Amalgamation

Amalgamation is a process of unification. The following terms can be discussed

1. Amalgamation
2. Absorption or Take over
3. External Reconstruction
4. Transferor Company (selling co.)
5. Transferree company (purchasing co.)

1. In Amalgamation, one company merges with another company and forms a

new company. Hereby both the old companies loses their existence.
Eg. ‘A’ and ‘B’ combined to form ‘C’ co.
2. Here, an existing company takes over another existing company. While the
first one is the purchasing one, the second lone is the selling company which
is liquidated.
3. While one ;new company is formed to take over the old/existing company e.g.
Z ltd. Is formed to take over X ltd.
This all happen so due to the following reasons.

i) To avoid cut-threat competition.

ii) To avail large scale economies.
iii) Socially desirable.
iv) Low selling price is possible
v) High profit is possible.
vi) Possible dissolution or closure is avoided for small companies.

PURCHASE CONSIDERATION
The new company takes over the old company and it has to pay something to the
selling one, known as purchase consideration. It may be in the4 form of cash, equity
shares, preference, debentures etc. They may be imued at par, premium or discount.

These are the following 4 methods for calculating purchase consideration.

I) Lump sum method
II) Net-worth method (Net Assets)
III) Net payment Method.
IV) Share- Exchange Method or Intrinsic Value Method.

I. Lump sum Method :-

The purchasing company pays a fixed amount to the selling company which is
calculated randomly with the discussion of ;both company without considering the
fact of Assets and Liabilities taken over.
II. Net worth method:-
Here, the purchase consideration is calculated as follows:- i.e.
Value of Assets taken over (at agreed values)XXXX
 Less: value of liabilities taken over (at agreed value)XXXX
Purchase consideration XXXX
Refer to pg No.327

III. Net payment Method:-

Here, the purchasing co. decides to pay cash and securities such as equity,
preference and debentures. These all are to be added to find out purchase
consideration. These may be issued at premium, par or discount. Such issue price
is to be added.

IV. Intrinsic/ Share Exchange Method:-

In the Books of selling company

There should be a given b/s which must contain assets and liabilities. Assets can
be fixed assets and current Assets and Fictious Assets. It can be used in the following ‘4’
ways.
A. Some assets are sold.
B. Some assets may be taken over by the purchasing company.
C. Some assets may be taken over by the liabilities.
D. Some assets will be transferred to Equity share holders A/c.
(Preliminary exps, P&L A/c. (Dr))

The liabilities can be current liabilities, accumulated profits, equity shares capital,
preference share capital, Debentures and other long term loans. It can be used in the
following ways.
A. It can be paid out of existing co.’s assets
B. It can be paid out of assets received from new company.

The selling company prepares the following accounts.

1. Realization A/c
2. Purchasing co. A/c
3. Equity shareholders’ A/c.
4. Cash A/c. etc.

1. The Realization A/c.

This is a nominal account and prepared to find out the profit or loss on realization. It is
debited with all the assets (both taken over and not taken over) except cash and fictious
assets.

This account is credited with the followings.

i) Liabilities taken over.
ii) Liabilities not taken over.
iii) Purchase consideration
The balance of this account represents profit or loss on realization which is transferred to
equity share holders’ A/c.

2) Purchasing company A/c.

This account is debited with purchase consideration and credited with all receipts in all
forms at issue prices. No balance is left lover.

2. Equity Shareholder’s A/c.

This account is credited with the followings.

i) equity share capital
ii) Accumulated profits
iii) Profit on realization.

This account is debited with the followings.

i) Accumulated losses.
ii) All cash and securities of the new company.

ENTRIES

1) For transferring assets Realization A/c. Dr.

Taken over. To all assets taken over
(Individually at Book value)
2) For all assets sold Realization A/c. Dr.
Or taken by liabilities To all assets.
3) For transferring Liabilities Liabilities Dr.
Taken over. (Individually at BV)
To Realization
4) For purchase consideration Purchasing co. Dr.
To Realization A/c.
5) For receiving purchase Cash and Securities Dr.
Consideration (at MV)
To purchasing co.
6) For amount received Bank A/c. Dr.
On assets sold. To Realization
7) For payment to Liabilities A/c. Dr.
Liabilities (not taken over) To Realization
8) For liquidation expenses -
i) It paid and borne by Realization A/c. Dr
ii) It paid and borne No entry
by purchasing co.
iii) It paid by selling co. (a) Purchasing co. Dr.
but to be borne by To bank
purchasing co. (b) Bank A/c. Dr.
To purchasing co.
9) For closing Realization A/c. -
i) For profit Realization A/c. Dr.
To Eq. share holder
ii) For loss Eq. sh. Holder Dr.
To Realization
10) For preference Capital Preference capital Dr.
Realization (if to be paid more)
To pref. holder
11) For equity capital Equity capital Dr.
And accumulated profits Ac. Profits Dr.
To Eq. holder
12) For accumulated losses Equity holder Dr.
To Au. Losses
13) For final payment Preference holder Dr.
Eq. holder Dr.
To Bank/ securities of new co.

