Acctng Aspects of Amalgamations Takeover Code

ACCOUNTING ASPECTS OF AMALGAMATION – AS - 14
For the purpose of accounting statement and related records, amalgamation means
an amalgamation pursuant to the provisions of the Companies Act, 1956. The Institute of
Chartered Accountants of India issued the Accounting Standard – 14 which is applicable
from 1st April 1955. The Accounting Standard - 14 is based on the International
Accounting Standard - 22, captioned “Accounting for Business Combinations”. The
Accounting Standard 14 deals with the accounting requirements of amalgamations and
mergers and treatment of all aspects of the amalgamation e.g. valuation of goodwill, assets,
reserves etc.
The provisions of AS-14 are applicable only in the case of amalgamation where the
transferor company ceases to exist after such amalgamation (i.e. liquidated). The
acquisition of shares or assets of one company by another company where the acquired
company is not dissolved and its separate identity continues to exist falls outside the
purview of AS-14.
PURCHASE CONSIDERATON – METHODS
1. Lump sum Method

2. Net Assets Method
3. Net Payment Method
Lump Sum Method: In this method, transferee company agrees to pay a fixed sum to the
transferor company.
Net Assets Method: Under this method, purchase consideration is calculated by taking
agreed value of assets taken over by the transferee company and deducting therefrom
agreed value of liabilities assumed by the transferee company (i.e. net worth).
Net Payment Method: Under this method, purchase consideration is calculated by adding
various payments in the form of shares, securities, cash etc. made by the transferee
company.
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Methods of Accounting:
Para 7 of AS-14 states two methods of accounting for amalgamations. These are:
1. Pooling of Interest Method and
2. Purchase Method
Types of Mergers/ Amalgamations:

AS-14 classifies mergers into two categories. These are.
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of acquisition
Pooling of Interest method is applicable in the case of amalgamation in the nature of

merger and Purchase method is applicable in the case of amalgamation in the nature of
acquisition.
Amalgamation in the nature of merger

An amalgamation which fulfils the following conditions is treated as an
amalgamation in the nature of merger.
Conditions:
1. All assets and liabilities of the transferor company before amalgamation should
become the assets and liabilities of the transferee company.
2. Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (excluding the proportion held by the transferee company)
should become shareholders of the transferee company.
3. The consideration payable to the shareholders of transferor company should be
discharged by issue of equity shares, except the cash may be paid in respect of any
fractional shares.
4. The business of the transferor company is intended to be carried on by the transferee
company.
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5. The transferee company intends to incorporate into its balance sheet the book
values of assets and liabilities of the transferor company without any adjustment
except to the extent needed to ensure uniformity of accounting policies.
Amalgamation in the nature of Acquisition

An amalgamation which does not fulfill any one or more of the conditions said
above is treated as an amalgamation in the nature of acquisition (paragraph 6 – 8).
Pooling of Interest Method

Following are the salient features of pooling of interest method of accounting.
1. Under this method, not only the assets and liabilities but also the reserves (including
statutory reserves) of the transferor company are recorded by the transferee
company in its books of account.
2. The difference between the consideration paid and the share capital of the transferor
company is adjusted in general reserve or other reserves of the transferee company.
Purchase Method
Following are the salient features of purchase method of accounting.(Paragraph 36 – 39)
1. Under this method, all the assets and liabilities of the transferor company are
recorded in the books of transferee company at the existing carrying amounts or by
allocating purchase consideration to individual identifiable assets and liabilities on
the fair values on the date of amalgamation.
2. Reserves (except statutory reserves) of transferor Company are not aggregated with
those of the transferee company. In other words, only statutory reserves of
transferor company is incorporated in the books of transferee company and
maintained for the specified period, failing which the benefits associated with the
reserves will be withdrawn. When the identity of the statutory reserve is no longer
required to be maintained, it can be eliminated from the balance sheet.
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3. The difference between the purchase consideration and the net book value of assets
over liabilities is treated as ‘goodwill’/ Capital Reserves. If purchase consideration
is greater than the net book value of assets and liabilities, it is goodwill and
otherwise it is capital reserve.
4. The goodwill arising out of merger is amortised over a period not exceeding five
years. However, a longer period may be allowed if it deems necessary.
The following factors are to be taken into account in estimating the useful life of
goodwill.
i. The force able life of the business or industry
ii. The effects of product obsolescence, changes in demand and other economic
factors;
iii. The service life expectancies of key individuals or groups of employees.
Pooling of Interest Method Vs. Purchase Method
Points of Differences Pooling of Interest Method Purchase Method
Transfer of Book values Revalued values
Assets & Liabilities (Market Values) or
PC allocated to individual identifiable
assets and liabilities on the basis of fair
value on the date of amalgamation.
Reserves & Surplus Transferred Not Transferred
(Excluding SR)
Statutory Reserves (SR) Transferred Transferred
(Amalgamation Adjustment A/c is
debited with the amount of S R)
Treatment of Difference between PC and Difference between PC and Networth of
Profit/loss on amalgamation share capital of transferor the transferor company is treated as C R
company is adjusted in G R or or Goodwill.
other reserves of transferee
company
For example, amalgamation of HLL (Hindustan Lever Ltd.) and BBLIL (Brooke
Bond Lipton India Ltd.) is a case of amalgamation in the nature of merger and
amalgamation of HLL and TOMCO (Tata Oil Mill Co. Ltd.) is a case of amalgamation in
the nature of purchase
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US Practice of Accounting for Amalgamations:
In US all the companies are required to follow purchase method of accounting.
Because in recent past, US Financial Accounting Standard Board (FASB) has scrapped the
pooling of interest method of accounting. The uniform method of accounting enables to
easily compare the financial statements of different companies. And goodwill arising out
of acquisition is amortised over a period of 20 years. Earlier it was allowed to be amortised
over the period of 40 years.
Accounting Disclosures
Following are the accounting disclosures required to be made in the first financial
statements following the amalgamation.
1. General Disclosures : Required for amalgamations of every type

i. Names and general nature of business of the amalgamating companies
ii. Effective date of amalgamation for accounting purposes
iii. The method accounting used to reflect the amalgamation
iv. Particulars of the scheme sanctioned under a statute
2. Additional Disclosures Required under ‘Pooling of Interest Method’ :

In case of amalgamation in the nature of Pooling of Interest method.
i. Description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation
ii. The amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
3. Additional Disclosures Required under ‘Pooling of Interest Method’

In case of amalgamation in the nature of Pooling of Interest method.
i. Consideration for the amalgamation and a description of the consideration paid
or contingently payable
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ii. The amount of any difference between the consideration and the value of net
identifiable assets required, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
Amalgamation After the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure should
be made as per the provisions of AS-4 : ‘Contingencies and Events Occurring after the
Balance Sheet Date’. However, the amalgamation should not be incorporated in that
financial statements. In certain circumstances, the amalgamation may also provide
additional information affecting the financial statements themselves, for instance, by
allowing the going concern assumption to be maintained.
Treatment of reserves and goodwill in the books of transferee company is explained

with the following illustration.
Illustration:
Consider the following balance sheets of A Ltd. and B Ltd. as on 31st March 2004.
(in lakh Rs.)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share Capital Fixed Assets:
Equity share of Rs.10 each 700 400 Land & Building 250 150
10% Preference Shares of Plant & Machinery 550 300
Rs.10 each - 120 Furniture & Fixtures 60 40
Reserves & Surplus: Investment 180 100
General Reserves 250 150
Development Allowance Current Assets, Loans &
Reserve - 50 Advances: 200 270
P & L A/c 100 50 Inventories 100 70
Sundry Debtors 50 20
Secured Loan: Bank 80 30
15% Debentures 200 80 Cash 30 20
Advance Tax
Unsecured Loan:
Fixed Deposit 90 70
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Current Liabilities &
Provisions:
Sundry Creditors 70 50
Bills Payable 40 10
Provision for tax 50 20
Total 1,500 1,000 Total 1,500 1,000
A Ltd. and B Ltd. agreed to merge each other on the above date for a total consideration
of Rs.600 lakh to be discharged fully by issue of equity shares of A Ltd. The market price
per share of A Ltd. as on the date of amalgamation was 15.
Prepare the balance sheet of A Ltd. after merger, if it is a

i. amalgamation in the nature of merger
ii. amalgamation in the nature of purchase
Solution:
i. If it is a amalgamation in the nature of merger

Balance Sheet of A Ltd. after merger
(in lakh Rs.)
Liabilities Amount Assets Amount
Equity share of Rs.10 each (700+400) 1,100 Land & Building (250 + 150) 400
10% Preference Shares of Rs.10 each Plant & Machinery (550+300) 850
(0+120) 120 Furniture & Fixtures (60+40) 100
Investment (180+100) 280
Reserves & Surplus:
General Reserves (See W.N.-2) 200 Current Assets, Loans &
Share Premium (See W.N. – 1) 200 Advances:
Development Allowance Reserve 50 Inventories (200+270) 470
P & L A/c (100+50) 150 Sundry Debtors (100+70) 170
Bank balances (50+20) 70
Secured Loan: Cash (80+30) 110
15% Debentures (200+80) 280 Advance Tax (30+20) 50
Unsecured Loan:
Fixed Deposit (90+70) 160
Current Liabilities & Provisions:

Sundry Creditors (70+50) 120
Bills Payable (40+10) 50
Provision for tax (50+20) 70
Total 2,500 Total 2,500
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It is observed that the balance sheet size of the merged entity is equal to the total of
individual balance sheet size of both the merging companies. It is because of the assets,
liabilities and reserves of target company are incorporated in the balance sheet of acquirer
company at carrying amounts not at any revalued figures as per provisions of AS - 14.
Working Notes
1. Computation of Equity Share Capital and Share Premium
No. of Shares Issued = Purchase Consideration / Market Price

= Rs.600 lakh / Rs.15 = 40 lakh shares
Amount
(in lakh Rs.)
Equity Shares Capital (40 lakh shares x Rs.10) 400
Share Premium (40 lakh shares x Rs.5) 200
600
2. Computation of General Reserve
Amount
(in lakh Rs.)
General Reserve of A Ltd. 250
General Reserve of B Ltd. 150
400
Less: Adjustment for merger -200
Purchase consideration – nominal value of shares 200
(i.e. 600 – 400)
ii. If it is a amalgamation in the nature of purchase

(in lakh Rs.)
10% Preference Shares of Rs.10 each 120 Plant & Machinery (550+300) 850
Reserves & Surplus: Furniture & Fixtures (60+40) 100
Capital Reserve (See W.N.-3) 50 Investment (180+100) 280
General Reserves 250
Share Premium 200 Current Assets, Loans &
Development Allowance Reserve 50 Advances:
P & L A/c 100 Inventories (200+270) 470
Sundry Debtors (100+70) 170
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Secured Loan: Bank balances (50+20) 70
15% Debentures(200+80) 280 Cash (80+30) 110
Advance Tax (30+20) 50
Unsecured Loan: Amalgamation Adjustment A/c 50

Total 2,550 2,550
Working Notes
3. Computation of Capital Reserve / Goodwill
CR / Goodwill = Net worth – Purchase Consideration
Amount
(in lakh Rs.)
Net worth of B Ltd.
Total value of Assets taken over 1,000
Less: Liabilities Assumed
10% Pref. Shares 120
15% Debentures 80
Fixed Deposits 70
Sundry Creditors 50
Bills Payable 10
Provision for Tax 20 - 350
Net Worth of B Ltd. 650
Purchase Consideration 600
Less: Net Worth of B Ltd. -650
Capital Reserve 50
If the fair value of the assets and liabilities of B Ltd. are :
Amount
(in lakh Rs.)
Assets
Land & Building 180
Plant & Machinery 400
Furniture & Fixtures 25
Investment 200
Inventories 250
Sundry Debtors 50
Bank 20
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Cash 30
Advance Tax 20
Liabilities
10% Pref. Shares 120
15% Debentures 80
Fixed Deposits 70
Sundry Creditors 50
Bills Payable 10
Provision for Tax 20
Prepare the balance sheet of A Ltd. after merger under Purchase Method
Method -1
(All the assets and liabilities of the transferor company are recorded in the books of
transferee company at the carrying amounts)

(in lakh Rs.)
Reserves & Surplus:
General Reserves 250 Current Assets, Loans &
Capital Reserve 225 Advances:
Share Premium 200 Inventories (200+250) 450
Development Allowance Reserve 50 Sundry Debtors (100+50) 150
P & L A/c 100 Bank balances (50+20) 70
Cash (80+30) 110
Secured Loan: Advance Tax (30+20) 50
15% Debentures (200+80) 280 Amalgamation Adjustment A/c 50
Unsecured Loan:

10
Method- 2
(Purchase Consideration is allocated to individual identifiable assets and liabilities on the
fair values on the date of amalgamation)
Working Notes
Amount of Adjusted Purchase Consideration

Amount
(in lakh Rs.)
Purchase Consideration 600
Add: Long-term Liabilities
(Whose fair values are same as book values)
10% Preference Shares 120
15% Debentures 80
Fixed Deposits 70 270
870
Less: Assets (Whose fair value are same as book values)
Bank 20
Cash 30
Advance Tax 20 70
800
Fair Value Ratio

Amount
(in lakh Rs.)
Land & Building 180
Plant & Machinery 400
Furniture & Fixtures 25
Investment 200
Net Current Assets (250 + 50 – 50 – 10 – 20) 220
Total 1,025
Distribution of Purchase Consideration
Amount
(in lakh Rs.)
Land & Building (800 / 1,025 x 180) 140
Plant & Machinery (800 / 1,025 x 400) 312
Furniture & Fixtures (800 / 1,025 x 25) 20
Investment (800 / 1,025 x 200) 156
Net Current Assets (800 / 1,025 x 220) 172
800
Net Current Assets 172
Add: Sundry Creditors 50
Bills Payable 10
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Provision for tax 20 80
Gross Current Assets 252
Inventories (252/300 x 250) 210
Sundry Debtors (252/300 x 50) 42

(in lakh Rs.)
Equity share of Rs.10 each (700+400) 1,100 Land & Building (250 140) 390
Reserves & Surplus:
General Reserves 250 Current Assets, Loans &
Share Premium 200 Advances:
Development Allowance Reserve 50 Inventories (200+210) 410
P & L A/c 100 Sundry Debtors (100+42) 142
Bank balances (50+20) 70
Secured Loan: Cash (80+30) 110
15% Debentures (200+80) 280 Advance Tax (30+20) 50
Amalgamation Adjustment A/c 50
Unsecured Loan:

Thus, in case of the amalgamation is in the nature of merger the premium paid has
no impact on future profits, rather it is adjusted with past profits. However, in case of the
amalgamation in the nature of purchase, any premium paid to acquire the transferor
company would affect future profits of the acquiring company (at least for next five years).
Higher the value of goodwill arising out of merger, higher the adverse impact on future
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profit. The impact of amalgamation (in the nature of purchase) on future profit would
discourage the acquirer from paying huge premium in acquisition.
LEDGER ACCOUNTS AND JOURNAL ENTRIES
LEDGER ACCOUNTS
in the Books of B Co. Ltd. (Transferor Co.)

