solving amalgamation problems

Step 1

Identify nature of Amalgamation

If the six conditions of amalgamation in nature of merger not satisfied then it is treated as amalgamation in nature of purchase. If the information provided in the question is not sufficient to decide the nature of amalgamation or question is silent on the nature of amalgamation then it is better to assume the nature of amalgamation as purchase.

Step 2

Method of accounting

 After identifying the nature of amalgamation the method of accounting is determined, it may be as follows:-
Nature of Amalgamation
Method of Accounting
Merger
Pooling of Interest Method
Purchase
Purchase Method



Step 3

Purchase consideration

Purchase consideration is amount payable by transferee company (purchasing accompany) to transferor company (selling company) at the event of amalgamation. The payment may be in the mode of shares, debentures and cash. The purchase consideration may be in lump sum payment or based on net assets of selling company.  
LUMP SUM PAYMENT/PAYMENT METHOD
NET ASSETS METHOD
Aggregate of consideration paid to share holder (equity and preference) in various forms
Aggregate of assets taken over at fair value                                    XXX
Less:-
Liabilities taken over at agreed
 amounts                                XXX
Net assets                            xxxx
Note:- In case of pooling of interest method the 90% shareholders of selling company will get consideration in the form of equity shares. The consideration paid by the purchase company may be in following cases
Particular
Merger nature
Purchase nature
Case 1
Consideration paid is more than paid up capital of selling company
Consideration paid is more than net assets of selling company
Case 2
Consideration paid is less than paid up capital of selling company
Consideration paid is less than net assets of selling company

Step 4

Discharge of purchase consideration

Purchase consideration is discharged by transferee company(purchasing co) in various forms
After computation of purchase consideration it is discharged in the forms of shares at different values, It may be issued by debentures and by cash etc.

Step 5

Accounting in the books of transferor company (Selling company)

The selling company has to close all accounts by transferring to realization account except shareholders account. The shareholders account is prepaid and closed after passing necessary entries. Journal entries for the same can be find in part – 2 of amalgamation article.click here for part 2 of amalgamtion

Note:- Before attempting the question just clarify whether there is any requirement of passing journal entries in the books of transferor(Selling Co)

Step 6

Computation of Profit / loss in case of amalgamation for transferee company(Purchasing co)

As accounting standard 14 the profit or loss should be recognized in the following way:-



Amalgamation in the nature of merger

Particular
Amalgamation in the nature of merger
Profit or Loss
Case 1
Consideration paid is morethan paid up capital of selling company
It is loss for the purchasing company and the same should be adjusted against free reserves of selling company and purchasing company
Case 2
Consideration paid is lessthan paid up capital of selling company
It is Profit for the purchasing company and the same should be treated as capital reserve in the books of purchasing company

Amalgamation in nature of purchase

Particular
Amalgamation in nature of purchase
Profit or Loss
Case 1
Consideration paid is morethan net assets of selling company
It is loss for the purchasing company and the same should be treated as goodwill in the books of purchasing company
Case 2
Consideration paid is lessthan net assets of selling company
It is Profit for the purchasing company and the same should be treated as capital reserve in the books of purchasing company
     

Step 7

Accounting in the books of transferee (purchasing company)

Transferee company (Purchasing company) has to merge all assets and liabilities taken over at fair value. Journal entries for the same can be find in part – 2 of amalgamation article.Click here for part -2 of amalgamation

Note:- Before attempting the question just clarify whether there is any requirement of passing journal entries in the books of transferee(Purchasing Co).
In the most of the questions they will ask to prepare balance sheet after amalgamation.

Let us take a small illustration:-
X Ltd and Z Ltd amalgamated on and from 1st January 2015. A new company XZ Ltd was formed to take over the business of the existing companies.
Balance sheet as on 31.12.2014
Liabilities
X Ltd
Z Ltd
Assets
X Ltd
Z Ltd
Equity share capital Rs.10
60,00,000
70,00,000
Sundry Fixed assets
85,00,000
75,00,000
General reserve
15,00,000
20,00,000
Investment
10,50,000
5,50,000
Profit & Loss A/c
10,00,000
5,00,000
Stock
12,50,000
27,50,000
Statutory Reserves
5,50,000
2,00,000
Debtors
18,00,000
40,00,000
12% Debentures
30,00,000
40,00,000
Bank & Cash
4,50,000
4,00,000
Sundry creditor
10,00,000
15,00,000




1,30,50,000
1,52,00,000

1,30,50,000
1,52,00,000
Z Ltd issued enough number equity shares for the net assets , compute purchase consideration and mode of discharge thereof draft the balance sheet of XZ Ltd. After amalgamation.

Solution:-

Step 1:-
Nature of amalgamation
As the question is silent about nature of amalgamation, it is assumed as amalgamation in the nature of purchase.

Step 2:-
Method of accounting
It is assumed the nature of amalgamation is purchase then the method of accounting will be purchase method.

Step 3:-
Purchase consideration
The information related to purchase consideration is not given in the question and it is clearly mentioned that is discharged based on net assets of selling companies.
Computation of Net Assets
Particular
X Ltd
Z Ltd
Assets
Sundry fixed assets
Investment
Stock
Debtors
Cash and Bank

85,00,000
10,50,000
12,50,000
18,00,000
4,50,000

75,00,000
5,50,000
27,50,000
40,00,000
4,00,000
Total(A)
1,30,50,000
1,52,00,000
Liabilities
12% Debentures
Sundry Creditors

30,00,000
10,00,000

40,00,000
15,00,000
Total(B)
40,00,000
55,00,000
Net Assets(A-B)
90,50,000
97,00,000

Step 4:-
Discharge of purchase consideration
Purchase consideration is discharged by XZ Ltd in the forms of equity shares.
The number of shares to be issued to X Ltd is Rs.90,50,000/Rs.10=905000 shares
The number of shares to be issued to Z Ltd is Rs.97,00,000/Rs.10=970000 shares

Step 5:-
Accounting in the books of transferor company (Selling company)
In the question it is not mentioned to prepare ledgers in selling company
  
Step 6:-
Computation of Profit / loss in case of amalgamation for transferee company(Purchasing co)
Amalgamation in nature of purchase

Particular
Amalgamation in nature of purchase
Profit or Loss
1
Consideration paid is equal to net assets of selling company
No loss , No profit

Step 7:-
Accounting in the books of transferee (purchasing company)
Journal entries have not been asked for in the question.
Amalgamated Balance sheet
Balance sheet of XZ ltd as at 1st January 2015.
Particulars
Note
Amount
EQUITY AND LIABILITIES
Shareholder’s funds
Share capital
Reserves and surplus
Non-current Liabilities
Long term borrowings
{30,00,000+40,00,000}
Current liabilities
Trade payables


1
2


1,87,50,000
   7,50,000


 70,00,000

 25,00,000
Total

2,90,00,000
ASSETS
Non-current assets
Fixed assets
[85,00,000+75,00,000]
Non-Current Investment
[10,50,000+5,50,000]
Non-current assets(amalgamation adjustment)
Current assets
Inventories[12,50,000+27,50,000]
Trade Receivables[18,00,000+40,00,000]
Cash and Cash Equivalent
[4,50,000+4,00,000]




1,60,00,000

16,00,000
 7,50,000
40,00,000
58,00,000

 8,50,000
Total

2,90,00,000

Notes to the financial statements
Share capital
Particular
Amount
Authorised
Issued, subscribed and fully paid up
18,75,000 equity shares of Rs.10 each


1,87,50,000

Reserves and surplus

Particular
Amount
Statutory reserves
7,50,000

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