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;
- Old Company? New Company
- Selling Company? Buying Company
- Transferor Company? Transferee Company
- 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:
- a) Lumpsum method
- b) Payment method
- c) Net Asset method
- Lumpsum Method:
Hint: a) Amount of total PC is given in question
- b) All MOP given in question.
- 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 |
- Payment Method :
Hints : a) Amount of total PC not given in question.
- b) All MOP given in question.
- 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 |
- Net Assets Method :
Hints : a) Amount of total PC not given in question.
- b) All MOP given in question.
- 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).
- 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:
- Realisation A/c
- Cash / Bank A/c
- Equity Share holder A/c
- Preference share holder A/c
- Buying Company A/c
- 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:
- Record actual amount received on sale without bothering about profit or loss on sale.
- 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.
- 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.
We appreciate the efforts of Prof. Nimesh Agarwal (Lecturer at Dr. Babasaheb Ambedkar College of Commerce and Management, Vasai) For the above Content. 
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