UNIT – I AMALGAMATION, ABSORBTION AND RECONSTRUCTION What Is Amalgamation? An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies. The term amalgamation has generally fallen out of popular use in countries like the United States, being replaced with the terms merger or consolidation. But it is still commonly used in countries like India. Purchase Consideration: Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company. Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below: A. Lump sum method B. Net Assets method C. Net Payment Method A. Lump sum Method: Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration. B. Net Assets Method: Under this method P.C. shall be computed as follows:
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UNIT – IAMALGAMATION, ABSORBTION AND RECONSTRUCTION
What Is Amalgamation?An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.
The term amalgamation has generally fallen out of popular use in countries like the United States, being replaced with the terms merger or consolidation. But it is still commonly used in countries like India.
Purchase Consideration:Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:A. Lump sum methodB. Net Assets methodC. Net Payment Method
A. Lump sum Method:Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.B. Net Assets Method:Under this method P.C. shall be computed as follows:Particulars Rs.Agreed value of assets taken overLess: Agreed value of Liabilities taken over
XXXXXX
Purchase Consideration XXX
C. Net Payment Method:Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars Rs.Cash4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share
5,00,00060,00,000
Purchase Consideration 65,00,000
1. Calculate purchase consideration from the following given Balance Sheet:
Solution:
2. The following information has been extracted from the balance sheets of P Ltd.
P Ltd. takes over S Ltd. on 1st April, 2012, and discharges consideration for the business as follows: (i) Issued 35 lakh fully paid equity shares of Rs 10 each at par to the equity shareholders of S Ltd.(ii) Issued fully paid 12% preference shares of Rs 10 each to discharge the preference shareholders of S Ltd. at a premium of 10%.It is agreed that the debentures of S Ltd. will be converted into equal number and amount of 10% debentures of P Ltd.You are required to show the balance sheet of P Ltd. assuming that:
(i) The amalgamation is in the nature of merger, and(ii) The amalgamation is in the nature of purchase.
3) On 31st March, 2012, Thin Ltd. was absorbed by Thick Ltd., the latter taking over all the assets and liabilities of the former at book values. The consideration for the business was fixed at Rs 40 crore to be discharged by the transferee company in the form of its fully paid equity shares of Rs 10 each, to be distributed among the shareholders of the transferor company, each shareholder getting two shares for every share held in the transferor company.The balance sheets of the two companies as on 31st March, 2012 stood as under:
Amalgamation expenses amounting to Rs 10 lakh were paid by Thick Ltd. You are required to:(i) Show the necessary ledger accounts in the books of Thin Ltd.,(ii) Show the necessary journal entries in the books of Thick Ltd., and(iii) Prepare the balance sheet of Thick Ltd. after the amalgamation.
4) White Ltd. agreed to acquire the business of Green Ltd. as on March 31, 2012. The summarised balance sheet of Green Ltd. at that date was as follows:
5) The following are the summarised balance sheets of V Ltd and P Ltd as at 31st March, 2012:You are required to:(a) Prepare Realisation Account and Equity Shareholders Account in the books of V Ltd.(b) Pass journal entries in the books of P Ltd. and redraft P Ltd.’s balance sheet immediately after amalgamation assuming (i) it is an amalgamation in the nature of purchase and (ii) it is an amalgamation in the nature of merger.
Meaning:A holding company is a type of business that deals specifically with assets, investments and management, rather than providing goods and services with a view to making a profit from production and sales. It will usually be limited by shares and its main activities will involve owning assets in another company or many companies. Assets could be in the form of shares, intellectual property and real property.
Holding companies may also be responsible for the supervision and management of other companies, in addition to or instead of holding shares and receiving dividends from their shareholdings. Aside from these functions, a holding company will normally conduct no other type of business activity.
The other companies in which assets are held are known as ‘subsidiaries’. Holding companies in the UK that own more than 50% of another company’s shares are known as ‘parent’ companies of these subsidiaries.
