Amalgamation

ADVANCED ACCOUNTING ARIVUPRO ACADEMY
Chapter 4 AMALGAMATION OF COMPANIES
 In an amalgamation, two or more companies are combined into one by merger or by one taking
over the other.
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:

 Two or more companies join to form a new company or
 Absorption and blending of one by the other. Thus, amalgamation include absorption.
 The purpose of companies joining together is to secure various advantages such as economies of
large scale production, avoiding competition, increasing efficiency, expansion etc.
 The companies going into liquidation or merged companies are called vendor companies or
transferor companies. The new company which is formed to take over the liquidated companies or
the company with which the transferor company is merged is called transferee or vendee.
 Wherever an undertaking is being carried on by a company and is in substance transferred, not to
an outsider, but to another company consisting substantially of the same shareholders with a view
to its being continued by the transferee company, there is external reconstruction.
Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more companies In this case an In this case, a newly
are wound up and a new existing company formed company takes
company is formed to take takes over the over the business of an
over their business. business of one or existing company.
more existing
companies.
Minimum number of At least three companies At least two Only two companies
Companies involved are involved. companies are are involved
involved
Number of new Only one resultant No new resultant Only one resultant
resultant companies company is formed. Two company is formed company is formed.
companies are wound up Under this case a
to form a single resultant newly formed
company. company takes over
the business of an
existing company.
Objective Amalgamation is done to Absorption is done External reconstruction
cut competition & reap the to cut competition & is done to reorganise
economies in large scale reap the economies the financial structure
in large scale of the company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to take
amalgamate to form C Ltd. business of another over the business of an
existing company B existing company A
Ltd. Ltd.
CA SANDESH .C H Page 4.1

TYPES OF AMALGAMATION-
The Institute of Chartered Accountants of India has introduced Accounting Standard -14 (AS 14) on
‘Accounting for Amalgamations’. The standard recognizes two types of amalgamation –
 Amalgamation in the nature of merger is an amalgamation where there is a genuine pooling not
merely of assets and liabilities of the transferor and transferee companies but also of the
shareholders’ interests and of the businesses of the companies.
 Amalgamation in the Nature of Purchase
AS PER AS 14, AMALGAMATION IN THE NATURE OF MERGER IS AN AMALGAMATION WHICH SATISFIES

ALL THE FOLLOWING CONDITIONS:
 All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company
 No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies. For example, if transferor company is
following straight line method of depreciation, the book value of the assets of the transferor
company will be revised by applying the written down method of depreciation.
 Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
 The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company, except that
cash may be paid in respect of any fractional shares
 The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.
METHODS OF ACCOUNTING FOR AMALGAMATIONS -

Pooling of Interest Method - Used in case of amalgamation in the nature of merger
Purchase Method – Used in case of Amalgamation in the Nature of Purchase
Goodwill arising on Amalgamation in case of Purchase method should be amortized over 5 years unless
longer period can be justified.

purchase method + purchase consideration

PROBLEMS
1. The Balance Sheet of Partha Ltd as on 31st March is given below - (in 000’s)
Liabilities Amount Assets Amount

Share Capital: Equity 50,50 Sundry Fixed Assets 50,00
Shares of Rs 10 each
preference
8% Preference Shares 9,50 Stock 20,00 over equity
shareholder
12% Debentures 15,00 Debtors 10,00
Sundry Creditors & Other 10,00 Cash & Bank 5,00
Liabilities
Total 85,00 Total 85,00
Krishna Ltd agrees to take over Partha Ltd, by issuing requisite number of Preference Shares of 10/- each at
par to the Preference Shareholders of Partha Ltd, and requisite number of Equity Shares of 10/- each at par
all
to the Equity Shareholders of Partha Ltd. Purchase Consideration is settled as per Book Value of the assets,
and the Debentures will be taken over by Krishna Ltd on the agreement that these will be paid off at 10%
premium after one year. Debenture holders of Partha Ltd will accept 12% Debentures of Krishna Ltd.
Calculate Purchase Consideration.

purchase method + purchase consideration
2. Trimurthi Company Ltd was incorporated for the purpose of acquiring Brahma Ltd, Vishnu Ltd and Shiva
Ltd. The Balance Sheet of these Companies as on 31st March is as follows:
Particulars Brahma Ltd Vishnu Ltd Shiva Ltd
Tangible Fixed Assets at Cost Less Depreciation 5,00,000 4,00,000 3,00,000
Goodwill - 60,000 -
Other Assets 2,00,000 2,80,000 85,000

Total Assets 7,00,000 7,40,000 3,85,000
Share Capital ( Rs 10 each) 4,00,000 5,00,000 2,50,000
Profit and Loss Account 1,50,000 1,10,000 60,000

10% Debentures 70,000 - 40,000
Sundry Creditors 80,000 1,30,000 35,000
Total Liabilities 7,00,000 7,40,000 3,85,000
Average Annual Profits before Debenture Interest 90,000 1,20,000 50,000
Professional Valuation of Tangible Assets on 31st 6,20,000 4,80,000 3,60,000
March
The Directors in their negotiations agreed that –
(i) the recorded Goodwill of Vishnu Ltd is valueless,
(ii) The Other Assets of the Brahma Ltd are worth 30,000/-,
(iii) The valuation of 31st March in respect of Tangible Fixed Assets should be accepted,
(iv) These adjustments are to be made by the individual Company before the completion of the acquisition.
The acquisition agreement provides for the issue of 12% Unsecured Debentures to the value of the Net
Assets of the Companies Brahma Ltd, Vishnu Ltd and Shiva Ltd and for the issuance of 10/- Nominal Value
Ordinary Shares for the Capitalized Average Profits of each acquired Company in excess of the Net Assets
contributed. Capitalization Rate = 10%.
You are required to calculate Purchase Consideration and show the Purchase Consideration as discharged
purchase method and purchase consideration
3. Star and Moon had been carrying on business independently. They agree to amalgamate and form a
new Company Neptune Ltd with an Authorized Share Capital of Rs 2,00,000/- divided into 40,000
Equity Shares of 5/- each.
On 31st March, the respective Balance Sheets of Star and Moon were as follows: (in Rs)
Particulars Star Moon
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Less: Current Liabilities (2,98,500) (90,125)
Balance representing 1,82,500 1,76,250
Capital
Additional Information: Revalued figures of Fixed and Current Assets were as follows:
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
The Debtors and Creditors include Rs 21,675/- owed by Star to Moon. ignore
 The Purchase Consideration is satisfied by issue of the following Shares and Debentures:
30,000 Equity Shares of Neptune Ltd to Star and Moon, in the proportion to the profitability of their
respective business, based on the Average Net Profit during the last three years which were as
follows:
Year before last Profit 2,24,788 1,36,950
capital
Last Year (Loss) / Profit (1,250) 1,71,050 interest employed =
This Year Profit 1,88,962 1,79,500 equal to net assets
 15% Debentures in Neptune Ltd at par to provide an Income equivalent to 8% Return on Capital
Employed in their respective business as on 31st March, after revaluation of assets.
Required: (1) Compute the amount of Debentures and Shares to be issued to Star and Moon, and
purchase method and purchase consideration

4. P and Q have been carrying on same business independently. Due to competition in the market, they
decided to amalgamate and form a new company called PQ Ltd. Following is the Balance Sheet of P and
Q as at 31st March:
Liabilities P Q Assets P Q
Capital 7,75,000 8,85,000 Plant & Machinery 4,85,000 6,14,000
Current 6,23,500 5,57,600 Building 7,50,000 6,40,000
Liabilities Current Assets 1,63,500 1,58,600
TOTAL 13,98,500 14,12,600 TOTAL 13,98,500 14,12,600
same as 3rd sum

Following are the additional information: ignore

a. Liabilities of P include 50,000/- due to Q for purchases made. Q made a profit of 20% on sale to P.
b. P has goods purchased from Q, cost to Q being 10,000/-. This is included in the Current Assets of P as on
31st March. ignore
c. The assets of P and Q are revalued as under:
Particulars P Q
Plant & Machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000
d. The Purchase Consideration is to be discharged as under:
i. Issue 24,000 Equity Shares of 25 each fully paid, up in proportion of the profitability in the preceding 2
years, which are given below:
Particulars P Q
1st Year 2,62,800 2,75,125
nd
2 Year 2,12,200 2,49,875
Total 4,75,000 5,25,000
ii. Issue 12% Preference Shares of Rs 10 each at par, to provide Income equivalent to 8% Return on Capital
Employed in the business as on 31st March, after revaluation of assets of P and Q respectively.
You are required to:

a. Compute the amount of Equity and Preference Shares issued to P and Q.