Realisation A/c
Dr. Cr.
Date Particulars Amount Date Particulars Amount
To Land & Building 150 By 10% Pref. Shares 120
To P & M 300 By 15% Debentures 80
To F & F 40 By Fixed Deposits 70
To Investment 100 By Creditors 50
To Inventories 270 By Bills Payable 10
To Debtors 70 By Provision for tax 20
To Bank 20 By A Co. Ltd. 600
To Cash 30 By Equity Shareholders 50
To Advance Tax 20 (loss)
Equity Shareholders A/c

Dr. Cr.
To Realisation A/c 50 By Equity Shares 400
To Equity Shares in 600 By General Reserve 150
A Co. By Dep. Allow Res. 50
By P & L 50
650 650
JOURNAL ENTRIES
In the books of A Co. Ltd. company

PURCHASE METHOD
Date Particulars LF Debit Credit

For Purchase of Business (P C)
Business Purchase A/c Dr. 600 -
To Liquidator of B Co. Ltd. A/c - 600
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For Incorporation of assets and Liabilities taken over at agreed
values
Land & Buildings A/c Dr. 180 -

Plant & Machinery A/c 400 -
Furniture & Fixtures A/c 25 -
Investment A/c 200 -
Inventory A/c 250 -
Sundry Debtors A/c 50 -
Bank A/c 20 -
Cash A/c 30 -
Advance Tax A/c 20 -
- 120
To 10% Pref. Share Capital A/c - 80
To 15% Debentures A/c - 70
To Fixed Deposits A/c - 50
To Sundry Creditors A/c - 10
To Bills Payable A/c - 20
To Provision for Tax A/c - 50
To B Co. Ltd. (PC) - 600
To Capital Reserve (B/f) - 225
When Statutory Reserves of Transferor Co. is to be
maintained
50 -
Amalgamation Adjustment A/c Dr.
- 50
To Development Allowance Reserve A/c
For Discharging Purchasing Consideration
Liquidator of B Co. Ltd. A/c Dr. 600 -
To Equity Share Capital A/c - 400
To Share Premium A/c (if any) - 200
POOLING OF INTEREST METHOD

Business Purchase A/c Dr. 600 -
To Liquidator of B Co. Ltd. A/c - 600
values
Land & Buildings A/c Dr. 150 -

Plant & Machinery A/c 300 -
Furniture & Fixtures A/c 40 -
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Investment A/c 100 -
Inventory A/c 270 -
Sundry Debtors A/c 70 -
Bank A/c 20 -
Cash A/c 30 -
Advance Tax A/c 20 -
To 10% Pref. Share Capital A/c - 120

To 15% Debentures A/c - 80
To Fixed Deposits A/c - 70
To Sundry Creditors A/c - 50
To Bills Payable A/c - 10
To Provision for Tax A/c - 20
To Development Allowance Reserve A/c - 50
To B Co. Ltd. (PC) - 600

Liquidator of B Co. Ltd. A/c Dr. 600 -
To Equity Share Capital A/c - 400
To Share Premium A/c (if any) - 200
JOURNAL ENTRIES
In the Books of Transferor Company (Both the methods)

For transferring various assets at book values
Realisation A/c Dr. XX -
To Various Assets A/c - XX
For transferring various liabilities at book values
Various Liabilities A/c Dr. XX -
To Realisation A/c - XX
For recording Purchase Consideration
Transferee Co. A/c Dr. XX -
For receiving Purchase Consideration in various forms
Cash A/c Dr. XX -
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Equity Share Capital A/c Dr. XX -
Preference Share Capital A/c Dr. XX -
Debentures A/c Dr. XX -
To Transferee Co. A/c (PC) - XX
For sale of the assets not taken over by the transferee Co.
Cash A/c Dr. XX -
Treatment of Liquidation Expenses
a. When paid and borne by transferor co.
To Cash A/c - XX
b. When paid by transferor but collected from the
transferee Co.
i. Transferee co. A/c Dr. XX -
To Cash / Bank A/c - XX
ii. Bank A/c Dr. XX -

To Transferee Co. - XX
c. When paid and borne by the transferee Co.
No entry
For transfer of debentures (if not assumed) to debenture
holders A/c
Debentures A/c Dr. XX -
To Debenture holders A/c - XX
Discharge of debentures (not assumed)
Debenture holders A/c Dr. XX -
Premium on discharge of debentures
To Debenture holders A/c - XX
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(Note: The above entry is reversed if debentures are discharged
at discount)
Discharge of any other liability (not assumed) by Transferee
Company
Concerned Liability A/c Dr. XX -
Premium on discharge of the liability
To Concerned Liability A/c - XX
(Note: The above entry is reversed if the liability is discharged
at discount)
For transfer of preference share capital to preference
share holders A/c
Preference Share Capital A/c Dr. XX -
To Preference Shareholders A/c - XX
For payment to preference shareholders
Preference Shareholders A/c Dr. XX -
To Cash / Debentures / Preference shares/ Equity shares in - XX
Transferee Co.
For Transfer of Equity share capital, credit balance of P &
L etc. to equity shareholders A/c
Equity Share Capital A/c Dr. XX -
Capital Reserves A/c Dr. XX -
Capital Redemption Reserve A/c Dr. XX -
Share Premium A/c Dr. XX -
Genera Reserve A/c Dr. XX -
P & L A/c (Cr. Balance) Dr. XX -
Sinking Fund A/c Dr. XX -
To Equity Shareholders A/c - XX
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For transfer of debit balances of P & L A/c etc. to Equity
Shareholders A/c XX -
Equity Shareholders A/c Dr. - XX
To Preliminary Expenses A/c - XX
To Underwriting Commission A/c - XX
To Expenses on Issue of Debentures A/c - XX
To Discount on Issue of Shares A/c - XX
To Discount on Issue of Debentures A/c - XX
To P & LA/c (Dr. Balance)
For transfer of realization profit
To Equity shareholders A/c - XX
For transfer of realization loss

Equity shareholders A/c Dr. XX -
For payment to equity shareholders
Equity shareholders A/c Dr. XX -
To Cash /Bank - XX
To Equity shares in Transferee Co. - XX
Notes:
1. Cash and bank balances are transferred to realisation account only when they are
taken over by the company and only the portion of cash/bank taken over by the
transferee company is transferred. However, the other assets (including goodwill if
any), are transferred even if they are not taken over.
2. Asset does not include expenses and losses appearing in the balance sheet not yet
written off
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3. If there is a provision against an asset, such an asset is transferred to realization
account at gross figure; the related provision account is transferred to realization
account by means of another entry.
4. Transfer only those liabilities which are taken over.
5. If any fund or reserve denotes liability it should be transferred to the realization
account. If only a portion of it is a liability, that portion only should be transferred.
In the Books of Transferee Company

Business Purchase A/c Dr. XX -
To Liquidator of Transferor Co. A/c - XX
values (Excluding Goodwill)
PURCHASE METHOD
Various Assets A/c Dr. XX -
Goodwill A/c (B/f) Dr. XX -
To Various Liabilities A/c - XX
To Capital Reserve (B/f) - XX
To Business Purchase A/c - XX
(If credit is more than the debit, the difference is treated as
Goodwill and if debit is more than the credit, it is Capital
Reserve)

Various Assets A/c Dr. XX -
P & L A/c (B/f) Dr. XX -
To Various Liabilities A/c - XX
To Various Reserves A/c (Except P & L A/c & GR) - XX
To General Reserve A/c (B/f) - XX
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To Business Purchase A/c - XX
(As per Para 33 of AS-14, the balance of P & L A/c of the
transferor company is adjusted to General Reserve)
When Statutory Reserves of Transferor Co. is to be
maintained
Amalgamation Adjustment A/c Dr. XX -
To Statutory Reserves A/c - XX
Liquidator of Transferor Co. A/c Dr. XX -
Discount on Issue of Shares/Other Securities A/c (If any) Dr. XX -
To Equity Share Capital A/c - XX
To Share Premium A/c (if any) - XX
To Other Securities A/c (if any) - XX
To Cash A/c (if any) - XX
To Investment in shares of transferor Co. (if any) - XX
For recording Liquidation Expenses
(When paid and borne by transferee Co.)
PURCHASE METHOD
Goodwill / Capital Reserve A/c Dr. XX -
To Cash/Bank A/c - XX

General Reserve / P & L A/c Dr. XX -
For discharge of debentures of the transferor company by
the transferee company directly (i.e. by allotting its own
debentures)
Debentures (of Transferor Co.) A/c Dr. XX -
Debenture Discount A/c (if any) Dr. XX -
To Debentures (of Transferee Co.) A/c - XX
To Debenture Premium A/c (if any) - XX
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For expenses incurred by the transferee company for its
formation
Preliminary Expenses A/c Dr. XX -
For Elimination of Inter Company Dues
Concerned Liabilities A/c Dr. XX -
To Concerned Asset A/c - XX
(The above entry is applicable for both - the amount due by
transferor to transferee or transferee to transferor company)
For Elimination of Unrealized Profit on assets
For Unrealised profit included in the stock of transferor
company bought from transferee company
No Entry
(The stock of transferor company reduced by the unrealized
profit is incorporated)
For the Unrealised profit included in the stock of transferee

company bought from transferor company
PURCHASE METHOD
XX -
Goodwill / Capital Reserves A/c Dr.
- XX
To Stock A/c
XX -
General Reserves / P & L A/c Dr.
- XX
To Stock A/c
Notes:
1. All the assets, unwritten-off expenses, liabilities to outsider and reserves of the
transferor company are to be incorporated in the books of the transferee company
in the form and at the book values as they were appearing in the books of the
transferor company on the date of amalgamations.
LEDGER ACCOUNTS
In the Books of TRANSFEROR Company:
1. Realization A/c
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2. Transferee Company A/c
3. Equity Shareholders A/c
4. Debenture holders A/c (If any)
5. Preference Shareholders A/c (If any)
6. Liability (not taken over by transferee Co.) A/c
7. Equity /Preference Shares/Debentures in Transferee Co.
8. Cash or Bank A/c
In the Books of TRANSFEREE Company:

1. Business Purchase A/c
2. Liquidator of Transferor Company A/c
3. Capital Reserve or Goodwill A/c (in case of Purchase Method)
4. General Reserve or P & L A/c (in case of Pooling of Interest Method)
TREATMENT OF DISSENTING SHAREHOLDERS

The accounting treatment of dissenting shareholders is as same as the treatment of
preference shareholders or debenture holders. The share capital held by the dissenting
shareholders is transferred to a separate account opened for the purpose. Any amount paid
in excess of the capital or discount received from them is transferred to the realisation
account. All items of the balance sheet pertaining to equity shareholders are transferred to
assenting (or willing) shareholders only, but not to the dissenting shareholders. Realisation
profit or loss is also transferred only to the willing shareholders.
Illustration
Following is the balance sheet of Star Ltd. as on 31 st December 2006.
Capital & Liabilities Amount Assets Amount
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Share Capital Land & Building 5,00,000
Equity shares of Rs.10 5,00,000 Plant & Machinery 2,00,000
each 2,00,000 Stock 1,00,000
General Reserve 1,50,000 Debtors 2,50,000
P & L A/c 3,00,000 Bank 1,00,000
Creditors
11,50,000 11,50,000
Sun Ltd. agreed to take over the business of Star Ltd. except cash of Rs.40,000. For
every five shares held by the shareholders of Star Ltd. were to be allotted two shares of
Rs.100 each (Rs.50 paid) in Sun Ltd. The market value of the shares of Sun Ltd. On the
date of absorption is Rs.80 each.
Star Ltd. paid liquidation expenses Rs.5,000 and income tax liability of Rs.10,000
and 1,000 dissenting shareholders are paid Rs.20,000.
Prepare necessary ledger accounts in the books of Star Ltd. and journal entries in
the books of Sun Ltd.
Solution:
Ledger Accounts in the Books of Star Ltd. (Transferor Co.)
Realisation A/c
Dr. Cr.
31st To Land & Building 5,00,000 31st By Creditors 3,00,000
Dec. To Plant & Machinery 2,00,000 Dec. By Sun Ltd. (PC) 15,68,000
2006 To Stock 1,00,000 2006
To Debtors 2,50,000
To Bank 60,000
To Bank :
Liquidation Exp. 5,000 15,000
Income Tax 10,000
To Dissenting
Shareholders 10,000
To Equity
Shareholders A/c 7,33,000
18,68,000 18,68,000
Purchase Consideration
Equity Shares (2/5 x 49,000 shares) 19,600 shares at Rs.80 each Rs.15,68,000
23
Sun Ltd. A/c (Transferee Co.)
Dr. Cr.
31st Realisation A/c 15,68,000 31st By Equity Shares in 15,68,000
Dec. Dec. Sun Ltd.
2006 2006
15,68,000 15,68,000
Equity Shares in Sun Ltd. A/c

Dr. Cr.
31st To Sun Ltd. A/c 15,68,000 31st By Equity Share 15,68,000
Dec. Dec. holders A/c
2006 2006
15,68,000 15,68,000
Dissenting Shareholders A/c

Dr. Cr.
31st To Bank A/c 20,000 31 st
By Equity Share
Dec. Dec. Capital A/c 10,000
2006 2006 By Realization A/c 10,000
20,000 20,000

Dr. Cr.
31st To Equity Shares in 15,68,000 31st By Equity Share 4,90,000
Dec. Sun Ltd. Dec. Capital
2006 To Bank A/c 5,000 2006 By General Reserve 2,00,000
By P & L A/c 1,50,000
By Realistion A/c 7,33,000
15,73,000 15,73,000
Bank A/c
Dr. Cr.
31st To Balance B/d 40,000 31st By Realisation A/c 15,000
Dec. Dec. Liquidation Exp.
2006 2006 Income Tax
By Dissenting
Shareholders A/c 20,000
By Equity
Shareholders A/c 5,000
24
40,000 40,000
Journal Entries in the Books of Sun Ltd. (Transferee Co.)

