Amalgamation Important Theory.

AMALGAMATION, ABSORPTION &  EXTERNAL RECONSTRUCTION

THEORY

AMALGAMATION	ABSORPTION	EXTERNAL RECONSTRUCTION
Two or more existing company decides to amalgamate & starts a new company.	One existing company takes over business of other one or more existing company.	One new company is specifically incorporated to take over another existing loss making company.
For e.g. A Ltd & B decided to amalgamate & form a new company AB Ltd.	A Ltd take over business of B Ltd.	A (new Ltd) is incorporated to take over business of A Ltd (loss making company).

 

Note : 1. In all above 3 situation; there is a transaction of buying and selling of business.

Note : 2. In all the above 3 situation; company’s are divided into 2 categories;

1. Old Company? New Company
2. Selling Company? Buying Company
3. Transferor Company? Transferee Company
4. Vendor Company? Purchasing Company

 

Given in Question	Required in Solution
1.Balance Sheet of existing company	1.Purchase Consideration (PC)
2.Adjustment	2.Books of old  company.(Ledger & Journal entries.)
	3.Books of new company.(Journal entries & Balance Sheet).

 

1.Purchase Consideration:

It is a price payable by new company to preference shareholder and equity shareholder of old company; as per accounting standard (AS 14).

 

2.Mode of Payment (MOP):

Company can make payment by issue of equity share, preference share, debentures, cash.

 

3.Methods of Calculation of PC:

1. a) Lumpsum method
2. b) Payment method
3. c) Net Asset method

 

 

1. Lumpsum Method:

Hint: a) Amount of total PC is given in question

1. b) All MOP given in question.
2. c) Amount of all MOP given but; amount of any / MOP may not be given.

 

Calculation of PC [ Lumpsum Method ]

To whom	Rs.	MOP
1.Preference shareholder of old company	Xx   xx	Equity share capital / Preference Share Capital of New company of Rs. _____at _____ cash
2.Equity Shareholder of new company.	Xx   xx	____ Equity share capital / Preference Share Capital of New company of Rs. ______at ______ cash
Total PC	xx

 

1. Payment Method :

Hints : a) Amount of total PC not given in question.

1. b) All MOP given in question.
2. c) Amount of all MOP given in question.

 

Calculation of PC [Payment Method]

To whom	Rs.	MOP
1.Preference shareholder of old company	Xx Xx	____ESC/ PSC of New company of Rs. __at __ cash
2.Equity Shareholder of old company.	Xx Xx	____ ESC / PSC of New company of Rs. _at _ cash
Total PC	Xx

 

1. Net Assets Method :

Hints : a) Amount of total PC not given in question.

1. b) All MOP given in question.
2. c) Amount of any/ MOP not given in question.

 

Calculation of PC [Net Asset Method]

To whom	Rs.	MOP
1.Preference shareholder of old company	Xx xx	____ ESC /PSC of New company of Rs. _at _ cash
2.Equity Shareholder of old company.	Xx xx	__ESC/PSC of New company of Rs. __at __ cash
Total PC	Xx

 

Calculation of PC by Net Asset Method :

Asset taken over                     xx [ Agreed value]

(-) Liabilities taken over       xx [Agreed value]

Total PC                     xxx

Note: 1. Assets taken over does not include miscellaneous expense and Profit & Loss A/c (Debit side).

2.   Liabilities taken over does not include PSC, ESC and Reserve & Surplus.

Accounting treatment to close the Books of Selling Company.

Following Accounts are to be prepared:

1. Realisation A/c
2. Cash / Bank A/c
3. Equity Share holder A/c
4. Preference share holder A/c
5. Buying Company A/c
6. Securities (E/P/D) in New Co. A/c

STEPS TO BE FOLLOWED:

STEP I –

Transfer of Balance sheet items at balance Sheet / book values.

Balance sheet of old Company

	Liability	Where to  Write		Assets	Where to  Write
1.	Preference  Share Capital	PSH A/c	1.	Misc. Exp.	ESH A/c
2.	Equity Share Capital	ESH A/c	2.	Cash/Bank A/c
3.	Reserve  and Surplus	ESH A/c		a) Not T/o by  new co	Cash/Bank A/c
				(a) T/o by new co	Realisation A/c
4.	All remaining liabilities SL/UL/CL whether taken over or not (including bank o/d. & Deb)	Realisation A/c	3.	All remaining Assets [FA/I/CA] Whether  t/o  or not (at book value)	Realisation A/c
5.	RFDC (Reserve for discount from creditors)	Realisation A/c	4.	RDD	Realisation A/c.

 

STEP  II :

Demand PC from Buying Co.

New Co. A/c                          Dr.        XX

To Realisation A/c                              XX

STEP  III :

Receipt of PC

Equity Share in New Co.	Dr.	XX
Preference Share in New Co.	Dr.	XX
Debenture in New Co.	Dr.	XX
Cash / Bank	Dr.	XX
To New Co.			XX

STEP  IV: 

Sale of Asset not taken over by Buying Co.

Cash / Bank A/c           Dr.    XX

To Realisation A/c                 XX

Note:

1. Record actual amount received on sale without bothering about profit or loss on sale.
2. If any asset is not T/O by new co., & the selling price is not given then consider to be Worthless

STEP  V: 

Payment of Liability not taken over by Buying Co.

Realisation A/c             Dr.    XX

To Cash / Bank A/c               XX

Note:

1       Record actual amount paid without bothering about Profit/loss.

2. If any liability is not T/O by new co., then it must be paid off.

STEP  VI:  

Payment of realisation/dissolution/ winding up/liquidation expenses (if paid by Selling co.)

Realisation A/c             Dr.    XX

To Cash / Bank A/c               XX

Note:

• If exp. Are paid by New Co., then no entry in Selling Co’s books
• If expenses are reimbursed

Cash / Bank A/c                    Dr.

To Realisation A/c

STEP  VII:  

Payment  to PSH

PSH A/c	Dr.	XX
To Equity Share in Buying Co.			XX
To Preference Share in Buying Co.			XX
To Debenture Share in Buying Co.			XX
To Cash / Bank			XX

*Close Preference Share holders Account and transfer the difference to realisation account.

STEP  VIII :

Close Realisation Account & transfer the difference to ESH A/C.

(a)        If Profit             Þ                  Realisation  A/c        Dr.

To ESH   A/c.

(b)        If Loss              Þ                  ESH   A/c                 Dr.

To Realisation A/c

STEP  IX :

Close remaining Account [Sec. & Cash] and transfer the difference to ESH Account. (means Payment to  ESH)

ESH A/c	Dr.	XX
To Equity Share in New Co.			XX
To Preference Share in New Co.			XX
To Debenture Share in New Co.			XX
To Cash / Bank			XX

*At the end ESHs Account must Tally.

 

For Opening entries in Buying Co’s book (Purchase) & Further Easy steps to make amalgamation really simple to solve, Download the Free File attached. 

Download (DOCX, 35KB)

We appreciate the efforts of Prof. Nimesh Agarwal  (Lecturer at Dr. Babasaheb Ambedkar College of Commerce and Management, Vasai) For the above Content.