IPCC – Accounting CA Kartik Parekh 09819367666

AMALGAMATION
1. A Co. & B CO. C CO. (Amalgamation)
2. X Co. & Y CO. X CO. (Absorption)
3. Z Co. Z CO. (External Reconstruction)

In case 1 A & B are old Companies and it is taken over by new company C, this is called
Amalgamation.
In case 2 X & Y are old Companies and X takes over the business of Y & X continues the
business, this is called Absorption.
In case 3 Z company reforms itself, here there is no takeover, this is called External
Reconstruction.

 Amalgamation is defined by Accounting Standard AS – 14 & it considers both case 1 &

case 2, above as Amalgamation.
 Case 3, External Reconstruction is not defined by AS -14 (Because as per AS 14,
Amalgamation is combination of business).
 Accounting treatment of case 1 & 2 is same.

In case 1 both A & B Co. are called Vendor company or Transferor Company & C & Co. is called
Purchaser Company or Transferee Co.
In case 2 Y is called Vendor Company or Transferor Company & X is called Purchaser Co. or
Transferee Company.

 AS 14 is silent about the accounting treatment of Vendor Company/ Transferor

Company.
 AS -14 has defined the accounting treatment of Purchaser Company/ Transferee
Company.

Merger Purchase Method

(Pooling of Interest Method) (Purchase Method)

 All Assets & Liabilities are taken over.

 All Assets & Liabilities are taken over at Book Value.
 All or at least 90% of Equity holders agree to the scheme.
 Equity share holder should get Equity shares only.
 Business of Vendor Co. should continue.

(If all these 5 conditions are satisfied, solve sum by Merger Method or else Purchase Method).

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IPCC – Accounting CA Kartik Parekh 09819367666

Before going into accounting treatments in the books of vendor & Purchaser Company,
we focus now on Purchase Consideration.
Purchase Consideration:

What is Purchase Consideration?

Purchase Consideration is the amount paid by purchasing company to the vendor
company for purchasing their business.

To whom the Purchase consideration is paid?

Purchase consideration is the amount paid to the Equity share holders & Preference
share holders only of the vendor company by the Purchasing Company.

What is not to be considered for Purchase consideration?

 Amount paid to Debenture holders of Vendor Company.
 Amount paid to Creditors of Vendor Company.
 Amount paid for Realization Expenses.
 Amount paid to any other than Equity share holders & Preference share holders.

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IPCC – Accounting CA Kartik Parekh 09819367666

Q.1 The abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2011, are as follows:

Liabilities Rs.

Equity share capital (Rs. 100 each) 15,00,000

12% preference share capital (Rs. 100 each) 8,00,000

13% Debentures 3,00,000

On the 31st March, 2011 BXE Ltd. agreed to take over AXE Ltd. on the following terms:

(1) For each preference share in AXE Ltd., Rs. 10 in cash and one 9% preference share of Rs. 100
in BXE Ltd.
(2) For each equity share in AXE Ltd., Rs. 20 in cash and one equity share in BXE Ltd. of Rs. 100
each. It was decided that the share in BXE Ltd. will be issued at market price Rs. 140 per share.
(3) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of Rs. 10,000.
Actual expenses amounted to Rs. 12,500.

You are required to compute the amount of purchase consideration.

Answer:

Notes before solving:-

 Here BXE Ltd. Is taking over the business of AXE Ltd so BXE Ltd. Will have to pay to AXE
Ltd.
 Here in this sum they have directly given the amounts which BXE Ltd pays to the
shareholders of the AXE Ltd.
 This is called Lumpsum Method (Easiest Method).
 Liquidation expenses are to be ignored for Purchase consideration calculation.
 No of Preference Share holders of AXE Ltd 8,00,000/100 = 8,000
 No of Equity Share holders of AXE Ltd 15,00,000/100 = 1,500

Calculation of Purchase Consideration:-

For Preference Share Holder:-

9% Preference share of BXE Ltd. of Rs. 100 each 8,000 X 100 = 8,00,000

Cash Rs. 10 8,000 X 10 = 80,000

Total (A) 8,80,000

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IPCC – Accounting CA Kartik Parekh 09819367666

For Equity Share Holder:-

Equity Shares of BXE Ltd. of Rs. 100 each 15,000 X 140 = 21,00,000

Cash Rs. 20 15,000 X 20 = 3,00,000

Total (B) 24,00,000

Total Purchase Consideration (A + B) 32,80,000

Q.2 The Indo-Gulf Co. Ltd. sells its business to the Continental Co. Ltd. as on December 31, 2010,
on which date its Balance Sheet was as under:

Liabilities Rs. Assets Rs.

Paid-up Capital 2000 shares 2,00,000 Freehold property 1,50,000

Of Rs.100 each Goodwill 50,000
Debentures 1,00,000 Plant and Tools 83,000
Trade Creditors 30,000 Stock 35,000
Reserve Fund 50,000 Bills Receivable 4,500
Profit & Loss Account 20,000 Sundry Debtors 27,500
Cash at Bank 50,000

4,00,000 4,00,000

The Continental Co. Ltd. agreed to take over the Assets (exclusive of cash at Bank and Goodwill) at
10 percent less than the book value, to pay Rs. 75,000 for Goodwill, and to take over the
Debentures.

The purchase consideration was to be discharged by the allotment to the Indo-Gulf Ltd. of 1,500
shares of Rs.100 each at premium of Rs.10 per share and the balance in cash.

The cost of the liquidation amounted to Rs. 3,000. Calculate Purchase Consideration.

Answer:

Notes before solving

 Here the directly the amount paid for purchase consideration is not given, since balance
amount in cash is still a question
 So here we cannot calculate by the way we calculated Q.1
 Whenever this situation arise we follow Net Asset Method i.e is (Asset – Liabilities)
 Calculate the Net Asset of Vendor Company & that is the amount of PC.

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IPCC – Accounting CA Kartik Parekh 09819367666

 While calculating PC, take asset and liabilities at value taken over by Purchasing
Company
 If nothing is specified about liabilities they are to be taken over at Book value.

Calculation of Purchase consideration:-

Particulars Rs.
Assets:-
Freehold Property (150,000 – 15,000) 135,000
Goodwill 75,000
Plant & Tools (83,000 – 8,300) 74,700
Stock (35,000 – 3,500) 31,500
Bills Receivable (45,00 – 450) 4,050
Debtors (27,500 – 2,750) 24,750
345,000
Less:
Liabilities:- (100,000)
Debentures
Creditors (30,000)
Purchase Consideration 215,000

To be paid as follows:-

Shares of Continental Ltd. 1,500 X 110 165,000

Cash (Balancing Figure) 30,000

Total 215,000

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