Chapter 4

AMALGAMATION OF COMPANIES

Question 1 (RTP – May 18)

P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme
envisaged a share capital, equal to the combined capital of P Ltd. and Q Ltd. for the
purpose of acquiring the assets, liabilities and undertakings of the two companies in exchange
for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date
of amalgamation) are given below:
Summarized balance sheets as at 31-03-2017
Liabilities P Ltd. Rs Q Ltd. Rs Assets P Ltd. Rs Q Ltd. Rs
Equity & Assets:
liabilities:
Shareholders Non-current
Fund Assets:
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current a. Inventories 3,60,000 6,60,000
Liabilities
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000

The consideration was to be based on the net assets of the companies as shown in the
above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to
be calculated as its weighted average of net profits for the three years ended 31st March,
2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were
agreed as 1, 2 and 3 respectively.
The profit had been:

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2014-15 Rs 3,00,000; 2015-16 Rs 5,25,000 and 2016-17 Rs 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in
proportion to the agreed net assets value of these companies.
In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of Rs 10 each
at the same rate of premium as issued for discharging purchase consideration to P Ltd. and
Q Ltd.
You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary
journal entries.
Solution
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance sheet Rs
P Ltd. 6,00,000
Q Ltd. 8,40,000
14,40,000

Share of P Ltd. = Rs 14,40,000 x [21,60,000/ (21,60,000 + 14,40,000)]

= Rs 8,64,000 or 86,400 shares
Securities premium = Rs 21,60,000 – Rs 8,64,000 = Rs 12,96,000
Premium per share = Rs 12,96,000 / Rs 86,400 = Rs 15
Issued 86,400 shares @ Rs 10 each at a premium of Rs 15 per share
Share of Q Ltd. = Rs 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)]
= Rs 5,76,000 or 57,600 shares
Securities premium = Rs 14,40,000 – Rs 5,76,000 = Rs 8,64,000
Premium per share = Rs 8,64,000 / Rs 57,600 = Rs 15
Issued 57,600 shares @ Rs 10 each at a premium of Rs 15 per share

(ii) Journal Entries in the books of PQ Ltd.

Dr. Cr.
Particulars Amount (Rs) Amount
(Rs)
Business purchase account Dr. 36,00,000
To Liquidator of P Ltd. account 21,60,000
To Liquidator of Q Ltd. account 14,40,000

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 (Being the amount of purchase consideration
payable to liquidator of P Ltd. and Q Ltd. for
assets taken over)
Goodwill Dr. 5,40,000
Fixed assets account Dr. 7,20,000
Inventory account Dr. 3,60,000
Trade receivables account Dr. 4,80,000
Cash at bank Dr. 3,00,000
To Trade payables account 2,40,000
To Business purchase account 21,60,000
(Being assets and liabilities of P Ltd. taken over)
Fixed assets account Dr. 10,80,000
Inventory account Dr. 6,60,000
Trade receivables account Dr. 7,80,000
To bank overdraft account 5,40,000
To Trade payables account 5,40,000
To Business purchase account 14,40,000
(Being assets and liabilities of Q Ltd. taken over)
Liquidator of P Ltd. Account Dr. 21,60,000
To Equity share capital account (86,400x Rs 10) 8,64,000
To Securities premium (86,400 x Rs 15) 12,96,000
(Being the allotment of shares as per agreement
for discharge of purchase consideration)
Liquidator of Q Ltd. account Dr. 14,40,000
To Equity share capital account (57,600x Rs 10) 5,76,000
To Securities premium (57,600 x Rs 15) 8,64,000
(Being the allotment of shares as per agreement
for discharge of purchase consideration)
Bank A/c 18,00,000
To Equity share capital account 7,20,000
To Securities premium 10,80,000
(Equity share capital issued to raise working
capital)

(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 21,60,000
b Reserves and Surplus 2 32,40,000

