j.h.

bhaladowial Womens College RAJKOT

Corporate Accounting -2
B.Com,-Sem.-IV

Chapter-1 Accounts of Amalgamation of Companies

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Introduction
When two or more companies are voluntarily liquidated and a new company is established for the
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purpose of purchasing the business of all the companies is technically termed as Amalgamation
The process in which two or more existing companies engaged in same business decide to liquidate
their business and form a new company to take over the business of the existing companies is termed as
Amalgamation. The newly formed company acquires the assets and liabilities of existing companies. The
newly formed company is known as Amalgamated Company and the liquidating company is also known as
amalgamating companies

Purchase Consideration
Newly formed company pays a certain consideration for taking over the business of amalgamating
companies, which is known as purchase consideration. These purchase consideration can be paid in the form
of equity shares, preference shares and debentures of the new company. Cash may also be paid if required.
There are three methods to calculate purchase consideration

(a) NET ASSET METHOD

(b) CONSIDERATION (PAYMENT) METHOD
(c) LUMP SUM METHOD
To decide Purchase Consideration following steps to be considered:

(i) Calculate the total amounts of assets which are took over at certain specific-agreed value by the
new company for all the amalgamating company (old company).
(ii) Calculate total amounts of liabilities which are accepted to take over at the agreed value by the
new company for all the amalgamating company (old company).
(iii) Calculate Net Asset = Total Assets realised Total Liabilities taken over for all the
amalgamating company (old company)
(iv) Calculate Purchase Consideration paid by the amalgamated (new) Company to amalgamating
company (old Company)
(v) Calculate Goodwill OR Capital Reserve for all the amalgamating company (old company)
Goodwill = Purchase Consideration Net Assets
OR
Capital Reserve = Net Assets Purchase Consideration

Necessary Accounts in the Books of Amalgamating Company (old Company)

(a) Realisation A/c. (b) Equity shareholders A/c. (c) Preference shareholders A/c.
(d) Debenture holders A/c. (e) Cash/Bank A/c. (f) New companys A/c. (g) New companys
Equity shares A/c.(h) New companys Preference shares A/c. (i) New companys Debentures A/c.

Notes for Debentures :

If New Co. offers its shares, debentures , cash or its own debentures in exchange of the debenture of
old company in that case the Liability of the old debentures is not accepted by the new company.
Therefore, while ascertaining net assets, debentures are not included in liability. While computing
purchase consideration the amount of new debentures which is received in exchange of old debentures
are to be included in purchase consideration.
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Following Steps to be followed while recording Journal in the Books of Old Company Or
preparing Necessary A/c. in the Books of Old Company

Transfer All the tangible and intangible Assets except cash and bank balance on debit side of
Realisation A/c.
Transfer All the Outside Liabilities (including Debentures if nothing is mentioned) on credit side of
Realisation A/c.
Transfer Equity share Capital and Balance of Reserve and Surplus to Credit side of Equity
shareholders A/c.
Transfer Preference share Capital to Preference Shareholders A/c.
Transfer fictitious Assets like Discount on share or debenture, Underwriting Commission,
Establishment Expenses, Preliminary Expenses, Advertisement Suspense Account, Suspense
Account and Profit & Loss A/c. debit Balance to Equity shareholders A/c.
Record the purchase consideration on credit side of realisation A/c. and debiting the same to New
Companys A/c.
Dispose off the assets not taken over by the new company and discharge the liabilities which is not
taken over by the new company
Record the Dissolution (Liquidation) Expenses paid by the old company
Record the purchase consideration received from new company
Distribute the Purchase consideration among equity shareholder; Preference shareholder
Close the Accounts (except Realisation; Equity shareholder; Cash/Bank A/c.)
Close realisation A/c. and profit or loss is transferred to Equity shareholders A/c.
Close Equity shareholders A/c. and balance is transferred to Cash/Bank A/c.
Bank Account is generally Tally by closing it.

Accounting Journal in the Books of Amalgamating company (old company)

(i) When Assets are transferred to Realisation A/c.

Realisation A/c. .. Dr. xxxx

To Respective Assets A/c. xxxx

(ii) When Liabilities are transferred to Realisation A/c.

Respective Liabilities A/c. .. Dr. xxxx

To Realisation A/c. xxxx

(iii) When Equity Share Capital and Balance of Reserve & Surplus (except specific Provisional
Reserve is transferred to Equity shareholders A/c.

Equity Share Capital A/c. Dr.. xxxx

Reserve & Surplus A/c. Dr.. xxxx
To Equity Shareholders A/c. xxxx

(iv) When Preference Share Capital is transferred to Preference Shareholders A/c.

Preference Share Capital A/c. Dr. xxxx

To Preference Shareholder A/c. xxxx

(v) When Purchase consideration is due

New Cos A/c. Dr. xxxx
To Realisation A/c. xxxx
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(vi) When Purchase Consideration is discharged by New Co.

