CORPORATE ACCOUNTING

CHAPTER 5 CORPORATE RESTRUCTURING

Amalgamation
Types
 In the nature of merger
 In the nature of purchase
Sl Calculation / journal entry Meaning Value points
.
N
o
1. Purchase consideration
Methods :
 Lump sum method
Full
amount of
money to
 Net asset method : be
PC= assets taken over at considered
agreed value – liabilities as
taken over at agreed purchase
values. considerati  Fictitious
on assets and
liabilities
not taken
over should
not
considered.
 Prepaid
 expenses
not
considered.
 Unless
otherwise
stated, cash
in hand and
cash at bank
are to be
treated as
assets taken
over.
 If any
particular
assets is not
taken over,
it should be
avoided.
 Accumulate
d
fund( reserv
e fund,
dividend
equalization
fund,
investment
allowance
reserve,
security
premium,
capital
 redemption
reserve etc
should not
considered.
 Trade
liabilities
include only
sundry
creditors
and bills
payable but
does not
include
other
liabilities to
third parties.

 Net payment Calculatin 1. If the

method : g PC by liquidation
PC = adding all expenses are
Shares xxx payments to be born
Debenture xx made by by the
Cash xxx the transferee
Pc xxx transferee company,
company. these should
not be
added to PC
2. Assets and
liabilities
taken over
are not be
considered
for
calculation
3. The
payment
made by
transferee
company for
shareholders
must be
taken
4. Issue price
of shares
and
debentures
is to be
considered (
including
premium ).
5. If creditors
and
debentures
are taken
over by the
 transferee
company
and
subsequentl
y discharged
then such
amount
should not
be added to
the
purchased
consideratio
n.
6. Any
payment
made by the
transferee
company to
some other
party on
behalf of the
transferor
company
should not
be
considered.
 Intrinsic value PC  In net asset,
method : calculated fictitious
Intrinsic value = net on the asset not
asset ÷ no. Of shares basis of included.
intrinsic
 value of
shares of
transferor
company.
2 Journal entries of
transferor company :

 For transferring assets  Transfer of

to realization a/c assets is
Realization a/c Dr made at
To assets a/c book value,
not agreed
value
 Fictitious
assets such
as
preliminary
expenses,
discount on
issue of
shares and
debentures,
debit
balance of
P&L a/c etc.
Should not
be
transferred
to
realization
a/c
 If cash in
hand and at
bank are not
taken over
by the
transferee
company,
these should
not be
transferred
to
realization
a/c.
 Other assets
even if they
are not
taken over
by the
transferee
company
should also
be
transferred
to
realization
a/c.
 Goodwill,
patents,
trade marks
etc.are also
transferred
 to
realization
a/c.
 For transferring  If any
liabilities ( outside liability is
liabilities only) to not taken
realization a/c : over by the
Liabilities a/c Dr transferee
To realization a/c company
that should
not be
tranferred.
But any
profit or
loss on
payment of
such
liability is
transferred.
 The outside
liabilities
such as
debentures
shall be
assumed to
be taken
over and
discharged
by
transferee
company.
 Items in the
nature of
provisions
are to be
transferred.
 Items in the
nature of
reserve like
P&L credit
balance,
general
reserve etc
are to be
transferred.
 Any fund
which
denote both
liability and
reserve
( work men
compensatio
n fund) the
portion of
liability
should be
transferred
to
realization
a/c and the
portion of
accumulated
 profit
should be
transferred
to sundry
shareholders
.

 For Purchase 
consideration (PC)
due from the
transferee company :
Transferee company A/c
Dr
To realization a/c
 On receiving PC: 
Equity shares In transferee
company Dr
Preference shares in
transferee company
Dr
Debentures Dr
Bank a/c Dr
To transferee company
 For the sale of assets  Since all
not taken over by the assets are
transferee company : transferred,
Bank a/c Dr profit or
To realization a/c loss on sale
need not be
 taken in the
realization
a/c,
automaticall
y adjusted
in
realization
a/c
 For discharging 
liabilities :
Liability a/c Dr
To bank A/c
 For liquidation 
expenses :
1. If liquidation
expenses are met
by the transferor
company :
Realization a/c Dr
To bank
2. If realization
expenses met by
transferee
company :
A. No entry
B.Two entries
Transferee company A/c
Dr
To bank

Bank a/c Dr
 To transferee Co.
 Balancing the 
realization a/c:
A. For loss
Equity shareholders a/c
Dr
To realization a/c

B. For profit
Realization a/c Dr
To equity
shareholders a/c
 For closing pref. 
Share capital by
transferring it to pref.
Shareholders :
Pref. Share capital A/c
Dr
To preference
shareholders a/c
 For paying off 
preference
shareholders :
Pref. Shareholders a/c
Dr
To pref. Shares in
transferee Co
To bank( if any
To debentures
  For transferring 
equity share capital,
reserves and surplus
etc. :
Equity share capital a/c
Dr
General reserve a/c
Dr
P&L a/c Dr
Dividend equalization
reserve a/c Dr
Security premium a/c
Dr
To sundry
shareholders a/c
 For transferring 
accumulated losses
and expenses not
written off:

