted)
Share first call a/c Dr
3,00,000
To share capital a/c 3,00,000
(being the first call due)
Bank a/c Dr
3,00,000
To share first call a/c 3,00,000
Being the call money received
Share final call a/c Dr
2,00,000
To share capital a/c 2,00,000
(being the final call due)

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Bank a/c Dr
To share final call a/c 2,00,000
2,00,000
Being the call money received except 300 shares
Share capital DR
To share final all a/c
30,000 6,000
To share forfeited a/c
24,000
Being 300 shares forfeited
Bank a/c Dr
Share forfeited a/c Dr 17,000
To share capital a/c 3,000
20,000
Being 200 shares reissued
Share forfeited a/c Dr
To capital reserve a/c 13,000
13,000
Being the balance of 200 shares forfeited a/c transferred

Redemption of preference shares

Redemption of preference shares means returning the preference share capital to
the preference shareholders either at a fixed date or after a certain time period during the life
time of the company provided company must complied certain conditions.

The following are the details from the records of B Ltd. on 30.6.2017
Equity Shares Fully paid up Rs.6,00,000
Preference shares fully paid up Rs.3,00,000
General reserve Rs.2,00,000
PL account credit balance Rs.1,25,000
Share premium a/c Rs.50,000

The company decided to redeem the preference shares at a premium of 10% out of its
general reserve and P/L account. Give journal entries relating to redemption of preference
shares.
Particulars Debit Credit
General reserve a/c Dr
p/l a/c a/cDr 2,00,000
To capital redemption reserve a/c 1,00,000
3,00,000
(Being the amount transferred to CRR )
Share premium a/c Dr
To premium on redemption a/c 30,000
30,000
(Being the premium on redemption appropriated)
Preference share capital a/c Dr
premium on redemption a/c Dr
To redeemable preference share capital a/c 3,00,000
(Being the share capital and premium transferred to 30,000
3,30,000
RPS holder a/c)

Redeemable preference shareholder a/c Dr

To bank a/c 3,30,000
3,30,000
(Being the final payment made)

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

ABC Ltd has 5000, 8% Redeemable preference shares of 100 each fully paid up. When
these shares became due to redemption the company issued new 6% 2500 Redeemable
preference shares of each at a premium of Rs. 10 and 25,000 equity shares of Rs.10 each at a
premium of Ra.2 each. The new issue was fully subscribed and paid for. Then 8 % Redeemable
preference shares were redeemed. Show journal entries.

Particulars Debit Credit

Bank a/c Dr
To 6% redeemable preference share capital a/c
To redeemable preference share premium a/c 2,75,000 2,50,000
(being the new 6% redeemable preference shares 25,000
issued)
Bank a/c Dr
To Equity preference share capital a/c
3,00,000 2,50,000
To Equity share premium a/c
50,000
(being the new equity shares issued)
8% redeemable preference share capital a/c Dr
To 8% redeemable preference share holder a/c
5,00,000
(being the RPSC transferred) 5,00,000

8% redeemable preference share capital a/c Dr

To bank a/c 5,00,000
5,00,000
(being the RPS holders paid)

A company has as part of its share capital 1000 redeemable preference shares of Rs.100
each fully paid up. When these shares became due for redemption, the company had Rs.60,000
in its reserve fund. The company issued necessary equity shares of Rs.25 specifically for the
purpose of redemption and received cash in full. Make the necessary journal entries regarding
the above transactions.

Particulars Debit Credit

Bank a/c Dr
To equity share capital a/c 40,000
40,000
(Being the fresh issue made)
Reserve fund a/c Dr
To capital redemption reserve a/c 60,000
60,000
(Being the amount transferred to CRR )
Redeemable preference share capital a/c Dr
To redeemable preference shareholder a/c 1,00,000
1,00,000
(being the capital transferred)
Redeemable preference shareholder a/c Dr
To bank a/c 1,00,000
1,00,000
(being the final payment made)

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Issue of Debentures
Debenture
The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to
borrow or loan. Debentures are written instruments of debt that companies issue under their
common seal. They are similar to a loan certificate. Debentures are issued to the public as a
contract of repayment of money borrowed from them. These debentures are for a fixed period
and a fixed interest rate that can be payable yearly or half-yearly. Debentures are also offered to
the public at large, like equity shares. Debentures are actually the most common way for large
companies to borrow money.

Types of Debentures
Secured Debentures:
These are debentures that are secured against an asset/assets of the company. This
means a charge is created on such an asset in case of default in repayment of such debentures.
So in case, the company does not have enough funds to repay such debentures, the said asset
will be sold to pay such a loan. The charge may be fixed, i.e. against a specific assets/assets or
floating, i.e. against all assets of the firm.

Unsecured Debentures: These are not secured by any charge against the assets of the company,
neither fixed nor floating. Normally such kinds of debentures are not issued by companies in
India.

Redeemable Debentures:
These debentures are payable at the expiry of their term. Which means at the end of a
specified period they are payable, either in the lump sum or in installments over a time period.
Such debentures can be redeemable at par, premium or at a discount.

Irredeemable Debentures:
Such debentures are perpetual in nature. There is no fixed date at which they become
payable. They are redeemable when the company goes into the liquidation process. They can be
redeemable after an unspecified long time interval.

Fully Convertible Debentures:

These debentures can be converted to equity shares at the option of the debenture
holder. So if he wishes then after a specified time interval all his shares will be converted
to equity shares and he will become a shareholder.

Partly Convertible Debentures:

Here the holders of such debentures are given the option to partially convert their
debentures to shares. If he opts for the conversion, he will be both a creditor and a shareholder
of the company.

Non-Convertible Debentures:
As the name suggests such debentures do not have an option to be converted to shares
or any kind of equity. These debentures will remain so till their maturity, no conversion will take
place. These are the most common type of debentures.

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Thamiz Ltd offered 20,000, 10% debentures of Rs. 10 each at a premium of 5% were
payable as under
on application Rs. 3
on allotment Rs. 4.50
on first and final call Rs. 3 public applied for 22,000 debentures.
The directors allotted 20,000 debentures and rejected the remaining applications. All
moneys due were fully received. Give journal entries.