New Cos Equity Share A/c. Dr. xxxx

New Cos Preference Share A/c. Dr. xxxx
New Cos Debenture A/c. Dr. xxxx
Cash/ Bank A/c Dr. xxxx
To New Cos A/c. xxxx

(vii) When Assets disposed off not taken by new company

Bank A/c. Dr. xxxx

To Realisation A/c. xxxx

(viii) When Liabilities discharged which is not taken by new company

Realisation A/c. Dr. xxxx

To Bank A/c. xxxx

(ix) When dissolution expenses paid by the company

Realisation A/c. Dr. xxxx

To Bank A/c. xxxx

(x) New Companys Equity share is distributed among Equity shareholder/Preference

Shareholder / Debenture holder (as the case may be)

Equity Share holder A/c. Dr. xxxx

Preference Shareholder A/c. Dr. xxxx
Debenture holder A/c. (Realisation A/c.) Dr. xxxx
To New Companys Equity Share A/c. xxxx
(xi) New Companys Preference Share is distributed among Equity shareholder/Preference
Shareholder / Debenture holder (as the case may be)

Equity Share holder A/c. Dr. xxxx

Preference Shareholder A/c. Dr. xxxx
Debenture holder A/c. (Realisation A/c.) Dr. xxxx
To New Companys Preference Share A/c. xxxx

(xii) New Companys Debenture is distributed generally among Debenture holder

Debenture holder A/c. (Realisation A/c.) Dr. xxxx

To New Companys Debenture A/c. xxxx

(xiii) Closing the Preference shareholder A/c. and Debentureholder A/c. (if separately
prepared) Balance is transferred to Realisation A/c.

Realisation A/c. Dr. xxxx

To Debenture holder A/c. (if prepared) xxxx
To Preference Shareholder A/c. xxxx
(Surplus Received by Deb. Holder / Pref. Holder)
OR

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Debenture holder A/c. Dr. (if Prepared) xxxx
Preference holder A/c. Dr. xxxx
To Realisation A/c. xxxx
(Deficit of Deb. holder / Pref. Holder)

(xiv) Closing Realisation A/c.

Realisation A/c. Dr. xxxx

To Equity shareholder A/c. xxxx
OR

Equity Shareholder A/c. Dr. xxxx

To Realisation A/c. xxxx

(xv) Closing Equity Shareholder A/c.

Equity shareholder A/c. Dr. xxxx

To Cash/ Bank A/c. xxxx

Accounting Journal in the Books of Amalgamated company (New company)

(a) When Business Purchase of Old Company

Sundry Asset A/c. (including Goodwill) Dr. xxxx

To Sundry Liabilities (including Capital Reserve) A/c. xxxx
To Liquidator of Old Company A/c. [Purchase Consideration] xxxx

(b) When Business Purchase is discharged

Liquidator of old company A/c. Dr. xxxx

To Equity Share Capital A/c. xxxx
To Preference Share capital A/c. xxxx
To Debenture A/c. xxxx
To Cash/ Bank A/c. xxxx
To Security Premium A/c. xxxx

(c) If Dissolution Expenses is paid and bone by New company

Goodwill A/c. Dr. xxxx

To Bank/Cash A/c. xxxx

(d) When establishment expenses paid by the New Company

Preliminary Expenses A/c. Dr. xxxx

To Cash/Bank A/c. xxxx

(e) When New company issues shares or debentures to general public

Bank A/c. Dr. xxxx

To Equity Share Capital A/c. xxxx
To Preference Share capital A/c. xxxx
To Debenture A/c. xxxx
To Security Premium A/c. xxxx
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Practical Sum
(1) Following are the Balance Sheets of Ram Ltd. and Shyam Ltd. as on 31-03-2012
a
Liabilities Ram Shyam Assets Ram Shyam
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Goodwill - 17,500

Equity Share each of Rs.10 5,00,000 1,00,000 Land & Building 1,75,000 50,000
General Reserve 1,50,000 - Machinery 3,50,000 -
P & L A/c. 57,500 13,000 Furniture 25,000 -
Creditors 32,500 7,750 Patent 37,500 2,500
Bills Payable 5,000 - Stock 75,000 16,000
Debtors 25,000 15,500
Bills Receivable 7,500 -
Bank Balance 50,000 11,750
Vehicles - 7,500
Total 7,45,000 1,20,750 Total 7,45,000 1,20,750

Director of both the companies have decided to form a New Company named RAGHUVANSI
LTD. to purchase all the Assets and Liabilities except cash of both the companies.

Authorised Share Capital of RAGHUVANSI LTD. is 6,00,000 Equity Shares of Rs. 10 Each.
Purchase Consideration of Ram Ltd. is Rs. 7,00,000 which is discharged by issuing 44,300
Equity shares of Rs. 10 each at 50% premium and remaining amount in cash.
Purchase Consideration of Shyam Ltd. is Rs. 92,500 Which is discharged by issuing 5,700
Equity Share of Rs. 10 each at 50% premium and remaining amount in cash.
RAGHUVANSI LTD. Issued remaining shares to the public at 50% premium.

You are required to prepare :

(a) All the necessary Accounts in the Books of Ram Ltd.
(b) Balance Sheet of RAGHUVANSI LTD.

