Corporate Accounting

Unit – I
Valuation of Shares
Shares
The capital of the company can be divided into different units with definite values called
shares. Thus a share is the shared capital in the firm giving ownership right to the
shareholder.
Types of Shares
There are two types of shares that a company may issue-
1. Preference Shares:
A Preference share has following two features-(i) A right to receive dividend at a given rate
or amount before any dividend is paid.(ii) A right to repayment of capital in the event of
winding-up of company.
2. Equity Shares:
An Equity share has following features-(i) It gets dividend and repayment after payment to
preference shareholders.(ii) Rate of dividend is not fixed and is determined by Directors.(iii)
Such shareholders may go without any dividend if no profit is made.(iv) They also have
voting rights proportionate to one’s share in the paid-up equity capital.
The value of share of a company depends on so many factors such as:
1. Nature of business.
2. Economic policies of the Government.
3. Demand and supply of shares.
4. Rate of dividend paid.
5. Yield of other related shares in the Stock Exchange, etc.
6. Net worth of the company.
7. Earning capacity.
8. Quoted price of the shares in the stock market.
9. Profits made over a number of years.
10. Dividend paid on the shares over a number of years.
11. Prospects of growth enhanced earning per share, etc.
Need and Purpose of Valuation of Shares
The need for valuation of shares may be felt by any company in the following circumstances:
1. For assessment of Wealth Tax, Estate Duty, Gift Tax, etc.

2. Amalgamations, absorptions, etc.
3. For converting one class of shares to another class.
4. Advancing loans on the security of shares.
1
5. Compensating the shareholders on acquisition of shares by the Government under a
scheme of nationalisation.
6. Acquisition of interest of dissenting shareholder under the reconstruction scheme, etc.
Factors Influencing Valuation
The valuation of shares of a company is based, inter alia, on the following factors:
1. Current stock market price of the shares.

2. Profits earned and dividend paid over the years:
3. Availability of reserves and future prospects of the company.
4. Realisable value of the net assets of the company.
5. Current and deferred liabilities for the company.
6. Age and status of plant and machinery of the company.
7. Net worth of the company.
8. Record of efficiency, integrity and honesty of Board of Directors and other managerial
personnel of the company.
9. Quality of top and middle management of the company and their professional competence.
10. Record of performance of the company in financial terms.
Methods of Valuation of Shares
1. Net Asset Method

2. Yield Method
3. Fair or Dual value Method
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.
Net Asset Method
2
Example: 1
From the information given below and the balance sheet of Cipla Limited on 31st December,
2009, find the value of shares by Intrinsic value method.
Liabilities Amount Assets Amount

1000, 8% Preference Shares of ` 100 each Buildings 70,000
fully paid 1,00,000
4,000 Equity Shares of ` 100 fully paid Furniture 3,000
4,00,000
Reserves 1,50,000 Stock (Market value) 4,50,000
Profit and Loss account 5,10,000 Investment at cost (face
value 4,00,000) 3,35,000
Creditors 48,000 Debtors 2,80,000
Bank 60,000
Preliminary Expenditure
10,000
12,08,000 12,08,000
Building is now worth of ` 3,50,000 and the Preferential shareholders are having preference
as to capital and dividend.
Sol:
Valuation of Equity Share Intrinsic Value Method
Particulars Amount
Furniture 3,000
Stock (Market value) 4,50,000
Investment at cost (face value 4,00,000) 3,35,000
Debtors 2,80,000
Bank 60,000
Buildings 3,50,000
Total assets 14,78,000
Less:
Creditors (48,000)
Net amount available to shareholders 14,30,000
Less: Preference Share Capital (1,00,000)
Net amount available to Equity shareholders 13,30,000
¿
Value of Equity Share = Net amount available ¿ Equity shareholders No . of Equity Shares
13,30,000
=
4,000
3
= 332.5
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.
Profit available to equity share holders
Particulars Amount
Expected profit xxx
(-) Tax xxx

PAT xxx
(-) Transfer to Reserve xxx

xxx
(-) Preference Dividend xxx
Profit available to equity

share holders xxx
ERR=Profit available ¿ equity share holders ¿ ×100

Equity ShareCapital
ERR
Valuation of share= × paid up value of Equity share
NRR
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 Method end Yield Value Method. The same provides a
better indication about the value of shares than the earlier two methods.
Net Asset value+ yield value

Fair Value= × 100
2
4
Valuation of Goodwill
Goodwill may be described as the aggregate of those intangible attributes of a business which
Contribute to its superior earning capacity over a normal return on investment. It may arise
from such attributes of a business as good reception, a favourable location, the ability and
skill of its employees and management, nature of its products, etc.
Goodwill is an intangible asset. The real value is indeterminable for a non-purchased

goodwill and based on arbitrary measurement. The valuation of goodwill is often based on
the customs of the trade and generally calculated as number of year’s purchase of average
profits or super-profits.
CLASSES OF GOODWILL
It is very interesting to study the classification of Goodwill based on consumer behavior.

This theory was first coined by P.D. Leake in 1921. He also defines goodwill as follows:
“the right which grows out of all kinds of past effort in seeking profit, an increase of value or
other advantages”.
1. DOG GOODWILL
A dog is an animal that develops a fondness for its owner and not the place where he resides.
When the owner moves, the dog also follows. Similar behavior is portrayed by consumers of
an entity with dog goodwill. The customers rely on the management and leadership of the
company. They see value in the company because of the people chairing its positions. Such
consumers will be likely to move their preferences to the location of the company leaders.
Thus, the leadership of a business drives the dog goodwill.
For example, Warren Buffet is the heart and soul of Berkshire Hathaway Inc. The share value
will spiral down were Buffet to step down or move. People will then choose to reallocate
their funds to Buffets new address.
2. CAT GOODWILL
A cat is often pictured as a self-sufficient animal with a “couldn’t-care-less” personality. It
does not care where the fish is coming from as long as it is coming every day. Think of an
alley where you will always notice the same group of cats. Thus, cat goodwill customers are
more loyal to a brand or the company name. The management and leadership team of the
entity does not concern them. They are highly invested in the “brand equity” of the product
and will hardly switch their preference.
5
The Apple iPhone users are the best example of cat goodwill. They are so highly drawn to the
brand that no amount of better deals, price cuts or fancy features can lure them away. Steve
Jobs and Wozniak can come and go. But the Apple users are here to stay.
3. RAT GOODWILL
Rat is a scurried animal rushing over to wherever the next piece of cheese is. It does not care
“who” is putting out the cheese or “where” is it coming from. In other words, such consumers
do not play favorites either in management personnel or in the brand. For this reason, it is
also known as fugitive goodwill and is valueless. It is fickle and vulnerable. Therefore, it
cannot be translated to generate any value.
For example, the customers of FMCG companies do not demonstrate any loyalties. The
products from any of the companies will serve the same purpose. Thus, the customer chooses
based on his mood and preference at the time.
4. RABBIT GOODWILL
Rabbits remain to confine to a patch and do not like to venture far away. Similarly, the rabbit
consumers will only pick a product if it is available in their acceptable radius.
For example, no one likes to go through extra efforts to buy fruits, vegetables, and groceries.
A consumer would like to go no farther than the nearest departmental store to make the
purchase.
Valuation of purchased goodwill:

1. Average profit method :
Under this method average profit is calculated on the basis of the past few year’s
profits. At the time of calculating average profit abnormal profit or loss will be
ignored. After calculating average profit, it is multiplied by a number (3 or 4 years),
as agreed. The product will be the value of the goodwill.
Goodwill = Average Profit × No. of year purchase
total profit
Average profit =
no . of years
Trading Profit/Business Profit/Recurring Profit/Normal Profit (of Past Year)
Particulars Amount
Net Profit before Adjustment and Tax xxx
Less: Non Trading Income
(i.e., Income from investment Asset) (xxx)
Less: Non-recurring Income
(i.e., profit on sale of investment/Asset) (xxx)
Add: Non-recurring Loss
(i.e., Loss on sale of investment/Asset) xxx
Trading Profit after Adjustment and before Tax XXX
6
Example: 1
X Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued
at 3 years’ purchase of average profits of last 5 years.
Years 1 2 3 4 5
Profit 24,000 20,000 22,000 26,000 24,000
Solution:
Goodwill = Average Profit × No. of year purchase
24,000+20,000+22,000+26,000+24,000
Average profit =
5
1,16,000
=
5
= 23,200/-
∴ good will = 23,200 x 3
= 69,600
2. Super-profit method:
Super profit is the excess of actual profit over the normal profit. Under this method,
super profits are taken as the basis for calculating goodwill in place of average profit.
Goodwill is calculated as follows:
Step 1: Calculate Capital Employed
Step 2: Calculate Normal Return
Normal Return = Capital employed × Rate of normal return
Step 3: Calculate future maintainable Profit
Step 4: Calculate super profit
Future Maintainable Profit xxxx
Less: Normal Return (xxx)
Super Profit xxxx
Goodwill = Super profit × No. of years purchases
3. Capitalization Method:
The goodwill under this method is ascertained by capitalizing the super profits on the
basis of normal rate of return. This method assesses the capital needed for earning the
super profit.
The value of goodwill is computed as follows:
Goodwill is calculated as follows:
7
Step 1: Calculate Capital Employed
Step 2: Calculate Normal Return
Normal Return = Capital employed × Rate of normal return
Step 3: Calculate future maintainable Profit
Step 4: Calculate super profit
Future Maintainable Profit xxxx
Less: Normal Return (xxx)
Super Profit xxxx
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, 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,
a 1
(
V = 1−
i 1−i n )
Where
V = Present value of Annuity; a = Annual Super Profit; n = Number of Years

I = Rate of Interest
8
Examples on Valuation of Shares
1. The following is the summarized balance sheet of a company as at 31-12-2014