31stBusiness Purchase A/c Dr. 15,68,000 -
Dec. To Liquidator of Star Ltd. A/c - 15,68,000
2006 (Being purchase consideration payable)
-do- Land & Building A/c Dr. 5,00,000 -
Plant & Machinery A/c Dr. 2,00,000 -
Stock A/c Dr. 1,00,000 -
Debtors A/c Dr. 2,50,000 -
Bank A/c Dr. 60,000 -
Goodwill A/c (B/f) Dr. 7,58,000 -
To Creditors A/c - 15,68,000
To Business Purchase A/c - 3,00,000
(Being incorporation of the above assets and liabilities
taken over and adjustment of the balance to capital
reserve)
-do- Liquidator of Star Ltd. A/c Dr. 15,68,000 -
To Equity share capital A/c - 9,80,000
To Equity Share Premium A/c - 5,88,000
(Being discharge of purchase consideration)
TREATMENT OF INTER COMPANY OWINGS

Amounts owed by the transferee company to the transferor company or vice versa is
called inter company owings. Such inter company owings should be eliminated in the
books of transferee company by passing the following entry. No entry is required to be
passed in the books of transferor company.
Sundry Creditors A/c Dr.

To Sundry Debtors A/c
Bills Payable A/c Dr.

To Bills Receivable A/c
(The same entry is passed for both the types of owings – owings by transferor to
transferee and transferee to transferor company)
For Inter company Debentures (Investments

A. When Debentures held by the Transferee Company in Transferor Company
25
Debentures A/c Dr.
Investment in Debentures A/c
Adjustment of profit / loss on revaluation of debentures

In case of Purchase Method
If debentures were purchased at below the recorded value (Profit)
Debentures A/c Dr.
To Investment in Debentures A/c
To Goodwill / Capital Reserve A/c
If debentures were purchased at above the recorded value (Loss)

Debentures A/c Dr.
Goodwill / Capital Reserve A/c
In case of Pooling of Interest Method

If debentures were purchased at below the recorded value (Profit)
Debentures A/c Dr.
To Capital Reserve A/c
If debentures were purchased at above the recorded value (Loss)

Debentures A/c Dr.
GR / P & L A/c
B. When Debentures held by the Transferor Company in Transferee Company

In case of Purchase Method
If par value of debentures is more than recorded value (Profit)
Debentures A/c Dr.
To Goodwill / Capital Reserve A/c
If par value of debentures is less than recorded value (Loss)

Debentures A/c Dr.
Goodwill / Capital Reserve A/c
In case of Pooling of Interest Method

If par value of debentures is more than recorded value (Profit)
Debentures A/c Dr.
To Capital Reserve A/c
If par value of debentures is less than recorded value (Loss)
26
Debentures A/c Dr.
GR / P & L A/c
UNREALISED PROFIT ON STOCK

When transferor company sells goods to transferee company or vice versa at
profit and some of these goods are unsold, the profit on such portion of unsold stock is
called as unrealized profit. It is treated as follows.
In case of unsold stock of transferor company bought from transferee company

While passing the entries for acquisition of the business of the transferor company,
the figure of stock should be reduced by the profit charged by the transferee company. The
figure of goodwill / capital reserve (Purchase Method) or G R / P & L A/c (Pooling of
Interest Method) will be automatically get adjusted.
In case of unsold stock of transferee company bought from transferor company

The following entry is passed
i. In case of Purchase Method
Goodwill / Capital Reserve A/c Dr.
To Stock A/c
ii. In case of Pooling of Interest Method

GR / P & L A/c Dr.
To Stock A/c
TREATMENT OF INTER COMPANY HOLDINGS

Inter company holdings may take in the form of
i. Holdings by transferor company in the transferee company
ii. Holdings by transferee company in the transferor company
iii. Holdings by both the companies in one another
Treatment of Holdings by Transferee Company in Transferor Company

Purchase consideration is calculated only for outsiders and credited to Realisation
account and Paid up value of the shares held by the transferee company should be debited
to the share capital account and credited to the Realisation account.
Alternatively purchase consideration is calculated for the entire firm. Then the
proportionate amount due to the transferee company for shares held by it should be debited
27
to the shareholders account and credited to the account of the transferee company which
company will square up its account by issuing shares and cash etc. for the amount really
due from its.
Illustration
The balance sheet of P Ltd. and Q Ltd. is as follows.
Capital & P Ltd. Q Ltd. Assets P Ltd. Q Ltd.

Liabilities
Capital Fixed Assets 20,00,000 10,00,000
Equity Shares of Current Assets 16,50,000 7,00,000
Rs.10 each 25,00,000 15,00,000 Investments
General Reserve 5,00,000 - 30,000 Equity
Current Liabilities 10,00,000 3,00,000 shares in Q 3,50,000 -
Ltd. - 1,00,000
P & L A/c
40,00,000 18,00,000 40,00,000 18,00,000
P Ltd. took over the business of Q Ltd. for which it agreed to pay cash Rs.1,00,000
and issue the sufficient number of equity shares of Rs.10 each at an agreed value of
Rs.15 each and to meet the liquidation expenditure of Rs.10,000.
You are required

i. To prepare necessary ledger accounts in the books of Q Ltd.
ii. Pass the journal entries in the books of P Ltd.
iii. Prepare the balance sheet of P Ltd. after absorption
Solution:
Computation of Purchase Consideration (Net Assets Method)
Fixed Assets 10,00,000

Current Assets 7,00,000
Total Assets 17,00,000
Less : Current Liabilities 3,00,000
14,00,000
P’s holdings in Q is (30,000/1,50,000 x 100) 20%
The Purchase Consideration to be paid is (80% of Rs.14,00,000) Rs.11,20,000
28
Mode of Payment
1. In Cash: Rs. 1,00,000
2. In Equity Shares: 68,000 shares of Rs.15 Rs. 10,20,000
(Rs.10,20,000 / Rs. 15) 11,20,000
Ledger Accounts in the Books of ‘Q’ Ltd. (Transferor Co.)

Realisation A/c
Dr. Cr.
To Fixed Assets 10,00,000 By Current Liabilities 3,00,000
To Current Assets 7,00,000 By ‘P’ Co. A/c (PC) 11,20,000
To Equity Share 20,000 By Equity Share Capital 3,00,000
holders A/c (Profit)
17,20,000 17,20,000
‘P’ Ltd. A/c (Transferee Co.)

Dr. Cr.
Realisation A/c 11,20,000 By Equity Shares in 10,20,000
‘P’ Ltd. 1,00,000
By Bank A/c
11,20,000 11,20,000
Equity Shares in ‘P’ Ltd. A/c

Dr. Cr.
To ‘P’ Ltd. A/c 10,20,000 By Equity Share 10,20,000
holders A/c
10,20,000 10,20,000
Equity Share Capital A/c

Dr. Cr.
To Realisation A/c 3,00,000 By Balance b/d 15,00,000
To Equity 12,00,000
Shareholders A/c
6,00,000 15,00,000

Dr. Cr.
To P & L A/c 1,00,000 By Equity Share
Capital 12,00,000
29
To Equity Shares in 10,20,000 By Realistion A/c 20,000
‘P’ Ltd. 1,00,000
To Bank A/c
12,20,000 12,20,000
Journal Entries in the Books of ‘P’ Ltd. (Transferee Co.)

Business Purchase A/c Dr. 11,20,000 -
To Liquidator of Q Ltd. A/c - 11,20,000
(Being purchase consideration payable to liquidator of
Q Ltd.)
Fixed Assets A/c Dr. 10,00,000 -
Current Assets A/c Dr. 7,00,000 -
Goodwill A/c (B/f) Dr. 70,000 -
To Current Liabilities A/c - 3,00,000
To Investment in Q Co. A/c - 3,50,000
(Being incorporation of the above assets and liabilities of
Q Ltd. taken over and adjustment of the balance to
Goodwill)
Liquidator of Q Ltd. A/c Dr. 11,20,000 -
To Equity share capital A/c (68,000 x 10) - 6,80,000
To Share Premium A/c (68,000 x 5) - 3,40,000
To Bank A/c - 1,00,000
(Being discharge of purchase consideration by allotment
of 68,000 shares at Rs.15 each and the balance in cash)
Goodwill A/c Dr. 10,000 -
To Bank A/c - 10,000
(Being liquidation expenses paid adjusted to Goodwill
A/c)
Balance Sheet of P Ltd. after Absorption

(in Rs.) (in Rs.)
Capital: Goodwill 80,000
3,18,000 Equity Shares of 31,80,000 (70,000 + 10,000)
Rs.10 each Fixed Assets 30,00,000
(2,50,000 + 68,000) (20,00,000 + 10,00,000)
Share premium 3,40,000 Current Assets 22,40,000
(68,000 shares at Rs.5) (16,50,000 -1,00,000 –
General Reserve 5,00,000 10,000 + 7,00,000)
Current Liabilities 13,00,000
(10,00,000 + 3,00,000)
53,20,000 53,20,000
30
Holdings by Transferor Company in Transferor Company
The shares already held by the transferor company in the transferee company is
deducted from the total number of shares which would be allocated for the entire firm.
Illustration
Balance sheet of A Ltd. and B Ltd. as on 31st March 2006 is given below.
Capital & A Ltd. B Ltd. Assets A Ltd. B Ltd.

Liabilities
Capital Fixed Assets 30,00,000 10,00,000
Equity shares of Investments
Rs.10 each 50,00,000 20,00,000 30,000 shares
General Reserve 2,00,000 - in A Ltd. (at - 3,50,000
P & L A/c 3,00,000 - cost) 10,00,000 50,000
Current liabilities 5,00,000 5,00,000 Cash and Bank 20,00,000 9,00,000
Current assets - 2,00,000
P & L A/c
60,00,000 25,00,000 60,00,000 25,00,000
A Ltd. agreed to absorb the business of B Ltd. on the following terms

1. The purchase consideration is agreed for Rs.20,00,000
2. The consideration is to be discharged by paying cash Rs.5,00,000 and
allotment of sufficient number of equity shares in A Ltd. of the face value
of Rs.10 each issued at Rs.15
3. The cost of liquidation Rs.15,000 is paid by A Ltd.
You are required

i. To prepare necessary ledger accounts in the books of B Ltd.
ii. Pass the journal entries in the books of A Ltd.
iii. Prepare the balance sheet of A Ltd. after absorption
Solution:
Computation of Number of Shares Issued
Consideration for the whole company Rs.20,00,000

Less : Cash payment Rs. 5,00,000
Consideration to be met by issue of shares Rs.15,00,000
31
Number of Shares to meet Rs.15,00,000(Rs.15,00,000 / Rs.15) 1,00,000 shares
Less : Shares already held by transferor company 30,000 shares
Number of shares to be issued 70,000 shares
Mode of Payment
1. In Cash Rs. 5,00,000
2. In Equity Shares: (70,000 Shares x Rs.15) Rs.10,50,000
Purchase Consideration Rs.15,50,000
Ledger Accounts in the Books of ‘B’ Ltd. (Transferor Co.)

Realisation A/c
Dr. Cr.
st st
31 To Fixed Assets 10,00,000 31 By Current Liabilities 5,00,000
March To Current Assets 9,00,000 March By ‘A’ Co. A/c (PC) 15,50,000
2006 To Bank 50,000 2006 By Equity Shares in A 1,00,000
To Equity Share 2,00,000 Ltd. (Profit on
holders A/c (Profit) Revaluation)
21,50,000 21,50,000
‘A’ Ltd. A/c (Transferee Co.)