[Net Assets of Ram Ltd. Rs. 6,57,500 ; Net Asset of Shyam Ltd. Rs. 83,750; Goodwill of Ram
Ltd. Rs. 42,500 and Goodwill of Shyam Ltd. Rs. 8,750; Profit on realisation of Ram Ltd. is Rs.
42,500; Cash paid to Ram Ltd. Rs. 35,500 and Shyam Ltd. Rs.7,000 Total of B/s. of Raghuvansi
Ltd. Rs. 9,45,250]

(2) Abhi Ltd. and Aish Ltd. have to decided to amalgamated and form a new company called
Abhi-Aish Ltd. with the authorised share capital of Rs. 20,00,000 divided in to 15,000 Equity shares
each of Rs. 100 and 5,000 12% Preference Shares.
Before implementing amalgamation scheme both the companies has to pay off their Bills
Payable. Fixed Assets of both the companies valued 10% more and current Assets 20% less. Other
Assets and Liabilities are valued at their Book Value.
Abhi-Aish Ltd. had purchased the business of the Abhi Ltd. at such a price to raise Goodwill
of Rs. 1,40,000. While Aish Ltd. had been purchase at such a price to raise Capital Reserve of Rs.
1,55,000.
Purchase Consideration will discharged to both the companies by way issuing 50% Equity
Shares; 20 % Pref. Shares; 25% , 11% Debentures and 5% cash.
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Liquidation expenses of both the company are Rs. 10,000 and Rs. 12,000 respectively.
Establishment Expenses of New Company amounting to Rs. 7,500.

Following are the Balance Sheets of Abhi Ltd. and Aish Ltd. as on 31-03-2012.

Liabilities Abhi Aish Assets Abhi Aish

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Goodwill 1,50,000 -

Equity Shares of Rs. 100 Fixed Assets 15,00,000 18,00,000
each fully paid up 7,50,000 9,00,000 Current Assets 3,00,000 3,00,000
12% Pref. Shares of Rs. Bank Balance 1,35,000 90,000
100 each fully paid up 3,00,000 4,50,000 Preliminary Exps. 15,000 60,000
Share Premium 85,000 45,000
11% Debentures 4,50,000 4,50,000
Creditors 5,00,000 3,75,000
Bills Payable 15,000 30,000

Total 21,00,000 22,50,000 Total 21,00,000 22,50,000

You are required to prepare all the necessary Accounts in the books of Aish Ltd. and Balance Sheet
in the Books of Abhi-Aish Ltd.

[(a) Net Assets of Abhi Ltd. Rs. 10,60,000 ; Aish Ltd. Rs. 14,55,000; (b) Purchase
Consideration of Abhi Ltd. Rs. 12,60,000; Aish Ltd. Rs. 13,00,000; (c) Loss from the realisation
A/c. of Aish Ltd. Rs. 47,000 (d) Equity shareholders of Aish Ltd. received Equity share of Rs.
4,60,000; Rs, 3,25,000 as 11 % debentures and Rs. 53,000 in Cash (d) Total of B/s of Abhi-Aish
Ltd. Rs. 44,40,000.]

(3) The Balance Sheet of Ram Ltd. and Rahim Ltd. as on 31-03-2012 are given below :

Liabilities Ram Rahim Assets Ram Rahim

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Land & Building 40,000 15,000

Fully paid Equity share of Machinery 20,000 10,000
Rs. 10 each 50,000 20,000 Stock 10,000 8,000
General Reserve 10,000 5,000 Debtors 5,000 5,000
Workmens Comp. Fund 2,000 - Investment 5,000 -
P & L A/c. 5,000 - Cash 2,000 6,000
12% Debentures 10,000 - Preliminary Exp. 3,400 -
Creditors 8,000 15,000 P & L a/c. - 1,000
Provident Fund - 5,000
Bad Debts 400
Total 85,400 45,000 Total 85,400 45,000

It was decided to establish a new company Ram-Rahim Ltd. on 1-4-2012 to carry out
amalgamation of both the above companies. Main condition of amalgamation were as under :

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For Ram Ltd. :

(a) Goodwill of the company was to be calculated at twice the total profit of the past three years.
Average profit of the last three years was Rs. 2,500.
(b) Book Value of Land and Building is 20% less than the market value. Land & Building were
to be taken up at the market price.
(c) Investments except that of Rs. 1,500 and cash are not to be taken.
(d) Debtors require a provision of 10% as Bad Debt Reserve
(e) A claim of Rs. 500 is accepted by the company against workmens Compensation fund;
which will be paid by Ram-Rahim Ltd. in future.
(f) Purchase consideration will be discharged as follows :
(i) Equal number of new companys equity shares of Rs. 10 each at a price of Rs. 16 per
share.
(ii) 10% New companys Debentures to the debenture holders of the old company in
such a manner that debenture holders of the old company do not sustain any interest
loss in future.
(iii) Balance amount in Cash.

For Rahim Ltd.

(a) Machinery to be valued 10 % more. All other assets and liabilities to be taken at their Book-
Value.
(b) Purchase consideration to be discharged in the form of 1,500 shares of Rs. 10 each of Ram-
Rahim Ltd. at a market price of Rs. 16 and the Balance in Cash.

Pass Necessary Journal entries in the Books of Ram-Rahim Ltd. Prepare Balance Sheet of Ram-
Rahim Ltd. as on 1.4.2012. show your calculation.

