Purchase Method. Read this article to learn about the accounting treatment required during amalgamation of companies! III. 4. 60 paid-up in exchange of every two shares in P Ltd. to the shareholders who agree with the scheme. Equity Shares 2, 00,000/4 x 6 x Rs. To maintain investment allowance reserve for two years. On the other hand, Absorption is the process in … An amalgamation is a combination of two or more companies into a new entity. 2,000. 2. 9,000/12 x 100 = Rs. It should be noted that the Accounting Standard (AS-14) deals with the accounting procedures only in the books of the transferee company. It is an amalgamation in Nature of Purchase because all the assets and liabilities are not taken over by the transferee company. 10 share in A Co. Ltd. 2. Debtors realised Rs. Equity Shares of A Ltd. (2 x 10 x 20,000) 4, 00,000. 2. Types of Amalgamation. one company or all or part of the shares or assets of another company. 12, 00,000; stock at Rs. Such shareholders hold 400 equity shares. (b) In tangible assets such as goodwill, patents, trademarks etc. Lender accepted the debentures in Suraj Ltd in discharge of the loan. 1,00,000 at a premium of 10% in 9% debentures issued at par; and the payment of Rs. The ‘amalgamation in the nature of merger’ according to accounting standard 14 preserves the identity of the transferor company’s reserves in the statements in the transferee company. This is also the goodwill paid by Recovery Ltd. Again, profit sharing ratio between Weak Ltd. and Feeble Ltd. is: Rs. The Purchase Consideration was agreed as: 1. The net amount payable to equity shareholders must be equal to the amount of shares in Transferee Company and cash and bank balance left after the discharge of all outsiders’ liabilities and claims of preference shareholders. 1,00,000). 10 each in X Ltd. for every share in Y Ltd. Y Ltd. has 50,000 equity shares outstanding as on the date of amalgamation. 2. The methods are: 1. 10 = Rs. By contrast, it can also occur when companies want to enter new markets or get into a new business, and use mergers and acquisitions as a way to achieve that. On 1st April, 2013 B Co. Ltd. absorbed the business of A Co. Ltd. This definition emphasizes the following points which should be remembered while calculating ‘Purchase Consideration’: 1. After passing the above mentioned entries in books of Transferor Company, all the accounts will be closed and not a single account will show any balance. To issue 15% preference shares of Rs. Prepare Ledger Accounts in the books of A Co. Ltd. and pass journal entries in the books of B Co. Ltd. Calculate purchase consideration as per AS-14. 10 each. 3. These are directly transferred to sundry shareholders account (e.g. Only payments to shareholders are to be taken into consideration. 100 each of Sun Limited. 100 each to discharge preference shares of B Ltd. at par. 6, 00,000 at a premium of 10%. The following are the salient features of pooling of interest method: 1. The pooling of interests method in accounting standard 14 may only be used in situations that meet the requirements of ‘amalgamation in the nature of merger’. Sumant Ltd. to take over sundry creditors. The shareholders of Y Ltd. are to be paid Rs. 9,000 (9% of Rs. feel free to call us +91-9319459510 info@companyvakil.com. 4. 5,00,000, 15% debentures by Sumant Ltd. Shares Issued (50,000 x 4 x 10) 20, 00,000. Gain the confidence you need to move up the ladder in a high powered corporate finance career path. A cash payment of Rs. Amalgamations are often done when competing companies engaged in similar business would achieve some synergy or cost savings by combining their operations, which can be quantified in a financial model. If the amount of consideration is lower than the value of net assets acquired, the difference should be treated as Capital Reserve. (iii) The debentures of both companies are to be converted into equivalent number of 12% Debentures in RS Ltd. (iv) Statutory Reserves are to be maintained for 3 more years. As per AS-14, there are two methods of accounting for amalgamation: Applicable in case of Amalgamation in the nature of merger. Amalgamations for this accounting standard come in four very broad categories, listed below. The 5 steps discussed in detail, The ultimate guide on how to be a world-class financial analyst. (6, 85,000 + 6, 50,000) = Rs. 1, 65,000 x 2/5 = Rs. 2, 05,000. X Ltd. agrees to acquire the business of Y Ltd. on the following terms: 1. 3. 2. The bankers will typically perform extensive financial modeling and valuation to evaluate the potential transaction and advise the individual corporations. When it comes to the method of accounting, if the amalgamation affected is in the nature of merger, then pooling of interest method is followed, whereas if the amalgamation is in the nature of the purchase, in that case, purchase method is followed. 40,000 respectively.
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