The legal requirements of a holding company
In order to qualify as a holding company, the Companies Act 2006 (sec. 1159) states that it will be considered the subsidiary of a holding company in the following circumstances: The parent company holds greater than 50% of the voting rights in the subsidiary. The parent company is a member of the subsidiary and has the right to appoint or remove
a majority of its board of directors. The parent company is a member of the subsidiary and, in accordance with an agreement
with other shareholders, it alone controls a majority of the voting rights in the subsidiary.
2. From the balance sheets and information given below, prepare a Consolidated Balance Sheet:
(a) All the profits of S Ltd. have been earned since the shares were acquired by H Ltd. but there was already the Reserve of Rs. 6, 00,000 on that date.
(b) The bills accepted by S Ltd. are all in favour of H Ltd. which has discounted Rs. 2,000 of them.
(c) Sundry assets of S Ltd. are undervalued by Rs. 2,000.
{d) The stock H Ltd. includes Rs. 5,000 bought from S Ltd. at a profit to the latter of 25% on cost.
3) From the balance sheets and information given below, prepare a Consolidated Balance Sheet:
(a) All the profits of S Ltd. have been earned since the shares were acquired by H Ltd. but there was already the Reserve of Rs. 6, 00,000 on that date.
(b) The bills accepted by S Ltd. are all in favour of H Ltd. which has discounted Rs. 2,000 of them.
(c) Sundry assets of S Ltd. are undervalued by Rs. 2,000.
{d) The stock H Ltd. includes Rs. 5,000 bought from S Ltd. at a profit to the latter of 25% on cost.
Problem 4 (Cash-in-Transit & Mutual Obligation):X Ltd. purchased 750 shares in Y Ltd. on 1.7.2006. The following were their Balance Sheets on 31.12.2006.
Further:1. Bills Receivable of X Ltd. include Rs. 10,000 accepted by Y Ltd.
2. Debtors of X Ltd. include Rs. 20,000 payable by Y Ltd.
3. A cheque of Rs. 5,000 sent by Y Ltd. on 20th December was not yet received by X Ltd. till 31st December 2006.
4. Profit and Loss Account of Y Ltd. showed a balance of Rs. 20,000 on 1st January 2006.
You are required to prepare a consolidated Balance sheet of X Ltd. and Y Ltd. as on 31st December 2006.
5. The summarised Balance Sheet of H Ltd. and its S Ltd. on 31st December 2004 are as follows:
S Ltd. had the credit balance of Rs 30,000 in the Reserves when H Ltd. acquired shares in S Ltd. decided to make a bonus issue out of post-acquisition profits of two shares of Rs 10 each fully paid for every five shares held. Calculate the cost of control before the issue of bonus shares and after the issue of bonus shares. Also make the consolidated Balance Sheet after the issue of bonus shares.
On 31st December, 2002 the Sun Co. Ltd. remitted cash Rs. 1,000 on current account to Moon Co. Ltd. On 1st January, 2007, Moon Co. Ltd., utilised a part of its capital reserve to make a bonus issue of one share for every four shares held. There is a contingent liability for bills discounted Rs. 1,200.
The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company’s Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense
will increase.Double entry means that every transaction will involve at least two accounts. For example, if your company borrows money from the bank, the company’s asset Cash is increased and the company’s liability Notes Payable is increased. If your company pays the six-month insurance premium, your company’s asset Cash is decreased and its asset Prepaid Insurance is increased. If an employee works for hourly wages, the company’s account Wages Expense is increased and its liability account Wages Payable is increased. When the employee is paid, the account Wages Payable is decreased and Cash is decreased.
Double entry also requires that one account be debited and the other account be credited. Accounting software might record the effect on one account automatically and only require information on the other account. For example, if you are preparing a check, the software will automatically reduce the Cash account. Therefore, the accounting software needs only to prompt you for information on the other account involved in the payment being processed.
Double entry also allows for the accounting equation (assets = liabilities + owner’s equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner’s equity to decrease. In that example, the asset Cash decreased and the owner’s capital account within owner’s equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
SPECIAL FEATURES OF DOUBLE ACCOUNTING SYSTEM:The following are the special features of the double accounting system:
( i ) I t i s n o t a s y s t e m o f m a i n t a i n i n g a c c o u n t s , b u t o n l y a s y s t e m o f p r e s e n t i n g t h e final accounts.