Given in lakhs be careful

Particulars Note No. Amount (Rs in Lakhs)
Equity and Liabilities
(1) Shareholders’Funds (a) Share Capital 1 1,150
(b) Reserves and Surplus 2 (87)
(2) Non-Current
Liabilities Long-Term Borrowings 3 630
(3) Current Liabilities Trade Payables 170
Total 1,863
Assets
(1) Non-Current Assets Tangible Assets 4 1,152
(2) Current Assets Inventories 380
Trade Receivables 256
Cash and Cash Equivalents 5 75
Total 1,863
merger method + JE in purchasing company

5. Balance sheet of V ltd as on 31.03.2014 :
Notes:
(1) Share Capital Authorised:

Issued, Subscribed and Paid up:
80 Lakh Equity Shares of Rs 10 each, fully paid up 800
35 Lakh 12% Cumulative Preference Shares of Rs 10 each, fully paid up 350
Total 1,150
(2) Reserves and Surplus: Debit Balance of Profit & Loss Account Dr side of JE (87)
Total (87)
(3) Long-Term Borrowings

10% Secured Cumulative Debentures of Rs 100 each, fully paid up 600
Outstanding Debenture Interest 30
Total 630
Land and Buildings - 445 , Plant and Machinery-593 Furniture, Fixtures and Fittings-114
Total 1,152
(5) Cash and Cash Equivalents

Balance at Bank 69
Cash in Hand 6
Total 75

On 1st April 2014, P Ltd took over the entire business of V Ltd on the following terms:
 V Ltd’s Equity Shareholders would receive 4 fully paid Equity Shares of P Ltd of Rs 10 each issued at a
Premium of Rs 2.50 each for every Five Shares held by them in V Ltd.
 Preference Shareholders of V Ltd would get 35 Lakh 13% Cumulative Preference Shares of Rs 10 each
fully paid up in P Ltd, in lieu of their present holding.
 All the Debentures of V Ltd would be converted into equal number of 10.5% Secured Cumulative
Debentures of Rs 100 each, fully paid up after the take over by P Ltd, which would also pay Outstanding
Debenture Interest in cash.
 Expenses of Amalgamation would be borne by P Ltd. Expenses came to be Rs 2 Lakh. P Ltd discovered
that its Creditors included Rs 7 Lakh due to V Ltd for goods purchased.
 Also P Ltd’s Stock included goods of the Invoice Price of Rs 5 Lakh earlier purchased from V Ltd, which
had charged profit at 20% of the Invoice Price.

(i) Prepare Realisation A/c in the books of V Ltd.
ii) Pass Journal Entries in the books of P Ltd, assuming it to be an amalgamation in the nature of Merger.
merger method + JE in purchasing company
6. Balance Sheet as on 31st March was as follows –
Liabilities Gee Ltd Pee Ltd Assets Gee Ltd Pee Ltd
Equity Share Capital (10 each) 25,00,000 15,00,000 Buildings 12,50,000 7,75,000
14% Preference Share Capital 11,00,000 8,50,000 Plant & Machinery 16,25,000 8,50,000
(100 each)
General Reserve 2,50,000 2,50,000 Furniture 2,87,500 1,75,000
Export Profit reserve 1,50,000 1,00,000 Investments 3,50,000 2,50,000
Investment Allowance Reserve - 50,000 Stock 6,25,000 4,75,000
P&L A/c 3,75,000 1,25,000 Debtors 4,00,000 4,60,000
15% Debentures (100 each) 2,50,000 1,75,000 Bills Receivable 50,000 55,000
Creditors 1,50,000 75,000 Cash at bank 3,62,500 2,60,000
Bills payable 75,000 1,00,000
Other current liabilities 1,00,000 75,000
Total 49,50,000 33,00,000 Total 49,50,000 33,00,000
All the Bills Receivable of Pee Ltd were having Gee Ltd’s acceptances. Gee Ltd takes over Pee Ltd on the
above date. The Purchase Consideration is discharged as follows – Do not forget mutual Owings
and cash effect in B/S
(a) Issued 1, 65,000 Equity Shares of Rs 10 each at par to the Equity Shareholders of Pee Ltd.
(b) Issued 15% Preference Shares of Rs 100 each to discharge the Preference Shareholders of Pee Ltd
at 10% Premium.
(c) The Debentures of Pee Ltd will be converted into equivalent number of Debentures of Gee Ltd.
(d) The Statutory Reserves of Pee Ltd is to be maintained for two more years.
(e) Expenses of Amalgamation amounting to Rs 10,000 will be borne by Gee Ltd.

Show the opening Journal Entries and the Opening Balance Sheet of Gee Ltd as at 1st April after
amalgamation on the assumption that the amalgamation is In the nature of Merger.
Closing Accounts in Selling

st Company
7. Balance sheet of Mitra Ltd as on 31 March –
Share Capital: Fixed Assets:
1,00,000 Equity Shares of Rs 10 10,00,000 Land and Building 7,64,000
each fully paid up
Reserves and Surplus: Current Assets:
Capital Reserve 42,000 Stock 7,75,000
Contingency Reserve 2,70,000 Sundry Debtors - 160,000
Profit and Loss A/c 2,52,000 Less: Provision for Doubtful 1,52,000
Debts (8,000)
Current Liabilities and Provisions: Bills Receivable 30,000
Bills Payable 40,000 Cash at Bank 3,29,000
Sundry Creditors 2,26,000
Provision for Income Tax 2,20,000
Total 20,50,000 Total 20,50,000
On 1st April, Jagan Limited agreed to absorb Mitra Limited on the following terms and conditions:
 Jagan Limited will take over the Assets at the following values- (a) Land and Building - Rs 10,80,000,
(b) Stock - Rs 7,70,000, (c)Bills Receivable - Rs 30,000.
 Purchase Consideration will be settled by Jagan Ltd as under - 4,100 fully paid 10% Preference
Shares of Rs 100 will be issued, and the balance will be settled by issuing Equity Shares of Rs 10 each
at Rs 8 Paid Up.
 Liquidation Expenses are to be Reimbursed by Jagan Ltd to the extent of Rs 5,000.
 Sundry Debtors realized Rs 1,50,000. Bills Payable were settled for Rs 38,000. Income Tax
Authorities fixed the Taxation Liability at Rs 2,22,000 and the same was paid.
 Creditors were finally settled with the cash remaining, after meeting Liquidation Expenses
amounting to Rs 8,000.
Requirement :
Required - (1) Calculate the Number of Equity and Preference Shares to be allotted by Jagan Ltd, in
discharge of Purchase Consideration, (2) Prepare Realization A/c, Bank A/c, Equity Shareholders A/c and
Jagan Ltd’s A/c, in the books of Mitra Ltd
8. Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that they should
amalgamate. A new Company, Ram and Shyam Limited, is to be formed to which the Assets and
Liabilities of the existing Companies, with certain exceptions, are to be transferred. On 31st March 2014,
the Balance Sheets of the two Companies were as under: purchase method + JE in
purchasing company
Balance Sheet of Ram Li mited as at 31st March 2014
Liabilities Rs Assets Rs
Issued and Subscribed Share Capital: Freehold Property, at cost 2,10,000
30,000 Equity Shares of Rs 10 each, 3,00,000 Plant and Machinery, at cost Less Depre 50,000
General Reserve 1,60,000 Motor Vehicles, at cost Less Depreciation 20,000
Profit and Loss Account 40,000 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
Cash at Bank 86,000
Total 6,50,000 Total 6,50,000
Net assets calculate separately for both companies and pass JE for
purchase of two different companies separately in purchasing
company
Balance S heet of Shyam Limited as at 31st March 2014
Issued and Subscribed Share Capital: Freehold Property, at cost 1,20,000
16,000 Equity Shares of Rs 10 each, 1,60,000 Plant and Machinery, at cost Less Depre 30,000
Profit and Loss Account 40,000 Stock 1,56,000
6% Debentures 1,20,000 Debtors 42,000
Sundry Creditors 64,000 Cash at Bank 36,000
Total 3,84,000 Total 3,84,000
Assets and Liabilities are to be taken at Book Value, with the following exceptions:
 Goodwill of Ram Limited and of Shyam Limited is to be valued at Rs 1,60,000 and Rs 60,000 respectively.
 Motor Vehicles of Ram Limited are to be valued at Rs 60,000.
 Debentures of Shyam Ltd are to be discharged by the issue of 6% Debentures of Ram and Shyam Ltd at a
Premium of 5%. not to be taken over
 The Debtors of Shyam Ltd. realized fully and Bank Balance of Shyam Limited are to be retained by the
Liquidator and the Sundry Creditors of Shyam Ltd are to be paid out of the proceeds thereof.
 Compute the basis on which Shares in Ram and Shyam Limited will be issued to the Shareholders of the
existing Companies, assuming that the Nominal Value of each Share in Ram and Shyam Limited is Rs 10.
 Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April 2014, the date of completion of
amalgamation.
purchase method + + JE
in purchasing company
9. Following is the summarized Balance Sheet of Arun Ltd as at 31st March
Equity Share Capital (Rs 100 each) 15,00,000 Land and Building 10,00,000
11% Preference Share Capital 5,00,000 Plant and Machinery 7,00,000
General Reserve 3,00,000 Furniture and Fittings 2,00,000
Sundry Creditors 2,00,000 Stock-in-Trade 3,00,000
Sundry Debtors 2,00,000
Cash in Hand and at Bank 1,00,000
Total 25,00,000 Total 25,00,000
go as per steps
Mitra Ltd agreed to take over Arun Ltd on the following terms:
 Each Equity Share in Arun Ltd for the purpose of absorption is to be valued at Rs 80.
 Equity Shares will be issued by Mitra Ltd by valuing its each Equity Share of Rs 100 each at Rs 120
per share.
 11% Preference Shareholders of Arun Ltd will get 11% Redeemable Debentures of Mitra Ltd at
equivalent value.
 All the Assets and Liabilities of Arun Ltd will be recorded at the same value in the books of Mitra
Ltd
 Required – Calculate Purchase Consideration and Pass journal entries in Mitra Ltd (Assume
Purchase Method)

