AMALGAMATION, ABSORPTION & RECONSTRUCTION

1. Method to calculate Purchase Consideration:

Net Asset method
Agreed value of
assets taken over
Less: Agreed value of
Liab. taken over
PC

Intansic value method

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xxx
xxx

MV of total assets
Less: MV of total Liab.
Net intrinsic value

Net payment method

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xxx
xxx

Intrinsic Value = Net Intrinsic value

Per share
No. of equity share
PC= No. of equity shares purchased
X Intrinsic value per share of
vendor company

Amalgamation in nature of: Merger: Amount paid to Equity

shareholders only in the form of
equity shares in purchasing
company except cash for fraction
of shares.
Purchase: Cash and agreed
value of shares, debentures and
other assets given by purchasing
company to the liquidator of
vendor company For the
Shareholders of vendor
company.

Note: If information about all the three method is given in the question then we should
follow Net payment method.
2. Amalgamation in nature of merger: Amalgamation deemed to be in the nature of merger
if following conditions are satisfied: (BARED)
Business of vendor company must be carried on by the purchasing company.
All assets and liabilities of vendor company transferred to purchasing company.
Recorded in new company of assets and liabilities taken over at Book Value of vendor
company. (Except to comply with accounting policy)
Equity shareholders holding 90% shares (except already held) agree to become
shareholders in new company.
Disbursement of Purchase Consideration only in shares except cash for fraction of
shares.
3. Entries in books of vendor company:
a) Realisation account: We have to follow the following procedure
Transfer all real assets to debit side at Gross Book Value including goodwill but
excluding fictitious assets.
Transfer all outside liabilities to credit side at Gross Book Value but excluding
accumulated reserves and surplus.
If any asset/liabilities not taken over than any realisation on sale of such asset or
payment on disbursement of such liabilities is credited/debited to realisation
account.
Amount of Purchase Consideration is credited to realisation account.
Liquidation expenses debited to realisation account if born by vendor company
Realisation account is balanced and the balance of this account is profit or loss on
realisation, which is transferred to Equity Shareholders Account.
Notes:
1. Assets not taken over if transferred to shareholders account: it must be shown
on debit side of shareholders account at Current Value of such asset and a
corresponding credit is made to realisation account.

2. What are outside liabilities: Preference shareholders and Debenture holders are
treated outside liabilities. But proposed dividend is not treated outside liabilities.
3. If against any reserve there is any expected liabilities: then to the extent of that
expected liability the amount of reserve is transferred to realisation account and
balance to shareholders account as usual.
Example:
Workmen compensation reserve given in Balance sheet = 8000
Expected liability to workmen =5000.
Therefore Rs 5000 will be transferred to the credit side of realisation account and
balance Rs 3000 to the credit side of shareholders account.
4. Any inter company owings or adjustments: is ignored while preparing vendor
company books, it is considered only while preparing purchasing company books.
b) Equity Shareholders Account:
Credit side: Equity Share Capital, Accumulated profits and reserves, balance of
realisation account.
Debit side: Accumulated losses, Fictitious asset, amount of Purchase
Consideration, balance of realisation account.
c) Purchasing Company Account:
Credit side: Amount of Purchase Consideration due.
Debit side: Discharge of Purchase Consideration.
4. Entries in books of Purchasing Company
a) Three basic entries
For purchase consideration due
Business purchase a/c
To liquidator of vendor company
For assets and liabilities taken over
Assets taken over
Goodwill a/c
To liabilities taken over
To business purchase a/c
To capital reserve a/c
For discharge of purchase consideration
Liquidator of vendor company a/c
To equity share capital a/c
To share premium a/c
To debentures a/c
To preference share capital a/c
To cash

Dr.
Dr.
Dr.

Dr.

b) For liquidation expenses paid by purchasing company

Goodwill/Capital reserve a/c
To cash a/c

Dr.

c) For cancellation of mutual owings

Creditor /Bills payable a/c

Dr.

To Debtors/Bills receivable a/c

d) For adjustment of unrealised profit
Goodwill/Capital reserve a/c
To Stock a/c

Dr.

e) For carry forward of statutory reserves

Amalgamation adjustment a/c
To Statutory reserve a/c

Dr.

f) If both capital reserve and goodwill appears in books

Capital reserve a/c
To Goodwill a/c

Dr.

Note:
Amalgamation in nature of merger: The entries in the case of amalgamation in the
nature of merger is almost similar to the entries given above, the only difference is:
In the second basic entry above, instead of opening the Goodwill/Capital reserve
a/c, the difference between purchase consideration paid and book value of the share
capital of vendor company is adjusted in general reserve. If general reserve is not
sufficient then balance adjusted in profit & loss account. Similarly any difference in
actual debenture value and the amount paid to them is also adjusted to general
reserve. If general reserve is not sufficient then balance adjusted in profit & loss
account.
Where ever Goodwill/Capital reserve a/c is debited or credited in above entries we
will have to debit or credit general reserve account.
Following will remain same in both the methods of amalgamation
Calculation of Purchase consideration.
Discharge of Purchase consideration.
Entries in books of vendor company.

5. Inter company holding

Purchasing company held shares
in vendor company (PV)

Vendor company held shares

in purchasing company
(VP)
Calculation of purchase consideration
PC (Given/calculated)
xxx PC (Given/calculated)
Less: % reduction for shares
xxx
Held by purchasing
Less: Value of shares Held
company in vendor
by vendor company in
company
xxx
purchasing company
Net PC
xxx xxx
Net PC
xxx
% = Shares held by X 100
purch. comp.
Total shares of
vendor comp.
Books of Vendor company
Realisation account
All assets

Value= No of shares held X

Intrinsic value per share

Realisation account

Both vendor and purchasing

company held shares in each
other (P<V)
PC (Given/calculated)
Less: % reduction for shares
Held by purchasing
company in vendor
company
Less: Value of shares Held
by vendor company in
purchasing company
Net PC

xxx

xxx
xxx
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