Particulars Debit Credit

Bank a/c Dr
To debentures application a/c 66,000
66,000
(being application money received)
Debentures application a/c Dr
To debentures a/c 60,000
60,000
(being the application money transferred to capital a/c)
Debentures application a/c Dr
To bank a/c 6,000
6,000
(being the excess application money returned)
Debenture allotment a/c Dr
To debenture a/c
90,000 80,000
To debenture premium a/c
10,000
Being the allotment made
Bank a/c Dr
To debenture allotment a/c 90,000
90,000
Being the allotment money received
Debenture first and final call a/c Dr
To debenture a/c 60,000
60,000
Being the first and final call made
Bank a/c Dr
To Debenture first and final call a/c 60,000
60,000
(being call money received)

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

UNIT - II
FINAL ACCOUNTS OF COMPANIES

Authorised capital of G Ltd is Rs. 5,00,000. 50,000 equity shares of Rs.10 each on 31.12.2012
25,000 shares were fully called up.
Particulars Rs.
Opening capital 50,000
Sales 4,25,000
Purchases 3,00,000
Wages 70,000
Discount allowed 4,200
Discount received 3,150
Insurance paid up to 31.3.2013 6,720
Salaries 18,500
Rent 6,000
General expenses 8,950
Printing and stationery 2,400
Advertising 3,800
Bonus 10,500
Sundry debtors 38,700
Sundry creditors 35,200
Plant and machinery 80,500
Furniture 17,100
Cash and bank 1,34,700
Reserve 25,000
Loan from M.D 15,700
Bad debts 3,200
Calls in arrears 5,000
P /l a/c credit balance 6,220

Additional information:
Closing stock Rs. 91,500
Depreciation on plant and machinery furniture at 10% and 15% respectively
Wages salaries and rent outstanding amounts to Rs.5,200 Rs.1,200 and Rs. 600 respectively.
Dividend at 5% on paid up share capital is to be provided
Prepare final account of the company

Solution
1. revenue from operation - sales 4,25,000
2. other income – discount received 3,150
3. cost of goods sold
Opening stock +purchase-closing stock
50,000+3,00,000-91,500=2,58,500
4. Employee benefits
Wages+outstanding 70,000+5,200=75,200
Salary+outstanding 18,500+1,200=19,700
Bonus 10500

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Total 1,05,400
5. Finance cost ----
6. Depreciation and amortization expenses
Machinery 80,500x10% 8050
Furniture 17,100x15% 2565
Total 10615
7. Other expenses
Discount 4200
Insurance-prepaid6720-1680 5040
Rent +outstanding 6000+600 6600
General expenses 8950
Printing and stationery 2400
Advertising 3800
Bad debts 3200
Total 34190
Statement of profit and loss for the year ended 31.3.2012
Particulars Note no. Rs
Income
Revenue From Operation 1 42500
Other Income 2 3150
Total Revenue A 428150
Expenses
cost of goods sold 3 258500
Employee benefits 4 105400
finance cost 5 --
depreciation and amortization expenses 6 10615
other expenses 7 34910
total expenses B 408705
Profit For The Period
19445
- Tax Expenses
--
Profit 19445

1. Share holders’ funds

Called up capital 250000
Arrears 5000
Paid up capital 245000
2. Reserve and surplus
Reserve 25000
P/L a/c 6220
Current year profit 19445
50665
Less appropriation proposed dividend 245000x5% 12250
Dividend tax 17% on 12250 2083----------15333
Total 36332

II non-current liabilities
3. Long term borrowings- loan to M.D 15700
III current liabilities

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

4. Trade payable – creditors 35200

5. Other current liabilities
Dividend tax payable 2083
Wags o/s 5200
Salaries o/s 1200
Rent o/s 600---------------9083
6. Short Term Provisions- Proposed Dividend 12250
Assets
I noncurrent assets
7. Tangible assets
Machinery-depreciation 80500-8050 72450
Furniture-depreciation 17100-2565 14535----------86985
II current assets
8. Inventories 91500
9. Trade receivables-debtors 38700
10. Cash and cash equivalents 134700
11. Other current assets- prepaid insurance 1680

Balance sheet of Gltd

Particulars Note no. Rs
Equity and liabilities
1.shareholders’ funds
Share capital 1 24500
Reserves and surplus 2 36332
II noncurrent liabilities
long term borrowings 3 15700
III current liabilities
trade payable 4 35200
other current liabilities 5 9083
Short Term Provisions 6 12250
Total 353565
Assets 86985
I.Non current assets 7
Fixed assets
Tangible assets
II current assets
inventories 8 91500
trade receivables 9 38700
cash and cash equivalents 10 134700
other current assets 11 1680
TOTAL 353565

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

UNIT – III
UNDER WRITING

Why is it called underwriting?

Underwriting is the process through which an individual or institution takes on financial
risk for a fee. The term underwriter originated from the practice of having each risk-taker write
their name under the total amount of risk they were willing to accept for a specified premium.

Underwriting
STATEMENT SHOWING LIABILITY OF UNDERWRITERS
GROSS LIABILITY BASIS
Particular No. of shares
Gross liability of each underwriters xxx
(-) unmarked application in the ratio of gross xxx
liability
Balance left xxx
(-) marked application xxx

Net liability of the underwriter xxx

FULL UNDERWRITING
1. A company issued 20000 shares of Rs.10 Each at per which were underwritten as follows
X – 10000 shares Y – 6000 shares Z – 4000 shares application were received & 18000 shares
which included marked application as follows X – 4000 shares ,Y – 2000 shares ,Z – 10000
sharesPrepare a statement showing how many more shares underwriters will have to take
under the underwriting contract.

WORKINGS:
No. of shares issued 20000 Application received 18000
(-) application received 18000(-) marked application 16000(4000+2000+10000)
2000Unmarked application 2000

Statement showing liability of underwriters

(Gross liability basis)
Particulars X Y Z Total
Gross liability 10000 6000 4000 20000
(-) unmarked applications 1000 600 400 2000
(5:3:2)
10000:6000:4000
Balance left 9000 5400 3600 18000
(-) marked applications 4000 2000 10000 16000
5000 3400 (-)6400 -
(-) excess of Z shares 4000 2400 6400 -
(5:3)
Net liability of underwriters 1000 1000 - 2000

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Firm under writing:

1. Vijay ltd issued 20,000 shares which were underwritten as follows:
X -12000 Shares Y-5000 shares and Z – 3000 shares. The underwriters made applications for
him underwriting as X -1600 Shares Y-600 shares and Z – 2000 shares. The total
subscriptions excluding firm underwriting but including marked applications were for 10000
shares. The marked applications were as X -2000 Shares Y-4000 shares and Z – 1000 shares.
You are required to show the allocation of liability of the underwriters.
Statement showing liability of underwriters
Gross liability basis
Particulars X Y Z Total
Gross liability 12,000 5,000 3,000 20,000
Less unmarked application 12:5:3 1,800 750 450 3,000
Balance 10,200 4,250 2,550 17,000
Less marked + firm under writing 3,600 4,600 3,000 11,200
6,600 - 350 - 450 -
Less Excess of y and z to X 800 350 450 -
NET LIABLITY 5,800 - - 5,800
ADD Firm underwriting 1,600 600 2,000 4,200

Total liablity 7,400 600 2,000 10,000

Net liability total application received 14200

No. of application issued 20000 less marked and firm 11200
Less application received 14200 -----------
------- unmarked application 3000
Net liability 5800 ----------
Firm 4200
------------
Total liability 10000
------------------