Closing accounts in selling company + JE in
Purchasing company
10. The summarized Balance Sheet of SRISHTI Ltd as on 31st March 2014, was as follows:
Equity Shares of Rs 10 fully paid 30,00,000 Goodwill 5,00,000
Export Profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and Loss Account 5,50,000 Debtors 1,80,000
9% Debentures 5,00,000 Cash & Bank 2,80,000
Trade Creditors 1,00,000 Preliminary Expenses 50,000
Total 50,50,000 Total 50,50,000
ANU Ltd agreed to absorb the business of SRISHTI Ltd with effect from 1st April, 2014.
(a) The Purchase Consideration settled by ANU Ltd as agreed:
(i) 4,50,000 Equity Shares of Rs 10 each issued by ANU Ltd by valuing its Shares at Rs 15 per Share.
(i) Cash Payment equivalent to Rs 2.50 for every Share in SRISHTI Ltd.
(b) The issue of such an amount of fully paid 8% Debentures in ANU Ltd at 96%, as is sufficient to
discharge 9% Debentures in SRISHTI Ltd at a premium of 20%.
(c) ANU Ltd will take over the Tangible Fixed Assets at 100% more than the Book Value, Stock at Rs 7,10,000 and
Debtors at their face value, subject to a provision of 5% for Doubtful Debts.
(d) The actual cost of liquidation of SRISHTI Ltd was Rs 75,000. Liquidation Cost of SRISHTI Ltd is to be reimbursed
by ANU Ltd to the extent of Rs 50,000.
(e) Statutory Reserves are to be maintained for 1 more year.
Close the books of SRISHTI Ltd and Prepare journal entries in the books of ANU Ltd.
11. The following is the Balance Sheet of Arudra Ltd as at 31st March:
8,000 Equity Shares of Rs 100 each 8,00,000 Building 3,40,000
10% Debentures 4,00,000 Machinery 6,40,000
Loan from Directors 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenditure 34,000
Total 17,60,000 Total 17,60,000
Bhagya Ltd agreed to absorb Arudra Ltd on the following terms and conditions:
(a) Bhagya Ltd would take over all Assets, except Bank Balance, at their Book Values less 10%.
Goodwill is to be valued at 4 years’ purchase of Super Profits, assuming that the Normal Rate of
Return be 8% on the combined amount of Share Capital and General Reserve
(b) Bhagya Ltd is to take over Creditors at Book Value
(c) The Purchase Consideration is to be paid in cash to the extent of Rs 6,00,000 and the balance in
fully paid Equity Shares of Rs 100 each at Rs 125 per Share.
The Average Profit is Rs 1,24,400. The Liquidation Expenses amounted to Rs 16,000. Bhagya Ltd sold
prior to 31st March, goods costing Rs 1,20,000 to Arudra Ltd for Rs 1,60,000. Rs 1,00,000 worth of
goods are still in Stock of Arudra Ltd on 31s March. Creditors of Arudra Ltd include Rs 40,000 still due
to Bhagya Ltd.
Show the necessary Ledger Accounts to close the books of Arudra Ltd and prepare the Balance Sheet
of Bhagya Ltd as at 1st April, after the takeover.

SOLUTION –
BALANCE SHEET OF BHAGYA LTD (AFTER ABSORPTION) as on 1st April

Particulars Note No Amount
I. EQUITY & LIABILITIES
1. Share Holder’s Funds:
a. Share Capital 1 4,88,000
b. Reserves & Surplus
Securities Premium (4,800 x 25) 1,22,000
2. Current Liabilities:
(a) Trade Payables
Creditors (3,20,000 – Mutual Owings 40,000) 2,80,000
(b) Bank OD assumption made 6,00,000
TOTAL 14,90,000
II. ASSETS
1. Non Current Assets
(a) PPE
i. Tangible Asses 2 8,82,000
ii. Intangible Assets
Goodwill (2,16,000 + 15,000) 231,000
2. Current Assets-
(a) Inventory (198,000 – Stock Reserve 15,000) 183,000
(b) Trade Receivables
Debtors (234,000 – Mutual Owings 40,000) 194,000
TOTAL 14,90,000
Notes To Accounts
Note # Particulars Amount
1 Share Capital
Authorized, Issued, Subscribed and Paid Up capital
4,880 shares of Rs 100 each 4,88,000
( All shares are issued for consideration other than cash)
2 Tangible Assets:
Building 306,000
Plant & Equipment 5,76,000
TOTAL 8,82,000

securities premium alone in

B/S
12. Gowri Ltd and Ambika Ltd had the following Balance Sheets as on 31st March - (in Lacs)
Liabilities Gowri Ambika Assets Gowri Ambika
Share Capital of Rs 100 50 - Fixed Assets 83 160
each
Share Capital of Rs 10 - 80 Current Assets 69 168
each
Capital Reserve 10 - Investments 17 -
General Reserve 36 100 Goodwill 2 -
Secured Loans - 40
Unsecured Loans 22 -
Sundry Creditors 42 46
Provision for Taxation 11 52
Proposed Dividend - 10
TOTAL 171 328 TOTAL 171 328
Gowri Ltd is amalgamated with Ambika Limited on the above date. For the purpose of amalgamation, the
Goodwill of Gowri Ltd is considered valueless. There are also arrears of depreciation of Gowri Ltd amounting to
Rs 4,00,000.
The Shareholders in Gowri Ltd are allotted, in full satisfaction of their claims, Shares in Ambika Limited in the
same proportion as the respective Intrinsic Values of the Shares of the two Companies bear to one another.
Pass Journal Entries in the books of both the Companies, to give effect to the above.
SOLUTION-
JOURNAL ENTRIES IN THE BOOKS OF GOWRI LTD
Realization A/c Dr 1,71,00,000
To Fixed Assets A/c 83,00,000
To Current Assets A/c 69,00,000
To Investment A/c 17,00,000
To Goodwill A/c 2,00,000
( being Assets transferred to Realization A/c)
Unsecured Loans A/c Dr 22,00,000

Sundry Creditors A/c Dr 42,00,000
Provision for Taxation A/c Dr 11,00,000
To Realization A/c 75,00,000
(Being Liabilities transferred to Realization A/c
Ambika Ltd A/c Dr 90,00,000

(Being PC receivable recorded)
Equity Shareholders A/c Dr 6,00,000

( being Realization Loss Transferred)

Share Capital A/c Dr 50,00,000

Capital Reserve A/c Dr 10,00,000
General Reserve A/c Dr 36,00,000
To Equity Shareholders A/c 96,00,000
(Being capital and reserves & surplus transferred)
Equity Shares in Ambika Ltd A/c Dr 90,00,000

To Ambika Ltd 90,00,000
(Being PC received recorded)
Equity Shareholders A/c Dr 90,00,000

To Equity Shares in Ambika Ltd 90,00,000
(Being shares distributed to shareholders)
Balance Sheet of Ambika Ltd as on 31st March (After Absorption)

Particulars Note No Amount
I. EQUITY & LIABILITIES
1. Share Holder’s Funds:
a. Share Capital 1 1,20,00,000
b. Reserves & Surplus 2 1,50,00,000
2. Non Current Liabilities-

(a) Long Term Borrowings
i. Secured Loans 40,00,000
ii. Unsecured Loans 22,00,000
2. Current Liabilities:
(a) Trade Payables
Creditors (42,00,000+46,00,000) 88,00,000
(b) Short Term Provisions
Provision for Taxation (11,00,000+52,00,00) 63,00,000
(c) Proposed Dividend 10,00,000
TOTAL 4,93,00,000
II. ASSETS
(a) PPE
i. Tangible Assets (79,00,000+1,60,00,000) 2,39,00,000
(b) Non Current Investments 17,00,000

2. Current Assets (69,00,000+1,68,00,000) 2,37,00,000
TOTAL 4,93,00,000

Notes To Accounts
Note # Particulars Amount
1 Share Capital
Authorized, Issued, Subscribed and Paid Up capital
12,00,000 shares of Rs 10 each 1,20,00,000
( Of the Above, 400,000 shares are issued for consideration other than
cash)
2 Reserves & Surplus

General Reserve 1,00,00,000
Securities Premium 50,00,000
TOTAL 1,50,00,000
13. Following are the summarized balance sheet of K Ltd and W ltd as at 31st March(Rs in ‘000)
Liabilities K Ltd W Ltd Assets K Ltd W Ltd
Equity Share Capital 2,000 1,500 Goodwill 20 -
(Rs 100)
10% Preference 700 400 Other Fixed Assets 2,400 1,150
shares (Rs 100)
General Reserve 240 170 Debtors 625 615
P&L A/c - 15 Stock 412 680
12% Debentures( Rs 600 200 Bank 38 155
100)
Creditors 560 315 Own Debentures(Nominal 192 -
Value of Rs 2,00,000)
Discount on issue of 2 -
Debentures
P&L A/c 411 -
TOTAL 4,100 2,600 TOTAL 4,100 2,600
profits and losses are routed through Capital
reduction account
On 1st June (3 months after the above balance sheet date) K ltd adopted the following scheme of
reconstruction –
 Each Equity share shall be sub divided in to 10 equity shares of Rs 10 each fully paid up. 50% of the
equity share capital would be surrendered to the company.
 Preference dividends are in arrears for 3 years. Preference shareholders agreed to waive 80% of the
sold @ 98
dividend claim and accept payment for the balance. bought @ 96
 Own Debentures of Rs 80,000( Nominal value) were sold at Rs 98 cum interest and remaining own
debentures were cancelled. other fixed asset
 Debenture holders of Rs 3,00,000 agreed to accept one Machinery of book value of Rs 3,20,000 in
full settlement.
 Creditors, Debtors and stock were valued at 5,00,000 , 6,00,000 and 4,00,000 respecctively.
Goodwill, Discount on issue of debentures and P&L (Dr) to be written off.
 The company paid Rs 20,000 as penalty to avoid capital commitments of Rs 4,00,000
must do balance sheet after internal reconstruction

