Corporate Accounting - II
Semester - IV
First Published in India in 2016 by Jain University Press
Jakkasandra Post, Kanakapura Taluk
Ramanagara District- 562 112
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Credits
Dr. Easwaran Iyer
Professor & Dean, Faculty of Commerce
Dr. B.A Vasu
Professor & Director, School of Commerce and Management Studies
Course Writers
Ms. Lakshmi Parthan Lecturer, Department of Commerce
Ms. Manju Shree D
Lecturer, Department of Commerce
Mr. Srinivas G
Asst. Professor, Department of Commerce
Nasreen Sayeed
Asst. Professor, Department of Commerce
Content Editor
Mr. K.M Mahesh
Principal, Department of Commerce V. V Puram, Bengaluru Language Editor
Mr. Shyam Sundar
Contents
Acknowledgements
v
Introduction
vi
Syllabus
vii
Module - 1
Amalgamation of Companies
1-54
Module - 2
Absorption
55-90
Module - 3
External Reconstruction
91-108
Module - 4
Internal Reconstruction
109-138
Module - 5
Liquidation of Companies
139-162
v
Acknowledgments
Providing quality education is the key purpose at Jain University. One of the
strategies to provide quality and focused education is to develop engaging and
informative reading material for the students. With the assistance of the huge
intellectual pool at the University, we have created a comprehensive course
material for the students pursuing their undergraduate degree in Commerce.
Developing the book, ensuring accuracy and preparing it in the manner
that best suits the academic and practical needs of the student is a daunting
task and cannot be undertaken alone. It was a team effort and required the
valuable contribution of a number of people.
The book has been developed by experienced academicians of Jain University
who understand the needs of the students. It has also been reviewed to
neutralize errors. The faculty members from the Department of English have
provided valuable assistance in editing.
We place our sincere appreciation for the Course Writers, Ms. Lakshmi
Parthan, Ms. Manju Shree D and Mr. Srinivas G; Content Editor, Mr. K.M
Mahesh and Language Editor, Mr. Shyam Sundar for their inputs to the
content and owe a depth of gratitude to Dr. Chenraj Roychand, President,
Jain University and Dr. N. Sundararajan, the Hon’ble Vice Chancellor for
their continued support and guidance.
Director
The Center for Virtual Learning and Innovation
Jain University
vi
Note on the Corporate Accounting-II
Corporate Accounting is a special branch of accounting dealing with the accounting
of companies, preparation of final accounts and cash flow statements, analysis
and interpretation of company’s results and accounting for specific events like
amalgamation, absorption and development, and preparation of consolidated
balance sheet. A public company is usually referred to as a company that is permitted
to offer its registered securities such as stocks and bonds for sale to public, normally
through stock exchange.
This course has a wider exposure when compared to Corporate Accounting – I.
Module One covers amalgamation of companies; Module Two throws light on
absorption; Module Three covers external reconstruction; Module Four talks about
internal reconstruction and Module Five deals with the liquidation of a company.
The content is developed in the standard Instructional Design format, with the
objective to make the subject simple and easy to learn with examples from real life
situations. The assignments and exercises are part of the text to facilitate application
of the concepts learnt. At the end of each module, sample questions have been added
so that students can conduct a self-assessment and assess their preparedness for the
examinations.
vii
4BCOM3
Syllabus: Corporate Accounting - II
Objective
To acquaint the students with provisions of the Companies Act and the latest
amendments introduced from time to time.
Module - 1
Amalgamation of Companies
•
18 Hours
Meaning, Definition & Types of Amalgamation
Calculation of Purchase Consideration under Net Asset and Net Payment Basis
Adopting Accounting Standards 14 - *Purchase and Merger Method and Other
Relevant Standards
•
•
•
•
•
•
•
•
Treatment of Fractional Shares
Liquidation Expenses met by Purchasing Company
Passing Journal Entries
Preparation of Ledger Accounts in the Books of the Purchasing
Company
Incorporation Entries
Finding Out Goodwill or Capital Reserve
*Merger Expenses
Preparation of Balance Sheet
Module – 2
Absorption
•
•
•
•
•
•
12 Hours
*Meaning
Calculation of Purchase Consideration under Net Asset and Net
Payment Basis Adopting Accounting Standards 14 - *Purchase and
Merger Method
Treatment of Dissolution Expenses met by the Purchasing Company Assets and Liabilities Not Taken Over
Intrinsic Value of Shares
Journal Entries and Preparation of Ledger Accounts in the Books of the
Purchasing Company
Incorporating Entries - Preparation of Balance Sheet
viii
Module - 3
External Reconstruction
•
•
•
•
10 Hours
Differences between Amalgamation, Absorption and External
Reconstruction
Calculation of Purchase Consideration under Net Asset and Net
Payment Basis Adopting Accounting Standards 14
Passing Journal Entries and Preparation of Ledger Accounts in the
Books of the Purchasing Company
Passing Incorporating Entries - Preparation of Balance Sheet
Module - 4
Internal Reconstruction
•
•
•
•
10 Hours
Meaning and Oobjective – Procedure
Form of Reduction
Accounting Arrangements
Passing of Journal Entries
Surrender of Shares
•
•
Module -5
Liquidation
•
•
•
•
•
•
•
*Buy-back of Shares
Preparation of Balance Sheet after Reconstruction
10 Hours
Types of Liquidation
Preparation of Liquidator’s Statement of Affairs
Order of Payment
Calculation of Commission
Payment to Unsecured Creditors and Preferential Creditors
Treatment of Uncalled Capital
Liability of Contributors (Simple problems) Books for Reference
•
Jain. S.P. and Narang. K.L. 8th Edition (2009). Advanced Accountancy.
Kalyani Publishers
•
Raman. B.S. 1st Edition (2005). Corporate Accounting II. United Publishers
•
Arulanandam. M.A. Dr. and Raman. K.S. Millenium edition. Corporate
Accounting. Himalaya Publishing House
•
Jain. S.P. and Narang. K.L. 1st Edition (2005). Corporate Accounting.
Kalyani Publishers
MODULE - I
Amalgamation of Companies
MODULE - I
MODULE - 1
1
Amalgamation of Companies
Structure
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Introduction
Meaning
Types of Amalgamation
1.3.1 Amalgamation in the Nature of Merger
1.3.2 Amalgamation in the Nature of Purchase
Purchase Consideration
1.4.1 Net Payments Method
1.4.2 Net Assets Method
1.4.3 Exchange Method
Treatment of Fractional Shares
Accounting Treatment
1.6.1 Difference Between the Two Methods of Accounting
Summary
Terminal Questions
Answers
Objectives
•
•
•
To understand the meaning and types of amalgamation
To be able to calculate the purchase consideration under net assets
method, net payments method and share exchange method
To study the accounting treatment in the books of the vendor
company and the purchasing company.
2
Corporate Accounting - II
1.1 Introduction
The concept of amalgamation is very popular now as more companies
carrying on similar businesses join together to consolidate their market share
and reap economies of scale. This chapter explains the accounting treatment
followed during amalgamation.
1.2 Meaning
Amalgamation refers to two or more companies merging to form a new
company. In other words, two or more companies liquidate and form a new
company. The main features of amalgamation are
•
•
Liquidation of two or more companies and
Formation of a new company.
The two companies involved are – Transferor Company and Transferee
Company. The companies that liquidate are referred to as the transferor
companies (or vendor companies) and the new company formed is referred
to as the transferee company.
The Institute of Chartered Accountants of India (ICAI) has issued Accounting
Standard – (AS-14) for amalgamation. This standard is applicable for
amalgamation and absorption of companies. Reconstruction means
reorganizing the capital structure of the company. There are two types of
reconstruction – internal and external. Intern
al reconstruction is carried out by internally reorganizing the company
without resorting to liquidation. In the case of external reconstruction a new
company is formed to take over the business of an old company.
In other words –
Amalgamation refers to two or more companies being liquidated and a new
company being formed to take over the business of the two companies.
Absorption refers to the purchase of a company (which will be liquidated) by
an existing company. No new company will be formed.
MODULE - 1
3
External reconstruction refers to a new company being formed to carry on
the business of an old company which will be liquidated.
The accounting treatment to be followed for amalgamation, absorption and
external reconstruction are the same even though they are conceptually
different. In this chapter the concept of amalgamation will be studied in detail.
1.3 Types of Amalgamation
AS -14 has classified amalgamation under the following two types:
1.
Amalgamation in the nature of merger and
2.
Amalgamation in the nature of purchase.
Note: In both cases, Amalgamation includes Absorption and External
Reconstruction.
1.3.1 Amalgamation in the Nature of Merger
a)
b)
c)
Amalgamation in the nature of merger is an amalgamation which
satisfies the following conditions:
All the assets and liabilities of the transferor company, after
amalgamation becomes, the assets and liabilities of the transferee
company.
Share holders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees)
become equity share holders of the transferee company by virtue
of the amalgamation.
The consideration for the amalgamation receivable by those equity
share holders of the transferor company who agree to become
equity share holders of the transferee company is discharged by
the transferee company wholly by the issue of equity shares in the
transferee company, except that cash may be paid in respect of
any fractional shares.
4
Corporate Accounting - II
d)
e)
The business of the transferor company is intended to be carried
on, after the amalgamation, by the transferee company.
No adjustment is intended to be made to the book values of
the assets and liabilities of the transferor company when they
are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
1.3.2 Amalgamation in the Nature of Purchase
a)
b)
c)
d)
e)
Amalgamation in the nature of purchase is an amalgamation
which does not satisfy one or more of the above conditions. That
is, an amalgamation can be considered as amalgamation in the
nature of purchase whenAll the assets and the liabilities of the transferor company does
not become the assets and liabilities of the transferee company
after amalgamation; or
Shareholders holding not less than 90% of the face value of
the equity shares of the transferor company do not become
equity shareholders of the transferee company by virtue of the
amalgamation; or
The consideration for amalgamation is given by transferee
company in the form of cash, debentures etc., with or without
equity shares of the transferee company; or
The transferee company is not intending to carry on the business
of the transferor company, after amalgamation; or
The assets and liabilities of the transferor company are
incorporated in the books of transferee company at adjusted
values.
1.4 Purchase Consideration
Purchase consideration refers to the cash and non-cash payments made
by the purchasing company to the shareholders of the selling company/
companies. Non-cash items include shares, debentures and other securities
like debentures issued by the transferee company. In other words it is the
MODULE - 1
5
payment made by the new company for taking over the assets and liabilities
of the vendor company.
Para 3(g) of AS-14 defines the term Purchase Consideration as the “aggregate
of the shares and other securities issued and the payment made in the form
of cash or other assets by the transferee company to the shareholders of the
transferor company”.
Purchase consideration can be computed under the following three methods:
1.
2.
3.
Net payments method
Net assets method and
Exchange method.
1.4.1 Net Payments Method
Under this method, purchase consideration is calculated as the total of
payments made in the form of shares, debentures, other securities and cash
to the shareholders of the vendor/transferor company. According to AS–14,
purchase consideration includes the amount paid to shareholders only – both
equity and preference shareholders. Payments made to debenture holders
and creditors will not form a part of the purchase consideration.
1.4.2 Net assets method
In this method, purchase consideration will be the excess of assets over
liabilities. The purchasing company will take over assets and liabilities at
certain value (also known as agreed values/taken over values), which may or
may not be the balance sheet values. In other words, assets and liabilities will
be considered at the agreed values for calculating the purchase consideration.
Purchase Consideration = Assets taken over (at ‘taken
over’ values) – Liabilities taken over (at ‘taken over’ values)
6
Corporate Accounting - II
Points to be remembered:
a)
b)
c)
d)
Net assets method to be followed only when it is not possible to
calculate the consideration under net payments method.
Assets taken over by the purchasing company at the agreed values
to be considered.
Similarly, liabilities taken over at agreed values only to be included
while calculating purchase consideration.
Items included under the heading “Miscellaneous Expenses” and
“Reserves and surplus” in the balance sheet should be ignored
while determining the purchase consideration.
1.4.3 Exchange Method
Under this method, the purchasing company allots its shares to the
shareholders of the vendor company on the basis of a certain ratio. This ratio
is usually determined based on the intrinsic value or market value of the
shares.
Illustration 1 (Intrinsic Value)
Number of shares issued 10,000 shares of Rs.10 each. The net asset or intrinsic
value of shares of B Ltd. is Rs.13. Calculate purchase consideration payable
by A Ltd.
Solution:
Number of shares of B Ltd Intrinsic value of B Ltd.
10,000 13 = Rs.1,30,000.
Illustration 2 (Exchange Ratio)
The shareholders to get Rs.5 cash for every share in X Ltd. (shares in X Ltd.
is 10,000 shares of Rs.10 each) and 2 shares of Rs.20 each for every 5 shares
held by X Ltd.
Calculate purchase consideration.
MODULE - 1
Solution:
1.
Cash = (10,000 5)
2.
Shares: 4,000 shares of Rs.20 each (4,000 20)
7
Rs.
50,000
80,000
1,30,000
Working note:
Shares held 5
10,000 No. of shares allotted =
Shares allotted
2
?
10,000 Χ 2
= 4,000 shares
5
1.5 Treatment of Fractional Shares
In some cases while calculating the purchase consideration, the number of
shares to be allotted maybe as a fractional or decimal value. Since shares cannot
be allotted as a fraction, these shares will be aggregated by the purchasing
company. It will be sold in the market and individual shareholders will be
compensated. For example, if the purchasing company is to allot 1 share for
every 3 shares held and there are 10,000 shares in the vendor company, then
the number of shares to be allotted will be as follows:
=
10,000 Χ 1
= 3,333.33 shares
3
The company will allot 3,333 shares and the fractional share of 1/3 will be sold
in the market and cash will be paid to the shareholders.
8
Corporate Accounting - II
1.6 Accounting Treatment
There are two methods of accounting for amalgamation, viz.,
•
•
The pooling of interests methods; and
The purchase method.
The pooling of interest method is adopted for accounting only when the
“amalgamation is in the nature of merger” and, The Purchase Method is
adopted for accounting in case of “amalgamation in the nature of purchase.”
1.
2.
Under pooling of interests method, all assets, liabilities and
reserves of the transferor/vendor company will be recorded by
the transferee company at book values unless any adjustment is
required due to different accounting policies followed by these
companies.
Under purchase method, assets and liabilities of the transferor
company, taken over, will be recorded in the books of Transferee
Company at agreed values. In this case, no reserves (other than
statutory reserves) of the transferor company will be recorded in
the books of Transferee Company.
1.6.1 Difference between the Two Methods of Accounting
Pooling of Interests Method
Purchase Method
1. All assets and liabilities of Transferor Company 1. Only assets and liabilities taken over by
will be incorporated in the books of Transferee Transferee Company will be incorporated in its
Company.
books.
2. All reserves of Transferor Company will be 2. Other than Statutory Reserves (see below), no
recorded in the books of Transferee Company.
other reserves of the Transferor Company will be
recorded in the books of Transferee Company.
3. The assets and liabilities of Transferor 3. The assets and liabilities of Transferor
Company will be recorded in the books of Company will be recorded in the books of
Transferee Company at book values.
Transferee Company at agreed values.
4. Any difference between purchase consideration 4. Any difference between purchase consideration
and value of assets and liabilities taken over must and value of assets and liabilities taken over must
be adjusted against general reserves.
be treated as goodwill or capital reserves, as the
case may be.
MODULE - 1
9
Statutory Reserve:
It refers to the reserves to be maintained as per the requirements of any law or
legislation only in case of Amalgamation in the nature of purchase (Purchase
Method).
In the books of the vendor company it should be treated like any other liability.
In the books of the purchasing company, statutory reserve must be transferred
to “Amalgamation Adjustment Account” and appears in the Balance Sheet.
The following entry should be passed to incorporate the reserve:
Amalgamation adjustment A/c
To Statutory Reserve A/c
It will appear in the balance sheet as follows:
Statutory Reserve will be recorded on the liabilities side under “Reserves &
Surplus” and Amalgamation Adjustment Account will be recorded on the
asset side under “Miscellaneous Expenses and losses”.
If the statutory reserve need not be maintained by the purchasing company,
the above entry will be reversed to eliminate the reserve.
10
Corporate Accounting - II
Classification of Accounts:
The following table gives the list of items classified under various
categories:
Trade Liabilities
1. Creditors or
trade creditor
2. Bills payable
Liabilities
1. Trade Creditors
2. Bills payable
3. Bank overdraft.
4. Debentures
5. Loans
6. Pension Fund
7. Provident Fund
8. Super
Annuation Fund
9. Workman
Savings bank
account
10. Workman
Profit Sharing
Fund
11. Provision for
Taxation
12. Unclaimed
dividend
13. Outstanding
expenses
Accumulated
Profits
1. Profit and Loss
(Credit)
2. General
Reserve
3. Reserve Fund
4. Revenue
Reserve
5. Debenture
Sinking Fund
or Debenture
Redemption
Fund
6. Capital
Redemption
Reserve
7. Shares forfeited
Account
8. Share Premium
Account
9. Workman
Compensation
Fund
10.Workman
Accident Fund or
Fatal Accident
11.Insurance
Fund
12.Dividend
Equalization
Fund
13. Dividend
Rebate Reserve
Provision and
Accumulated
losses
1. Provision for
Depreciation or
Depreciation
Fund
2. Provision for
Doubtful Debt
3. Provision for
Investments
4. Profit and Loss
Account (Debit)
5. Preliminary
Expenses
6. Discount on
issue of Shares
and Debentures
i.e., expenses not
yet written off
Statutory
Reserves
1. Investments
Allowance
Reserve
2. Development
Rebate Reserve
3. Workman
Compensation
Fund
4. Foreign Project
Reserve
5. Export Profit
Reserve etc
Steps involved in the accounting procedure of Amalgamation, Absorption
and External Reconstruction of Companies.
a.
Calculation of purchase consideration
MODULE - 1
b.
c.
d.
11
Ascertainment of discharge of purchase consideration
Closing the books of vendor company or transferor company
Passing opening entries in the books of purchasing company (i.e.,
Transferee Company).
Step 1. Calculation of purchase consideration
Step 2. Discharge of purchase consideration: After calculating the purchase
consideration, the way in which it will be discharged by the purchasing
company must be determined. The consideration can be settled by paying
cash and allotting shares (equity and preference shares).
Step 3. Closing the books of transferor company: The following journal
entries are to be passed under the purchase method of accounting:
(i)
(ii)
For transfer of assets including cash at the balance sheet value:
Realisation A/c Dr.
To Individual asset A/c
For transfer of all liabilities including debentures and statutory
reserves:
Individual liability A/c Dr.
To Realisation A/c
(iii) For purchase consideration due:
Purchasing company A/c Dr.
To Realisation a/c
(iv) For payment of realization expenses:
(1) If paid by the vendor company:
Realisation A/c Dr.
To Cash / Bank A/c
(2) If paid by the purchasing company:
No entry.
(v) For sale of assets not taken by the purchasing company:
Cash / Bank A/c Dr.
To Realisation a/c
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Corporate Accounting - II
(vi) For payment of liabilities not taken over by the purchasing
company:
Realisation A/c Dr.
To Cash / Bank A/c
(vii) For preference share capital due:
(1) Payable at par:
Preference share capital A/c Dr.
To Preference shareholders a/c
(2) Payable at a higher value:
Preference share capital A/c Dr.
Realisation A/c Dr.
To Preference shareholders a/c
(3) Payable at a lower value:
Preference share capital a/c Dr.
To Realisation A/c
To Preference shareholders A/c
(viii) For closing realization a/c:
(1) In case of profit:
Realisation A/c Dr.
To Equity shareholders a/c
(2) In case of loss:
Equity shareholders A/c Dr.
To Realisation A/c
(ix) For transfer of share capital, reserves and profits:
Equity share capital A/c Dr.
Reserve A/cDr.
P/L A/c Dr.
To Equity shareholders a/c.
MODULE - 1
(x)
For transfer of preliminary expenses, underwriting
commission, discount on issue of shares and
debentures and P/L (loss) a/c:
Equity shareholders A/c Dr.
To preliminary expenses A/c
To underwriting commission a/c
To discount on issue of shares and debentures A/c
To P/L a/c.
(xi) For receipt of purchase consideration:
Equity shares in purchasing company A/c
Dr.
Preference shares in purchasing company A/c Dr.
Cash / Bank A/c Dr.
To purchasing company A/c
(xii) For final payment made to preference share holders:
Preference share holders A/c Dr.
To cash a/c
To shares/debentures in purchasing company a/c
(xiii) For final payment made to equity shareholders:
Equity shareholders A/c Dr.
To Equity shares in purchasing company A/c
To Cash/ Bank A/c.
Step 4 Opening entries in the books of the purchasing company:
Pooling interest method
1. For purchase consideration payable
Business purchase A/c Dr.
To Liquidator of purchasing co. a/c
Purchase method
1. For purchase consideration payable
Business purchase A/c Dr.
To Liquidator of purchasing co. a/c
2. For incorporation of assets, liabilities & 2. For incorporation of assets and liabilities:
reserves:
Individual assets a/c Dr (Revised values)
Individual assets A/c Dr.
Bank A/c Dr.
General reserve (bf) A/c Dr.
Goodwill (bf) A/c Dr.
To creditors A/c
To Individual liabilities A/c (Revised values)
To bills payable A/c
To capital reserve (bf) A/c
To reserves A/c
To P/L A/c
To business purchase A/c
To general reserve (bf) A/c
13
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Corporate Accounting - II
3. For discharge of purchase consideration:
Liquidator of purchasing co. A/c Dr.
Discount on issue of securities a/c Dr.
To bank A/c
To equity share capital A/c
To preference share capital A/c
To debentures A/c
To securities premium A/c
3. For discharge of purchase consideration:
Liquidator of purchasing co. A/c Dr.
Discount on issue of securities A/c Dr.
To bank A/c
To equity share capital A/c
To preference share capital A/c
To debentures A/c
To securities premium A/c
4. For making payment to debentures and other
liabilities:
Debentures / liability A/c Dr.
Discount on issue of debentures A/c Dr.
To debentures A/c
To premium on issue of debentures A/c
4. For making payment to debentures and other
liabilities:
Debentures / liability A/c Dr.
Discount on issue of debentures A/c Dr.
To debentures a/c
To premium on issue of debentures A/c
5. Payment of realization expenses:
Reserves A/c Dr.
To cash A/c
5. For payment of realization expenses:
Goodwill / Capital reserve A/c Dr.
To cash A/c
6. For incurring formation expenses:
Preliminary expenses a/c Dr.
To cash A/c
6. For incurring formation expenses:
Preliminary expenses a/c Dr.
To cash A/c
7. For incorporation of statutory reserve:
Amalgamation adjustment a/c Dr
To Statutory reserve A/c
8. If statutory reserve need not be maintained:
Statutory reserve A/c Dr.
To amalgamation adjustment a/c
Formation Expenses:
It is also known as preliminary expenses and are incurred at the time of
incorporation. After the liquidation of the old companies when the new
company is formed it may incur formation expenses.