Equity shareholders a/c

Dr
To p&l a/c( debit bal)
To preliminary
expenses
To discount
/expenses om issue of
securities
 For final payment to 
equity shareholders :
Equity shareholders a/c
Dr
To equity shares in
transferee Co.
To bank a/c
 Accounting in the 
books of transferee
Company :
 Two methods :

 Pooling of interest
method (merger )

 Purchase method
 Pooling of interest  Record the
method : journal assets,
entries liabilities
and reserves
( whether
capital or
revenue ) of
transferor
Co. At their
book value
unless any
adjustment
is required.
 The balance
of P&L a/c
of the
 transferor
Co. Should
be
transferred
to General
reserve
account.
 The
difference
between
purchase
consideratio
n and share
capital
adjusted in
reserves.
 For purchase 
consideration due:

Business purchase a/c

Dr
To liquidator of
transferor Co.
 For assets and 
liabilities taken over:
Assets a/c Dr
To liabilities
To reserves of
transferor company
To liquidator of
transferor Co.
  For payment of  If shares
purchase and
consideration : debentures
are issued at
Liquidator of transferor co. premium,
Dr share capital
To share capital a/c or
To debentures debentures
To bank a/c a/c should
be credited
with
nominal
value and
security
premium a/c
should be
credited
with
premium. If
they are
issued at
discount,
share capital
a/c or
debentures
a/c should
be credited
with
nominal
value and
discount on
 shares a/c or
discount on
debentures
a/c should
be debited.
 For payment of  If there is no
liquidation expenses general
of transferor co. ( if reserve P&L
paid by the transferee a/c should
co. ): be debited.

General reserve a/c

Dr.
To bank a/c
 For payment of 
formation expenses :

Preliminary expenses a/c

Dr.
To cash/bank
 Purchase method : 
 Journal entry
 In the books of
transferee co.

 For purchase 
consideration due:
Business purchase
a/c Dr.
To liquidator of
transferor co.
 For assets and  If total
liabilities taken over: credit is
more than
Assets a/c Dr. total debit,
To liabilities the
To liquidator of difference is
transferor co. debited to
goodwill
a/c. If total
debit is
more than
total credit,
the
difference is
credited to
capital
reserve a/c.
 For payment of PC: 

Liquidator of transferor co.

A/c Dr.
To share capital
To bank a/c
 To record the 
statutory reserve of
the transferor co.
Amalgamation adjustment
a/c Dr.
To statutory reserve
a/c
 For payment of  If there is no
liquidation expenses general
of transferor company reserve,
: P&L a/c
should be
Goodwill / capital reserve debited.
a/c Dr.
To cash /bank
 For payment of 
formation expenses :
Preliminary expenses a/c
Dr.
To cash/ bank a/c
 In case there are both 
goodwill and capital
research a/c, goodwill
may be set off against
capital reserve.
Capital reserve a/c Dr
To goodwill a/c
 If any liability is 
discharged by the
transferee co.

Liability a/c Dr.

To share capital /
debentures /bank a/c
 Inter company 
 Owings:
A. Mutual debts
Sundry creditors a/c
Dr.
To sundry creditors a/c

B. Mutual acceptance
Bills payable a/c Dr.
To bills receivable
 Inter company stock 
Goodwill (capital
reserve ) a/c Dr.
To stock a/c

INTERNAL RECONSTRUCTION
It includes :
1. Alteration of share capital
2. Reduction of share capital
3. Variation of shareholders rights
4. Scheme of compromise / arrangement
Sl. No Journal entry Value point
1. Alteration of share
capital
 For increasing share
capital :

A. Bank a/c Dr.

 To equity share
application
&allotment
B. Equity share
application
&allotment a/c Dr.
To equity Share
capital

 For consolidation of
shares:
Equity share capital a/c(rs.)
Dr.
To equity share capital
(Rs.)

 For sub division of

shares :

Equity share capital

(rs.100) a/c Dr.
To equity Sc
 For conversion of
shares into stock :

Equity share capital a/c

Dr.
To equity stock a/c

 For conversion of
 stock into shares:

Equity stock a/c Dr.

To equity SC a/c

2 Reduction of share It is the

capital : repayment or
writing down of a
company ‘s
different classes
of capital as a
result of large
accumulated
losses.
Methods—
A.For reducing the
liability in
respect of
uncalled capital :

Share capital a/c Dr. (Old)

To share capital
a/c(new)

B.For paying off the

surplus capital :
 Share capital a/c Dr
 To shareholders a/c
 Shareholders a/c Dr.
To bank
C. For written off paid
up capital which is
lost or not represented
by available assets:
 Share capital a/c Dr.
To share capital a/c
To capital reduction
a/c
 For reducing the paid
up capital without
changing the face
value
Share capital a/c Dr.
To capital
reduction
3 Scheme of compromise :
A. Debenture
holders forgoing
their claims:
Debentures a/c Dr.
To capital reduction

B.Debenture
holders
exchanging their
debentures for
new debentures /
shares:
 Debentures a/c Dr.
To new debentures /
share capital

C.Creditors forgoing
their claims :
Creditors a/c Dr.
To cap. Reduction

D.Creditors agreed to
receive share or
debentures :
Creditors a/c Dr.
To share capital /
debentures
5. Capital reduction a/c It is a new
account opened
for transferring
that part of capital
which is lost or is
unrepresented by
assets.

LIQUIDATION OF COMPANIES