ACCOUNTING ACCORDING TO AS-14

(AMALGAMATION OF COMPANIES, w.r.t. AS-14)

Accounting Standard 14 – Accounting for Amalgamation, prescribed by the Institute of
Chartered Accounts of India, deals mainly with the accounting treatment in respect of
amalgamation of limited companies in the books of the ‘Purchasing Company’. The
accounting treatment depends upon the type of amalgamation. According to AS 14,
amalgamations are of two broad types – merger and purchase.

AMALGAMATION IN NATURE OF MERGER

In ‘amalgamation in the nature of merger’, there is a pooling of assets, liabilities, capitals and
businesses of both the companies. Such amalgamation must satisfy all the following
conditions-
a. Assets & Liabilities: All the assets and liabilities of the vendor company become the
assets and liabilities of the purchasing company.
b. Equity Share Capital: Shareholder holding not less than 90% of the face value of the
equity share capital in the vendor company become equity shareholders in the
purchasing company.
c. PC Discharged by Issue of Equity Shares: The purchase consideration due to the
equity shareholders of the vendor company is discharged by the purchasing company
wholly by way of issue of equity shares in the purchasing company (except cash paid
against fractional shares or payment to dissenting shareholders).
d. Business: The business of the vendor company is intended to be carried on by the
purchasing company.
e. Book Values: No adjustment is intended to be made to the book values of the assets
and liabilities of the vendor company when they are incorporated in the accounts of
the purchasing company, except to ensure that the accounting policies are uniform.
AMALGAMATION IN NATURE OF PURCHASE
Amalgamation in the nature of purchase is defined as an amalgamation which does not satisfy
any one or more of the conditions applicable to a merger.
While in amerger, the interests of equity shareholders of both Companies merger and join
together; in a purchase, one company makes an outright purchase of the interests of the equity
shareholders of another company.
ACCOUNTING:
According to the guidelines contained in AS 14, the accounting in case of amalgamation in
the nature of purchase is done under the ‘Purchase Method’, in the following manner-
1. Agreed values of assets/liabilities: In the books of the purchasing company, the
assets and liabilities of the vendor company are incorporated on the basis of their
agreed values (i.e., either the book values or the fair values).
2. Difference between PC and Net Assets: The difference between the purchase
consideration and the net assets of the vendor company, if any, is either debited to the
Goodwill Account (PC Less Net Assets) or credited to the Capital Reserve Account
 (Net Assets Less PC). AS 14 recommends that Goodwill arising on amalgamation
should be written off within 5 years.
3. Statutory Reserves: The reserves of the vendor Company (except a statutory reserve)
are not brought in the books of the purchasing company. A particular reserve created
under any law is known as a statutory reserve. Examples of statutory reserve are
Export Profit Reserve, Development Rebate Reserve, Investment Allowance Reserve,
Project Export Reserve, Tea Development Account etc. created by the vendor
company to obtain benefit under the Income-tax laws. Hence, such reserve must be
created in the books of the purchasing company also.

ENTRIES (PURCHASING COMPANY – PURCHASE METHOD)

1. Acquisition of business of vendor company

Business Purchase Dr (Purchase Consideration)

To Liquidator of vendor company

2. Incorporating assets/Liabilities of vendor company taken over

Various Asset Accounts Dr (Agreed Values)

Goodwill Account Dr (PC less Net Assets)
To Various Liabilities or Provisions (Agreed Values)
To Debentures in Vendor Co. (Take-over Value)
To Business Purchase Account (PC)
To Capital Reserve Account ( Net Assets less PC)

OR

Various Assets Account Dr

To Various Liabilities Account
To Liquidator of Vendor Co.

3. Discharge of Purchase Consideration

Liquidator of Vendor Co Dr (PC)

Discount on Issue of Shares Dr (Discount, if any, on issue)
 To Equity Share Capital Account (Paid up Value of Share Issued)
To Pref Share Capital Account (Paid up Value of Pref Shares)
To Security Premium Account (Premium, if any on issue)
To Cash/Bank Account (Paid, if any)

4. Discharge Debentures of Vendor Co.

Debentures in Vendor Co. Dr (Take-over Value)

Discount on Issue of Debenture in
Purchasing Co. Account Dr (Discount, if any, on issue)
To Debentures in Purchasing Co Account (Nominal value issued)
To Security Premium Account (Premium, if any on issue)
To Cash/Bank Account (Paid, if any)

5. Share Issue Expenses Paid

Share Issue Expenses Dr (Amount of expenses)

To Bank

6. Dissolution expenses paid & borne by purchasing company

Goodwill Account Dr (Amount of expenses)