Liability Amount Assets Amount
10,000. 5% Preference 10,00,000 Fixed assets 38,00,000
Shares @ 100/- each
200000 Equity Share 20,00,000 Investments 10,25,000
@ 10/- each fully paid
General reserve 15,00,000 Stock in trade 5,72,000
Profit and loss a/c 12,00,000 Sundry debtors 12,78,000
6% Debenture 8,00,000 Cash an bank balance 2,25,000
Sundry Creditors 2,75,000
Other Liabilities 1,25,000
69,00,000 69,00,000
For this purpose of valuation of shares fixed assets are to be depreciated by 10% and
investment are to be revalued at Rs. 10,80,000/-. Calculate the value of each equity share.
Solution:
Calculate the value of equity share
Particulars Amount Amount

Net assets: (market value of assets)
Fixed assets 38,00,000
(-) Depreciation (3,80,000 34,20,000
Investment ) 10,80,000
Stock in trade 5,72,000
Sundry debtors 12,78,000
Cash and cash balance 2,25,000
Total net assets 65,75,000
Less: Liabilities
6% Debentures 8,00,000
Sundry creditors 2,75,000
Other liabilities 1,25,000 (12,00,000)
Net assets available to share holder 53,75,000
Less: Preference shares capital (10,00,000)
Net amount available to equity share holders

43,75,000
9
¿
Valuation of share = Net amount available ¿ equity share holders No . of Equity shares
43,75,000
= 2,00,000 = ans: 21.87
2. Balance sheet on X company limited as follows:
Liability Amount Assets Amount

20000 Equity Share @ Good will 1,90,000
10/- each fully paid 2,00,000 Investments 3,00,000
Reserve 2,50,000 Current assets 80,000
Profit and loss a/c 30,000 Deferred expenditure 10,000
Unsecured loan 80,000
Other Liabilities 20,000
5,80,000 5,80,000
For this purpose of valuation of shares goodwill taken as an average profit of 2 years. The
profit earned during last 5 years were as follows;
Rs.60,000/-, Rs. 70,000/-, Rs. 40,000/-, Rs. 50,000/-, Rs. 50,000.
(Note: In this case they are not mention about which method of valuation we follow. So that
as per given information, we can choose net asset method)
Solution:

Net Assets: (market value of assets)
*Good will 1,08,000
Investment 3,00,000
Current assets 80,000
Less: Liabilities
Unsecured loan 80,000
Current liabilities 20,000 (1,00,000)
Net amount available to share holders 3,88,000
Less: Preference share capital -
Net amount available to equity share holders 3,88,000
¿
10
3,88,000
= 20,000 = Ans: 19.4
 Working Note: calculation of Goodwill

Average goodwill = average profit x no. of years purchased
60,000+70,000+40,000+50,000+50,000.
Average profit = = 54,000
5
Good will = 54,000 x 2
= 1,08,000
3. The balance sheet of Raghu Ltd. As on 31-12-2018 was as follows:

20,000 equity shares Goodwill 50,000
@45/- each 9,00,000 Fixed assets 9,65,000
1000, 4% cumulative Current assets 5,00,000
Preference shares of
@100/- each fully paid 1,00,000
Loans 6% 75,000
Current liabilities 1,80,000
15,15,000 15,15,000
Interest on loan, debenture and dividend on preference shares were arrears for the last one
year. Though they are not shown in the balance sheet. Preference shares have right to take
10% premium, the assets are independently valued as follows:
Fixed assets: 12,00,000/- Current assets: 6,00,000/-
Calculate the value of equity share.
11
Solution:

Net Assets: (market value of assets)
Goodwill 50,000
Current assets 6,00,000
Total Assets 18,50,000
Less: Liabilities
Loan’s 75,000
(+)interest on loan 4,500 79,500
(+) interest on Debenture 13,000 2,73,000
Current liabilities 1,80,000 (5,32,500)

Net amount available to share holders 13,17,500
Less: Preference share amount
Preference share capital 1,00,000
Premium 10% 10,000
Arrears for dividend of one year 4,000 (1,14,000)
Net amount available to equity share holders 12,03,500
¿
12,03,500
=
20,000
= Ans: 60.18
12
Partial paid up equity shares (Problems on Notional Calls money)
4. The following is the balance sheet of Madhu Ltd., as on 31-12-2017

10,000 Equity shares @10/- each 1,00,000 Fixed assets 2,20,000
fully paid
10,000 Equity shares @10/- each 80,000 Current assets 1,10,000
, Rs. 8/- per share paid
10,000 Equity shares @10/- each 50,000 Preliminary expenses 5,000
Reserves 50,000 Floating assets 5,0000
Profit and loss A/c 50,000
Creditors 10,000
3,40,000 3,40,000
Calculate the value of equity share.
Solution:

Market value of Assets:
Fixed assets 220000
current assets 110000
floating assets 5000
Total Assets 335000
Less: Liabilities:
creditors 10000 10000
325000
Add: Notional Calls:
on 10000 Equity Shares @2/- 20,000
on 10000 Equity Shares @5/- 50,000 70,000
net amount available to Equity share holders 395000
¿
13
3,95,000
=
30,000
= Ans: 13.17
10/- each 8/- paid up share = (13.7 – 2) = 11.17
Yield method:
1.From the following particulars calculate the value of share by using Yield method.
1. 2000, 9% Preference share of Rs. 100/-

2. 50,000 Equity share of Rs. 10/- each, Rs. 8/- per share paid
3. Expected profit per year before tax – 2,18,000.
4. Rate of Tax – 50%
5. Transfer to general reserve every year 20% of profit.
6. Normal rate of earnings (NRR) – 15%
Solution:
Calculation of profit available for equity share holders
Particulars Amount
Expected profit 2,18,000
50 (1,09,000)
Less: Tax @ 50% 2,18,000× [ 100 ]
1,09,000
Less: Transfer to General Reserve @ 20% (2,18,000)
20
[ 1, 09,000 ×
100 ]
Profit after general reserve and tax 87,200
Less: 9% Preference Dividend on 2,00,000 Preference
share capital (18,000)
9
[ 2 ,00,000 ×
100 ]
Profit available for equity share holders 69,200
Calculation of Expected Rate of Return (ERR)

Profit available for equity share holders
ERR= × 100
paid up Equity share capital
14
69,200
ERR= × 100 (Equity Capital: 50,000 x 8 = 4,00,000)
4,00,000
ERR = 17.3%
Calculation of value of equity share:

ERR
value per share= × paid up value of equity share
NRR
17.3
value per share= ×8
15
= 9.23 Ans.
2. surabhi limited has 5,000 Equity share of RS. 10/- each, Rs. 8/- paid up and 50,000,
6% Preference shares of Rs. 10/- each fully paid. The company transfer 20% of the
profit to general reserve every year. If the expected profit (based on the past year
performance) before tax is Rs. 1,00,000 and the rate of tax is 50%. You are required
to calculate the value of equity share by Yield method. Assume that the normal rate of
dividend (NRR) is 20%.
Solution:
Particulars Amount
Expected profit 1,00,000
50 (50,000)
Less: Tax @ 50% 1,00,000× [ 100 ]
50,000
Less: Transfer to General Reserve @ 20%
20 (10,000)
[ 50 ,000 ×
100 ]
Less: 6% Preference Dividend on 5,00,000 Preference
share capital (30,000)
6
[ 5 ,00,000 ×
100 ]
15
ERR= × 100
10,000
ERR= ×100 (Equity Capital: 5,000 x 8 = 40,000)
40,000
ERR = 25%

ERR
NRR
25
20
= 10/- Ans.
Example: 3
The following is the balance sheet of Madhu Ltd., as on 31-12-2017
10,000 Equity shares @10/- each 1,00,000 Fixed assets 2,20,000
fully paid
10,000 Equity shares @10/- each 80,000 Current assets 1,10,000
10,000 Equity shares @10/- each 50,000 Preliminary expenses 5,000
Reserves 50,000 Floating assets 5,0000
Profit and loss A/c 50,000
Creditors 10,000
3,40,000 3,40,000
The normal average profit of the company (after tax) will be maintained at Rs. 46,000/- and
normal rate of return is 8%. Calculate the value of each type of equity share by the asset
backing method (Net asset method) and yield method
Solution: Calculate the value of equity share

Fixed assets 220000
current assets 110000
floating assets 5000
Total Assets 335000
Less: Liabilities:
creditors 10000 10000
16
325000
Add: Notional Calls:
on 10000 Equity Shares @2/- 20,000
on 10000 Equity Shares @5/- 50,000 70,000
net amount available to Equity share holders 395000
¿
3,95,000
=
30,000
= Ans: 13.17
Yield method: Calculation of profit available for equity share holders
Particulars Amount
Expected profit (average profit) 46,000
Less: Tax (--)
46,000
Less: Transfer to General Reserve (--)
Less: Preference Dividend (--)
46,000
ERR= ×100 (Paid Up Equity Capital:1,00,000+80,000+50,000 = 2,30,000)
2,30,000
ERR = 20%

ERR
NRR
20
at 10 fully paid = ×10 = 25/- ans.
8
20
at 8 paid up= ×8 = 20/- ans.
8
17
20
at 5 paid up= ×5 = 12.5/- ans.
8
Dual or Fair value method

net asset value+ yield value
Valuation of equity =
2
Example: 4
On 31-12-2012 the balance sheet as a limited company reveals the following position