Illustration1. (Net assets method) A Ltd. and B Ltds agreed to amalgamate
by transferring their undertakings to a new company, AB Ltd. formed for that
purpose. On the date of the amalgamation Balance Sheets of the companies
were as under:
MODULE - 1
Equities and Liabilities
A
B
Paid up capital
Creditors
Export profit reserve
Reserves
P and L Account
2,24,000
5,000
5,000
8,000
11,000
1,75,000
6,000
3,000
12,000
4,000
Total
2,53,000
2,00,000
Assets
Goodwill
Buildings
Plant
Stock
Debtors
Cash
Total
A
B
80,000
50,000
41,000
42,000
23,000
17,000
32,000
60,000
10,000
33,000
40,000
25,000
2,53,000
2,00,000
Purchase Consideration for A Ltd
Buildings
Plant
Stock
Debtors
Cash
45,000
41,000
42,000
21,850
17,000
46,500
Goodwill
2,13,350
Less: Liabilities
Creditors
(5,000)
Purchase Consideration
2,08,350
In the books of A Ltd
Realization Account
To Buildings
To Plant
To Stock
To Debtors
To Cash
To Goodwill
50,000
41,000
42,000
23,000
17,000
80,000
2,53,000
By Creditors
By export profit reserve
By C Ltd (P.C)
By share holders A/c
5,000
5,000
2,08,350
34,650
2,53,000
15
16
Corporate Accounting - II
C Limited Account
To Realization A/c
2,08,350 By Equity Shares in C
Limited Account
2,08,350
Equity Shares in C Limited Account
To C Ltd A/c
2,08,350 By Equity Share Holders
Account
2,08,350
Equity Share Holders Account
To Realization A/c
To Equity Shares in C Limited
Account
34,650 By paid up capital
2,08,350 By Reserve
By P and L Account
2,24,000
8,000
11,000
2,43,000
2,43,000
Journal Entries in the books of A Ltd
SL
NO
PARTICULARS
LF
DEBIT
1
Realization A/c
Dr
To Buildings
To Plant
To stock
To Debtors
To Gash
To Goodwill
[Being assets transferred to realization at book
value]
2,48,000
2
Creditors A/c
Dr
To Realization A/c
[Being liabilities transferred to realization at book
value]
5,000
Export Profit Reserve A/c
Dr
To Realization A/c
[Being statutory reserve transferred to realization]
5,000
3
4
C company Ltd A/c
To Realization A/c
[Being P.C due from C Ltd]
Dr
CREDIT
50,000
41,000
42,000
23,000
12,000
80,000
5,000
5,000
2,08,350
2,08,350
MODULE - 1
5
6
7
8
9
Equity shareholders A/c
Dr
To Realization A/c
[Being Realization loss transferred to share holders
A/c]
34,650
34,650
Equity shares of C Ltd A/c
Dr
To C Ltd A/c
[Being P.C. received in the form of equity shares]
2,08,350
Paid up capital A/c
To Equity Share holders A/c
[Being equity share capital called back]
2,24,000
Dr
2,08,350
2,24,000
Reserve fund A/c
Dr
P&L A/c
Dr
To Equity share holders A/c
[Being accumulated profits transferred to share
holders A/c]
Equity share holders A/c
Dr
To Equity Shares in C Limited Account A/c
[Being full settlement made]
8,000
11,000
19,000
2,08,350
2,08,350
Purchase Consideration for B Ltd
Buildings
Plant
Stock
Debtors
Cash
54,000
10,000
33,000
38,000
25,000
15,000
Goodwill
1,75,000
Less: liabilities
Creditors
6,000
Purchase Consideration
1,69,000
In the books of B Ltd
Realization Account
To Buildings
To Plant
To Stock
To Debtors
To Cash
To Goodwill
60,000
10,000
33,000
40,000
25,000
32,000
2,00,000
By Creditors
By export profit reserve
By C Ltd (P.C)
By Equity share holders A/c
6,000
3,000
1,69,000
22,000
2,00,000
17
18
Corporate Accounting - II
C Limited Account
To Realization A/c
1,69,000 By Equity Shares in C
Limited Account
1,69,000
Equity Shares in C Limited Account
To C Ltd A/c
1,69,000 By Equity Share Holders
Account
1,69,000
Equity Share Holders Account
To Equity Shares in C Limited
Account
To Realization A/c
1,69,000 By paid up capital
22,000 By Reserve
By P&L A/c
1,75,000
12,000
4,000
1,91,000
1,91,000
Journal Entries in the books of B Ltd
SL
NO
1
2
3
4
PARTICULARS
LF
Realization A/c
Dr
To Buildings
To Plant
To stock
To Debtors
To cash
To goodwill
[Being assets transferred to realization A/c at book
value]
Creditors A/c
Dr
To Realization A/c
[Being liabilities transferred to realization at book
value]
C company Ltd A/c
To Realization A/c
[Being P.C due from C Ltd]
Dr
Equity shareholders A/c
Dr
To Realization A/c
[Being Realization loss transferred to share holders
A/c]
DEBIT
CREDIT
2,00,000
60,000
11,000
33,000
40,000
25,000
32,000
6,000
6,000
1,69,000
1,69,000
22,000
22,000
MODULE - 1
5
6
7
8
Equity shares holders A/c
Dr
To C Ltd A/c
[Being P.C. received in the form of equity shares]
1,69,000
Paid up capital A/c
To Equity Share holders A/c
[Being equity share capital called back]
1,75,000
Dr
1,69,000
1,75,000
Reserve fund A/c
Dr
P&L A/c
Dr
To Equity share holders A/c
[Being accumulated profits transferred to share
holders A/c]
Equity share holders A/c
To equity shares of C Ltd A/c
[Being full settlement made]
19
Dr
12,000
4,000
16,000
1,69,000
1,69,000
NOTE: In the above problem, it is given specifically as export profit is to be
maintained for 3 years that is why it is treated as statutory reserve.
Illustration 2:(Exchange method and net assets method) A Ltd. and B Ltd.
agreed to amalgamate and form a new company, C Ltd., which will take over
all the assets and liabilities of the two companies on the basis of amalgamation
in the nature of purchase.
In the case of A Ltd. the assets and liabilities are to be taken over at book value
for shares in C Ltd. at the rate of 5 shares in C Ltd. at 10%. Premium (i.e.,
Rs.11 per shares) for every four shares in A Ltd.
In the case of B Ltd.
1)
2)
3)
The debentures of B Ltd. would be paid off by the issue of an equal
number of debentures in C Ltd. at a discount of 10%.
The holders of 10% preference shares of B Ltd. would be allotted
for 12% preference shares of Rs.100 each in C Ltd. for every five
preference shares in B Ltd.
The equity shareholders would be allotted sufficient shares in C
Ltd. to cover the balance on their accounts after adjusting asset
values by reducing plant and machinery by 10% and providing
5% on sundry debtors.
The summarized balance sheets of the two companies just prior to
20
Corporate Accounting - II
amalgamation were as follows:
Equities and Liabilities
Equity share capital of Rs. 10 each
6% preference share capital of 100 each
4% Debentures
P&L A/c
Contingency reserve
Creditors
Total
Assets
Plant and machinery
Stock
Debtors
P&L A/c
Bank
Total
A
B
4,00,000
5,00,000
50,000
75,000
5,00,000
3,00,000
2,00,000
90,000
10,25,000
10,90,000
A
B
8,00,000
65,000
95,000
65,000
8,00,000
60,000
50,000
1,40,000
40,000
10,25,000
10,90,000
Show the journal entries in the books of A Ltd. and B Ltd. Show the Balance
Sheet of C Ltd.
Solution:
Calculation of Purchase Consideration for A Ltd.
Shareholders of A Ltd. are to get 5 shares in C Ltd. @ Rs.11 per share for every
4 shares in A Ltd.
A Ltd. has 40,000 shares; so shareholders of A Ltd. will get 50,000 (i.e., 5/4
40,000) shares @ 11 per share.
Thus, purchase consideration is Rs.5,50,000 (i.e., 50,000 11)
The Purchase consideration is discharged as follows:
Mode of payment
10%
Preference 12% preference shares @ 4 preference shares
Shareholders to get
for every 5 preference shares in B Ltd. (3,000
4/5) i.e. 2,400 shares of Rs. 100 each
2,40,000
MODULE - 1
Equity Shareholders to 35,750 equity shares of Rs.10 each i.e.
get
balance of purchase consideration
3,57,500
5,97,500
Realization Account
To Plant & Machinery
To Stock
To Debtors
To Bank
8,00,000 By Creditors
65,000 By C Ltd
95,000 By Equity share holders
65,000
75,000
5,50,000
4,00,000
10,25,000
To Realization A/c
10,25,000
C Limited Account
5,50,000 By Equity share holders A/c
5,50,000
5,50,000
5,50,000
Equity Shares in C Limited Account
To C Ltd A/c
5,50,000 By Equity Share Holders
Account
5,50,000
5,50,000
5,50,000
Equity Share Holders Account
To Realization A/c
To Equity Shares in C Limited
Account
4,00,000 By equity share capital
5,50,000 By P&L A/c
By contingency reserve
4,00,000
5,00,000
50,000
9,50,000
9,50,000
Journal Entries in the Books of A Ltd.
Date
Particulars
Rs.
Realisation Account
To Plant & Machinery
To Stock
To Debtors
To Bank
(Being transfer of assets to Realisation A/c)
Dr.
Creditors
To Realisation Account
(Being transfer of creditors to Realisation A/c)
Dr.
Rs.
10,25,000
8,00,000
65,000
95,000
65,000
75,000
75,000
21
22
Corporate Accounting - II
C Ltd
Dr.
To Realisation Account
(Being Purchase consideration agreed to be paid by C
Ltd)
5,50,000
Equity Shares in C Ltd. Account
To C Ltd.
(Being receipt of purchase consideration)
5,50,000
Dr.
5,50,000
5,50,000
Equity Shareholders Account
Dr.
To Realisation Account
(Being loss on realisation transferred to Equity
Shareholders A/c)
4,00,000
Equity Share Capital Account
Dr.
Profit & Loss Account
Dr.
Contingency Reserve Account
Dr.
To Equity Shareholders Account
(Being transfer of various accounts to Equity
Shareholders Account)
4,00,000
5,00,000
50,000
Equity Shareholders Account
Dr.
To Shares in C Ltd.
(Being amount due to shareholders paid by giving
shares in C Ltd.)
5,50,000
Calculation of Purchase Consideration for B Ltd.
4,00,000
9,50,000
5,50,000
Rs.
Rs.
Value of assets taken over by C Ltd.
Plant and Machinery (Rs.8,00,000 Less: 10%)
7,20,000
Stock
60,000
Debtors (Rs.50,000 Less: 5% Provision for Bad Debts)
47,500
Bank
40,000
8,67,500
Less: Creditors taken over
Debentures taken over to be paid by C Ltd. at a discount of 10%
Rs.90,000
Rs.1,80,000
2,70,000
Purchase Consideration
5,97,500
MODULE - 1
Realization Account
To Plant & Machinery
To Debtors
To Stock
To Bank
To Bank ( Expenses)
8,00,000
50,000
60,000
34,000
6,000
By Creditors
By Debentures
By C Ltd
By preference shares
By Equity share holders
9,50,000
To Realization A/c
90,000
2,00,000
5,71,500
60,000
28,500
9,50,000
C Limited Account
5,71,500 By Equity share holders A/c
By preference shares
3,31,500
2,40,000
5,71,500
5,71,500
Preference Shares in C Limited Account
To C Ltd A/c
2,40,000 By preference Share Holders
Account
2,40,000
Preference Share Holders Account
To Realization A/c
To preference shares of C Ltd
60,000 By Preference share capital
2,40,000
3,00,000
3,00,000
3,00,000
Equity Shares in C Limited Account
To C Ltd A/c
3,31,500 By Equity Share Holders
Account
3,31,500
Equity Share Holders Account
To P&L A/c
To Realization A/c
To Equity Shares in C Limited
Account
1,40,000 By equity share capital
28,500
3,31,500
5,00,000
5,00,000
5,00,000
23
24
Corporate Accounting - II
Journal Entries in the Books of B Ltd.
Date
Particulars
Rs.
Realisation Account
To Plant & Machinery
To Stock
To Debtors
To Bank
(Being transfer of assets to Realisation A/c)
Dr.
Creditors
14% Debentures
To Realisation Account
(Being transfer of creditors to Realisation A/c)
Dr.
Dr.
Rs.
9,50,000
8,00,000
60,000
50,000
40,000
90,000
2,00,000
2,90,000
C Ltd
Dr.
To Realisation Account
(Being Purchase consideration agreed due from C
Ltd.)
5,97,500
12% Preference Shares in C Ltd. Account
Equity Shares in C Ltd. Account
To C Ltd.
(Being receipt of purchase consideration)
2,40,000
3,57,000
Dr.
Dr.
5,97,500
5,97,500
10% Preference Share Capital Account
Dr.
To 10% Preference Shareholders Account
(Being transfer of 10% Preference Share Capital A/c to
Preference Share holders A/c)
3,00,000
10% Preference Shareholders Account
Dr.
To 12% Preference Shares in C Ltd. A/c
To Realisation Account
(Being payment of preference share holders and profit
thereon transferred to Realisation A/c)
3,00,000
Equity Shareholders Account
Dr.
To Realisation Account
To Profit and Loss Account
(Being transfer of loss on realisation and debit balance
of profit & loss A/c to Equity Shareholders A/c)
1,42,500
Equity Share Capital Account
Dr.
To Equity Shareholders Account
(Being transfer of Equity Share Capital Account)
5,00,000
Equity Shareholders Account
Dr.
To Equity Shares in C Ltd.
(Being payment due to equity shareholders made)
3,97,500
3,00,000
3,00,000
2,500
1,40,000
5,00,000
3,97,500
MODULE - 1
25
Balance Sheet of C Ltd.
Liabilities
Rs.
Share Capital:
Assets
Rs.
Fixed Assets:
2,400 12% preference
shares of Rs.100 each
2,40,000
85,750 equity shares of
Rs.10 Each fully paid up
8,57,500 Current Assets:
Stock
Debtors
Less: Provision for Bad
Debts
Reserve and Surplus:
(1) Capital Reserve
(2) Securities Premium
Plant & Machinery
15,20,000
1,45,000
2,500
Bank
1,25,000
1,42,500
1,05,000
4,00,000 Miscellaneous Expenditure:
50,000 Discount on
Debentures
Issue
of
20,000
Secured Loans:
14% Debentures
2,00,000
Current Liabilities
Sundry Creditors
1,65,000
19,12,500
19,12,500
Working Notes:
(a)
Capital reserve has arisen in case of purchase of business of A Ltd.
as shown below:
Value of assets taken over
Plant and Machinery
Rs.
8,00,000
Stock
65,000
Debtors
95,000
Bank
65,000
10,25,000
Less: Creditors taken over
75,000
9,50,000
Less: Purchase Consideration
5,50,000
4,00,000
26
Corporate Accounting - II
There is no capital reserve in case of purchase of business of B Ltd. because
purchase consideration is payable on the basis of net value of assets taken
over.
(b)
Calculation of Securities Premium
50,000 shares have been issued to shareholders of A Ltd. at a premium of Rs.1
per share. Therefore, Securities Premium is Rs.50,000 (i.e. 50,000 Re.1).
Illustration 3: (Fractional shares) Following is the Balance Sheet of Star Ltd.
Equities and Liabilities
Equity share capital
General reserve
Capital redemption reserve
Development rebate reserve
Debenture redemption account
Creditors
Out standing bills
Amount
2,00,000
1,00,000
1,00,000
40,000
60,000
1,00,000
70,000
6,70,000
Assets
Amount
Intangible assets
Fixed assets
Current assets
Unwritten off expenses
1,30,000
3,00,000
2,00,000
40,000
Total
6,70,000
The transferee company is Zee Ltd. which took away assets except debtors
of Rs.30,000, these were later on collected by the Star Ltd., and could realize
only Rs.28,000. Zee Ltd. also agreed to pay trade liabilities. The purchase
consideration is the exchange of three shares of Rs.20 each in Zee Ltd. for
two shares in Star Ltd. fractions totaling 15 shares which Zee Ltd agreed to
pay in cash. The cost of liquidation amounted to Rs.500 which the transferee
company agreed to bear. Assume that sufficient shares are sold to pay liabilities
not taken over.
MODULE - 1
27
You are required to give journal entries in the books of Star Ltd. Assume that
the shares of Zee Ltd. are quoted in the market at Rs.52.
Solution: Calculation of purchase consideration:
Purchase consideration is calculated by net payment method.
Rs.
Number of Shares: 3/2 20,000
30,000
Less: Fractions
15
Shares issued
29,985
Amount to be paid in shares: 29985 Rs. 20
5,99,700
Amount to be paid in cash for fractions: 15 Rs. 52
780
6,00,480
Total Purchase Consideration
Journal of Star Ltd.
Date
Particulars
Realisation Account
To Intangible Assets Account
To Fixed Assets Account
To Current Assets Account
(Being transfer of assets taken over by Zee Ltd.)
Rs.
Dr.
Rs.
6,30,000
1,30,000
3,00,000
2,00,000
Sundry Creditors Account
Dr.
O/S Bills Account
Dr.
To Realisation Account
(Being transfer of trade liabilities taken over by Zee
Ltd.)
1,00,000
70,000
Zee Ltd. Account
To Realisation Account
(Being entry for purchase consideration)
Dr.
6,00,480
Bank Account (Amount collected)
To Realisation Account
(Being collection of debtors not taken over)
Dr.
1,70,000
6,00,480
Realisation Account
Dr.
To Equity Share holders Account
(Being profit on realisation transferred to shareholders
a/c)
28,000
28,000
98,480
98,480
28
Corporate Accounting - II
Equity Share Capital Account
Dr.
General Reserve Account
Dr.
Capital Redemption Reserve Account
Dr.
Development Rebate Reserve Account
Dr.
Debenture Redemption Reserve Account
Dr.
To Equity Share holders Account
(Being Transfer of accumulated profits and share
capital to shareholders a/c)
2,00,000
1,00,000
1,00,000
40,000
60,000
Equity Share holders Account
Dr.
To Unwritten-off Expenses Account
(Being transfer of expenses to Share holders A/c)
40,000
Shares in Zee Ltd. Account
Bank Account
To Zee Ltd. A/c
(Being receipt of purchase consideration)
Dr.
Dr.
5,00,000
40,000
5,99,700
780
6,00,480
Bank Account
Dr.
To Shares in Zee Ltd. Account
To Profit on Sale of Shares Account
(Being Sale of 793 shares of Rs. 20 each at market price
of Rs. 52 each)
41,236
Profit on Sale of Shares Account
To Equity Share holders Account
(Being transfer of profit on sale of shares)
Dr.
25,376
Equity Share holders Account
To Shares in Zee Ltd. Account
To Bank Account
(Being payment to share holders)
Dr.
15,860
25,376
25,376
Realisation Account
Dr.
To Bank Account
(Being payment of outstanding bills not taken over by
Zee Ltd.)
5,83,856
5,83,856
70,000
70,000
Working notes:
1)
2)
3)
Debtors of Rs.30,000 included in current assets are not taken over
by Zee Ltd. and hence not transferred to realisation account.
Outstanding bill is not a trade liability.
Bank Account
Rs.
To Debtors
28,000 By Equity Shareholders
Rs.
16
MODULE - 1
To Zee Ltd.
780 By Outstanding Bills
To Shares in Zee Ltd. (793 Rs.20)
15,860
To Profit on Sale of Shares (793
Rs.32)
25,376
70,000
70,016
4)
29
70,016
In order to pay the outstanding bills (not taken over by Zee Ltd.)
it is necessary to sell some shares.
Calculation of shares to be sold in the market:
Amount to be paid to outstanding bills
Rs.
Less: Amount available
Collection from debtors
Received from Zee Ltd.
70,000
28,000
780
28,780
Amount to be collected from the sale of shares
41,220
Market price per share
52
Number of shares to be sold Rs. 41,220 52 = 792.69 i.e. 793 shares
Illustration 4:
1.
A Ltd and B Ltd agreed to amalgamate the business the scheme
resulted in formation of C Ltd, the share capital included
combined capital of A Ltd and B Ltd for the purpose of acquiring
assets and liabilities in exchange of shares of C Ltd. The B/S of A
Ltd and B Ltd on 31.12.2001 were as follows:
Equities and Liabilities
A
B
Share capital
Reserves
Creditors
Bank O/d
1,00,000
1,70,000
40,000
-
1,40,000
1,00,000
90,000
90,000
Total
3,10,000
4,20,000
30
Corporate Accounting - II
Assets
Fixed assets(exclusive of goodwill)
Stock
Debtors
Cash at bank
Total
A
B
1,20,000
1,80,000
60,000
80,000
50,000
1,10,000
1,30,000
-
3,10,000
4,20,000
1.
The P.C was to be based on Net assets of the company as shown
in their books, subject to an addition to compensate A Ltd for
its super profit record. This addition was to be paid based on
weighted average of the net profit of A Ltd for 3 years ended
31.12.2001. The weighs for the purpose for the calendar year
1999, 2000 and 2001 were 1, 2 and 3 respectively. The profits for
the year ended 31.12.1999 20,000, 31.12.2000 80,000, 31.12.2001
1, 20,000.
2.
The shares in C Ltd were to be issued A & B Ltd at a premium of
the agreed Net assets value of those companies.
3.
In order to increase Working Capital C Ltd increased its
authorized capital by Rs. 2,00,000 and proceeded to issue 12,000
shares of 10 each at a price of 15/ share.
Close books of A & B Ltd, Journalize in C Ltd and prepare Balance Sheet.
Calculation of Goodwill for A Ltd
Year
1999
Goodwill =
Profits
Weights
Products
20,000 1
20,000
2000
80,000 2
1,60,000
2001
1,20,000 3
3,60,000
6
5,40,000
MODULE - 1
Calculation of P.C A Ltd
Fixed assets
Stock
Debtors
Bank
1,20,000
60,000
80,000
50,000
Less: Creditors
3,10,000
40,000
Add Goodwill
2,70,000
90,000
3,60,000
Calculation of P.C B Ltd
Fixed assets
Stock
Debtors
1,80,000
1,10,000
1,30,000
Less: Bank O/d
Crediotrs
4,20,000
90,000
90,000
2,40,000
Combined shares of A & B
= 24,000 shares
Total purchase consideration = 6,00,000
Total shares available = 24,000
Rupees per share =
Companies received shares of Rs.10 at premium of Rs. 15
A company will receive
B company will receive
31
32
Corporate Accounting - II
In the books of A Ltd
Realization A/c
To fixed assets
To stock
To debtors
To Bank
To equity share holders
1,20,000 By creditors
60,000 By AB Ltd[P.C]
80,000
50,000
90,000
40,000
3,60,000
4,00,000
4,00,000
C Ltd A/c
To realization
3,60,000 By equity shares of C
Ltd(14,400x25)
3,60,000
3,60,000
3,60,000
Equity shares in C Ltd A/c
To C Ltd
3,60,000 By equity share capital
By reserves
By realization
1,00,000
1,70,000
90,000
3,60,000
3,60,000
Equity share holders A/c
To equity shares of C Ltd
3,60,000 By equity shares holders
3,60,000
3,60,000
3,60,000
In the books of B Ltd
Realization A/c
To fixed assets
To stock
To debtors
1,80,000 By creditors
1,10,000 By bank O/d
1,30,000 By AB Ltd[P.C]
90,000
90,000
2,40,000
4,20,000
4,20,000
C Ltd A/c
To realization
2,40,000 By equity shares of C Ltd
2,40,000
2,40,000
2,40,000
MODULE - 1
Equity shares in C Ltd A/c
To C Ltd
2,40,000 By equity shares holders
2,40,000
2,40,000
2,40,000
Equity share holder s/c
To equity shares of C Ltd
2,40,000 By equity share capital
By reserves
2,40,000
2,40,000
2,40,000
To equity shares of C Ltd
To equity shares of C Ltd
2,40,000 By equity share capital
By reserves
2,40,000
2,40,000
2,40,000
Journal Entries
SL
NO
PARTICULARS
LF
DEBIT
1
Business purchase A/c
Dr
To liquidator of A Ltd
[Being business acquired for a consideration]
3,60,000
2
Business purchase A/c
Dr
To liquidator of B Ltd
[Being business acquired for a consideration]
2,40,000
Fixed Assets A/c
Dr
Stock A/c
Dr
Debtors A/c
Dr
Bank A/c
Dr
Goodwill A/c
Dr
To creditors
To business purchase A/c
[Being business acquired &assets & liabilities
taken over]
1,20,000
60,000
80,000
50,000
90,000
3
CREDIT
3,60,000
2,40,000
40,000
3,60,000
33
34
Corporate Accounting - II
4
Fixed Assets A/c
Dr
Stock A/c
Dr
Debtors A/c
Dr
To creditors
To Bank O/d
To business purchase
[Being assets & liabilities taken over transferred to
ledger]
1,80,000
1,10,000
1,30,000
5
Liquidator of A Ltd A/c
Dr
To share of C Ltd
[Being P.C paid by issue of shares at premium]
3,60,000
6
Liquidator of B Ltd A/c
Dr
To share of C Ltd
[Being P.C paid by issue of shares at premium]
2,40,000
7
Share capital A/c
Share premium A/c
To bank A/c
[Being shares issued to public]
1,20,000
60,000
Dr
Dr
90,000
90,000
2,40,000
3,60,000
2,40,000
1,80,000
Bank A/c
To balance B/d
To share capital
To share premium
50,000 By balance B/d
1,20,000 By balance C/d
60,000
90,000
1,40,000
2,30,000
2,30,000
MODULE - 1
35
Balance Sheet of C Ltd as on 31.12.2001
Equities and liabilities
Rs
Share capital
Authorized(44,000x10)
Issued capital(36,000x10)
4,40,000
3,60,000
Reserves and surplus
Share premium(12,000x5+24,000x15)
4,20,000
Long term loans
Current liabilities
creditors
1,30,000
9,10,000
Assets
Tangible assets
Other Fixed assets
Intangible assets
Goodwill
Noncurrent investments
3,00,000
90,000
Noncurrent assets
Current assets
Stock
Debtors
Bank
1,70,000
2,10,000
1,40,000
9,10,000
Illustration: 5: Two companies A company Ltd and B company Ltd agreed
to amalgamate to form a new company AB company Ltd. The new company
registered with an authorized capital of Rs. 40,00,000 divided into shares of
Rs. 10 each to take assets and liabilities of both the companies subject to the
following adjustment.
1.
2.
The goodwill of A company was agreed at 2 years purchase of
super profits at 10% return on capital employed. The average
profits of the company for the last 5 years was 2,50,000.
The goodwill of B Company was to be considered worthless.
36
Corporate Accounting - II
3.
4.
5.
6.
The plant and machinery of A.co Ltd were taken at 10,50,000
while the buildings of B company at 1,10,000.
The debentures of A company are to be discharged by the issue of
6% debentures.
The debtors and B/R of A Company were to be taken over subject
to a provision of 10% and 5% respectively.
The cash and debtors of B Company were to be retained by the
liquidator of that company to be utilized for paying of creditor,
B/P and O/S liability.
On the date of amalgamation Balance Sheet were:
Equities and Liabilities
A
Share capital (50,000 shares of 10 each)
Reserve funds
Employee compensation fund
Contingency reserve
5% debentures
Creditors
Employees P.F
Employees savings bank deposit
O/s liability
5,00,000
10,00,000
15,000
85,000
5,00,000
1,00,000
2,00,000
1,50,000
50,000
Total
26,00,000
Assets
A
Land and buildings
Plant and machinery
Furniture
Stock
Debtors
B/R
Bank balance
cash
7,00,000
11,00,000
2,00,000
3,00,000
1,50,000
40,000
1,00,000
10,000
Total
26,00,000
MODULE - 1
37
Balance Sheet of B Ltd
Equities and Liabilities
B
Share capital (1,50,000 shares of 10 each)
Creditors
B/P
O/S liabilities
15,00,000
1,00,000
50,000
20,000
Total
16,70,000
Assets
B
Goodwill
Land and building
P&M
Furniture
Stock
Debtors
Bank
P&L A/c
1,00,000
10,00,000
1,00,000
50,000
1,40,000
1,00,000
80,000
1,00,000
Total
16,70,000
AB co. Ltd allotted 1, 50,000 shares of Rs. 10 each respectively to each of the
amalgamating companies. Balance of amount due to A company was paid
in cash. Prepare necessary A/c’s in the book of A company and B Company.