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 2 Current liabilities
a Trade payables (2,40,000 + 5,40,000) 7,80,000
Total 61,80,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets (7,20,000 + 10,80,000) 18,00,000
Intangible assets (goodwill) 4 5,40,000
2 Current assets
a Inventories (3,60,000 + 6,60,000) 10,20,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000
c Cash and cash equivalents 3 15,60,000
Total 61,80,000

Notes to accounts
Rs
1 Share Capital
Issued, subscribed and paid up share capital 2,16,000 Equity shares 21,60,000
of Rs10 each (Out of the above 1,44,000 shares issued for non-
cash consideration under scheme of amalgamation)
2 Reserves and Surplus
Securities premium (@Rs 15 for 2,16,000 shares) 32,40,000
3 Cash and cash equivalents
Cash at Bank 15,60,000
4 Intangible Assets
Goodwill 5,40,000
Working Notes:
1. Calculation of goodwill of P Ltd.
Particulars Amount Rs Weight Weighted amount Rs
2014-15 3,00,000 1 3,00,000
2015-16 5,25,000 2 10,50,000
2016-17 6,30,000 3 18,90,000
Total (a+b+c) 14,55,000 6 32,40,000
weighted Average = [Total weighted amount/Total of
weight] [Rs 32,40,000/6]
Goodwill 5,40,000
2. Calculation of Net assets
P Ltd. Rs Q Ltd. Rs
Assets
Goodwill 5,40,000

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 Fixed assets 7,20,000 10,80,000
Inventory 3,60,000 6,60,000
Trade receivable 4,80,000 7,80,000
Cash at bank 3,00,000
Less: Liabilities
Bank overdraft 5,40,000
Trade payables 2,40,000 5,40,000
Net assets or Purchase consideration 21,60,000 14,40,000

3. New authorized capital

= Rs 14,40,000 + Rs 12,00 000 = Rs 26,40,000
4. Cash and Cash equivalents
Rs
P Ltd. Balance 3,00,000
Cash received from Fresh issue (72,000XRs 25) 18,00,000
21,00,000
Less: Bank Overdraft 5,40,000
15,60,000
*The balance of cash and cash equivalents has been shown after setting off overdraft amount.

Question 2 (RTP NOV. 18)

The financial position of two companies Alex Ltd. and Beta Ltd. as on 31st
March, 2017 was as under:
Assets ALex Ltd. (Rs) Beta Ltd. (Rs)
Goodwill 1,40,000 70,000
Building 8,40,000 2,80,000
Machinery 14,00,000 4,20,000
Inventory 7,00,000 4,90,000
Trade receivables 5,60,000 2,80,000
Cash at Bank 1,40,000 56,000
37,80,000 15,96,000
Liabilities ALex Ltd. (Rs) Beta Ltd. (Rs)
Share Capital:
Equity Shares of Rs 10 each 28,00,000 8,40,000
8% Preference Shares of Rs 100 each 2,80,000 –
10% Preference Shares of RS 100 each – 2,80,000
General Reserve 1,96,000 1,96,000
Retirement Gratuity fund 1,40,000 56,000
Trade payables 3,64,000 2,24,000

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 37,80,000 15,96,000
Beta Ltd.is absorbed by Alex Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8% Preference
Shares of Alex Ltd.
(b) Goodwill of Beta Ltd. is valued at Rs 1,40,000, Buildings are valued at Rs 4,20,000
and the Machinery at Rs 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be
created @ 7.5%.
(d) Equity Shareholders of Beta Ltd. will be issued Equity Shares of Alex Ltd. @ 5%
premium.
You are required to:
(a) Prepare necessary Ledger Accounts to close the books of Beta Ltd.
(b) Prepare the acquisition entries in the books of Alex Ltd.
(c) Also prepare the Balance Sheet after absorption as at 31st March, 2017.
Solution
(a) In the Books of Beta Ltd. Realisation Account
Rs Rs
To Sundry Assets 15,96,000 By Retirement Gratuity Fund 56,000
To Preference 28,000 By Trade payables 2,24,000
Shareholders (Purchase Consideration)
(Premium on Redemption)
To Equity Shareholders By Alex Ltd. 14,84,000
(Profit on Realisation) 1,40,000 _______
17,64,000 17,64,000
Equity Shareholders Account
Rs Rs
To Equity Shares of Alex Ltd. 11,76,000 By Share Capital 8,40,000
By General Reserve 1,96,000
_______ By Realisation Account 1,40,000
(Profit on Realisation)
11,76,000 11,76,000
Preference Shareholders Account
Rs Rs
To 8% Preference Shares of Alex Ltd. 3,08,000 By Preference Share Capital 2,80,000
By Realisation Account 28,000
(Premium on Redemption
of Preference Shares)
3,08,000 3,08,000

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 Alex Ltd. Account
Rs Rs
To Realisation Account 14,84,000 By 8% Preference Shares 3,08,000
_______ By Equity Shares 11,76,000
14,84,000 14,84,000

(b)
In the Books of Alex Ltd. Journal Entries
Dr. Cr.
Rs Rs
Business Purchase A/c Dr. 14,84,000
To Liquidators of Beta Ltd. Account 14,84,000
(Being business of Beta Ltd. taken over)
Goodwill Account Dr. 1,40,000
Building Account Dr. 4,20,000
Machinery Account Dr. 4,48,000
Inventory Account Dr. 4,41,000
Trade receivables Account Dr. 2,80,000
Bank Account Dr. 56,000
To Retirement Gratuity Fund Account 56,000
To Trade payables Account 2,24,000
To Provision for Doubtful Debts Account 21,000
To Business Purchase A/c (Being Assets and Liabilities 14,84,000
taken over as per agreed valuation).
Liquidators of Beta Ltd. A/c Dr. 14,84,000
To 8% Preference Share Capital A/c 3,08,000
To Equity Share Capital A/c 11,20,000
To Securities Premium A/c (Being Purchase Consideration 56,000
satisfied as above).
(c)
Balance Sheet of Alex Ltd. (after absorption) as at 31st March, 2017
Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 45,08,000
B Reserves and Surplus 2 2,52,000
2 Non-current liabilities
A Long-term provisions 1,96,000
3 Current liabilities
A Trade Payables 5,88,000

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 B Short term provision 21,000
Total 55,65,000
Assets
1 Non-current assets
A Fixed assets
Tangible assets 3 31,08,000
Intangible assets 2,80,000
2 Current assets
A Inventories 11,41,000
B Trade receivables 8,40,000
C Cash and cash equivalents 1,96,000
Total 55,65,000
Notes to accounts:
Rs
1 Share Capital
Equity share capital
3,92,000 Equity Shares of Rs 10 each fully paid (Out of above 1,12,000 39,20,000
Equity Shares were issued in consideration other than for cash)
Preference share capital
5,880 8% Preference Shares of ` 100 each (Out of above 3,080 5,88,000
Preference Shares were issued in consideration other than for cash)
Total 45,08,000
2 Reserves and Surplus
Securities Premium 56,000
General Reserve 1,96,000
Total 2,52,000
3 Tangible assets
Buildings 12,60,000
Machinery 18,48,000
Total 31,08,000
Working Notes:
Purchase Consideration: Rs
Goodwill 1,40,000
Building 4,20,000
Machinery 4,48,000
Inventory 4,41,000
Trade receivables 2,59,000
Cash at Bank 56,000
Less: Liabilities:
Retirement Gratuity (56,000)

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 Trade payables (2,24,000)
Net Assets/ Purchase Consideration 14,84,000
To be satisfied as under:
Preference Shareholders of Beta Ltd. 2,80,000
Add: 10% Premium 28,000
Satisfied by issue of 3,080 no. of 8% Preference Shares of Alex Ltd. 3,08,000
Equity Shareholders of Beta Ltd. to be satisfied by issue of 1,12,000
Equity Shares of Alex Ltd. at 5% Premium 11,76,000
Total 14,84,000

Question 3 (RTP May 19)

P Ltd. and Q Ltd. decided to amalgamate as on 01.04.2018. Their
summarized Balance Sheets as on 31.03.2018 were as follows:
(Rs in ‘000)

Particulars P Ltd. Q Ltd.

Source of Funds:
Equity share capital (Rs 10 each) 300 280
9% preference share Capital (Rs 100 each) 60 40
Investment allowance Reserve 10 4
Profit and Loss Account 68 68
10 % Debentures 100 60
Trade Payables 50 30
Tax provision 14 8
Total 602 490
Application of Funds:
Building 120 100
Plant and Machinery 160 140
Investments 80 50
Trade receivables 90 70
Inventories 72 80
Cash and Bank 80 50
Total 602 490

From the following information, you are required to prepare the Balance Sheet as on
01.04.2018 of a new company, R Ltd., which was formed to take over the business of
both the companies and took over all the assets and liabilities:
(i) 50 % Debenture are to be converted into Equity Shares of the New Company.

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 (ii) Investments are non- current in nature.
(iii) Fixed Assets of P Ltd. were valued at 10% above cost and that of Q Ltd. at 5%
above cost.
(iv) 10 % of trade receivables were doubtful for both the companies. Inventories to be
carried at cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference
shares at par.
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing
Equity shares of Rs 10 each of the new company at a premium of Rs 5 per share.
Give your answer on the basis that amalgamation is in the nature of purchase.
Solution
M/s R Ltd.
Balance Sheet as at 1.4.2018
Particulars Notes Rs in'000
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 6,55,980
b Reserves and Surplus 2 2,77,990
2 Non-current liabilities
a Long-term borrowings 3 80,000
3 Current liabilities
a Trade Payables 4 80,000
b Short term provision 5 22,000
Total 11,15,970
Assets
1 Non-current assets
Property, Plant & Equipment
aTangible assets 6 5,60,000
b Non-current investments 7 1,30,000
Current assets
a Inventory 8 1,52,000
b Trade receivables 9 1,44,000
c Cash and cash equivalents 10 1,29,970
Total 11,15,970
Notes to accounts
Rs in'000
1.Share Capital
Equity share capital
55,598 Equity shares of Rs 10 each, fully paid up (W.N.2) 5,55,980

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 Preference share capital
9% Preference share capital (Share of Rs 100 each) (W.N.2) 1,00,000
6,55,980
2.Reserves and Surplus
Securities premium (W.N.2) 2,77,990
Investment allowance reserve 14,000
(`10,000 + Rs 4,000)
Amalgamation adjustment reserve (14,000)
2,77,990
3.Long-term borrowings
Secured
10% Debentures (50% of Rs 1,60,000) 80,000
4. Trade Payables (Rs 50,000+ Rs 30,000) 80,000
5.Short term provisions
Provision for tax (Rs 14,000+ Rs 8,000) 22,000
6.Tangible assets
Building (Rs 1,32,000+Rs 1,05,000) 2,37,000
Plant and machinery (Rs 1,76,000+Rs 1,47,000) 3,23,000
5,60,000
7.Non – current Investments (Rs 80,000+ Rs 50,000) 1,30,000
8.Inventory
Stock (Rs 72,000+ Rs 80,000) 1,52,000
9.Trade receivables
Trade receivables (90% of (Rs 90,000+ Rs 70,000) 1,44,000
10.Cash and cash equivalents
Cash and Bank (Rs 80,000+ Rs 50,000 – Rs 30) 1,29,970

Working Notes:
1. Calculation of value of equity shares issued to transferor companies
P Ltd. Q Ltd.
(Rs) (Rs)
Assets taken over:
Building 1,32,000 1,05,000
Plant and machinery 1,76,000 1,47,000
Investments 80,000 50,000
Inventories 72,000 80,000
Trade receivables 81,000 63,000
Cash & Bank 80,000 50,000
6,21,000 4,95,000

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 Less: Liabilities:
10% Debentures 1,00,000 60,000
Trade payables 50,000 30,000
Tax Provision 14,000 1,64,000 8,000 98,000
4,57,000 3,97,000
Less: Preference Share Capital 60,000 40,000
3,97,000 3,57,000

2. Number of shares issued to equity shareholders, debenture holders and preference

shareholders
P Ltd. Q Ltd. Total
Equity shares issued @ Rs 15 per
share (including Rs 5 premium)
Rs 3,97,000/15 26,466
shares1
Rs 3,57,000/15 23,800 shares 50,266 shares
Equity share capital @ Rs 10 Rs 2,64,660 Rs 2,38,000 Rs 5,02,660
Securities premium @ Rs5 Rs 1,32,330 Rs 1,19,000 Rs 2,51,330
Rs 3,96,990 Rs 3,57,000 Rs 7,53,990
50% of Debentures are converted into equity shares @ Rs 15 per share
1,00,000/2 = 50,000/15 3,332 shares2
60,000/2 = 30,000/15 2,000 shares 5,332 shares
Equity share capital @ Rs 10 Rs 33,320 Rs 20,000 Rs 53,320
Security premium@ Rs 5 Rs 16,660 Rs 10,000 Rs 26,660
Rs 49,980 Rs 30,000 Rs 79,980
9% Preference share capital issued Rs 60,000 Rs 40,000 Rs 1,00,000

Cash paid for fraction of shares = Rs 3,97,000 less Rs 3,96,990 = Rs10

2 Cash paid for fraction of shares = Rs 50,000 less Rs 49,980 = Rs20

Question 4 (RTP – Nov. 19)

The following is the summarized Balance Sheet of A Ltd. as at 31st
March, 2019:

Liabilities Amount Assets Amount

8,000 Equity shares of 100 each 8,00,000 Building 3,40,000
10% Debentures 4,00,000 Machinery 6,40,000
Loans 1,60,000 Inventory 2,20,000
Trade payables 3,20,000 Trade receivables 2,60,000
General Reserve 80,000 Bank 1,36,000

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 Patent 1,30,000
Share issue Expenses 34,000
TOTAL 17,60,000 TOTAL 17,60,000

B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

B Ltd. would take over all assets, except bank balance and Patent at their book values less
10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the
normal rate of return be 8% on the combined amount of share capital and general reserve.
B Ltd. is to take over trade payables at book value.
The purchase consideration is to be paid in cash to the extent of 6,00,000/- and the
balance in fully paid equity shares of 100/- each at 125/- per share.
The average profit is Rs. 1,24,400.
The liquidation expenses amounted to Rs. 16,000.
B Ltd. sold prior to 31st March, 2018 goods costing Rs. 1,20,000 to A Ltd. for Rs.
1,60,000. Rs. 1,00,000 worth of goods are still in Inventory of A Ltd. on 31st March,
2018.
Trade payables of A Ltd. include Rs. 40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance
Sheet of B Ltd. as at 1st April, 2019 after the takeover.
Solution
Books of A Limited
Realization Account
Particulars Rs. Particulars Rs.
TO Building 3,40,000 BY Trade payables 3,20,000
TO Machinery 6,40,000 BY B Ltd. 12,10,000
TO Inventory 2,20,000 BY Equity Shareholders (Loss) 76,000
TO Trade receivables 2,60,000
TO Patent 1,30,000
TO Bank (Exp.) 16,000
16,06,000 16,06,000

Bank Account
To Balance b/d 1,36,000 By Realization (Exp.) 16,000
To B Ltd. 6,00,000 By 10% Debentures 4,00,000
By Loan 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000

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 Equity Share Holders Account
To Realization Account 76,000 Equity share capital 8,00,000
To Share issue Expenses 34,000 General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000

B Ltd
Balance Sheet as on 1st April, 2019 (An extract)
Particulars Notes `

EQUITY AND LIABILITIES

1 Shareholders' funds
a Share capital 1 4,88,000
b Reserves and Surplus 2 1,07,000
2 Current liabilities
a Trade Payables 3 2,80,000
b Bank overdraft 6,00,000
14,75,000
ASSETS
1 Non-current assets
Property, Plant and Equipment
Tangible assets 4 8,82,000
B In Tangible assets 5 2,16,000
2 Current assets
a Inventories 6 1,83,000
b Trade receivables 7 1,94,000
14,75,000
Notes to Accounts
S.No. Particulars Rs.
1 Share Capital
Equity share capital
4,880 Equity shares of 100 each 4,88,000
(Shares have been issued for
consideration other than cash)
Total 4,88,000
2 Reserves and Surplus (an extract)
Securities Premium 1,22,000
Profit and loss account
Less: Unrealized profit (15,000) (15,000)

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 Total 1,07,000
3 Trade payables
Opening balance 3,20,000
Less: Inter-company transaction cancelled (40,000) 2,80,000
upon amalgamation
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
5 Intangible assets
Goodwill 2,16,000
6 Inventories
Opening balance 1,98,000
Less: Cancellation of profit upon (15,000) 1,83,000
amalgamation
7 Trade receivables
Opening balance 2,34,000
Less: Intercompany transaction cancelled (40,000) 1,94,000
upon amalgamation

Working Notes:
1. Valuation of Goodwill Rs.
Average profit 1,24,400
Less: 8% of Rs. 8,80,000 (70,400)
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Inventory 1,98,000
Trade receivables (2,60,000-26,000) 2,34,000
Total Assets 15,30,000
Less: Trade payables (3,20,000)
Net Assets 12,10,000
Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 –
6,00,000) Rs. 6,10,000 in shares of 125/-. Thus, the number of shares to be allotted
6,10,000/125 = 4,880 shares.

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 3. Unrealized Profit on Inventory Rs.
The Inventory of A Ltd. includes goods worth Rs. 25,000
1,00,000 which was sold by B Ltd. on profit.
Unrealized profit on this Inventory will be 40,000.
40000 x 100000 / 160000
As B Ltd purchased assets of A Ltd. at a price 10% (10,000)
less than the book value, 10% need to be adjusted
from the Inventory i.e., 10% of Rs. 1,00,000.
Amount of unrealized profit 15,000

Question 5 (MTP – April 19) (In the Nature of Merger)

The following were the summarized Balance Sheets of P Ltd. and V Ltd. as
at 31 -3-20X1:
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in Lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500

Assets P Ltd. (Rs. in lakhs) V Ltd. (Rs. in lakhs)

Land and Buildings 6,000 –

Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures — 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It
was agreed that in discharge of consideration for the business P Ltd. would allot three fully

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paid equity shares of Rs. 10 each at par for every two shares held in V Ltd. It was also
agreed that 12% debentures in V Ltd. would be converted into 13% debentures in P Ltd.
of the same amount and denomination.
Details of trade receivables and trade payables as under:
Assets P Ltd. V Ltd.

(Rs. in lakhs) (Rs. in lakhs)

Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463
Trade receivables

Debtors 2,120 1,020

Bills Receivable ____- 80
2,120 1,100
Expenses of amalgamation amounting to Rs.1lakh were borne by P Ltd. You are required to:
(i) Prepare journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger considering that the
cost of issue of debentures shown in the balance sheet of the V Ltd. Company is not
transferred to the P Ltd. company.
Solution
(Rs. in lacs) (Rs. inlacs)
Debit Credit
Business Purchase A/c 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for
consideration settled as per agreement)
Plant and Machinery 5,000
Furniture & Fittings 1,700
Inventory 4,041
Debtors 1,020
Cash at Bank 609
Bills Receivable 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 – 50*) 775
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702

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 To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of
equity shares)
Profit & loss A/c 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged byissue of 13%
debentures)
Bills Payable A/c 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)

Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes Rs. (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,654
2 Non-current liabilities
A Long-term borrowings 3 1,000
3 Current liabilities
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,769
Assets
1 Non-current assets
A Fixed assets
Tangible assets 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769

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Notes to accounts
Rs.
1. Share Capital
Equity share capital
Authorised, issued, subscribed and paid up
24 crores equityshares of Rs. 10 each (Of the above shares, 9 crores shares
have been issued for consideration other than cash) 24,000
Total 24,000
2. Reserves and Surplus
General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004
Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for
every two equity shares held in V Ltd.
3
Purchase consideration = Rs 6,000 lacs × = Rs. 9,000 lacs.
2
* Cost of issue of debenture adjusted against P & L Account of V Ltd.

Question 6 (May18 Exam – 20 Marks) (Books of Tranferor Co.)

The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
X Ltd. (Rs) Y Ltd. (Rs)
Equity and Liabilities
Equity Shares of Rs 10 each 30,00,000 9,00,000
9% Preference Shares of Rs 100 each 3,00,000 -
10% Preference Shares of Rs 100 each - 3,00,000
General Reserve 2,10,000 2,10,000

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 Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Trade Receivables 6,00,000 3,00,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference
Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average
profits of preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs
78,000 and 2014-15: Rs 72,000). The profits of 2014 -15 included credit of an
insurance claim of Rs 25,000 (fire occurred in 2013-14 and loss by fire Rs 30,000
was booked in Profit and Loss Account of that year). In the year 2015 -16, there
was an embezzlement of cash by an employee amounting to Rs 10,000.
(iii) Land & Buildings are valued at Rs 5,00,000 and the Plant & Machinery at Rs
4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts
is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value
amounted to Rs 15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
Solution
In the Books of Y Ltd. Realisation Account
Rs Rs
To Sundry Assets : By Retirement 60,000
Gratuity Fund
Goodwill 75,000

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Land & Building 3,00,000 By Trade payables 2,40,000
Plant & Machinery 4,50,000 By X Ltd. 15,90,000
(Purchase
Inventory 5,25,000 Consideration)
Trade receivables 3,00,000
Bank 60,000 17,10,000
To Preference Shareholders 30,000
(Premium on Redemption)
To Equity Shareholders
(Profit on Realisation) 1,50,000 _______
18,90,000 18,90,000
In the Books of X Ltd. Journal Entries
Dr. Cr.
Rs Rs
Business Purchase A/c Dr. 15,90,000
To Liquidators of Y Ltd. Account (Being business of Y 15,90,000
Ltd. taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c (Being Assets and Liabilities 15,90,000
taken over as per agreed valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c (Being Purchase Consideration 60,000
satisfied as above).
Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018
Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 48,30,000
B Reserves and Surplus 2 2,70,000

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 2 Non-current liabilities
A Long-term provisions 3 2,10,000
3 Current liabilities
A Trade Payables 4 6,10,000
B Short term provision 5 7,500
Total 59,27,500
Assets
1 Non-current assets
A Fixed assets
Tangible assets 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500

Notes to accounts
Rs
1 Share Capital
Equity share capital
4,20,000 Equity Shares of ` 10 each fully paid (Out of above 1,20,000 42,00,000
Equity Shares were issued in consideration other than for cash)
Preference share capital
6,300 9% Preference Shares of ` 100 each (Out of above 3,300 6,30,000
Preference Shares were issued in consideration other than for cash)
Total 48,30,000
2 Reserves and Surplus
Securities Premium 60,000
General Reserve 2,10,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables (3,90,000 + 2,40,000 - 20,000*) 6,10,000
* Mutual Owings eliminated.
5 Short term Provisions
Provision for Doubtful Debts 7,500
6 Tangible assets
Land & Buildings 14,00,000

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 Plant & Machinery 19,00,000
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
8 Inventories (7,50,000 + 4,72,500) 12,22,500
9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000

Working Notes:
1. Computation of goodwill Rs
Profit of 2016-17 90,000

Profit of 2015-16 adjusted Rs 78,000 + 10,000) 88,000

Profit of 2014-15 adjusted (Rs 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = RS 1,50,000
2.
Purchase Consideration: Rs
Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500
Trade receivables 3,00,000
Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Trade payables 2,40,000 (3,07,500)
Provision for doubtful debts 7,500
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000
equity Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000

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Student Notes:-

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