Issued share capital Fixed assets 5,00,000
@10/- each 4,00,000 Current assets 2,00,000
Reserve 90,000 Good will 40,000
Profit and loss a/c 20,000
5% Debenture 1,00,000
Current liabilities 1,30,000
7,40,000 7,40,000
On 31-12-2012 the fixed assets were independently valued at Rs. 3,50,000/- and
goodwill at Rs. 50,000/-. The net profit for 3 years were:
2000 - 51,600
2011 - 52,000
2012 - 51,650
Of which 20% was placed under reserve. This profession being considered reasonable
in the industry in which the company is engaged and were a fair investment return
maybe taken at 10%. Compute value of the company share by dual method ( a). Net
assets and b). Yield method.)
Solution:

Current assets 2,00,000
Goodwill 50,000
18
Total Assets 6,00,000
Less: Liabilities:
5% Debenture 1,00,000
Creditors 1,30,000 (2,30,000)
3,70000
Less: Preference capital
net amount available to Equity share holders 3,70,000
¿
3,70,000
=
40,000
= Ans: 9.25
Yield method:
Calculation of average expected future profit:
Net profit for valuation of share
Years profit
2000 51600
2011 52000
2012 51650
Total profit 155250
total profit 155250

Average expected future profit =
No . of years
; 3
= 51,750
Particulars Amount
Expected profit 51,750
Less: Tax (--)
51,750
19
Less: Transfer to General Reserve @ 20%
20 (10,350)
[ 51, 750 ×
100 ]
Less: Preference Dividend
(--)

ERR= × 100
41,400
ERR= × 100
4,00,000
ERR = 10.35%

ERR
NRR
10.35
10
= 10.35/- Ans.
9.25+10.35
Valuation of equity =
2
= Ans. 9.8
Prior to Incorporation
The acquisition of business usually commences from the beginning of the accounting year of
the business. But, the incorporation of the company which takes over the said business may
not commence on the same date. It may be much later. Hence, the profit of such business has
to be divided into two parts:
1. Profits from the date of the beginning of the accounting year of the business upto the date
of incorporation of the company, and
20
2. Profits from the date of incorporation of the company upto the closing of the accounting
year of the business.
The former is known as 'profits prior to Incorporation' and the latter as 'Profits after
Incorporation'. The whole amount of profits belongs to the company, But since legally it
cannot do any business before its incorporation, the profits earned by the company for the
period falling before the date of incorporation is regarded as capital profit and is transferred
to Capital Reserve. This amount can be utilised only for writing off the losses of capital
nature. They are not available for declaring dividend to shareholders. Thus you can
appreciate the need to calculate the profits prior to incorporation.
Steps to find out the profit or loss before and after incorporation are as follows:
1. Prepare one trading account for the whole period. Do not consider the date of
incorporation. Thus, one figure of gross profit for the entire period is arrived at.
2. The gross profit is apportioned between the two periods, prior to incorporation and post-
incorporation, on the basis of sales in the two periods.
3. The various expenses, which are shown in the profit and Loss Account, should be divided
between pre and post incorporation periods on some logical and appropriate basis.
They are given below:
Time Ratio:
21
(i) From the date of purchase to the date of incorporation (Pre-incorporation period) and
(ii) From the date of incorporation to the closing of the accounting year (Post-incorporation
period)
Sales Ratio:
In simple problems, where the sales is evenly spread over the whole period, the sales are
apportioned between pre and post-incorporation periods in the proportion of their time
periods. But in many cases, the sales are fluctuating from time to time. Therefore, the Sales
Ratio is found out by considering pre and post-incorporation periods on the basis of their
respective turnover. (Turnover-cum-time basis.)
Proforma of Statement of Profit, Pre and Post Incorporation
Basis of Pre – Post –
Particulars Amount Allocatio Incorporation Incorporation
n Dr Cr Dr Cr
1. Flat Limited was incorporated on 1st July 2019 to take over the running business of
Mr. Round with effect from 1st April 2019. The following profit and Loss Account for
the year ended 31st March 2020 was drawn up:
98500
The average monthly turnover from July 2019 onwards was double than that of the
previous months. Calculate the profit prior to incorporation.
Solution:
Time ratio:
Opening date: 1-4-2019
22
Closing date: 31-3-2020
Date of Incorporation (DOI): 1st July 2019
April May June July August Sept Oct Nov Dec Jan Feb March
(DOI)
Pre incorporation Post- incorporation period
period
9 months
3 months
Pre – Incorporation period: 1-4-2019 to 30-6-2019 = 3 months

Post- Incorporation period: 1-7-2019 to 31-3-2020 = 9 months
12 months
TR = 3 : 9
1:3
Calculation of sales ratio: pre – incorporation post – incorporation

April to June: (one unit each month) 3 --
July to March: (two unit each month) - 18
Sales ratio = 3 : 18
1:6
Statement of Profit, Pre and Post Incorporation

Basis of Pre – Incorporation Post – Incorporation
Particulars Amount
Allocation Dr Cr Dr Cr
By Gross Profit 98,500 SR – 1:6 14,071 84,429
To Commission 2,625 SR – 1:6 375 2,250
To Advertisement 5,250 SR – 1:6 750 4,500
To Director 9000
9,000 Post --
Remuneration
To Depreciation 2,800 TR – 1:3 700 2100
To Salaries 18,000 TR – 1:3 4500 13500
To Insurance 600 TR – 1:3 150 450
To Preliminary 700
700 Post --
Expenses
To Rent & Taxes 3,000 TR – 1:3 750 2,250
To Discount 350 SR – 1:6 50 300
To Bad Debts 1,250 SR – 1:6 179 1071
To Net Profit 54,925 6,617 48,308
98,500 14,071 84,429
23
2. Madhu Company limited was incorporated on 1-5-2018 to take over the business of
Sai Company limited a going concern from 1-1-2018. The profit and loss account for
year ended 31-12-2018 as follows:
Particulars Amount Particulars Amount

To Rent 12,000 By Gross Profit 1,55,000
To Insurance 3,000
To Electric charges 2,400
To Salaries 36,000
To Director fee 3,000
To Auditor fee 1,600
To Commission 6,000
To Advertisement 4,000
To Discount 3,500
To Office expense 7,500
To Carriage 3,000
To Bank charges 1,500
To Preliminary expenses 6,500
To Bad debts 2,000
To Interest on loans 3,000
To Net profit 60,000
1,55,000 1,55,000
The total turnover for the year ending 31-12-2018 was 5, 00,000 divided into 1,
50,000/- for the period up to1-5-2018 and 3, 50,000/- for the remaining period.
Ascertain the profit prior to incorporation of the company.
Solution:
Working note for time and sales ratio
Time ratio:
Year : 1-1-2018 to 31-12-2018
Date of incorporation: 1-5-2018
Jan Fed Mar Apr May Jun July Aug Sept Oct Nov Dec
(date of
incorporation
on 1-5-2018 )
Pre incorporation Post incorporation
4 months 8 months
Pre incorporation period: 1-1-2018 To 30-4-2018 = 4 months
Post incorporation period: 1-5-2018 To 31-12-2018 = 8 months
24
Total = 12 months
Time ratio = 4 : 8
1:2
Sales ratio:
Total sales = 5,00,000
Less: Pre incorporation period sales = 1,50,000
Post incorporation period sales = 3,50,000
Sales ratio = 1,50,000 : 3,50,000
= 3:7
Statement of profit Pre and Post Incorporation
Basic Pre – Post –

Particulars Amoun Approac Incorporation Incorporation
t h Debit Credit Debit Credit
By Gross Profit 1,55,00 SR - 3:7 -- 46,500 -- 1,08,50
To Rent 0 TR – 1:2 4,000 8,000 0
To Insurance 12,000 TR – 1:2 1,000 2,000
To Electric charges 3,000 TR – 1:2 800 1,600
To Salaries 2,400 TR – 1:2 12,000 24,000
To Director fee 36,000 POST -- 3,000
To Auditor fee 3,000 TR – 1:2 533 1,067
To Commission 1,600 SR – 3:7 1,800 4,200
To Advertisement 6,000 SR – 3:7 1,200 2,800
To Discount 4,000 SR – 3:7 1,050 2,450
To Office expense 3,500 TR – 1:2 2,500 5,000
To Carriage 7,500 SR – 3:7 900 2,100
To Bank charges 3,000 TR – 1:2 500 1,000
To Preliminary 1,500 POST -- 6,500
expenses 6,500 SR – 3:7 600 1,400
To Bad debts 2,000 TR – 1:2 1,000 2,000
To Interest on loans 3,000 18,617 41,383
To Net profit 60,000
(18,617 + 41,383)
1,55,00 46,500 46,500 1,08,50 1,08,50
0 0 0
25
Unit – II
Amalgamation, Absorption
Amalgamation is defined as the combination of one or more companies into a new entity. It
includes:
i. Two or more companies join to form a new company

ii. Absorption or blending of one by the other
Thereby, amalgamation includes absorption.

However, one should remember that Amalgamation as its name suggests, is nothing but two
companies becoming one. On the other hand, Absorption is the process in which the one
powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line
of activity or has some synergy in their operations. Again the companies may also combine
for diversification of activities or for expansion of services
Transfer or Company means the company which is amalgamated into another company;
while Transfer Company means the company into which the transfer or company is
amalgamated.
Existing companies A and B are wound up and a new Amalgamation

company C is formed to take over the businesses of A and B
Existing company A takes over the business of another Absorption

existing company B which is wound up
26
A New Company X is formed to take over the business of an External
existing company Y which is wound up. reconstruction
Types of Amalgamation
1. Amalgamation in the nature of merger:
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also
of the shareholders’ interests and the businesses of these companies. In other words, all assets
and liabilities of the transferor company become that of the transfer company. In this case,
the business of the transfer or company is intended to be carried on after the amalgamation.
There are no adjustments intended to be made to the book values. The other conditions that
need to be fulfilled include that the shareholders of the vendor company holding atleast 90%
face value of equity shares become the shareholders’ of the vendee company.
2. Amalgamation in the nature of purchase:
This method is considered when the conditions for the amalgamation in the nature of merger
are not satisfied. Through this method, one company is acquired by another, and thereby the
shareholders’ of the company which is acquired normally do not continue to have
proportionate share in the equity of the combined company or the business of the company
which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded
as the goodwill, while if it is less than the net assets value it is recorded as the capital
reserves.
The main objectives of amalgamation are:
1. Establishment and management charges are reduced.