2. A company made a public issue of 125000 shares . The entire issue was undertaken by four
parties A 30 % , B 25 % , C 25% AND D 20% respectively. A,B,C,D has agreed on firm
underwriting of 4000, 6000, nil, 15000 respectively. The total subscriptions excluding firm
underwriting including marked application were for 90000 shares .marked applications received
were as under A- 24000 , B-20000 C- 12000 D- 24000. Ascertain the liability of the individual
underwriters.
Net liability total application received 1,25,000
No. of application issued 1,25,000 less marked and firm 1,15,000
Less application received 1,15,000 -----------
(90+25) ------- unmarked application 10,000
Net liability 10,000 ----------
Firm 25,000
------------
Total liability 35,000
------------------

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 STUDY MATERIAL FOR B.COM
CORPORATE ACCOUNTING - I
SEMESTER - V, ACADEMIC YEAR 2020 - 21

Statement showing liability of underwriters

Gross liability basis
particulars A B C D Total
Gross liability 37,500 31,25 31,25 25,000 1,25,00
Less unmarked application 3,000 0 0 2,000 0
30:25:25:20 34,500 2,500 2,500 23,000 10,000
Less marked application, firm 28,000 28,75 28,75 39,000 1,15,00
underwriting 6,500 0 0 -16,000 0
6,000 26,00 12,00 16,000 1,05,00
Less excess D share 30:25:25 500 0 0 - 0
500 2,750 16,75 - -
Less B share 30:25
- 5,000 0 - -
Net liability 5,000
4000 -2,250 15,000 -
Add firm underwriting 2,250 11,75 -
- 0 10,000
6,000 1,750 25,000
10,00
0
-
Total liability 4000 6,000 10,00 15,000 35,000
0

3. K ltd has issued 25000 shares. A 15,000 shares ( firm underwriting 2500 shares ) B 7500
shares ( firm underwriting 1000 shares ) c 2500 shares ( firm underwriting 500 shares ). Out of
the total issue 22,500 shares including firm underwriting were subscribed an 8000 shares B
5000 shares c 2000 shares. Calculate the liability of each underwriter.

Statement showing liability of underwriters

Gross liability basis
Particulars A B C Total
Gross liability 15,000 7,500 2,500 25,000
Less unmarked application 12:5:3 2,100 1,050 350 3,500
Balance 12,900 6,450 2,150 21,500
Less marked + firm under writing 10,500 6,000 2,500 11,900
2,400 450 - 350 -
Less Excess of y and z to X 233 117 350 -
NET LIABLITY 2,333 167 - 2,500
ADD Firm underwriting 2,500 1,000 500 4,000

Total liablity 4,667 1,333 500 6,500

Net liability total application received 22500

No. of application issued 25000 less marked and firm 19000
Less application received 22500 -----------
------- Unmarked application 3500
Net liability 2500 ----------
Firm 4000
------------

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 STUDY MATERIAL FOR B.COM
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SEMESTER - V, ACADEMIC YEAR 2020 - 21

Total liability 6,500

------------------
Profit prior to incorporation
Profit prior to incorporation is that profit which a company gets between the period of
date of buying and date of incorporation. Suppose, A company buys XYZ Company on1st
Jan.2010 and it has to incorporate at1st April2010. Then profit between1st Jan.2010 and1st
April2010 will be profit prior to incorporation. This profit cannot be used for paying dividend to
shareholders. Because current shareholder’s capital is not involved for this profit, so this will be
capitalized profit and it will be transferred to capital reserve account. If company gets loss prior
to incorporation, it will be transferred to goodwill account.
s.no. Nature of items Basis of allocation Examples

a. Profit / loss Sales ratio Gross profit, gross loss

b. Fixed Time ratio or Printing stationery, rent, rates, salary,

expenses(incurred on weighted time ratio interest, insurance, depreciation,
the basis of time) establishment, bank charges, postage,
audit fees *
c. Variable expenses Sales ratio or Discount allowed, bad debts,
(connected with sales) weighted sales ratio commission, remuneration to sales man,
advertisement, carriage outward
d. Variable Purchase ratio Carriage inward
expenses(connected
with purchase)
e. Expenses of company Wholly to the post Preliminary expenses, director’s fees,
(solely incurred by the incorporation debenture interest, directors salary,
company on and after period. discount on debentures, good will return
its incorporation) off donations given by the company
audit fees
f. Expenses of firm Wholly to the pre Partner’s salary, drawings.
incorporation
period.
Profit Prior to Incorporation.
1. Weighted Sales Ratio
Incorporation date is 1.4.2007 accounting period 1.1.2007 to 31.12.2007 the sales of
the firm was doubled in the after incorporation period. Find Weighted Sales Ratio?

1.1.2007 1.4.2007 31.12.2007

3:9
3:18 = 1:6
weighted sales ratio =1:6
2. A Company was incorporated on 1.5.1994 to take over a business from 1.1.1994.
The accounts were made up to 31.12.1994. As usual and the trading profit and loss
account the following result.

Particulars RS Particulars RS
To opening stock 1,40,000 By sales 12,00,000

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To purchase 9,10,000 By closing stock 1,50,000

To gross profit 3,00,000
13,50,000 13,50,000
To Rent&Taxes 18,000 By Gross Profit 3,00,000
To Director fees 20,000
To Salaries 51,000
To Office expenses 48,000
To Travelling commission 12,000
TO Discount 15,000
TO Baddebts 3,000
To Audit fees 8,500
To Depreciation 6,000
To Debenture Interest 4,500
To Net profit 1,14,00
3,00,000 3,00,000

It is ascertained sales for November and December are one and half time of the
average of those for the year. While those for February and April are only half the
average and all remaining month having average sales.
Find the profit and pre and post incorporation period.
1. 1.1.1994 TO 1.5.1994 : 1.5.1994to 31.12.1994

4:8
Average sales = 12,00,000 /12 =1,00,

January -1,00,000
February – 50,000
March – 1,00,000
April – 50,000

May – 1,00,000

June – 1,00,000
July – 1,00,000
August – 1,00,000
September – 1,00,00
October – 1,00,000
November – 1,50,000
December – 1,50,000

Pre incorporation sales : post

3,00,000 : 9,00,000
3:9

particulars Pre Basis Post Pre Post

incorpora incorpora particul Basis incorpor incorporat
tion tion ars ation ion

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To salaries T 17000 34000 By Sales 75,000 2,25,000

To debenture - 4500 gross
interest T 2000 4000 profit
To Depreciation T 6000 12000
To rent - 20000
To directors fees T 16000 32000
To office S 3000 9000
expenses
Travellers S 3750 11250
commission S 750 2250
To discount T 2833 5667
To bad debts
To audit fees
TO CAPITAL 23667
RESERVE 90333
TO NET PROFIT

75,000 2,25,000 75,000 2,25,000

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UNIT – IV
VALUATION GOODWLL
Valuation of Goodwill
According to Kohler “Goodwill is the current value of expected future income in excess
of normal return on investment in net tangible assets”

Different methods of valuation of goodwill:-

1. Years’ Purchase of Average Profit Method:
Under this method, average profit of the last few years is multiplied by one or more
number of years in order to ascertain the value of goodwill of the firm. It is also called Purchase
of Past Profit Method or Average Profit Basis Method.

