Amalgamation of Companies- TYBCOM SEM-6

 

Amalgamation of Companies

 

Meaning –

When two or more than two companies are liquidated and an ew company comes into existence it is known as Amalgamation.

Steps-

A) Computation of Purchase Consideration

B) Closing of the books of Liquidated Companies

C) Opening of the books of New Company

 

A) Computation of Purchase Consideration

Methods to compute purchase consideration

a)      Net Assets Method

b)      Lump-sum Method

c)      Actual Payment Method

a) Net Assets Method

          Purchase Consideration = Assets Taken over at Revised Values – Liabilities taken

                                                                     over at R. V.

     b) Lump-sum Method

            Under this method a fixed amount is given as Purchase Consideration

    c) Actual Payment Method

            Under this method the various payments made to the vendor or liquidated company y in different form is taken as purchase consideration, provided the complete information as to the different forms of payment is given.

 

B) Closing of the books of the old companies

1) Transfer of all the assets to Realisation Account at their book values.

            Realisation A/c                                               Dr

              To Sundry Assets A/c

Note : Cash & Bank Balance to be transferred to Realisation A/c only to the extent taken over.

 

2) Transfer of all misc. expenditure group items and Profit & Loss A/c Debit Balance to ‘  

Equity Shareholder’s A/c                   Dr

  To Misc. Exp. Group Item’s  A/c

  To Profit & Loss A/c Dr. Bal.

 

3) Transfer of Equity Share Capital, Reserves and Surplus items including P & L A/c Cr. Bal to Equity Shareholder A/c Cr. Side

            Equity Share Capital A/c                    Dr

            Reserves & Surplus A/c                      Dr

            Profit & Loss A/c Cr. Bal.                  Dr

                        To Equity Shareholder’s A/c

4) Transfer of Liabilities to Relisation A/c Cr. Side at their Revised Values.

            Sundry Liabilities A/c                         Dr

              To Realisation A/c

 

5) Transfer of Debentures to Debenture Holder’s Account

            Debentures A/c                                   Dr

              To Debenture Holder’s A/c

Note: If Debentures are taken over by the new company, the same will be transferred to Realisation A/c Cr. Side.

 

6) Transfer of Preference Share Capital to Preference Shareholder’s Account.

            Preference Share Capital A/c             Dr

              To Preference Shareholder’s A/c

 

7) Recording Purchase Consideration

            New Company’s A/c

              To Realisation A/c

8) Receiving Purchase Consideration

            Equity Shares in New Co.’s A/c         Dr

            Pref. Shares in New Co.’s A/c            Dr

            Debentures in New Co.’s A/c             Dr

                        To New Company’s A/c

 

9) Payment of Realisation/ Liquidation Expenses

a) 1^st Possibility

Liquidation Expenses paid by and borne by Vendor Company.

            Realisation A/c                                   Dr

              To Cash/ Bank A/c

 

b) 2^nd Possibility

Liquidation Expenses paid by Vendor Company but borne by the New Company.

            New Company’s A/c                          Dr

              To Cash/ Bank A/c   ------------------------------(On Payment)

 

            Cash/ Bank A/c                                   Dr

              To  New Company’s A/c -------------------------(On Reimbursement)

 

c) 3^rd Possibility

Liquidation Expenses included in Purchase Consideration. If included in P. C. then it must have been credited to Realisation A/c and hence on payment-

            Realisation A/c                                   Dr

              Cash/ Bank A/c

 

10) Realisation of Assets not taken over by purchasing company

            Cash/ Bank A/c                                   Dr

              To Realisation A/c

Note : Profit or Loss on Realisation of Assets are automatically adjusted through Realisation Account, hence no separate entry.

 

11) Payment to Debenture Holders

            Debenture Holder’s A/c                      Dr

              To Cash/ Bank A/c

Note : Balance in Debenture Holder’s A/c are to be transferred to Realisation A/c

 

12) Payment of liability other than Debentures not taken over by Purchasing Company.