2. Competitions among the amalgamating companies are eliminated.
3. Purchase of materials, in bulk, can be made at reduced price.
4. Production can be carried on in large scale.
5. Capital amount is increased by combination of companies.
6. Manufactured products can be easily marketed.
7. All the advantages of combination are available.
8. Avoiding duplication of expenditure and reduction in cost.
9. Research and development facilities are increased.
10. Price maintenance can be regulated.
27
Prior to 1st April 1995, the accounting procedures for amalgamation were under three
different treatment, that is, Amalgamation, Absorption and Reconstruction of companies. The
Institute of Chartered Accountants of India introduced a new Accounting Standard known as
“Accounting Standard – 14” (AS-14) from 1.4.1995 which over-ruled the old system of
accounting. This change is of mandatory nature.
Purchase Consideration
Purchase Consideration refers to the consideration payable by the purchasing company to the
vendor company for taking over the assets and liabilities of Vendor Company.
Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the
shares and other securities issued and the payment made in the form of ach or other assets by
the transferee company to the shareholders of the transferor company”. Although, purchase
consideration refers to total payment made by purchasing company to the shareholders of
Vendor Company, its calculation could be in different methods, as explained below:
1. Lump sum method
2. Net Assets method
3. Net Payment Method
1. 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.
Example: A purchasing company agreed to take over a business of selling company for Rs.
5, 00,000. In such a case, the purchase consideration is Rs. 5,00,000. No calculations are
needed.
2. Net Worth or Net Assets Method:
Under this method, purchase consideration is calculated by adding up the values of various
assets taken over by the purchasing company and then deducting there from the values of
various liabilities taken over by the purchasing company. The values of assets and liabilities
for the purpose of calculation of purchase consideration are those which are agreed upon
between the purchasing company and the vendor company and not the values at which the
various assets and liabilities appear in the Balance Sheet of the vendor company.
Particulars Rs.
Agreed value of assets taken over XXX
Less: Agreed value of Liabilities taken over XXX

Purchase Consideration XXX
The following relevant points are to be noted while ascertaining the purchase price
under this method:
(i) If the transferee company agrees to take over all the assets of the transferor company, it
28
would mean inclusive of cash and Bank balances.
(ii) The term all assets, however, does not include fictitious assets, like Debit balance of
Profit and Loss Account, Preliminary Expenses Account, Discount and other expenses on
issue of shares and Debentures, Advertising Expenses Account etc.
(iii) Any specific asset, not taken over by transferee company, should be ignored while
computing the purchase price,
(iv) If there is any goodwill, pre-paid expenses etc. the same are to be included in the assets
taken over unless otherwise stated,
(v) The term liabilities will always signify all liabilities to third parties. Trade liabilities are
those incurred for the purchase of goods such as Trade Creditors or Bills Payable,
(vi) Other liabilities like Bank Overdrafts, Tax payable, Outstanding expenses etc. are not a
part of trade liabilities.
(vii) Liabilities do not include accumulated or undistributed profits like, General Reserve,
Securities Premium, Workmen Accident Fund, Insurance Fund, Capital Reserve, Dividend
Equalisation Fund etc.
3. Net Payment Method:

The agreement between selling company and purchasing company may specify the amount
payable to the share-holders of the selling company in the form of cash or shares or
debentures in purchasing company. AS – 14 states that consideration for amalgamation
means the aggregate of shares and other securities issued and the payment made in the form
of cash or other assets by transferee company to the share-holders of transferor company.
Thus, under net payment method purchase consideration is the total of shares, debentures and
cash which are to be paid for claims of Equity and Preference share-holders of the transferor
company.
Particulars Rs.
Purchase consideration received in cash XXX
Purchase consideration received in shares XXX

Purchase Consideration XXX
The following points are to be noted while ascertaining the purchase price under net payment
method:
(i) The assets and liabilities taken over by the transferee company and the values at which
they are taken over are not relevant to compute the purchase consideration.
29
(ii) All payments agreed upon should be added, whether it is for equity shareholders or
preference share-holders.
(iii) If any liability is taken over by purchasing company to be discharged later on, such
amount should not be deducted or added while computing purchase consideration.
(iv) When liabilities are not taken over by the transferee company, they are neither added nor
deducted while computing consideration.
(v) Any payment made by Transferee Company to some other party on behalf of Transferor
Company are to be ignored.
Entries in the Books of New Company (Purchaser)
Date Particulars LF Debit Credit

1 Business purchase A/c Dr xxx
To A A/c xxx
To B A/c xxx
(Being business purchased)
2 Assets A/c Dr xxx
Goodwill (bal.fig) xxx
To Liabilities A/c xxx

To Business Purchase A/c xxx
To Capital Reserve (bal.fig) xxx
(Being assets and liabilities are taken over)
3 A A/c Dr xxx
B A/c Dr xxx
To Share capital A/c xxx

To Share Premium A/c xxx
(Being purchase consideration received)
Format of some Ledger Accounts in the books of Selling (Vendor) Company
1. Realisation Account
Dr Cr
To Sundry Assets A/c xxx By Sundry Liabilities xxx
(Assets taken over) (Liability taken over)
30
To Cash / Bank By Purchasing Co. A/c
(Liquidation/Realization xxx (Purchase Consideration Due) xxx
Expenses met)
By Assets and Liability
To Assets and Liability (paid less than book value) xxx
(paid more than book value) xxx
By Shareholders A/c
To Shareholders A/c (Loss on Realisation
(Profit on Realisation xxx transferred, if any) xxx
transferred)
xxx xxx
2. Shareholders Account
Dr Cr
To Non-Transferable assets xxx By Non-Transferable liabilities xxx
P & L A/c Share capital
Preliminary expenses Reserves and surplus
Loss on issue of share P & L a/c
Loss on issue of debenture Share premium
Reserve fund
To Cash (PC in cash - Payment) xxx DEF
To Share xxx
To Realization a/c xxx By Realization xxx
(Profit)
(Loss)
xxx xxx
3. New Company Account

Dr Cr
To Realization (purchase xxx By cash xxx
consideration ) By shares xxx
xxx xxx
31
Examples: Amalgamation – (Net asset method)
1. Given below are the balance sheet on 31-3-2010 of Ram limited and Krishna
limited which are amalgamated to form a new company Ramkrishna Limited.
Liabilities Ram Krishna Assets Ram Krishna

Share capital@100/- 1,00,000 2,00,000 Goodwill -- 40,000
Capital reserve 50,000 10,000 Building 30,000 25,000
P & L A/c 40,000 Nil Plant 60,000 80,000
General reserve 10,000 Nil Furniture 5,000 10,000
Loan’s 80,000 60,000 Stock 1,00,000 1,40,000
Other liabilities 20,000 80,000 Debtors 1,04,000 13,000
Bank 1,000 2,000
P&L A/c - 40,000
3,00,000 3,50,000 3,00,000 3,50,000
The share holders in amalgamated company are to be allocated fully paid equity share
in Ramakrishna Limited are there consideration at 10/- each. New company taken all
assets and liabilities at book value except goodwill and P&L a/c of Krishna limited.
Show balance sheet and journals in the books of Ramakrishna Limited.
Solution.
Purchase consideration of Rama Limited:
Particulars Amount
Building 30,000
Plant 60,000
Furniture 5,000
Stock 1,00,000
Debtors 1,04,000
Bank 1,000
Less:
Loan’s 80,000
Other liabilities 20,000 1,00,000
Purchase consideration 2,00,000
purchase consideration
Number of share =
share value
2,00,000
= 10
32
= 20,000 shares
Purchase consideration (PC) of Krishna Limited:
Particulars Amount
Building 25,000
Plant 80,000
Furniture 10,000
Stock 1,40,000
Debtors 13,000
Bank 2,000
Less:
Loan’s 60,000
Other liabilities 80,000 1,40,000
Purchase consideration 1,30,000

purchase consideration
Number of share =
share value
1,30,000
= 10
= 13,000 shares
Total Purchase consideration = 2,00,000 + 1,30,000 = 3,30,000
Journals in the books of Ramakrishna limited

1 Business purchase A/c Dr 3,30,000
To Ram Limited A/c 2,00,000
To Krishna Limited A/c 1,30,000
(Being business purchased and purchase
consideration payable)
2 Building A/c Dr 55,000
Plant A/c Dr 1,40,000
Furniture A/c Dr 15,000
Stock A/c Dr 2,40,000
Debtors A/c Dr 1,17,000
Bank A/c Dr 3,000
To Loan’s A/c 1.40,000

To Other liabilities A/c 1,00,000
To Business Purchased A/c 3,30,000
(Being assets and liabilities taken over)
3 Ram Limited A/c Dr 2,00,000
33
Krishna Limited A/c Dr 1,30,000
To share capital A/c 3,30,000
(being purchase consideration paid by
way of 10/- per share)
Balance sheet of Ramakrishna limited

Share capital @10/- 3,30,000 Building 55,000
Loan’s 1,40,000 Plant 1,40,000
Other liabilities 1,00,000 Furniture 15,000
Stock 2,40,000
Debtors 1,17,000
Bank 3,000
5,70,000 5,70,000
Amalgamation – (Net payment method)
2. Anil and Balu limited amalgamated and newly registered as AB limited registered
at authorized capital of RS. 25,00,000/- @10 each.
Liabilities Anil Balu Assets Anil Balu