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟𝑠

Average Profit =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠

Value of Goodwill = Average Profit x Years’ Purchase

2. Years’ Purchase of Weighted Average Method:

This method is the modified version of Years’ Purchase of Average Profit Method. Under
this method, each and every year’s profit should be multiplied by the respective number of
weights, e.g. 1, 2, 3 etc., in order to find out the value of product which is again to be divided by
the total number of weights for ascertaining the weighted average profit. Therefore, the
weighted average profit is multiplied by the years’ purchase in order to ascertain the value of
goodwill. This method is particularly applicable where the trend of profit is rising.

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟𝑠

Weighted Average Profit =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠

Value of Goodwill = Weighted Average Profit x Years Purchase

3. Capitalisation Method:
Under this method, the value of the entire business is determined on the basis of
normal profit. Goodwill is taken as the difference between the Value of the Business minus Net
Tangible Assets.

Under this method, the following steps should be taken into consideration for ascertaining the
amount of goodwill:
(i) Expected Average Net Profit should be ascertained;
(ii) Capitalized value of profit is to be calculated on the basis of normal rate of return;
(iii) Net Tangible Assets (i.e. Total Tangible Assets – Current Liabilities) should also be
calculated;
(iv) To deduct (iii) from (ii) in order to ascertain the value of Goodwill.

Capitalized Value of Profit = Profit (Adjusted)/Normal Rate of Return x 100

Value of Goodwill = Capitalized Value of Profit – Net Tangible Assets

4. Annuity Method:
Under this method, Super-profit (excess of actual profit over normal profit) is being
considered as the value of annuity over a certain number of years and, for this purpose,

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compound interest is calculated at a certain respective percentage. The present value of the
said annuity will be the value of goodwill.
Value of Goodwill,

V=

Where
V = Present value of Annuity
a = Annual Super Profit
n = Number of Years
I = Rate of Interest
5. Super-Profit Method:
Super-profit represents the difference between the average profit earned by the
business and the normal profit (on the basis of normal rate of return for representative firms in
the industry) i.e., the firm’s anticipated excess earnings. As such, if there is no anticipated
excess earning over normal earnings, there will be no goodwill.
Super-Profit = Average Profit (Adjusted) – Normal Profit
Value of Goodwill = Super-Profit x Years’ Purchase

6. Capitalisation of Super-Profit Method:

Under the method, to consider super-profit in place of ordinary profit against the
normal rate of return.
The same is calculated as:
Value of Goodwill = Super-Profit/Normal Rates of Returns x 100

7. Sliding Scale Valuation Method:

Under this method, the distribution of profit which is related to super-profit may vary from year
to year. In other words, in order to find out the value of goodwill, sliding scale valuation may be
considered relating to super-profits of an enterprise.

Factors Affecting the Value of Goodwill

1. Locational Factor:
If the firm is centrally located or located in a very prominent place, it can attract, more
customers resulting in an increase in turnover. Therefore, locational factor should always be
considered while ascertaining the value of goodwill.

2. Time Factor:
Time dimension is another factor which influences the value of goodwill. The
comparatively old firm will enjoy more commercial reputation than the other one since the old
one is better known to its customers although both of them may have the same location
advantages.

3. Nature of Business:
This is another factor which also influences the value of goodwill which includes:
(i) The nature of goods;
(ii) Risk involved;
(iii) Monopolistic nature of business;

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(iv) Benefits of patents and Trademarks; and

(v) Easy access of raw materials, etc.

4. Capital Required:
More buyers may be interested to purchase a business which requires comparatively
small amount of capital but rate of earning profit is high and, consequently, raise the value of
goodwill. On the contrary, for a business which requires large amount, of capital but the rate of
earning profit is comparatively less, no buyer will be interested to have the business and,
hence, goodwill of the said firm is pulled down.
5. Trend of Profit:
Value of goodwill may also be affected due to the fluctuation in the amount of profit
(i.e. on the basis of rate of return). If the trend of profit is always rising, no doubt value of
goodwill will be high, and vice versa.

6. Efficiency of Management:
The efficient management may also help to increase the value of goodwill by increasing
profits through proper planned production, distribution and services. Therefore, in order to
ascertain the value of goodwill, it must be noted that such efficiency in management must not
be stopped.

7. Other Factors:
(i) Condition of the money market;
(ii) Possibility of competition;
(iii) Government policy; and
(iv) Peace and security in the country.

1. Calculate amount of goodwill on the basis of 3 year purchase of the last years of average
profits. The profits for the last 5 years are 4800,7200,10000,3000,and 5000.
Solution
Average Profit= Total Profit/Number Of Years
= 4800+7200+10000+3000+ 5000/5
=Rs.6000
Goodwill = Average Profit X Number Of Year Purchases
= 6000x3=Rs.18000

2. Calculate the average profit of the last years. Capital employed Rs.50, 000.trading results,
2002 profit- 12,200.2003 profits- 15,000. 2004 loss –Rs.2000. 2005 profit Rs.21,000 Market rate
of interest on investment 8%.

Solution
Average Profit = Total Profit/Number Of Years
= 12200+15000+21000-2000/4 = Rs.11,550

3. Goodwill is to be valued at 3 years purchase of 5 years average profits. The profits for the last
years of the firm were 10, 000, and 15000,15000,20000,30000. The capital employed in the
business is Rs.1, 50,000 and normal rate of return is 10%. Calculate the value of goodwill on the
basis of 4 years purchase of super profit.

Solution

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1. Average Profit = Total Profit/Number Of Years

= 10,000+15000+15000+20000+30000/5
=Rs.18,000

2. Normal Profit= Capital Employed Normal Rate of Return

= 150000X10% =Rs.15,000

3. Super Profit= Average Profit- Normal Profit

= 18000-15000=3000

4. Goodwill = Super Profit X Number of Year Purchases

= 3200x3=9,600

4. From the following particulars relating to the business of Mr.R. Compute the value of
goodwill on the basis of 3 years purchase of super profits taking the average of last 4 years.
Capital invested Rs.12, 000. Market value of return on investment is 12%. Rate of risk of return
on capital invested 3%. Managerial remuneration of the proprietor if employed elsewhere Rs.
30,000 p.a. trading results are profit 60,000 , profit72,000 , profit 8,000 and profit 88,000.

