APT
Am alg lgam atitionof Com panies
Notes Relevant accounting Standard
14
Amalgamation
1. 2.
3. 4.
Essential conditions for Merger:All assets and Liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation at book values. Shareholders of the transferor company holding not less than 90% of the face value of equity shares become the shareholder of Transferee Company b y virtue of amalgamation. For the purpose of computing 90%, exclude shares already held prior to amalgamation by a. transferee co in Transferor Company. b. One or more subsidiaries of Transferee co. in the transferor co. c. Nominees of transferee co in the transferor company. The consideration paid to equity shareholders of the transferor is in the form of equity shares in the transferee company, except that of cash, which is paid for fractional shares. The Business of the transferor company is intended to be carried on after the amalgamation by the transferee company.
Amalgamation in the nature of Purchase;- which is not of nature of merger.
Journal Entries in Books of Transferor Company(whether merger/purchase)
1. Transfer all Recorded assets to realization a/c(including intangible assets like g/w) but excluding the debit bal. of P&l a/c,Misc expenditure item(preliminary exp., Underwriting Commission Discount on issue of shares etc.),Cash and bank bal which are not taken over by the purchasing company. These assets are transferred at there book values/Gross value irrespective of the fact whether the purchasing company is taking over asset of not. Realisation a/c Dr. To Sundry Assets(individually)
2. Transfer only those third party liability which are taken over by the purchasing co.at their resp .book values ,also transfer those provisions which are created against assets transferred in entry 1 to gross values(eg. Prov. of bad debts, depreciation).Also provision of taxation, EPF, Pension fund etc to Realisation a/c but exclude Items of reserves representing profit portion such as workmen compensation reserve, Dividend Equalisation reserve General reserve etc. Those third parties liabilities which are not taken over by the purchasing company should not be transferred to Realisation account. Only Profit and loss on discharge of such liabilities is transferred to realization. Sundry Liabilities(individually) Dr. Dr. Assets Specific Provisions To Realisation a/c(total)
3. Make Due The Purchase Consideration
2
Anshul Agrawal(APT)
Amalgamation Transferee company a/c Dr. To Realisation a/c
4. Receipt of Purchase Consideration Equity Shares in Transferee co.(issue price) Dr. Pref.Shares in Transferee co.(issue price) Dr. Debentures in Transferee co.(issue price) Dr. Bank a/c Dr. To Transferee co. 5. Realisation Expenses a. Borne by transferor company. Realisation a/c To Bank.
b. Borne By Transferee company and paid by transferee company. NO entry c. Paid by Transferor Company but reimbursed by transferee company.
Realisation a/c To Bank. (amount paid for realization exp is added to purchase consideration)
6. Sale those assets, which are not taken over by purchasing company. Bank a/c To Realisation a/c 7. Pay out those liability which are not taken over by purchasing company and adjust any surplus or deficiency with realization account. Liability a/c Dr. Realisation a/c(with loss) Dr. To Bank a/c To Realisation a/c(with profit) 8 Discharge the claims of preference shareholders and transfer the difference betwn the amount actually payable and the book figure to the realization account. a.Journal entry on making due Preference share capital Dr. Realisation a/c(with Loss) Dr. To Preference Shareholders (with amt payable) To Realisation (with profit) b.Journal entry for making payment Preference share Holder Dr. To bank To shares/Deb. Of transferee company.
3
Anshul Agrawal(APT)
Amalgamation 9. Ascertain profit and loss on realization and transfer the same to the Equity shareholders . In case of profit Realisation a/c dr. To Equity Shareholders Or In case of loss. Equity Shareholders To Realisation a/c
10. Transfer the equity share capital, accumulated profits, Reserves and losses to the Equity shareholder`s a/c Equity Share capital a/c Dr. GR/P&L a/c/WCR/CR/CRR/DRR a/c Dr. Dividend Equalisation Reserve a/c Dr Securities Premium Dr To Equity shareholder a/c
Transfer losses, preliminary expenses, Underwriting commission etc to shareholder`s a/c Equity shareholder a/c dr. To P& l a/c To Preliminary Exp a/c//Underwriting comm.. To Misc.Expenditure
11 Settle Equity Shareholder`s with consideration received from transferee company. Equity shareholder a/c dr. To bank To shares/Deb. Of transferee company.
Note The net amount payable to the equity shareholder must be equal to the amount of consideration received from transferee company as reduced by realization expenses, amount paid to preference shareholders and amt paid to external shareholders.