On 2nd June a scheme of absorption was adopted. K Ltd would take over W ltd. The purchase consideration
was fixed as below –
 Equity shareholders of W Ltd will be given 50 equity shares of Rs 10 each fully paid up, in exchange
for every 5 shares held in W ltd.
 Issue of 10% Preference shares of Rs 100 each in the ratio of 4 preference shares of K ltd for every 5
preference shares held in W ltd.
Issue of 12% Debentures of Rs 100 each of K ltd for every 12% Debentures in W ltd.
Pass necessary journal entries in the books o f K ltd and prepare balance sheet as at 2nd June .
Solution –
Journal Entries in the books of K ltd

Equity Share Capital A/c Dr (20,000 *100) 20,00,000
To Equity Share Capital A/c ( 200,000 * 10) 20,00,000
Equity Share Capital A/c Dr 10,00,000

To Reconstruction A/c 10,00,000
Reconstruction A/c Dr (700,000 * 10% * 3 * 20%) 42,000

To Bank A/c 42,000
Bank A/c Dr ( 800 * 98) 78,400

To Own Debentures ( 80,000 * 192,000 /200,000) 76,800
To Reconstruction A/c 1600
12% Debentures A/c Dr 120,000

To Own Debentures ( 120,000 * 192,000 /200,000) or (192000-76800) 115,200
To Reconstruction A/c 4800
12% Debentures A/c Dr 300,000

Reconstruction A/c Dr 20,000
To Machinery A/c 320,000
Creditors A/c Dr (560,000 – 500,000) 60,000

To Reconstruction 60,000

To Debtors (625,000 - 600,000) 25,000
To Stock A/c (412,000 - 400,000) 12,000

To Bank A/c 20,000

To Goodwill 20,000
To Discount on issue of debentures 2000
To P&L A/c 4,11,000


To Capital Reserve A/c 514,400
Computation of Purchase Consideration (PC)
(a) To equity shareholders of W Ltd ( 15,000 * 50 /5 * 10) = 15,00,000

(b) To Preference shareholders of W ltd ( 4000 * 4 /5 * 100) = 320,000
TOTAL PC = 18,20,000
Merger Method
Paid up capital ( 15,00,000+400,000) = 19,00,000
PC = 18,20,000
Capital Reserve = 80,000
Journal Entries in the books of K ltd ( Merger Method)
Business Purchase A/c Dr 18,20,000

To Liquidator of W ltd 18,20,000
Fixed Assets A/c Dr 11,50,000

Stock A/c Dr 680,000
Debtors A/c Dr 615,000
Cash at bank A/c Dr 155,000
To Sundry Creditors 315,000
To 12% Debentures of W ltd 200,000
To P&L a/c 15,000
To Business Purchase A/c 18,20,000
To General Reserve 170,000
To Capital Reserve 80,000
12% Debentures of W ltd 200,000

To 12% Debentures (K ltd) 200,000
Liquidator of W ltd A/c Dr 18,20,000

To Equity Share capital A/c 15,00,000
To 9% Preference Share capital A/c 3,20,000

Balance Sheet of K ltd as on 2nd June ( After absorption & Internal Reconstruction)
I. Equity & Liabilities

1. Shareholders Funds
a . Share Capital
i. 250,000 equity shares of Rs 10 each 25,00,000
Ii 10,200 preference shares of Rs 100 each 10,20,000 35,20,000
b. Reserves & Surplus
Capital Reserve ( 514,400+80,000) 594,400
General Reserve ( 240,000+170,00) 410,000
P&L a/c (0+15,000) 15,000 10,19,400
2. Non current liabilities

12% Debentures ( 600,000-120,000-300,000+200,000) 380,000
3. Current Liabilities-
Creditors (560,000-60,000+315,000) 8,15,000
TOTAL 57,34,400
II Assets
Tangible Fixed Assets ( 24,00,000-320,000+11,50,000) 32,30,000
2. Current Assets
Inventories ( 412,000-12,000+680,000) 10,80,000
Trade Receivables (625,000-25,000+615,000) 12,15,000
Cash & Cash Equivalents ( 38,000+78,400-20,000+155,000-42,000) 209,400
TOTAL 57,34,400

ADDITIONAL QUESTIONS ON AMALGAMATION OF COMPANIES
14. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two
companies on the date of amalgamation was as under:
Particulars K Ltd L Ltd Particulars K Ltd L Ltd

Equity Shares of Rs 100 8,00,000 3,00,000 Goodwill 80,000 -
each
7% Preference Share of Rs 4,00,000 3,00,000 Land & Building 4,50,000 3,00,000
100 each
5% Debentures 2,00,000 - Plant & Machinery 6,20,000 5,00,000
General Reserve - 1,00,000 Furniture and 60,000 20,000
Fittings
P&L A/c 3,71,375 97,175 Trade receivables 2,75,000 1,75,000
Trade payables 1,00,000 2,10,000 Stores & inventory 2,25,000 1,40,000
Secured Loan - 2,00,000 Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
18,71,375 12,07,175 18,71,375 12,07,175
The terms of amalgamation are as under: 3) point explanation in this since intrinsic adjustment is given calculate
NA and from that after giving the share of psh and esh , remaining is
given in cash to esh
(1) The assumption of liabilities of both the Companies. meaning all liabilities are taken over
(2) Issue of 5 Preference shares of Rs 20 each in LK Ltd. @ Rs 18 paid up at premium of Rs 4 per share for
each preference share held in both the Companies. effect is 18rs paid up + 4rs premium = 22rs
(3) Issue of 6 Equity shares of Rs 20 each in LK Ltd. @ Rs 18 paid up at a premium of Rs 4 per share for each
equity share held in both the Companies. In addition, necessary cash should be paid to the Equity effect is 18rs
Shareholders of both the Companies as is required to adjust the rights of shareholders of both the paid up + 4rs
premium =
Companies in accordance with the intrinsic value of the shares of both the Companies. 22rs
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5%
debentures in K Ltd. at a discount of 5% after takeover.after takeover so effect on NA calculation
(5) The assets and liabilities are to be taken at book values inventory and trade receivables for which
provisions at 2% and 2 ½ % respectively to be raised. Taken over value is different from BV so purchase method
(6) The trade receivables of K Ltd. include Rs 20,000 due from L Ltd.
(7) The LK Ltd. is to issue 15,000 new equity shares of Rs 20 each, Rs 18 paid up at premium of Rs 4 per
share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. and L Ltd. to
close their books. ( Study Material Question) ignore 7th adjustment
Solution-
In the books of K ltd

in realization whole PC ( NA) is shown
Realization A/c
To Goodwill 80,000 By 5% Debentures 200,000
To Land & Building 450,000 By Trade Payables 100,000
To Plant & Machinery 620,000 By LK Ltd ( PC) 15,60,000
To Furniture 60,000 By Equity 51,375
shareholders
A/c
To Trade Receivables 275,000
To Stores & Inventory 225,000
To Cash at bank 120,000

To cash in hand 41,375

To Preference 40,000
Shareholders
19,11,375 19,11,375
Equity shareholders A/c

To Realization A/c 51,375 By Share capital 800,000
To Equity shares in LK Ltd 10,56,000 By P&L a/c 371,375
To Cash 64,000
11,71,375 11,71,375
Preference shareholders A/c

By Share capital 400,000
To Preference shares in LK Ltd 440,000 By Realization a/c 40,000
440,000 440,000
LK Ltd
By Equity shares in LK Ltd 10,56,000
To Realization A/c 15,60,000 By Preference shares in LK 440,000
Ltd
By Cash 64,000
15,60,000 15,60,000
In the books of L ltd
Realization A/c
To Goodwill - By Trade Payables 210,000
To Land & Building 300,000 By Secured Loan 200,000
To Plant & Machinery 500,000 By LK Ltd ( PC) 790,000
To Furniture 20,000 By Equity 37,175
shareholders
A/c
To Trade Receivables 175,000
To Stores & Inventory 140,000
To Cash at bank 55,000
To cash in hand 17,175
To Preference 30,000
Shareholders
12,37,175 12,37,175
Equity shareholders A/c

To Realization A/c 37,175 By Share capital 300,000
To Equity shares in LK Ltd 396,000 By P&L a/c 97,175
To Cash 64,000 By Reserve 100,000
4,97,175 4,97,175

Preference shareholders A/c

By Share capital 300,000
To Preference shares in LK Ltd 330,000 By Realization a/c 30,000
330,000 330,000
LK Ltd
By Equity shares in LK Ltd 396,000
To Realization A/c 790,000 By Preference shares in LK 330,000
Ltd
By Cash 64,000
790,000 790,000
WN1 – Purchase Consideration ( Net Asset Method)