[ Purchase Consideration = Net Asset for both the companies Ram Ltd. Rs. 92,500; Rahim
Ltd. Rs. 25,000; Total of New B/S Rs. 1,44,000]

(4) Following are the Balance Sheet of Riddhi Ltd. and Siddhi Ltd. as on 31-03-2012.

Liabilities Riddhi Siddhi Assets Riddhi Siddhi

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Goodwill 4,00,000 -

Equity share each of Rs.10 12,00,000 12,00,000 Fixed Assets 18,00,000 10,00,000
10% Pref. Share each of Rs.10 8,00,000 4,00,000 Stock 6,60,000 6,00,000
Securities Premium - 2,00,000 Debtors 4,80,000 3,00,000
General Reserve 6,00,000 - Prepaid Expenses 40,000 60,000
14% Debentures 4,00,000 2,00,000 Cash/Bank 3,60,000 4,00,000
Creditors 5,00,000 4,00,000 Preliminary Exp. 60,000 40,000
Provident Fund 3,00,000 2,00,000 Profit & Loss A/c. - 2,00,000
Total 38,00,000 26,00,000 Total 38,00,000 26,00,000

It was decided to Amalgamate both the companies and form the Gajanan Ltd. with Rs. 50
Lacs Authorised Capital of Rs. 10 each.

The conditions of amalgamation were as under :

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For Riddhi Ltd.

(a) Equity shareholders were given 4 equity shares at Rs. 12 each of Gajanan Ltd. as against 3
Equity shares in old companies.
(b) Preference shareholders were given 5 Equity shares at Rs. 12 each of Gajanan Ltd. as against
4 preference shares in old companies.
(c) 14% Debentureholders will get 15% premium by allotting debentures each of Rs. 100 bearing
Interest at 10% p.a. at 8% discount.
(d) The New Company will give Rs. 80,000 in cash.
(e) Riddhi Ltd. will pay the amount of provident fund to the workers before amalgamation.
(f) New Company will purchase all the Assets and Liabilities of Riddhi Ltd. with the following
Adjustments :
(i) The Book Value of Fixed Assets is 60% of its Market Value. Fixed assets are to be
valued at Market Value.
(ii) 10% Bad Debt Reserve to be provided on Debtors.
(iii) The Other Assets & Liabilities are to be taken at Book Value.

For Siddhi Ltd.

(a) The Fixed Assets are valued at 40% more.

(b) Value of Stock Rs. 5,40,000
(c) Other Assets and Liabilities are to be taken at Book Value.
(d) Goodwill is to be taken at Rs. 2,00,000
(e) 10% Bad Debts Reserve is to be provided on Debtors.
(f) 14% debentureholders were to be allotted such number of debentures in the new company
bearing 10% Interest p.a. so that they can earn same amount of Interest.
(g) The New Company will issue 1,60,000 equity shares at Rs. 12 each and the remaining
purchase price is to be paid by cash.

The New Copany has issued the remaining equity shares to public at 20% premium.

From the above information pass necessary Journal entries in the Books of Gajanan Ltd. and
also prepare Balance Sheet after Amalgamation.
[(a) Purchase Consideration of Riddhi Ltd. as per Consideration Method Rs.36,60,000 and
Net Assets Rs. 36,92,000; Capital Reserve Rs. 32,000;
(b) Purchase Consideration of Siddhi Ltd. as per Net Asset Method Rs. 22,70,000 (including
Goodwil of Rs. 2,00,000)
(c) Issued Equity Share Capital (including Premium) Rs. 9,60,000 and Total of New B/s is
Rs.78,80,000 Cash Balance in New Company Rs. 12,70,000]

(5) Shiv Ltd. and Shakti Ltd. have to decided to amalgamated and form a new company called
Shiv-Shakti Ltd. with the authorised share capital 5,000 Equity Shares of Rs. 100 each.
(a) The Business of the two companies (except investment of Shiv Ltd. and Bank overdraft of
Shakti Ltd.) are to be taken over. Assets and Liabilities are to be valued at book value.
(b) Total Purchase Consideration for both the companies is fixed at Rs. 13,50,000. The Purchase
Consideration of Shiv Ltd. is so fixed that Rs. 1,20,000 is to be paid to Shiv Ltd. as Goodwill.
(c) Rs. 15,000 and Rs. 12,500 will be paid in cash respectively for purchase consideration and
for the Balance, the shares of Shiv-Shakti Ltd. of Rs. 100 each at 15% premium will be given
(d) Dissolution expenses of both the companies amounted to Rs. 5,000 and Rs. 3,000
respectively which is to be borne and paid by new company. The preliminary expenses of
new company amounted to Rs. 7,500.

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(e) 20% from the remaining shares of Shiv-Shakti Ltd. were issued to public at 15% premium.
All these shares were subscribed for and were fully paid-up.
(f) Use Capital Reserve to write off Goodwill.