Journalize in the books of AB company and prepare Balance Sheet there from
Soln:
calculation of P.C
A co. [Calculation of Capital employed]
Land and building
Plant and machinery
Furniture
Stock
Debtors
B/R
Bank
cash
7,00,000
10,50,000
2,00,000
3,00,000
1,35,000
38,000
1,00,000
10,000
25,33,000
Less: Employees P.F
Employees deposits
O/S liability
Creditors
Debentures
2,00,000
1,50,000
50,000
1,00,000
5,00,000
38
Corporate Accounting - II
Capital employed
15,33,000
Calculation of Goodwill
Average profit
Normal return on capital employed
(10% of 15,33,000)
2,50,000
(1,53,300)
Super profits
96,700
Goodwill = 96,700 x 2 = 1,93,400
Total net worth = 17,26,400 [15,33,000+1,93,400]
Payment of Net Worth
Shares 1, 50,000 x 10 = 15,00,000
Cash
= 2,26,400
Realization A/c
To land & Building
To plant and Machinery
To furniture
To stock
To debtors
To B/R
To bank
To cash
To Equity share holders
7,00,000
10,50,000
2,00,000
3,00,000
1,35,000
38,000
1,00,000
10,000
By creditors
By employees P.F
By employees savings
By debentures
By O/S liability
By employee
compensation fund
By AB co. Ltd[P.C]
27,41,400
1,00,000
2,00,000
1,50,000
5,00,000
50,000
15,000
17,26,400
27,41,400
AB Company Ltd
To realization
17,26,400 By equity shares in AB
Company Ltd
By cash
15,00,000
2,26,400
17,26,400
17,26,400
Equity shares in AB Company Ltd
To AB Co Ltd
17,26,400 By equity share holders
a/c
By cash
15,00,000
2,26,400
17,26,400
17,26,400
MODULE - 1
Equity share holders A/c
To equity shares in AB
Company Ltd
To cash
15,00,000 By equity share capital
By Reserve fund
2,26,400 By Contingency reserve
By realization
5,00,000
10,00,000
85,000
1,41,400
17,26,400
17,26,400
B company Ltd
1,30,000 shares of 10 each – 13,00,000
Realization A/c
To land & Building
To plant and Machinery
To furniture
To stock
To Goodwill
10,00,000 By AB Co. [P.C]
1,00,000 By Equity share holders
50,000 A/c
1,40,000
1,00,000
13,00,000
90,000
13,90,000
13,90,000
AB Co.
To realization
13,00,000 By equity shares in AB
Co Ltd
13,00,000
13,00,000
13,00,000
Equity shares in AB Company Ltd
To AB Co Ltd
13,00,000 By equity share holders
a/c
13,00,000
13,00,000
13,00,000
Creditors A/c
To bank
1,20,000 By balance B/d
By O/s liabilities
1,00,000
20,000
1,20,000
1,20,000
Debtors A/c
To balance B/d
1,00,000 By bank
1,00,000
1,00,000
1,00,000
39
40
Corporate Accounting - II
B/P A/c
To bank
50,000 By balance B/d
50,000
50,000
50,000
Bank A/c
To balance B/d
To debtors
80,000 By creditors
1,00,000 By O/S Liability
By B/P
By equity share holders
1,00,000
20,000
50,000
10,000
1,80,000
1,80,000
Equity share holders A/c
To equity shares in AB Co
Ltd
To realization
To P&L A/c
To Bank
13,00,000 By Equity share capital
90,000
1,00,000
10,000
15,00,000
15,00,000
15,00,000
Journal Entries in AB Ltd
SL
NO
PARTICULARS
LF
DEBIT
1
Business purchase A/c
To liquidator of X co.
[Being business acquired of A co. for a
consideration]
Dr
17,26,400
2
Business purchase A/c
To liquidator of B co.
[Being business acquired of B co. For a
consideration]
Dr
13,00,000
CREDIT
17,26,400
13,00,000
MODULE - 1
3
4
5
6
7
Land & Buildings A/c
Dr
Plant & machinery
Dr
Furniture A/c
Dr
Stock A/c
Dr
Debtors A/c
Dr
B/R A/c
Dr
Bank A/c
Dr
Cash A/c
Dr
Goodwill (B/F) A/c
Dr
To creditors
To Debentures
To O/S Liability
To employees provident fund
To employee savings
To liquidator of A co.
[Being assets and liabilities taken over transferred
to ledger, balance to goodwill]
7,00,000
10,50,000
2,00,000
3,00,000
1,35,000
38,000
1,00,000
10,000
1,93,400
Land & Buildings A/c
Dr
Plant & machinery
Dr
Furniture A/c
Dr
Stock A/c
Dr
To liquidator of B co.
To capital reserve
[Being assets and liabilities taken over transferred
to ledger, balance to goodwill]
11,00,000
1,00,000
50,000
1,40,000
Liquidator of A Co. Ltd A/c
Dr
To shares of AB Co. Ltd
[Being P.C discharged by issue of shares and cash]
17,26,400
Liquidator of B Co.
To equity share of AB co. Ltd
[Being P.C discharged by issue of shares]
13,00,000
Dr
1,00,000
5,00,000
50,000
2,00,000
1,50,000
17,26,400
13,00,000
90,000
17,26,400
Employee compensation fund A/C Dr
To Amalgamation adjustment reserve
( Being statutory reserve incorporated)
13,00,000
15,000
15,000
Cash A/c
To balance B/d
To balance C/d
1,00,000 By liquidator of A Ltd
1,26,400
2,26,400
2,26,400
2,26,400
41
42
Corporate Accounting - II
Balance sheet of AB Company Ltd
Equities and Liabilities
Share capital
Authorized capital
Issued and subscribed capital
Rs.
40,00,000
28,00,000
Reserves and surplus
Employee compensation fund
Long term loans
Debentures
5,00,000
Current liability
Creditors
O/S liability
Employees P.F
Employees savings deposits
Bank over draft
1,00,000
50,000
2,00,000
1,50,000
1,26,400
15,000
39,41,400
Assets
Tangible assets
Land & Building
Plant & Machinery
Furniture
Intangible assets
Goodwill
Less: Capital reserve
18,00,000
11,50,000
2,50,000
1,93,400
(90,000)
Noncurrent investment
Noncurrent assets
Amalgamation adjustment reserve
Current Assets
Stock
Debtors
B/R
Cash
Rs.
1,03,400
15,000
4,40,000
1,35,000
38,000
10,000
39,41,400
1.7 Summary
The concept of amalgamation refers to the liquidation of two or more
companies and the formation of a new company. Purchase consideration is
MODULE - 1
43
the amount payable by the purchasing company to the shareholders of the
selling company. It is calculated under three methods – Net Assets Method,
Net Payment Method and Exchange Method. Two types of accounting
treatment are followed – Pooling Interest Method (Merger Method) and
Purchase Method (Purchase Method of Amalgamation). The steps followed
while solving problems are – calculation of purchase consideration, discharge
of purchase consideration, closing the accounts of transferor company,
opening entries in the books of the transferee company and preparation of
balance sheet after amalgamation.
1.8 Questions
Terminal questions
2 Mark
1.
2.
3.
4.
What are the features of amalgamation?
What are the two types of amalgamation?
What is included under trade liabilities?
What is meant by purchase consideration?
5 Mark
1.
2.
3.
What are the features of amalgamation in the nature of merger?
What are the features of amalgamation in the nature of purchase?
Differentiate between pooling interest method of accounting and
purchase method of accounting.
14 Mark
1.
Following are the balance sheets of Arun Ltd. and Udaya Ltd.
which agree to amalgamate their business and form a new
company called “Arunodaya Ltd.” with an authorized capital of
Rs.25,00,000 divided into 25,000 shares of Rs.100 each:
44
Corporate Accounting - II
Equities and Liabilities
Share capital
Shares of 100 each
Reserves and surplus
General reserve
Profit and loss account
Long term loans
8% debentures
Public deposits
Current liabilities
Creditors
Bills payable
Arun
Udaya
5,00,000
4,00,000
90,000
1,00,000
-
75,000
-
2,00,000
1,00,000
25,000
50,000
15,000
39,41,400
Assets
Intangible assets
Good will
Fixed assets
Buildings
Plant and machinery
Current assets
Investments
Stock
Debtors
Bank
Profit and loss account
Arun
Udaya
1,00,000
37,5000
1,00,000
2,50,000
1,25,000
2,00,000
2,50,000
75,000
40,000
75,000
-
1,50,000
50,000
30,000
35,000
8,90,000
8,90,000
37,500
You are required to calculate purchase consideration, pass the journal entries
in the books of Arun Ltd. and Udaya Ltd.
MODULE - 1
2.
45
The following is the Balance Sheet of Eastern Sugar Co. Ltd.
Equities and Liabilities
Share capital
Share capital ( share of Rs 10 each)
Reserves and surplus
Profit and loss account
Long term loans
5% debentures
Current liabilities
Creditors
Amount
3,00,000
50,000
70,000
30,000
4,50,000
Assets
Intangible assets
Goodwill
Current assets
Stock
Debtors
Amount
70,000
1,80,000
2,00,000
4,50,000
The following is the balance sheet of Western Sugar Co. Ltd.
Equities and Liabilities
Share capital
Share capital ( share of 10 each )
Reserves and surplus
Profit and loss account
Current liabilities
Creditors
Amount
2,00,000
42,000
58,000
3,00,000
Assets
Current assets
Stock
Debtors
Amount
80,000
2,20,000
3,00,000
The above two companies amalgamate and form a New Company Called
East-West Sugar Co. Ltd. The average profits of Eastern and Western Sugar
Companies have been Rs.30,000 and Rs.20,000 respectively. East-West Sugar
Co. Ltd. agree to take over both the companies for a sum of Rs.6,00,000 and
in addition to discharge all liabilities Rs.1,00,000 to be paid in cash and the
balance in shares at face value.
46
Corporate Accounting - II
Debtors of the two companies to be written off by 10%. The profit on
conversion is to be divided between the shareholders of two companies in the
same proportion as the profits previously earned by them.
Prepare ledger accounts to close the two sugar companies and pass opening
entries is the books of East-West Sugar Co. Ltd.
3.
The following are the balance sheets of A Co. Ltd. and B Co. Ltd.
as on 31-12-2001. On that date they decided to amalgamate their
business and form a new AB Co. Ltd. The authorized capital of
AB Co. Ltd. will be Rs.14,00,000 divided into Rs.10,00,000 equity
shares of Rs. 10 each and Rs.4,00,000 12% preference shares of
Rs.100 each.
The purchase consideration was agreed as under:
(1)
A Co. Ltd.: The assets and liabilities were taken over at book
values except:
a)
Land & Buildings valued at Rs. 1,75,000; and
b)
Plant & Machinery at 10% less than the book value.
The consideration being:
c)
Equity shareholders of A Co. Ltd. will be paid cash of Rs. 5
per share, and
d) Four equity shares of Rs. 10 each in AB Co. Ltd. for every
three shares in A Co. Ltd.
(2) B Co. Ltd.: All the assets except goodwill and bank balance
are taken over at book values and the liabilities with respect to
creditors only are taken over, whereas bills payable were to be
paid off before amalgamation by B Co. Ltd.
The consideration being:
The equity shareholders of B Co. Ltd. will receive:
(i)
Rs.1,00,000 12% preference shares of Rs.100 each fully paid;
MODULE - 1
47
(ii)
Three equity shares of Rs.10 each in AB Co. Ltd. in exchange for
every four equity shares in B Co. Ltd.; and
(iii) The balance in cash of the remaining equity shares of AB Co. Ltd.
20,000 equity shares were issued to public and the cash was duly
received.
Write up the necessary ledger accounts to close the books of A Co. Ltd. and
B Co. Ltd.
4.
A Ltd. and B Ltd., doing business in the same field, decided to
amalgamate to avoid unnecessary competitions and secure
economy in production and marketing. Following were the
Balance Sheets as on 31st December 2001.
Equities and Liabilities
Share capital
Equity share of 10 each
8% preference shares of 10 each
Reserves and surplus
Reserve Fund
P & L A/c
Workmen’s SB A/c
Export Profit Reserve
Long term loans
10 % debentures of 100 each
8% debentures of 100 each
Current liabilities
Other liabilities
Assets
Intangible assets
Good will
Fixed assets
Land and buildings
Plant and machinery
Furniture and fittings
Current assets
Investments
Stock
Sundry Debtors
Bills Receivable
Cash and Bank
Miscellaneous expenses
A co ltd
D co ltd
10,00,000
5,00,000
5,00,000
3,00,000
1,60,000
70,000
1,30,000
36,000
1,10,000
50,000
-
5,00,000
-
2,50,000
2,50,000
3,14,000
26,46,000
15,24,000
A co ltd
D co ltd
-
1,00,000
15,30,000
4,80,000
30,000
8,10,000
2,40,000
26,000
20,000
3,05,000
1,25,000
19,000
74,000
10,000
1,87,000
69,000
11,000
38,000
63,000
33,000
26,46,000
15,24,000
48
Corporate Accounting - II
The amalgamation was effected on 1-1-2002. The purchase consideration
payable by the new company AB Ltd. was as follows:
For A Ltd.
1.
2.
3.
Equity shareholders to get one equity share of Rs.10 each in AB
Ltd., valued at Rs.12 per share, for every equity share in A Ltd.
8% Preference shareholders to get 10% preference shares in AB
Ltd., equal to their claim.
10% Debenture holders to get sufficient 12.5% Debentures of AB
Ltd. so as to get the same amount of interest they were getting in
A Ltd.
For B Ltd.
1.
2.
3.
4 Equity shares of Rs.10 each in AB Ltd., valued at Rs.12 per share
for every 5 equity shares in B Ltd.
8% Preference shareholders to get 90% of their claim in 10%
Preference shares in AB Ltd., in full satisfaction.
8% Debenture holders to get sufficient 12.5% Debentures of AB
Ltd. so as to get the same amount of interest as they were getting
in B Ltd.
AB Ltd, took over all the assets and liabilities of both companies at their
book values except Land and Buildings, Plant and Machinery and Stock of
A Ltd., which were taken over at Rs.18,50,000, Rs.3,20,000 and Rs.2,80,000
respectively and investments of B Ltd. at Rs.16,000. The liquidation Expenses
of A Ltd., came to Rs.13,000 and that of B Ltd. to Rs.9,000. Balance of Cash
and Bank was transferred to AB Ltd.
The Authorized capital of AB Ltd. is 2,50,000 Equity Shares of Rs.10 each and
1,00,000, 10% Preference shares of Rs.10 each. Export profit reserve (statutory
Reserve) is to be maintained for three more years.
Prepare Purchase Consideration statements, close the books of A Ltd. and B
Ltd. and prepare opening Balance Sheet of AB Ltd. under amalgamation in
the nature of purchase.
MODULE - 1
5.
49
Deva Ltd., and Asura Ltd., carrying on similar business agreed
for amalgamation by transferring their undertaking to a new
company, Devasura Ltd.
The balance sheets of the two companies as on the date of transfer were as
follows:
Equities and Liabilities
Share capital
Equity Shares of Rs.100 each
6% Preference Shares of Rs.100 each
Reserves and surplus
General Reserve
P & L A/c
Long term loans
5% Debentures
Current liabilities
Sundry creditors
Assets
Fixed assets
Land and buildings
Plant and machinery
Furniture and fittings
Current assets
Stock
Debtors
Cash at bank
Cash in hand
Preliminary expenses
D co ltd
A co ltd
5,00,000
5,00,000
3,00,000
2,50,000
2,00,000
1,15,000
70,000
50,000
-
40,000
75,000
35,000
13,90,000
7,50,000
D co ltd
A co ltd
4,65,000
5,60,000
79,000
2,55,000
3,58,000
34,000
81,500
56,000
87,000
6,400
52,000
24,600
22,500
3,900
55,100
-
13,90,000
7,50,000
The terms of agreement were as follows:
1.
The purchase consideration consisted of:
a)
The assumption of liabilities of both the companies
b)
The discharge of the debentures in Asura Ltd. at a premium
of 5% by Devasura Ltd. by the issue of 7% debentures
c)
The issue of 10 equity shares of Rs.10 each at a premium of
Rs.2 per shares for each preference share held in both the
companies
50
Corporate Accounting - II
d)
2.
3.
The issue of 10 equity shares of Rs.10 each at a premium
of Rs.2 per share and Rs.22 in cash for each equity share in
Deva Ltd., and 5 equity shares of Rs.10 each at a premium
of Rs.2 per share and Rs.80 in cash for every equity share in
Asura Ltd
All the assets and liabilities of the two companies were taken over
at their book values except that a provision @ 5% to be raised on
debtors
In order to raise working capital and to pay the purchase
consideration Devasura Ltd. decided to issue 30,000 equity shares
of Rs.10 each at a premium of Rs.2.50 per share.
Prepare ledger accounts in the books of Deva ltd., pass opening entries and
prepare balance sheet in the books of a new company.
6.
The following are the Balance Sheet of X Ltd and Y Ltd. as on 31st
March 2005.
Equities and Liabilities
Share capital
Equity share capital (Rs 10 each)
14% preference share capital (Rs 100 each)
Reserves and surplus
Export Profit Reserve (required under Income Tax
Act)
Reserve (Statutory)
Profit & Loss A/c
Long term loans
13% Debentures (Rs.100 each)
Current liabilities
Trade creditors
Other current liabilities
X co ltd
Y co ltd
50,00,000
22,00,000
30,00,000
17,00,000
3,00,000
2,50,000
7,50,000
5,00,000
5,00,000
3,50,000
4,50,000
2,00,000
3,50,000
1,50,000
99,00,000
66,00,000
MODULE - 1
Assets
Fixed assets
Land and buildings
Plant and machinery
Furniture and fittings
Current assets
Investments
Debtors
Cash at bank
Stock
X co ltd
51
Y co ltd
25,00,000
32,50,000
5,75,000
15,50,000
17,00,000
3,50,000
7,00,000
9,00,000
7,25,000
12,50,000
5,00,000
10,30,000
5,20,000
9,50,000
99,00,000
66,00,000
XY Ltd. is formed to take over X Ltd. and Y Ltd., for the following consideration.
X Ltd.
1.
2.
Issue of 4,80,000 Equity Shares of Rs.10 each of XY Ltd. at par to
the equity shareholders.
Issue of 15% preference shares of Rs.100 each of XY Ltd. to
discharge the preference shareholders of X Ltd. at 10% premium.
Y Ltd.
1.
2.
Issue of 3,50,000 equity shares of Rs.10 each of XY Ltd., at par, to
the equity shareholders.
Issue of 15% preference shares of Rs.100 each of XY Ltd. and
discharge the preference shareholders of Y Ltd. at 10% premium.
The debentures of X Ltd. and Y Ltd. will be converted into equivalent number
of debentures of XY Ltd. the statutory reserves are to be maintained for two
more years.
Calculate the purchase consideration, show the opening entries and balance
sheet of XY Ltd. on the assumption that the amalgamation is in the nature of
merger and in the nature of purchase.
52
Corporate Accounting - II
1.9 Answers
Answers:
2 Mark
1.
2.
3.
4.
Liquidation of two or more companies and
- Formation of a new company.
Amalgamation in the nature of purchase and in the nature of
merger.
Creditors and bills payable
Para 3(g) of 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 cash or other assets
by the transferee company to the shareholders of the transferor
company”.
5 Mark
1.
2.
3.
Refer 1.3.1.
Refer 1.3.2.
Refer 1.6.1.
14 Mark
1.
2.
(Answers: P/C Rs.6,90,000 and Rs.3,62,500)
(Answers:
Eastern company
P/C
Profit on conversion
Realisation
Western company
3,60,000
2,40,000
30,000
20,000
10,000 (profit)
2,000 (loss)
MODULE - 1
3.
Answers:
A company
B company
P/C
Realisation
4.
5,50,000
4,50,000
1,50,000 (profit)
55, 000 (loss)
Answers:
A company
P/C
B company
17,00,000
7,50,000
Realisation
33,000 (profit)
1,47,000 (loss)
Debentures
4,00,000
1,60,000
Balance sheet 41,29,000
5.
Answers:
Deva ltd
P/C
Asura ltd
13,10,000
7,20,000
Realisation
49,900 (loss)
1,47,000 (loss)
Debentures
4,00,000
1,60,000
Balance sheet 22,07,000
6.
Answers:
P/C
72,20,000 53,70,000
Balance sheet
1,65,00,000 (Merger method)
1,71,00,000 (Purchase method)
53
MODULE - 2
Absorption
MODULE - 2
MODULE - 2
55
Absorption
Structure
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Introduction
Meaning and types of Absorption
Methods of Accounting Absorption
Purchase consideration
2.4.1 Methods of Calculating Purchase Consideration
2.4.2 Discharge of Purchase Consideration
Summary
Terminal Questions
Answers
Learning Objectives
•
•
To know the meaning of certain key items used in the chapter.
To make appropriate accounting in the books of both vendor and
purchasing companies.
2.1 Introduction
The term “Absorption” means taking over the business of one or more
companies by a company already in existence.
2.2 Meaning and types of Absorption
Absorption refers to purchase of an existing company or companies by
another existing company. It is not governed by AS 14. e.g. A Ltd acquires
the business of B Ltd. Here A Ltd is purchasing company and B Ltd is Vendor
Company.
56
Corporate Accounting - II
Reasons for absorption:
1.
2.
To avoid cut-throat competition
To obtain economies of large scale production.
Differences between Absorption and Amalgamation:Amalgamation
Absorption
1. It is governed by AS 14 promulgated by ICAI
1. It is not governed by AS–14.
2. Involves formation of a new company.
2. Does not involve formation of new company.
3. Liquidates two or more existing companies
3. Liquidates only one existing company.
Types of Absorption:Legally, absorption is covered by amalgamation. So, absorption can be of two
types:
a)
In the nature of purchase
b)
In the nature of merger.
In most of the cases, absorption is in the nature of purchase.
2.3 Method of Accounting
Based on the nature of absorption, there are two types of accounting methods.
a)
b)
Pooling of interest method (for merger)
Purchase method (for purchase).
Steps involved in absorption of companies:
a)
b)
c)
d)
Calculation of purchase consideration
Discharge of purchase consideration
Closing the books of vendor/transferor company
Passing opening entries in the books of transferee/ purchasing
company.
2.4 Purchase Consideration
MODULE - 2
57
Refers to the consideration payable by purchasing company to vendor
company for taking over its assets and liabilities.
Para 3(g) of AS–14 defines the term Purchase Consideration as the “aggregate
of the shares and other securities issued and the payment made in the form
of cash or other assets by the transferee company to the shareholders of the
transferor company”.
2.4.1 Methods of calculating purchase consideration
There are four methods, they are:
a)
b)
c)
Lumpsum Method: In this method, the amount of consideration
will be given directly, hence no calculation is required.
Intrinsic worth Method: This method is applied only when it is
specifically asked to do. Calculation is done on the basis of real
or intrinsic value of Vendor Company. For example, in the paid
up capital of vendor company consisting of 50,000 equity shares
of Rs.10 each, fully paid up, the intrinsic value of shares of the
vendor company is Rs.12 each. Then based on this method, the
consideration will be Rs.12 50,000, Rs. 6,00,000.
Net Assets / Net Worth Method: In this case, purchase
consideration is calculated based on the net worth of the assets
taken over by the transferee company.
Net worth = Agreed value of assets taken (-) Agreed value of
liabilities taken.
Points to be remembered for calculating net worth:
•
•
•
Agreed value of these assets added are only those which are taken
over by purchasing company.
Fictitious assets are ignored.
Agreed value of these liabilities are only deducted which are taken
over the transferee company.
58
Corporate Accounting - II
•
•
d)
Incase of undistributed profits like credit balance of profit & loss
account, reserves are not deducted.
Staff Provident Fund, Employees Profit Sharing Fund and other
liabilities are treated as liability to outsiders.
Net Payment Method: In this method Purchase Consideration is
calculated by adding the various payments in form of shares, cash
etc., made by transferee company. Even though the liabilities are
assumed by purchasing company, they are not deducted.
How to identify the method of purchase consideration, applicable for the
given problem?
1.
2.
3.
4.
If the problem specifies the method to be adopted – adopt the
method specified.
If the method is not specified in the problem, but the amount of
purchase consideration is given, it is lumpsum method and does
not need any calculation.
When the payments made by purchasing company to vendor
company are given, with the statement “Balance in…..”, then,
“Net Assets Method” must be adopted.
When the payments made by purchasing company to vendor
company are given liability wise or any other item-wise without
the statement “Balance in….”, then, “Net Payments Method” must
be adopted.
2.4.2 Discharge of Purchase Consideration
Refers to the form specified, in which the purchase consideration is to be
disbursed by the transferee company to the transferor company.
Closing the books of vendor company:
Closing vendor company books involves the following steps and entries.
While solving problems, students are advised to follow the below order
strictly to avoid confusion in both absorption in the nature of purchase and
absorption in the nature of merger.
MODULE - 2
59
Accounting entries in the books of Vendor Company.
1.
For transfer of various assets including cash at their book value
Realisation Account Dr.
To Concerned Asset A/c
Note: Cash is transferred to Realisation Account, only if it is taken over by the
Purchasing Company.
2.
For transfer of various liabilities including debentures at their
book value.
Concerned Liability A/c Dr.
To Realisation Account.
3.
For purchase consideration due
Purchasing Company Account Dr.
To Realisation Account
4.
For the receipt of purchase consideration
Equity Shares in Purchasing Company A/c
Dr.