( i i ) I t i s gene ra l l y adop t ed by pub l i c u t i l i t y c once rns fo rmed unde r spe c i a l a c t s o f parliament.
( i i i )As ind i c a t ed ea r l i e r , unde r t h i s s y s t em , t he ba l ance s hee t i s b i fu r ca t ed i n t o two parts viz., (i) receipts and expenditure on capital a/c and (ii) general balance sheet.
Problem 1:The following balances are extracted from the books of M/s. Flashlight Electric Company Ltd:(i) Fixed assets:Expenditure up to 1.1.2006:(a) Land and Buildings Rs 10,00,000 ;
(b) Machinery Rs 15, 00,000.
(ii) Additions during the year – Machinery Rs 3, 50,000
(iv) Authorised Capital Rs 50, 00,000 divided into equity shares of Rs 100 each.
(v) Issued and fully paid-up 20,000 equity shares of Rs 100 each (including 2,500 equity shares issued during the year).
(vi) 7.5% Debentures Rs. 10, 00,000 secured by a charge on Fixed Assets.
(vii) Sundry Creditors Rs. 2,50,000; Reserve Fund Rs. 5,00,000; Reserve Fund Investments at cost Rs. 5,00,000; (Market value Rs. 5,25,000).
(viii) Stock Rs. 3, 02,500; Sundry Debtors Rs. 4, 50,000; Cash at Bank Rs. 2, 00,000; Cash in hand Rs. 50,000.
(ix) Profit and Loss Account (Cr.) Rs 2, 02,500.
Your are instructed to prepare:(i) The Balance Sheet as on December 31, 2006, according to Schedule VI to the Companies Act, 1956, under the Single Account System (previous year’s figures not required).
(ii) (a) Capital Account
(b) General Balance Sheet as on the same date under the Double Account System.
2)The Chennai Electricity Company decides to replace one of its old plants with a modern one with a larger capacity. The plant when installed ten years back cost the company Rs. 24,00,000, the components of materials, labour and overheads being in the ratio of 5:3:2.
It is ascertained that the costs of materials and labour have gone up by 40% and 80% respectively. The proportion of overheads to total costs is expected to remain the same as before. The cost of the new plant as per improved design is Rs. 60 lakhs and in addition, materials recovered from the old plant of a value of Rs. 2, 40,000 has been used in the construction of the new plant. Old plant was scrapped and sold for Rs. 7, 50,000.
The accounts of the company are maintained under the double account system. Indicate how much would be capitalized and the amount to be charged to revenue. Show journal entries and prepare ledger accounts.
3) In the year 1984 railway lines were laid between Agra and Delhi at a cost of Rs 1, 50, 00,000. This expenditure was distributed over overheads, wages and material in the ratio of 2: 4: 9. The lines were replaced in the year 2004 at a cost of Rs 3, 80, 00,000. It was estimated that the price of overheads, wages and material had gone up during this period of 20 years as follows: overheads 25%; wages 20% and materials 45%.
Ascertain the amount to be capitalized in respect of the railway lines for the purpose of preparing the final accounts for the year 2004.
Problem 4: From the following balances as on December 31, 2004, appearing in the ledger of the Electric Light and Power Co. Ltd. you are required to prepare:(a) Revenue Account,
1. INTRODUCTIONA banking company means and includes any company which carries on business or which transacts banking business in India. A banking business generally governed by the provisions of the Companies Act 1956 andspecifically by the Banking Regulation Act. The Banking regulation Actof 1949 came into force on 16thMarch 1949 as a result of long-felt need toregulate the banking business in India and protect the interest of number of depositors.The existence of well- organized, regulated and efficient banking systemis pre-requisite for economic growth. Banks are agencies responsible for mobilizing and channeling of funds in a country. The major institutionscarrying business,in India, include:(a)Nationalized banks(b)State bank of India and Associates banks(c)Foreign banks having branches in India(d) Co-operative banks(e)Rural banks and(f)Private sector banks.