Dr. Cr.
31st Realisation A/c 15,50,000 31st By Equity Shares in
March March ‘A’ Ltd. 10,50,000
2006 2006 By Bank A/c 5,00,000
15,50,000 15,50,000
Equity Shares in ‘A’ Ltd. A/c

Dr. Cr.
31st To Balance b/d 3,50,000 31st By Equity Share 15,00,000
March To ‘A’ Ltd. A/c 10,50,000 March holders A/c
2006 2006
15,00,000 15,00,000

Dr. Cr.
st st
31 To Equity 20,00,000 31 By Balance b/d 20,00,000
March Shareholders A/c March
2006 2006
20,00,000 20,00,000
32
Dr. Cr.
31st To P & L A/c 2,00,000 31st By Equity Share
March To Equity Shares in March Capital 20,00,000
2006 ‘A’ Ltd. 15,00,000 2006 By Realistion A/c 2,00,000
To Bank A/c 5,00,000
22,00,000 22,00,000
Journal Entries in the Books of ‘A’ Ltd. (Transferee Co.)

March To Liquidator of B Ltd. A/c - 15,50,000
-do- Fixed Assets A/c Dr. 10,00,000 -
Current Assets A/c Dr. 9,00,000 -
Bank A/c Dr. 50,000 -
To Current Liabilities A/c - 5,00,000
of B Ltd. taken over and adjustment of the balance to
Goodwill)
-do- Liquidator of B Ltd. A/c Dr. 15,50,000 -
To Share Premium A/c (70,000 x 5) - 3,50,000
To Bank A/c - 5,00,000
-do- Goodwill A/c Dr. 15,000 -
(Being liquidation expenses paid adjusted to Goodwill
A/c)
Balance Sheet of ‘A’ Ltd. after Absorption

(in Rs.) (in Rs.)
Capital: Goodwill 1,15,000
5,70,000 Equity Shares of Rs.10 57,00,000 (1,00,000 + 15,000)
each Fixed Assets 40,00,000
(5,00,000 + 70,000) (30,00,000 + 10,00,000)
Share premium 3,50,000 Current Assets 29,00,000
(70,000 shares at Rs.5) (20,00,000 + 9,00,000)
33
General Reserve 2,00,000 Cash at Bank 5,35,000
P & L A/c 3,00,000 (10,00,000 - 5,00,000 –
Current Liabilities 10,00,000 15,000 + 50,000)
(5,00,000 + 5,00,000)
75,50,000 75,50,000
Mutual Holdings
In this case, the value of shares of both the companies should be ascertained.
Because, value of share of one company influences the value of share of another company.
And hence, total value is ascertained by means of an algebraic equation.
Illustration.
The following are the summarized balance sheets of two companies - Alpha Ltd.
and Beta Ltd. as on 31st march 2006.
Capital & Liabilities Alpha Ltd. Beta Ltd. Assets Alpha Ltd. Beta Ltd.
Share Capital Sunday Assets 12,00,000 8,00,000
(Shares of Rs.10 6,00,000 4,00,000 Investments
each) 10,000 Shares in
Reserves 2,50,000 - Alpha - 1,50,000
12% Debentures - 3,00,000 5,000 Shares in Beta 40,000 -
Trade Creditors 4,40,000 3,00,000 Debentures in Beta 50,000 -
P & L A/c - 50,000
12,90,000 10,00,000 12,90,000 10,00,000
Both the companies agreed that Alpha Ltd. is to take over the business of Beta Ltd.
According to the agreement, the shareholders of Beta Ltd. were to receive shares in Alpha
Ltd. on the basis of the intrinsic value of the shares. For this purpose, sundry assets of Beta
Ltd. is written-off by Rs.50,000 and those of Alpha Ltd. written-up by Rs.30,000. The 12%
debenture holders in Beta Ltd. are converted into 15% Preference shares of Rs.100 each.
Prior to absorption, Alpha Ltd. declared a dividend of 10%, which is not yet been paid.
Prepare necessary ledger accounts in the books of Beta Ltd. and pass journal entries
in the books of Alpha Ltd. and prepare amalgamated balance sheet of Alpha Ltd.
Solution:
34
Computation of Purchase Consideration
i. Intrinsic Value of the Companies (Before adjustment of inter company investment)

Alpha Co. Beta Co.
Other Assets 12,30,000 7,50,000
Debentures in Beta Co. 50,000 -
Dividend outstanding - 10,000
Less : Liabilities 12,80,000 7,60,000
Creditors 4,40,000 3,00,000
12% Debentures - 3,00,000
Dividend outstanding 60,000 -
7,80,000 1,60,000
ii. Computation of Intrinsic Value of shares of the companies (after adjustment of

inter company investment)
Let A be the intrinsic value of Alpha Co. and B be the intrinsic value of Beta Co.
A = Rs.7,80,000 + 1/8th of B.
B = Rs.1,60,000 + 1/6th of A.
= 7,80,000 + 1/8th of (1,60,000 + 1/6th of A)

= 7,80,000 + 20,000 + 1/48th of A
= 8,00,000 + 1/48 A
= 3,84,00,000/48 + 1/48A
48 A = 3,84,00,000 + A
47 A = 3,84,00,000
A = 3,84,00000 / 47
A = 8,17,021
B = 1,60,000 = 1/6th of 8,17,021

B = 1,60,000 + 1,36,170
B = 2,96,170
Intrinsic Value Per Share of Alpha Ltd. : 8,17,021 / 60,000 = Rs.13.62
Intrinsic Value Per Share of Beta Ltd. : 2,96,170 / 40,000 = Rs.7.40
Amount to be paid to outsiders in Beta Ltd. = Rs.2,59,149

(7/8th of Rs.2,96,170)
Number of shares to be issued 19,027

(i.e. 2,59,149 / 13.62)
Less : Shares already with Beta Ltd. 10,000
Additional shares to be issued 9,027
35
And hence, Purchase Consideration payable = Rs.1,22,948
(9,027 shares at Rs.13.62)
Goodwill / Capital Reserve

Assets taken over from Beta Ltd. 7,50,000
Add: Dividend Receivable 10,000
7,60,000
Less : Liabilities taken over
Debentures Rs.3,00,000
Creditors Rs.3,00,000 6,00,000
1,60,000
Less :Intrinsic value of shares held in Beta Ltd. 37.021

(2,96,170 x 1/8) 1,22.979
Less : Purchase Consideration 1,22,948
Profit 31
Profit on Valuation of Shares in Beta Ltd.

Intrinsic value of 5,000 shares in Beta Ltd. 37,021
(or 5,000 shares x Rs.7.40)
Less : Cost of Investment 40,000
Loss on Valuation (Goodwill) 2,979
Add: Profit on Purchase of business (Goodwill) 31
Total Loss (Goodwill) 2,948
Less : Profit on revaluation of assets of Alpha Ltd. 30,000
Capital Reserve 27,052
Alpha Ltd. will not convert own debentures in Beta Ltd. into preference shares
Balance Sheet of Alpha Ltd. after Absorption

Share Capital 6,90,270 Other Assets 19,80,000
(69,0270 shares of Rs.10 each)
Share Premium 32,678
(9,027 shares at Rs.3.62)
15% Preference Share Capital 2,50,000
Genera Reserve 1,90,000
Creditors 7,40,000
Outstanding Dividend 50,000
19,80,000 19,80,000
RECONSTRUCTION
36
Reconstruction means reorganization of a company’s financial structure. Financial
structure of a company is reorganized in two ways - internally and externally. The former
is called Internal Reconstruction and the latter is External Reconstruction.
INTERNAL RECONSTRUCTION
In the case of internal reconstruction, all the assets and liabilities of a company are
revalued, the losses suffered by the company is written off by a deduction of the paid
up value of shares and /or varying of the rights attached to different classes of shares
and compounding with the creditors. Neither an existing company is liquidated nor a
newly formed.
EXTERNAL RECONSTRUCTION
In case of external reconstruction, a new company is formed to take over the
business of an existing company. It means an undertaking of a company is transferred to a
newly formed company consisting substantially of the same shareholders with a view to
carry on the business of the transferor company.
Illustration:
Due to financial distress Bharat Ltd. decided to undertake external reconstruction.
Following is the balance sheet of Bharat Ltd. as on 31st December 2006.

Capital Fixed Assets 6,00,000
Equity Share Capital 11,00,000 Current Assets 3,00,000
8% Preference Share Capital 3,00,000 P & L A/c 6,00,000
Profit Prior to Incorporation 5,000
Current Liabilities 95,000
15,00,000 15,00,000
Bharat Ltd. liquidated and formed a new company known as New Bharat Ltd. to takeover
the business of Bharat Ltd. New Bharat Ltd. Valued the assets as under.
Building Rs.3,00,000
Plant & Machinery Rs.1,50,000
Furniture Rs.50,000
37
Stock Rs.1,00,000
Rs.6,00,000
The purchase consideration was satisfied by allotment of equity shares and 10%
preference shares in New Bharat Ltd. in the ratio of 2 : 1.
Sundry debtors of Bharat Ltd. was realized for Rs.1,20,000 and paid Rs.80,000 to
sundry creditors in full satisfaction of their claim. Liquidation expenses amounted to
Rs.15,000. The preference shareholders in the Bharat Ltd. agreed to accept in fully
satisfaction of their claims, the preference shares in the new company and the available in
cash.
New Bharat Ltd. also agreed to assume contingent liability of Rs.20,000 (which was
included in current liability) and which was settled by allotment of equity shares.
Pass journal entries in the books of both the companies and prepare the balance
sheet of New Bharat Ltd.
Solution:
Journal Entries in the Books of

Bharat Ltd. (Transferor Company)
31st Dec. Realisation A/c Dr. 9,00,000 -
2006 To Fixed Assets A/c - 6,00,000
To Current Assets A/c - 3,00,000
(Being transfer of the above assets to Realisation A/c
taken over by New Bharat Ltd.)
-do- New Bharat Ltd. A/c Dr. 6,00,000 -
To Realisation A/c - 6,00,000
(Being purchase consideration due from New Bharat
Ltd.)
-do- Bank A/c Dr. 1,20,000 -
(Being amount realized from sundry debtors)
-do- Current Liabilities A/c Dr. 95,000 -
38
To Realisation A/c - 15,000
(Being amount paid to sundry creditors in full
satisfaction their claim and the balance transferred to
realization A/c)
-do- Equity Shares in New Bharat Ltd. A/c Dr. 4,00,000 -
10% Preference Shares in New Bharat A/c Dr. 2,00,000 -
To New Bharat Ltd. A/c (PC) - 6,00,000
(Being receipt of purchase consideration in equity
shares and in preference shares in the ratio of 1 : 2)
-do- Realisation A/c Dr. 15,000 -
(Being liquidation expenses paid)
-do- 8% Preference Shareholders A/c Dr. 3,00,000 -
To 10% Preference shares in New Bharat A/c - 2,00,000
To Realistion A/c 75,000
(Being distribution of preference shares received
from New Bharat to the preference shareholders of
Bharat and cash)
-do- Equity Shareholders A/c Dr. 7,05,000 -
To P & L A/c 6,00,000
(Being transfer of realization loss and profit and loss
account)
-do- Equity Share Capital A/c Dr. 10,00,000 -
Profit Prior to Incorporation A/c Dr. 5,000 -
To Equity Shareholders A/c - 10,05,000
(Being transfer of share capital and profit prior to
incorporation to equity shareholders account)
-do- Equity shareholders A/c Dr. 4,00,000 -
To Equity Shares in New Bharat Ltd. A/c - 4,00,000
(Being distribution of shares received from New
Bharat Ltd., to the equity shareholders)
Note :
1. Cash available to preference shareholders (Sundry debtors of Rs.1,20,000 – paid to
creditors Rs.80,000 – liquidation expenses Rs.15,000) = Rs.25,000.
2. Computation of Realisation Loss
Realisation A/c
Amount Amount
To Fixed Assets 6,00,000 By New Bharat (PC) 6,00,000
To Current Assets 3,00,000 By Bank (Debtors) 1,20,000
To Bank (Exp.) 15,000 By Liabilities (Profit) 15,000
By 8% Preference Share
capital (Profit) 75,000
1,05,000
39
By Equity Share holders
A/c (Loss)
9,15,000 9,15,000

New Bharat Ltd. (Transferee Company)

Dec. To Liquidator of Bharat Ltd. - 6,00,000
-do- Buildings A/c Dr. 3,00,000 -
Furniture A/c Dr. 50,000 -
Stock A/c Dr. 1,00,000 -
of Bharat Ltd. taken over and adjustment of the balance
to capital reserve)
-do- Liquidator of Bharat Ltd. A/c Dr. 6,00,000 -
To 10% Preference Share Capital A/c - 2,00,000
of equity shares and preference shares)
To Equity Share Capital A/c - 20,000
(Being discharge of contingent liability by allotment of
equity shares)
Balance Sheet of New Bharat Ltd.

as on 31st December 2006
Capital Goodwill 20,000
Equity Share Capital 4,20,000 Building 3,00,000
(4,00,000 + 20,000) Plant & Machinery 1,50,000
10% Preference Share Capital 2,00,000 Furniture 50,000
Stock 1,00,000
6,20,000 6,20,000
40
Illustration - 4
The following balance sheet of X Ltd. and Y Ltd. as at 31stMarch 1998 are given below:
ASSETS & LIABILITIES X Ltd. Y Ltd.

