CHAPTER 4

BUSINESS
STRUCTURE
(PART 3)

Standard
1. MFRS 3 Business Combination

 Absorption
 Absorption

1. Concept:
Absorption
Seller: Buyer:

P will lose their existence to become part of Q (existing company)

Example:

S Sdn Bhd + Y Sdn Bhd = S Sdn Bhd

Celcom Bhd + Tmtouch = Celcom Bhd

Guthrie Bhd + Golden Hope Bhd + Sime Darby Bhd = Sime Darby

KPJ Health Care Sdn. Bhd vs Hospital Penawar Holdings = KPJ Health Care
Sdn. Bhd
Absorption takes place when one dominant company acquires the assets and
liabilities of another company and the company being acquired is wound up.
 Accounting Treatment (Seller & Buyer)

STEP 1: CLOSING THE BOOKS OF THE SELLER

Realisation account opened to transferred the carrying amount of the assets and
liabilities which are transferred to the buyer, then the balance remaining
realisation account will be transferred to the capital account.

Realization Accounts
Assets taken over X Purchase Price X
Liquidation expenses ** X Liabilities taken over X
Profit on realisation: Loss on realisation:
Debentures holders X Debentures holders X
PS holders X PS holders X
OS holders x OS holders X
Xxx xxx
** Liquidation expenses paid by seller **

Sundry Members’ Account – OS (for company)

Loss on realisation X Profit on realisation x
Assets not taken over X Liabilities not taken over X
Purchase considerations: Equity not taken x
OS X
Bank x
Xx xx

Sundry Members’ Account – PS (for company)

Loss on realisation X Profit on realisation x
Dividend X Dividend x
Purchase considerations:
OS X
Bank x
Xx xx
STEP 2: TO OPEN THE BOOKS OF THE BUYER

Ledger Accounts:

Business Purchase Account

Purchase Price X Assets taken over X
Liabilities taken over X Goodwill X
Liquidation expenses **
Capital reserve X
xxx xxx
** Liquidation expenses paid by new company @ buyer **
Bank Account
b/f (if any) X Liquidation expenses X
Issuance of OS/Deb X Formation expenses X
X Purchase x
considerations (cash)
xxx xxx
 Example 4 : Absorption

Given below are the statement of financial position of Hannah Bhd and Delisha
Bhd on 31 December 2021.
Hannah Delisha
RM RM
Non-current assets
Land and building 500,000 300,000
Plant and machinery 200,000 160,000
Goodwill 100,000 40,000
Current asset
Inventories 100,000 100,000
Trade receivables 160,000 80,000
Bank 80,000 100,000
1,140,000 780,000
Equity & liabilities
Ordinary shares capital 900,000 420,000
Profit and loss 200,000 100,000
10% debenture 200,000
Trade payables 40,000 60,000
1,140,000 780,000

Additional Information:
1. Hannah would acquire all the assets (except bank) and liabilities of Delisha
Bhd as at 31 December 2021.

2. The consideration transferred would consist of the following:

i) 600,000 ordinary shares in Hannah valued at RM 1.25 per share.
ii) RM 240,000 8% debentures in Hannah to discharge the 10%
debentures of Delisha at a premium of 20%.

3. The fair value of the assets of Delisha Bhd are:

i) Land and building RM 700,000
 ii) Plant and machinery RM 100,000
iii) Inventories RM 100,000
iv) Trade receivables RM 80,000

4. Hannah Bhd agreed to pay the liquidation expenses of Delisha Bhd

amounted to RM 24,000.

You are required:

a) Close the books of Delisha Bhd

b) Open the books of Hannah Bhd

c) Prepare the statement of financial position of Hannah Bhd after the

absorption of Delisha Bhd.

Answer:

1. Calculate Consideration Transfer:

RM
Ordinary shares 600,000 x RM 1.25 750,000
8% Debenture 240,000
Liquidation expenses 24,000
paid by Hannah Bhd
Total Consideration Transferred 1,014,000

2. Close the books of Delisha Bhd:

Realisation Accounts (Delisha Bhd)

RM RM
Land and building 300,000 Liquidator Delisha 990,000
Plant and machinery 160,000 Trade payable 60,000
Goodwill 40,000
Inventories 100,000
Trade receivables 80,000
Debenture 40,000
Profit 330,000
1,050,000 1,050,000
 3. Sundry Member (Delisha Bhd)

Sundry Member - Delisha Bhd

OS Deb OS Deb
Purchase
b/f 420,000 200,000
consideration:
OS 750,000 PNL 100,000
Debenture 240,000 Realisation 330,000 40,000
Bank 100,000
850,000 240,000 850,000 240,000

4. Open Buyer Book:

BPA (Hannah Bhd)

RM RM
Purchase
1,014,000 Land and building 700,000
consideration
Trade payables 60,000 Plant and machinery 100,000
Inventories 100,000
Trade receivables 80,000
Goodwill 94,000
1,074,000 1,074,000

5. Statement of Financial Position after absorption:

Hannah Bhd
Statement of Financial Position
as at 31 December 2021
RM
Non-current assets
Land and building 1,200,000
Plant and machinery 300,000
Goodwill 194,000
Current asset
Inventories 200,000
Trade receivables 240,000
Bank (80-24k) 56,000
2,190,000
Equity & liabilities
Ordinary shares capital 1,650,000
Profit and loss 200,000
8% debenture 240,000
Trade payables 100,000
2,190,000
 Exercise 7:

Below are the Statement of Financial Position of Star Bhd and Buck Bhd on
31st December 2021.
Star Bhd Buck Bhd
RM RM
Intangibles asset 15,000 1,000
Non-current asset 150,000 100,000
Current asset 125,000 64,000
290,000 165,000
Ordinary share capital 200,000 100,000
Preference share 25,000
Profit and loss 60,000 25,000
Trade payables 30,000 15,000
290,000 165,000

1. It had been agreed that Star Bhd purchase all the assets and liabilities of
Buck Bhd on 31st December as follow:

RM
Fully paid ordinary shares at RM 2 200,000
Preference shares at RM 1 30,000

2. The fair value of the assets taken over by Star Bhd as follows
RM
Non-current assets 140,000
Current assets 50,000
Intangibles (except goodwill) 5,000

3. Star Bhd has to pay the expenses of transferring Buck Bhd which
amounted RM 1,500.
You are required:
a) Calculate consideration transferred.
b) Close the books of Bucks Bhd
c) Open the books of Star Bhd.
d) Statement of Financial Position of Star Bhd after absorption on 31st
December 2021
 Exercise 8:

Below are the Statement of Financial Position of Coffee Bhd and Bean Bhd on
31st December 2021.
Coffee Bhd Bean Bhd
RM RM
Plant and equipment 130,000 12,000
Machinery 300,000 150,000
Bank 150,000 100,000
580,000 262,000
Ordinary share capital 400,000 200,000
Profit and loss 120,000 (50,000)
Trade payables 60,000 12,000
7% Debenture 100,000
580,000 262,000

1. Coffee Bhd purchase all the assets and liabilities of Bean Bhd on 31st
December as follow:
RM
Fully paid ordinary shares at RM 2 125,000
8% Debenture 105,000

2. The fair value of the assets taken over by Coffee Bhd as follows
RM

Plant and equipment 170,000

Machinery 90,000

Bank 16,000

3. Coffee Bhd agreed to pay Bean Bhd liquidation expenses which amounted
to RM 2,000.
You are required:
a) Calculate consideration transferred.
b) Close the books of Bean Bhd
c) Open the books of Coffee Bhd.
d) Statement of Financial Position of Coffee Bhd after absorption on 31st
December 2021