Solution
1. Average Profit = Total Profit/Number Of Years
= 60000+72000+8000+88000/4= 57000
Average profit = 57,000
-managerial remuneration = 30,000
-------------
Adjusted average profit = 27,000

2. Normal Profit= Capital Employed Normal Rate of Return

= 120000X15% =18,000

3. Super Profit= Average Profit- Normal Profit

= 27000-18000=9000

4. Goodwill= Super Profit X Number of Year Purchases

= 9000x3=27000

5. from the following particulars find out the value of goodwill as per annuity method. Capital
employed Rs.3, 00,000. Normal rate of return is 10%. Present value of Re.1 for five years at 10%
3.78. Normal profit for five years 30,000,34,000,34000, 36,000 , 38,000. Non recurring income
1,600and Non recurring expenses Rs.1,600.

Solution
1. Average Profit = Total Profit/Number Of Years
= 30000+32000+34000+36000+38000/5
Average profit =34,000
Add nonrecurring expenses=1000
Less non recurring income=1600
Adjusted average profit= 33,400

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2. Normal Profit= Capital Employed Normal Rate Of Return

= 3,00,000X10% =30,000
3. Super Profit= Average Profit- Normal Profit
= 33400-30000=3400

4. Goodwill= Super Profit x Annuity table value

= 3400 x 3.78 = 12,852

6. The net profit of a company after providing taxation for the past five years are 80,000 ,
85,000 , 92,000 , 105000 ,and 1,18,000. Capital employed Rs. 8, 00,000.
Normal rate of return is 10% on capital employed. Calculate the value of goodwill on the basis
of 1. Five years purchase of super profit method 2.capitalisation of super profit method.

Solution
1. Average Profit = Total Profit/Number Of Years
= 80000+85000+92000+105000+118000/5
= 96,000

2. Normal Profit= Capital Employed Normal Rate Of Return

= 8,00,000X10% =80,000

3. Super Profit= Average Profit- Normal Profit

= 96000-80000=16000

4. Year purchase of super profit = super profit x no. of year of purchase

= 16000x5=80,000

5. Capitalisation of super profit

Goodwill = super profit/ normal rate of return x 100
= 16000/10x100=1,60,000

7. The net profit of a company after providing taxation for the last 5 year are 40000, 42000,
45000, 46000 and 47000. The capital employed in the business is Rs. 4, 00,000. On which a
reasonable return of 10% is expected. It is expected that the company will be able to maintain
its super profit for the next five years.

1. Calculate goodwill on 5 years purchase of super profit

2. Calculate goodwill under capitalization method

3. Calculate goodwill under annuity methods of super profit taking the present value of annuity
of one rupee for 5 years at 10% interest as 3.78.

Solution
1. Average Profit = Total Profit/Number of Years
= 40000+42000+45000+46000+47000/5
= 44,000
2. Normal Profit= Capital Employed Normal Rate Of Return

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= 4,00,000X10% =40,000

3. Super Profit= Average Profit- Normal Profit

= 44000-40000=4000

4. 5 year purchase of super profit = super profit x no. Of years of purchase

= 4000x5=Rs.20,000

5. Capitalisation of super profit

Goodwill = super profit/ normal rate of return x 100
= 4000/10x100=Rs.40,000

6. Annuity method = super profit annuity value

= 4000x3.78=Rs.15,120

8. The balance sheet of S Ltd. as on 30.6.1998 was as follows.

Liabilities Rs. Assets Rs.
10% preference share capital 1,00,000 Goodwill 20,000
20,000 equity shares of Rs.10 Fixed assets 3,60,000
each 2,00,000 Investment(5% government 40,000
Reserves (including provision bonds)
for tax 20000) 2,00,000 Current assets 2,00,000
9% debentures Preliminary expenses 15,000
creditors 1,00,000
35,000
6,35,000 6,35,000

The average profit of the company after tax is 62000. Fixed assets are undervalued by
10000.normal rate of return 10%. You are required to value the goodwill of the company at 4
times the super profits.

Solution
1. Calculation of average capital employed.
Particulars Rs.
Assets 370000
Fixed assets 360000+10000 200000
Current assets 570000
Less external liabilities
Provision for tax 20000
9% debentures 100000
Creditors 35000 155000
Capital employed 415000
Less ½ of net profit 60000x1/2 30000
385000

2. Calculation of adjusted average profit

Average profit = 62000
Less interest received from non business investment =2000

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(40000x5%)
Adjusted average profit = 60000

3. Normal Profit = Capital Employed Normal Rate of Return

= 3,85,000X10% =38,500

4. Super Profit= Average Profit- Normal Profit

= 60000-38500=21500

5. Goodwill = super profit x no. Of years of purchase

= 21500x4=86000

Valuation of shares
Different methods of Valuation of shares

1. Net Asset Method:

This is also known as Balance Sheet Method or Intrinsic Method or Break-up Value
Method or Valuation of Equity basis or Asset Backing Method. Here the emphasis is on the
safety of investment as the investors always need safety for their investments. Under this
method, net assets of the company are divided by the number of shares to arrive at the net
asset value of each share.
Total Value of Equity shares = Net Assets – Preference share capital
Value of one Equity share = Net Assets – Preference share capital/Number of Equity shares

2. Yield Method:
Under the Net Asset Method, the weightage is given on the safety of the investment.
One, who invests money on shares, always needs safety. Even if the return is low, safety is
always looked upon. At the same time under the yield method, the emphasis goes to the yield
that an investor expects from his investment. The yield, here we mean, is the possible return
that an investor gets out of his holdings—dividend, bonus shares, right issue. If the return is
more, the price of the share is also more. Under this method the valuation of shares is obtained
by comparing the expected rate of return with normal rate of return
Value Per Share= Expected Rate Of Return/Normal Rate Of Return Xpaid up value per share

3. Fair Value Method:

There are some accountants who do not prefer to use Intrinsic Value or Yield Value for
ascertaining the correct value of shares. They however, prescribe the Fair Value Method which
is the mean of intrinsic value and Yield Value method and the same provides a better indication
about the value of shares than the other methods.
Fair Value = (Intrinsic Value + Yield Value)/2

1. From the following information, calculate value per equity share.

2000, 9% preference shares of Rs. 2, 00,000
50,000 equity shares of Rs.10 each of Rs. 8 paid up Rs. 4, 00,000
Expected profit per year before tax Rs. 2, 18,000
Rate of tax 50%
Transfer to general reserve every year 20% of profit
Normal rate of earning 15%

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Solution
Calculation of expected rate of return
Particulars Rs
Profit before tax 2,18,000
Less tax 50%on 218000 1,09,000
Profit before tax 1,09,000
Less transfer to general reserve20%on 109000 21,800
87,200
Less dividend for preference shareholders 9% on 200000 18,000
Profit available to shareholders 69,200

Expected rate of return = profit available/paid up capital x100

=69200/400000x100=17.3
Value per share= Expected rate of return/normal rate of return x paid up value per share
= 17.3/15x8=9.22
2. Balance sheet of X Ltd as on 31.3.2013
Liabilities Rs. Assets Rs.
6% preference shares of Rs. 50,000 Goodwill 10,000
100 each Machinery 1,00,000
2000 equity shares of Rs.100 2,00,000 Stock 30,000
each Debtors 60,000
Reserve fund 50,000 Cash 1,00,000
P/l a/c 20,000 Preliminary expenses 40,000
Debentures 12,000
Creditors 8,000
3,40,000 3,40,000

Depreciate machinery by Rs.25, 000. Average profits for the last five years Rs.15,000. Goodwill
should be calculated on the basis of 3 years purchase of average profit of last five years.
Calculate the value of equity shares on the basis of net asset method.