In Rs. In Rs.
ASSETS
Fixed Assets 10,00,000 50,000
Sundry Debtors 2,90,000 1,50,000
Stock 4,80,000 2,10,000
Investments:
1,000 shares in Y Ltd. 1,50,000 -
3,000 shares in X Ltd. - 5,00,000
Cash at Bank 1,40,000 90,000
Total 20,60,000 10,00,000
LIABILITIES
Share Capital: 15,00,000 5,00,000
(Fully paid up equity shares ofRs.100 each)
General Reserve 2,00,000 1,00,000
P& LA/c 1,60,000 10,000
12% Debentures - 3,00,000
Current liabilities 2,00,000 90,000
Total 20,60,000 10,00,000
Y Ltd. traded in raw materials which were required by X Ltd. for manufacture of
its products. Stock of X Ltd. includes Rs.1,00,000 for purchases made from Y Ltd. on
which Y Ltd. made a profit of 20% on selling price X Ltd. owed Rs.40,000 to Y Ltd. in
this respect. It was decided that X Ltd. should absorb Y Ltd. On the basis of the intrinsic
value of the shares of the two companies. Before absorption, X Ltd. declared a divided on
8% X Ltd. also decided to revalue the shares in Y Ltd. before recording entries relating to
the absorption.
Show the journal entries, which X Ltd. must pass to record the acquisition and
prepare its balance sheet immediately thereafter. All working notes should form part of the
answer.
Solution :
Journal Entries in the Books of X Ltd.
41
1 P & L A/c Dr. 1,20,000 -
To Dividend Payable A/c - 1,20,000
(Dividend payable on Rs.15,00,000 @ 8%)
2 General Reserve A/c Dr. 55,833 -
To Shares in Y Ltd. - 55,833
(Reduction in value of shares in Y Ltd.
1,50,000 – 94,167)
3 Fixed Assets A/c Dr. 50,000 -
Sundry Debtors A/c Dr. 1,50,000 -
Stock-in-trade A/c Dr. 2,10,000 -
Dividend Receivable A/c Dr. 24,000 -
Bank A/c Dr. 90,000 -
To 12% Debentures A/c - 3,00,000
To Current Liabilities A/c - 90,000
To Y Ltd. - 1,34,000
(Sundry assets and liabilities taken over from
Y Ltd.)
4 Y Ltd. A/c Dr. 1,34,000 -
To Bank A/c - 86
To share capital A/c - 35,400
To Share premium A/c - 4,347
To share in Y Ltd. - 94,167
(Settlement of purchase consideration and
cancellation of shares held in Y Ltd., credited
to share premium on 354 shares @
Rs.12.2778 per share)
5 Sundry Creditors A/c Dr. 40,000 -
To Sundry Debtors A/c - 40,000
(Adjustment of Inter-company balances)
42
6 Goodwill A/c Dr. 20,000 -
To Stock - 20,000
(Adjustment of unrealized profit on stock
transferred from Y Ltd.)
7 Dividend Payable A/c Dr. 1,20,000 -
To Dividend Receivable A/c - 24,000
(Dividend paid)
Consolidated Balance Sheet of X Ltd. as on 31st March 1987

Share Capital 15,35,400 Fixed Assets:
(15,354 sharesofRs.100 fully paid) Good will 20,000
Reserve &Surplus: Other FA 10,00,000
Share premium 4,347 Addition 50,000 10,50,000
General Reserve 2,00,000 Current Assets, Loans &
Less : Transfer to Advances:
investment A/c 55,833 1,44,167 Stock-in-trade 4,80,000
P& L A/c 1,60,000 Addition 2,10,000
Less : Dividend 1,20,000 40,000 Less: Unrealized profit 20,000 6,70,000
Secured loans: Sundry Debtors 2,90,000
12% Debentures 3,00,000 Addition 1,50,000
Current Liabilities& Provisions: Less :inter Co. 40,000 4,00,000
Current liabilities 2 ,90,000 Cash at bank 1,40,000
Less: inter co. debt 40,000 2,50,000 Addition 90,000
Less : Dividend 96,086 1,33,914
22,73,914 Total 22,73,914
Exercise Problems
P-1
The following is the balance sheet of A Co. Ltd. as on 31-03-2005.

(in Rs.) (in Rs.)
43
Share capital Buildings 1,50,000
(50,000 equity shares of Rs.10 each) 5,00,000 Machinery 5,50,000
General Reserve 1,70,000 Stock 80,000
P & L A/c 30,000 Debtors 70,000
12% Debentures of Rs.100 each 1,00,000 Cash 15,000
Trade creditors 50,000
Employees PF 15,000
8,65,000 8,65,000
Company B has agreed to purchase company A at Rs.6,61,500/- to be paid in fully

paid equity shares of Rs.10 each.
Pass journal entries to close the books of accounts of A Ltd. and also prepare the
realization and equity shareholder’s account.
MACR-VTU-MBA-III-Jan-2006 (NS)
Solution :
Journal Entries in the books of ‘A’ Co.

31st March Realisation A/c Dr. 8,65,000
2005 To Building A/c - 1,50,000
To Machinery A/c - 5,50,000
To Stock A/c - 80,000
To Debtors A/c - 70,000
To Cash A/c - 15,000
(Being transfer of the above assets taken over by B
Co.)
-do- 12% Debentures A/c Dr. 1,00,000 -
Trade creditors A/c Dr. 50,000 -
Employees PF A/c Dr. 15,000 -
(Being transfer of the above liabilities assumed by B
Co.)
-do- B Co. A/c Dr. 6,61,500 -
(Being purchase consideration due from B Co.)
-do- Equity Shares in B Co. A/c Dr. 6,61,500 -
To B Co. A/c (PC) - 6,61,500
(Being receipt of purchase consideration in shares)
-do- Equity Share Capital A/c Dr. 5,00,000 -
General Reserves A/c 1,70,000 -
Dr. 30,000 -
P & L A/c - 7,00,000
To Equity Shareholders A/c
44
(Being transfer of share capital, reserves etc. to the
equity shareholders account)
-do- Equity shareholders A/c Dr. 38,500 -
(Being transfer of realization loss to the shareholders
account)
To Equity shares in B Co. - 6,61,500
(Being distribution of shares, received from B
company, to the equity shareholders)
Realisation A/c
Dr. Cr.
st st
31 To Building 1,50,000 31 By Debentures 1,00,000
March To Machinery 5,50,000 March By Creditors 50,000
2005 To Stock 80,000 2005 By Employees PF 15,000
To Debtors 70,000 By B Co. (PC) 6,61,500
To Cash 15,000 By Equity
shareholders A/c 38,500
(Realistion loss)
8,65,000 8,65,000

Dr. Cr.
31st To Equity Shares in 31st By Balance b/d 5,00,000
March B Co. 6,61,500 March By General Reserve 1,70,000
2005 To Realisation A/c 38,500 2005 By P & L A/c 30,000
7,00,000 7,00,000
P-2
The following is the balance sheet of Dee Ltd. as on 31-03-2005.

(in Rs.) (in Rs.)
Share capital Buildings 1,70,000
(40,000 equity shares of Rs.10 each) 4,00,000 Plant & Machinery 4,00,000
General Reserve 50,000 Investment 50,600
P & L A/c 29,600 Debtors 1,40,500
10% Debentures 2,50,000 Stock 80,700
Creditors 1,28,700 Cash at bank 16,500
45
8,58,300 8,58,300
Dee Ltd. was absorbed by Comet Ltd. on the above mentioned date on the following terms
and conditions:
Comet Ltd.to:
i. Assume liabilities and to acquire all assets except investments which were sold
by Dee Ltd. For Rs.45,000.
ii. Discharge the debentures of Dee Ltd. at a discount of 5% by issue of 12%
debentures of Rs.100 each in Comet Ltd.
iii. Issue Two equity shares of Rs.5 each in Comet Ltd. at Rs.6 pe share and also to
pay Rs.2 per share in cash to the share holders of Dee Ltd. in exchange of every
share in Dee Ltd. And
iv. Pay the cost of absorption Rs.2,500 as part of purchase consideration. Dee Ltd.
sold in the open market 1/4th of the shares received from Comet Ltd. at the
average rate of Rs.5.50 per share.
Show the necessary ledger accounts in the books of Dee Ltd. and the opening entries
in the books of Comet Ltd.
MACR-VTU-MBA-III-Jan-2006 (NS) and MACR-VTU-MBA-III-Jan/Feb-2003
(NS)
Solution :
It is treated as amalgamation in the nature of Purchase.

1. In Equity Shares : 80,000 shares of Rs.6 each 4,80,000
(2/1 x 40,000)
2. In Cash :
To Equity shareholders : (Rs.2 x 40,000 shares) 80,000
Towards Liquidation Exp.: 2,500 82,500
5,62,500
Ledger Accounts in the Books of Dee Ltd. (Transferor Company)

Realisation A/c
Dr. Cr.
46
31st To Building A/c 1,70,000 31st By 10% Debentures 2,50,000
March To Plant & M/c A/c 4,00,000 March By Creditors 1,28,700
2005 To Investment A/c 50,000 2005 By Comet Ltd. A/c 5,62,500
To Debtors A/c 1,40,500 (PC)
To Stock A/c 80,700 By Investments A/c 45,000
To Bank A/c 16,500
To Bank A/c (Exp.) 2,500
To Equity Share
holders A/c (Profit) 1,25,400
9,86,200 9,86,200
Comet Ltd. A/c (Transferee Co.)

Dr. Cr.
st st
31 Realisation A/c 5,62,500 31 By Equity Shares in
March March Comet Ltd. 4,80,000
2005 2005 By Cash A/c 82,500
5,62,500 5,62,500
Equity Shares in Comet Ltd. A/c

Dr. Cr.
st st
31 To Comet Ltd. A/c 4,80,000 31 By Equity Share 4,80,000
March March holders A/c
2005 2005
4,80,000 4,80,000

Dr. Cr.
31st To Equity 31st By Balance b/d 4,00,000
March Shareholders A/c 4,00,000 March
2005 2005
4,00,000 4,00,000

Dr. Cr.
31st To Equity Shares in 31st By Balance b/d 4,00,000
March B Co. 4,80,000 March By General Reserve 50,000
2005 To Bank A/c 1,25,000 2005 By P & L A/c 29,600
6,05,000 6,05,000
47
Bank A/c
Dr. Cr.
st st
31 To Balance b/d 16,500 31 By Realisation A/c 16,500
March To Comet Ltd. A/c 82,500 March By Realisation A/c
2005 To Investment A/c 45,000 2005 (Exp.) 2,500
By Equity Sahre
holders A/c 1,25,000
1,44,000 1,44,000

Comet Ltd.

31st Business Purchase A/c Dr. 5,62,500 -
March To Liquidator of Y Ltd. - 5,62,500
2005 (Being purchase consideration payable to liquidator of
Dee Ltd.)
-do- Building A/c Dr. 1,70,000 -
Stock A/c Dr. 80,700 -
Bank A/c Dr. 16,500 -
(Being incorporation of various assets and liabilities of
Dee Ltd. taken over and adjustment of the balance to
goodwill account)
-do- Liquidator of Dee Ltd. A/c Dr. 5,62,500 -
To Equity Share Premium A/c (80,000 x 1) - 80,000
(Being discharge of debentures of Dee Ltd. by allotment
of new 12% debentures at par value)
P-3
White Ltd. agreed to acquire the business of Green Ltd. as on 31st March 2004.The
summarised balance sheet of Green Ltd. at that date was as follows.
(in Rs.) (in Rs.)
48
Share capital in fully paid 6,00,000 Goodwill 1,00,000
equity shares ofRs.10 each Land and Buildings 2,30,000
General Reserve 1,70,000 Plant and Machinery 4,10,000
Profit and loss account 1,10,000 Stock in trade 1,68,000
12% Debentures 1,00,000 Debtors 36,000
Creditors 20,000 Cash at bank 56,000
10,00,000 10,00,000
While computing the agreed consideration, the directors of White Ltd. valued the
assets as under.
Amount
(in Rs.)
Land & Buildings 7,50,000
Plant& Machinery 4,50,000
Stock-in-trade 1,42,000
Debtors Subject to an
allowance of 5% to
cover doubtful debts.
The consideration payable by White Ltd. was agreed as follows :
• A cash payment equivalent to Rs.2.50 for every Rs.10 share in Green Ltd.
• The issue of 90,000 Rs.10 equity shares fully paid in White Ltd. having an
agreed value of Rs.15 per share.
White Ltd. Also agreed to discharge the 12% debentures of Green Ltd. at a premium
of 20% by allotment of its 14% debentures at 96%.
The cost of liquidation of Green Ltd. came toRs.5,000, which was borne by White
Ltd.
Give ledger accounts to close the books of Green Ltd. and draft journal entries
required in the books of White Ltd.
MACR-VTU-MBA-III-Jan/Feb.-2005(NS)
Solution:
Computation of Purchase Consideration (Net Payment Method)

1. In Cash Rs.2.50 x 60,000 Shares 1,50,000
2. In Equity Shares (90,000 Shares x Rs.15) 13,50,000
Total 15,00,000
Ledger Accounts in the Books of Green Ltd. (Transferor Company)

Realisation A/c
Dr. Cr.
49
st st
31 To Goodwill A/c 1,00,000 31 By 10% Debentures 1,00,000
March To L & B A/c 2,30,000 March By Creditors 20,000
2005 To P & M A/c 4,10,000 2005 By White Ltd. A/c 15,00,000
To Stock A/c 1,68,000 (PC)
To Debtors A/c 36,000
To Bank A/c 56,000
To Equity Share 6,20,000
holders A/c (Profit)
10,20,000 10,20,000
White Ltd. A/c (Transferee Co.)