4
Anshul Agrawal(APT)
Amalgamation Journal Entries in books of Transferee company.(needed to be supported by explanations of Anshul sir )
Case
Merger
purchase
Acquisition of Business Purchase a/c Business To Liquidator of vendor co. Recording of assets Assets a/c(all assets at BV) and liabilities taken General reserve(bal fig.) over To Liabilities(at BV) To Prov.of Bad debts/depr To Reserves(other than GR) To GR/P&L a/c (bal fig.) To Business Purchase a/c
Business Purchase a/c To Liquidator of vendor co Assets a/c(at agreed value)) Goodwill(bal fig.) To Liabilities(at agreed value) To Debenture holders (settlement amount) To Capital Reserve(bal fig) To Business Purchase a/c Taking over statutory NA(as already included in Amalgamation Adj.a/c Reserve Reserves) To Statutory Reserves Payment of Purchase Liquidator of vendor co a/c Liquidator of vendor co a/c Consideration Discount on issue of Shares Discount on issue of Shares To Equity Share capital To Equity Share capital To Security Premium To Pref. Share capital To Bank(fraction shares) To Debentures To Security Premium To Bank Settlement of debentu- Debenture(of vendor co.) Debenture Holder a/c re of transferor co. by Dis. on issue of Deb.(new) Dis. on issue of Deb.(new) issuing deb. To Debentures(new) To Debentures(new) To Premium on issue of To Premium on issue of Debentures. Debentures Liquidation Exp Borne Liquidation Exp./Gen.Reserve Goodwill/Capital Reserve a/c By transferee co. To Bank. To Bank. Preliminary Exp of Preliminary Expenses a/c Preliminary Expenses a/c transferee co. To Bank. To Bank.. Elimination of unrealized stock a. Purchasing co a. General Reserve/P&L a. Capital Reserve/G/w includes goods a/c a/c purchased from To Stock a/c(with To Stock a/c(with vendor co. unrealized Profit) unrealized Profit
b. Stock of transferor co includes goods purchased from transferee co. Eliminate co.debts
5
Inter
b. No specific entry.(stock b. No specific entry.(stock taken over will be reduced taken over will be reduced by by unrealized profit) unrealized profit)
Creditors a/c To Debtors a/c
Creditors a/c To Debtors a/c
Anshul Agrawal(APT)
Amalgamation Eliminate Inter co Bill B/P accepted To B/R (excludes that amount which are discounted by bank or endorsed to third party) Eliminate Inter co. Debentures a/c debentures held as To Investments a/c investments by other (surplus or deficiency is adj. co. With Gen.Reserves) Set off of Bal fig. P&L a/c To General Reserve (when there in Dr bal in Gen Reserve)
B/P To B/R (excludes that amount which are discounted by bank or endorsed to third party) Debentures a/c To Investments a/c (surplus or deficiency is adj. With G/w or Cap..Reserves) Cap Reserve a/c To Goodwill (if both arrived in above Bs .than ad. is to be done with lesser amount.
** When the debtors of a company included a sum due from another company but the creditors of another company include a lesser sum due to the former company than the difference is treated as Cash In Transit .
6
Anshul Agrawal(APT)
Amalgamation
Practical Questions Purchase consideration 1. The Balance Sheet of A ltd as on 31st Dec. is given below-(in Rs.000’) Liabilities Share capital Equity Shares 10each 8% Pref Shares 12% Debentures Sundry Creditors
Amount
Assets Sundry Fixed Assets 5050 Stock 950 Debtors 1500 Cash And Bank 1000 8500
Amount 5000 2000 1000 500 8500
B ltd agrees to take over A ltd by issuing requisite no of Preference shares of Rs.10 each at 5% discount to the preference shareholders of A ltd. and requisite no. of equity shares of Rs.10 each at par to the equity shareholders of A ltd. Purchase consideration is settled as per book values of the assets and the debentures will be taken over by Bltd on the agreement that these will be paid off at 10% premium after one year. Debenture holders of A ltd will accept 12% debentures of Krishna Ltd. Calculate Purchase consideration. Ans:PC Rs.5850/2. PQR ltd was incorporated for the purpose of acquiring P ltd, Q ltd, R ltd .The Balance Sheet of these companies as on 31 st Dec are as follows: Liabilities Equity Share 10/P& L a/c 10% Debentures Sundry Creditors Total
PLtd 400000 150000 70000 80000 700000
Qltd 500000 110000 130000 740000
R ltd Assets 250000 Fixed Assets 60000 G/w 40000 other assets 35000 385000 Total
Avg Annual profits before debenture Interest Professional Valuation of Tangible assets
PLtd 500000
R ltd 300000
200000
Qltd 400000 60000 280000
700000
740000
385000
90000 620000
120000 480000
50000 360000