Solution
Particulars Rs.
Assets
Goodwill 15000x3 45000
Machinery 100000-25000 75000
Stock 30000
Debtors 60000
Cash 100000
310000
Less external liabilities debentures 12000
Creditors 8000 20000
290000
Less preferential share capital 50000
Amount available to equity shareholders 240000

Value per share= Assets available to equity shareholder/number of equity shares

=24000/2000=120

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3 . On 31.12.2002 the balance sheet of a company is given below

Liabilities Rs. Assets Rs.
Issued capital Rs.10 each 4,00,000 Goodwill 40,000
Reserve 90,000 Fixed assets 5,00,000
P/L a/c 20,000 Current assets 2,00,000
5% Debentures 1,00,000
Current liabilities 1,30,000

7,40,000 7,40,000

On 31.12.2002 the fixed assets were valued at Rs.3, 50,000 and the goodwill at Rs.50,000. The
net profits for three years were 51600, 52000 and 51650.of which 20% was transferred to
reserve. The return on investment expected is 10%.compute the value per equity shares under
1.Net asset method 2. Yield method.

Solution
1. Net assets method
Particulars Rs.
Assets
Goodwill 50000
Fixed assets 350000
Current assists 200000
600000
Less : Liabilities debentures 100000
Creditors 130000 230000

Amount available to equity shareholders 370000

No of equity shares= total value of shares/face value per share

= 400000/10=40000
Value per share= assets available to equity shareholder/number of equity shares
= 370000/40000=9.25
2. Yield method.
Average Profit=51600+52000+51650/3= 51750
Less Transfer To Reserve 20%On 51750= 10350
Profit Available To Share Holders=41400
Expected Rate of Return = Profit Available To Shareholders/Paid Up Capital X100
=41400/400000x100=10.35
Value per Share= Expected Rate of Return/Normal Rate of Return Xpaid up value per share
= 10.35/10x10=10.35

4. The balance sheet of B ltd as on 31.3.2005 is given below

Liabilities Rs. Assets Rs.
4000, 10% preference shares 400000 Sundry assets at book value 1200000
of 100 each
60,000 equity shares of 10 600000

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each
Bills payable 50000
Creditors 150000
1200000 1200000

The market value of 60% of the assets is estimated to be 15% more than the book value and
that of the remaining 40% at 10% less than book value.
There is an unrecorded liability of Rs.10, 000 Find out the value of equity shares on the basis of
the assumption that preference shareholder have no prior claim as to payment of dividend or
repayment of capital.

Solution
Sundry assets 60% of 12,00,000=720000is increased 15%=108000 (720000+108000=828000)
Sundry assets 40% of 12,00,000=4,80,00 is decreased 10%=48,000 (480000-48000=432000)
Particulars Rs
Market value of assets 1260000
Less – bills payable 50000
Creditors 150000
Unrecorded liabilities 10000
Amount available to equity shareholders 1050000
This amount is to be divided in the ratio of paid up capital
400000:600000
Amount available to preference shareholders = 1050000x2/5=420000
Value per share=420000/4000=105
Amount available to equity shareholders=1050000x3/5=630000
Value per share = 630000/60000=10.5

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UNIT – V
AMALGAMATOIN & ABSORBTION

What is amalgamation absorption and reconstruction?

Amalgamation is when two firms come together to become one unit and they both have
a share in the new firm. Absorption is when one firm completely takes over the other firm
including its assets and liabilities. Reconstruction is usually done when a firm is a loss making
Enterprise and it wants to turnaround.

Differences betweenFINAL ACCOUNTS OF COMPANIES

1. When two companies join and liquidate to give birth to a new company is known as
Amalgamation. Absorption is a process whereby one company occupies control over the
other company.
2. Amalgamation is voluntary in nature, whereas Absorption can be discretionary or
hostile.
3. In amalgamation, there are minimum three companies involved, i.e. two amalgamating
companies and one new company which is formed by the fusion of the two companies.
Conversely, in Absorption, only two companies are involved.
4. In amalgamation, the formation of the new company is there while in absorption no
such new company is formed.
5. The size of the companies going through amalgamation is more or less the same. On the
contrary, one company of bigger size overpowers the company of smaller size in
Absorption.
6. Amalgamation is a wider term than Absorption because the former includes the latter.

Purchase Consideration – Meaning & Methods

In case of amalgamation, purchase consideration is the agreed amount which transferee
company (Purchasing company) pays to the transferor company (Vendor company) in exchange
of the ownership of the transferor company. It may be in form of cash, shares or any other
assets as agreed between both the companies.

Methods of Purchase Consideration:

Net asset method
Purchase consideration is equal to the total net assets of Transferor Company.
Total agreed amount of asset – Total agreed amount of liabilities

Net payment method

Payment made to the shareholders of Transferor Company in form of cash, shares or
debentures.

Lump sum method

Fixed amount paid by the transferee company to the transferor company. This method does
not require any calculation as the amount is decided by mutual consent of both the companies.

Intrinsic value/ Share exchange method

It is calculated by dividing the net asset value of Transferor Company by price of one share of
Transferee Company.

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The result figure then divided by number of existing shares of transferor company to find out
the ratio.

Intrinsic value – Net asset / Number of equity shares.

1. The company B Takes over the business of company A. the value agreed for various assets is
goodwill Rs.22,000. land and buildings Rs.25,000. plant and machinery Rs.24,000.stock
Rs.13,000.Debtors Rs.8,000. B company does not take over cash but agrees to assume the
liability of sundry creditors at Rs.5,000. calculate purchase consideration.