Preference Shares in Purchasing Company Account
Dr.
Cash/Bank Account Dr.
To Purchasing Company A/c
5.
For the payment of realisation expenses
(a) If it is paid By vendor company
Realisation A/c Dr.
To Cash/Bank A/c
(b) If it is paid by purchasing company
(i) For making payment
Purchasing Company A/c Dr.
To Cash/ Bank A/c
(ii) For collecting the amount from
purchasing company
Cash/ Bank A/c Dr.
To Purchasing Company A/c
60
Corporate Accounting - II
6.
For sale of assets not taken over by the purchasing company
Cash/ Bank Account Dr.
To Realisation Account
7.
For payment of liabilities not taken over by the purchasing
company (including debentures if not taken over)
Realisation AccountDr.
To Cash/ Bank Account
8.
For purchase share capital due
(i) Payable at par
Preference Share Capital A/c Dr.
To Preference Shareholder’s A/c
(ii) Payable at a higher value
Preference Share Capital A/c
Dr.
Realisation Account Dr.
To Preference Shareholder’s A/c
(iii) Payable at a lower value
Preference Share Capital A/c
Dr.
To Realisation Account
To Preference Shareholders A/c
9.
For the final payment made to preference shareholders
Preference Shareholders A/c
Dr.
To Cash/ Bank Account
To Share in Purchasing Company Account (if distributed)
10. For closing realisation account
(i) In case of profit
Realisation Account Dr.
To Equity Shareholders Account
(ii) In case of loss
Equity Shareholder A/c Dr.
To Realisation A/c
11. For transfer of share capital, reserves and profits
Equity Share Capital Account Dr.
Reserve Account Dr.
Profit and Loss Account Dr.
To Equity Shareholder’s Account
MODULE - 2
61
12.
For transfer of preliminary Expenses, underwriting commission,
Discount on issue of share and debentures and profit and loss
account (loss) etc.
Equity Shareholder’s Account Dr.
To Preliminary Expenses Account
To Underwriting Commission Account
To Discount on Issue of Shares and Debentures Account
To Profit and Loss Account
13. For the final payment made to Equity Shareholder’s
Equity Shareholder’s Account Dr.
To Equity Shares in purchasing company Account
To Cash/ Bank Account
Note: When purchasing company issues debentures for discharge of vendor
company debentures, in the books of vendor company the debentures must
be shown as ‘taken over’ by the purchasing company, and later in the books
of purchasing company the discharge must be recorded by way of entry for
exchange (as per requirements of AS 14)
IV. Opening Entries in the Books of Purchasing Company:
The following entries will be passed in the books of Purchasing Company in
the case of Absorption.
1.
For showing Purchasing Consideration Due
Business Purchase A/c Dr.
To Liquidator of Vendor Company A/c
(with the amount of purchase consideration)
2.
For discharging purchase consideration
Liquidator of Vendor Company A/c Dr.
To Share Capital A/c
To Share Premium A/c or Securities Premium A/c
To Bank A/c, etc.
(with the amount of discharge of Purchase Consideration)
62
Corporate Accounting - II
3.
For incorporating Assets and Liabilities taken over
(a) In case of Absorption in the nature of merger (pooling of
interest method)
Various Assets (Taken over) A/c Dr.
To Various Liabilities (Taken over) A/c
To Business Purchase A/c
To Reserve A/c (Balance figure).
(b) In case of Absorption in the nature of purchase (Purchase
Method)
Various Assets (Taken over) A/c Dr.
Amalgamation Adjustment A/c Dr.
(to the extent of statutory reserves)
Goodwill All (Balancing figure, if any) Dr.
To Various Liabilities (Taken over) A/c
To Statutory Reserves A/c
To Business Purchase A/c
To Capital Reserve A/c (Balancing figure, if any)
Note:
1.
On incorporating assets and liabilities taken over, if his total
credit is more than total debit, the balancing figure is Goodwill.
On the other hand, if the total debit is more than total credit, the
balancing figure is Capital Reserve, on incorporation. Either of
this only can result.
2.
When there is no need for maintaining statutory reserves, the
following reversal entry must be passed.
Statutory Reserve Account Dr.
To Amalgamation Adjustment Account
3.
For including Formation Expenses
Formation Expense/ Preliminary Expenses A/c Dr.
To Bank A/c
4.
For payment of realisation or liquidation expenses of vendor
company:
Goodwill Account or Capital Reserve Account Dr.
To Bank Account
MODULE - 2
63
5.
For making payment to Debentures and other liabilities of Vendor
Company
Debentures/ Item of Liability A/c Dr.
(of Vendor Company)
To Debentures A/c.
To Share Capital A/c, etc.
Problem Solved one:
1) Illustration:
With a view to expand business and also affect economies, the Bright Light
Limited and Sun Light Limited decided to amalgamate and for this purpose
the Bright Light Limited was absorbed by Sun Light Limited. The assets and
liabilities of the two companies are given below:
Bright Light Limited. Cash Rs.5,000. Investment Rs.10,000, Reserves,
Rs.10,000. debentures Rs.60,000, Machinery Rs.70,000, Book Debts
Rs.45,000, Creditors Rs.30,000, Workmen Compensation Reserve Rs.10,000,
Stock Rs.10,000 and Goodwill Rs.20,000.
Sun Light Limited. Capital Rs.40,000, Investments Rs.10,000, Reserves
Rs.25,000, Debentures Rs.50,000, Machinery Rs.60,000, Book Debts
Rs.10,000, Creditors Rs.20,000, Workmen Compensation Fund Rs.5,000,
Stock Rs.5,000 and Cash Rs.2,000.
You are told that the shareholders of Bright Light Limited consisted of Rs.100
shares, called Rs.50 and that of Sun Light Limited Rs.100 shares called Rs.40.
It was agreed that the shareholders of Bright Light Limited were to be issued
such number of Re.1 shares of Sun Light Limited at their intrinsic value
as would equal the intrinsic value of the Bright Light Limited shares. The
debtors of Sun Light Limited include Rs.5,000 due by Bright Limited and the
investments include Rs.5,000 paid up value of shares in Bright Light Limited.
The stocks of Bright Light Limited include Rs.2,000 worth of stock bought
from Sun Light Limited invoiced at 10% profit on sale price by Sun Light
Limited.
64
Corporate Accounting - II
Give journal entries in Sun Light’s Books and also the Balance Sheet of Sun
Light Limited after amalgamation taking amalgamation in the nature of
purchase.
Solution:
Calculation of Intrinsic Value of Shares of Bright Ltd.
Balance sheet of Bright Light Limited is prepared to find out capital which is
not given in the question.
Balance sheet of Bright Light Limited
Equities and liabilities
Share capital
Share Capital (Balancing figure) 1,000 shares of
Rs.100 each Rs.50 called up
Reserves and surplus
Reserves
Workmen’s Compensation
Long term loans
Debentures
Current liabilities
Creditors
Total
Amount
50,000
10,000
10,000
60,000
30,000
1,60,000
Assets
Intangible assets
Goodwill
Fixed assets
Machinery
Current assets
Investments
Stock
Debtors
Cash
Total
Amount
20,000
70,000
10,000
10,000
45,000
5,000
1,60,000
Total Assets
1,60,000
Less: Liabilities
Debentures
60,000
Creditors
30,000
90,000
Intrinsic worth of 1,000 shares
70,000
MODULE - 2
65
 Rs.70,000 
Therefore, intrinsic value per share  1,000  Rs.70.


Calculation of Intrinsic Value of Shares of Sun Light Limited
Balance sheet of Sun Light Limited is prepared to find out the value of goodwill
(not given in the question). There is an excess of liabilities over assets and the
difference has been assumed to be goodwill.
Balance sheet of Sun Light Limited
Equities and liabilities
Share capital
Share Capital: 1,000 shares of Rs.100 each Rs.40
per share called up
Reserves and surplus
Reserves (including Rs.2,000 resulting from the
increase in the value of shares in Bright Light Ltd.)
Workmen’s Compensation
Long term loans
Debentures
Current liabilities
Creditors
Total
40,000
27,000
5,000
50,000
20,000
1,42,000
Assets
Intangible assets
Goodwill(Balancing figure)
Fixed assets
Machinery
Current assets
Investment in Bright Light Ltd 100 shares @ Rs.70
per share)
Rs.7,000
Other investments
Rs.5,000
Stock
Debtors
Cash
Total
Amount
Amount
53,000
60,000
12,000
5,000
10,000
2,000
1,42,000
Note: Sun Light Limited has an investment of Rs.5,000 in Rs.50 paid-up shares
Rs. 5,000
of Bright Light Limited. Therefore, number of shares held is
=100.
Rs.500
66
Corporate Accounting - II
the intrinsic worth of a share of Bright Light Ltd. is Rs.70 share, so value of
100 shares is Rs.7,000 (i.e., 100 Rs.70).
Intrinsic value of shares of Sun Light Limited is as follows:
Total Assets
1,42,000
Less: Liabilities
Debentures
50,000
Creditors
20,000
70,000
Intrinsic worth of 1,000 shares
72,000
 Rs.72,000 
Therefore, intrinsic value per share 
 Rs.72
 1,000 
Calculation of Purchase Consideration:
Purchase Price of the business of Bright Light Limited is equal to the intrinsic
value of shares held by shareholders (other than Sun Light Limited) of Bright
Light Limited.
Total number of shares of Bright Light Limited
Less: Number of shares held by Sun Light Ltd.
Shares held by outsiders
Intrinsic worth of 900 shares @ Rs.70 is Rs. 63,000.
Intrinsic value of a share of Sun Light Ltd. is Rs.72.
= 1,000
100
900
Hence, the number of shares to be issued by Sun Light Ltd. to pay the
Rs.63,000
purchase price of Rs.63,000 is
= 875 shares. Therefore, purchase
Rs.72.
consideration is 875 shares of Rs.100 each. Rs.40 paid up (875 Rs.40) =
Rs.35,000.
Note. While calculating purchase consideration, shares have been valued at
their paid-up value of Rs.40 each and not at the intrinsic value of Rs.72 each.
MODULE - 2
Journal Entries in Books of Sun Light Ltd.
Date
Particulars
Rs.
Business Purchase A/c
To Liquidators of Bright Ltd.
(Being the amount of purchase consideration)
Dr. 35,000
Machinery Account
Investment Account
Stock Account (Rs. 10,000 less 10% on Rs. 2,000)
Debtors Account
Cash Account
To Debentures Account
To Creditors Account
To Business Purchase A/c
To Capital Reserve Account
(Balance Figure)
(Being assets and liabilities taken over)
Dr.
Dr.
Dr.
Dr.
Dr.
Rs.
35,000
70,000
10,000
9,800
45,000
5,000
60,000
30,000
35,000
14,800
Liquidators of Bright Light Ltd.
Dr.
To Share Capital Account
(Being payment of purchase price by issue of 875 shares of
Rs. 100 each, Rs. 40 paid up)
35,000
Sundry Creditors Account
Dr.
To Sundry Debtors Account
(Being cancellation of amount due by Bright Light Ltd)
5,000
Capital Reserve Account
Dr.
To Investment Account
(Being investment in shares of Bright Light Ltd., eliminated
on takeover of Bright Ltd’s business)
7,000
35,000
5,000
7,000
67
68
Corporate Accounting - II
Balance Sheet of Sun Light Ltd.
Equities and liabilities
Share capital
Authorized Capital
…shares of Rs.100 each
Paid-up capital
1,875 shares of Rs.100 each, Rs.40 paid up (Of the
above 875 shares have been issued in pursuance of
the purchase of business of Bright Light Ltd.)
Reserves and surplus
Capital Reserve
Reserves
Workmen’s Compensation
Long term loans
Debentures
Current liabilities
Creditors
Amount
75,000
7,800
27,000
5,000
1,10,000
45,000
2,69,800
Assets
Intangible assets
Goodwill
Fixed assets
Machinery
Current assets
Investments
Stock
Debtors
Cash
Total
Amount
53,000
1,30,000
15,000
14,800
50,000
7,000
2,69,800
2) Illustration 24:
(Problem under Business Purchase Method with Calculation of Purchase
Consideration under Net Assets Method)
The Balance Sheet of Novelty Company as on 31-12-2001 was as follows:
MODULE - 2
Equities and liabilities
Share capital
2000 shares at Rs.100 each
Reserves and surplus
Reserve fund
Long term loans
5% Debentures
Current liabilities
Loan from X (A Director)
Creditors
69
Amount
2,00,000
20,000
1,00,000
40,000
80,000
4,40,000
Assets
Intangible assets
Goodwill
Fixed assets
Buildings
Machinery
Current assets
Stock
Debtors
Cash at bank
Miscellaneous expenses
Discount on Debentures
Total
Amount
35,000
85,000
1,60,000
55,000
65,000
34,000
6,000
4,40,000
This company was agreed to be purchased by Marvel Company on the
following terms:
(a)
(b)
(c)
Marvel Company to acquire all assets at book value less 10%
except cash, which is retained in the Novelty Company. The
goodwill is to be valued on the following lines:
The Goodwill is to be valued at 4 years purchase of the excess
average profit of 5 years over 8% of the combined share capital
and reserve fund.
Marvel Company to take over creditors at 5% Discount.
The purchase consideration to be paid as to Rs.1,50,000 in cash
and the balance in shares of Rs.10 each, valued at Rs.12,50 each.
The average profits for the last years is Rs.30,100, the expenses of realisation
are Rs.4,000
70
Corporate Accounting - II
Prepare the necessary ledger accounts in the books of Novelty Company and
journal entries in the books of Marvel Company.
Solution:
Note: Since all the assets are not taken over at book value by transfer company,
it cannot be amalgamation in the nature of merger (i.e., pooling of interest
method cannot be used).
Note: I. Calculation of Purchase Consideration:
The problem states that purchase consideration should be paid upto Rs.
1,50,000 in cash and ‘Balance in Shares’. Hence, Net Assets Method of
calculating Purchase Consideration must be adopted.
(i)
Calculation of Value of Goodwill:
Average Profits of last 5 years
30,100
Less: 8% of combined share capital and reserve fund 8% of (Rs.2,00,000 + Rs.20,000)
17,600
Excess
12,500
Goodwill = 4 years purchase of Excess
= 4 Rs.12,500
= Rs.50,000.
(ii)
Calculation of Purchase Consideration’s (Net Assets Method)
A. Assets Taken Over
Rs,
Goodwill
50,000
Buildings (Rs.85,000 – Rs.8,500)
76,500
Machinery (Rs. 1,60,000 – Rs.16,000)
1,44,000
Stock (Rs.55,000 – Rs.5,500)
49,500
Debtors (Rs.65,000 – Rs.6,500)
58,500
3,78,500
Less: Liabilities Taken Over
Trade Creditors (Rs.80,000 – Rs.4,000)
Purchase Consideration (A-B)
76,000
3,02,500
MODULE - 2
71
II. Discharge of Purchase Consideration:
In Cash
1,50,000
In Equity Shares (Balancing Figure)
1,52,500
3,02,500
No. of shares issued:
Rs.1,52,500
Rs.12.50 per share
= 12,200 shares
III. Closing the Books of Vendor Company:
Books of Novelty Company
Dr.
Particulars
Realisation A/c
Rs. Particulars
Cr.
Rs.
To Goodwill A/c
35,000 By Loan from X
40,000
To Building A/c
85,000 By Creditors A/c
80,000
To Machinery A/c
1,60,000 By Marvel Co. Ltd. A/c (Purchase
Consideration)
3,02,500
To Stock A/c
55,000 By Equity Shareholders A/c
(Loss, being balancing figure,
transferred)
21,500
To Debtors A/c
65,000
To Banks A/c (X’s loan)
40,000
To Bank A/c (Realisation Exps)
4,000
4,40,000
Dr.
Particulars
4,44,000
Marvel Company A/c
Rs. Particulars
Cr.
Rs.
To Realisation A/c
(Purchase Consideration)
3,02,500 By Equity Shares in Marvel Co. A/c
By Bank A/c
3,02,500
1,52,500
1,50,000
3,02,500
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Corporate Accounting - II
Dr.
Equity Shareholders A/c
Particulars
Cr.
Rs. Particulars
To Discount on
Debentures A/c
issue
of
To Equity Shares in Marvel Co.
A/c
Rs.
6,000 By Equity Share Capital A/c
1,52,500 By Reserve Fund A/c
To Realisation A/c (loss)
21,500
To Bank A/c (Balancing figure)
40,000
20,000
2,20,000
Dr.
2,20,000
Debenture Holders A/c
Particulars
Cr.
Rs. Particulars
To Bank A/c
Dr.
Rs.
1,00,000 By 5% Debentures A/c
1,00,000
1,00,000
1,00,000
Bank A/c
Particulars
Cr.
Rs. Particulars
To Balance b/d
To Marvel Co. A/c
Rs.
34,000 By Debenture holders A/c
1,50,000 By Realisation A/c
(X’s loan)
By Realisation A/c (Expenses)
By Equity Shareholders A/c
1,84,000
Dr.
Equity Shares in Marvel Co. A/c
Particulars
Rs. Particulars
To Marvel Co. A/c
2,00,000
1,00,000
40,000
4,000
40,000
1,84,000
Cr.
Rs.
1,52,500 By Equity Shareholders A/c
1,52,500
1,52,500
1,52,500
Notes:
1.
2.
Loan of X is not taken over and hence has been discharged by
paying cash.
Debentures are not taken over. Hence, they are discharged by
paying cash. The treatment can also be given turnover Realisation
A/c like any other liability not taken over.
MODULE - 2
73
IV. Opening entries in the Books of Purchasing Company.
Books of Marvel Ltd.
Journal Entries.
Sl. No
1
2
3
3)
Particulars
Rs.
Business Purchase A/c
To Liquidators of Novelty Co. A/c
(Being purchase consideration due recorded)
Dr.
Liquidator of Novelty Co. A/c
To Equity Share Capital A/c
(12,200 shares at Rs.10 each)
To Securities Premium A/c
(12,200 shares at Rs.10 each)
To Bank A/c
(Being purchase consideration discharged recorded)
Dr.
Rs.
3,02,500
3,02,500
3,02,500
1,22,000
30,500
1,50,000
Goodwill A/c
Dr.
Building A/c
Dr.
Machinery A/c
Dr.
Stock A/c
Dr.
Debtors
Dr.
To Trade Creditors A/c
To Business Purchase A/c
(Being assets and liabilities taken over incorporated
recorded).
50,000
76,500
1,44,000
49,500
58,500
76,000
3,02,500
Illustration 20: (Problem under Business Purchase Method when
portion of shares received from Purchasing Company are sold by
Vendor Company – without statutory reserve)
The following is the Balance Sheet of D Ltd., on 31-12-2001.
Equities and liabilities
Share capital
4000 shares at Rs.100 each
Reserves and surplus
General Reserve
Profit & Loss a/c
Long term loans
5% Debentures
Current liabilities
Creditors
Dividend equalization fund
Amount
4,00,000
50,000
5,600
2,50,000
1,28,700
24,000
8,58,300
74
Corporate Accounting - II
Assets
Fixed assets
Buildings
Machinery
Current assets
Investments
Stock
Debtors
Cash at bank
Total
Amount
1,70,000
4,00,000
50,600
1,40,500
80,700
16,500
8,58,300
D Ltd. was absorbed by N Ltd. on the above mentioned date on the following
terms and conditions:
1)
2)
3)
4)
5)
N Ltd. to assume all liabilities and to acquire all assets except
investments which were sold by D Ltd., for Rs.45,500.
Discharge the Debenture debt at a discount of 5% by the issue of
7% Debentures in Ltd.
Issue two shares of Rs.60 each in N Ltd., at Rs.65 per share and
also to pay Rs.2 in cash to the shareholders of D Ltd. in exchange
for one share in D Ltd.
Pay the cost of absorption Rs.1,500.
D Ltd. sold in the open market one fourth of the shares received
from N Ltd. at the average rage of Rs.63 per share.
Show the realisation accounts, Bank Account and Shareholders account in
the books of D Ltd. Under Business Purchase Method.
Solution:
1. Calculation of Purchase Consideration:
Payment made to each item of liability is specifically given in the problem.
Hence, ‘Net Payment Method’ of calculating purchase consideration must be
adopted.
MODULE - 2
75
Payment towards equity shareholders:
Rs.
In Equity Shares of N Ltd.
(4,000 shares 2 Rs.65 per share)
5,20,000
In Cash (4,000 shares Rs.2 per share)
Purchase Consideration
8,000
5,28,000
Note: Issue of Debentures for discharging of 5% Debentures of D Ltd cannot
form a part of Purchase Consideration. Exchange of Debentures can be
recorded, only in the books of N Ltd. Hence, the Debentures of D Ltd. are to be
treated as being taken over. Similarly, payment towards Absorption Expenses
cannot from a part of Purchase Consideration, as it is not a payment made
towards Shareholders.
II. Discharge of Purchase Consideration
Rs.
In Equity Shares of N Ltd.
(8,000 shares of Rs.60 each at Rs.65 per share)
5,20,000
In Cash (8,000)
8,000
Purchase Consideration
5,28,000
III. Closing the books of Vendor Company
Books of D Ltd.
Dr.
Particulars
Realisation A/c
To Building A/c
1,70,000 By Creditors A/c
To Plant & Machinery A/c
4,00,000 By 5% Debentures A/c
To investments A/c
To Debtors A/c
Cr.
Rs. Particulars
50,600 By N Ltd’s A/c
Consideration)
Rs.
1,28,700
2,50,000
(Purchase
1,40,500 By N Ltd. A/c (Expenses)
To Stock A/c
80,700 By Bank A/c (investment sold)
To Bank A/c
16,500
5,28,000
1,500
45,500
76
Corporate Accounting - II
To Equity Shares in NLtd. A/c
(loss on sale)
4,000
To Bank A/c (Expenses)
1,500
To Equity shareholders A/c
(Balancing figure, being profits
transferred)
89,900
9,53,700
Dr.
N Ltd. A/c
Particulars
To Realisation A/c
Consideration)
9,53,700
Cr.
Rs. Particulars
(Purchase 5,28,000
To Realisation A/c (Expenses)
1,500
Rs.
By Equity Shares in N. Ltd. A/c
5,20,000
By Bank A/c
9,500
5,29,500
5,29,500
Dr.
Equity Shares in N Ltd. A/c
Particulars
Rs.
To N Ltd’s A/c
Cr.
Particulars
5,20,000 By Bank A/c (8,000 shares
Rs.63 per share)
Rs.
¼
1,26,000
By Realisation A/c (loss on sale)
(8000 shares ¼ Rs.2 per share)
4,000
By Equity Shareholders
(Balancing figure)
A/c
5,20,000
5,20,000
Dr.
Equity Shareholders A/c
Particulars
Rs.
Particulars
To Equity Shares in N Ltd. A/c
3,90,000 By Equity Shareholders A/c
To Bank A/c
(Balancing figure)
1,79,500 By General Reserve A/c
By Profit & Loss A/c
5,69,500
3,90,000
Cr.
Rs.
4,00,000
50,000
5,600
By Dividend Equalisation Fund
A/c
24,000
By Realisation A/c (Profits)
89,900
5,69,500
MODULE - 2
77
Bank A/c
Dr.
Particulars
Rs.
To Balance b/d
To N Ltd’s. A/c
To Equity Shares in N Ltd. A/c
(Sale of 2000 shares at Rs.
63
per share)
To Realisation A/c
(Investment sold)
Cr.
Particulars
Rs.
16,500 By Realisation A/c
16,500
9,500 By Realisation A/c (Expenses)
1,26,000 By Equity Shareholders A/c
1,500
1,79,500
45,500
1,81,000
1,81,000
Notes:
1.
2.
3.
Bank balance is taken over by N Ltd. hence; it has been transferred
to Realisation A/c.
Investment A/c, instead of transferring to Realisation A/c, can be
shown as a separate A/c. Only the loss on sale can be transferred
to Realisation A/c.
Shares are allotted to N Ltd., at Rs.65 per share. One-fourth of
such shares (i.e., 2,000) are sold at Rs.63 per share. Hence, loss per
share is Rs.2 (i.e. Rs.65- Rs.63). Rs.4,000 transferred to Realisation
Account.
IV. Passing Opening Entries in the books of Purchasing Company.
Books of N Ltd.
Journal Entries
Sl. No
1
2
Particulars
Business Purchase A/c
To Liquidators of D Ltd. A/c
(Being purchase consideration due recorded)
Rs.
Dr.
Liquidator of D Ltd. A/c
Dr.
To Equity Share Capital A/c
(8,000 shares Rs.60 per share)
To Share Premium A/c or Securities Premium A/c
(8,000 shares Rs.5 per share)
To Bank A/c
(Being purchase consideration discharged recorded)
Rs.
5,28,000
5,25,000
5,28,000
5,28,000
78
Corporate Accounting - II
3
4
5
Building A/c
Dr.
Plant & Machinery A/c
Dr.
Debtors A/c
Dr.
Stock A/c
Dr.
Bank A/c
Dr.
Goodwill A/c
Dr.
To Creditors A/c
To 5% Debentures A/c (of D Ltd.)
(Rs.2,50,000 – Rs.12,500)
To Business Purchase A/c
(Being assets and liabilities taken over incorporated
recorded).
1,70,000
4,00,000
1,40,500
80,700
16,500
86,5000
5% Debentures of D Ltd. A/c
Dr.
To 7% Debentures A/c
(Being issue of 7% Debentures to discharge 5% Debentures
of D Ltd)
2,37,500
Goodwill A/c
Dr.