Share capital @10/- 15,00,00 3,90,000 Goodwill 1,00,000 1,00,000
Share premium 0 -- Buildings 4,50,000 1,30,000
Reserve 1500 -- Machinery 3,50,000 1,10,000
P&L A/c 1,00,000 -- Stock 6,82,760 1,52,000
Debenture 1,68,650 70,000 Debtors 2,58,500 95,000
Creditors 3,50,000 2,57,000 Bank 3,36,740 --
Bank OD 57,850 6,000 P&L A/c -- 1,36,000
---
21,78,00 7,83,000 21,78,00 7,83,000

0 0
Agreement with Anil:
1. New company issued 6 share for every 5 shares held.
2. Rs. 10,000 paid in cash
3. New company issued 8% debenture to Anil limited in exchange of old
debenture for the same value
4. New company taken at book value of assets and liabilities
Agreement with Balu:
1. New company issued 1 share for every 3 shares held.
2. Rs. 5,000 paid in cash
34
3. New company issued 8% debenture to Anil limited in exchange of old
debenture for the same value
4. New company taken at book value of assets and liabilities
Solution:
A limited Purchase consideration
1) PC in shares:
15,00,000
Total shares of A limited = = 1,50,000shares
10
New company issued 6 share for every 5 shares held
6
= 1,50,000 × = 1,80,000 shares
5
1,80,000 shares @ 10/- each 18,00,000
2) PC in Cash :
Cash paid 10,000
Purchase consideration = 21,60,000
B limited Purchase consideration
1) PC in shares:
3,90,000
Total shares of A limited = = 39,000shares
10
New company issued 1 share for every 3 shares held
1
= 39,000 × = 13,000 shares
3
13,000 shares @ 10/- each 1,30,000
2) PC in Cash :
Cash paid 5,000
8% Debentures 70,000
Total Purchase Consideration = 21,60,000+2,05,000
= 23,65,000
Journals in the books of AB limited

35
To Anil Limited A/c 0 21,60,000
To Balu Limited A/c 2,05,000
(Being business purchased and
purchase consideration payable)
2 Building A/c Dr 5,80,000
Plant A/c Dr 4,60,000
Stock A/c Dr 8,34,760
Debtors A/c Dr 3,53,500
Bank A/c Dr 3,36,740
Goodwill A/c (bal.fig) Dr 1,20,850
To Creditors A/c 3,14,850

To Bank OD A/c 6,000
(Being assets and liabilities taken
over)
3 Anil Limited A/c Dr 21,60,00
Balu Limited A/c Dr 0
To share capital A/c 2,05,000 23,65,000
Balance sheet of AB limited

Share capital @10/- 23,65,000 Building 5,80,000
Creditors 3,14,850 Plant 4,60,000
Bank OD 6,000 Stock 8,34,760
Debtors 3,53,500
Bank 3,36,740
(-) paid to
Anil 10,000
3,26,740
(-) paid to
Balu 5,000 3,21,740
Goodwill 1,20,850
26,70,850 26,70,850
Amalgamation – (Lum sum method)
Raju and Ravi limited balance sheet as follows:
Liabilities Raju Ravi Assets Raju Ravi
36
Share capital @ 100/- 3,00,000 5,00,00 Sundry assets 4,50,00 6,000,000
each 1,00,000 0 Goodwill 0 ---
Creditors 75,000 2,00,00 Preliminary 50,000
Reserve 25,00 0 expenses 20,000
Pension fund -- P&L A/c 80,000
--
5,00,000 7,00,00 5,00,00 7,00,000
0 0
Raju and Ravi limited liquidate and newly registered as Raviraju limited. New
company of all assets and liabilities taken at book value. New company paid
4,50,000/- to Raju limited and 6,00,000/- to Ravi limited as purchase
consideration by way of 100/- each. Prepare journal and new balance sheet of
Raviraju limited.
Solution:
Purchase consideration of Raju Limited = 4,50,000
Purchase consideration of Ravi Limited = 6,00,000
Total purchase consideration = 10,50,000
Journals in the books of Raviraju limited

To Raju Limited A/c 0 4,50,000
To Ravi Limited A/c 6,00,000
(Being business purchased and
purchase consideration payable)
2 Sundry assets A/c Dr 10,50,00
Goodwill A/c (bal.fig) Dr 0
(50,000+2,75,000) 3,25,000
To Creditors A/c 1,00,000
To Pension fund A/c 25,000
(Being assets and liabilities taken
over)
3 Raju Limited A/c Dr 4,50,000
Ravi Limited A/c Dr 6,00,000
37
Balance sheet of AB limited

Share capital @10/- 10,50,000 Sundry assets 10,50,000
Creditors 1,00,000 Goodwill 3,25,000
Pension fund 25,000
13,75,000 13,75,000
Absorption
Balance sheet of X limited as follows:

20,000 shares @ 10/- each 2,00,000 Building 1,00,000
Debentures 1,00,000 Machinery 1,50,000
Reserve 25,000 Working progress 30,000
Dividend equalization fund 20,000 Stock’ 60,000
Profit and loss a/c 5,100 Furniture 2,500
Creditors 30,000 Bank 12,500
Debtors 25,000
Cash 100
3,80,100 3,80,100
On 1-1-2012 the above company is absorbed by the A limited. A limited paid
purchase consideration to X limited as follows:
1. A cash payment for redemption of debentures 5% premium

2. A cash payment to share holders @ 7/- per share
3. An issue of one equity share @5/- each, 8/- market value
4. New company taken assets and liabilities taken at book value.
5. Realization expenses 500/- paid X limited.
Prepare journals ledges in the books of X limited and journals and balance sheet in the
books of A limited.
Solution:
Accounts in the books of A limited.
Purchase consideration :
1. PC in cash
Share paid in cash 7/- each (20,000 x 7) 1,40,000
Debentures 1,00,000
Premium on debenture 5% (1,00,000x5/100) 5,000
38
2. PC in shares:
20,000 shares @ 5/- each (20,000x5) 1,00,000
Premium 3/- (8-5) (20,000x3) 60,000
Journal in the books of A limited

To X limited A/c 4,05,000
(Being business purchased and purchase
consideration payable)
2 Building A/c Dr 1,00,000
Machinery A/c Dr 1,50,000
Working progress A/c Dr 30,000
Stock A/c Dr 60,000
Furniture A/c Dr 2,500
Bank A/c Dr 12,500
Debtors A/c Dr 25,000
Cash A/c Dr 100
Goodwill A/c (bal.fig) Dr 54,900
To Creditors A/c 30,000

(Being assets and liabilities taken over)
3 X Limited A/c Dr 4,05,000
39
To cash A/c 2,45,000
To share premium A/c 60,000
Ledgers in the books of X limited
Realization A/c
To Building 1,00,000 By Creditors 30,000
To Machinery 1,50,000 By A limited 4,05,000
To Working progress 30,000
To Stock’ 60,000
To Furniture 2,500
To Bank 12,500
To Debtors 25,000
To Cash 100
To expenses 500
To Debenture premium 5,000
To Shareholder (profit) 49,400
4,35,000 4,35,000
Shareholders A/c

To Cash 1,39,500 By 20,000 shares @ 10/- each 2,00,000
(1,40,000-500)
To Share 1,00,000 By Reserve 25,000
To Premium 60,000 By Dividend equalization fund 20,000
By Profit and loss a/c 5,100
By Realization 49,400
2,99,500 2,99,500
A limited A/c
Particulars Amount Particular Amoun

s t
To realization 4,05,000 By share 1,60,00
0
By cash 2,45,00
0
4,05,000 4,05,00
0
40
UNIT – III
Reconstruction
When a company is suffering loss for several past years and suffering from financial
difficulties, it may go for reconstruction. In other words, when a company's balance sheet
shows huge accumulated losses, heavy fictitious and intangible assets or is in financial
difficulties or is to over capitalized, and then the process of reconstruction is restored.
Objectives:
1. To generate surplus for writing off accumulated losses & writing down overstated assets.
2. To generate cash for working capital needs, replacement of assets, to add balancing
equipment’s, modernise plant & machinery etc.
A company can be reconstructed in any of the two ways. These are:
(i) ‘External’ Reconstruction and
(ii) ‘Internal’ Reconstruction.
41
1. External reconstruction
When a company is suffering losses for the past several years and facing financial crisis, the company
can sell its business to another newly formed company. Actually, the new company is formed to take
over the assets and liabilities of the old company. This process is called external reconstruction. In other
words, external reconstruction refers to the sale of the business of existing company to another
company formed for the purposed. In external reconstruction, one company is liquidated and another
new company is formed. The liquidated company is called "Vendor Company" and the new company is
called "Purchasing Company". Shareholders of vendor company become the shareholders of purchasing
company.
2. Internal Reconstruction
It is an arrangement made by the companies whereby the claims of shareholders, debenture holders,
creditors and other liabilities are altered/ reduced, so that the accumulated loss are written off, asset are
valued at its fair value and the balance sheet shows the true and fair view of the financial statement
• Forms of internal reconstruction
i. Re-organization or alteration of share capital
ii. Reduction of share capital and other liabilities
• Objectives of internal reconstruction
i. To resolve the problem of over-capitalization/ huge accumulated losses/ over valuation of assets
ii. When the capital structure of a company is complex and is required to make it simple
iii. When change is required in the face value of shares of the company
• Meaning of capital reduction account
It involves sacrifice on the part of shareholders, debenture holders and creditors. The amount sacrificed
by them shall be utilized in writing off of losses and to bring down the assets to their real values. An
account called capital Reduction also called Internal Reconstruction Account or capital Reorganization
Account is opened for this purpose. Amounts sacrificed by various parties are credited to this account.
It is generally resorted to write of the past accumulated losses of the company
BASIS FOR INTERNAL EXTERNAL