Solution
Agreed value of assets
Particulars Rs
Goodwill 22,000
Land and building 25,000
Plant and machinery 24,000
Stock 13,000
Debtors 8,000
Total assets 92,000
Less agreed value of liabilities-creditors 5,000
Purchase consideration 87,000

2. The balance sheet of A and B Ltd as on 31.3.2005

Liabilities A Ltd B Ltd Assets A Ltd B Ltd
Sharecapital 50,000 40,000 Goodwill 5,000 2,000
General reserve 20,000 -- Buildings 17,000 10,000
p/l a/c 3,000 -- Machinery 24,000 16,000
creditors 4,000 8,000 Vehicles 5,000 7,500
bank overdraft 4,000 8,000 Stock 10,000 7,500
Debtors 12,000 7,000
Cash 8,000 300
p/l a/c -- 5,700
81,000 56,000 81,000 56,000

The above two companies wanted to amalgamate and the following scheme of valuation is
proposed

An Ltdprovides 5% on debtors write off Rs.400 from stock and 33 1/3 from machinery
B Ltd- Eliminate its goodwill and p/l a/c write off Rs. 1000 on debtors as bad and provide 5% on
debtors, write off 10% of machinery and Rs.1400 from stock.
Compute purchase consideration.
Solution
A Ltd
Particulars Rs
Goodwill 5,000
building 17,000
machinery24000-8000 -1/3 on 24000 16,000
vehicles 5,000
Stock 10000-400 9,600

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Debtors 12000-600 11,400

cash 8,000
Total assets 72,000
Less agreed value of liabilities-creditors 4000
Bank overdraft 4000 8,000
Purchase consideration 64,000

B Ltd
Particulars Rs
building 10,000
machinery 16000-1600 14,400
vehicles 7,500
Stock 7500-1400 6,100
Debtors 7000-1000=6000-300 5,700
cash 300
Total assets 44,000
Less agreed value of liabilities-creditors 8000
Bank overdraft 8000 16,000
Purchase consideration 28,000

3. Give journal in the books of a purchasing company. A company purchased assets of Rs.3,
50,000 and took the liabilities of Rs. 30,000. It agreed to pay the purchase price Rs. 3, 30,000 by
issuing debentures of Rs.100 each at a premium of 10%.
Particulars Debit Credit
Business purchase a/c Dr 3,30,000
To liquidators of vendor company a/c 3,30,000
(being business purchased)
Assests a/c Dr 3,50,000
Goodwill a/c Dr (b.f) 10,000
To liabilities a/c 30,000
To business purchase a/c 3,30,000
(being assets and liabilities taken over)
Liquidator of vendor company a/c Dr 3,30,000
To debentures a/c 3,00,000
To debenture premium a/c 30,000
Number of debentures= total amount of Purchase Consideration/ issue price
=330000/100+10=3000 debentures
3000 at 100 debentures = 300000
3000 at 10 debenture premium =30000
----------
3,30,000.

4. A purchasing company agrees to issue three shares of Rs.10 each paid up at market value of
Rs.15 per share for every 5 shares in the vendor company. Find out the number and amount of
shares to be issued by the purchasing company if the vendor company has 1,00,000 shares of
Rs.10 each Rs. 5 paid up.

Solution

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Number of shares= offered shares of purchase consideration/accepted shares of vendor

company x total shares of vendor company
= 3/5x1,00,000=60,000 shares
Total amounts of purchase consideration
60000 shares at 15= 9,00,000
60000 at 210= 600000 share capital
60000 at 5= 3,00,000 securities premium

5. Compute purchase consideration.

1. A cash payment equivalent to Rs.3 for every Rs.10 share in G Ltd(number of shares 1,20,000)
2. The issue of 90,000 shares of Rs.10 fully paid in W ltd. having an agreed value of Rs.12 per
share.
3. The issue of 5% debentures of W Ltd for 6% debentures of the G Ltd(Rs.1,00,000)at a
premium of 20%.

Solution
By cash Rs.3 for 1, 20,000 shares = 3,60,000
By shares 90,000 shares at 12 =10,80,000
Purchase consideration = 14,40,000

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

Solution
Assets- liabilities
Total capital of partners10000+6000+5000=21000
Less increase in value of liabilities 8000
Decrease in value of assets 1000—9000
Purchase consideration 12000

7. The following is the balance sheet of X Ltd, as on 31.3.2008

Liabilities Rs Assets Rs
2,00,000shares of Rs.10 each 20,00,000 Land and building 10,00,000
General reserve 2,50,000 Plant &machinery 15,00,000
Dividend equalization reserve 2,00,000 Furniture 25,000
p/l a/c 51,000 Stock 6,00,000
12% debentures 10,00,000 Work-in-progress 3,00,000
Sundry creditors 3,00,000 Sundry debtors 2,50,000
Cash at bank 1,26,000
38,01,000 38,01,000

The company was absorbed by A ltd on the above date. The consideration for the
absorption is the discharge of the debentures at a premium of 5% taking over the liability in
respect of sundry creditors and a payment of Rs.7 in cash and one share of Rs.5 in A Ltd at the
market value of Rs. 8 per share for every share Xltd. The cost of liquidation of Rs.15,000 is to be
met by the purchasing company.

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Close the books of X Ltd and pass journal entries in the books of A Ltd.
Solution

In the books of XLtd(selling company)

Particulars Debit Credit
Realisation a/c Dr 38,01,000
To sundry assets a/c 38,01,000
Being the assets transferred to realisation
Sundry creditors a/c Dr 3,00,000
To realisation a/c 3,00,000
Being the liability taken over transfer to realisation a/c
A Ltd a/c Dr 40,50,000
To realisation a/c 40,50,000
Being the purchase consideration due
Bank a/c Dr 24,50,000
Shares in A Ltd a/c Dr 16,00,000
To A Ltd a/c 40,50,000
Being the purchase consideration received
Debenture a/c Dr 10,00,000
Realisation a/c Dr 50,000
To debenture holders a/c 10,50,000
Being the debenture with 5% premium transferred to
debenture holder
Debenture holder a/c Dr 10,50,000
TO Bank a/c 10,50,000
Being the debenture holder paid
Share capital a/c Dr 20,00,000
General reserve a/c DR 2,50,000
Dividend Equalisation reserve a/c Dr 2,00,000
p/l a/c Dr 51,000
TO Equity shareholders a/c 25,01,000
Being the share capital and accumulated profit transferred
Realisation a/c Dr 4,99,000
TO Equity shareholders a/c 4,99,000
Being the profit transferred to realisation
Equity shareholders a/c Dr 30,00,000
To bank a/c 14,00,000
To shares in A Ltd a/c 16,00,000
Being final settlement made

Realization a/c
Particulars Rs Particulars Rs
To sundry assets 38,01,000 By sundry creditors 3,00,000
To debenture holder premium 50,000 By A Ltd 40,50,000
To equity shareholders profit 4,99,000

43,50,000 43,50,000
A Ltd a/c

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Particulars Rs Particulars Rs
To Realisation a/c 40,50,000 By Bank 24,50,000
By shares A Ltd 16,00,000
40,50,000 40,50,000

Equity shareholders a/c

Particulars Rs Particulars Rs
To Bank 14,00,000 Share capital a/c Dr 20,00,000
To shares A Ltd 16,00,000 General reserve a/c DR 2,50,000
Dividend Equalisation reserve a/c Dr 2,00,000
p/l a/c Dr 51,000
30,00,000 30,00,000

Bank a/c
Particulars Rs Particulars Rs
To A Ltd a/c 24,50,000 By Debenture holders 10,50,000
By equity shareholder 14,00,000
24,50,000 24,50,000