To Bank A/c
(Being payment to P Ltd., for meeting realisation expenses
recorded)
1,500
1,28,700
2,37,500
5,28,000
2,37,500
1,500
4) Illustration 9:
(Problem on absorption – with statutory reserve)
The position of A Company and B Company was as follows:
Equities and Liabilities
Share capital
Equity Shares of Rs.10 each
Reserves and surplus
Profit & Loss A/c
Work men compensation fund
Long term loans
5% Debentures
Current liabilities
Creditors
A ltd
B ltd
5,00,000
7,00,000
1,00,000
1,50,000
-
1,00,000
-
2,00,000
2,00,000
9,00,000
10,50,000
MODULE - 2
Assets
Intangible assets
Goodwill
Fixed assets
Fixed assets
Current assets
Stock and Debtors
Cash at bank
Miscellaneous expenses
Profit and loss account
A ltd
79
B ltd
1,00,000
3,50,000
3,00,000
5,00,000
3,50,000
-
1,00,000
1,00,000
1,50,000
-
9,00,000
10,50,000
B Company agreed to acquire A Company on the following terms:
(a)
(b)
(c)
Shares of A Company are to be considered as worth Rs.6 each
and shares of B Company are to be considered as worth Rs.12.50
each, which are taken as the basis for calculation of purchase
consideration.
When paying the purchase consideration, the B Company agreed
to pay 1/4th in the form of cash and the balance in shares of B
Company.
It was decided to issue along with Purchase consideration 5%
Debentures of Rs.95 each for every 5% Debentures of Rs.100 each
in Company.
Prepare the Journal Entries in the Books of A Company and B Company
and also Balance Sheet in the Books of B Company. Under business purchase
method. Assume that workmen’s compensation fund (statutory reserve to be
continued for 2 more years).
Solution:
Calculation of Purchase Consideration (Market Price Method)
Rs.
Amount of Purchase Consideration (50,000 6)
3,00,000
Mode of Payment
1. Cash (3,00,000 ¼ )
75,000
80
Corporate Accounting - II
2. By Equity Shares (2,25,000/ 12.50 = 18,000 shares)
18,000 shares of Rs.10 each at an agreed value of Rs.12.5 per share
(18,000 12.5)
2,25,000
Purchase Consideration
3,00,000
Journal Entries in the Books of A Company (Vendor Company)
Sl. No
1
2
3
4
5
6
7
8
Particulars
Rs.
Realisation A/c
To Fixed Assets A/c
To Stock, Debtors
To Goodwill A/c
(Being assets transferred)
Dr.
5% Debentures A/c
Creditors A/c
Worker’s Compensation Fund A/c
To Realisation A/c
(Being liabilities transferred)
Dr.
Dr.
Dr.
1,00,000
3,00,000
1,00,000
B Company A/c
To Realisation A/c
(Being Purchase Consideration due).
Dr.
3,00,000
Cash A/c
Equity Shares in B Company A/c
To B Company A/c
(Being receipt of purchase consideration)
Dr.
Dr.
Equity Shareholders A/c
To Realisation A/c
(Being losses on realisation transferred)
Dr.
Equity Share Capital A/c
To Equity Shareholders A/c
(Being shares capital transferred)
Dr.
Equity Shareholders A/c
To Profit and Loss A/c
(Being transfer of accumulated loss)
Dr.
Equity Shareholders A/c
To Cash A/c
To Equity Shares in B Company A/c
(Being final payment made to equity shareholders)
Dr.
Rs.
7,50,000
3,00,000
3,50,000
1,00,000
5,00,000
3,00,000
75,000
2,25,000
3,00,000
50,000
50,000
5,00,000
5,00,000
1,50,000
1,50,000
3,00,000
75,000
2,25,000
MODULE - 2
Journal Entries in the Books of B Company (Purchasing Company)
Sl. No
1
2
3
4
5
Particulars
Rs.
Business Purchase A/c
To Liquidator’s of A Company A/c
(Being Purchase Consideration due)
Dr.
Fixed Assets A/c
Stock, Debtors A/c
To Creditors A/c
To 5% Debentures A/c
To Business Purchase A/c
To Capital Reserve A/c (Bal. Fig.)
(Being assets and liabilities taken over)
Dr.
Dr.
3,00,000
3,50,000
Amalgamation Adjustment A/c
To Workmen’s compensation Fund A/c
(Being incorporation of statutory reserve recorded).
Dr.
1,00,000
Liquidator’s of A Company A/c
To Cash A/c
To Equity Shares Capital A/c
(18,000 10)
To Share Premium A/c
(18,000 2.5)
(Being payment of purchase consideration)
Dr.
5% Debentures A/c
To 5% Debentures in B Company A/c
(Being discharge of Debentures)
Dr.
3,00,000
3,00,000
Share capital
Share capital shares of 10 each
Reserves and surplus
Profit and loss account
Share premium
Capital reserve
Work men compensation fund
Long term loans
5% Debentures (95 each)
Current liabilities
Creditors (2,00,000+2,00,000)
2,00,000
95,000
3,00,000
55,000
1,00,000
3,00,000
3,00,000
95,000
95,000
Balance Sheet of B Company as on 1.1.1991
Equities and liabilities
Rs.
Amount
8,80,000
1,50,000
45,000
55,000
1,00,000
95,000
4,00,000
17,25,000
81
82
Corporate Accounting - II
Assets
Fixed assets
Fixed assets
Intangible assets
Goodwill
Current assets
Stock and Debtors
Cash at bank
Miscellaneous expenses
Amalgamation adjustment account
Total
Amount
8,00,000
3,50,000
4,50,000
25,000
1,00,000
17,25,000
2.5 Summary
Absorption leads to dissolution of one existing company. The purchasing
company will give the purchase consideration to the transferee company. The
books of accounts of the vendor company is closed after passing the entries
and after passing the opening entries in the books of transferee company
all the assets and liabilities which being over by the transferee company are
incorporated.
2.6 Questions
Self Assessment questions
(A) State whether each of the following statements is true/false
1.
2.
A new company has to be formed in case of absorption?
Select the most appropriate answer:
(a)
Preliminary expenses are transferred by the vendor
company at the time of absorption to
(i) Purchasing company’s account, (ii) Realisation
account, (iii) Equity shareholders account.
(b) Two companies, X Ltd and Y Ltd go into liquidation to
form a new company, Z Ltd. it is a case of
(i) Absorption, (ii) External Reconstruction, (iii)
Amalgamation.
3
Answer the following
MODULE - 2
83
(i) What do you mean by Absorption?
(ii) What are the different methods of purchase consideration?
(iii) What will be the treatment in the books of both transferor
and transferee?
Exercise
1) Illustration:
(Problem on absorption with calculation of purchase consideration under net
payment method without statutory reserve)
The following is the Balance Sheet of Ashwini Company Ltd. on 31.3.2002.
Equities and liabilities
Share capital
Share Capital (Shares of Rs.10 each)
Reserves and surplus
Reserve Fund
Workmen Compensation Fund
Dividend Rebate Reserve
Profit & Loss A/c
Depreciation Fund (Land & Buildings)
Long term loans
Debentures
Current liabilities
creditors
Amount
2,00,000
25,000
10,000
10,000
5,100
20,000
1,00,000
30,000
4,00,100
Assets
Fixed assets
Land and buildings
Machinery
Furniture
Work in progress
Current assets
Stock
Debtors
Cash in hand
Cash at bank
Total
Amount
1,20,000
1,50,000
2,500
30,000
60,000
25,000
100
12,500
4,00,100
84
Corporate Accounting - II
The company is absorbed by Jaswant Company Ltd. on the above date. The
consideration for the absorption is the discharge of debentures at a premium
of 5%, taking over the trade liability and a payment of Rs.7 in cash and one
share of the face value of Rs.5 in Jaswant Company Ltd. (Market value Rs.8
per value) in exchange for one share in Ashwini Company Ltd. The cost of
liquidation Rs.500 is to be met by the purchasing company.
Calculate purchase consideration and the journal entries in the books of both
the companies. Under Purchase Method (i.e., Amalgamation in the nature of
purchase).
2) Illustration:
(Problem under Business Purchase Method statutory reserve)
The following is the Balance Sheet of Fair Deal Ltd. as on 31st March 2001:
Equities and liabilities
Share capital
90,000 Equity Share of Rs.10 each
Reserves and surplus
General reserve
Profit & Loss A/c
Long term loans
12% Debentures
Current liabilities
creditors
Amount
9,00,000
1,20,000
52,000
4,00,000
3,18,600
17,90,600
Assets
Fixed assets
Land and buildings
Machinery
Furniture
Intangible assets
Trade marks
Current assets
Stock
Debtors
Investments
Bank
Total
Amount
4,25,000
2,25,000
75,000
35,000
5,60,000
3,00,000
1,15,000
55,600
17,90,600
MODULE - 2
85
Fair Deal Ltd. was absorbed by Nathan Ltd. on the following terms and
conditions:
(i)
Assume all liabilities and to acquire all assets except investments,
which were sold by Fair Deal Ltd. at 90% of book value.
(ii) Discharge the Debentures of Fair Deal ltd., at a discount of 10%
by the issue of 14% Debentures of Rs.100 each in Nathan Ltd.
(iii) Trade Marks were found useless
(iv) Issue of one equity share of Rs.10 in Nathan Ltd. issued at Rs 12
and a cash payment of Rs 3 for every share in Fair Deal Ltd.
(v) Pay the cost of absorption for 5,800.
(vi) Fair Deal Ltd. sold in the open market half of the shares received
from Nathan Ltd. at Rs.15 per share.
Show the necessary Ledger Accounts in the books of Fair Deal Ltd., and
Opening Journal Entries in the books of Nathan Ltd. under Business Purchase
Method.
3) Illustration:
The following is the Balance Sheet of D Ltd. as on 30th June, 2004:
Equities and liabilities
Share capital
15,000 equity shares of Rs.10 each
10,000 6% cumulative
preference shares of
Rs.10 each
Long term loans
5% Debentures of Rs.100 each
Current liabilities
Employees’ Profit Sharing A/c
Bank Overdraft
Sundry Creditors
Contingent Liability
Arrears of Cumulative Preference Dividend
Rs.12,000
Amount
1,50,000
1,00,000
50,000
14,000
20,000
94,000
4,28,000
Assets
Amount
86
Corporate Accounting - II
Intangible assets
Goodwill
Fixed assets
Machinery
Current assets
Stock
Debtors
Cash at bank
Miscellaneous expenses
Profit and loss account
Preliminary expenses
Commission and brokerage on issue of shares
Total
20,000
1,50,000
80,000
1,20,000
8,900
40,100
5,000
4,000
4,28,000
C Ltd. agreed to absorb D Ltd. from 1st July, 2004 on the following terms:
1)
2)
3)
4)
5)
C Ltd. has to take over all tangible assets except cash.
C Ltd. has is to take over debentures of D Ltd.
It has to issue one equity shares of Rs.10 each and make a payment
of Rs.4 in cash in exchange of every two equity shares in D Ltd.
Sundry creditors will receive 90% of the sums due to them in fully
paid equity shares in Rs.10 each in C Ltd. in full settlement of
their claims.
Preference Shareholders will be issued 5% debentures in C Ltd.
Show the necessary ledger accounts to close the books of D Ltd.
4) Illustration:
The following was the Balance Sheet of Thin Ltd. as on 31-12-2004:
MODULE - 2
Equities and liabilities
Share capital
5,000 6% Preference Shares of Rs.10 each fully
paid
15,000 Equity Share of Rs.10 each fully paid
Long term loans
6% Debentures
Current liabilities
Sundry Creditors
Preference dividends in arrears for four years
87
Amount
50,000
1,50,000
30,000
20,000
2,50,000
Assets
Intangible assets
Goodwill
Patents
Current assets
Sundry assets
Bank
Miscellaneous expenses
Profit and loss account
Preliminary expenses
Total
Amount
40,000
15,000
1,64,500
500
28,000
2,000
2,50,000
The following scheme of reconstruction was agreed upon:
1.
2.
3.
4.
5.
6.
7.
A new company called Thick Ltd. was to be formed, to take over
the business, with an authorized capital of Rs.3,25,000 in equity
shares of Rs.10 each.
One equity share Rs.5 paid-up in the new company to be issued
for every equity share in Thin Ltd.
Two equity shares Rs.5 paid-up in the new company to be issued
for every preference share in Thin Ltd.
Arrears of dividend to be cancelled.
Debentures holders to receive 3,000 equity shares fully paid in the
new company.
Creditors to be taken over by the new company.
The remaining unissued shares to be taken up by the directors
and paid in full.
88
Corporate Accounting - II
8.
9.
10.
The new company to take over all assets (except patents) subject
to writing down Sundry Assets by Rs.35,000.
Patents realised Rs.1,000.
Liquidation expenses amounted to Rs.1,000.
Close the books of Thin Ltd (ledger accounts) and prepare the Balance Sheet
of Thick Ltd. on the basis of the above scheme.
5) Problem:
Following is the Balance Sheet of D Company Ltd as on Dec 31st 2000.
Equities and liabilities
Share capital
4,000 shares of 100 each
Reserves and surplus
Free Reserves
Profit & Loss account
Long term loans
5% debentures
Current liabilities
Creditors
Dividend Equalization fund
Amount
4,00,000
50,000
5,600
2,50,000
1,28,000
24,400
2,50,000
Assets
Fixed assets
Land and buildings
Machinery
Current assets
Stock
Debtors
Investments
Bank
Total
Amount
1,70,000
4,00,000
80,700
1,40,000
50,000
17,300
2,50,000
D ltd was absorbed by N ltd based on the above B/S, subject according to the
following terms.
(a)
The purchasing company shall assume all the liabilities including
the debentures and acquire all the assets except investments
which were sold by the liquidating unit for Rs.45,500.
MODULE - 2
(b)
(c)
(d)
89
The purchase company shall issue 2 shares of Rs.60 each at a
premium of Rs.5 per share and also to pay Rs.2 in cash to the
share holders, for every single share.
The purchasing company agreed to bear liquidation expenses of
Rs.1,500.
D ltd sold ¼ th of the shares received in the open market, averaged
at Rs.63 per share.
Show the accounts as they appear in the Books of D company ltd.
6) Problem:
The X Company Ltd., is absorbed by Y company Ltd. Given below are the
Balance sheets of the two companies, taken after revaluation of their assets
on a uniform basis:
X Company Limited
Equities and liabilities
Share capital
Authorized capital
9,000 shares of Rs.300 each
Paid-up Capital
9,000 shares, Rs.270 paid on each
Reserves and surplus
Reserve fund
Profit & Loss A/c
Current liabilities
creditors
Amount
27,00,000
24,30,000
8,07,000
30,000
1,10,000
33,77,000
Assets
Amount
Current assets
Sundry assets
Cash at Bank
33,70,000
7,000
Total
33,77,000
90
Corporate Accounting - II
Equities and liabilities
Share capital
Authorized capital
40,000 shares of Rs.180 each
Paid-up Capital
40,000 shares, Rs.150 paid on each
Reserves and surplus
Reserve fund
Profit & Loss A/c
Current liabilities
creditors
Amount
72,00,000
60,00,000
25,70,000
70,000
1,30,000
87,70,000
Assets
Amount
Current assets
Sundry assets
Cash at Bank
87,15,000
55,000
Total
87,70,000
The holder of every three shares in the X company Ltd. was to receive five
shares in the Y Company Ltd., plus as much cash as is necessary to adjust the
rights of shareholders of both the companies in accordance with the intrinsic
values of the shares as per respective Balance sheets. Pass the journal entries
in the books of Y Company Ltd., and prepare the balance sheet giving effect
to the above scheme of absorption.
2.7 Answers
Answers to self assessment questions
1. False
2.
3.
(a) – (iii),
(b) – (iii).
(i) Refer to section 3.3
(ii) Refer to section 3.4
(iii) Refer to section 3.5
MODULE - 3
External Reconstruction
MODULE - 3
MODULE - 3
91
External Reconstruction
Structure
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Introduction
Meaning of External Reconstruction
Differences Between External Reconstruction, Amalgamation and
Absorption
Calculation of Purchase Consideration
Summary
Terminal Questions
Answers
Objectives
(a)
(b)
(c)
Understand the different method, for computation of purchase
consideration.
To understand the difference between external reconstruction,
amalgamation and absorption.
Make appropriate accounting entries in the books of vendor and
purchasing companies.
3.1 Introduction
External Reconstruction is to reorganize the financial structure of the
company.
External reconstruction is different from absorption regarding the final
existence of the companies. Though it is the same in terms of accounting
entries in the books of vendor and purchasing company, but the liquidated
may not be vanquished like absorption. This scheme of reconstruction
highlights financial insolvency, which can be recovered by getting synergized
with some prospective company. The newly reconstructed company then
begins with a new name.
92
Corporate Accounting - II
3.2 Meaning
Reconstruction takes place with or without the liquidation of the old
company. If the company undergoing reconstruction is liquidated, then the
reconstruction is called external reconstruction.
1.
Where a new company is formed with the same name in order to
take over the business of an existing company, it is called external
reconstruction.
Reason: This type of reconstruction is resorted to by the companies having
losses for a continuous period and the value of assets are not shown at their
true value.
Accounting Entries: Same as absorption given in the previous chapter.
Purchase Consideration: Consideration given by a purchasing or transferee
company (company that will exist after taking over the business of the other
company) to the transferor/vendor company (company which gives up its
business to the purchasing company). Purchase consideration under net
payment method (explained in previous chapter) is calculated by adding the
various payments in the form of equity shares preference shares, cash made
by the transferred company.
3.3 Difference between External Reconstruction,
Amalgamation and Absorption
Amalgamation
Absorption
External Reconstruction
1. Two or more companies are
liquidated and their businesses
are sold to a newly formed
company.
1. A company is liquidated
and an existing company
(generally) a bigger company
acquires its business.
1. A company is liquidated
and that company sells its
business to a newly formed
company.
2. A new company is
incorporated or formed.
2. No new company is
formed.
2. A new company is formed.
3. There may be a financial
problem when a company is
amalgamated.
3. Like amalgamation, there
may be no financial problems
when a company is absorbed.
3. External reconstruction
is resorted to by a company
having financial problems.
MODULE - 3
4. In case of amalgamation,
a new company is formed to
take over the business of two or
more companies.
4. In case of absorption, one
existing company in taking
over the business of the other
existing company. No new
company is formed.
93
4. In case of external
reconstruction, there is only
one company (facing financial
problems) is liquidated
and the same is brought in
existence with new name.
3.4 Calculation of Purchase Consideration Problems
1) Illustration:
A limited company goes into voluntary liquidation on 31st
having assets and liabilities appearing in the books as follows:
Fixed Assets
Current Assets
Creditors Paid up capital
March, 2005,
Rs.
3,50,000
1,00,000
50,000
4,80,000
The assets are sold to a new company for Rs.4,30,000, Rs.3,75,000 payable in
shares of that company of Rs. 10 each, credited with Rs. 7.50 per share paid
up, and Rs. 55,000 in cash. Cash is sufficient to discharge the creditors and
pay the costs of winding up. Close the book of the company in liquidation.
Solution:
First Balance Sheet is prepared to find out the excess of liabilities over assets
(loss) or excess of assets over liabilities (profit).
94
Corporate Accounting - II
Balance Sheet of……..
as on 31st March, 2005
Equities and liabilities
Amount
Share capital
Paid-up capital
Current liabilities
Creditors
4,80,000
50,000
5,30,000
Assets
Amount
Fixed assets
Fixed assets
Current assets
Current assets
Miscellaneous expenses
Profit and Loss Account (Bal. Fig.)
3,50,000
1,00,000
80,000
Total
5,30,000
Journal Entries
Particulars
Rs.
Realisation A/c
Dr.
To Fixed Assets A/c
To Current Assets A/c
(Being assets taken over by new company transferred to
Realisation Account)
4,50,000
New Company’s Account
Dr.
To Realisation Account
(Being purchase price payable by new company for the
purchase of assets)
4,30,000
Bank A/c
Shares in New Company A/c
To New Company’s Account
(Being receipt of purchase price)
Dr.
55,000
3,75,000
Realisation A/c
To Bank A/c
(Being cost of winding up)
Dr.
Creditor’s Account
To Bank Account
(Being payment of creditors)
Dr.
Rs.
3,50,000
1,00,000
4,30,000
4,30,000
5,000
5,000
50,000
50,000
MODULE - 3
Shareholders A/c
Dr.
To Realisation A/c
To Profit and Loss A/c
(Being loss on realisation and debit balance of Profit and loss
Account transferred to Shareholders’ A/c)
1,05,000
Share Capital A/c
To Shareholders A/c
(Being share capital transferred to shareholders A/c)
Dr.
4,80,000
Shareholders A/c
To Shares in New Company A/c
(Being shares in new company paid to shareholders)
Dr.
25,000
80,000
4,80,000
3,75,000
3,75,000
Illustration 2:
The Balance Sheet of Small Ltd. was as follows:
Equities and liabilities
Amount
Share capital
Issued Capital:
6% Rs.10 Preference Shares
Rs. 10 Equity Shares
Reserves and surplus
General Reserve
Profit and Loss A/c.
Long term loans
Debentures
Current liabilities
Sundry Creditors
1,20,000
80,000
84,000
20,000
1,00,000
82,000
4,86,000
Assets
Intangible assets
Goodwill
Fixed assets
Buildings
Plant
Current assets
Stock
Debtors
Less: RBD
Bills Receivable
Cash
Total
Amount
1,00,000
1,10,000
90,000
70,000
3,500
83,000
66,500
32,500
4,000
4,86,000
95
96
Corporate Accounting - II
A new company called the Big Ltd. was floated to purchase the business of the
above concern. All the assets except cash and creditors were to be transferred
to the new venture.
The purchase price was:
1)
2)
3)
The allotment of eleven 5% Preference Shares of Rs.10 each fully
paid for each ten preference shares held.
Twenty equity shares of Rs.10 each credited as Rs.9 paid for each
16 equity shares held.
And sufficient debentures to enable the existing debenture holders
to be satisfied at a premium of 55 on their holding by the issue of
debentures in the new company.
The expenses of winding up of Small Ltd. were Rs.7,500.
Show the ledger accounts in the books of Small Ltd. and the Journal Entries
in the books of the purchasing company.
Solution:
Calculation of purchase consideration:
In this problem, the total payment made by the purchase company to the
selling company (i.e., the total amount of debentures and shares given by the
purchasing company to the selling company) by way of purchase consideration
is specially stated. So, the purchase consideration has to be calculated on the
net payment basis. The purchase consideration, on the payment basis, can be
calculated as follows:
Payment made by the purchasing company to the shareholders of the selling
company:
a)
Payment made to preference shareholders
in the form of 5% preference shares in the
purchasing company
Rs.
MODULE - 3
(
b)
12,000
× 11 × 10 )
10
97
1,32,000
Payment made to equity shareholders in the
form of equity shares in the purchasing
company
(
8, 000
× 20 × 9 )
16
90,000
Total payment or purchase consideration
2,22,000
The purchase consideration will be settled as follows:
Rs.
1. In the form of preference shares in purchasing company 1,32,000
2. In the form of equity shares in purchasing company
90,000
2,22,000
Ledger Accounts in the Books of Small Ltd.
Dr.
Realisation A/c
Particulars
Rs. Particulars
Cr.
Rs.
To Goodwill A/c
1,00,000 By Reserve for Bad Debts A/c
3,500
To Building A/c
1,10,000 By Creditors A/c (Taken over)
82,000
To Plant A/c
90,000 By Debentures A/c.
1,00,000
To Stock A/c
By Big Ltd.’s A/c. (Purchase
83,000
Consideration)
2,22,000
To Debtors (Gross) A/c
By Equity Shareholders A/c
(Realisation loss transferred to
70,000
Equity Shareholders) (Balancing
Figure)
69,000
To Bills Receivable A/c
4,000
To Cash A/c
Expenses paid)
7,500
(Realisation
To Preference Shareholders
A/c (Excess amount payable to
preference shareholders, i.e.,
1,32,000 – 1,20,000)
12,000
4,76,500
4,76,500
98
Corporate Accounting - II
Notes:
1)
2)
3)
4)
5)
6)
Cash in hand is not taken over. So, it is not transferred to
Realisation Account.
The Statement “all the assets except cash and creditors were to
be transferred to the new venture” should be taken to mean that
the purchasing company takes over all the assets except cash and
also takes over the creditors. So, creditors should be transferred
to Realisation Account at their book values.
While transferring the debtors to Realisation Account, the
debtors should be transferred at their gross value of Rs. 70,000.
The reserve for bad debts of Rs. 3,500 should also be transferred
to the credit side of the Realisation Account. (It should be noted
that just the net figure of debtors should not be transferred to
Realisation Account).
The expenses of winding up Short Ltd. must be paid by the selling
company, unless otherwise stated. so, the entry for the payment
of the realisation expenses must be passed in the books of the
selling company.
The preference share capital due to preference shareholders
is only Rs.1,20,000. But the payment to be made to preference
shareholders is Rs.1,32,000. That means, an excess amount of
Rs.12,000 is payable to preference shareholders. This excess
amount payable to preference shareholders is a loss for the selling
company. So, it should be transferred to Realisation Account
by debiting Realisation Account and crediting to Preference
Shareholders’ Account with Rs.12,000.
Payment made for the debentures of the selling company by the
purchasing company should be taken as debentures of the selling
company taken over by the purchasing company and paid.
Dr.
Particulars
To Realisation A/c
(Purchase Consideration due)
Big Ltd A/c
Rs. Particulars
By Preference Shares in Purchasing
2,22,000 company A/c. (Preference shares
received)
Cr.
Rs.
1,32,000
MODULE - 3
By Equity Shares in Purchasing
Company A/c. (Equity shares
received)
2,22,000
Dr.
To Preference Shares in Big Ltd.
A/c (Preference shares given)
Rs. Particulars
Particulars
Cr.
