KURUKSHETRA UNIVERSITY,

KURUKSHETRA

Financial accounting and auditing

Submitted to:- Submitted by:-

Anju Sharma(56)
Assistant Professor Sangeeta Dhir Sneha Verma(23)
MBA 2nd sem
Amalgamation...
Amalgamation:-
When two or more companies doing similar
business go into liquidation and a new
company is formed to take over their business
it is known as amalgamation.
Companies A + B = C

Old companies New company

Small in size Large in size

Transferor company Transferee company

Transferor company:-
Transferor company
means the company which is amalgamated into another
company.

Transferee company:-
Transferee company
means the company into which a transferor company is
amalgamated.
…Absorption…
No new company is formed under absorption. When an
company purchases another existing company it is known as
absorption.
A ltd B ltd

Absorbed/Selling co. Absorbing/Purchasing co.

Small company Large company

…Objectives…
 To eliminate cut throat competition.
 To secure economic of large-scale production.
 To increase the capital for achieving the targets requiring huge
investment.
 To utilise the services of high salaried experts. (Eg: CA)
 To control over the markets and to distribute the manufactured
goods in a large area.
 To attain all the other advantages of combination.
 All the assets and liabilities of the transferor company must become the assets and
liabilities of the transferee company.
 All the assets and liabilities of the transferor company must be transferred to
transferee company at book value.
 Purchase consideration must be paid in shares; however fractional share can be
paid in cash.
 The business of transferor company must be continued in future by transferee
company.
 At least 90% of equity shareholders of transferor company must be agreed to
become share holder of transferee company.
Amalgamation in the nature of purchase is an
amalgamation which doesn’t satisfy any one or
more of the five conditions stated above.
 in the nature of merger in the nature of purchase

 All the assets and liabilities are transfer from  Only purchase assets and liabilities are transfer
transferor company to transferee company. from transferor company to transferee company.
 Assets and liabilities are transfer at book value.  Assets and liabilities are transfer at revised value.
 Purchase consideration must be paid in shares  Purchase consideration can be paid in shares or
only. cash or in both.
 At least 90% shareholder of transferor  In nature of purchase, there is no such condition
company must be agreed to become because owner of the purchase company can be
shareholder of transferee company. outsider also.
 It is always intended to continue the business  There no such condition regarding the
of transferor company. continuation of business.
 There is no need to make entry of statutory  There is need to make entry of statutory reserve in
reserve. the following manner:
Amalgamation A/C Dr. ****
To statutory reserve A/C ****
(Being reserve made)
Purchase consideration…
…Meaning…
The Purchase consideration is the price which is paid by
transferee company to the transferor company for the
amalgamation accounting standard (AS-14) applies purchase
consideration it is clearly mention in (AS-14) that any
payment made to the debenture holder or any other outside
liability shall not be include in the value of purchase
consideration.
However, it is clearly express that a liability
has not been taken over by the transferee company it will be
paid by transferor company.
 LUMP SUM METHOD

NET PAYMENT METHOD

METHODS OF
PURCHASE
CONSIDERATIO
N
NET ASSET METHOD

INTRINSIC WORTH METHOD

LUMP SUM METHOD…
In this method transferee company makes lump sum
payment to the transferor company for the purchase of its
business.

For Eg. : X ltd purchase the business of Y ltd for 10,00,000

In this method, it is assumed that payment is made for
shareholder.
NET PAYMENT METHOD…

According to AS-14 tis is the main method of purchase consideration.

According to this method purchase consideration is calculated as
follows:-
 All the payment made to the shareholder of transferor company are
include in purchase consideration such payment may be include
equity shareholder or pre shareholder.
 Any payment made to the debenture holder of transferor company
would never include in the purchase consideration.
Example:-
A ltd agreed to take over the business of B ltd
balance sheet of B ltd includes
10,000 E share @10/-
2,000 P share @100/-

i. A ltd issue 2 equity share for every equity share held in B ltd of 10 each.
ii. A ltd issue equal number of preference share to B ltd of 100 each
Equity Shareholder 10,000 2 =20,000 10 200,000
(+)Preference shareholder 2,000 100 200,000
(=)Price consideration 400,000

Note While calculating purchase consideration under this method

nothing will be deducted from P.C in any situation.
Net asset method…
Some time it is not possible to calculate purchase consideration from the net payment
method. In such a situation net asset method is used.
Under net asset method, the purchase consideration is calculated by adding the value
of asset which have been taken by transferee company and deducting there from the
agreed value of those liability which have been taken over by the transferee
company.