Balance Sheets of Shiv Ltd. and Shakti Ltd. are as Under :

Liabilities Shiv Shakti Assets Shiv Shakti

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Land & Building 5,00,000 6,00,000

Equity Share Capital of Machinery 4,00,000 2,50,000
Rs. 100 each fully paid up 5,00,000 7,50,000 Investments 1,00,000 50,000
Security Premium 1,00,000 - Stock 70,000 50,000
P & L A/c. 2,00,000 - Debtors 1,00,000 1,30,000
12% Debentures 3,00,000 3,00,000 Cash Balance 30,000 40,000
Creditors 75,000 1,15,000 Share Discount - 30,000
Bank Overdraft - 50,000 Profit & Loss A/c. - 1,00,000
O/s Debenture Interest 25,000 35,000

Total 12,00,000 12,50,000 Total 12,00,000 12,50,000

Pass Necessary Journal entries in the Books of Shiv-Shakti Ltd. and also prepare its Balance Sheet.

[ Net Asset of Shiv Ltd. Rs. 7,00,000 ; Shakti Ltd. Rs. 6,70,000; Purchase Consideration of Shiv
Ltd. Rs. 8,20,000 and for Shakti Ltd. Rs. 5,30,000; Goodwill for Shiv Ltd. Rs. 1,20,000 (given)
and Capital Reserve for Shakti Ltd. Rs. 1,40,000]

(6) Balance Sheet of Mohanthal Ltd. and Ganthiya Ltd. as on 31-03-2012 are as follows :

Liabilities Mohanthal Ganthiya Assets Mohanthal Ganthiya

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Land & Building 10,00,000 5,00,000

Equity Share Capital of Rs. 100 Each 15,00,000 5,00,000 Machinery 3,00,000 75,000
Workmen Compensation Fund 6,000 - Debtors 2,00,000 1,00,000
9% Debentures 24,000 - Cash Balance 1,00,000 25,000
Creditors 70,000 2,00,000

Total 16,00,000 7,00,000 Total 16,00,000 7,00,000

On 1-4-2012 Sweet-Namkeen Ltd. was formed to amalgamate both the companies, with an
authorized capital of Rs. 25,00,000 divided into 25,000 shares of Rs. 100 each with the following
conditions :
(a) Book value of Land & Building is 20% less than the market price of both the companies.
Land and Building were to be taken up at the market price.
(b) To take over all the assets except Rs. 20,000 cash of both the companies at book value.
(c) A claim of Rs. 2,000 accepted by Mohanthal Ltd. against workmen compensation fund which
will be paid by Sweet-Namkeen Ltd.
(d) Purchase consideration was decided in such a way that Rs. 98,000 capital reserve arose while
purchasing the business of Mohanthal Ltd. and Rs. 80,000 Goodwill arose while purchasing
the Business of ganthiya Ltd.
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(e) For purchase consideration four equity shares of new company at 10% premium for five
equity shares held in Mohanthal Ltd. Similarly for equity shares of new company at 10%
premium for five equity shares held in Ganthiya Ltd.
(f) 9% Debenture holders of Mohanthal Ltd. were paid at 10% premium by 11% Debentures of
Sweet-Namkeen Ltd. at 12% Discount.
(g) Balance amount of purchase consideration of both the companies paid in cash.

The New company issued the remaining equity shares to public which were fully paid. Show
necessary Calculations.
Write off Capital Reserve against Goodwill and prepare the Balance Sheet of the new
company.
[ Mohanthal Ganthiya
Ltd. Ltd.
Purchase consideration 16,60,000 6,85,000
in the following form
Equity Shares 12,00,000 4,00,000
Security Premium 1,20,000 40,000
Debentures 26,400 -
Cash (balancing figure) 3,13,600 2,45,000
Net Assets 17,58,000 6,05,000
Capital Reserve 98,000 -
Goodwill - 80,000
Total of B/s of New co. Rs. 29,80,000; Equity shares issued to public =9,000 shares]

(7) Saif Ltd. and Kareena Ltd. whose business are of similar nature have agreed to amalgamate and form
a new company called Saif-Kareena Ltd. Following are the Balance Sheet of both the companies as
on 31-03-2012.
Liabilities Saif Kareena Assets Saif Kareena
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Freehold Assets 2,00,000 1,20,000

Equity Shares of Rs.10 Each 1,80,000 - Debtors 80,000 40,000
Equity Shares of Rs. 100 each - 1,20,000 Stock 50,000 20,000
Profit & Loss A/c. 30,000 20,000
Debentures 50,000 30,000
Creditors 45,000 10,000
Bills Payable 25,000 -
Total 3,30,000 1,80,000 Total 3,30,000 1,80,000

Average Profit of Saif Ltd. and Kareena Ltd. have been Rs. 30,000 and Rs. 20,000
respectively. The New Company agrees to take over both the companies. for Rs. 3,90,000 and in
addition to discharge all liabilities and to pay Rs. 30,000 in Cash (by taking overdraft from a Bank)
and to pay the remaining purchase price in fully paid shares.
It was agreed that profit on the conversion was to be divided between the shareholders of Saif
Ltd. and Kareena Ltd. in the same proportion as the profit previously earned by them. The above
cash Rs. 30,000 was to be divided between them according to their purchase price.
Prepare shareholders and Realisation Accounts in the books of Saif Ltd. and Kareena Ltd.
and also prepare the opening Balance sheet in the Books of Saif-Kareena Ltd.