            Particular Liability A/c                       Dr

              To Cash/ Bank A/c

Note: Profit or Loss on discharge of such liability is transferred to Realisation A/c

            If Profit Cr. Side

            If Loss Dr. Side

 

13) Payment to Preference Shareholder

            Preference Shareholder’s A/c             Dr

              To Cash/ Bank A/c

Note: Balance in Preference Shareholder’s A/c to be transferred to Realisation A/c

 

14) Profit or Loss on Realisation

a) If Profit

            Realisation A/c                                   Dr

              To Equity Shareholder’s A/c

b) If Loss

            Equity Shareholder’s A/c                   Dr

              To Realisation A/c

 

15) For payment to Equity Shareholder

            Equity Shareholder’s A/c                   Dr

              To Cash/ Bank A/c

              To Equity Shares in New Co.’s A/c

              To Pref. Shares in New Co.’s A/c

              To Debentures in New Co.’s A/c

 

This will close the books of Old Company

 

C) Opening Entries in the Books of New Company

1) Recording the Purchase Consideration

            Business Purchase A/c                        Dr

              To Liquidator’s of Vendor Co’s A/c

 

2) Assets and Liabilities taken over

            Sundry Assets A/c                              Dr

              To Sundry Liabilities A/c

              To Business Purchase A/c

Note: If net assets are less than P.C. then the diff. is termed as Goodwill and debited to Goodwill A/c. If net assets are greater than P. C. then the Diff. is Profit termed as Capital Reserve credited to Capital Reserve A/c.

 

3) Discharge of Purchase Consideration

            Liquidator’s of Vendor Co.’s A/c       Dr

            Disc. On Issue of Shares/ Deb. A/c    Dr

              To Equity Share Capital A/c

              To Pref. Share Capital A/c

              To Share Premium A/c

              To Debentures A/c

              To Cash/ bank A/c

 

4) For Liquidation Expenses

  (Paid and borne by New Company)

            Goodwill/ Capital Reserve A/c           Dr

              To Cash/ Bank A/c

 

 

Practical Problems

 

1) Parag Ltd. and Chirag Ltd. to amalgamate and form a new company namely Anurag Ltd. which will take over all the assets and liabilities of both the companies. Following are the Balance Sheets of Parag Ltd. and Chirag Ltd. as on 31^st March 2012.

 

Liabilities	Parag Ltd.	Chirag Ltd.	Assets	Parag Ltd.	Chirag Ltd.
Equity Shares of Rs. 10 each fully paid 6% Preference Shares of Rs. 100 each fully paid Profit & Loss A/c Statutory Reserve 9% Debentures of Rs. 100 each Creditors	4,00,000   5,00,000 50,000 75,000 10,25,000	5,00,000   3,00,000       2,00,000 90,000   10,90,000	Plant and Mach. Stock Debtors Profit & Loss A/c Bank	8,00,000 65,000 95,000   65,000             10,25,000	8,00,000 60,000 50,000 1,40,000 40,000             10,90,000

Terms of Amalgamation:

            In case of Parag Ltd. : Assets and Liabilities are to be taken over at book values. For every 4 Equity shares in Parag Ltd. 5 Equity Shares of Rs. 10 each in Anurag Ltd. shall be issued at 10% premium.

In case of Chirag Ltd.:

a)      6% Preference shareholder of Chirag Ltd. would be allotted 4, 7% Preference shares of Rs. 100 each in Anurag Ltd. for very 5, 6% Preference shares in Chirag Ltd.

b)      9% Debenture holders would be discharged at par by issue of an equal number of 10% Debentures of Rs. 100 each in Anurag Ltd. at par.

c)      Plant and Machinery and stock shall be appreciated by 10%.

d)      Balance of purchase consideration would be discharged by issue of Equity shares of Rs. 10 each in Anurag Ltd. at 10% premium.

e)      Sundry Debtors of Chirag Ltd. include Rs. 5,000 due from Parag Ltd.

You are required to :

1. Compute Purchase Consideration
2. Give necessary Journal Entries in the books of Anurag Ltd. and
3. Balance Sheet of Anurag Ltd. after Amalgamation.

 

2) Aqua Engineers Ltd., a newly formed company acquired business of Beeta Ltd. a son 31- 03-2012.