Dr. Cr.
st st
31 Realisation A/c 15,00,000 31 By Equity Shares in
March March White Ltd. 13,50,000
2005 2005 By Bank A/c 1,50,000
15,00,000 15,00,000
Equity Shares in White Ltd. A/c

Dr. Cr.
st st
31 To White Ltd. A/c 13,50,000 31 By Equity Share 13,50,000
March March holders A/c
2005 2005
13,50,000 13,50,000

Dr. Cr.
31st To Equity 31st By Balance b/d 6,00,000
March Shareholders A/c 6,00,000 March
2005 2005
6,00,000 6,00,000

Dr. Cr.
st st
31 To Equity Shares in 31 By Balance b/d 6,00,000
March White Co. 13,50,000 March By General Reserve 1,70,000
2005 To Bank A/c 1,50,000 2005 By P & L A/c 1,10,000
15,00,000 15,00,000
50
Bank A/c
Dr. Cr.
st st
31 To Balance b/d 56,000 31 By Realisation A/c 56,000
March To White Ltd. A/c 1,50,000 March By Equity Share 1,50,000
2005 2005 holders A/c
2,06,000 2,06,000

Comet Ltd.

st
31 Business Purchase A/c Dr. 15,00,000 -
2004 (Being purchase consideration payable to liquidator of
Green Ltd.)
-do- Land & Building A/c Dr. 7,50,000 -
Stockn A/c Dr. 1,42,000 -
Debtors A/c Dr. 36,000 -
Bank A/c Dr. 56,000 -
To 12% Debentures A/c (at premium) - 1,20,000
To Creditors A/c - 20,000
To Provision for Bad Debts A/c - 1,800
To Business Purchase A/c 15,00,000
Dee Ltd. taken over and adjustment of the balance to
goodwill account)
-do- Liquidator of Green Ltd. A/c Dr. 15,00,000 -
To Equity Share Premium A/c - 4,50,000
To Bank A/c - 1,50,000
of 90,000 shares at Rs.15 each and in cash)
Discount on Debentures A/c Dr. 5,000 -
(Being discharge of debentures of Green Ltd. by
allotment of new 14% debentures at 4% discount)
To Bank A/c - 5,000
51
P- 4
The following is the balance sheet of A Ltd.
(in Rs.) (in Rs.)
Share capital: Goodwill 70,000
6,000 equity shares ofRs.100 Plant & Machinery 4,60,000
each fully paid 6,00,000 Furniture 1,02,000
General Reserve 2,50,000 Stock 4,36,000
P & L Appropriation A/c 80,000 Debtors 1,34,000
B/P 70,000 Cash at bank 23,000
Creditors 2,45,000 Preliminary Exp. 20,000
12,45,000 12,45,000
Suppose :
i. B Ltd., purchased the business of A ltd.
ii. Good will is value at Rs.2,00,000 while stock is valued at Rs.4,16,000. Other
assets are considered worth their book value.
iii. B Ltd. Does not take over cash at bank.
iv. Consideration is to be discharged in the form of 90,000 fully paid equity shares
of Rs.10 each, valued at par and balance is cash.
From the above given information, calculate purchase consideration for Company A
Ltd.
MACR-VTU-MBA-III-Jun./Jul.-2004(NS)
Solution:

Agreed Value of the Assets taken over
Goodwill 2,00,000
Plant & Machinery 4,60,000
Furniture 1,02,000
Stock 4,16,000
Debtors 1,34,000
Less : Agreed Value of the Liabilities Assumed
Creditors 2,45,000
Bills Payables 70,000 3,15,000
9,97,000
Mode of Payment
1. In Equity Shares
(90,000 shares of Rs.10 each) 9,00,000
52
2. In Cash (B/f) 97,000
Total 9,97,000
P-5
The balance sheet as on 31st March, 2003 of TCS Ltd. and Sonata Ltd. are as under.
TCS Ltd.
(in Rs.) (in Rs.)
Share Capital: Fixed Assets:
Authorised & subscribed 60,000 Building 20,00,000
ES of Rs.100 each fully paid 60,00,000 Machineries 26,00,00
Reserves & Surplus : Furniture 40,000
General Reserves 8,00,000 Current Assets:
P & L A/c 4,80,000 Stock 16,00,00
Current liabilities & provisions Debtors 9,20,000
Sundry creditors 9,60,000 Cash in hand 2,80,000
Bank 8,00,000
82,40,000 82,40,000
Sonata Ltd.
(in Rs.) (in Rs.)
Share Capital : Goodwill 4,00,000
Authorised & subscribed 20,000 ES Fixed Assets :
of Rs.100 each fully paid 20,00,000 Machineries 16,80,000
Reserves & Surplus : Furniture 20,000
Capital Reserves 2,00,000 Current Assets :
General Reserves 1,00,000 Stock 7,20,000
P & L A/c 1,40,000 Debtors 7,20,000
Unsecured Loan : Cash in hand 20,000
12% debentures 12,00,000 Bank 1,60,000
Current liabilities & provisions: Expenditure on new
Sundry creditors 3,80,000 project 3,00,000
40,20,000 40.20.000
Sonata Ltd. was absorbed by TCS Ltd., on 1st April 2003, on the following terms :
i. Fixed assets other than good will to be valued at Rs.20,00,000 including
Rs.24,000 for furniture.
ii. Stock to be reduced by Rs.80,000 and debtors by 5%
53
iii. TCS Ltd. to assume liabilities and to discharge the 12% debentures by issue of
11% debentures of the same value in addition a premium of 6% was paid in
cash
iv. The new project to be valued @ Rs.3,80,000
v. The share holders of Sonata Ltd. to receive cash payment of Rs.30 per share
plus four equity shares in TCS Ltd., for every five shares held in Sonata ltd.
vi. Both the companies to declare and pay dividend of 6% prior to absorption.
vii. Expenses of liquidation of Sonata Ltd. are to be reimbursed by TCS Ltd. to the
extent of Rs.20,000. The actual expenses amounted to Rs.24,000. Draft journal
entries regarding the scheme in the books of Sonata Ltd., and TCS Ltd. and
prepare the balance sheet of TCS Ltd. after absorption assuming that TCS Ltd.’s
authorized capital has been increased to Rs.80,00,000.
MACR-VTU-MBA-III-Jun./Jul.-2004(NS)
Solution:
Since the adjustments are made to the book value of the assets of the transferor
company while incorporating them in the books of Transferee Company, it is treated as
amalgamation in the nature of purchase as per AS-14.
Computation of Purchase Consideration (Net Payment Method)

1. In Cash : Rs.30 x 20,000 Shares 6,00,000
2. In Equity Shares: 16,000 shares @ Rs.100 16,00,000
(4/5 x 20,000 Shares) 22,00,000

Sonata Ltd. (Transferor Company)
st
31 March Profit & Loss A/c Dr. 1,20,000 -
2003 To Dividend A/c - 1,20,000
(Being dividend payable on equity share capital)
-do- Dividend A/c Dr. 1,20,000 -
To Bank A/c - 1,20,000
-do- Realisation A/c Dr. 38,96,000 -
To Goodwill A/c - 4,00,000
54
To Furniture A/c - 20,000
To Stock A/c - 7,20,000
To Debtors A/c - 7,20,000
To Cash A/c - 20,000
To Bank A/c1 - 36,000
To New Project A/c - 3,00,000
taken over by TCS Ltd.)
Creditors A/c Dr. 3,80,000 -
(Being transfer of the above liabilities assumed by
TCS Ltd.)
-do- TCS Ltd. A/c Dr. 22,00,000 -
(Being purchase consideration due from TCS Ltd.)
-do- Equity Shares in TCS Ltd. A/c Dr. 16,00,000 -
Bank A/c Dr. 6,00,000 22,00,000
To TCS Ltd. A/c (PC) -
(Being receipt of purchase consideration partly in
shares and partly in cash)
-do- Realisation A/c Dr. 4,000 -
To Bank A/c - 4,000
-do- Equity Shareholders A/c Dr. 1,20,000 -
(Being transfer of realization loss)
Equity Share Capital A/c Dr. 20,00,000 -
-do- Capital Reserve A/c Dr. 2,00,000 -
General Reserves A/c Dr. 1,00,000 -
P & L A/c 2 Dr. 20,000 -
(Being transfer of equity share capital and reserves
etc. to the equity shareholders account)
To Equity Shares in TCS Ltd. A/c - 16,00,000
To Bank A/c - 6,00,000
(Being distribution of shares received from TCS and
payment of cash to the shareholders)
Notes:
1. Bank Account: (Rs.1,60,000 – 1,20,000 – 4,000) = Rs.36,000
2. P & L Account: (Rs.1,40,000 – 1,20,000 dividend) = Rs.20,000

TCS Ltd. (Transferee Company)
55
-do- Machinery A/c Dr. 19,76,000 -
Furniture A/c Dr. 24,000 -
Stock A/c Dr. 6,40,000 -
Cash A/c Dr. 20,000 -
Bank A/c Dr. 36,000 -
New Project A/c Dr. 3,80,000 -
Goodwill A/c (B/f) Dr. 20,000 -
To Provision for Bad Debts A/c - 36,000
Sonata Ltd. taken over and adjustment of the balance to
goodwill account)
Goodwill A/c Dr. 72,000 -
To Bank A/c - 72,00,000
(Being discharge of 12% debentures at 6% premium by
issue of new 11% debentures and payment of cash)
(Being payment of liquidation expenses)
-do- Liquidator of Sonata Ltd. A/c Dr. 22,00,000 -
To Bank A/c - 6,00,000
of 16,000 shares at Rs.100 each and partly in cash)
-do- Profit & Loss A/c Dr. 3,60,000 -
To Dividend A/c - 3,60,000
(Being dividend payable on equity share capital)
-do- Dividend A/c Dr. 3,60,000 -
To Bank A/c - 3,60,000
(Being payment of dividend)
Balance Sheet of TCS Ltd. after absorption

as on 31st March 2003
56
Issued and Subscribed: Goodwill 1,12,000
76,000 equity shares of Buildings 20,00,000
Rs.100 each 76,00,000 Machinery 45,76,000
Reserves & Surplus: Furniture 64,000
General Reserve 8,00,000 New Project 3,80,000
P & L A/c 1,20,000 Current Assets:
Secured Loans Stock 22,40,000
11% Debentures 12,00,000 Debtors 16,40,000
Current Liabilities: Cash and Bank 84,000
Creditors 13,40,000
1,10,60,000 1,10,60,000
P-6
Calculate the purchase consideration according to Net assets method.
(in Rs.) (in Rs.)
Share Capital : Goodwill 1,70,000
(6,000 equity shares of Rs.100 each Plant & Machinery 3,40,000
fully paid) 6,00,000 Furniture & Fittings 1,22,000
12% Preference shares Stock 4,34,000
(Rs.10 each fully paid) 2,00,000 Debtors 1,36,000
General Reserve 1,50,000 Cash at bank 20,000
P & L A/c 50,000 Preliminary expenses 23,000
Bills payable 40,000
Sundry creditors 2,05,000
12,45,000 12,45,000
The terms of purchase are as follows.

i. Good will is valued at Rs.2,50,000 while stock is valued at Rs.4,14,000 and
other assets are valued at their book values
ii. Cash is not taken over
iii. Consideration is to be paid in the following manner.
60,000, equity shares of Rs.10 each at a premium of 10%
1,000, 13% Preference shares of Rs.100 each at par
5,000, 14% debentures of Rs.10 each at a discount of 5%. And the balance being
paid in cash.
MACR-VTU-MBA-III-Jan/Feb.-2003(NS)
Solution:

Agreed Value of the Assets taken over
57
Goodwill 2,50,000
Plant & Machinery 3,40,000
Furniture 1,22,000
Stock 4,14,000
Debtors 1,36,000
12,62,000
Less : Agreed Value of the Liabilities assumed
Creditors 2,05,000
Bills Payables 40,000 2,45,000
10,17,000
Mode of Payment
1. In Equity Shares
(60,000 shares of Rs.11 each) 6,60,000
2. In 1,000 13% Preference Shares 1,00,000
3. In 5,000 14% Debentures 52,500
4. In Cash (B/f) 2,04,500
Total 10,17,000
P-7
The balance sheet of company A and company B as on December 31, 1992 are as
given below:
Balance Sheet of Company A

(in Rs.) (in Rs.)
Share Capital : Fixed Assets:
Authorized Capital : Goodwill 80,000
10,000 shares of Rs.100 each 10,00,000 Other 8,00,000 8,80,000
Issued capital: Current Assets, Loans and
10,000 sharesofRs.100 each Advances 9,00,00
fully paid 10,00,000
Reserves and Surplus:
Capital Reserves 2,00,000
General Reserve 70,000 2,70,000
Unsecured loans 2,00,000
Current Liabilities and
Provisions:
3,10,000
Sundry Creditors
17,80,000 17,80,000
It is proposed that company A be takenover by company B. The following

arrangement is accepted by both companies:
58
a) Goodwill of company A is considered valueless
b) Arrears of depreciation in Company A is Rs.40,000
c) The holder of every 2 shares in Company A is to receive:
i. 10 shares in company B as fully paid at par, and
ii. So much cash as is necessary to adjust the rights of the shareholders
of both companies in accordance with the intrinsic value of the
shares as per their balance sheets, subject to necessary adjustments
with regard to goodwill and depreciation in company A’s balance
sheet.
Balance Sheet of Company B

(in Rs.) (in Rs.)
Share Capital: Fixed Assets: 16,00,000
Authorized Capital: Current Assets, Loans and
10,000 shares of Rs.100 each 20,00,000
Issued capital: Advances
10,000 sharesofRs.100 each 8,60,000
fully paid 8,00,000 Bank 2,00,000
Reserves and Surplus: Others 6,60,000
General Reserve 8,00,000
Secured Loans 5,00,000
Current Liabilities and
Provisions:
3,60,000
Sundry Creditors
24,60,000 24,60,000
You are required to :

a. Determine the composite of purchase consideration; and
b. Show the balance sheet after absorption.
M & A -VTU-MBA-III-March-2000(OS)
Solution:

(Based on Intrinsic Value of the companies)
59
Intrinsic Value of A Co. Ltd. (Transferor Co.)
Less : Accumulated Depreciation 40,000 7,60,000
Current Assets, Loans & Advances 9,00,000
Total Fixed Assets 16,60,000
Less : Liabilities:
Unsecured Loan 2,00,000
Sundry Creditors 3,10,000 5,10,000
Intrinsic Value Per Share 11,50,000
= Rs.11,50,000 / 10,000 (No. of shares)
= Rs.115
Intrinsic Value of B Co. Ltd. (Transferee Co.)