In the books of A Ltd purchasing company

Particulars Debit Credit
Business purchase a/c Dr 40,50,000
To liquidators of X Ltd 40,50,000
Being the purchase consideration due
Land and building a/c Dr 10,00,000
Plant &machinery a/c Dr 15,00,000
Furniture a/c Dr 25,000
Stock a/c Dr 6,00,000
Work-in-progress a/c Dr 3,00,000
Sundry debtors a/c Dr 2,50,000
Cash at bank a/c Dr 1,26,000
Goodwill a/c Dr 5,49,000
To sundry creditors a/c 3,00,000
To business purchase a/c 40,50,000
Being the assets and liabilities taken over
Liquidators of X Ltd a/c Dr 40,50,000
To bank a/c 24,50,000
To share capital 200000x5 10,00,000
To share premium a/c 200000x3 6,00,000
Being the purchase consideration paid
Goodwill a/c Dr 15,000
To bank a/ c 15,000
Being the liquidation expensed paid
Purchase consideration
For shareholders cash 200000x7=1400000
Equity share 200000x1x8=1600000
For debenture holders cash 1000000x105/100=1050000
Purchase consideration 40, 50,000

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8. Following is the balance sheet of X company as on 30.6.2004

Liabilities Rs Assets Rs
12,000 shares of Rs.500 each 60,00,000 Land and building 27,20,000
reserve fund 6,50,000 Plant &machinery 30,00,000
Insurance fund 1,30,000 Furniture 1,00,000
p/l a/c 20,000 Patent &trademark 4,00,000
2,600 debentures of Rs.500 each 13,00,000 Stock 20,00,000
Workman saving bank 4,00,000 Sundry debtors 6,00,000
Sundry creditors 5,00,000 Cash at bank 1,80,000
38,01,000 90,00,000
Y company Ltd agreed to take over x Ltd on the following basis
1.Payment of cash at Rs.90 for every share in X Ltd
2. Payment of cash at Rs.550 for every debenture holder in full discharge of debentures.
3.Exchange of 4 shares of Y company on Rs.75 each (quoted in the market at Rs. 140 each) for
every share in x company Ltd.
Show the necessary ledger accounts in X Ltd.

Solution
Realization a/c
Particulars Rs Particulars Rs
To Land and building 27,20,000 By sundry creditors 5,00,000
To Plant &machinery 30,00,000 By workman saving 4,00,000
To Furniture 1,00,000 bank
To Patent &trademark 4,00,000 By Y Ltd purchase 61,00,000
To Stock 20,00,000 consideration
To Sundry debtors 6,00,000 By equity 21,20,000
To Cash at bank 1,80,000 shareholders - loss
To debenture holders excess 1,30,000
payment
91,300,000 91,30,000
Bank a/c
Particulars Rs Particulars Rs
To Y Ltd a/c 25,10,000 By debenture holders 14,30,000
By equity share holders (b.f) 10,80,000

25,10,00 25,10,000
Equity shareholders a/c
Particulars Rs Particulars Rs
To realisation loss 21,20,000 By equity share capital 60,00,000
To shares in Y co. 36,00,000 By reserve fund 6,50,000
To bank a/c 10,80,000 By insurance fund 1,30,000
By profit & loss a/c 20,000
68,00,000 68,00,000

Debenture holder a/c

Particulars Rs Particulars Rs
To bank a/c 14,30,000 By debenture a/c 13,00,000

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By realisation excess payment 1,30,000

14,30,000 14,30,000

Y Company
Particulars Rs Particulars Rs
To realisation a/c 61,10,000 By bank a/c 25,10,000
By shares in y ltd 1,30,000
61,10,000 61,10,000

Shares in Y company a/c

Particulars Rs Particulars Rs
To Y company 36,00,000 By equity 36,00,000
shareholders
36,00,000 36,00,000

Purchase consideration
For share holders cash 12000x90= 10,80,000
Shares 12000 x4x75= 36,00,000
For debentures cash 2600x550=14,30,000
Purchase consideration 61,10,000

9.Kala Ltd balance sheet showed the following position on 31.3.2008

Liabilities Rs. Assets Rs.
10,000 equity shares of Rs. 100 each 10,00,000 Fixed Asset 8,00,000
Capital reserve 2,00,000 Current assets 4,00,000
Bank loan 2,00,000 Bank 2,00,000
Trade creditors 3,00,000 Profit & loss a/c 3,00,000
17,00,000 17,00,000

Mala Company was incorporated to take the fixed assets and 60% of the current assets at an
agreed value of Rs. 9, 00,000 to be paid as Rs. 7, 40,000 in equity shares of Rs. 10 each and the
balance in settlement of loan. Remaining current assets realised Rs.90,000 After meeting
Rs.20,000 expenses of liquidation all the remaining cash was paid to the creditors in full
settlement .

Solution
Books of Kala Ltd -selling company
Particulars Debit Credit
Realisation a/c Dr 12,00,000
To Fixed assets a/c 8,00,000
To current assets a/c 4,00,000
Being transfer of assets to realisation except bank
Mala company a/c Dr 9,00,000
To realisation a/c 9,00,000
Being purchase price receivable
Shares in mala company a/c Dr 7,40,000
Debentures in Mala company a/c Dr 1,60,000

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To Mala co. a/c 9,00,000

Being purchased price received in shares and debentures
Bank a/c DR 90,000
To Realisation a/c 90,000
Being amount realised for 40% of the current assets not taken
over by Mal co.
Bank loan a/c Dr 2,00,000
To debentures in Mala co. 1,60,000
To realisation a/c 40,000
Being payment of liquidation expenses
Realisation a/c Dr 20,000
To bank a/c 20,000
Being payment of liquidation expenses
Trade creditors a/c Dr 3,00,000
To bank a/c 2,70,000
To realisation a/c 30,000
Being settlement of creditors by payment of all the cash
available
Equity share capital a/c Dr 10,00,000
Capital reserve a/c DR 2,00,000
TO Equity share holders a/c 12,00,000
Being transfer of capital and reserve
Equity shareholders a/c Dr 3,00,000
To profit and loss a/c 3,00,000
Being transfer of accumulated loss
Shareholders a/c Dr 1,60,000
To realisation a/c 1,60,000
Being loss on realisation

In the books of Mala Ltd – purchasing company

Particulars Debit Credit
Business purchase a/c Dr 90,00,000
To liquidators of kala Ltd 90,00,000
Being the purchase price payable
Fixed assets a/c Dr 8,00,000
Current assets a/c Dr 400000x60% 2,40,000
To business purchase a/c 9,00,000
To capital reserve a/c(b.f) 1,40,000
Being assets taken over and the capital profit there on
Liquidators of Kala a/c Dr 9,00,000
To debenture a/c 1,60,000
To share capital a/c 7,40,000
Being the liquidation expensed paid

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