Sundry asset take over by transferee company ****

(-)Sundry liability taken over by transferee company ****
= Purchase consideration ****
Point kept in mind...
 Only those assets will be added which have been taken
over by transferee company.
 Only those liability will be deducting which have been
taken over by transferee company.
 Cash balance is normally included in asset but if it will not
taken over it will not be included.
 This method will be adopted only when Net payment
method cannot be used.
Intrinsic method...
This method is slightly variation of net asset method
sometime it is agreed that purchase consideration will be
calculated on the basis of intrinsic value of share of
transferor company.
Intrinsic value of share can be calculated by:-
Net asset
Intrinsic value =
No. of share

Net asset = Asset – outside liability

 Accounting treatment

Transferor company Transferee company

Merger Purchase Merger Purchase

Same Separate Separate

Entry Entry Entry
 Journal entries
Transferor:
Date Particular L.F Dr. Cr.
1. Realisation A/C Dr. ****
To Asset A/C ****
(Being asset transfer to realisation )
2. Liability A/C Dr. ****
To Realisation A/C ****
(Being liability transfer to realisation)
3. Transferee company A/C Dr. ****
To Realisation A/C ****
(Recording purchase consideration)
4. Bank A/C Dr. ****
Share in transferor co. A/C Dr. ****
To Transferee co. A/C ****
( Receiving purchase consideration)
5. Bank A/C Dr. ****
Realisation A/C Dr. ****
To Bank A/C ****
(Asset sold that is not taken by transferee co.)
6. Realisation A/C Dr. ****
Liabilities A/C Dr. ****
To Bank A/C ****
(Liability that are not taken by transferee co.)
Date Particular L.F Dr. Cr.
7. Realisation A/C Dr. ****
To Bank A/C ****
(Liquidation Expense)
8. Transferee co. Dr. ****
To Bank A/C ****
Bank A/C Dr. ****
To Transferee co. ****
(Expense borough transferee company)
9. Realisation A/C Dr. ****
To Bank A/C ****
(Liability not shown in balance sheet)
10. Realisation A/C Dr. ****
To Equity shareholder A/C ****
(Profit on realisation)
11. Equity shareholder A/C Dr. ****
To Realisation A/C ****
(Loss on realisation)
12. Equity shareholder A/C Dr. ****
To Bank A/C ****
To share in transferee co. A/C ****
(Paying to equity shareholder)
Date Particular L.F Dr. Cr.
13. Equity share capital A/C Dr. ****
Reserve fund A/C Dr. ****
General reserve A/C Dr. ****
Workmen compensation reserve A/C Dr. ****
Insurance fund A/C Dr. ****
To equity shareholder A/C ****
(Amount due to equity shareholder)
14. Equity shareholder A/C Dr. ****
To surplus A/C (negative balance) ****
To share issue expense A/C ****
To discount on debenture A/C ****
(Share issue to equity share holder)

**** ****
Transferee: There are different entries in the case of transferee.
I. Merger:-
Journal entry
Date Particular L.F Dr. Cr.
1. Business purchase A/C Dr. ****
To Liquidation A/C ****
(Business purchase)
2. Asset A/C Dr. ****
To liability A/C ****
To surplus A/C ****
To provision A/C ****
To reserve A/C ****
To business purchase A/C ****
(Asset liability recorded)
3. Share issue expense A/C Dr. ****
To bank A/C ****
(Formation expense)
Date Particular L.F Dr. Cr.
4. Liquidation transferor A/C Dr. ****
To Bank A/C ****
To share capital A/C ****
To security premium reserve A/C ****
(Purchase consideration paid)

5. General reserve A/C Dr. ****

To Bank A/C ****
(Liquidation expense transferee)

**** ****
II.
Journal entry
Purchase:-
Date Particular L.F Dr. Cr.
1. Business purchase A/C Dr. ****
To Bank A/C ****
(Business purchase)
2. Asset A/C Dr. 1,00,000
Goodwill A/C Dr. 10,000
To liabilities A/C 20,000
To Business purchase A/C 90,000
(Asset liability recorded)
3. Asset A/C Dr. 1,00,000
To liability A/C 20,000
To Business purchase A/C 70,000
To Capital reserve A/C 10,000
(Asset liability recorded)
4. Liquidator A/C Dr. ****
To Bank A/C ****
To share capital A/C ****
To security premium reserve A/C ****
(Purchase consideration paid)
Date Particular L.F Dr. Cr.
5. Amalgamation adjustment A/C ****
Dr. ****
To statutory Reserve A/C
(Statutory Reserve)
****
6. Goodwill A/C ****
Dr.
To Bank A/C
(Liquidation account) ****
****
7. Preliminary expense A/C Dr.
To Bank A/C
(Formation expense)
**** ****