COMPARISON RECONSTRUCTION RECONSTRUCTION
Meaning Internal reconstruction refers to the External reconstruction is one in

method of corporate restructuring which the company undergoing
wherein existing company is not reconstruction is liquidated to take
liquidated to form a new one. over the business of existing
company.
New company No new company is formed. New company is formed.
Use of specific Balance Sheet of the company No specific terms are used in the
terms in Balance contains "And Reduced". Balance sheet.
Sheet
42
Capital reduction Capital is reduced and the external No reduction in the capital
liability holders waive their claims.
Approval of court Approval of court is must. No approval of court is required.
Transfer of Assets No such transfer takes place. Assets and liabilities of existing
and Liabilities company are transferred to the new
company.
Accounting procedure for Capital Reduction:
Date Particulars LF debit Credit

1 To reduce equity capital : xxx
Equity Share Capital A/c Dr (old value)
(new value) To Equity Share Capital A/c xxx
(balance) To Capital Reduction A/c xxx
(Being equity share reduced from Rs. xxx
to xx/- each)
2 To reduce preference capital: xxx
Pref., Share Capital A/c Dr (old value)
(new value) To Pref. Share Capital A/c xxx
(Being preference share reduced from Rs.
xxx to xx/- each)
3 To reduce debenture: xxx
Debenture A/c Dr (old value)
(new value) To Debenture A/c xxx
(Being debenture reduced from Rs. xxx to
xx/- each)
4 To decrease liability:
Liability A/c Dr (Reduced value) xxx
To Capital reduction A/c xxx
(Being liability reduced)
5 To increase liability:
Capital reduction A/c Dr (Increased value) xxx
To Liability A/c xxx
(Being liability increased)
6 To increase assets:
Assets A/c Dr (Increased value) xxx
To Capital reduction A/c xxx
(Being asset increased)
7 Entry for utilising the amount of capital
reduction to w/o accumulated losses.
Capital Reduction A/c Dr xxx
To Profit & Loss A/c xxx

Co To Preliminary Expenses A/c xxx
mp
ulso 43
ry
To Discount on Shares xxx
/Debentures A/c
To Goodwill A/c xxx
To Trade Assets A/c xxx
To Patents/Copy rights xxx
To Assets A/c xxx
To Capital Reserve A/c (bal. fig) xxx
(Being various assets written of out of
capital reduction)
1. The following balance sheet of Kumar Limited as on 31-12-2015 as follows:

LIABILITIES AMOUNT ASSETS AMOUNT
Equity share capital @10/- each 1200000 Goodwill 200000
12% Preference share capital @100/- 1200000 Building 1200000
each
10% Debentures 800000 Machinery 1000000
Outstanding interest on debentures 80000 Furniture 300000
Bank overdraft 60000 Patents 150000
Creditors 300000 Stocks 100000
Debtors 130000
Cash 60000
Profit and loss a/c 500000
3640000 3640000
Scheme of reconstruction:
1. The 12% preference shares are to be converted into same of number of 15% preference
shares Rs. 75/- per share.
2. The equity share are to be converted into same number of shares of RS. 5/- each fully paid.
3. Debenture holders agree to forego interest outstanding subject to the condition that the
rate to be increased to 15%.
4. Creditors agree to forego 25% of their claim.
5. Building is valued at Rs. 15,00,000/-
6. The amount does made available utilized to write off all intangible and fictitious assets.
7. Reduce the value of machinery by 40%
You are required to prepare reconstruction balance sheet.
Solution:
Entries in the books of Kumar limited

12% preference share capital A/ Dr 12,00,000
To 15% Preference share capital A/c 9,00,000
To Capital reduction A/c 3,00,000
44
(being preference value reduced to 100/- to 75/- per share)
Equity share capital A/c Dr 12,00,000
To Equity share capital A/c 6,00,000
(being equity share value reduced to 10/- to 5/- per share)
Outstanding interest on debentures A/c Dr 80,000
To Capital reduction A/c 80,000
(being outstanding interest on debenture is written off)
10% Debentures A/c Dr 8,00,000
To 15% Debentures A/c 8,00,000
(being interest rate changed from 10% to 15% with same
value)
Creditors A/c Dr 75,000
To Capital reduction A/c 75,000
(being 25% of creditors written off)
Building A/c Dr 3,00,000
(being building is appreciated by 3,00,000)
Capital reduction A/c Dr 13,55,000
To Goodwill A/c 2,00,000
To Patents A/c 1,50,000
To Profit and Loss A/c. 5,00,000
To Machinery A/c 4,00,000
To Capital reserve A/c 1,05,000
(being various loss written off out of capital reduction A/c)
Reconstructed balance sheet
LIABILITIES AMOUN ASSETS AMOUN

T T
Equity share capital @5/- each 6,00,000 Building 15,00,000
15% Preference share capital 9,00,000 Machinery 6,00,000
@75/- each
15% Debentures 8,00,000 Furniture 3,00,000
Bank overdraft 60,000 Stocks 1,00,000
Creditors 2,25,000 Debtors 1,30,000
Capital reserve 1,05,000 Cash 60,000
2,69,000 2,69,000
Modern accounting rules
PARTICULARS DEBIT CREDIT

Assets ↑ ↓
45
Liabilities ↓ ↑
Income/revenue ↓ ↑
Expenses/loss ↑ ↓
Equity/capital ↓ ↑
Unit - IV
Liquidation
Meaning:
Liquidation is the process of selling off assets to repay creditors and distributing the remaining assets to
the owners. In other words, liquidation is the process of closing a business, paying off creditors, and
giving the investors whatever is left over.
“The liquidation or winding up of a company is the process whereby its life is ended and its property is
administered for the benefit of its creditors and members. An Administrator, called a liquidator, is
appointed and he takes control of the company, collects its assets, pays its debts and finally distributes
any surplus among the members in accordance with their rights.”
Liquidator:
A liquidator is the officer appointed when a company goes into winding-up or liquidation who has
responsibility for collecting in all of the assets under such circumstances of the company and settling all
claims against the company before putting the company into dissolution. Liquidator is a person
officially appointed to 'liquidate' a company or firm. His duty is to ascertain and settle the liabilities of a
company or a firm. If there are any surplus assets, they are distributed to the contributories.
Duties of Liquidator in Winding up a Company
46
1. To conduct proceedings in winding up:
The liquidator shall conduct the proceedings in winding up the company and perform such duties in
reference thereto as the court may impose. The acts of the liquidator shall be valid, notwithstanding any
defect that may afterwards be discovered in his appointment or qualifications (Sec. 457).
2. To submit preliminary report:
Immediately on the receipt of the Statement of Affairs from the directors and within six months after
the date of the winding up order, liquidator shall submit to the court a preliminary report with regard to
capital issued, subscribed and paid, the estimated amount of assets and liabilities, causes of the failure
of the company and whether in his opinion, fraud and punishable offence have been committed by
directors and other officers of the company (Sec. 455).
3. Collection and distribution of company’s property:
Immediately after the winding up order is made by the court, all the property and assets of the company
shall vest in the liquidator. He shall have the rights to enjoy control on all the properties of the
company.
He shall collect all the assets of the company, prepare schedules of creditors and contributories and
distribute proportionately the total realisations made by him amongst the creditors (Sec. 456).
4. To obey the order of the court:
Throughout the performance of his duties, Official Liquidator shall not only obey the orders and carry
out the advice and directions of the court but shall also care to see that his actions do not come out to be
ultra vires the provisions of the company law. He shall carry out his duties most honestly and faithfully.
He shall also take into account the directions given to him by the resolutions of the creditors or
contributories.
5. Meetings of creditors and contributories:
The liquidator may call the meetings of creditors and contributories whenever he may deem fit for the
purposes of ascertaining their wishes. But he shall have to summon such meetings at such times as the
creditors or contributories may by resolution direct or whenever requested in writing to do so [Sec. 460
(3)].
6. To maintain proper books:
The liquidator shall keep, in the manner prescribed, proper books in which he shall cause entries or
minutes to be made of the proceedings at meetings and of such other matters as may be prescribed. Any
creditor or contributory may, subject to the control of the court, inspect any books personally or by his
agent (Sec. 461).
7. To account for money received by him:
Official Liquidator shall pay all cash collections made by him into the public account of India in the
Reserve Bank of India. He shall present to the court twice a year an account of his receipts and
payments as liquidator.
The account shall be in prescribed form and shall also be verified by a declaration in the prescribed
form. The court shall cause the account to be audited in a manner as it thinks fit
8. Appointment of committee of inspection:
47
The liquidator will have to appoint a Committee of Inspection to assist him if the court so directs. He
should convene a meeting of the creditors within two months from the date of the court’s direction for
the purpose of determining who are to be the members of the committee.
He should also within fourteen days of the creditors’ meeting, convene a meeting of the contributories
to consider the decision of the creditors’ meeting with respect to the membership of the committee. In
case the contributories do not accept die decision of the creditors’ meeting in its entirety, the liquidator
should apply to the court for directions regarding the composition of the committee (Sec. 464).
9. Information as to pending liquidation:
If the winding up of a company is not completed within one year after its commencement, the liquidator
shall within two months of the expiry of such year and thereafter until the winding up is concluded at
intervals of not more than one year, file a statement in the prescribed form and containing the
prescribed particulars regarding proceedings in and position of liquidation. The statement should be
duly audited by a person qualified to act as an auditor of the company.
Modes of Winding Up
The modes of winding up may be discussed under the following three heads, namely:-
1. Compulsory winding up by the court.
2. Voluntary winding up.
3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.
1. Compulsory Winding Up by the Court:
Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of
the Companies Act lays down the circumstances under which a Company may be compulsorily wound
up.
(a) If the Company has by special resolution, resolved that the Company may be wound up by the court.
(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory
meeting.
(c) If the Company does not commence its business within a year from its incorporation or suspends it
for a whole year.
(d) If the number of members is reduced, in the case of a public Company below seven, and in the case
of a private company below two.
(e) If the Company is unable to pay its debts.
(f) If the court is of the opinion that it is just and equitable that the company should be wound up.
2. Voluntary Winding Up:
A voluntary winding up occurs without the intervention of the court. Here the Company and its
creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:
(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the
Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution
to wind up voluntarily; or
48
(b) The passing of a special resolution by the Company to wind up voluntarily.
3. Winding Up Subject to Supervision of the Court:
Windings up with the intervention of the court are ordered where the voluntary winding up has already
commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A
court may approve a resolution passed by the Company for voluntary winding up but the winding up
should continue under the supervision of the court.
The court will issue such an order only under the following circumstances:
(a) If the resolution for winding up was obtained by fraud by the company; or
(b) If the rules pertaining to winding up are not being properly adhered to; or
(c) If the liquidator is found to be prejudicial or is negligent in releasing the assets of the company.
The Court may exercise the same powers as it has in the case of compulsory winding up under the order
of the court.
Liquidator Final Statement Account
Receipts Amount Payments Amount
To Surplus from secured creditors xxx By Secured creditors