Particulars K Ltd L Ltd
Goodwill 80,000 -
Land & Building 450,000 300,000
Plant & Machinery 620,000 500,000
Furniture 60,000 20,000
Trade Receivables ( at 2.5% less) 268,125 170,625
Inventory ( at 2% less) 220,500 137,200
Cash at bank 120,000 55,000
Cash in hand 41,375 17,175
Debentures (200,000) -
Trade Payables (100,000) (210,000)
Secured Loans (300,000) (200,000)
Net Assets = PC 15,60,000 790,000
Discharge of PC
(a) Equity shares of LK ltd 10,56,000 396,000
( 8000 * 6*22) (3000 * 6 *22)
(b) Preference share of LK Ltd 440,000 330,000
(4000 * 5* 22) (3000 * 5 * 22)
(c) Cash ( Balancing figure) 64,000 64,000
(15,60,000 – 10,56,000 – (790,000-396,000-
440,000) 330,000)
15. The following are the summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 20X1:
Particulars P Ltd Q Ltd Particulars P Ltd Q Ltd

Equity Shares of Rs 10 each 6,00,000 3,00,000 Fixed Assets 7,00,000 2,50,000
10 % Preference Share of 2,00,000 1,00,000 Investment 80,000 80,000
Rs 100 each
Reserves & Surplus 3,00,000 2,00,000 Inventory 2,40,000 3,20,000
12% Debentures 2,00,000 1,50,000 Debtors 3,60,000 1,90,000
Sundry Creditors 2,20,000 1,25,000 Bills Receivable 60,000 20,000
Bills Payable 30,000 25,000 Cash at Bank 1,10,000 40,000
15,50,000 9,00,000 15,50,000 9,00,000

 Fixed Assets of both the companies are to be revalued at 15% above book value.
 Inventory in Trade and Debtors are taken over at 5% lesser than their book value.
 Both the companies are to pay 10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms:
(i) 8 Equity Shares of Rs 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd.
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference Shares of
Rs 100 each at par in P Ltd.
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at a
discount of 10%.
(iv) Rs 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd. include Rs
10,000 due to P Ltd.
Prepare:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.
Solution
Journal Entries in the Books of P Ltd.
Fixed Assets A/c Dr 1,05,000

To Revaluation Reserve 1,05,000
(Revaluation of fixed assets at 15% above book value)
Reserve and Surplus A/c Dr 60,000

To Equity Dividend 60,000
(Declaration of equity dividend @ 10%)
Equity Dividend 60,000

To Bank Account 60,000
(Payment of equity dividend)
Business Purchase Account 4,90,000

To Liquidator of Q Ltd. 4,90,000
(Consideration payable for the business taken over from Q Ltd.)
Fixed Assets (115% of Rs 2,50,000) 2,87,500

Inventory (95% of Rs 3,20,000 ) 3,04,000
Debtors 1,90,000
Bills Receivable 20,000
Investment 80,000
Cash at Bank (Rs 40,000 –Rs 30,000 dividend paid) 10,000
To Provision for Bad Debts (5% of Rs 1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in Q Ltd. 1,62,000
To Bills Payable 25,000
To Business Purchase Account 4,90,000
To Capital Reserve (Balancing figure) 80,000
(Incorporation of various assets and liabilities taken over from Q

Ltd. at agreed values and difference of net assets and purchase
consideration being credited to capital reserve)
Liquidator of Q Ltd 4,90,000

To Equity Share Capital 4,00,000
To 10% Preference Share Capital 90,000
(Discharge of consideration for Q Ltd.’s business)
12% Debentures in Q Ltd. (Rs 1,50,000 × 108%) 1,62,000

Discount on Issue of Debentures 18,000
To 12% Debentures 1,80,000
(Allotment of 12% Debentures to debenture holders of Q Ltd. at
a discount of 10%)
Sundry Creditors of Q Ltd 10,000

To Sundry Debtors of P Ltd. 10,000
(Cancellation of mutual owing)
Goodwill 30,000
To Bank 30,000
(Being liquidation expenses reimbursed to Q Ltd.)
Capital Reserve 30,000

To Goodwill 30,000
(Being goodwill set off)
(b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment method)
Shares to be allotted ( 30,000 * 8 /6 ) = 40,000 shares of P Ltd

Value (40,000 *10 ) = 4,00,000
For 10% preference shares, to be paid at 10% discount

(100,000 * 90/100) = 90,000
Total PC (4L+90,000) = 4,90,000
16. Explain the treatment for Retirement Gratuity Fund on the liability side of Selling companies
Balance Sheet ?
Solution –
 Treat it as normal liability
 Transfer it to Realization A/c in Selling company books
 Normally new company takes over this liability (as it relates to employees) so account it in journal
entry no 2 in Purchasing company books by crediting the Retirement Gratuity Fund Liability A/c

17. The following are the summarized Balance Sheets of X Ltd. and Y Ltd :
Particulars X ltd Y Ltd

Equity Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 -
Trade payables 25,000 5,000
Loan X Ltd. - 15,000
1,35,000 70,000
Sundry Assets 1,20,000 60,000

Loan Y Ltd 15,000 -
Profit & Loss A/c - 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and trade payables of X Ltd. and Y Ltd. and
for this purpose, the sundry assets of X Ltd. are revalued at Rs 1,00,000. The debt due to X Ltd. is also to be
discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.
Solution
In the books of X Ltd
Realization A/c
To Sundry Assets 120,000 By Trade Payables 25,000
To Loan Y ltd 15,000 By XY Ltd (PC) ( WN1) 90,000
By shareholders A/c (Loss on 20,000
realization)
120,000 120,000
Shareholders A/c
To Realization A/c 20,000 By Equity Share capital 100,000
To shares in XY Ltd 90,000 By P&L A/c 10,000
110,000 110,000
Shares In XY Ltd
To XY Ltd 90,000 By shareholders a/c 90,000
90,000 90,000
XY ltd
To Realization A/c 90,000 By shares in XY Ltd 75,000
WN1 –Purchase Consideration (Net Asset Method)

Sundry Assets ( Agreed value) 100,000
Loan to Y ltd 15,000
Creditors (25,000)
NA=PC 90,000

18. Explain the treatment in the purchasing company books for Merger Method if selling company has
cost of issue of debentures on the Asset side of Balance Sheet ?
Solution –
 Transfer cost of issue of debentures to P&L a/c and take over that reduced balance in P&L a/c
(In Journal entry no 2).
 As ,In Merger method all the reserves & surplus of selling company are taking over and accounted in
Purchasing company books.
19. Show the Treatment of following components when X Ltd. absorbs Y Ltd. on the following terms:
 Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of
preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs 78,000 and 2014-15: Rs 72,000).
The profits of 2014 -15 included credit of an insurance claim of Rs 25,000 (fire occurred in 2013-14
and loss by fire Rs 30,000 was booked in Profit and Loss Account of that year). In the year 2015 -16,
there was an embezzlement of cash by an employee amounting to Rs 10,000.
 There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to Rs
15,000 and such asset was also taken over by X Ltd. ( MAY 2018)
Solution:
Computation of goodwill
Profit of 2016-17 90,000
Profit of 2015-16 adjusted ( 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (` 72,000 – 25,000) 47,000
225,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = Rs 1,50,000
Unrecorded Current Assets –

 In the books of selling company – No treatment
 In the books of Purchasing company –
 Treat it as normal asset taken over and consider this as well for PC calculation under
NA method
 Record this asset in Journal entry no 2 as ‘Unrecorded Current Assets’
20. The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2019:
Liabilities Assets Amount
14,000 Equity shares of Rs. 100 14,00,000 Sundry Assets 18,00,000
each, fully paid up
General reserve 10,000
10% Debentures 2,00,000
Trade payables 140,000
Bank overdraft 50,000
18,00,000 18,00,000
B Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under Net Assets
method on the basis: Market value of 75% of the sundry assets is estimated to be 12% more than the book
value and that of the remaining 25% at 8% less than the book value. The liabilities are taken over at book
values. There is an unrecorded liability of Rs. 25,000.
Solution
Calculation of Purchase Consideration under Net Assets Method
Sundry assets
(a) For 75% (18,00,000 * 75% *112 /100) 15,12,000
(b) For 25% (18,00,000 * 25% *92 /100 414,000
10% Debentures (2,00,000)

Trade payables (140,000)
Bank overdraft (50,000)
Unrecorded Liability (25,000)
Net Assets = Purchase Consideration 15,11,000
21. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital,
equal to the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities
and undertakings of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation) are
given below:
Summarized balance sheets as at 31-03-2017

Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Equity & liabilities: Assets:

Shareholders Fund Non-current
Assets:
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding
Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. Inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade 4,80,000 7,80,000
receivables
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000
The consideration was to be based on the net assets of the companies as shown in the above Balance
Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted
average of net profits for the three years ended 31 st March, 2017. The weights for this purpose for
the years 2014-15, 2015-16 and 2016-17were agreed as 1, 2 and 3 respectively.
The profit had been: 2014 -15 = 300,000; 2015- 16 =525,000; 2016-17= 630,000

The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.
In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of ` 10 each at the same rate of
premium as issued for discharging purchase consideration to P Ltd. and Q Ltd.

