SOLVE AMALGAMATION PROBLEM IN 7 STEPS

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 more than 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 less than 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 more than 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 less than 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 1^st 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	Y 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 fo 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 X 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 X ltd as at 1^st 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