Rs.
By Preference Share Capital A/c.
1,32,000 (Transfer of Preference share
capital)
1,20,000
By Realisation A/c. (Excess
amount payable to Preference
Shareholders, (1,32,000 – 1,20,000)
12,000
1,32,000
Dr.
90,000
2,22,000
Preference Shareholders’ A/c
Particulars
99
Equity Shareholders’ A/c
Rs. Particulars
1,32,000
Cr.
Rs.
To Realisation A/c
(Realisation loss transferred to
equity shareholders)
By Equity Share Capital A/c.
69,000 (Transfer)
80,000
To Equity Shares in Big Ltd A/c.
(Equity Shares given to equity
shareholders)
By General Reserve A/c
90,000 (Transfer)
84,000
To Cash A/c.
(Cash paid to equity shareholders)
(Balancing figure)
By Profit and Loss A/c.
25,000 (Transfer)
20,000
1,84,000
1,84,000
Note:
When there are both equity and preference shareholders, all accumulated
reserves and profit and loss account balance belonging to shareholders
should be transferred only to equity shareholders’ account. (They should not
be transferred to preference shareholders’ account).
Dr.
Particulars
To Balance b/d.
(old cash balance not taken over)
Cash A/c
Rs. Particulars
By Realisation A/c
32,500
(Realisation expenses paid)
Cr.
Rs.
7,500
100
Corporate Accounting - II
By Equity Shareholders’ A/c
(Cash paid to equity shareholders)
32,500
25,000
32,500
Note:
As cash is not taken over by the purchasing company, there is a balance of
cash in the books of the selling company. So, the cash balance is entered in the
Cash Account as “The Balance b/d.”
Dr.
Preference Shares in Big Ltd. A/c
Particulars
To Big Ltd.’s A/c
(Preference shares received from
purchasing company)
Dr.
Cr.
Rs. Particulars
Rs.
By
Preference
Shareholders
1,32,000 A/c. (Preference shares given to
preference shareholders)
1,32,000
1,32,000
1,32,000
Equity Shares in Big Ltd. A/c
Particulars
Cr.
Rs. Particulars
To Big Ltd.’s A/c
(Equity shares received from
purchasing company)
Rs.
By Equity Shareholders’ A/c.
90,000 (Equity Shares given to Equity
shareholders)
90,000
90,000
90,000
Journal Entries In the Books of Big Ltd.
Sl. No
Particulars
Rs.
1
Building A/c
Dr.
Plant A/c
Dr.
Stock A/c
Dr.
Debtors (Gross) A/c
Dr.
Bills Receivable A/c
Dr.
Goodwill A/c
Dr.
(Balancing figure, i.e., the difference between the credit and
debit items, i.e. 4,12,500 – 3,85,500)
To Reserve for Bad Debts A/c
To Creditors A/c
To Debentures of Vendor Company
(agreed value)
To Small Ltd.’s A/c
(Purchasing consideration amount).
1,10,000
90,000
83,000
70,000
32,500
27,000
Rs.
MODULE - 3
(Being the above assets and liabilities and debentures taken
over from the selling company at their agreed values)
101
3,500
82,000
1,05,000
2,22,000
2
3
Small Ltd.’s A/c
Dr.
To Preference Share Capital A/c
To Equity Share Capital A/c
(Being the purchase consideration paid to the selling
company in the form of preference shares and equity shares)
2,22,000
Debentures in Vendor Company A/c
To Debentures A/c
(Being the debentures taken over paid) Dr
1,05,000
Dr.
1,32,000
90,000
1,05,000
3.5 Summary
External reconstruction is the process of bringing bad (the existence of the
old company facing financial difficulties) in a new name in a newly organized
scheme. The idea behind this is to carry on the same business substantially by
the same person.
3.6 Questions
(A) State whether the following statements are true/false:
1.
A new company need not be formed in case of external
reconstruction.
Ans: False
(B)
2.
State the meaning of external reconstruction.
3. State the differences between external reconstruction, absorption
and amalgamation.
4. Mention the circumstances when the external reconstruction is
resorted.
5. State the differences between internal reconstruction and external
reconstruction
6.
State the differences between amalgamation and external
reconstruction.
102
Corporate Accounting - II
Problems
•
Pavani Company after a series of heave losses resolves to go
into voluntary liquidation and to reconstruct by means of a new
company under the name New Pavani Company. On the date of
reconstruction the Balance Sheet of Pavani Company as follows:
Equities and liabilities
Share capital
2,00,000 Shares of Rs. 5 each
Current liabilities
Sundry Creditors
Bank Loan
Bills payable
Amount
10,00,000
30,000
15,000
10,000
10,55,000
Assets
Fixed assets
Buildings
Machinery
Motor lorry
Current assets
Stock
Debtors
Bank
Miscellaneous expenses
Profit and loss account
Total
Amount
3,92,500
2,39,000
19,400
91,410
1,09,100
3,590
2,00,000
10,55,000
The following is the scheme of reconstruction:
(a)
(b)
(c)
(d)
The new company is to take over the Assets of the old company
and not the Liabilities.
Capital of the new company is to consist of 5,00,00 shares of Rs.5
each.
The new company is to issue 2,80,000 shares of Rs.5 each credited
with Rs.2.50 per share as paid up to the old company and to pay
to it Rs. 1,00,000 in cash by the way of purchase consideration.
The balance of Rs.2.50 per share is duly received by the new
company.
MODULE - 3
103
Record the Journal Entries in the books of both the companies and prepare
the Balance Sheet of the new company.
•
The following was the Balance Sheet of Thin Ltd. as on 31-122004:
Equities and liabilities
Share capital
5,000 6% Preference Shares of Rs.10 each fully
paid
15,000 Equity Share of Rs.10 each fully paid
Long term loans
6% Debentures
Current liabilities
Sundry Creditors
Preference dividends in arrears for four years
Amount
50,000
1,50,000
30,000
20,000
2,50,000
Assets
Intangible assets
Goodwill
Patents
Current assets
Sundry assets
Bank
Miscellaneous expenses
Profit and loss account
Preliminary expenses
Total
Amount
40,000
15,000
1,64,500
500
28,000
2,000
2,50,000
The following scheme of reconstruction was agreed upon:
1.
2.
3.
4.
5.
A new company called Thick Ltd. was to be formed, to take over
the business, with an authorized capital of Rs.3,25,000 in equity
shares of Rs.10 each.
One equity share Rs.5 paid-up in the new company to be issued
for every equity share in Thin Ltd.
Two equity shares Rs.5 paid-up in the new company to be issued
for every preference share in Thin Ltd.
Arrears of dividend to be cancelled.
Debentures holders to receive 3,000 equity shares fully paid in the
new company.
104
Corporate Accounting - II
6.
7.
8.
9.
10.
Creditors to be taken over by the new company.
The remaining unissued shares to be taken up by the directors
and paid in full.
The new company to take over all assets (except patents) subject
to writing down Sundry Assets by Rs.35,000.
Patents realised Rs.1,000.
Liquidation expenses amounted to Rs.1,000.
Close the books of Thin Ltd (ledger accounts) and prepare the Balance Sheet
of Thick Ltd. on the basis of the above scheme.
•
Following is the balance sheet of reckless ltd.
Equities and liabilities
Share capital
40,000 share 10
Current liabilities
Sundry Creditors
Amount
4,00,000
3,00,000
7,00,000
Assets
Fixed assets
Land and Buildings
Plant and Machinery
Current assets
Stock
Debtors
Cash
Miscellaneous expenses
Preliminary expenses
Profit and loss account
Total
1.
2.
3.
Amount
3,20,000
1,30,000
70,000
1,20,000
500
5,000
54,500
7,00,000
Careful ltd. was formed with the authorized capital of Rs.8 lakhs
to take over the assets & liabilities.
There is a preferential claim of Rs.10,000 in the balance sheet
included in sundry creditors to be paid in full.
Unsecured creditors will receive either of the two.
(a) 50% of their claim in cash in full settlement.
MODULE - 3
4.
5.
105
(b) 6% debentures equal to their claim at par.
The existing share holders will be given 1 share of 10 each, 5 paid
up for each share held by them.
The expenses of Rs.6,000 will be paid by the liquidating unit after
it receives enough cash from liquidating company.
Half the unsecured creditors opted for immediate cash payment for which
purpose cash was made available by the new company. The new company
made a call of Rs.5 on each of the partly paid share all amounts were duly
paid. The new company valued all the assets (except land & buildings) at par.
Draft the new company’s balance sheet after showing the necessary workings:
•
Big Ltd. decided to acquire all the assets excluding investment
and bank balance of Small Ltd, as on 31st March 1998 when the
balance sheet of Small Ltd.
Equities and liabilities
Share capital
Share capital (Rs.10/-)
Reserves and surplus
General reserve
Profit & Loss
Long term loans
12% Debentures
Current liabilities
Creditors
Provision for taxation
Amount
160
25
18
60
37
20
320
Assets
Intangible assets
Goodwill
Fixed assets
Land and buildings
Plant
Current assets
Investments
Stock
debtors
Bank
Total
Amount
50
80
80
30
40
20
20
320
106
Corporate Accounting - II
Big Ltd.
•
•
•
•
Discharge the debentures at 8% premium by issuing 14%
debentures in Big ltd., at 10% discount.
Issued 3 shares of Big ltd., at a valuation of Rs. 11/- for 2 shares of
small ltd.
Pay Rs.2 in cash for every share of small ltd.
It shall also pay the amalgamation expenses amounting to Rs.3
lakhs.
Small Ltd. sold its investments for 32 lakhs. 1/3rd of the shares received from
Big Ltd., are sold at Rs.10.5/- each. The tax liability was determined at Rs.24
lakhs. Before the actual transfer the liquidating unit declared and paid 10%
dividend Small Ltd is then dissolved. Big Ltd., values land and buildings at
100 lakhs, plant @ 10% less than book value, stock @ Rs. 35 lakhs, debtors
subject to 10% provision.
You are required to prepare the ledger a/cs. in the books of Small Ltd., and
journal entries for Big. Ltd.
•
On 1st July, 2004, the Balance Sheet of AB Ltd. was as follows:
Equities and liabilities
Share capital
Nominal and Issued
6,000 6% Cumulative Preference Shares of Rs.10
each
14,000 Equity Share of Rs.10 each
Long term loans
% Debentures
18,000
+ Interest accrued
2,000
Current liabilities
Creditors
Amount
60,000
1,40,000
20,000
24,401
2,44,401
Assets
Amount
MODULE - 3
Intangible assets
Goodwill
Fixed assets
Leasehold Premises
Plant and Trade Equipment
Current assets
Stock
debtors
cash at Bank
Miscellaneous expenses
Profit and loss account
Total
107
40,000
90,000
47,500
30,410
11,730
420
24,341
2,44,401
Note: Preference dividend had not been paid for three years.
In view of the company’s position, the following scheme was agreed to:
1)
A new company to be formed called ABC. Ltd. with a Nominal
Capital of Rs. 3,00,000 divided into Equity Shares of Rs. 10 each.
The purchase price of the old company’s business to be satisfied by the issue of
the necessary number of shares after the following scheme had been carried out.
2)
3)
4)
5)
6)
7)
8)
One Equity Share Rs.5 paid in the new company, to be issued for
every equity share in the old company.
Three Equity Shares, Rs.5 paid in the new company, to be issued
for every two preference shares in the old company.
Half the arrears of preference dividend, to be satisfied by the issue
of Equity Shares, Rs.5 paid in the new company.
The debenture holders to accept shares of Rs.10 each fully paid in
the new company in satisfaction of their debentures and accrued
interest.
The creditors to be taken over were paid in full at once by the new
company.
The remaining shares in the new company to be taken up and
paid for in full by the Directors.
The new company to take over the assets of the old company,
making the following adjustments in value.
108
Corporate Accounting - II
(a)
(b)
(c)
(d)
(e)
Writing down leasehold premises by Rs.10,000.
Reducing Plant & Equipment to Rs.30,000.
Reducing Stock of Rs.25,400.
Writing off the debit balance of profit and loss account.
Adjusting as required the value of goodwill.
You are required to give:
•
•
•
The Realisation Accounts in the books of the old company;
Journal and Cash Book Entries necessary to open the books of
the new company and;
The initial Balance Sheet of the new company.
3.7 Answers
Answers for questions (A)
1.
2.
3.
4.
5.
6.
False
Refer to section 3.2
Refer to section 3.3
Refer to section 3.3
Refer to section 3.3
Refer to section 3.3
Answers (B)
1.
2.
3.
4.
5.
Purchase consideration – 8,00,000, B/S – 14,55,000
Purchase consideration – 1,25,000, Realization Loss- 44,000 B/S
– 2,20,000
Purchase consideration – 2,00,000
Purchase consideration – 296 lakhs, Realization profit- 117 lakhs
B/S – 410 lakhs
Purchase consideration – 1,20,400 Realization Loss- 45,659 B/S –
1,79,600
MODULE - 4
Internal Reconstruction
MODULE - 4
MODULE - 4
109
Internal Reconstruction
Structure
4.1.
4.2
4.3
4.4
4.5
4.6
Introduction
Meaning of Internal Reconstruction
Forms of Internal Reconstruction
Summary
Questions
Answers
Objectives
•
•
•
Understanding the meaning of the term reconstruction
Meaning of subdivision, consolidation and conversions of shares
Accounting adjustments to be noted at the time of internal
reconstruction
4.1. Introduction
Sometimes, a company might have the problem of over capitalization or might
have suffered huge losses in the past or might have over-valued fixed assets
because of the non-provision of adequate depreciation. Once, such problem
arises the solution the company might take is liquidation. A company placed
in such a difficult position, if it feels that there is some chance of earning
profits, if instead of going into liquidation, may enter into a compromise or an
arrangement with its shareholders, debenture holders & creditors by which
the capital of the shareholders & claims of the debenture holders of creditors
are altered or reduced. Such an internal arrangement is called Internal
Reconstruction.
110
Corporate Accounting - II
4.2. Meaning of Internal Reconstruction
Internal Reconstruction is an arrangement made by companies to alter or
reduce the liabilities (claims of shareholders, debenture holders, creditors),
so that the accumulated losses are written off, assets are valued at its fair value
and the balance sheet shows the true and fair view of the financial position.
4.3. Forms of Internal Reconstruction
Internal reconstruction may take any of the two forms:
1)
2)
Reorganization or Alteration of Capital
Reduction of Capital.
Reorganization/ Alteration of Capital:
Reorganization or alteration of capital means the re-arrangement of the
capital of a company. It includes:
1. Increase of Share Capital:
Increase of share capital can be brought about by the issue of new share.
Journal entry being:
Cash/ Bank A/c ……..Dr
To Share Capital A/c
2. Decrease of share capital by the cancellation of unissued shares:
Cancellation of unissued shares without resulting in reduction of paid up
capital. It does not require any journal entry as it will not affect paid up capital
in any way.
•
Say, the authorized capital of a company is 10,00,000 & its paid up
capital is 8,00,000, cancellation of 2,00,000 unissued capital will
not affect the 8,00,000 paid up capital).
MODULE - 4
111
3. Conversion of shares into stocks:
Fully paid shares can be converted into stocks. A stock is an aggregate of fully
paid shares. Such conversion necessitates transfer from share capital account
to stock account. Therefore, the journal entry would be.
Share Capital Account…….
To Stock Account
Dr
4. Reconversion of Stocks into Shares
A company can reconvert the stocks into shares. This requires transfer from
stock account to share capital account. Therefore, the journal entry would be
Stock Account …………….Dr.
To Share Capital Account
5. Consolidation of Shares
A company can consolidate shares of smaller value into shares of higher
value. It involves consideration of all or part of its shares of smaller amounts
to larger denominations.
E.g.: A Company having a share capital of Rs.1,00,000 shares of Rs.1 each,
resolves to consolidate the shares into 10000 shares of Rs.10 each. Therefore,
the journal entry is:
Share Capital (Rs.1) Account……….. Dr.
To Share Capital (Rs.10) account 1,00,000
1,00,000
6. Sub – Division of Shares
A company can subdivide shares of higher value into shares of small value.
E.g. A company resolves to subdivide 6,000 shares of Rs. 100 each into 60,000
shares for Rs.10 each. Journal entry is:
112
Corporate Accounting - II
Equity Share Capital (Rs.100) Account……. Dr.
To Equity Share Capital (Rs.10) Account
6,00,000
6,00,000
Reduction of Capital and other liability:
Reduction of Capital and other liability has two steps:
1)
1.
2.
Reduction of Capital and other liability.
Writing off loses.
•
Reduction of Capital: Is an arrangement under which generally
the capital of the members, are reduced, and the amount so
reduced is used for writing off the accumulated losses, fictitious
assets & the over-valued portion of the fixed assets etc. . Reduction
of capital may take the following forms.
Reducing the Liability on Partly-paid Shares:
Extinguishing or reducing the liability of any of the shares in respect of the
unpaid amount
E.g. A company has 10,000 shares of Rs.10 each, Rs.8 paid up and the company
decides not to call remaining amount. In such a situation the value of share
becomes Rs.8 fully paid. The journal entry would be
Share Capital A/c (Rs. 10)…. ..Dr.
To Share Capital A/c (Rs. 8)
80,000
80,000
2)
Paying off Paid-up Capital which is in Excess of the Need of the
Company:
E.g. A company having 10,000 shares of Rs.10 each, fully paid up, decides to
pay back Rs.2 per share. Journal entry would be:
Transferring extra capital to shareholders account
1.
Share Capital A/c Dr. To Shareholders A/c 20,000
20,000
MODULE - 4
113
Paying cash to shareholders.
2.
Shareholders A/c Dr
To Bank Account 20,000
20,000
3. Cancellation of Paid-up-Capital which is Lost or Writing off of Share
Capital
Sometimes a company may have huge accumulated losses (in the form of debit
balance of profit & loss a/c, Preliminary expenses, underwriting commission,
over-valuation of assets etc). The writing off of accumulated losses against
share capital involves two steps
i)
ii)
Reduction of share capital
Writing off or eliminating of losses.
The required journal entries are:
Reduction of Share Capital
1st Case Reducing the paid-up value of
existing shares without reducing the face value of those shares.
E.g. Shares of Rs.10 each, 8 paid-up, reduced
to shares of Rs.10 each, Rs.6
paid-up
2nd Case
Reducing the paid-up value of the
existing shares as well as the liability
on those shares.
E.g.: Shares of Rs.10 each Rs.8 is
paid-up reduced to Rs.6 each
fully paid.
The journal entries for above two cases are as follows:
In the First case In the Second case:
Share Capital A/c
Dr.
Old Share Capital A/c Dr.
To Capital Reduction A/c
To New Share Capital A/c
To Capital Reduction A/c
114
Corporate Accounting - II
•
Reduction of other liability: Is an arrangement under which
generally the capital of the debenture holders and creditors, are
reduced, and the amount so reduced is used for writing off the
accumulated losses, fictitious assets & the over-valued portion
of the fixed assets etc. The following are the journal entries for
reduction of liabilities.
1.
Debentures to forgo their claim fully or partly
Debentures (old) a/c……
Dr
To Capital Reduction a/c
To Cash/Bank/Share Capital/Debentures(new)
2.
Creditors forgoing their claim fully or partly
Creditors(old) a/c………
Dr
To Capital Reduction a/c
To Cash/Bank/Share Capital/Debentures a/c
b)
For Writing off the losses.
Capita Reduction A/c
…………….Dr.
To Profit & Loss A/c
To Preliminary expenses A/c
To Underwriting Commission A/c
To Discount on Shares A/c
To Goodwill A/c
To Over-valued Assets A/c
To Capital Reserve A/c (Balance left over)
Illustrations:
1.
(a)
(b)
(c)
Journalise the following transactions in the books of a limited
company.
The company has a paid up capital of 25,000 equity shares of
Rs.100 each Rs.75 called up and paid up. It resolved to cancel the
uncalled capital of Rs.25 per share.
The company has a capital 1,35,000 equity shares of Rs.10 each
full paid. After having found the capital to be in excess it resolved
to refund Rs.6,75,000.
The company has 2,50,000 equity shares of Rs.10 each fully paid
MODULE - 4
115
in view of the huge accumulated losses it resolved to reorganize
the capital by reducing the shares of Rs.8 each.
Solution:
Journal of the Company
No.
Particulars
(a)
Equity Share Capital (Rs.100)
Dr.
To Equity Share Capital (Rs.75) A/c
(Cancellation of 25,000 equity Rs.100 each, Rs.75 called
up by converting & issue of 25,000 new shares of Rs.75
as fully paid)
18,75,000
(b)
Equity Share Capital (Rs.10) A/c
Dr.
To Equity Share Capital (RS.5) A/c
To Shareholders (Rs.5) A/c
(Reduction of capital of Rs.13,50,000 to Rs.6,75,000
i.e. by 50% being found in excess & refundable to the
shareholders)
13,50,000
(ii) Shareholders A/c
Dr.
To Cash/Bank A/c
(Excess capital of Rs.6,75,000 i.e 1,35,000 shares at Rs.5
each refunded)
6,75,000
(c)
(d)
(i) With change in the face value:
Equity Share Capital (old Rs.10)
Dr.
To Equity Share Capital (new Rs.8)
To Capital Reduction A/c
(2,50,000 equity shares of the face value of Rs.10 each
reduced to same number of equity shares of Rs.8 each
as fully paid)
With no change is the face value:
Equity Share Capital (Rs.2)
Dr.
To Capital Reduction A/c
(2,50,000 equity shares of Rs.10 each fully paid reduced
by Rs.2 per share to Rs.8 per share)
L.F.
Dr. Rs.
Cr. Rs.
18,75,000
6,75,000
6,75,000
6,75,000
25,00,000
20,00,000
5,00,000
5,00,000
5,00,000
116
2.
Corporate Accounting - II
Balance Sheet of a Private Company stood follows on 31.12.2009.
Balance Sheet
Equities and liabilities
Share capital
19,000 shares of 100 each
Long term loans
Debentures
Current liabilities
Creditors
Amount
19,00,000
1,00,000
1,00,000
21,00,000
Assets
Intangible assets
Good will
Fixed assets
Land and buildings
Machinery
Furniture
Stock debtors
Miscalleneous expenditure
Profit and loss account
Total
Amount
2,00,000
1,00,000
2,60,000
20,000
1,80,000
9,70,000
21,00,000
The company is to be reconstructed as follows:
a)
b)
c)
d)
Shares of Rs.100 are to be reduced to an equal number of fully
paid shares of Rs.40 each.
To issue 1000 new shares of Rs.40 each as fully paid up to
debenture holders in full settlement.
The amount available is to be utilized in writing off the goodwill
and profit and loss A/c and the balance in writing down the value
of machinery.
Authorized capital of the company is 20,000 shares of Rs.100
each.
Give the necessary journal entries. Prepare capital reduction account &
reconstructed balance sheet.
In the Books of Private Company Ltd.
Journal Entries
MODULE - 4
Sl. No
Particulars
1
Equity Share Capital A/c(old)
Dr.
To Equity Share Capital A/c (new)
To Capital Reduction A/c
(Being the conversion of 19,000 shares of Rs. 100 each to
Rs. 40 each)
2
3
4
Rs.
Debenture A/c
To Debenture holder A/c
(Being the debentures transferred)
Dr.
117
Rs.
19,00,000
7,60,000
11,40,000
1,00,000
1,00,000
Debenture holders A/c
Dr.
To Equity Share A/c
To Capital Reduction A/c
(Being the final settlement made to debenture holders)
1,00,000
Capital Reduction A/c
Dr.
To Profit & Loss A/c
To Goodwill
To Machinery
(Being the utilisation of capital reduction a/c balance in
writing off profit & loss a/c, goodwill & machinery)
12,00,000
40,000
60,000
9,70,000
2,00,000
30,000
Capital Reduction Account
Rs.
Rs.
To Profit & Loss A/c
9,70,000 By (old) Equity Share Capital
To Goodwill
2,00,000 By Debentures Holders A/c
To Machinery
11,40,000
60,000
30,000
12,00,000
12,00,000
Reconstructed Balance Sheet As At……..
Equities and liabilities
Share capital
Authorized Capital 20,000 shares of Rs. 100 each
Issued Capital
20,000 shares of Rs. 40 fully paid
Current liabilities
Creditors
Amount
20,00,000
8,00,000
1,00,000
9,00,000
118
Corporate Accounting - II
Assets
Amount
Fixed Assets
Land & Buildings
Machinery
Furniture
Current assets
Debtors
Stock
1,00,000
2,30,000
20,000
1,80,000
3,70,000
9,00,000
3.
The following is the Balance Sheet as on December 31, 2002.
Balance Sheet
Equities and liabilities
Amount
Share capital
13% cumulative preference shares of 100 each
Equity shares of 10 each
Long term loans
8% debentures
Current liabilities
Current liabilities
Provision for tax
1,00,000
7,00,000
3,00,000
39,00,000
3,00,000
53,00,000
Assets
Amount
Fixed assets
Fixed assets
Current assets
Current assets
Miscalleneous expenses
Profit and loss account
15,00,000
35,00,000
3,00,000
53,00,000
The following scheme of re-organisation is sanctioned.
1)
2)
3)
4)
5)
Fixed assets are to be written down by 33 1/3%.
Current assets are to be revalued at Rs. 27,00,000.
Preference shareholders decide to forego their right to arrears of
dividend which are in arrears for three years.
The taxation liability of the company is settled at Rs. 4,00,000.
One of the creditors of the company, to whom the company owes
MODULE - 4
119
Rs. 25,00,000, decide to forego 50% of his claim. He is allotted
1,00,000 equity shares of Rs. 5 each in part satisfaction of the
balance of his claim.