In the Books of purchasing

The purchasing company follows two methods while recording.

i. purchase method
ii. Merger/poling of interest method

(i) Purchase method :-

Here, the following points are adopted

(a) This method is adopted when the business of purchasing company and the
business of selling company are same or similar in nature.
(b) The assets and liabilities of transferer company (selling) is recorded at agreed
or revised value otherwise at Book Value.
(c) There is no guarantee that all the assets and liabilities will be taken. Selected
items may be taken
(d) The reserves of transferor company will never be taken unless and otherwise
they are liabilities.
(e) However, statutory Reserve will always be taken by the purchasing company
by debiting “Amalgamation Adjustment A/c.”
(f) While paying purchase consideration, the purchasing company may pay more
or less it pays more, then difference is to be debited to Goodwill A/c. and if
pays less, then difference is to be credited to “Capital Reserve A/c.”
(g) The Goodwill so arising or capital. Reserve so arising will be maintained in
assets and liabilities of the B/S respectively.
(h) If Goodwill and Capital Reserve arising simultaneously, then it may be
cancelled by passing a Reverse entry i.e. Capital Reserve A/c. Dr .
To Goodwill A/c
(Upto least amount)
i) The Goodwill must be amortised (written off) through the income over a
period of life which must not exceed 5 years unless a longer period is
justified.
j) Statutory Reserves include Development Allowance Reserves, Investment
Allowance Reserve etc.
k) The Amalgamation Adjustment A/c. so arising must be maintained in the
asset side under the Head “Misc. Expenditure”
l) Whenever it is so felt that statutory Reserves are no more required, then it
should be cancelled by passing a Reverse entry i.e.
Statutory Reserves A/c. Dr.
To Amalgamation Adjustment A/c.

Entries :-

(1) For purchase :-

Business purchase A/c. Dr.
To liquidator of selling Co.
(transferor co.)
(2) For recording Assets and liabilities
Various Assets (individually) Dr.
(at agreed value or at BV)
Goodwill A/c. (B/F) Dr.
To Liabilities
(individually at agreed value of BV)
To Business purchase A/c.
To Capital Reserve A/c. (B/F)

(3) Liquidator of transferer co. Dr.

Discount A/c. Dr.
To Eq. Shares
To Pref. shares
To Cash
To premium A/c.
(4)For recording Statutory Reserves
Amalgamation Adjustment A/c. Dr.
To Statutory Reserve
(5) For payment of liquidation exps.
Goodwill A/c. Dr.
To Bank A/c.
(6) For payment of formation exps.
Preliminary exps. A/c. Dr.
To Bank A/c.
(7) For setting off “Goodwill” or “CR” A/c.
Capital Reserve A/c. Dr.
To Goodwill A/c.
(8) For payment of various liabilities
 Liabilities A/c.Dr.
To Cash
To Securities
To Premium
(9) For issue of fresh shares
Cash A/c. Dr.
Discount A/c. Dr.
To Sh. Capital A/c.
To Sh. Premium A/c.
(10)For any short term loan
Cash A/c. Dr.
To Bank O.D.

(ii) Nature of Merger/Pooling of Interest method.

(a) This method is applicable mostly in those cases where transferee company
and transferer company carries separate business.
(b) Here, all the assets and liabilities of the transferer company including all
reserves, P&L A/c. (excluding eq. capital) is taken by the purchasing
company
(c) The assets and liabilities are taken at Book value never at agreed value.
(d) The difference arising for excess/less payments will be credited to General
Reserve A/c. (if payment is less) and will be debited to P&L A/c. (If payment
is more)
(e) If there are different accounting policies followed by both the companies a
uniform accounting policy should be followed for the purpose of
amalgamation.
(f) The assets and liabilities so incorporated/adopted) will appear in the Balance
sheet at their Book value.
• Preference shares are not taken by the transferee company.