The Balance Sheet of Beeta Ltd. as on that date was as under:

 

Liabilities	Rs.	Assets	Rs.
Equity Shares of Rs. 10 each fully paid General Reserve Export Profit Reserve Profit & Loss Account 12% Debentures Sundry Creditors Provision for Tax	1,50,000 25,000 8,000 18,000 60,000 37,000 30,000   3,28,000	Goodwill Land and Building Plant Investments Stock Debtors Bills Receivables Bank	20,000 80,000 80,000 30,000 40,000 50,000 8,000 20,000   3,28,000

Terms of Amalgamation:

     a)      Aqua Engineers Ltd. issued 25,000 equity shares of Rs. 10 each at Rs. 12 per share.

b)      Aqua Engineers Ltd. paid Rs. 4 in cash for each share of Beeta Ltd.

c)      Aqua Engineers Ltd. discharged 12% debentures of Beeta Ltd at 10% premium by issue of its 15% debentures at a discount of 12%.

d)      Aqua Engineers Ltd. paid absorption expenses Rs. 3,000.

e)      Aqua Engineers Ltd. revalued Land and Building at Rs. 1,00,000, Plant at 10% below book value, Stock at Rs. 35,000 and Debtors subject to 5% provision for doubtful debts.

f)       Beeta Ltd. sold one-fifth of the shares received from Aqua Engineers Ltd. at Rs. 13.00 per share.

g)      Aqua Engineers Ltd. issued 10,000 equity shares of Rs. 10 each at Rs. 12 each to the public. The issue was fully subscribed and paid for.

h)      Export Profit Reserve is to be maintained for next three years.

You are required to:

Compute Purchase Consideration

1. Prepare Realisation Account, Aqua Engineers Ltd Account, Equity Shareholder’s A/c Equity Shares in Aqua Engineer Ltd’s A/c and Bank Account in the books of Beeta Ltd.
2. Prepare Balance Sheet of Aqua Engineers Ltd’s Account  after acquisition.

 

3. Following are the Balance Sheets of Alpha Ltd. and Beeta Ltd. as on 31^st March, 2012.

 

Liabilities	Alpha Ltd.	Beeta Ltd.	Assets	Alpha Ltd.	Beeta Ltd.
Share Capital: 7% Preference Shares of Rs. 100 each Equity Shares of Rs. 100 each General Reserve Profit & Loss A/c Statutory Reserve 10% Debentures of Creditors Bills Payable	4,50,000   8,00,000 70,000 45,000 27,000 1,50,000 75,000 25,000   16,42,000	6,00,000   12,00,000 80,000 62,000 48,000 84,000 1,20,000 35,000   22,29,000	Goodwill Premises Pant and Mach. Computer Stock Sundry Debtors Bills Receivable Bank	60,000 6,50,000 4,80,000 1,20,000 1,80,000 1,10,000 30,000 12,000           16,42,000	1,00,000 7,00,000 6,20,000 2,00,000 2,50,000 3,15,000 20,000 24,000           22,29,000

 

Beta Ltd.  takes over Alpha Ltd. on 1^st April, 2012 on the following terms:

1)      Beta Ltd. discharged purchase consideration as under:

a)      Issued 10,000 equity shares of Rs. 100 each at a premium of 5% for the equity shareholders of Alpha Ltd.

b)      Issued 8% preference shares of Rs. 100 each at par to discharge the preference shareholders of Alpha Ltd. at 10% premium.

2)      The Debentures of Alpha Ltd. to be converted into equivalent number of debentures of Beta Ltd.

3)      Sundry debtors of Beeta Ltd. include Rs. 25,000 being amount due from Alpha Ltd.

4)      Bills Payable of Alpha Ltd. include Rs. 7,000 being the amount of bills accepted in favor of Beeta Ltd but bills receivable of Beeta Ltd includes Rs. 5,000 being the amount of bills due from Alpha Ltd.

5)      The stock of Beeta Ltd. Include Rs. 30,000 worth of goods purchased from Alpha Ltd. On which Alpha Ltd made a profit of 25% on cost.

 You are required to:

a)      Calculate purchase consideration

b)      Pass journal entries in the books of Beeta Ltd. assuming that amalgamation is in the nature of purchase.

c)      Prepare Balance Sheet of Beeta Ltd. after amalgamation.

 

4) Following are the Balance Sheets of Honest Limited and Faithful Limited as on 31^st March 2012.