The rate of interest on debentures is increased to 11%. The
debenture holders surrender their existing debentures of Rs. 100
each & exchange the same for fresh debentures of Rs. 75 each.
All existing equity shares are reduced to Rs. 5 each.
All preference shares are reduced to Rs. 75 each.
6)
7)
8)
Pass journal entries & show the balance sheet of the company after giving
effect to the above.
Solution:
Journal Entries
Sl. No
Particulars
1
Equity Share A/c (Rs.10 each)
Dr.
To Reorganization A/c or Capital Reduction A/c
To Equity Share Capital A/c
(Being the reduction of equity shares of Rs.10 each into
shares of Rs. 5 each)
7,00,000
13% Cumulative Preference Share Capital A/c
Dr.
To Preference Share Capital A/c
To Reorganization A/c
(Being the reduction of preference shares to Rs. 75 each)
1,00,000
3
Sundry Creditors A/c
Dr.
To Equity Share Capital A/c
To Reorganization A/c
(Being the claim foregone by a creditor & the allotment of
shares in part satisfaction of the balance of his claim).
17,50,000
4
8% Debenture A/c
Dr.
To 11% Debentures A/c
To Reorganization A/c
(Being the conversion of 8% debentures of Rs.100 each to
11% debentures of Rs. 75 each)
3,00,000
2
Rs.
Rs.
3,50,000
3,50,000
75,000
25,000
5,00,000
12,50,000
2,25,000
75,000
120
Corporate Accounting - II
5
Reorganization A/c
Dr.
To Profit & Loss A/c
To Fixed Asset A/c
To Current Asset A/c
To Provision for taxes A/c
(Being the loss written off, assets reduced & provision for
tax increased)
17,00,000
3,00,000
5,00,000
8,00,000
1,00,000
Balance Sheet as on 31st December, 2002.
Equities and liabilities
Share capital
13% Cumulative preference shares of Rs. 75 each.
Equity Shares Capital
Long term loans
8% Debentures
Current liabilities
Current Liabilities
Provision for taxes
Amount
75,000
8,50,000
2,25,000
21,50,000
4,00,000
37,00,000
Assets
Fixed Assets
Fixed Assets
Current Assets
Current Assets
Amount
10,00,000
27,00,000
37,00,000
Illustration 4:
The following is the Balance Sheet of Downhill Ltd. as at 31st March, 2003.
Equities and liabilities
Share capital
20,000 equity shares of Rs 100 each
Long term loans
12% debenture
Out standing debenture interest
Current liabilities
Creditors
Amount
20,00,000
5,00,000
1,20,000
3,00,000
29,20,000
MODULE - 4
Assets
Intangible assets
Good will
Fixed assets
Land and buildings
Plant and machinery
Furniture
Current assets
Stock
Debtors
Cash at bank
Miscalleneous expenses
Preliminary expenses
Profit and loss account
121
Amount
25,000
1,50,000
3,00,000
80,000
2,70,000
60,000
35,000
20,000
19,80,000
29,20,000
The following scheme of reconstruction is executed:
(i)
Equity shares are reduced by Rs.95 per share. They are, then,
consolidated into 10,000 equity shares of Rs.10 each.
(ii) Debenture holders agree to forego outstanding debenture
interest. As a compensation 12% debentures are converted into
14% debentures, the amount remaining Rs.5,00,000.
(iii) Creditors are given the option to either accept 50% of their claim
in cash in full settlement or to convert their claims into equity
shares of Rs.10 each. Creditors for Rs.2,00,000 opt for shares in
satisfaction of their claims.
(iv) To make payment to creditors opting for cash payment and to
augment working capital, the company issues 50,000 equity
shares of Rs.10 each at par, the entire amount being payable along
with applications. The issue was fully subscribed.
(v) Land & Buildings are revalued at Rs.2,00,000 whereas Plant &
Machinery is to be written down to Rs.2,10,000. A provision
amounting to Rs.5,000 is to be made for doubtful debts.
122
Corporate Accounting - II
Pass journal entries and draft the company’s balance sheet immediately after
the reconstruction.
Solution:
Journal Entries
Particulars
Rs.
Equity Share Capital (Rs.100) A/c
To Equity Share Capital A/c (Rs.5)
To Capital Reduction A/c
(Being the reduction of equity share capital)
Dr.
Equity Share Capital (Rs.5) A/c
To Equity Share Capital (Rs.10) A/c
(Being consolidation of 10,000 shares to Rs.10 each)
Dr.
Rs.
20,00,000
1,00,000
19,00,000
1,00,000
1,00,000
12% Debentures A/c
Dr.
Outstanding Debentures Interest A/c
Dr.
To 14% Debentures A/c
To Capital Reduction A/c
(Being conversion of 12% debentures into 14% debentures
and outstanding debenture interest foregone by debenture
holders)
5,00,000
1,20,000
Creditors A/c
Dr.
To Equity Share Capital A/c
To Bank A/c
To Capital Reduction A/c
(Being creditors opted for payment in cash and equity
shares)
3,00,000
Bank A/c
To Equity Share Capital A/c
(Being issue of equity shares) Dr.
Dr.
5,00,000
Land & Building A/c
To Capital Reduction A/c
(Being appreciation in the value of land & building)
Dr.
5,00,000
1,20,000
2,00,000
50,000
50,000
5,00,000
Capital Reduction A/c
Dr.
To Profit & Loss A/c
To Preliminary Expenses A/c
To Goodwill
To Plant & Machinery A/c
To Provision for Doubtful Debts A/c
(Being the balance of capital reduction utilized for writing
off fictitious assets or previous losses and fixed assets)
50,000
50,000
21,20,000
19,80,000
20,000
25,000
90,000
5,000
MODULE - 4
123
Balance Sheet of M/S Downhill Ltd. (After Reconstruction)
as on 31st March, 2003.
Equities and liabilities
Amount
Share Capital
Issued and Subscribed 80,000 Equity shares of Rs.
10 each
Long term Loans
14% Debentures of Rs. 100 each
8,00,000
5,00,000
13,00,000
Assets
Fixed Assets:
Goodwill
Less: Reduced under
Reconstruction Scheme
dated…..
Land & Building
Plant & Machinery
Less; Reduced under
Reconstruction
Furniture
Current Assets
Stock
Debtors
Less: Provision for D/D
Bank Balance
(Rs.5,35,000 - Rs.50,000)
Amount
25,000
25,000
Nil
3,00,000
90,000
60,000
5,000
2,10,000
80,000
2,70,000
55,000
4,85,000
13,00,000
Illustration 5:
Given below is the Balance Sheet of Bud Kismat Ltd. as at March 31, 2003.
124
Corporate Accounting - II
Equities and liabilities
Share capital
4,000 Equity Shares of Rs. 100 each fully paid
4,00,000
1,000 Equity ‘A’ Shares of Rs.100 each
Rs.50 per share paid
50,000
Reserves and surplus
Development rebate reserve
Long term loans
Loans (unsecured)
Current liabilities
Creditors(including Rs.10,000 holding lien on
some assets)
Amount
4,50,000
1,50,000
6,40,000
2,60,000
15,00,000
Assets
Fixed assets
Land and buildings
Machinery
Motor vans
Furniture
Current assets
Investments ( market value 40,000)
Stock
Debtors
Bank balance
Miscalleneous expenses
Profit and loss account
Amount
1,00,000
4,00,000
40,000
10,000
50,000
1,00,000
1,90,000
10,000
6,00,000
15,00,000
The company having turned the corner, a scheme of reconstruction was
prepared and approved as under:
(1)
(2)
(3)
(4)
Equity shares to be reduced to Rs.10 per share on both the equity
shares ,and the face value remaining the same at Rs. 100 and both
the equity shareholders paying a call of Rs.50 per share to provide
funds for the company’s working.
To bring in the books the present market value of land and
building which has appreciated by 150%
Development rebate reserve, being no longer required, to be
transferred to profit and loss account.
Unsecured loans to be paid immediately to the extent of
Rs.1,00,000
MODULE - 4
(5)
125
Unsecured creditors to be paid immediately to the extent of 10%
of their claims and they accept a remission of 20% of their claims
Investments to be brought to their market value
The amount available as a result of the scheme is to be used to
write off the debit balance in Profit & Loss Account.
(6)
(7)
Give journal entries to record the above and give the Balance Sheet after the
reconstruction is effected.
Solution:
Journal Entries in the Books of Bud-Kismat Ltd.
Sl. No
1
Particulars
Rs.
Rs.
Equity Share Capital A/c
Dr.
3,60,000
Equity ‘A’ Share Capital A/c
Dr. 40,000
To Capital Reduction A/c
(Entry to record the cancellation of Rs.90 per share on 4,000
equity shares and Rs. 40 per share on 1,000 equity, ‘A’ shares
as per the reconstruction scheme dated)
4,00,000
Bank A/c
Dr.
To Equity Share Capital A/c
To Equity ‘A’ Share Capital A/c
(Being the receipt of call money @ Rs.50 per share on 4,000
equity shares and 1,000 equity ‘A’ shares)
2,50,000
2,00,000
50,000
Land & Building A/c
Dr.
To Capital Reduction A/c
(Entry to record 150% appreciation in the value of land and
building)
1,50,000
4
Development Rebate Reserve A/c
Dr.
To Profit & Loss A/c
(Being balance of development reserve a/c transferred to
profit & loss a/c)
1,50,000
5
Unsecured Loans A/c
To Bank A/c
(Being the payment to unsecured creditors)
1,00,000
2
3
Dr.
1,50,000
1,50,000
1,00,000
126
Corporate Accounting - II
6
Creditors A/c
Dr. 75,000
To Bank A/c
To Capital Reduction A/c
(Being payment to unsecured creditors to the extent of 10%
and remission of 20% of their claims)
7
Capital Reduction A/c
Dr.
To Investment A/c
To Profit and Loss A/c
To Capital Reserve A/c
(Being the entry to write off investment loss and profit &
loss account and balance transferred to capital reserve A/c)
6,00,000
Balance Sheet of Bud-Kismat Ltd. (And Reduced)
as on 31st March, 2003
Equities and liabilities
Amount
Share Capital
40,000 Equity share of Rs.100 each, Rs.60 paid up
2,40,000
1,000 equity ‘A’ Shares of Rs. 100 each, Rs.60 paid
up
60,000
Reserve and Surplus:
Capital Reserve
Long term loans
Unsecured loans
Current Liabilities:
Creditors (including Rs. 10,000 holding lieu on
some assets)
3,00,000
1,40,000
5,40,000
1,85,000
11,65,000
Assets
Fixed Assets:
Land & Building
Add: 150% Appreciation as per
Reconstruction scheme
Machinery
Motor Vans
Furniture
Current Assets:
Investments
Stock
Debtors
Bank Balance
Amount
1,00,000
1,50,000
2,50,000
4,00,000
40,000
10,000
40,000
1,00,000
1,90,000
1,35,000
11,65,000
25,000
50,000
10,000
4,50,000
1,40,000
4.4 Summary
•
•
•
•
•

127
Reconstruction is a process by which affairs of the company
are recognized by revaluation of assets, reassessments of
liabilities and writing of the losses by various such modes.
During the process of reconstruction, it accounts to
opening of new account called Capital Reduction Account
or Reorganization Account, where transfer of sacrifice of
shareholders and others have made.
Reconstruction account is utilized for writing off intangible
assets, over valuation of assets and new liability of the
company.
If there is credit balance in Reduction account, the same
have to be transferred to Capital Reserve Account.
Modes of Internal Reconstruction
Reorganization/ Alteration of Capital
1.
2.
3.
4.
5.
6.

MODULE - 4
Increase of Share Capital
Debenture of share capital by the cancellation of unissued
shares
Conversion of shares into stocks
Reconversion of Stocks into shares
Consolidation of shares
Sub–division of Shares.
Reduction of Capital.
1.
2.
3.
Reducing the liability on partly-paid shares.
Paying off paid-up capital, which is in excess of the need of
the company.
Cancellation of paid-up-capital, which is lost or writing off
of share capital.
128
Corporate Accounting - II
4.5 Terminal Questions
Self assessment questions:
Objective type
1.
Fill in the blanks
I.
II.
III.
2.
Under the section 95 of the Companies Act, 1956, the
company shall give notice of the alteration of capital to the
Registrar within……… days of doing so.
Internal reconstruction is generally resorted to write off
the…….
Reduction of capital is unlawful except when…….
Choose the correct answers
I.
When the objective of company is to re-organize the capital
or compound with creditors then it is called
a) Internal Reconstruction with liquidation
b) Internal Reconstruction without liquidation
c) External Reconstruction
II. Reconstruction includes all of them except
a) Consolidation of shares
b) Subdivision of shares
c) Buy back of shares
Short answer type
1)
Why do we resort to Internal reconstruction? What is the journal
entry for the following scheme of capital reduction?
50,000 equity shares of Rs.100 reduced to Rs.10 each fully paid
Long answer type
1)
Explain the various provision of alteration of share capital as
given in the Companies Act, 1956
MODULE - 4
2)
129
Write a note on Internal Reconstruction.
Exercise Problems:
1.
On the reconstruction of a company, the following terms were
agreed upon:
The shareholders to receive in lieu of their present holding (viz. 50,000 shares
of Rs.10 each) the following:
(a)
(b)
(c)
Fully paid Equity Shares equal to of their holdings.
5% preference shares fully paid, to the extent of of the above new
Equity shares.
Rs.60,000, 6% Second Debentures.
An issue of Rs.50,000, 5% First Debentures was made an allotted payment for
the same having been received in cash.
The goodwill, which stood at Rs.3,00,000 was written down to Rs.1,50,000.
The plant and machinery, which stood at Rs.1,00,000 were written down to
Rs.75,000.
The Freehold and Leasehold premises, which stood at Rs.1,50,000 were
written down to Rs.1,25,000.
Make the Journal Entries in the books of the company necessitated by the
above reconstruction.
130
Corporate Accounting - II
2.
Following is the balance sheet of Unfortunate Ltd., as on 31st
December, 2004
Equities and liabilities
Share capital
30,000 5% prefernce shares of Rs 10 each
50,000 equity shares at Rs 10 each
Long term loans
Debentures
Loans
Current liabilities
Trade creditors
Amount
3,00,000
5,00,000
2,50,000
50,000
1,93,000
12,93,000
Assets
Fixed assets
Land and buildings
Machinery
Furniture
Intangible assets
Goodwill
Current assets
Stock
Debtors
Bills receivable
Bank balance
Miscalleneous expenses
Profit and loss account
Amount
3,00,000
2,50,000
2,000
70,000
30,000
1,20,000
95,000
6,000
4,20,000
12,93,000
On receiving the court order to reconstruct (internally) Unfortunate Ltd.,
the board of directors decided that the will follow following scheme of
reconstruction,
1.
2.
3.
4.
5.
The Preference Share dividends were not paid for the past 2 years.
The depreciation on machinery was not provided, the amount of
depreciation assessed till date was Rs.20,000.
Then arrears of dividend are to be cancelled completely.
Preference Shares are to be reduced to Rs.8 per share, fully paid
and it shall carry an additional dividend of 1.25%.
Equity Shares will be reduced to Rs.2 each as Re.1 paid-up and the
balance money shall be called immediately, which will provide
MODULE - 4
6.
131
additional capital for the company.
The debit balance of the profit and loss A/c, Goodwill A/c is to be
written off completely.
Pass the journal entries and prepare reconstructed balance sheet under the
assumption that the payment is received from all the equity share holders on
making the calls.
3.
New Infrastructure Ltd., obtained court sanction to reduce the
capital and reconstruct itself internally, based on the following
balance sheet
Equities and liabilities
Share capital
15% preference shares of 10 each
Equity shares of 10 each
Reserves and surplus
Surplus
Long term loans
10% mortgaged debentures of 10 each
Current liabilities
Current liabilities
Amount
4,00,000
10,00,000
4,53,500
2,00,000
2,74,500
23,28,000
Assets
Fixed assets
Land and buildings
Current assets
Stock
Book debtors
Bank balance
Miscellaneous expenses
Profit and loss account
Amount
4,67,000
8,12,500
4,67,500
25,000
5,56,000
23,28,000
Scheme:
1.
Each debenture is to be exchanged for Rs.5 of new 12% debenture
and new 20% Preference Share of Rs.2.5 and new equity share of
Rs.2.5.
132
Corporate Accounting - II
2.
3.
4.
5.
The existing Preference Shares are to be reduced to Rs.3.75 of
which Rs.2 shall be represented be new 20% Preference Shares
and Rs.1.75 by equity shares.
The existing equity shares shall be reduced to Rs.2.5 each.
The profit available in Reduction A/c together with reserves
and surplus shall be used for wiping off profit & loss a/c and the
remaining if any shall be used to write down land & buildings and
stock proportionately.
Both the Preference shares and equity shares are to be consolidated
into shares of Rs.10 each.
Write up the journal entries and also balance sheet as it may appear after
company is internally reconstructed.
4.
A company decided to reconstruct itself internally based on the
following scheme.
1.
Equity Shareholders have agreed to have their capital reduced to
5% of their present holding.
The 10% Preference Share holders have also agreed to have their
capital reduced by 25% of their present holding.
The debentures holders have agreed to settle for 2,000 Preference
Shares of Rs.100 each, fully paid in exchange of interest due to
them.
The creditors have agreed that their claim be reduced by half.
The arrears of preference dividend shall be settled by the issue of
3,000, 3% participating preference shares of Rs.100 each in full
settlement.
The company utilized a portion of Rs.80,000 it recovered as
damages from another company to pay off the salary Rs.8,000,
which was not shown in balance sheet. Rs.2,000 being the expense
on reconstruction was also paid using the account received above.
2.
3.
4.
5.
6.
MODULE - 4
7.
133
It was agreed to write down a debit balance of profit & loss a/c,
suspense a/c in full. The company had obtained certain patent
rights recorded in the balance sheet, which is now lapsed. This
needs to be eliminated from the books of accounts at 100% of its
book value. If any balance is available, write off the goodwill.
The balance sheet before reconstruction was as follows:
Equities and liabilities
Share capital
40,000 shares of 10 each
50,000, 10% preference shares of Rs 100 each
Long term loans
8% debentures
Interest on debentures
Current liabilities
Trade creditors
Amount
4,00,000
50,00,000
10,00,000
2,00,000
2,00,000
68,00,000
Assets
Fixed assets
Plant and machinery
Furniture
Intangible assets
Patents rights
Good will
Current assets
Stock and debtors
Bank
Miscellaneous expenses
Suspense account
Profit and loss account
Amount
28,00,000
1,00,000
2,00,000
15,00,000
11,00,000
2,000
32,000
10,66,000
68,00,000
Pass the journal entries & show balance sheet after reconstruction.
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Corporate Accounting - II
5.
Following is the Balance Sheet of Govind Ltd. as on March
31st
Equities and liabilities
Share capital
8,000 equity shares of 100 each
Long term loans
8% debentures
Accrued interest
Current liabilities
Trade creditors
Income tax liability
Amount
8,00,000
14,00,000
70,000
4,50,000
10,000
27,30,000
Assets
Fixed assets
Land, buildings and machinery
Current assets
Stock
Debtors
Investments
Cash at bank
Cash in hand
Miscellaneous expenses
Profit and loss account
Amount
14,00,000
1,00,000
40,000
15,000
1,03,000
2,000
10,70,000
27,30,000
A scheme was prepared and was passed. The following are the important
points of the scheme:
1.
2.
3.
4.
Each share shall be sub-divided into fully paid equity shares of
Rs.10 each.
After such sub division, every share holder shall surrender to
the company, 90% of their holding, for the purpose of re-issue to
the debentures and creditors as much as required otherwise for
cancellation.
The debenture holders total claim shall be reduced to Rs.5,00,000
which will be satisfied by issuing 50,000 Preference shares of Rs.
10 each fully paid.
The claim of total creditors shall be reduced by 80%, balance to be
satisfied by allotting them equity shares of Rs.10 each fully paid
MODULE - 4
5.
135
from the shares which were surrendered.
The surrendered shares which are not reissued shall be cancelled.
Prepare the journal entries and balance sheet after the scheme has been
carried into effect.
6.
Balance Sheet of Indian Construction Ltd. as on December 31,
2001.
Equities and liabilities
Share capital
Authorized Capital :
20,000 equity shares of Rs.10 each
Issued, Subscribed and Paid-up capital:
12,000 equity shares of Rs.10 each
1,20,000
Less: Calls in arrears
(Rs.3 per share on 3,000 shares)
Current liabilities
Sundry creditors
Provision for taxes
Amount
9,000
1,11,000
15,425
4,000
1,30,425
Assets
Intangible assets
Goodwill
Fixed assets
Land and buildings
Machinery
Current assets
Stock
Book debts
Cash at bank
Miscellaneous expenses
Profit & Loss A/c: Balance as per last Balance Sheet
22,000
Less: Profit for the year
Preliminary expenses
Amount
10,000
20,500
50,580
10,275
15,000
1,500
1,200
20,800
1,500
1,30,425
A valuation of machinery reveals that it is over-valued by Rs.10,000. It is
proposed to write down this asset to its true value, to eliminate the deficiency
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Corporate Accounting - II
in the profit and loss account and to write off goodwill and preliminary
expenses by adopting the following course:
1)
2)
3)
4)
7.
Forfeit the shares on which call is outstanding.
Reduce the paid-up capital by Rs.3 per share; face value remaining
the same.
Reissue the forfeited shares at Rs.5 per share.
Utilize the provision for taxes if necessary.
Following is the balance of eastern sugar mills ltd., as on 31st
March, 1992.
Equities and liabilities
Share capital
4,000, 6% cumulative preference shares of 100
75,000, Equity shares of Rs. 10
Long term loans
6% Debentures (freehold property)
Unsecured loan
Loan from director
Current liabilities
Creditors
Interest o/s on debentures
Bank overdraft
Amount
4,00,000
7,50,000
3,75,000
1,00,000
3,00,000
22,500
1,95,000
21,42,500
Assets
Fixed Assets
Free hold property
Plant
Intangible assets
Patents
Goodwill
Current assets
Investments-at cost
Debtors
Stock
Miscellaneous exp & losses
Profit & loss
Deferred Ad. Expenses
Amount
4,25,000
50,000
37,500
1,30,000
55,000
4,85,000
4,25,000
4,35,000
1,00,000
21,42,500
MODULE - 4
1.
2.
3.
4.
5.
6.
7.
8.
9.
137
Write down preference shares to Rs.75 each and equity shares of
Rs.2/- each.
Preference dividends are in arrears for 3 years, 2 years arrears
may be cancelled and for the balance issue equity shares of Rs.2/each.
The interest outstanding on debenture is to be paid in cash.
Debenture holders agree to take over a certain portion of free
hold property at a valuation of Rs.1,00,000 towards part payment
of their claim, further they agreed to provide an additional cash
of Rs. 1,30,000 secured by floating charge on fixed assets, at 8%
p.a.
Patent, goodwill and deferred advertising shall be written off.
Stock to be written off by Rs. 65,000 and Rs.68,500 is irrecoverable
debts.
The remaining portion of free hold property is valued at
Rs.3,87,500
Trade investments are to be sold for Rs.1,40,000.
The directors have agreed to accept their loan as 90% in Rs.2/equity capital, Rs.5,000 in cash and the remaining is waived
(cancelled or forgone).
Show the journal entries and balance sheet.
4.6 Answers
1.
2.
(Ans: I. 30, II. past accumulated losses, III. Sanctioned by the
court)
(Ans I. b, II c)
Short answers
1)
2)
(Refer to sec. 4.1)
(Refer to sec. 4.4)
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Corporate Accounting - II
Long answers
1.
2.
(Refer to sec. 4.4)
(Refer to sec. 4.1, 4.3, 4.4)
Exercises
1.
2.
3.
4.
5.
6.
7.
Capital reduction 2,00,000
Cap Reduction- 5,10,000 and B/S- 8,33,000
Cap Reduction- 14,53,500, Balance sheet total-Rs.8,74,500)
Cap Reduction -18,00,000, Balance sheet total -53,70,000
Cap Reduction- 20,50,000, Balance sheet total – 16,60,000
Cap Reduction- 42,300 Balance sheet total- 103125
Cap Reduction -8,28,500 Balance sheet – 12,69,000
MODULE - 5
Liquidation of Companies
MODULE - 5
MODULE - 5
139
Liquidation of Companies
Structure
5.1.
5.2.
5.3.
5.4.
5.5.
Introduction
Meaning of Liquidation
Modes / Forms of Liquidation
Contributory
Liquidator
5.5.1 Liquidators Remuneration
5.5.2 Liquidator’s Final Statement
5.6 Meaning of Related Terms
5.7 Preferential Payments
5.8 Summary
5.9 Questions
5.10 Answers
Learning Objective
•
•
•
To clearly understand all the provisions of the companies act for
liquidation.
To know the kinds of liquidations and to understand parties
involved in the process of liquidation.
To know hierarchy of the company liabilities.
5.1. Introduction
Liquidation is usually the last stage of a workout plan or bankruptcy
proceeding for a company. It occurs when it has been determined that a
company cannot continue on as a viable entity and it is believed that there
exists more value in the assets of the company than in the company as a going
concern. Occasionally a company’s assets will be liquidated when the owner
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Corporate Accounting - II
decides to quit, not because he has gone bankrupt but because he doesn’t
want to go through the effort and trouble of finding a buyer.
5.2. Meaning of Liquidation
One of the main characteristics of a Joint Stock Company is that it is created
by law and therefore it can come to an end only through a legal process.
“The legal process, by which a joint stock company is brought to an end i.e.,
completely closed down, is called liquidation or winding up”.