xxx
To Assets Realised By Legal Expenses xxx
 Marketable Securities
 Bills Receivables By Liquidator Remuneration
 Trade Debtors  on assets realised
 Loans and Advances  on pay. to Pref. creditors
xxx
 Stock in trade  on pay. to unsecure creditors
 Work in Progress  on share holders
 Land & Building
By Liquidation expenses
 Plant & Machinery
(OR) xxx
 Furniture and fixtures Winding up expenses
 Patents, trademarks xxx
 Investments By Preferential Creditors xxx
By Debenture holders xxx
To Cash / Bank xxx
By Unsecured Creditors xxx
49
xxx By Preferential Shareholders
To Contributions made by contributors
 arrears of dividend xxx
 current dividend
By Equity Shareholders xxx
xxx xxx
Receipt Side of Liquidator's Final Statement:
i. Assets Realized: The liquidator would collect the amount by selling the assets of liquidating
company. Such an amount received from sold out of assets comes under this heading.
ii. Surplus from securities: It is related with secured creditors. The secured creditors provide the loan
against the security. In the treatment of realization from such security, there are possibilities of two
situations:
a. Only one surplus amount sent by the creditors.
b. Whole securities realized by the liquidator and later the creditors are paid off.
In the condition a., the liquidator will receive remuneration on the net amount realized. On the condition
b., the liquidator would receive the remuneration on the entire amount of securities realized.
iii. Collection of unpaid calls: The liquidator can collect the unpaid calls if there is a shortage of
amount to discharge the liability. These unpaid calls are collected from shareholders. Similarly, if there
are any due calls, in that case the liquidator can also make calls and can collect money from them.
Payment Side of Liquidator's Final Statement
i. Secured Creditors:
While raising a long term debt, a company may mortgage its property as a security to the debt provider.
Such a debt comes under secured creditors. In other words, the secured creditor is such a loan which has
been taken from the loan provider on collateral securities.
ii. Liquidator’s Remuneration:
The liquidator normally gets the remuneration in the form of commission which is usually based as a
percentage on the value of assets realized and amount paid to unsecured creditors. In calculating the
liquidator’s remuneration, the following points may be noted:
(a) On assets realized: The term ‘assets realised’ does not include cash and bank balances as the
liquidator does not realize cash and bank balances. However, in some cases cash and bank balances are
given in the list of assets realized by the liquidator, then the remuneration has to be calculated even on
cash and bank balances.
Some assets are given as security to secured creditors. If the assets given as security are sold by the
liquidator he will get remuneration on the securities sold by him. If the securities are sold by the
creditors and the surplus after deducting the amount due to them is given to the liquidator, then
remuneration is given to the liquidator on such surplus from securities.
(b) On amount paid to unsecured creditors: Unless otherwise stated, for the purpose of calculating
liquidator’s remuneration, the term unsecured creditors includes preferential creditors as basically they
are also unsecured creditors. The Commission is calculated as follows:
50
 If the amount available is sufficient to pay unsecured creditors
Rate
Remuneration=Preferential Creditors+Unsecured Creditors ×
100
 If the amount available is insufficient to pay Unsecured Creditors in full
Rate
Remuneration=Amount available UnsecuredCreditors ×
100+ Rate .
Calculation of liquidator remuneration
Particulars Amount
Total Assets realized xxx
Less:
Legal expenses xxx
Remuneration on Preferential creditors xxx
Liquidation charges xxx
Preferential creditors xxx
Debentures xxx xxx
Amount available Unsecured Creditors xxx
Note: In some cases, the remuneration is paid on amount paid to shareholders.
Rate
Remuneration=Amount available before paying shareholders×
100+ Rate .
ii. Liquidation Costs: It is an expense incurred by the liquidator while liquidating the company. It
includes liquidator's remuneration and commission and any legal expenses on the process of liquidation.
iii. Preferential Creditors: It is placed in third position in order of payment. It includes the amount
payable to government and employees. Taxes, Fees, Electricity charges, Water supply charge etc. are
the examples of payable due to government. Similarly, salaries and wages, provident fund, gratuity and
other amount payable to the employee are some of the examples of due to employees.
iv. Debenture Holders: It includes the amount of payable to debenture holders with outstanding
interest therein. The debenture interest should be paid up to the date of liquidation if it is insolvent and
if the company is solvent, the interest on debentures will be paid up to the date of payment.
v. Unsecured Creditors: If the loan is raised by a company without any collateral securities, it is
known as unsecured creditors. Bank overdraft, creditors, outstanding expenses etc. are the examples of
unsecured creditors.
vi. Payment Made To Shareholders: After paying all the above dues, the turn goes towards the
shareholders. Among the shareholders, the first priority must be given to preference shareholders. The
preference shareholders will get the principal plus arrear of dividend. The last party to receive anything
left, after the payment of preference shareholders, is equity shareholders.
51
Unit - V
ACCOUNTING STANDARDS
Meaning
Accounting standards are the written statements consisting of rules and guidelines, issued by the
accounting institutions, for the preparation of uniform and consistent financial statements and also for
other disclosures affecting the different users of accounting information.
Accounting standards lay down the terms and conditions of accounting policies and practices by way of
codes, guidelines and adjustments for making the interpretation of the items appearing in the financial
statements easy and even their treatment in the books of account.
Nature of Accounting Standards:
On the basis of forgoing discussion we can say that accounting standards are guide, dictator, service
provider and harmonizer in the field of accounting process.
(i) Serve as a guide to the accountants:
52
Accounting standards serve the accountants as a guide in the accounting process. They provide basis on
which accounts are prepared. For example, they provide the method of valuation of inventories.
(ii) Act as a dictator:
Accounting standards act as a dictator in the field of accounting. Like a dictator, in some areas
accountants have no choice of their own but to opt for practices other than those stated in the
accounting standards. For example, Cash Flow Statement should be prepared in the format prescribed
by accounting standard.
(iii) Serve as a service provider:
Accounting standards comprise the scope of accounting by defining certain terms, presenting the
accounting issues, specifying standards, explaining numerous disclosures and implementation date.
Thus, accounting standards are descriptive in nature and serve as a service provider.
(iv) Act as a harmonizer:
Accounting standards are not biased and bring uniformity in accounting methods. They remove the
effect of diverse accounting practices and policies. On many occasions, accounting standards develop
and provide solutions to specific accounting issues. It is thus clear that whenever there is any conflict on
accounting issues, accounting standards act as harmonizer and facilitate solutions for accountants.
Objectives of Accounting Standards:
In earlier days, accounting was just used for recording business transactions of financial nature. Its main
emphasis now lies on providing accounting information in the process of decision making.
For the following purposes, accounting standards are needed:
(i) For bringing uniformity in accounting methods:
Accounting standards are required to bring uniformity in accounting methods by proposing standard
treatments to the accounting issue. For example, AS-6(Revised) states the methods for depreciation
accounting.
(ii) For improving the reliability of the financial statements:
Accounting is a language of business. There are many users of the information provided by accountants
who take various decisions relating to their field just on the basis of information contained in financial
statements. In this connection, it is necessary that the financial statements should show true and fair
view of the business concern. Accounting standards when used give a sense of faith and reliability to
various users.
They also help the potential users of the information contained in the financial statements by disclosure
norms which make it easy even for a layman to interpret the data. Accounting standards provide a
concrete theory base to the process of accounting. They provide uniformity in accounting which makes
the financial statements of different business units, for different years comparable and again facilitate
decision making.
(iii) Simplify the accounting information:
Accounting standards prevent the users from reaching any misleading conclusions and make the
financial data simpler for everyone. For example, AS-3 (Revised) clearly classifies the flows of cash in
terms of ‘operating activities’, ‘investing activities’ and ‘financing activities’.
(iv) Prevents frauds and manipulations:
53
Accounting standards prevent manipulation of data by the management and others. By codifying the
accounting methods, frauds and manipulations can be minimized.
(v) Helps auditors:
Accounting standards lay down the terms and conditions for accounting policies and practices by way
of codes, guidelines and adjustments for making and interpreting the items appearing in the financial
statements. Thus, these terms, policies and guidelines etc. become the basis for auditing the books of
accounts.
List of ICAI’s Mandatory Accounting Standards (AS 1~29)
List of Mandatory Accounting Standards of ICAI (as on 1 July 2017 and onwards), is as under:
1. AS 1 Disclosure of Accounting Policies: This Standard deals with the disclosure of significant
accounting policies which are followed in preparing and presenting financial statements.
2. AS 2 Valuation of Inventories: This Standard deals with the determination of value at which
inventories are carried in the financial statements, including the ascertainment of cost of inventories and
any write-down thereof to net realisable value.
3. AS 3 Cash Flow Statements: This Standard deals with the provision of information about the
historical changes in cash and cash equivalents of an enterprise by means of a Cash Flow Statement
which classifies cash flows during the period from operating, investing and financing activities.
4. AS 4 Contingencies and Events Occurring After Balance Sheet Date: This Standard deals with
the treatment of contingencies and events occurring after the balance sheet date.
5. AS 5 Net profit or Loss for the period, Prior Period Items and Changes in Accounting Policies:
This Standard should be applied by an enterprise in presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the Statement of Profit and Loss, in accounting for
changes in accounting estimates, and in disclosure of changes in accounting policies.
6. AS 7 Construction Contracts: This Standard prescribes the accounting for construction contracts in
the financial statements of contractors.
7. AS 9 Revenue Recognition: This Standard deals with the bases for recognition of revenue in the
Statement of Profit and Loss of an enterprise. The Standard is concerned with the recognition of
revenue arising in the course of the ordinary activities of the enterprise from: a) Sale of goods; b)
Rendering of services; and c) Interest, royalties and dividends.
8. AS 10 Property, Plant and Equipment: The objective of this Standard is to prescribe the
accounting treatment for property, plant and equipment (PPE).
9. AS 11 The Effects of Changes in Foreign Exchange Rates: AS 11 lays down principles of