Liabilities	Honest Ltd.	Faithful Ltd.	Assets	Honest Ltd.	Faithful Ltd.
Equity Share Capital (Shares of Rs. 100 each paid up) 7& Preference Share Capital (Shares of Rs. 100 each paid up) General Reserve Profit & Loss A/C Statutory Reserve 10% Debentures Sundry Creditors	12,00,000         6,75,000 1,05,000 67,500 40,500 2,25,000 1,50,000   24,63,000	18,00,000         9,00,000 1,20,000 93,000 72,000 1,26,000 2,32,500   33,43,500	Goodwill Premises Plant and Mach. Stock Sundry Debtors Bank	90,000 9,75,000 9,00,000 2,70,000 2,10,000 18,000             24,63,000	1,50,000 10,50,000 12,30,000 3,75,000 5,02,500 36,000             33,43,500

On the above date, Faithful limited takes over Honest Limited on the following terms and condition:

1)      All assets and liabilities are taken over at book value except the following which were revalued as under:

Premises Rs. 8,50,000 and Plant and Machinery Rs. 7,00,000.

2)      Equity shareholders of Honest Limited to be issued 10,000 equity shares of Rs. 100 each at 10% premium.

3)      7% Preference shareholders of Honest Limited to be discharged at 10% premium by issuing 8% Preference Shares of Rs. 100 each (at par) in Faithful Limited.

4)      Debentures of Honest Limited to be converted into equivalent number of debentures of Faithful Limited.

5)      Sundry debtors of Faithful Limited include Rs. 25,000 due from Honest Limited.

6)      Cost of liquidation amounting to Rs. 4,000 were borne by Faithful Limited.

You are required to:

 Calculate purchase consideration

Show workings for Goodwill/ Capital Reserve

Prepare Balance Sheet of Faithful Limited after Amalgamation.

 

5) Following is the Balance Sheet of Prakash Ltd. as on 31^st March 2012.

 

Liabilities	Rs.	Assets	Rs.
Equity Shares of Rs. 10 each fully paid up Capital Reserve Profit & Loss A/c Export Profit Reserve Revaluation Reserve Sundry Payables	4,00,000 25,000 75,000 60,000 1,50,000 90,000   8,00,000	Land and Buildings Furniture and Fittings Stock Sundry Receivables Cash and Bank Balance	3,85,000 80,000 40,000 75,000 2,20,000       8,00,000

 On the above date Akash Limited is formed to take over the business of Prakash limited (including Cash and Bank Balance), on the following terms and condition:

1)      Stock is taken over at 75% of its book value.

2)      Furniture and Fittings are taken over at Rs. 70,000.

3)      Sundry receivables are taken over, subject to reserve for bad debts Rs. 5,000.

4)      Land and Building is taken over by Akash Limited at Rs. 10,00,000.

5)      Statutory reserve is required to be maintained for 1 more year.

6)      Goodwill is valued and taken over at 250% of the book value of furniture and fittings.

7)      90% Purchase consideration is settled by issuing equity shares in Akash Limited of Rs. 10 each at Rs. 15 each, to the equity shareholders of Prakash Limited. 10% of the purchase consideration is settled in cash.

8)      Akash Ltd issued, 2%, 40,000 preference shares of Rs. 10 each at Rs. 9 each fully paid up. All these preference shares were fully subscribed for by public and issued accordingly by the company.

You are required to:

a)      Calculate purchase consideration

b)      Prepare Balance Sheet of Akash Limited after amalgamation.

 

6. The following is the summarized Balance Sheet of Vishal Ltd. as on 31^st March 2015:

Liabilities	Rs.	Assets	Rs.
Issued and Paid –up Capital Equity Share Capital (Rs. 10 each) Statutory Reserve (to be maintained for 3 more years) 10% Debentures Creditors	10,00,000   20,000 2,00,000 1,00,000   13,20,000	Intangible Assets Fixed Assets Current Assets Profit & Loss (Dr.)	1,00,000 8,40,000 2,20,000 1,60,000       13,20,000

Vaman Ltd. agreed to take over Vishal Ltd. on the following terms:

a)      Vaman Ltd. agreed to take over all the assets and liabilities. (intangible assets are not taken over).

b)      The fixed and current assets of Vishal Ltd. are to be considered to be worth Rs. 8,00,000 and Rs. 2,00,000 respectively.

c)      The Purchase Consideration is to be paid one-quarter in cash and the balance in equity shares which are issued at the market price.

d)      Liquidation expenses amounted to Rs. 600 agreed to be paid by Vishal Ltd.

e)      Market value per share of Vaman Ltd. is Rs. 12.

f)       Debentures of Vishal Ltd. Were taken over and paid by Vaman Ltd.

g)      The amalgamation is in nature of purchase.