(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary
journal entries.
Solution-
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance Rs
sheet
P Ltd. 6,00,000
Q Ltd. 8,40,000
14,40,000
Share of P Ltd.= Rs 14,40,000 x [21,60,000/ (21,60,000 +14,40,000)]
= Rs 8,64,000 or 86,400 shares
Securities premium = Rs 21,60,000 – Rs 8,64,000 = Rs 12,96,000
Premium per share = Rs 12,96,000 / Rs 86,400 = Rs 15
Issued 86,400 shares @ Rs 10 each at a premium of Rs 15 per share
Share of Q Ltd. = Rs 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)]

= Rs 5,76,000 or 57,600 shares
Securities premium = Rs 14,40,000 – Rs 5,76,000 = Rs 8,64,000
Premium per share = Rs 8,64,000 / Rs 57,600 = Rs 15
Issued 57,600 shares @ Rs 10 each at a premium of Rs 15 per share
(ii) Journal Entries in the books of PQ Ltd.

Particulars Dr. Cr.
Business purchase account Dr 36,00,000
.
To Liquidator of P Ltd. Account 21,60,000
To Liquidator of Q Ltd. Account 14,40,000
(Being the amount of purchase
consideration payable to liquidator of P
Ltd. and Q Ltd. for assets taken over)
Goodwill Dr 5,40,000
.
Fixed assets account Dr 7,20,000

.
Inventory account Dr 3,60,000
.
Trade receivables account Dr 4,80,000
.
Cash at bank Dr 3,00,000
.
To Trade payables account 2,40,000
To Business purchase account 21,60,000
(Being assets and liabilities of P Ltd. taken
over)
Fixed assets account Dr 10,80,000

.
Inventory account Dr 6,60,000
.
Trade receivables account 7,80,000
To bank overdraft account 5,40,000
To Trade payables account 5,40,000
To Business purchase account 14,40,000
(Being assets and liabilities of Q Ltd.
taken over)
Liquidator of P Ltd. Account Dr 21,60,000

To Equity Share Capital A/c (86,400 x 8,64,000
10)
To Securities premium (86,400 x 15) 12,96,000
(Being the allotment of shares as per
agreement for discharge of purchase
consideration)
Liquidator of Q Ltd. Account Dr 14,40,000

To Equity Share Capital A/c (57,600 x 5,76,000
10)
To Securities premium (57,600 x 15) 8,64,000
(Being the allotment of shares as per
agreement for discharge of purchase
consideration)
Bank A/c Dr 18,00,000

To Equity share capital account 7,20,000
To Securities premium 10,80,000
(Equity share capital issued to raise
working capital)

(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Particulars Notes Rs
1 Shareholders' funds
a Share capital 1 21,60,000
b Reserves and Surplus 2 32,40,000
2 Current liabilities
a Trade payables (2,40,000 + 5,40,000) 7,80,000
Total 61,80,000
Assets
1 Non-current assets
A Fixed assets
Tangible assets (7,20,000 + 10,80,000) 18,00,000
Intangible assets (goodwill) 4 5,40,000
2 Current assets
a Inventories (3,60,000 + 6,60,000) 10,20,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000
c Cash and cash equivalents 3 15,60,000
Total 61,80,000
Notes to accounts
1 Share Capital
Issued, subscribed and paid up share capital
2,16,000 Equity shares of Rs 10 each 21,60,000
(Out of the above 1,44,000 shares issued for non-cash
consideration under scheme of amalgamation)
2 Reserves and Surplus
Securities premium 32,40,000
(@ 15 for 2,16,000 shares)
3 Cash and cash equivalents
Cash at Bank 15,60,000
4 Intangible Assets
Goodwill 5,40,000

Working Notes:
1. Calculation of goodwill of P Ltd.
Particulars Amount Weight Weighted
amount
2014-15 3,00,000 1 3,00,000

2015-16 5,25,000 2 10,50,000
2016-17 6,30,000 3 18,90,000
Total (a+b+c) 14,55,000 6 32,40,000
weighted Average =
[Total weighted amount/Total of weight]
[ 32,40,000/6]
Goodwill 5,40,000
2. Calculation of Net assets

P Ltd. Q Ltd.
Assets
Goodwill 5,40,000
Fixed assets 7,20,000 10,80,000
Inventory 3,60,000 6,60,000
Trade receivable 4,80,000 7,80,000
Cash at bank 3,00,000
Less: Liabilities
Bank overdraft 5,40,000
Trade payables 2,40,000 5,40,000
Net assets or Purchase consideration 21,60,000 14,40,000
3. New authorized capital = 14,40,000 + 12,00 000 = 26,40,000
4. Cash and Cash equivalents

P Ltd. Balance 3,00,000
Cash received from Fresh issue (72,000 X 25) 18,00,000
21,00,000
Less: Bank Overdraft 5,40,000
15,60,000*
*The balance of cash and cash equivalents has been shown after setting off
overdraft amount.

22. P Ltd. and Q Ltd. decided to amalgamate as on 01.04.2018. Their summarized Balance Sheets as on
31.03.2018 were as follows:
(In ‘000)
Particulars P Ltd. Q Ltd.
Source of Funds:
Equity share capital (10 each) 300 280
9% preference share Capital (100 each) 60 40
Investment allowance Reserve 10 4
Profit and Loss Account 68 68
10 % Debentures 100 60
Trade Payables 50 30
Tax provision 14 8
Total 602 490
Application of Funds:
Building 120 100
Plant and Machinery 160 140
Investments 80 50
Trade receivables 90 70
Inventories 72 80
Cash and Bank 80 50
Total 602 490
From the following information, you are required to prepare the Balance Sheet as on 01.04.2018 of a new
company, R Ltd., which was formed to take over the business of both the companies and took over all the
assets and liabilities:
(i) 50 % Debenture are to be converted into Equity Shares of the New Company.
(ii) Investments are non- current in nature.
(iii) Fixed Assets of P Ltd. were valued at 10% above cost and that of Q Ltd. at 5% above cost
(iv) 10 % of trade receivables were doubtful for both the companies. Inventories to be carried at
cost
(v) Preference shareholders were discharged by issuing equal number of 9% preference shares at
par
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing Equity
shares of 10 each of the new company at a premium of 5 per share.
Give your answer on the basis that amalgamation is in the nature of purchase.
SOLUTION-
Balance Sheet of M/s R ltd as at 1.4.2018
Particulars Notes in'000
2 Non-current liabilities

A Long-term borrowings 3 80,000

a Trade Payables 4 80,000
B Short term provision 5 22,000
Total 11,15,970
Assets
A Property, Plant & Equipment
Tangible assets 6 5,60,000
b Non-current investments 7 1,30,000
2 Current assets
a Inventory 8 1,52,000
b Trade receivables 9 1,44,000
c Cash and cash equivalents 10 1,29,970
Total 11,15,970
Notes to accounts
in'000
1. Share Capital
Equity share capital
55,598 Equity shares of 10 each, fully paid up (W.N.2) 5,55,980
Preference share capital
9% Preference share capital (Share of 100 each) (W.N.2) 1,00,000
6,55,980
2. Reserves and Surplus
Securities premium (W.N.2) 2,77,990
Investment allowance reserve
14,000
(10,000+4,000)
Amalgamation adjustment reserve (14,000)
2,77,990
3. Long-term borrowings
Secured
10% Debentures (50% of 1,60,000) 80,000
4. Trade Payables (50,000+ 30,000) 80,000
5. Short term provisions
Provision for tax (14,000+ 8,000) 22,000
6. Tangible assets
Building (1,32,000+1,05,000) 2,37,000
Plant and machinery (1,76,000+1,47,000) 3,23,000
5,60,000
7. Non – current Investments (80,000+ 50,000) 1,30,000
8. Inventory

Stock (72,000+ 80,000) 1,52,000

9. Trade receivables
Trade receivables {90% of (90,000+ 70,000)} 1,44,000
10. Cash and cash equivalents
Cash and Bank ( 80,000+ 50,000 – 30) 1,29,970
Working Notes:
1. Calculation of value of equity shares issued to transferor companies
P Ltd. Q Ltd.
Assets taken over:

Building 1,32,000 1,05,000
Plant and machinery 1,76,000 1,47,000
Investments 80,000 50,000
Inventories 72,000 80,000
Trade receivables 81,000 63,000
Cash & Bank 80,000 50,000
6,21,000 4,95,000
Less: Liabilities:
10% Debentures 1,00,000 60,000
Trade payables 50,000 30,000
Tax Provision 14,000 8,000
Less: Preference Share 60,000 40,000

Capital
3,97,000 3,57,000
2. Number of shares issued to equity shareholders, debenture holders and preference shareholders
P Ltd. Q Ltd. Total
Equity shares issued @ 15 per share
(including 5 premium)
3,97,000/15 26,466
Shares(*)
3,57,000/15 23,800 shares 50,266
Shares
Equity share capital @ 10 2,64,660 2,38,000 5,02,660
Securities premium @ 5 1,32,330 1,19,000 2,51,330
3,96,990 3,57,000 7,53,990
50% of Debentures are converted into equity shares @ 15 per share

1,00,000/2 = 50,000/15 3,332

Shares**
60,000/2 = 30,000/15 2,000 shares 5,332
Shares
Equity share capital @ 10 33,320 20,000 53,320
Security premium@ 5 16,660 10,000 26,660
49,980 30,000 79,980
9% Preference share capital issued 60,000 40,000 1,00,000
1 Cash paid for fraction of shares = Rs 3,97,000 less Rs 3,96,990 = Rs10

2 Cash paid for fraction of shares = Rs 50,000 less Rs 49,980 = 20

23. Explain the treatment in Selling Company books for Underwriting Commission of Rs 40,000
appearing on the Asset side of Balance Sheet of Selling Company?
Solution –
Transfer Underwriting Commission of Rs 40,000 to Equity Shareholder’s A/c.
Journal Entry for Transfer-

