MCQ
When two or more companies doing similar business go into liquidation and a new company is formed to take over their business, it is known as amalgamation. For example, if a new company Z Ltd is formed to take over X Ltd and Y Ltd which are existing companies, it is an example of amalgamation. In above example X Ltd & Y Ltd are transferor company and Z Ltd. is transferee company. The transferor company ceases to function as a separate entity. So all accounts given in its balance sheet must be closed. Amalgamation is of two types i.e. amalgamation in the nature of merger or amalgamation in the nature of purchase.
ACCOUNTING ENTRIES IN THE BOOKS OF TRANSFEREE COMPANY
Accounting Treatment in the books of Transferee Company will be different in both the types of amalgamation. There are two methods for this:
(1) The Pooling of Interest Method: This method is applicable in case of amalgamation in the Nature of Merger. In this case, the amalgamation is accounted for as if separate businesses of amalgamated companies were intended to be carried on by the transferee company. That is when only minimum changes are made in aggregating the individual financial statements of the transferor companies. The following factors are considered in this method:
The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amount and in the same form as at the date of amalgamation.
The balance of profit and loss account of the transferor company is aggregated with the balance of the transferee company or transferred to general reserve.
The identity of the reserves is preserved and they are shown in the balance sheet of the transferee company in the same form in which they appeared in the Balance Sheet of the transferor company.
The difference between the amounts recorded as share capital issued plus any additional consideration in the form of cash on the one hand and the amount of share capital of the transferor company on the other hand is adjusted in Reserves or Profit and Loss as the case may be.
The following journal entries are made in the books of Transferee Company, in case of amalgamation in the nature of merger:
For recording the purchase consideration:
Business Purchase A/c Dr. (with amt. of purchase consideration)
To Liquidator of Transferor Co.
(Being purchase consideration becoming due)
If debit Balance of Total of Assets exceeds the total of liabilities and purchase consideration, then the difference is adjusted in general reserve, being the balancing figure. For recording the assets and liabilities taken over:
Sundry Assets A/c Dr. (Book Value)
To Sundry Liabilities A/c (Book Value)
To Provision for Doubtful Debts A/c (Book Value)
To Profit and Loss A/c (Book Value)
To Reserves A/c (Adjusted Value)
To Business Purchase (Purchase Consideration)
(Being assets and liabilities taken over)
Whereas, if Debit Balance of total of assets are less as compared to the total of liabilities side, then the difference is adjusted in Debit balance of Profit and Loss Account; being the balancing figure.
Sundry Assets A/c Dr. (Book Value)
Profit & Loss A/c (Dr. Balance) Dr. (Balancing Figure)
To Sundry Liabilities A/c (Book Value)
To Provision for Doubtful Debt A/c
To Business Purchase A/c (Purchase Consideration)
On discharge of Purchase Consideration:
Liquidator of the Transferor Co Dr. (Purchase Consideration)
To Share Capital A/c (With face value)
To Securities Premium A/c (With Premium Amount)
To Bank A/c
(Being purchase consideration satisfied)
If the Transferee co. bears the liquidation expenses:
General Reserve A/c Dr.
To Bank A/c
(Liquidation expenses paid by Transferee Co.)
For the formation expenses of the transferee Co:
Preliminary Expenses A/c Dr.
To Bank A/c
(Being formation expenses paid by Transferee Co.)
(2) The Purchase Method: This method is adopted when the amalgamation is in the Nature of Purchase:
The assets and liabilities of the transferor company are incorporated in the books of the transferee company either at the book value or at the revised price.