Entries

(1) For Business purchase :-

Business purchase A/c. Dr.
To liquidator of transferor co.
(with purchase consideration)
(2) For recording Assets and Liabilities :-
Assets A/c. Dr.
(individually)
P&L A/c. (BF) Dr.
To Liabilities
To Reserves
To Business purchase
To General Reserve A/c. (BF)
(3) For payment:-
 Liquidator of transferor co. A/c. Dr.
To Bank A/c
To Sh. Capital A/c
To Securities premium A/c.
(4) For payment of liquidation expenses :-
General Reserve Ac. Dr.
P&L A/c. Dr.
To Bank A/c.
(5) For formation expenses:-
Preliminary expenses A/c. Dr.
To Bank A/c.
(6) For discharge of liabilities
Liabilities A/c. Dr.
To Bank A/.c.

Liquidation

Liquidation refers to winding up or closure of a company. It refers to a process whereby

the life of the company is ended. The affairs of the organization is closed and the name
of the company is struck off from the Register of companies maintained by the Registrar
of the companies.

Hereby, an administrator, known as liquidator is appointed to control the process of

liquidation who takes the charge of collection of assets and payment of liabilities.

Liquidation is different from Insolvency.

1. Insolvency is applicable to sole-trading firms, partnership firms &

HUF whereas liquidation is applicable to Joint Stock companies.
2. Insolvency leads to liquidation, but liquidation does not lead to
insolvency.
3. Insolvency is governed by Insolvency Act, but liquidation is governed
by companies Act.

MODES OR METHODS OF LIQUIDATION

Liquidation can be done in three ways.

(A) Compulsory winding up by the court
(B) Voluntary winding up by the members or creditors
(C) Winding up under the super vision of the court

(A) Compulsory winding up by the court :

Whenever the court of law does not feel satisfied about the progress or affairs of the
organization, then it may order for liquidation by which the affairs of the company has to
be closed.
(B) Voluntary winding up by the members or creditors

Whenever the members feel that the dividend is not properly paid or wherever the
Debenture holders feel that the interest is not properly paid or whenever the creditors feel
that their amount is not regularly paid, then they may apply to the court of law for
liquidation of the organisation. And if the court of law is satisfied of their claim, then it
may order for liquidation.

(C) Winding up under the supervision of the court

Liquidation arising due to any other reason is also done under the supervision of the
court.

CONSEQUENCES LOF WINDING UP

1. A liquidator is appointed by the court in case of compulsory winding

up. But in case of voluntary winding up the members appoint the
liquidator. In case members and creditors differ about the liquidator to
be appointed then the creditor’s decision will be final.
2. The liquidator collects the sale proceeds of the assets and distribute
among the right claimants as per law.
3. Liquidation leads to closure of the organization.
4. With the start of liquidation process the power of the director becomes
nullified.
5. The liquidator prepares a list of contributories who will contribute to
the assets of the organization in case of liquidation.

Contributories

Contributories refer to those members (share holders) who are supposed to contribute to
the organization in case of liquidation. They may be present members or past members.
Present members come under ‘A’ list of contributories. And past members are coming
under ‘B’ list of contributories. Present members are those who are share holders of the
company at the time of liquidation. They are supposed to pay the unpaid amount of the
value of the shares or guaranteed amount, as the case may be.

Past members are those 2who are ceased to be the share holders within one year
of the winding of the company. They are also required to contribute towards liquidation
in the sense that their activities have also affected the process of liquidation. However,
the following points are to be remembered.

(a) A past member will not contribute for any liability arising lout of any contract
made after he ceased to be a member of the company.
(b) A past member will not contribute if his ceased up period is more than 1 year.

Order of payment
The amount realized from assets (not specifically pleased) will be distributed as follows

I. Liquidation expenses (including liquidators’ Remuneration

II. Creditors or Debenture holders having a floating charge over the asset
III Preferential creditors
IV Unsecured creditors
V. Any surplus is to be distributed among the preference share holders and equity
share holders.

Preferential Creditors

These are those creditors who are ;not secured, but they are having prior rights over
unsecured creditors regarding payment. They are paid out of Assets not specifically
pledged and surplus from assets specifically pledged, after payment of legal expenses.
These includes the followings

1. All revenues, taxes, cesses and rates payable to govt. or local

authorities within 12 months before the date of
commencement of winding up.
2. All wages or salaries or commission to the employees for
services rendered to the company for a period not exceeding
4 months within 12 months before the date of
commencement. However, salary to (director, Branch
Manager, Manager, Secy, Asst. Secy) are not preferential
creditors.
3. All remuneration to employees due to termination of
employment is preferential.
4. Persons who have advanced money to pay the preferential
creditors are also called preferential creditors.
5. All money payable under ESI Act and workmen
compensation Act is also preferential creditors.
6. All sum payable to employee such as provident fund,
pension, gratuity fund is also called preferential creditors.
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