Equity Shareholder’s A/c Dr 40,000
To Underwriting Commission A/c 40,000
24. The financial position of two companies M/s. Abhay Ltd. and M/s. Asha Ltd. as on 31 -3-2015 is as
follows:
Balance Sheet as on 31-3-2015
Abhay Ltd. Asha Ltd.
Sources of Funds
Share Capital – Issued and Subscribed
15,000 equity shares @ 100, fully paid 15,00,000
10,000 equity shares @ 100, fully paid 10,00,000
General Reserve 2,75,000 1,25,000
Profit & Loss 75,000 25,000
Securities Premium 1,50,000 50,000
Contingency Reserve 45,000 30,000
12% Debentures, @ 100 fully paid 2,50,000
Sundry Creditors 55,000 35,000
21,00,000 15,15,000
Application of Funds
Land and Buildings 8,50,000 5,75,000
Plant and Machinery 3,45,000 2,25,000
Goodwill 1,45,000
Inventory 4,20,000 2,40,000
Sundry Debtors 3,05,000 2,85,000
Bank 1,80,000 45,000
21,00,000 15,15,000
They decided to Merge and form a new company M/s Abhilasha Ltd as on 01/04/2015 on the following
terms –
 Goodwill to be valued at 2 years purchase of the super profits. The normal rate of return is 10% of
the combined share capital and general reserve. All other reserves are to be ignored for the purpose
of goodwill. Average profits of M/s. Abhay Ltd. is 2,75,000 and M/s. Asha Ltd. is 1,75,000.
 Land and Buildings, Plant and machinery and Inventory of both companies to be valued at 10%
above book value and a provision of 10% to be provided on Sundry Debtors.
 12% debentures to be redeemed, by the issue of 12% preference shares of M/s. Abhilasha Ltd. (face
value of 100), at a premium of 10%.
 Sundry creditors to be taken over at book value. There is an unrecorded liability of 15,500 of M/s.
Asha Ltd. as on 1-4-2015.

 The bank balance of both companies to be taken over by M/s. Abhilasha Ltd. After deducting
liquidation expenses of ` 60,000 to be borne by M/s. Abhay Ltd. and M/s. Asha Ltd. in the ratio of
2 : 1.

(i) Compute the basis on which shares of M/s. Abhilasha Ltd. are to be issued to the shareholders of the
existing company assuming that the nominal value of per share of M/s. Abhilasha Ltd. is 100.
(ii) Draw Balance Sheet of M/s. Abhilasha Ltd. as on 1-4-2015 after the amalgamation
SOLUTION
(i) Computation of Purchase consideration and Basis for issue of Shares
Abhay Ltd. Asha Ltd.

Average profits 2,75,000 1,75,000
Less: Normal profits 1,77,500 1,12,500
Super Profit 97,500 62,500
Goodwill (at 2 years purchase) 1,95,000 1,25,000
Land and Building 9,35,000 6,32,500
Plant and Machinery 3,79,500 2,47,500
Inventory 4,62,000 2,64,000
Debtors less provision 2,74,500 2,56,500
Bank (less liquidation expenses 40,000: 20,000) 1,40,000 25,000
23,86,000 15,50,500
Less: Creditors (55,000) (50,500)
Debentures - (2,75,000)
Purchase consideration (Basis for issue of shares) 23,31,000 12,25,000
To be satisfied by issue of equity share of Abhilasha 23,310 12,250
Ltd. @ 100 face value
(ii) Balance Sheet of Abhilasha Ltd. (After Amalgamation) as on 01.04.2015
Particulars Note # Amount

I EQUITY & LIABILITIES
1. Shareholder’s Funds
Share Capital 1 38,31,000
Reserves & Surplus 0
2. Current Liabilities
Trade Payables 105,500
TOTAL 39,36,500
II ASSETS
PPE:
Tangible Assets 2 21,94,500

Intangible Assets 3 3,20,000
2. Current Assets:
Inventories (462,000+264,000) 726,000
Trade Receivables 4 5,31,000
Cash & Cash Equivalents 5 1,65,000
TOTAL 39,36,500
Notes to accounts
1. Share Capital
35,560 equity shares of 100 each
35,56,000
2,750 12% Preference shares @ 100
2,75,000 38,31,000
each (The above shares have been
issued for consideration other than
cash)
2. Tangible assets
Fixed Assets
Land and Building ( 9,35,000 + 6,32,500) 15,67,500
Plant and Machinery ( 3,79,500 + 2,47,500) 6,27,000 21,94,500
3. Intangible assets
Goodwill (1,95,000 + 1,25,000) 3,20,000
Current Assets
4. Trade Receivables (3,05,000 + 2,85,000) 5,90,000
Less: Provision for doubtful debts (59,000) 5,31,000
5. Cash and cash equivalents (Bank) 1,65,000

25. P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized
balance sheets of both the companies on the date of amalgamation stood as below:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Equity Shares ( 100 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
each)
9% Pref. Shares 3,80,000 2,80,000 Furniture & 1,00,000 50,000
(100 each) Fittings
8% Debentures 2,00,000 1,00,000 Plant & 6,20,000 4,50,000
Machinery
General Reserve 1,50,000 50,000 Trade 3,25,000 1,50,000
receivables
Profit & Loss A/c 3,52,000 2,05,000 Inventory 2,33,000 1,05,000
Unsecured Loan - 1,75,000 Cash at bank 2,08,000 1,75,000
Trade payables 88,000 1,60,000 Cash in hand 54,000 20,000
19,90,000 12,90,000 19,90,000 12,90,000
PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @
5% on inventory and trade receivables respectively and depreciating Furniture & Fittings by @ 10%, Plant
and Machinery by @ 10%. The trade receivables of P Ltd. include Rs 25,000 due from Q Ltd.
PQ Ltd. will issue:

(i) 5 Preference shares of Rs 20 each @ Rs 18 paid up at a premium of Rs 4 per share for each pref. share
held in both the companies.
(ii) 6 Equity shares of Rs 20 each @ Rs 18 paid up a premium of Rs 4 per share for each equity share held in
both the companies.
(iii) 6% Debentures to discharge the 8% debentures of both the companies.
(iv) 20,000 new equity shares of Rs 20 each for cash @ Rs 18 paid up at a premium of Rs 4 per share.
PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the
intrinsic value of the shares of both the companies.
Calculate Purchase Consideration.
Solution-
Purchase consideration(PC)
Particulars P Ltd Q Ltd
Payable to preference 4,18,000 3,08,000
shareholders:
Preference shares at 22 per 10,82,400 4,22,400
share
Cash [See W.N. (ii)] 1,01,700 61,850
TOTAL PC 16,02,100 7,92,250

WN (ii) Value of Net Assets-
Particulars P Ltd Q Ltd

Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture & Fittings less 10% Depreciation 90,000 45,000
Trade receivables less 5% 3,08,750 1,42,500
Inventory less 5% 2,21,350 99,750
Cash at Bank 2,08,000 1,75,000
Cash in hand 54,000 20,000
Less: Debentures (2,00,000) (1,00,000)
Less: Trade payables (88,000) (1,60,000)
Less: Secured Loans - (1,75,000)
NET ASSETS (A) 16,02,100 7,92,250
PC Payable in shares (B) 15,00,400 7,30,400
(418,000+10,82,400) (308,000+422,400)
PC Payable in Cash (A-B) 101,700 61,850
26. The following Balance Sheets are given as at 31st March, 20X1:
Particulars Best Ltd. (in Better Ltd. (in

lakhs) lakhs)
1 Shareholders’ funds
A Share capital 20 10
(shares of 100 each, fully pad)
B Reserves and Surplus 10 8
2 Current liabilities 20 2
Total 50 20
Assets
A Property, Plant and Equipment 25 15
B Non-current investments 5 -
2 Current assets 20 5
Total 50 20
The following further information is given —

(a) Better Limited issued bonus shares on 1st April, 20X1, in the ratio of one share for every two held, out of
Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s Balance
Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be 150 and the shares in Better Ltd. were valued at
Rs100 after the issue of the bonus shares. The allotment of shares is to be made on the basis of these
values.

(d) Liabilities of Better Ltd., included Rs1 lakh due to Best Ltd., for purchases from it, on which Best Ltd.,
made profit of 25% of the cost. The goods of Rs50,000 out of the said purchases, remained in stock on the
date of the above Balance Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best Ltd.,
and prepare the Balance Sheet as at 1st April, 20X1 after the takeover. (STUDY MATERIAL)
Solution
Realization A/c
To PPE A/c 15,00,000 By Liabilities A/c 2,00,000
To Current Assets A/c 5,00,000 By Best Limited (PC) ( WN1) 15,00,000
By shareholders A/c (Loss on 3,00,000
realization)
20,00,000 20,00,000
Shareholders A/c
To Realization A/c 300,000 By Equity Share capital 15,00,000
To shares in Best Ltd 15,00,000 By Reserves & Surplus A/c 300,000
(800,000-500,000)
{After Bonus Issue}
18,00,000 18,00,000
Share Capital A/c

By Balance B/d 10,00,000
To Shareholders A/c 15,00,000 By Reserves & Surplus (Bonus 500,000
Issue)
15,00,000 15,00,000
Reserves & Surplus A/c

To Share Capital (Bonus issue) 500,000 By Balance B/d 800,000
To Shareholders A/c 300,000
800,000 800,000
Journal Entries in the books of Best Ltd.
Date Particulars Amount

01/04/20X1 Business Purchase A/c Dr 15,00,000
To Liquidator of Better Ltd 15,00,000
01/04/20X1 Property, Plant and Equipment A/c Dr 15,00,000

Current Assets A/c Dr. 5,00,000
To Liabilities A/c 2,00,000
To Liquidator of Better Ltd. 15,00,000
To Capital Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over for an agreed purchase
consideration of 15,00,000 as per agreement dated....)