[Net Asset : Saif Ltd. Rs. 2,10,000; Kareena Ltd. Rs. 1,40,000; Goodwill Saif Rs. 24,000;
Kareena Rs. 16,000 Purchase consideration Saif Ltd. Rs. 2,34,000 ; Kareena Ltd. Rs. 1,56,000]
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Chapter-2 Accounts of Absorption of Companies
a
Meaning
When an existing solvent company absorbs the business of another one or more existing
weak companies, it is termed as Absorption of Companies.
aa economically solvent company purchases or takes
As per Scheme of Absorption, the existing
aaa The absorbed company is going into voluntary
over the business of other company or companies.
liquidation and closes its business. Thus in Absorption there is one or more liquidation of vendor
company or Companies and one of the existing company purchases or acquires the business (Assets
& Liabilities) of vendor company. So there is no new formation of new company in Absorption.

Difference of Amalgamation and Absorption

In spite of much similarity in Amalgamation an Absorption, the main differences of

Amalgamation and Absorption are as follows :

(i) All existing companies are amalgamated by going into voluntary Liquidation in case of
Amalgamation, while in Absorption any one existing Company remains or continues as
before out of the amalgamated companies.
(ii) New company is to be formed to take over the assets and liabilities of closing companies.
While in Absorption, there is no requirement to form a new company, any one existing
company takes over the assets and liabilities of closing company or companies.
(iii) Due to formation of a new company no question arises for market-value of shares for the
satisfaction of the payment of purchase consideration in shares. While in Absorption any one
company in having existence, this company purchases the business of other company, so for
the payment satisfaction usually the purchase price is calculated on the market value of share.

Specific Matter for Absorption :

(a) Market Value of Shares

(b) Intrinsic Value of Shares
(c) Inter Company Transaction
(i) Inter Company Owing (Indebtedness) Inclusion of Debtors and Creditors
(ii) Inter Company Bills (Inclusion of Bills Payable and Bills Receivable)
(iii) Goods sold by one company to another Company and Stock remains unsold with the
Purchasing company (Transaction regarding Internal Purchased- sold of goods and
unrealized profit/loss in stock.
(d) Inter Company Share holding transactions

Accounting journal and Necessary Accounts

Accounting Treatment in old Company (absorbed Co,/Liquidating Co./ Vendor Co. ) and in
Continuing Company (Absorbing Company/Purchasing company) are as same as of Accounts of
Amalgamation. Likewise, Necessary Account and Treatment in that Account are also same as that of
Amalgamation.

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Practical Sum
(1) Balance Sheet of Ram Ltd. and Kishan Ltd. as on 31-03-2012 were as follows :
aa
Liabilities Ram Krishna Assets Ram Krishna
a Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital : Land & Building 4,00,000 1,00,000

Equity Share of Rs. 10 Each 5,00,000 2,00,000 Machineries 5,00,000 2,00,000
10% Redeemable Pref. Shares Furniture 1,00,000 1,00,000
each of Rs. 100 3,00,000 2,00,000 Stock 2,00,000 1,00,000
General Reserve 2,00,000 1,00,000 Debtors 2,00,000 1,00,000
12% Debentures of Rs. 100 Each 2,00,000 1,00,000 Bank Balance 1,00,000 1,00,000
Creditors 3,00,000 2,00,000
Total 15,00,000 7,00,000 Total 15,00,000 7,00,000

Ram Ltd. Absorbed Krishna Ltd. on the basis of the above Balance-Sheets and the terms mentioned
below :
(1) The assets of B Ltd. to be revalued as follows :
Land & Building to be increased by 100%; Machineries to be increased by 50%; and
Furniture to be increased by 20 %; Stock to be increased by 20% and the provision for
doubtful debts to be created at 10% of debtors.
(2) Ram Ltd. is to issue its own debentures in exchange of the debentures of Krishna Ltd.
(3) Ram Ltd. is to settle the purchase consideration by paying the following amounts to Krishna Ltd.
(i) Issue 25 Equity shares as fully paid up of Ram Ltd. in exchange of 10 equity shares of
Krishna Ltd.
(ii) Issue 12 preference shares as fully paid up of Ram Ltd. in exchange of 10 Preference
shares of Krishna Ltd.
(iii) To pay Rs. 10,000 in cash.
Draft Journal entries (including cash transactions) in the books of Ram Ltd. to give effect to the
above transaction and prepare the Balance Sheet of Krishna Ltd. after absorption. Authorised share
capital of Ram Ltd. has been increased up to the requirement.
[ Net Asset = Purchase Consideration Rs. 7,30,000; Purchase consideration includes : Equity
Shares of Rs. 5,00,000 + Pref. Share Capital Rs. 1,20,000 + Debentures Rs. 1,00,000 + Cash Rs.
10,000; Bank Balance in New Balance Sheet Rs. 1,90,000 and Total of New B/s. Rs. 24,20,000]

(2) Following were the Balance Sheet of Kishan Ltd. and Kiran Ltd. as on 31-03-2012

Balance Sheet of Kishan Ltd. as on 31-03-2012

Liabilities Rs. Assets Rs.