a. The Directors in their negotiations agreed that (i) The recorded goodwill of Q ltd. Is valueless .(ii) The other assets of the P ltd are worth Rs.30000.(iii) Valuation in respect of tangible assets should b accepted. b. The acquisition agreement provides for the issue of 12% Unsecured Debentures to the value of the Net assets of the Companies. And for the issuance of Rs.10 nominal value of shares for the capitalized avg. profits of each acquired company in excess of the Net assets contributed. The capitalization rate is taken at 10%.Calculate PC and form in which it is Discharged. Ans.830000,1200000,460000 3. A ltd agrees to take over the business of B ltd on the following terms: a. The shareholders of B ltd are to be paid Rs.25 cash and the offer of four shares of Rs.10 each in A ltd for every share of B ltd. B ltd has 50000 equity shares outstanding. b. The debenture holders holding 5000 debentures of Rs.100 each are to redeemed at a premium of 10%. c. Costs of liquidation Amounting Rs.25000 are to be borne by A ltd. Compute Purchase consideration. Ans. Rs.3275000
7
Anshul Agrawal(APT)
85000
Amalgamation 4
Santa Ltd acquired the business of Banta Ltd Whose Balance sheet as on 31/12/07 is as follows: Liabilities
Amount
8% prf Shares (Rs 100 each) Equity Share capital (Rs 100 each) Capital Reserve Profit and Loss a/c 6% Debentures Outstanding Deb Int Workmen Comp Reserve (Expected Liability Rs.8000) Trade Creditors
Assets
600000 G/w Land & Building Plant and Machinery 1200000 Patents 100000 Stock 50000 Book Debts 200000 Cash at Bank 12000 Underwriting Comm. 12000 120000 2294000
Amount
350000 750000 750000 50000 150000 180000 14000 50000
2294000
Santa Ltd was to take over all assets (except cash) and liabilities(except interest due on debentures) and to pay following amount: (i) Rs.200000/- 7% Debentures(Rs.100 each) in Santa Ltd for the existing debentures in Banta Ltd, For the purpose each debentures of Santa ltd is issued at a premium of 5%. (ii) For Each Preference share of Banta Ltd Rs.10/- in cash and one 9% pref. Share of Rs.100 each In Santa Ltd. (iii)For each equity share in Zed ltd Rs.20 in cash and one equity share in Santa Ltd of Rs.100 each having market Value Rs.150. (iv)Expenses on Liquidation of Banta ltd are to be reimbursed by Santa ltd to the extent of Rs.15000.Actual expenses amounted to Rs.18000.Realisation Expenses is to be added to Purchase Consideration . (v) Value of land and Building is appreciated by 10%,While that of Plant and Machinery by Rs.50000/-.patents are valued at Rs.20000. Pass necessary Journal Entries in books of Santa and Banta .Also Prepare BS after amalgamation. 5. The Following are the Balance sheet of Ena ltd and Meena Ltd. (module) Liabilities
Share Capital P&L a/c Creditors Loan Deeka ltd
Ena Ltd
48000 7500 22500 15000 93000
Meenaltd
Assets
Ena Ltd
42000 Sundry Assets Shares in Meena ltd 9000 P&L a/c
63000 30000
51000
93000
Meenaltd
49500 1500 51000
The whole Business of Shares of Ena ltd are held by Deeka Ltd and the entire share capital of Meena ltd is held by Ena ltd . A new company EM ltd is formed to acquire the sundry assets and creditors of Ena ltd and Meena Ltd. For this Purpose the sundry assets and creditors of Ena ltd are revalued at Rs.45000/- and those of Meena ltd at Rs.30000.The amount of the loan due to Deeka Ltd is also to be discharged by the way of shares in the new company. Show the journal entries in all companies books.
8
Anshul Agrawal(APT)
Amalgamation 6.
The following are the balance sheet of Big ltd and small ltd for the year ending on 31/03/2007. (module) in crores Big ltd Small Ltd 50 40 Fixed Assets 60 Current assets
Equity Share capital(100 each) Pref share capital (Rs.100 each) Reserves and surplus loans secured
200 100 350
150 100 350
Big ltd Small Ltd 150 150 200 200
350
350
The present worth of fixed assets of Big ltd is Rs.200 crores and that of small ltd is Rs.429 crores. G/w of Big ltd is Rs.40crores and of small ltd is 75 crores. Small ltd absorbs Big ltd by issuing equity shares in such a way that intrinsic net worth is maintained. G/w account is not to appear in the books. Fixed assets are to appear at old figures. Prepare B.S after absorption. 7.
Following are the balance sheet of Jay ltd and Veeru ltd for the year ending on 31/03/2007 (module) Jai Equity share capital Rs.100 each Rs.10 each
3,000,000
Veeru
Jai 3,400,000
Fixed Assets Stock 1,000,000 (pledged with Secured loan holder) 18,400,000 Current assets 3,600,000 Profit & loss a/c 16,600,000 2,800,000 8,000,000
Pref shares (100 each) 1,000,000 Development Rebate res. 400,000 Gen Reserve Secured Loans 16,000,000 Unsecured Loan 8,600,000 Current Liability 13,000,000 4,600,000 42,000,000 16,400,000
Veeru 6,800,000
9,600,000
42,000,000 16,400,000
Both the companies amalgamate and formed Sholay ltd. On the basis of following information a. All the current assets of the two companies except pledged stock are taken over by Sholay ltd. The realizable value of all the current assets are 80% of bo ok value in case of Jai ltd and 70% in case of Veeru ltd. b. Current liabilities agreed to be taken over at Rs.14200000/- and at Rs.4240000/resp. of Jai and Veeru ltd. c. Secured loans includes Rs.1600000/- accrued interest in case of Veeru ltd
9
Anshul Agrawal(APT)