Current Assets 8,60,000
Total Fixed Assets 24,60,000
Less : Liabilities:
Secured Loan 5,00,000
Intrinsic Value Per Share 16,00,000
= Rs.16,00,000 / 80,000 (No. of shares)
= Rs.20
As per the agreement, for every 2 shares in A company, 10 shares of B company are
issued at intrinsic value and difference in cash.
Intrinsic Value of 2 shares of A Co. (2 shares x 115) 230

Less : Intrinsic Value of 10 sharesof B Co. (10 shares x 20) 200
Balance in Cash 30
Purchase Consideration
1. In Equity Shares : 50,000 shares of Rs.10 each at premium of Rs.10 10,00,000
(10/2 x 10,000 shares)
2. In Cash : Rs.30 x 10,000 shares 1,50,000
2 shares 11,50,000
Balance Sheet of B Co. Ltd. after absorption

as on 31st March 2003.
60
Capital Fixed Assets 23,60,000
Authorised: Current Assets:
2,00,000 Equity shares of 20,00,000 Others 15,60,000
Rs.10 Bank 50,000
Issued & Subscribed: 13,00,000

1,30,000* shares of Rs.10 each 5,00,000
Share Premium 8,00,000
General Reserve 5,00,000
Secured Loans 2,00,000
Unsecured Loan
Current Liabilities: 6,70,000
Sundry Creditors
39,70,000 39,70,000
* Existing shares 80,000 + 50,000 shares issued to A Ltd. = 1,30,000 shares.
P-8
Two companies, Moon Ltd. and Pleasant Ltd., carrying on a similar business
decide to amalgamate as on and from 1 st June 2002. Their respective agreed balance
sheets were as follows.
Liabilities Moon Pleasant Assets Moon Pleasant
Rs. Rs. Rs. Rs.
Share Capital: Fixed assets:
Shares ofRs.100 75,000 50,000 Goodwill 30,000 15,000
Reserves and Surplus: Freehold land 12,000 -
General Reserves 5,500 - P&M 19,500 25,000
P & L A/c 2,000 2,500 Investments - -
Secured loans - - Current Assets:
Unsecured loans - - Stock 15,000 12,000
Current liabilities: Debtors 8,000 6,000
Creditors 3,500 3,500 Cash 1,500 500
Dep. Provisions - 2,500
86,000 58,500 86,000 58,500
In case of Moon Ltd., which has been in existence for several years, the plant &
machinery has been regularly depreciated. But in case of Pleasant Ltd., which
commenced its business only on1st January 2001,the plant & Machinery stood at cost
and depreciation has been provided by means of depreciation provision. It is agreed
that the combined company called Honey-Moon Ltd., shall take over the assets
61
(including goodwill) and discharge the liabilities of each company on the basis of
amounts in their respective balance sheets as shown above.
The capital of Honey-Moon Ltd. is Rs.2,00,000 divided into 10,000 ordinary shares of
Rs.10 each and 10,000 6% cumulative preference shares of Rs.10 each.
The Honey-Moon Ltd. issued 1,500 shares for cash and agreed to allot to each
shareholder in Moon Ltd. And Pleasant Ltd. five ordinary and five preference shares
of Rs.10 each fully paid, in exchange for each Rs.100 share held by them and to
discharge the balance in cash.
Draw the balance sheet of Honey-Moon Ltd., after the above transactions have been
completed and show what each shareholder in Moon Ltld. & Pleasant Ltd. would
receive in the form of shares in the new company andin the form of cash.
M & A -VTU-MBA-III-July/Aug-2002(OS)
Solution:
Moon Ltd. Pleasant Ltd.
Assets
Goodwill 30,000 15,000
Plant & Machinery 12,000 25,000
Stock 19,500 12,000
Debtors 8,000 6,000
Cash 21,500 500
Total of Assets 86,000 58,500
Less: Liabilities
Provision for depreciation - 2,500
Creditors 3,500 3,500
Intrinsic Value or Net worth 82,500 52,500
Mode of Payment of Purchase Consideration
Moon Ltd. Pleasant Ltd.
62
Purchase Consideration 82,500 52,500
In Equity Shares
Moon Ltd.: 5 x 750 = 3750 shares at Rs.10 37,500 25,000
Pleasant Ltd.: 5 x 500 = 2,500 shares at Rs.10
In 6% Preference Shares 37,500 25,000

Moon Ltd.: 5 x 750 = 3750 shares at Rs.10
Pleasant Ltd.: 5 x 500 = 2,500 shares at Rs.10
In Cash (Balance in cash) 7,500 2,500
Balance Sheet of Honey moon Ltd. after absorption

as on 1st June 2002.
Rs. Rs.
Share Capital: Goodwill 45,000
Equity Share Capital 77,500 Land 12,000
(7,750 shares of Rs.10) Plant & Machinery 42,000
6% Pref. Share Capital Stock 27,000
(6,250 shares of Rs.10) 62,500 Debtors (after provision) 14,000
Creditors Cash 7,000
7,000
1,47,000 1,47,000
Working Note
Cash
Cash balance of Moon Ltd. 1,500
Cash blance of Pleasant Ltd. 500
Issue of 1,500 shares at Rs.10 15,000
Less: Cash Payment of P C
Payment to Moon Ltd. 7,500
Payment to Pleasant Ltd. 2,500 10,000
7,000
P-9
The following are the balance sheets of Sun Ltd. and Star Ltd. as at 31st December 2003.
Liabilities Sun Ltd. Star Ltd. Assets Sun Ltd. Star Ltd.
63
Share Capital: Goodwill 30,000 10,000
(Equity share of Rs.10 Machinery 1,50,000 1,00,000
each) 4,00,000 3,00,000 Stock 40,000 72,000
Reserves & Surplus 60,000 80,000 Debtors 2,10,000 1,20,000
Creditors 40,000 30,000 Bank 60,000 90,000
Preliminary
Exp. 10,000 18,000
5,00,000 4,10,000 5,00,000 4,10,000
Goodwill of the two companies is to be valued at Rs.50,000 and Rs.40,000

respectively. Machinery of Sun Ltd., is worth Rs.2,00,000 and of Star Ltd., Rs.90,000.
Stock of Star Ltd., has been shown at 90% of its cost. The revised values of Sun Ltd. Are
not to be recorded and are given only for ascertaining the intrinsic value.
Sun Ltd. Takes over Star Ltd., by taking over the entire business and the number of
shares to be issued to the shareholders of Star Ltd., is to be determined on the basis of the
intrinsic values of the shares of Sun Ltd. and Star Ltd.
You are required to pass journal entries in the books of both companies and show
the post merger balance sheet of Sun Company Ltd.
MACR -VTU-MBA-III-July 2006 (NS)
Solution:

Sun Ltd. Star Ltd.
Assets
Goodwill 50,000 40,000
Machinery 2,00,000 90,000
Stock 40,000 64,800
Debtors 2,10,000 1,20,000
Bank 60,000 90,000
Total of Assets 5,60,000 4,04,800
Less: Liabilities
Creditors 40,000 30,000
Intrinsic Value 5,20,000 3,74,800
Intrinsic Value Per Share: Intrinsic Value / Number of Shares

Sun Ltd. : 5,20,000 / 40,000 = Rs.13.00
64
Star ltd.: 3,74,800 / 30,000 = Rs.12.49
Purchase consideration payable to Star Ltd. is Rs.3,74,800
Number of Shares to be issued

Purchase Consideration Payable / Issue Price of Sun Ltd.
= 3,74,800 = 28,830 shares
13
Mode of Payment
In Equity Share: 28,830 shares at Rs.13 Rs.3,74,790
In Cash (Fractional amount) 10
Rs.3,74,800
Journal Entries in the books of Star Ltd.

31st Dec. Realisation A/c Dr. 3,92,000 -
2003 To Goodwill A/c - 10,000
To Stock A/c - 72,000
To Debtors A/c - 1,20,000

taken over by Sun Ltd.)
-do- Creditors A/c Dr. 30,000 -
(Being transfer of the creditors assumed by Sun Ltd.)
-do- Sun Ltd. A/c Dr. 3,74,800 -
(Being purchase consideration due from Sun Ltd.)
-do- Equity Shares in Sun Ltd. A/c Dr. 3,74,790 -
Cash A/c Dr. 10 3,74,800
To Sun Ltd. A/c (PC) -
(Being receipt of purchase consideration)
-do- Reailisation A/c Dr. 12,800 -
To Equity Shareholders A/c - 12,800
(Being transfer of realization profit)
Equity Share Capital A/c Dr. 3,00,000 -
-do- Reserve & Surplus A/c Dr. 80,000 -
(Being transfer of equity share capital and reserves
to the equity shareholders account)
-do- Equity Shareholders A/c Dr. 18,000 -
To Preliminary Expenses A/c - 18,000
65
(Being transfer of preliminary expenses)
To Equity Shares in Sun Ltd. A/c - 3,74,790
To Bank A/c - 10
(Being distribution of shares received from Sun Ltd.
and payment of cash to the shareholders)
Journal Entries in the books of Sun Ltd.

Dec. To Liquidator of Star Ltd. - 3,74,800
Machinery A/c Dr. 90,000 -
Stock A/c Dr. 64,800 -
Bank A/c Dr. 90,000 -
To Creditors A/c - 30,000
of Star Ltd. taken over)
-do- Liquidator of Star Ltd. A/c Dr. 3,74,800 -
To Equity Share Premium A/c - 86,490
To Bank A/c - 10
of 28,830 shares of Rs.10 each at a premium of Rs.3 per
share and the fractional amount in cash)
Balance Sheet of Sun Ltd. after absorption

as on 31st December 2003.
Rs. Rs.
Share Capital: Goodwill 70,000
68,830 equity shares of Rs.10 6,88,300 Machinery 2,40,000
Share Premium 86,490 Stock 1,04,800
(28,830 shares at Rs.3) Debtors 3,30,000
Reserves & Surplus 60,000 Bank 1,49,990
Creditors 70,000 Preliminary Expenses 10,000
9,04,790 9,04,790
P-10
66
B Ltd. is absorbed by A Ltd. by issuing 5 shares of Rs.10 each at a premium of
10% for every 4 shares held in B Ltd.
Balance Sheet as on 31st March 2006
Capital & A Ltd. B Ltd. Assets A Ltd. B Ltd.
Liabilities
Share Capital 10,00,000 6,00,000 Fixed Assets 8,00,000 4,00,000
(Shares of Rs.10 Investments:
each) 12,000 shares in
General Reserve 1,00,000 80,000 B Ltd. 1,60,000
Creditors 2,00,000 1,20,000 10,000 shares in
A Ltd. 1,20,000
Current Assets 3,40,000 2,80,000
13,00,000 8,00,000 13,00,000 8,00,000
Prepare
i. Necessary ledger accounts in the books of B Ltd. and
ii. Acquisition entries in the books of A Ltd. assuming current assets of B
Ltd. are taken at Rs.1,80,000.
Solution:
Shares held by the outsiders (60,000 – 12,000) 75,000 shares
Less: Shares already held by B Ltd. 10,000 shares
No. of shares constituting Purchase Consideration 65,000 shares
Therefore Purchase Consideration is Rs.7,15,000
(65,000 shares at Rs.11)
Ledger Accounts in the Books of B Ltd.

Realisation A/c
Dr. Cr.
st st
31 To Fixed Assets 4,00,000 31 By Sundry 1,20,000
March To Current Assets 2,80,000 March Creditors 7,15,000
2006 To Shares in A Ltd. 10,000 2006 By A Ltd. (PC)
To Shareholders 1,45,000
A/c (Profit)
8,35,000 8,35,000
A Ltd. A/c (Transferee Co.)

Dr. Cr.
67
st st
31 Realisation A/c 7,15,000 31 By Shares in A Ltd. 5,50,000
March March By Shareholders A/c 1,65,000
2006 2006
7,15,000 7,15,000
Equity Shares in A Ltd. A/c

Dr. Cr.
31st To Balance B/d 1,20,000 31st By Realisation A/c 10,000
March To A Ltd. 5,50,000 March (Loss) 6,60,000
2006 2006 By Shareholders A/c
6,70,000 6,70,000
Equity Share Holder A/c

Dr. Cr.
st st
31 To A Ltd. (set-off) 1,65,000 31 By Share Capital 6,00,000
March To Shares in A Ltd. 6,60,000 March By General Reserve 80,000
2006 2006 By Realisation A/c 1,45,000
(Profit)
8,25,000 8,25,000
Journal Entries in the books A Ltd.