Paid Up share Capital : Fixed Assets 11,00,000
Equity shares of Rs. 10 each Rs. 7.50 Stock 3,00,000
per shares paid up 6,00,000 Debtors 1,60,000
General Reserve 3,00,000 Preliminary Expenses 40,000
Workers Profit sharing Fund 1,00,000
10% debentures 2,00,000
Creditors 3,00,000
(including Rs. 50,000 due to Kiran Ltd.)
Total 16,00,000 Total 16,00,000
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Balance Sheet of Kiran Ltd. as on 31-03-2012

Liabilities Rs. Assets Rs.

Paid Up share Capital : Fixed Assets 5,00,000
Equity Share of Rs. 10 Each Rs. 5 Paid Up 6,00,000 Investments 1,10,000
10% Debentures 3,00,000 Stock 2,00,000
Creditors 2,00,000 Debtors 1,70,000
(Including Rs. 50,000 due
by Kishan Ltd.)
Preliminary Expenses 20,000
P & L A/c. 1,00,000
Total 11,00,000 Total 11,00,000

On 1-4-2012 Kishan Ltd. agreed to absorb Kiran Ltd. on the following conditions :
(a) Stock of Kiran Ltd. included Goods worth Rs. 60,000 purchased from Kishan Ltd. which
was sold by them charging 20% profit on cost.
(b) The Purchase Consideration was to be satisfied by issue of necessary equity shares of Kishan
Ltd. in exchange of equity shares of Kiran Ltd. on the basis of intrinsic value of their shares.

Prepare necessary ledger account in the books of Kiran Ltd. and pass journal entries in the books of
Kishan Ltd.

[(i) Net Asset Kishan Ltd. = Rs. 9,60,000; Kiran Ltd.= Rs. 4,80,000; (ii) Intrinsic Value of
Shares (Net Assets/ No. of Shares) Kishan Ltd. Rs. 12 ; Kiran Ltd. Rs. 4; (iii) Number of Shares
to be issued by Absorbing Co. (Kishan Ltd.) = Net Asset of Liquidating Co. / Intrinsic Value of
Absorbing Co. (4,80,000 / Rs. 12 = 40,000 shares of Kishan Ltd. issued to Kiran Ltd. @ Rs. 12
per shares (iv) Unrealised profit in stock Rs. 10,000 which is charged to Goodwill A/c. Hence
Stock to be reduced with Rs. 10,000 and addition to goodwill be considered Rs. 10,000; (v)
Debtors of Kiran Ltd. is w/o against Creditor of Kishan Ltd as inter company transaction.]

(3) Balance Sheet of Arjun Ltd. and Krishna Ltd. as on 31-03-2012 are given below :

Liabilities Arjun Krishna Assets Arjun Krishna

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital 1,00,000 80,000 Goodwill 60,000 30,000

Reserves 25,000 60,000 Machinery 1,20,000 1,56,000
Dividend Eq. Fund 15,000 40,000 Investment 20,000 20,000
P & L A/c. - 20,000 Stock 20,000 50,000
14% Debenture 1,20,000 1,00,000 Debtors 65,000 55,000
Creditors 50,000 30,000 Cash 20,000 9,000
Bills payable 10,000 10,000 Bills Receivable 15,000 20,000
Total 3,20,000 3,40,000 Total 3,20,000 3,40,000

It was agreed that Krishna Ltd., will absorb Arjun Ltd., on this date. The Purchase
Consideration was to be discharged by issue of Shares in Krishna Ltd., on the basis of intrinsic
values of Shares. The face value of Shares of Arjun Ltd., was Rs. 10 per share on which Rs. 5 per
shares was paid up, Whereas the nominal value of shares of Krishna Ltd., was Rs. 10 on which Rs. 4
was paid up. Debtors of Krishna Ltd., include Rs. 10,000 due by Arjun Ltd.., All Bills payable of
Arjun Ltd. are drawn by Krishna Ltd., Stock of Arjun Ltd., includes goods valued at Rs. 10,000
purchased from Krishna Ltd., which has sold goods so as to realise 25% profit on sales.
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Draft Journal in the books of Krishna Ltd., and Its opening Balance Sheet.

[(1) Net Assets : Arjun Ltd. Rs. 1,40,000; Krishna Ltd. Rs. 2,00,000; (2) Intrinsic Value of
Shares Arjun Ltd. Rs. 7 and Krishna Ltd. Rs. 10 (3) Purchase consideration Rs. 1,40,000
( 14,000 Equity shares x Rs. 10 of which Rs. 6 for Eq. Share Capital and Rs. 4 for premium) (4)
Goodwill of Rs. 60,000 shown in the books of Arjun Ltd. is calculated as the part of net assets
(5) Unrealised profit in stock Rs. 2,500 is debited to goodwill account and credited by stock A/c.
(6) Cancel Bill of Rs. 10,000 under internal company owing transactions. (7) Total of New
Balance Sheet Rs. 6,40,000 and Total Amount of Goodwill = Rs. 92,500 (Rs. 30,000 + Rs. 60,000
+ Rs 2,500 Unrealised profit)]

(4) Following are the Balance Sheets of Jay Ltd. and Vijay Ltd. as on 31-03-2012

Liabilities Jay Vijay Assets Jay Vijay

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital Fixed Assets 13,50,000 11,00,000

Equity Share of Rs. 100 each 15,00,000 - Investment(F.V.) - 2,00,000
Equity Share of Rs. 100 each - Current Assets 5,10,000 3,66,000
Rs. 80 paid up 16,00,000 Preliminary Exp. 40,000 -
General Reserve 1,60,000 - P & L A/c. - 2,34,000
P & L A/c. 1,00,000 -
12 % Debentures 1,00,000 1,00,000
Creditors 30,000 1,80,000
O/s Expenses 10,000 20,000
Total 19,00,000 19,00,000 Total 19,00,000 19,00,000

Jay Ltd.agreed to absorb the whole business of Vijay Ltd. as on 1.4.2012 with following terms and
conditions.