01/04/20X1 Liquidator of Better Ltd. 15,00,000

To Share Capital A/c 10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the issue of equity shares of
10,00,000 at a premium of Rs50 per share as per agreement)
01/04/20X1 Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in its creditors taken over,
cancelled against own Trade receivables)
Capital Reserve A/c Dr. 10,000

To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current assets of Better Ltd.
written off to Reserve Account. 20% on sale value of `50,000 shall be
eliminated as unrealized profit)
Working Note :
Calculation of Purchase consideration:

Issued Capital of Better Ltd. (after bonus issue) at Rs100 per share Rs15,00,000
Purchase consideration has been discharged by Best Ltd. by the issue of shares for Rs10,00,000 at a
premium of Rs5,00,000. This gives the value of Rs150 per share.
Balance Sheet of Best Ltd. (After absorption)

Particulars Notes
2 Current liabilities 21,00,000
Total 68,90,000
Assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2 Current assets 23,90,000
Total 68,90,000

Notes to accounts
1 Share Capital
Issued & Subscribed
30,000 shares of 100 (of the above 10,000
shares have been issued for consideration 30,00,000
other than cash)
Total 30,00,000

Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
3 Property, Plant and Equipment
PPE 25,00,000
Acquired during the year 15,00,000 40,00,000
Total 40,00,000
27. The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March, 20X1 was as
under:
Particulars Notes Hari Ltd. Vayu Ltd.

1 Shareholders’ funds
A Share capital 1 11,00,000 4,00,000
B Reserves and Surplus 2 70,000 70,000
A Long term provisions 3 50,000 20,000
A Trade Payables 1,30,000 80,000
Total 13,50,000 5,70,000
Assets
A Property, Plant and Equipment 4 8,00,000 2,50,000
B Intangible assets 5 50,000 25,000
2 Current assets
A Inventories 2,50,000 1,75,000
B Trade receivables 2,00,000 1,00,000

C Cash and Cash equivalents 50,000 20,000
Total 13,50,000 5,70,000
Notes to accounts
Hari Ltd. Vayu Ltd.
1 Share Capital
Equity shares of 10 each 10,00,000 3,00,000
9% Preference Shares of 100 each 1,00,000 --
10% Preference Shares of 100 each -- 1,00,000
11,00,000 4,00,000
General reserve 70,000 70,000
70,000 70,000
3 Long term Provisions
Retirement gratuity fund 50,000 20,000
50,000 20,000
4 Property, plant and Equipment
Land and Building 3,00,000 1,00,000
Plant and machinery 5,00,000 1,50,000
8,00,000 2,50,000
5 Intangible assets
Goodwill 50,000 25,000
50,000 25,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of Hari
Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at 1,50,000 and the Machinery at
1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March, 20X1.

Solution
In the Books of Vayu Ltd.
Realization Account
To Sundry Assets 5,70,000 By Retirement 20,000

Gratuity Fund
To Preference Shareholders By Trade payables 80,000
(Premium on Redemption) 10,000 By Hari Ltd. (Purchase
To Equity Shareholders Consideration) 5,30,000
(Profit on Realization) 50,000 ____ _
6,30,000 6,30,000
Equity Shareholders Account

` `
To Equity Shares of Hari Ltd. 4,20,000 By Share Capital 3,00,000
By General Reserve 70,000
By Realization
Account
(Profit on
____ _ realization) 50,000
4,20,000 4,20,000
Preference Shareholders Account

` `
To 9% Preference Shares of 1,10,000 By Preference Share 1,00,000
Hari Ltd. Capital
By Realization
Account
(Premium on
Redemption of
Preference
Shares) 10,000
1,10,000 1,10,000
Hari Ltd. Account

` `
To Realization Account 5,30,000 By 9% Preference Shares 1,10,000
____ _ By Equity Shares 4,20,000
5,30,000 5,30,000

In the Books of Hari Ltd.
Journal Entries
Dr. Cr.
Business Purchase A/c Dr. 5,30,000

To Liquidators of Vayu Ltd. Account 5,30,000
(Being business of Vayu Ltd. taken over)
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000
Machinery Account Dr. 1,60,000

Inventory Account Dr. 1,57,500
Trade receivables Account Dr. 1,00,000
Bank Account Dr. 20,000
To Retirement Gratuity Fund Account 20,000
To Trade payables Account 80,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 5,30,000
(Being Assets and Liabilities taken over as per
agreed valuation).
Liquidators of Vayu Ltd. A/c Dr. 5,30,000
To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as
above).
Balance Sheet of Hari Ltd. (after absorption) as at 31st March, 20X1

Particulars Notes
A Share capital 1 16,10,000
B Reserves and Surplus 2 90,000
A Long-term provisions 3 70,000
A Trade Payables 2,10,000
B Short term provision 7,500
Total 19,87,500

Assets
A Property, Plant and Equipment 4 11,10,000
B Intangible assets 5 1,00,000
2 Current assets
A Inventories 4,07,500
Trade receivables 6 3,00,000
B Cash and cash equivalents 70,000
C Total 19,87,500
Notes to accounts
`
1 Share Capital
1,40,000 Equity Shares of 10 each fully paid 14,00,000
(Out of above 40,000 Equity Shares were
issued in consideration other than for cash)
Preference share capital
2,100 9% Preference Shares of 100 each (Out 2,10,000
of above 1,100 Preference Shares were issued
in consideration other than for cash)
Total 16,10,000
Securities Premium 20,000
General Reserve 70,000
Total 90,000
3 Long-term provisions
Retirement Gratuity fund 70,000
Total 70,000
4 Short term Provisions
Provision for Doubtful Debts 7,500
5 Property, Plant and Equipment

Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
6 Intangible assets
Goodwill 1,00,000
7 Trade receivables 3,00,000

Working Notes:
Purchase Consideration:
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Inventory 1,57,500
Trade receivables 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity Fund (20,000)
Trade payables (80,000)
Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of
40,000 Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

Amalgamation

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Amalgamation

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Chapter 4 AMALGAMATION OF COMPANIES

Therefore, the term ‘amalgamation’ contemplates two kinds of activities:

Basis Amalgamation Absorption External

CA SANDESH .C H Page 4.1

AS PER AS 14, AMALGAMATION IN THE NATURE OF MERGER IS AN AMALGAMATION WHICH SATISFIES

METHODS OF ACCOUNTING FOR AMALGAMATIONS -

CA SANDESH .C H Page 4.2

purchase method + purchase consideration

Liabilities Amount Assets Amount

Calculate Purchase Consideration.

Other Assets 2,00,000 2,80,000 85,000

Profit and Loss Account 1,50,000 1,10,000 60,000

purchase method and purchase consideration

purchase method and purchase consideration

TOTAL 13,98,500 14,12,600 TOTAL 13,98,500 14,12,600

same as 3rd sum

CA SANDESH .C H Page 4.4

Following are the additional information: ignore

d. The Purchase Consideration is to be discharged as under:

You are required to:

CA SANDESH .C H Page 4.5

Given in lakhs be careful

merger method + JE in purchasing company

(1) Share Capital Authorised:

(3) Long-Term Borrowings

(5) Cash and Cash Equivalents

CA SANDESH .C H Page 4.6

You are required to:

General Reserve 2,50,000 2,50,000 Furniture 2,87,500 1,75,000

Export Profit reserve 1,50,000 1,00,000 Investments 3,50,000 2,50,000

Investment Allowance Reserve - 50,000 Stock 6,25,000 4,75,000

P&L A/c 3,75,000 1,25,000 Debtors 4,00,000 4,60,000

Creditors 1,50,000 75,000 Cash at bank 3,62,500 2,60,000

Bills payable 75,000 1,00,000

Other current liabilities 1,00,000 75,000

Total 49,50,000 33,00,000 Total 49,50,000 33,00,000

(e) Expenses of Amalgamation amounting to Rs 10,000 will be borne by Gee Ltd.

Closing Accounts in Selling

CA SANDESH .C H Page 4.9

CA SANDESH .C H Page 4.10

BALANCE SHEET OF BHAGYA LTD (AFTER ABSORPTION) as on 1st April

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securities premium alone in

General Reserve 36 100 Goodwill 2 -

Unsecured Loans A/c Dr 22,00,000

Ambika Ltd A/c Dr 90,00,000

Equity Shareholders A/c Dr 6,00,000

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Share Capital A/c Dr 50,00,000

Equity Shares in Ambika Ltd A/c Dr 90,00,000

Equity Shareholders A/c Dr 90,00,000

Balance Sheet of Ambika Ltd as on 31st March (After Absorption)

2. Non Current Liabilities-

(b) Non Current Investments 17,00,000

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2 Reserves & Surplus

must do balance sheet after internal reconstruction

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Journal Entries in the books of K ltd

Equity Share Capital A/c Dr 10,00,000

Reconstruction A/c Dr (700,000 * 10% * 3 * 20%) 42,000

Bank A/c Dr ( 800 * 98) 78,400