accounting for foreign currency transactions and foreign operations, i.e., which exchange rate to use and
how to recognise in the financial statements the financial effect of changes in exchange rates.
10. AS 12 Government Grants: This Standard deals with accounting for government grants.
Government grants are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks, etc.
11. AS 13 Accounting for Investments: This Standard deals with accounting for investments in the
financial statements of enterprises and related disclosure requirements.
54
12. AS 14 Accounting for Amalgamations: This Standard deals with accounting for amalgamations
and the treatment of any resultant goodwill or reserves.
13. AS 15 Employee Benefits: The objective of this Standard is to prescribe the accounting treatment
and disclosure for employee benefits in the books of employer except employee share-based payments.
It does not deal with accounting and reporting by employee benefit plans.
14. AS 16 Borrowing Costs: This Standard should be applied in accounting for borrowing costs. This
Standard does not deal with the actual or imputed cost of owners’ equity, including preference share
capital not classified as a liability.
15. AS 17 Segment Reporting: The objective of this Standard is to establish principles for reporting
financial information, about the different types of segments/ products and services an enterprise
produces and the different geographical areas in which it operates.
16. AS 18 Related Party Disclosures: This Standard should be applied in reporting related party
relationships and transactions between a reporting enterprise and its related parties. The requirements of
this Standard apply to the financial statements of each reporting enterprise and also to consolidated
financial statements presented by a holding company.
17. AS 19 Leases: The objective of this Standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases.
18. AS 20 Earnings Per Share: AS 20 prescribes principles for the determination and presentation of
earnings per share which will improve comparison of performance among different enterprises for the
same period and among different accounting periods for the same enterprise.
19. AS 21 Consolidated Financial Statements: The objective of this Standard is to lay down
principles and procedures for preparation and presentation of consolidated financial statements. These
statements are intended to present financial information about a parent and its subsidiary(ies) as a single
economic entity to show the economic resources controlled by the group, obligations of the group and
results the group achieves with its resources.
20. AS 22 Accounting for Taxes on Income: The objective of this Standard is to prescribe accounting
treatment of taxes on income since the taxable income may be significantly different from the
accounting income due to many reasons, posing problems in matching of taxes against revenue for a
period.
21. AS 23 Accounting for Investments in Associates: This Standard should be applied in accounting
for investments in associates in the preparation and presentation of consolidated Financial Statements
(CFS) by an investor.
22. AS 24 Discontinuing Operations: The objective of AS 24 is to establish principles for reporting

information about discontinuing operations, thereby enhancing the ability of users of financial
statements to make projections of an enterprise’s cash flows, earnings generating capacity, and financial
position by segregating information about discontinuing operations from information about continuing
operations. AS 24 applies to all discontinuing operations of an enterprise.
23. AS 25 Interim Financial Reporting: This Standard applies if an entity is required or elects to
publish an interim financial report. The objective of AS 25 is to prescribe the minimum content of an
interim financial report and to prescribe the principles for recognition and measurement in complete or
condensed financial statements for an interim period.
24. AS 26 Intangible Assets: AS 26 prescribes the accounting treatment for intangible assets (i.e.
identifiable non-monetary asset, without physical substance, held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes).
55
25. AS 27 Financial Reporting of Interests in Joint Ventures: The objective of AS 27 is to set out
principles and procedures for accounting for interests in joint ventures and reporting of joint venture
assets, liabilities, income and expenses in the financial statements of venturers and investors.
26. AS 28 Impairment of Assets: The objective of AS 28 is to prescribe the procedures that an

enterprise applies to ensure that its assets are carried at no more than their recoverable amount. The
asset is described as impaired if its carrying amount exceeds the amount to be recovered through use or
sale of the asset and AS 28 requires the enterprise to recognise an impairment loss in such cases. It
should be noted that AS 28 deals with impairment of all assets unless specifically excluded from the
scope of the Standard.
27. AS 29 Provisions, Contingent Liabilities and Contingent Assets: The objective of AS 29 is to

ensure that appropriate recognition criteria and measurement bases are applied to provisions and
contingent liabilities and that sufficient information is disclosed in the notes to the financial statements
to enable users to understand their nature, timing and amount. The objective of this Standard is also to
lay down appropriate accounting for contingent assets.
Accounting Standards Board (ASB)

The Accounting Standards Board (ASB) is an independent body with the authority to establish
accounting standards for use by all Canadian entities outside the public sector. We serve the public
interest by establishing standards for financial reporting by all Canadian private sector entities and by
contributing to the development of internationally accepted financial reporting standards.
The ASB at work. As an independent body, we develop and maintain Canadian accounting standards
to support informed economic decision making by financial statement users through maintaining a
framework that provides a basis for high-quality information about financial performance reported by
Canadian private sector entities. Accounting standards specify how transactions and other events are
to be recognized, measured, presented and disclosed in financial statements.
Our activities are overseen by the Accounting Standards Oversight Council (AcSOC). AcSOC
appoints our members and provides us input, primarily in terms of our strategic direction and
priorities. AcSOC also assesses and reports to the public on our performance, including our
compliance with due process.
Objectives:
 to establish financial reporting standards that improve the quality of information reported by
Canadian entities with due consideration for the costs and the benefits to the preparers and users
of financial statements, and changes in the economic environment;
 to facilitate the capital allocation process in both the business and not-for-profit sectors through
improved information;
 to participate with other standard setters in the development of a single set of high-quality
internationally accepted financial reporting standards; and
 to support the implementation of financial reporting standards and the resolution of emerging
application issues.
56

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Unit – I

There are two types of shares that a company may issue-

The value of share of a company depends on so many factors such as:

Need and Purpose of Valuation of Shares

1. For assessment of Wealth Tax, Estate Duty, Gift Tax, etc.

1. Current stock market price of the shares.

Methods of Valuation of Shares

1. Net Asset Method

Net Asset Method:

Net Asset Method

Liabilities Amount Assets Amount

Valuation of Equity Share Intrinsic Value Method

Less: Preference Share Capital (1,00,000)

Net amount available to Equity shareholders 13,30,000

Profit available to equity share holders

(-) Tax xxx

(-) Transfer to Reserve xxx

(-) Preference Dividend xxx

Profit available to equity

ERR=Profit available ¿ equity share holders ¿ ×100

3. Fair Value Method:

Net Asset value+ yield value

Goodwill is an intangible asset. The real value is indeterminable for a non-purchased

It is very interesting to study the classification of Goodwill based on consumer behavior.

Valuation of purchased goodwill:

Goodwill = Average Profit × No. of year purchase

Trading Profit after Adjustment and before Tax XXX

Goodwill = Super profit × No. of years purchases

The value of goodwill is computed as follows:

Goodwill is calculated as follows:

V = Present value of Annuity; a = Annual Super Profit; n = Number of Years

1. The following is the summarized balance sheet of a company as at 31-12-2014

Calculate the value of equity share

Particulars Amount Amount

Net assets available to share holder 53,75,000

Less: Preference shares capital (10,00,000)

Net amount available to equity share holders

2. Balance sheet on X company limited as follows:

Liability Amount Assets Amount

Rs.60,000/-, Rs. 70,000/-, Rs. 40,000/-, Rs. 50,000/-, Rs. 50,000.

Calculate the value of equity share

Particulars Amount Amount

Less: Preference share capital -

Net amount available to equity share holders 3,88,000

 Working Note: calculation of Goodwill

Good will = 54,000 x 2

3. The balance sheet of Raghu Ltd. As on 31-12-2018 was as follows:

Fixed assets: 12,00,000/- Current assets: 6,00,000/-

Calculate the value of equity share.

Calculate the value of equity share

Particulars Amount Amount

Current liabilities 1,80,000 (5,32,500)

Net amount available to equity share holders 12,03,500

4. The following is the balance sheet of Madhu Ltd., as on 31-12-2017

Calculate the value of equity share

Particulars Amount Amount

10/- each 8/- paid up share = (13.7 – 2) = 11.17

10/- each 5/- paid up share = (13.7 – 5) = 8.17

1. 2000, 9% Preference share of Rs. 100/-

Calculation of profit available for equity share holders

Calculation of Expected Rate of Return (ERR)

Calculation of value of equity share: