Accounting for Amalgamation - Amalgamation of Companies, Advanced Corporate Accounting | Advanced Corporate Accounting - B Com PDF Download

Introduction 

When two or more companies are voluntarily liquidated and a new company is established for the purpose of purchasing the business of all the companies is technically termed as – Amalgamation

The process in which two or more existing companies engaged in same business decide to liquidate their business and form a new company to take over the business of the existing companies is termed as Amalgamation. The newly formed company acquires the assets and liabilities of existing companies. The newly formed company is known as Amalgamated Company and the liquidating company is also known as amalgamating companies

Purchase Consideration

Newly formed company pays a certain consideration for taking over the business of amalgamating companies, which is known as purchase consideration. These purchase consideration can be paid in the form of equity shares, preference shares and debentures of the new company. Cash may also be paid if required. There are three methods to calculate purchase consideration

(a) NET ASSET METHOD
(b) CONSIDERATION (PAYMENT) METHOD
(c) LUMP SUM METHOD

To decide Purchase Consideration following steps to be considered:

(i) Calculate the total amounts of assets which are took over at certain specific-agreed value by the new company for all the amalgamating company (old company).
 (ii) Calculate total amounts of liabilities which are accepted to take over at the agreed value by the new company for all the amalgamating company (old company).
 (iii) Calculate Net Asset = Total Assets realised – Total Liabilities taken over for all the amalgamating company (old company)
 (iv) Calculate Purchase Consideration paid by the amalgamated (new) Company to amalgamating company (old Company)
 (v) Calculate Goodwill OR Capital Reserve for all the amalgamating company (old company)

Goodwill = Purchase Consideration – Net Assets
OR
 Capital Reserve = Net Assets – Purchase Consideration

Necessary Accounts in the Books of Amalgamating Company (old Company)

(a) Realisation A/c.
 (b) Equity shareholders‟ A/c.
 (c) Preference shareholders‟ A/c.
 (d) Debenture holders‟ A/c.
 (e) Cash/Bank A/c.
 (f) New company‟s A/c.
 (g) New company‟s Equity shares‟ A/c.
 (h) New company‟s Preference shares‟ A/c.
 (i) New company‟s Debentures A/c

Notes for Debentures :

If New Co. offers its shares, debentures , cash or its own debentures in exchange of the debenture of old company in that case the Liability of the old debentures is not accepted by the new company. Therefore, while ascertaining net assets, debentures are not included in liability. While computing purchase consideration the amount of new debentures which is received in exchange of old debentures are to be included in purchase consideration.

Following Steps to be followed while recording Journal in the Books of Old Company Or preparing Necessary A/c. in the Books of Old Company

• Transfer All the tangible and intangible Assets except cash and bank balance on debit side of Realisation A/c.
• Transfer All the Outside Liabilities (including Debentures if nothing is mentioned) on credit side of Realisation A/c.
• Transfer Equity share Capital and Balance of Reserve and Surplus to Credit side of Equity shareholders‟ A/c.
• Transfer Preference share Capital to Preference Shareholders‟ A/c.
• Transfer fictitious Assets like Discount on share or debenture, Underwriting Commission, Establishment Expenses, Preliminary Expenses, Advertisement Suspense Account, Suspense Account and Profit & Loss A/c. debit Balance to Equity shareholders‟ A/c.
• Record the purchase consideration on credit side of realisation A/c. and debiting the same to New Company‟s A/c.
• Dispose off the assets not taken over by the new company and discharge the liabilities which is not taken over by the new company
• Record the Dissolution (Liquidation) Expenses paid by the old company
• Record the purchase consideration received from new company
• Distribute the Purchase consideration among equity shareholder; Preference shareholder
• Close the Accounts (except Realisation; Equity shareholder; Cash/Bank A/c.)
• Close realisation A/c. and profit or loss is transferred to Equity shareholders‟ A/c.
• Close Equity shareholders‟ A/c. and balance is transferred to Cash/Bank A/c.
• Bank Account is generally Tally by closing it

Accounting Journal in the Books of Amalgamating company (old company)

(i) When Assets are transferred to Realisat ion A/c.

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(ii) When Liabilities are transferred to Realisation A/c.

(iii) When Equity Share Capital and Balance of Reserve & Surplus (except specific Provisional Reserve is transferred to Equity shareholders‟ A/c.

(iv) When Preference Share Capital is transferred to Preference Shareholders‟ A/c.

(v) When Purchase consideration is due

(vi) When Purchase Consideration is discharged by New Co.

(vii) When Assets disposed off not taken by new company

(viii) When Liabilities discharged which is not taken by new company

(ix) When dissolution expenses paid by the company

(x) New Company‟s Equity share is distributed among Equity shareholder/Preference Shareholder / Debenture holder (as the case may be)

(xi) New Company‟s Preference Share is distributed among Equity shareholder/Preference Shareholder / Debenture holder (as the case may be)

(xii) New Company‟s Debenture is distributed generally among Debenture holder

(xiii) Closing the Preference shareholder A/c. and Debentureholder A/c. (if separately prepared) Balance is transferred to Realisation A/c.

OR

(xiv) Closing Realisation A/c.

(xv) Closing Equity Shareholder A/c.

Accounting Journal in the Books of Amalgamated company (New company)

(a) When Business Purchase of Old Company

(b) When Business Purchase is discharged

(c) If Dissolution Expenses is paid and bone by New company

(d) When establishment expenses paid by the New Company

(e) When New company issues shares or debentures to general public