The revised formats are presented below:Format A — for Balance Sheet
You are required to prepare a Profit and Loss Account for the year ended 31st March, 2004, and Balance Sheet as at that date after considering the following:(i) Provide Rebate on bills discounted Rs. 5,000.
(ii) A scrutiny of the Current Account Ledger reveals that there are accounts overdrawn to the extent of Rs. 25,000 and the total of the credit balances is Rs. 1, 22,000.
iii) Claims by employees for Bonus Rs. 15,000 is pending award of arbitration,
(iv) Depreciation on building for the year amounts to Rs. 5,000.
(v) Out of profits for the year, 20 per cent transferred to Statutory Reserve and the Directors proposed a dividend of 8 per cent, subject to deduction of tax.
GIC – FIRE INSUREANCE (Fire Insurance Revenue Account and Final Accounts):From the following figures taken from the books of New Asia Insurance Company Ltd. doing fire underwriting business.
6) Prepare the set of final accounts for the year 2006-2007:
The following further information may also be noted:(a) Expenses of management include survey fees and legal expenses of Rs. 36,000 and Rs. 20,000 relating to claims;
(b) Claims intimated but not paid on 31st March 2006—Rs. 1, 04,000;
(c) Income-tax to be provided at 40%;
(d) Transfer of Rs. 2, 25,000 to be made from Current Profits to General Reserve.
(e) The company maintains a reserve for unexpired risk @ 50% of net premium income.
(f) The directors propose a dividend @ 30%. Dividend distribution tax is payable @ 11% which includes surcharge (CA Inter)
13) A fire occurred in the premises of Atul on 25th August, 2011 when a large part of the stock was destroyed. Salvage was Rs 1,50,000. Atul gives you the following information for the period from 1st April, 2011 to 25th August, 2011:(a) Purchases, Rs 8,05,000.(b) Sales, Rs 9,00,000.(c) Goods costing Rs 5,000 were taken away by Atul for his personal use.(d) Cost price of stock on 1st April, 2011 was Rs 4,00,000.Over the past few years, Atul has been selling goods at a consistent gross profit margin of 33 1/3%.The insurance policy was for Rs 5,00,000. It included an average clause also.
Atul asks you to prepare a statement of claim to be made on the insurance company.
1. What is Insurance? It is an agreement between Insured and Insurer to compensate the losses suffered due to uncertainties in future, for a consideration called premium.
2. What is meant by Fire Claims? It is a kind of General insurance where an agreement is made between the industry (i.e., insured) and General Insurance Company (i.e., insurer) to indemnify the compensation for the loss of stock or profit due to fire accident, for a consideration called premium.
3. Who is an Insured? Insured is a person/industry/asset, to whom/which the insurance is made. The compensation shall be received on happening of certain event determined i.e., death of a person or destroy of asset or properties.
4. Who is Insurer? Insurer is an insurance company which pays the losses suffered by the insured on happening of certain event estimated in advance i.e., death of a person or destroy of asset or properties.
5. What is Trading Account? Trading Account is a ledger prepared to find out the Gross Profit of an accounting year. It includes the trading activities done by an industry during a financial year.
6. When do we have to prepare the previous year’s ‘trading account under insurance? The previous year’s trading account is prepared to find out the last year gross profit to help the calculation of Gross Profit during the year in which fire accident occurred, to find out the stock on the date of fire accident.
Gross Profit Ratio is a ratio which shows the relationship between the Gross Profit and Net Sales. Net Sales = Total Sales – Return inwards.
8. How do you calculate Gross Profit Ratio? Gross Profit Ratio = Gross Profit x100 Net Sales
9. What is Memorandum Trading Account? The Memorandum Trading Account is similar to usual trading account. It is prepared from the begin date of accounting year and till the date of fire accident. It is not prepared as per double entry system of booking.
10. What is meant by Salvage? The value of stock saved from the fire accident is called salvaged stock. Sometimes it is also referred as scrap value or realizable value of stock. The saved stock should be deducted from the stock of the date of fire.