You are required to prepare:

a)      Statement of Purchase Consideration

b)      Necessary ledger accounts in the books of Vishal Ltd.

 

7. X Ltd and Y Ltd. agreed to amalgamate and form a new company Z Ltd. Summarized Balance Sheet Sheets of X Ltd. and Y Ltd. on the date of amalgamation are as follows:

 

Liabilities	X Ltd Rs.	Y Ltd. Rs.	Assets	X Ltd Rs.	Y Ltd. Rs.
Equity Shares of Rs. 100 each General Reserve Creditors Profit & Loss A/c	2,00,000 30,000 28,000 16,000   2,74,000	2,40,000 37,000 34,000 20,000   3,31,000	Plant & Machinery Stock Debtors Building Cash & Bank Balance	60,000 40,000 60,000 1,00,000 14,000   2,74,000	80,000 40,000 60,000 1,20,000 31,000   3,31,000

Z Ltd. Takes over the assets and liabilities of both the companies at book values except building which is taken over from X Ltd. at Rs. 2,00,000 and from Y Ltd. at Rs. 1,80,000.

Z Ltd. paid purchase consideration by allotting fully paid shares of Rs. 100 each at par.

Prepare statement of Purchase Consideration. Give Journal entries in the books of Z Ltd.

 

8. Following is the summarized Balance Sheet of Kartik Ltd. as on 31-03-2015.

Liabilities	Rs.	Assets	Rs.
Equity Shares of Rs. 10 Each General Reserve Debentures Creditors	10,00,000 20,000 2,00,000 1,00,000   13,20,000	Intangible Assets Tangible Assets Current Assets Profit & Loss A/c (Dr. Balance)	1,00,000 8,40,000 2,20,000 1,60,000   13,20,000

On the above date, Ganesh Ltd. agreed to take over the business of Kartik Ltd. on the following terms:

1)      The intangible assets, tangible, fixed assets & current assets of Kartik Ltd. are taken over at Rs. 10,00,000. The liabilities (including Debentures) are taken over at book value.

2)      The purchase consideration is to be paid one-quarter in cash and the balance in equity shares of Rs. 10 each at par.

3)      Liquidation expenses amounted to Rs. 600 agreed to be paid by Kartik Ltd.

4)      The takeover is in the nature of purchase.

You are required to:

a)      Calculate Purchase Consideration &

b)      Prepare necessary Ledger accounts to close the books of Kartik Ltd.

 

9)      Following is the summarized balance sheet of Akash Ltd. as on 31-03-2014.

Liabilities	Rs.	Assets	Rs.
Equity Shares of Rs. 10 Each Fully paid Capital Reserve Profit & Loss Account Statutory Reserve Revaluation Reserve Trade Payables	8,00,000 50,000 1,50,000 1,20,000 3,00,000 1,80,000   16,00,000	Land and Building Furniture Stock Trade Receivables Cash and Bank Balance	7,70,000 1,60,000 80,000 1,50,000 4,40,000     16,00,000

On the above date, Gagan Ltd. is formed to take over the business of Akash Ltd. (including cash and bank balance), on the following terms and conditions:

1)      Stock is taken over at Rs. 60,000.

2)      Furniture and fitting are taken over at Rs. 1,40,000.

3)      Trade receivables are taken over, subject to reserves for bad debts of Rs. 10,000.

4)      Land and Building is taken over by Gagan Ltd. at Rs. 20,00,000.

5)      Statutory Reserve is required to be maintained for 1 more year.

6)      Goodwill is valued and taken over at Rs. 4,00,000.

7)      90% purchase consideration is settled by issuing equity shares in Gagan Ltd. of Rs. 10 each at Rs. 15 per share to the equity shareholders of Akash Ltd. The balance 10% of the purchase consideration is settled in cash.

8)      Gagan Ltd. issued, 12%, 80,000 Preference Shares of Rs. 10 each at Rs. 9 per share fully paid up. All these Preference Shares were fully subscribed by public and issued accordingly by the company.

You are required to:

a)      Calculate Purchase Consideration.

b)      Pass journal entries in the books of Gagan Ltd.