(a) The purchase consideration was to be satisfied by issue of 4 fully paid equity shares of Jay
Ltd. in exchange of 10 equity shares of Vijay Ltd. on the basis of Intrinsic value of both
companies shares and Balance amount in cash.
(b) Fixed Assets of Jay Ltd. as shown in above Balance Sheet are 10% less than their market
value whereas the current assets of Vijay Ltd. as shown in above Balance Sheet are 10%
more than their market value.
(c) Debtors of Rs. 10,000 in Jay Ltd. are doubtful.
(d) Current Assets of Vijay Ltd. includes stock worth Rs. 66,000, whose market value is under
valued by 10%. In rest amount of current assets are Cash-Banks and Debtors.
(e) Market Value of Investment of Vijay Ltd. is 20 % more.
Show required calculations. Prepare required ledger accounts in the books of Vijay Ltd. pass
journal entries in the books of Jay Ltd.

[(i) Net Asset Jay Ltd. Rs. 18,60,000; Vijay Ltd. Rs. 13,00,000; (ii) Intrinsic Value of Shares
Jay Ltd Rs. 124; Vijay Ltd. Rs. 65; Purchase Consideration Rs. 13,00,000; by way of Equity
shares Rs. 8,00,000; Security premium Rs. 1,92,000; Cash (balancing figure) Rs. 3,08,000;
Loss on realisation Rs. 66,000]

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(5) Balance Sheet of Amar Ltd. and Prem Ltd. as at 31st March 2012 were as follows :

Liabilities Amar Prem Assets Amar Prem

Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.

Share Capital Fixed Assets 7,50,000 5,25,000

Eq. Shares Each of Rs. 10 9,00,000 6,00,000 (without Goodwill)
Reserve Fund 2,25,000 1,50,000 Stock 1,42,500 1,12,500
Profit & Loss A/c. 1,12,500 90,000 Debtors 2,10,000 1,50,000
Creditors 56,250 45,000 Cash & Bank 1,75,000 85,000
Bills Payable 6,250 15,000 Billls Receivable 7,500 20,000
Preliminary exp. 15,000 7,500
Total 13,00,000 9,00,000 Total 13,00,000 9,00,000

Amar Ltd. took over and absorbed Prem Ltd. as on 1-10-2012. Prem Ltd. has not prepared
Balance Sheet as on date of absorption. But following information available from transactions.

(a) Prem Ltd. earned profit for six month ended on 30.09.2012 Rs. 90,000 after provided
depreciation @ 10% p.a. on the fixed Assets.
(b) Amar Ltd. during that period had made net profit of Rs. 2,17,500 after provided depreciation
@ 10% p.a. on the fixed Assets.
(c) Both the companies paid divided @ 10% on 1st june 2012.
(d) Goodwill of Prem Ltd. as on date of absorption was estimated Rs. 60,000.
(e) Amar Ltd. to issue shares to shareholders of Prem Ltd. on the basis of the intrinsic value of
the shares on the date of Absorption.
(f) Assume profit have been earned in cash only by both the companies and value of all other
assets and creditors are to be taken over at book value. Except Cash Balance and P & L A/c.
Balance as on date of absorption are as same as shown in Balance Sheet.
Prepare Balance Sheet after absorption in the Books of Amar Ltd. All calculation should be
form part of your Answer.
[Note : Balance date and Absorption Date are different hence it is require to find the Cash
Balance and Balance of P & L A/c. and Revised B/s. as on date of Absorption as it is not
same
(Cash Balance as on Date of Absorption = Balance as on date of B/s. + profit for 6
month + Derepciation for 6 months Dividend @10% = Balance as on Date of
Absorption)
Cash Balance as on date of absorption for Amar Ltd. Rs. 3,40,000; Prem Ltd. Rs.
1,41,250
(Profit & Loss A/c. balance as on date of Absorption = Balance as on date of B/s. +
Profit for 6 month Dividend @ 10 % for 6 months)
P & L A/c. as on date of absorption for Amar Ltd. Rs. 2,40,000; Prem Ltd. Rs. 1,20,000
Total of Revised B/s. Amar Ltd. Rs. 14,27,500 ; Prem Ltd. Rs. 9,30,000
Net Assets Amar Ltd. Rs. 13,50,000; Prem Ltd. Rs. 9,22,500
Intrinsic Value of Amar Ltd. Rs. 15; Prem Ltd. Rs. 15.37
Purchase consideration Rs. 9,22,500 (61,500 shares x Rs. 10 for equity shares and 61,500
x Rs. 5 for security premium)
Balance Sheet after absorption Rs. 24,10,000]

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