Dec. To Liquidator of B Ltd. - 7,15,000
-do- Fixed Assets Dr. 4,00,000 -
Current Assets Dr. 1,80,000 -
To Sundry Creditors A/c 1,20,000
of B Ltd. taken over)
-do- Liquidator of B Ltd. A/c Dr. 7,15,000 -
To Equity Share Premium A/c - 50,000
To Shares in B Ltd. - 1,65,000
(Being discharge of purchase consideration)
-do- Shares in B Ltd. A/c Dr. 5,000 -
To Goodwill A/c - 5,000
68
(Being profit on revaluation of shares in B Ltd. credited
to goodwill account)
P-11
Following is the balance sheet of Alpha and Beta Ltd. as on 31st March 2006.
Capital & Liabilities Alpha Beta Assets Alpha Beta
Ltd. Ltd. Ltd. Ltd.
Equity Share Capital 10,00,000 5,00,000 Land & Building 5,00,000 -
Alpha: Rs.5 each Plant & Machinery 3,00,000 -
Beta: Rs.100 each Furniture 50,000 -
General Reserve 2,50,000 - Investments:
6% Debentures of 500 shares in Beta
Rs.100 - 3,00,000 Ltd. 50,000 -
Sundry Creditors 2,50,000 3,00,000 40,000 shares in
Alpha Ltd. - 2,00,000
Debentures in Beta
Ltd. 50,000 -
Other 70,000 -
Stock 2,20,000 5,00,000
Debtors 2,00,000 2,50,000
Bank 60,000 30,000
P & L A/c - 1,20,000
15,00,000 11,00,000 15,00,000 11,00,000
Alpha Ltd. absorbs Beta Ltd. on the following terms.
i. Prior to absorption Alpha Ltd. was to declare a dividend of25%
ii. For every share in Beta Ltd. 14 fully paid up equity shares in Alpha Ltd. were
to be issued
iii. For each debenture in Beta Ltd. 7-1/2% Preference shares of Rs.100 each of
Alpha Ltd. were to be issued as fully paid.
iv. Directors of Alpha Ltd. decided to revalue the shares in Beta Ltd. according to
their intrinsic value just before absorption.
Prepare balance sheet of Alpha Ltd. after absorption. Merger is to be in the nature of
purchase as per AS-14.
Solution:
Working Notes:
1. Computation of Intrinsic Value
Intrinsic Value of the Companies (without inter company investment)
69
Assets Alpha Ltd. Beta Ltd.
Land & Building 5,00,000 -
Plant & Machinery 3,00,000 -
Furniture 50,000 -
Debentures in Beta Ltd. 50,000 -
Other investments 70,000 -
Stock 2,20,000 5,00,000
Debtors 2,00,000 2,50,000
Bank 60,000 30,000
Dividend Receivable 0 50,000
Total Assets 14,50,000 8,30,000
Less: Liabilities
Dividend Payable 2,50,000 -
6% Debentures 0 3,00,000
Intrinsic Value 9,50,000 2,30,000
Computation of Actual Intrinsic Value (Including inter company investment)

Alpha Ltd. = 9,50,000 + 1/10th of B
Beta Ltd. = 2,30,000 + 1/5th of A
Then
Alpha Ltd. = 9,50,000 + 1/10 (2,30,000 + 1/5th of A)
= 9,50,000 + 23,000 + 1/50 of A
= 9,73,000 + 1/50 of A
= 9,73,000 x 50
49
Alpha Ltd. = Rs.9,92,857
Beta Ltd. = 2,30,000 + 1/5th of Rs.9,92,857
= 2,30,000 + 1,98,571
Beta Ltd. =Rs.4,28,571
2. Computation of Purchase Consideration
Shares in Beta Ltd. held by outsiders (5,000 – 500 shares) 4,500 shares
Total number of shares to be issued by Alpha Ltd.
(4,500 x 14 shares for every share) 63,000 shares
Less: Shares already held by Beta Ltd. in Alpha Ltd. 40,000 shares
Actual Number of Shares to be issued 23,000 shares
Value of shares (23,000 shares of Rs.5) Rs.1,15,000
70
Add: Issue of Pref. Shares issued Rs.42,857
Purchase Consideration Rs.1,57,857
3. Profit / Loss on Absorption

Intrinsic Value of the company Rs.2,30,000
Less: Purchase Consideration Rs.1,57,857
Capital Profit Rs.72,143
4. Profit / Loss on Revaluation of Shares held in Beta Ltd.

Current Value of the shares 42,857
Less: Cost of acquisition of shares 50,000
Capital loss 7,143
Computation of Capital Reserve / Goodwill

Capital profit on absorption of business 72,143
Less: Capital loss Revaluation of shares 7,143
Balance Sheet After Absorption as on 31st March 2006.
Share Capital Fixed Assets
Equity: 2,23,000 equity Land & Building 5,00,000
shares of Rs.5 each 11,15,000 Plant & Machinery 3,00,000
Pref.: 2,500 pref. Shares of Furniture 50,000
Rs.100 each 2,50,000 Investments 70,000
Reserve & Surplus Current Assets
Capital Reserve (See WN) 65,000 Stock 7,20,000
Current Liabilities Debtors 4,50,000
Sundry Creditors 5,50,000 Bank 90,000
Dividend Payable 2,00,000
21,80,000 21,80,000
◼ 0–
71
ACQUISITIONS / TAKEOVERS
Acquisition is defined as acquiring effective control over assets or management of

a company by another company without any combination of business or companies. In
other words, acquiring by an individual or a group of individuals or a company of a control
over the assets of a company either directly by becoming owner of those assets or indirectly
by obtaining control of the management of the company. After an acquisition both the
entities, (i.e. acquiring and target companies) continue to exist but only the management of
the target company changes.
72
The term ‘Takeover’ is interchangeably used with an acquisition. Acquiring
control over the management of a firm through purchasing substantial portion of its equity
shares is known as takeover. In theory, the acquirer needs to hold 51% stake to takeover a
company. However, in practice, takeover is carried out by acquiring even a smaller stake
between 15% to 50%. According to MRTP Act, takeover means an acquisition of not less
than 25% of the voting power in a company.
Following are the examples of acquisitions and takeovers.
Cases:
• UB Group recently acquiring 26% equity stake in Deccan Airlines.
• Mahindra & Mahindra acquiring 26% equity stake in Allwyn Nissan Ltd.
• Acquisition of 28% equity stake in International Data Management (IDM)
• Coco-Cola acquired soft drinks brands like Thumps Up, Limca, Gold Spot etc. from
Parle
• Acquisition of Cement division (of 1.7 million tonne) of Tata Steel by Laffarge of
France.
• Takeover of Shalimar paints by Jindals
• Takeover of Crystal Investment & Finance by MRF
• Takeover of Automotive unit of Guest Keen Williams Ltd. By M & M
• Takeover of Pleasant Hotels of Rane Group by Oberoi Group
• Takeover of Ceat Tyres, Herdillia Chemicals, Polychem etc. by Goenkas of
Calcutta.
FORMS OF ACQUISITIONS:
Acquisition may be taken place in the following forms.
• Acquisition of Controlling Stake
• Acquisition of an Asset
• Acquisition of Plant
• Acquisition of Division
• Acquisition of Unit
73
• Acquisition of Brand
TYPES OF TAKEOVERS
Takeovers are broadly classified into two categories: Friendly and Hostile takeovers.
Friendly Takeover: When the acquiring company negotiates with the management of the
target company to acquire it and the management is interested in parting with the stake. It
is known as Friendly Takeover.
Example:
Takeover of Indian Aluminium Co. (Indal) by the Kumarmangalam birla group from Alcan
of Canada (53% stake). Alcan decided to exit from Indal on its own.
Hostile Takeover: When a company takes over another company even though the
management of the target company is not interested in it. It is known as Hostile Takeover.
Examples:
• Takeover of Shaw Wallace, Dunlop, Mather andPlatt and Hindustan Door
Oliver by Manu Chabria (NRI) in 1987.
• Takeover of Ashok Leyland by Hindujas (NRI)
• Takeover of ICIM, Harisson Malayalam by Goenkas.
On the basis of the purpose for which takeover is carried out, Takeover can be
classified as follows. This classification may also be referred to as Modes of Takeovers.
Straight Takeover: Taking over a company and continuing it as it is, is known as straight
takeover.
Takeover for Merger: Taking over a company for the purpose of merging it with itself in
future.
74
Takeover of Sick Company: Takeover a company for revival of the business through
BIFR (Board /for Industrial and Financial Reconstruction) under the SICA (Sick Industrial
Companies (Special Provisions) Act, 1985.
Bail out Takeover: Takeover of financial weak (but not sick company declared under
SICA, 1985) company for reviving it is known as Bail out Takeover.
Regulatory Framework of Acquisition / Takeover:

Regulatory framework of acquisition or takeovers constitute the following:
1. 40A and 40B of Listing Agreement of Stock Exchange,
2. Companies Act, 1956 (for takeover of unlisted company only) and
3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997
(Takeover Code)
SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)

REGULATIONS 1997
When an acquirer acquires substantial quantity of shares or voting rights of the
target company, it results in the Substantial acquisition of Shares. The important
regulations governing acquisition of shares in listed companies are explained as under.
Regulation 6 : Disclosure of Holdings
This Regulation consists of 4 sub regulations and deals with the disclosure of the
holdings. According to the regulation, any person holding more than 5% of voting capital
or having control over a company, within 2 months of notification of these regulations,
must disclose his holding in that company, to the company.
Every company whose shares are held by the persons said above, within 3 months
of notification of these regulations, must disclose to all the stock exchanges where the
shares of the company are listed, the holding of the persons or promoters having control
over the company.
75
Regulation 7 : Disclosure of Acquisition of Shares not less than 5%
Any person who acquires shares or voting rights which (which when taken together
with his existing holding) would entitle him to more than 5% or 10% or 14% shares or
voting rights of target company, is required to disclose at every stage the aggregate of his
shareholding or voting rights to the target company and the Stock Exchanges where the
shares of the target company are traded within 2 days of receipt of intimation of allotment
of shares or acquisition of shares.
Regulation 8 : Yearly Disclosure of Holdings above 15%
An acquirer who holds more than 15% shares or voting rights of the target
company, shall within 21 days from the financial year ending March 31 make yearly
disclosures to the company in respect of his holdings as on the mentioned date. The target
company is, in turn, required to pass on such information to all stock exchanges where the
shares of target company are listed, within 30 days from the financial year ending March
31 as well as the record date fixed for the purpose of dividend declaration.
Regulation 10: Acquisition of more than 15% of voting capital for consolidation of
holding
An acquirer who intends to acquire shares which along with his existing shareholding
would entitle him to more than 15% voting rights, can acquire the additional shares only
through open offer by making a public announcement. And further, the additional shares
to be acquired must be atleast 20% of the voting capital of the target company.
Regulation 11: Acquisition of control over a company
An acquirer who is holding not less than 15% but less than 75% of shares or voting
rights of a target company, can consolidate his holding up to 5% of the voting rights in any
76
financial year ending 31st March. However, any additional acquisition over and above 5%
can be made only after making a public announcement.
Regulation 12: Acquisition of control over a company
An acquirer who is holding 75% shares or voting rights of target company, can
acquire further shares or voting rights only after making a public announcement specifying
the number of shares to be acquired through open offer from the shareholders of a target
company.
Thus, it can be observed that, SEBI has been modifying its regulations concerning
the substantial acquisition of shares and takeover of companies from time to time. SEBI
as a watchdog in protecting the interests of the shareholders, in particular, and interests of
the economy in general, initiates the modifications in its own regulations. But, it has been
very difficult to understand the motive behind certain regulations framed by the SEBI.
Escrow Account
Before making the Public Announcement the acquirer has to create an escrow
account having 25% of total consideration payable under the offer, if the offer size is upto
Rs. 100 crores. Additional 10% if offer size more than 100 crores.
-- 0 --
77

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ACCOUNTING ASPECTS OF AMALGAMATION – AS - 14

PURCHASE CONSIDERATON – METHODS

1. Lump sum Method

Types of Mergers/ Amalgamations:

Pooling of Interest method is applicable in the case of amalgamation in the nature of

Amalgamation in the nature of merger

Amalgamation in the nature of Acquisition

Pooling of Interest Method

1. General Disclosures : Required for amalgamations of every type

2. Additional Disclosures Required under ‘Pooling of Interest Method’ :

3. Additional Disclosures Required under ‘Pooling of Interest Method’

Amalgamation After the Balance Sheet Date

Treatment of reserves and goodwill in the books of transferee company is explained

Prepare the balance sheet of A Ltd. after merger, if it is a

i. If it is a amalgamation in the nature of merger

Current Liabilities & Provisions:

1. Computation of Equity Share Capital and Share Premium

No. of Shares Issued = Purchase Consideration / Market Price

2. Computation of General Reserve

ii. If it is a amalgamation in the nature of purchase

Current Liabilities & Provisions:

If the fair value of the assets and liabilities of B Ltd. are :

Balance Sheet of A Ltd. after merger

Current Liabilities & Provisions:

Amount of Adjusted Purchase Consideration

Fair Value Ratio

Distribution of Purchase Consideration

Inventories (252/300 x 250) 210

Sundry Debtors (252/300 x 50) 42

Balance Sheet of A Ltd. after merger

Current Liabilities & Provisions:

LEDGER ACCOUNTS AND JOURNAL ENTRIES

in the Books of B Co. Ltd. (Transferor Co.)

Total 1,000 Total 1,000

Equity Shareholders A/c

In the books of A Co. Ltd. company

Date Particulars LF Debit Credit

Land & Buildings A/c Dr. 180 -

POOLING OF INTEREST METHOD

Date Particulars LF Debit Credit

Land & Buildings A/c Dr. 150 -

To 10% Pref. Share Capital A/c - 120

For Discharging Purchasing Consideration

In the Books of Transferor Company (Both the methods)

ii. Bank A/c Dr. XX -

For transfer of realization loss

In the Books of Transferee Company

POOLING OF INTEREST METHOD

POOLING OF INTEREST METHOD

For the Unrealised profit included in the stock of transferee

In the Books of TRANSFEREE Company:

TREATMENT OF DISSENTING SHAREHOLDERS

Equity Shares in Sun Ltd. A/c

Dissenting Shareholders A/c

Equity Shareholders A/c

Journal Entries in the Books of Sun Ltd. (Transferee Co.)

Date Particulars LF Debit Credit

TREATMENT OF INTER COMPANY OWINGS

Sundry Creditors A/c Dr.

Bills Payable A/c Dr.

For Inter company Debentures (Investments

Adjustment of profit / loss on revaluation of debentures

If debentures were purchased at above the recorded value (Loss)