In this process of winding up of the company, its assets are realised, liabilities
are paid off and the surplus, if any is distributed among the members in
accordance with their rights. A company which is wound up need not
necessarily be a bankrupt (Insolvent) company, even solvent companies are
liquidated.
5.3. Modes / Forms of Liquidation
Under Sec 425 (1) of the Companies Act provides that a company can be
liquidated in any of the following three ways.
I.
Compulsory Winding Up:
Is a winding up which is brought by an order of the court. Compulsory
winding up takes place in any of the following circumstances.
1.
2.
3.
4.
5.
If the company has passed a special resolution to the effect that it
should be wound up, by the court
When company (Public Company) has failed to hold the statutory
meeting or file the statutory report with the Registrar of Company
If the Company has not commenced its business within a year of
its incorporation or has suspended its business for a whole year
If the number of members has fallen below seven in case of public
company or below two in the case of private company
If the company is unable to pay its debts
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6.
II.
141
If the court is of the opinion that it is Just and equitable that the
company should be wound up.
Voluntary Winding Up:
A company can be wound up voluntarily under following circumstances:
By an Ordinary Resolution:
•
•
Where the duration of the company was fixed by the articles and
the period has expired.
Where the articles provided for winding up on the occurrence of
any event and the specified event has occurred.
By a Special Resolution:
When a resolution is passed by members in all other cases for voluntary
winding up, it must be notified to the public by an advertisement in the
official Gazette and in newspaper.
Types of Voluntary Winding Up:
III. Voluntary Winding Up Under the Supervision of the Court:
When a company is being wound up voluntarily, the court on an application
presented to it for the court’s interference by any of the members or the
creditors may order that the voluntary winding up should be under its (court)
supervision. The object of a supervision order is to ensure the protection of
interests of all persons concerned with the company, the contributories and
creditors.
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Corporate Accounting - II
5.4. Contributory
Is a person who has agreed to contribute to the assets of company in the event
of liquidation. According to Section 428 of the Companies Act, a contributory
is “every person liable to contribute to the assets of a company in the event of
it being wound up, and includes holder of any shares which are fully paid up
and also any person alleged to be a contributory.
5.5. Liquidator
Are persons appointed specially for conducting the liquidation or winding up
proceedings of the company.
In case of:
1.
2.
3.
Compulsory Winding up – Official Liquidator is appointed by
the court.
Voluntary Winding up:
(a) Members – Liquidator is appointed by members during
eveloping their general meeting.
(b) Creditors – Creditors and members of the Company
nominate the liquidator.
Supervision of Court – Liquidator may be appointed by the
members or the creditors or by the court.
5.5.1 Liquidators Remuneration
Liquidator normally gets his remuneration in the form of commission, which
is usually based on value on assets realized and payments made to creditors.
If the amount is sufficient to make full payment of unsecured creditors, the
commission is calculated as follows:
LR= Amount due to unsecured creditors x % of commission
100
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143
If the amount is not adequate, then commission is calculated as follows:
LR= Amount available for unsecured creditors x % of commission
100 + % of commission
5.5.2 Liquidator’s Final Statement
At the time of liquidation, the liquidator realizes all the assets and discharges
the liabilities and capital. The statement prepared to record such receipts and
payments is called “Liquidator’s final statement of Account”.
…. Company Ltd.
Liquidator’s Final Statement of Account.
Receipts
Amount
Payments
Amount
Cash-in-hand
xxx
Secured Creditors
xxx
Cash at Bank
xxx
Legal charges (including
liquidation expenses)
xxx
Liquidator’s Remuneration
xxx
Assets Realised
Marketable Securities
xxx
Debenture Holders:
Bills Receivable
xxx
Outstanding
Debenture
Trade Debtors
xxx
Debentures
xxx
Loans and Advances
xxx
Preferential Creditors
xxx
Stock-in-trade
xxx
Unsecured Creditors
xxx
Work–in–Progress
xxx
Calls-in-Advance (if any)
xxx
Plant & Machinery
xxx
Arrears on Dividend on
preference share cumulative
xxx
Furniture & Fixtures
xxx
Preference shareholders
xxx
Patent, trade marks etc
xxx
Equity shareholders
xxx
Investments
xxx
Surplus realised from secured
creditors (if any)
xxx
Calls in arrears
xxx
Amount received from calls on
shares
xxx
Interest
on
xxx
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Corporate Accounting - II
5.6 Meaning of Related Terms
1.
2.
3.
Secured creditors: Any creditor or lender who takes collateral
(security) for the extension of credit, loan is called a secured
creditor. In other words, it refers to such liability which has security
of company’s property. To ascertain whether the liability is fully
secured, the realizable value of security should be compared with
the liability.
Unsecured creditors: An individual or institution that lends
money without obtaining specified assets as collateral
Preferential creditors: are in nature of unsecured creditors who
have priority of claims over other unsecured creditors, under
section 530 of the Companies Act.
5.7 Preferential Payments
1.
2.
3.
4.
5.
6.
7.
8.
Any kind of revenue due to government or local authorities within
12 months before the date of commencement of liquidation.
Any compensation, lay off or retrenchment of employees payable
to any of the worker as per industrial dispute Act within 12
months before the day of commencement of liquidation.
Any wage of salary due to any employee for period not exceeding
4 months within 12 months before the start of winding up
provided the amount payable to one employee does not exceed
Rs. 20000.
All accrued holiday remuneration becoming payable to any
employee on the termination of his services.
Contribution payable by the company as an employer under the
employees state insurance Act.
The expenses of any investigation held under section 235 or 237.
Advance received from any person for the purpose of making the
preferential payments.
All sums due to any employee with regards to provident fund, a
pension fund, a gratuity and other fund maintained for welfare of
the company.
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145
Preference dividend
•
•
Preference dividend declared but not paid must be treated as
“unsecured creditors” and paid accordingly.
In case of cumulative preference shares, if dividends are in arrears
for one or more years, but not declared, it must be paid before
paying preference share capital.
Note: when share capital of the company includes fully paid shares and partly
paid shares, the difference amount must be paid first on fully paid shares and
balance if any, must be proportionately distributed.
Illustrations
1)
The amount due to the unsecured creditors is Rs.20,000 and the
amount available for the payment of unsecured creditors before
charging such commission is Rs.3,50,000 and 3% commission
is to be paid on the amount available to unsecured creditors.
Calculate the remuneration payable to the liquidator.
Liquidators remuneration =
Amount due to unsecured creditors Χ % of commission
100
2,00,000 Χ 3
=
100
= Rs.6,000
(Note: the amount available is sufficient to pay the unsecured creditors
completely)
2)
From the following information available calculate the liquidators
remuneration payable
Creditors to be paid
Rs.3,00,000
Commission to be paid on the amount
paid to creditors2%
Total amount available
Rs.102000
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Corporate Accounting - II
Liquidators remuneration = amount available for unsecured creditors X % of
Commission.
100 + % of commission
= 102000 × 2
100 + 2
= Rs.2,000
3)
The following particulars related to a limited company which has
gone into voluntary liquidation. You are required to prepare the
liquidators final account allowing for his remuneration at 2% on
the amount realised. 2% on the amount distributed to unsecured
creditors other than prefential creditors.
Prefential Creditors
10,000
Unsecured Creditors
32,000
Debentures
10,000
Assets Realised:
Land & Building
20,000
Plant & Machinery
18,650
Fixtures 1,000
The liquidation expenses amount to Rs. 1000.
Solution:
Receipts
… Company
Liquidators Final Statement
Amount
Payments
Land & Building
20,000 Liquidation expenses
Plant & Machinery
18,650 Remuneration of liquidator
Fixtures & Fittings
1,000 2% on 39,650
2% on unsecured creditors
39,650
Amount
1000
793
350
Debentures
10,000
Preferential Creditors
10,000
Unsecured creditors (0.547
paisa in a rupee) (Balancing
figures)
17,507
39,650
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147
Calculation of Remuneration on Unsecured Creditors:
Assets realized
39,650
(-) Payments 21,793
17,857
17857 ×
4.
2
350
=
102
A limited company went into voluntary liquidation with the
following liabilities:
Trade creditors
12,000
Bank Overdraft
20,000
Capital
10,000 preference share of Rs. 10 each Rs. 7 called up (Prior rights)
10,000 ordinary shares of Rs. 10 each Rs. 9 called
70,000
90,000
(-) Calls in arrears 2000
2,000
88,000
Cash received in anticipation of calls (calls in advanced)
On preference shares
24,000
On ordinary shares
4,000
28,000
The assets realised Rs. 2,00,000. Expenses on liquidation amounted to Rs.
2000 and liquidator’s remuneration Rs. 3,000. Prepare liquidator’s final
statement of account.
Solution:
... company
Liquidator’s Final Statement
Assets Realised
Calls in arrears collected
2,00,000 Liquidation expenses
2,000 Liquidation remuneration
2,000
3,000
Unsecured creditors
Trade creditors
12,000
Bank Overdraft
20,000
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Corporate Accounting - II
Calls in advance
28,000
Preference share holders
70,000
Equity shareholder @ Rs.
6.70 per share (Balancing
figure)
67,000
2,02,000
5
2,02,000
The Balance Sheet of ‘B’ Ltd as on 31.12.09 was as follows:
Equities and liabilities
Share capital
8,000 preference shares of Rs.10 each
12,000 equity shares of Rs.10 each
Long term loans
8% Debentures
Interest outstanding on debentures
Current liabilities
Bank loan
Creditors
Amount
80,000
1,20,000
1,00,000
8,000
4,00,000
2,00,000
9,08,000
Assets
Fixed assets
Land & Building
Fixed assets
Current assets
Stock
Debtors
Miscalleneous expenses
Profit and loss account
Amount
25,000
2,00,000
5,25,000
1,00,000
58,000
9,08,000
The company went into liquidation on that date. Prepare liquidator’s statement
after taking into account the following.
1.
2.
3.
Liquidation expenses and Liquidator’s remuneration amounted
to Rs.3,000 and Rs.10,000 respectively.
Bank loan was secured by a pledge of stock.
Debentures and interest there on are secured by a floating charge
on all assets.
MODULE - 5
4.
Fixed assets were realised at book value and current assets at 80%
of book value.
Solution:
‘B’ Ltd
Liquidator’s Final Statement
Assets Realised
Liquidation Expenses
3,000
10,000
Land & Building
25,000
Liquidation remuneration
Other fixed assets
2,00,000
8% Deb
1,00,000 1,08,000
+Interest Outstanding
8,000
Debtors (1,00,000 80%)
80,000
Creditors
200000
Preference share holders
4,000
Surplus from stock held as security 20,000
by bank
(5,25,000 80% = 4,20,000)
(4,20,000 – 4,00,000)
3,25,000
6)
149
3,25,000
Balance Sheet of Soma Ltd as on December 31, 2009.
Equities and liabilities
Share capital
1,000, 6% preference shares of Rs. 100 each
2,000, equity shares of Rs.100 each, fully paid
3,000 equity shares of Rs.100 each Rs. 50 paid
Long term loans
6% Debentures
Unsecured Loan (Mortgage on Land & Building)
Current liabilities
Sundry Creditors
Income Tax
Amount
1,00,000
2,00,000
1,50,000
1,00,000
1,00,000
90,000
10,000
7,50,000
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Corporate Accounting - II
Assets
Amount
Fixed assets
Land & Building
Plant & Machinery
Current assets
Stock
Debtors
Cash at Bank
Miscalleneous expenses
Profit & Loss A/c
2,00,000
2,20,000
1,00,000
1,00,000
30,000
1,00,000
7,50,000
The company went into liquidation on 01 Jan, 2010. Preference dividend were
arrears for 3 years. The arrears are payable on liquidation. The assets were
realised as follows:
Land & Building – 2,40,000
Plant & Machinery – 1,80,000
Stock – 70,000
Debtors – 60,000
The expenses of liquidation amounted to 8,000. The liquidator is entitled
for commission at 2% on assets realised and 3% on amount distributed to
unsecured creditors. Prepare liquidator’s statement of accounts. All payments
are made on June 30, 2010.
Liquidator’s Statement of Accounts
Assets Realised
Liquidation expenses
Cash at Bank
30,000 2% on 5,50,000
Sundry Debtors
60,000 3% on 1,00,000 distributed
on unsecured creditors
3,000
70,000 Liquidation expenses
8,000
Stock in trade
11,000
Plant & Machinery
1,80,000 Debentures holders
Surplus from securities (24,00,000
– 10,000) (Land & Building)
1,40,000 Principal
(+) Interest
1,00,000
3,000
1,03,000
Preferential
Income Tax
Creditors
10,000
Unsecured Creditors
90,000
MODULE - 5
151
Preference Shareholders
Capital
+ Dividends
18,000
1,00,000
(6000 × 3)
1,18,000
Equity Shareholders
4,80,000
Rs. 57.40 on 2000 shares
1,14,800
Rs. 7.40 on 3,000 shares
22,200
4,80,000
Working Note:
1)
Debentures holders are entitled interest upto the payment date.
2)
Amount Payable to Equity Shareholders:
Amount available to Equity Shareholders = 1,37,000
Amount totally payable = 2,00,000 + 1,50,000 = 3,50,000.
Therefore Loss to the equity shareholder = 3,50,000 – 1,37,000
= 2,13,000
Therefore Loss per share =
Therefore, Refund per share =
Fully paid = 100–42.6 = 57.40 per share
Partly paid = 50–42.6 = 7.50 per share
5.8 Summary
•
•
•
Winding up of a company is the process whereby its life is ended
and its property administered for the benefit of its creditors and
members. An administrator called a liquidator is appointed and
he takes control of the company, collects its debts and finally
distributes any surplus among the members in accordance with
their rights.
Contributory: Is a person who has agreed to contribute to the
assets of company in the event of liquidation
Modes of Winding up of the company:
1.
By the Tribunal i.e. compulsory winding
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Corporate Accounting - II
2.
•
1.
2.
3.
•
a.
Voluntary winding up, which may be
(a) Member’s voluntary winding up;
(b) Creditor’s voluntary winding up;
Liquidator can be released from the relevant duties in a windingup proceedings:
All the assets of the company have been realized (i.e. all assets
have been sold and converted to cash);
Investigations related to the winding-up proceedings are
completed; and
A final dividend (if any) has been paid to the creditors to settle
the debts
Liquidators Remuneration
Language used for calculating liquidators remuneration can be
any of the following six:
i.
Percentage (%) on assets realized.
ii.
Percentage (%) of all assets/ gross assets/ total assets
iii. Percentage (%) of payment to unsecured creditors
iv. Percentage (%) of payment to secured creditors
v.
Percentage (%) of payment to members/shareholders
vi. Percentage (%) of payment to equity shareholders.
5.9 Questions
Self assessment questions
Objective type:
1)
State whether the following statements are true of false
a)
Insolvency is a necessary condition for liquidation.
b)
A contributory can only be a present member of the
liquidated company.
c)
Interest on liabilities is payable upto the date of actual
payment if the company is solvent and upto the
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153
commencement of the insolvency proceedings in case the
company is insolvent.
2)
Fill in the blanks
a)
A company can be liquidated in any of three ways……....
b)
Fraudulent preference takes place when one creditor
is………. to another creditor in the matter of payment of
his dues.
c)
When a company is wound up, all persons who ceased to
be the shareholders within a year before the winding up are
places in the……
3)
Choose the right answer
a)
Creditors voluntary winding up of a company applies to :
i.
Insolvent companies
ii.
Solvent companies
b)
A joint stock company can be liquidated under:
i.
Section 420 of the Companies Act,1956
ii.
Section 425 of the Companies Act,1956
c)
Preferential creditors are in the nature of:
i.
Unsecured creditors who have priority of claims
ii.
Secured creditors
d) If the amount due to unsecured creditor is Rs.10,00,000
and the amount available for unsecured creditors before
charging commission on amount paid to unsecured
creditor is Rs.4,12,000. 3% commission is to be paid to the
liquidator on the amount paid to unsecured creditors, the
liquidators remuneration will be:
i.
Rs.12,000
ii.
Rs.12,360
iii.
Rs.30,000
154
Corporate Accounting - II
2 Mark
1.
2.
3.
4.
5.
6.
Give the meaning of liquidation of a company.
Distinguish between insolvency and liquidation.
Mention the methods of winding up of company.
What are the functions of liquidators?
Who are preferential creditors? Give examples
Who are contributors?
5 Mark and 14 Mark
1.
2.
3.
4.
5.
What do you mean by Liquidation of a company?
Describe the different modes of winding up.
Give a Performa of liquidator’s final statement with imaginary
figures.
What do you mean by the term contributories
Explain the preferential creditors as given under the Indian
Companies Act.
Write a note on Liquidation of a company
Exercise Problems:
1)
Following particulars relate to a limited company which is
undergoing voluntary liquidation. Prepare the liquidators final
account after remunerating the liquidator at 3% on amount
realized and 2% on amount paid to unsecured creditors.
(Excluding preferential creditors)
1.
2.
3.
Share Capital: 1000 preference shares of 100/- fully paid
20,000 equity shares of 10/- fully paid.
4,000 equity shares of 10/-, 80% paid.
Assets realised Rs.3,08,000/- excluding the amount realised
by sale of securities held by the secured creditors.
Secured coeditors (security realised Rs. 54,000) Rs.46,000.
MODULE - 5
4.
5.
6.
7.
8.
2)
155
Unsecured creditors 2,83,698.
Preferential creditors 8000/Debentures with floating charge on the assets 1,00,000.
expenses on liquidation Rs.3,000/Call of Rs.2/- per share on partly paid equity share was duly
received except one particular share holder owning 400
shares failed to make the payment.
Prepare liquidators final statement of accounts.
The Rock Star Ltd went into voluntary liquidation on 1st Jan,
2009 at which date the dividend on its preference shares was two
years in arrears. The subscribed capital of the company consisted
of.
10,000 6% cumulative preference shares of Rs.10 each paid which were
preferential both as the dividend and capital.
20,000 equity shares of Rs.10 each (Rs.6.25 per shares called & paid up) 15,000
equity shares of Rs.10 each (Rs.7.50 per share called & paid)
The assets realized Rs.2,62,750, the cost & expenses of liquidation came to
Rs.11,500 and the liabilities amounted to 2,20,000.
Prepare the liquidator’s final statement of account as it would appear assuming
that he was able get in all the cash due from share holders in respect of such
calls as he found it necessary to make.
Note: It is not stated in Memorandum of Association or Article of Association
that the arrears of preference dividend were to be paid in the event of winding
up.
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Corporate Accounting - II
3)
Prakash Ltd., went into voluntary liquidation of 31st December
2002 when their balance sheet was
Equities and liabilities
Share capital
2000, 6% preference shares of Rs.100 each
1,000, equity shares of Rs.100 Rs.75 paid up
3,000 equity shares of Rs.100 60 paid
Long term loans
5% Debentures–with floating charge
Interest outstanding
Current liabilities
Creditors
Amount
2,00,000
75,000
1,80,000
1,00,000
5,000
1,45,000
7,05,000
Assets
Amount
Fixed assets
Land & Building
Paant and machinery
Intangible assets
Patents
Current assets
Stock
Debtors
Cash at bank
Miscalleneous expenses
Profit and loss account
1,00,000
2,50,000
40,000
55,000
1,10,000
30,000
1,20,000
7,05,000
Points to be considered for liquidation.
The company went into liquidation on the above date. The
preference dividend were in arrears for two years and payable on
liquidation as per articles of association.
Creditors include a loan for Rs.50,000 on mortgage of L/B. The
assets were realized as follows:
Land and building
Plant and machinery
Patents
Stock
Sundry debtors
– 1,20,000
– 2,00,000
– 30,000
– 60,000
– 80,000
MODULE - 5
157
The expenses of liquidation amounted to Rs.10,900. The liquidator is entitled
to a commission of 3% on all assets realized expect cash and a commission of
2% on amounts distributed among unsecured creditors. Preferential creditors
amount to Rs.15,000. Assume that the payment was made on June 30.
Prepare the liquidators of statement
4)
A company went into voluntary liquidation on 1-1-1993. The
liquidators are entitled to 3% remuneration on the assets realised
and 2% on the total final amount distributed to all the share
holders. The following was position of the company on the date
of liquidation.
a)
Assets realised (including the sales given as security)
Rs.5,00,000.
b)
Liquidation expense 9,000.
c)
Creditors (including salaries treated as preferential Rs.
6,000/- and a loan for Rs. 25,000/- for which assets offered
as security realized Rs.18,000/-) Rs.68,000/-. 5,000, 6%
pref. shares of 30 each, last dividend paid was on 31-121991 amount Rs.1,50,000/d) Rs.10,000/- equity shares of Rs.10/-, 9 paid – Rs.90,000/e)
General reserve 1,20,000/- and profit & loss A/c. 20,000/-
As per the articles of company the preference holders have a right to receive
1/3rd of the surplus remaining after the payment made to equity capital and
any arrears of dividend.
Prepare the liquidators account showing the necessary calculations and
working.
158
Corporate Accounting - II
5)
On 31st December 1989, a company was liquidated and its
balance sheet was
Equities and liabilities
Share capital
1) 2000, 6% cumulative pref. shares of 100/2) 1000, 7% non-cumulative pref. shares of 100/3) 5000 equity shares of 100, 80 paid up
4) 12,500 equity shares of 100, 40 paid up
Current liabilities
Creditors
Bank o/d (floating charge on assets)
Amount
2,00,000
1,00,000
4,00,000
5,00,000
9,95,000
25,000
22,20,000
Assets
Fixed assets
Land & Building
Paant and machinery
Intangible assets
goodwill
Current assets
Stock
Debtors
Cash
Miscalleneous expenses
Profit and loss account
Amount
2,80,000
3,55,000
2,50,000
4,85,000
3,62,000
3,000
4,85,000
22,20,000
1.
2.
3.
4.
The dividends on cumulative pref. shares are in arrears for 2 years
and on non-cumulative shares, it is not paid from past 4 years.
sundry creditors include
a.
Income tax due Rs.2,50,000/b.
Municipal taxes Rs.4,000/c.
Wages of factory workers Rs.10,000/d.
Fully secured loan by mortgaging the building Rs.2,00,000/The liquidator realized the assets as buildings Rs.2,25,000/,
machinery Rs.1,00,000/- stock 3,00,000/- and debtors
Rs.3,00,000/The liquidator shall get 3% of the amount realized from the sale
of assets and 2% on the amount paid to unsecured creditors
including prefential.
MODULE - 5
5.
6)
159
The liquidation expense amounted to Rs. 5,000/- (but it was
estimated at Rs.7,200/-)
Prepare the final statement of accounts
The balance sheet of the company on 31.12.2005 was
Equities and liabilities
Share capital
Share capital:
6,000, 5% Cumulative preference share of Rs.100
each fully paid.
50,000 equity share of Rs.10 each fully called.
5,00,000
Less; calls in arrears
25,000
Reserves and surplus
Share premium
Long term loans
5% Debentures
Interest O/S on Debentures
Current liabilities
Bank overdraft
Creditors (including Preferential creditors
Rs.15,000)
Amount
6,00,000
4,75,000
50,000
1,00,000
2,500
58,000
1,15,000
14,00,500
Assets
Fixed assets
Freehold properties
Plant
Motor Vehicles
Current assets
Stock
Debtors
Miscalleneous expenses
Profit and loss account
Amount
5,80,000
2,89,000
57,500
1,86,000
74,000
2,14,000
14,00,500
The preference dividends are in arrears from 1st January 2008. The company’s
Articles provide for the payment of premium of Rs.12.50 per share along
with any arrears of dividend to the cumulative preference shareholders in
the event of liquidation of the company and payable in priority to the equity
shareholders.
160
Corporate Accounting - II
The bank O/D was guaranteed by the directors who duly implemented their
guarantee.
Liquidator realized the assets:
Property Rs.7,00,000; plant Rs.2,40,000; Motor Vehicles Rs.50,000; Stock
Rs.1,50,000; Debtors Rs.60,000.
The calls in arrears were duly collected by him.
The trade creditors agreed to receive 5% less than their claims.
The cost of liquidation Rs.2, 750. The liquidator’s remuneration was 2.5% on
the total amount realized and 1% on the amount paid to unsecured creditors.
Prepare the liquidators Final statement of Account, indicating the amount
repaid on each equity share by the liquidator.
5.10 Answers
1.
a)
b)
c)
False,
False,
True)
a)
Compulsory winding up, voluntary winding up, winding up
under the supervision of court.
Preferred,
‘B’ list of contributories
2.
b)
c)
MODULE - 5
161
3.
a)
b)
c)
d)
i
ii
i
i)
Answers for 2 mark questions
1.
2.
3.
4.
5.
6.
Refer to sec.5.2
Refer to sec. 5.2
Refer to sec. 5.3
Refer to sec. 5.5 and 5.5.1
Refer to sec. 5.6
Refer to sec. 5.4
Answers for 5 & 14 mark questions
1.
2.
3.
4.
5.
(Refer to sec. 5.2 and 5.3)
(Refer to sec. 5.5.2)
(Refer to sec. 5.4)
(Refer to sec 5.6)
(Refer to sec. 5.2, 5.3, 5.4 and 5.5)
Answers for the exercises
1.
2.
3.
(Liquidators remunerations on amount realized is 16000, on
unsecured creditors is 6027, amount to equity shareholders is
27,073, Rs.3.98 per share)
(Preference share holders paid 1,00,000 and total 3,31,500)
(Liquidators remuneration- on assets realized-14700, preferential
creditors-300, unsecured creditors- 1600 and total-470000)
162
Corporate Accounting - II
4.
5.
6.
(Refund of surplus- preference shareholders- 50,333 and equity
shareholders-100667)
(Preference capital balancing figure 2,00,000 and total 10,91,360)
(Equity capital balancing figure 1,24,445 and total 12,25,000)