To Cash/Bank Account

7. Set off Goodwill and Capital Reserve

Capital Reserve Account Dr
To Goodwill Account
 CASE-LET

1. A Ltd and B td carrying on similar business decided to amalgamate and for this purpose a
new company AB Ltd was formed to take over assets and liabilities of both the companies. It
is agreed that fully paid shares of Rs. 100 each shall be issued by the new Co. to the value of
net assets of each of the old companies.
Summary Balance Sheet of A Ltd. As at 31st March, 2014
Liabilities Amount Assets Amount
Shares of Rs. 50 each 50,000 Goodwill 5,000
General Reserve 20,000 Land and Buildings 17,000
Profit & Loss Account 3,000 Plant & Machinery 24,000
Sundry Creditors 4,000 Stock 10,000
Bills Payable 4,000 Debtors 12,000
Furniture & Fittings 5,000
Cash at Bank 8,000
81,000 81,000

Summary Balance Sheet of B Ltd. As at 31st March, 2014

Liabilities Amount Assets Amount
800 Shares of Rs. 50 each 40,000 Goodwill 2,000
Bank Overdraft 8,000 Land and Buildings 10,000
Sundry Creditors 8,000 Plant & Machinery 16,000
Stock 7,500
Furniture & Fittings 7,500
Debtors 7,000
Cash 300
Profit & Loss Account 5,700
56,000 56,000

The following is the accepted scheme of valuation of business of the two companies:
A Ltd.: a) to provide for reserve for bad debts at the rate of 5% on debtors;
b) to write off Rs. 400 from stock; and
c) to write off 33.33% from plant and machinery
B Ltd.: a) to eliminate its goodwill and profit & loss account balances;
b) to write off bad debts Rs.1000 and to provide reserve of 5% on the balances of debtors;
c) to write down plant and machinery by 10%; and
d) to write off Rs. 1,400 from the value of stock.
You are required to pass the Journal Entries in the books of A Ltd., B Ltd. & AB Ltd. Also
prepare necessary ledgers along with Balance Sheet.
 PURCHASE CONSIDERATION – PROBLEMS
Net Payment Method
1. Calculate the amount of purchase consideration payable by Mini Limited to Maxi Limited.
The Summary Balance Sheet of Maxi Limited as on March, 31, 2015 ia as follows:

Liabilities Amount in Assets Amount in

Rs. Rs.
Equity Share Capital 150000 Goodwill 30000
(Shares of Rs. 10) Land 35000
8% Pref Share Capital 60000 Building 40000
(Shares of Rs. 10) Machinery 100000
Capital Reserve 8000 Investment 25000
General Reserve 14000 Stock 24000
Profit & Loss A/c 3000 Debtors 15000
7.5% Debentures (Rs. 100 30000 Cash & Bank 13000
each) Share issue expenses 30000
Sundry Creditors 12000
Outstanding expenses 8000
285000 285000

Mini Limited decided to take over Maxi Limited by issuing 6 equity sharesof Rs. 10 each
fully paid and Rs. 6.5 in cash for every 5 equity shares held in Maxi Ltd. The preference
shareholder are to be paid at premium of 15% by issue of 10% Preference Shares in Mini
Limited. Debentureholders of Maxi Ltd., will be paid 9.5% Debentures of Mini Ltd. For equal
value. Realisation expenses of Rs. 7,500 are to be brone and paid by Mini Ltd. To Maxi Ltd.
Net Asset Method
2. Homer Ltd and Illiad Ltd propose to amalgamate.
Goodwill may be taken at Rs. 96,000 for Homer Ltd. And Rs. 38,000 for Illiad Ltd. The stock
of Homer Ltd. And Illiad Ltd. To be taken at Rs. 2,04,000 and Rs. 1,42,000 respectively. You
are required to find out the purchase consideration receivable by both the companies on the
basis of the Net Assets Method. Their financial position as on December 31, 2015 were:

Liabilities Homer Illiad Assets Homer Illiad

Rs Rs. Rs Rs.
Share Capital : Fixed Assets 4,00,000 1,00,000
Equity Shares of Rs. 10 (at cost less Dep)
each 5,00,000 2,00,000 Investment 1,00,000 -
Reserves & Surplus: Current Assets:
General Reserves 2,00,000 20,000 Stock 2,00,000 1,30,000
P&L A/c 1,00,000 30,000 Debtors 1,70,000 60,000
Current Liabilities: Cash & Bank 30,000 10,000
Creditors 1,00,000 50,000
9,00,000 3,00,000 9,00,000 3,00,000
 INTERNAL RECONSTRUCTION – CAPITAL REDUCTION PROBLEM

Q.1 Following is the summarized Balance Sheet of Paramount Ltd. As on 31-03-2018

Liabilities Amount Assets Amount
Share Capital: Fixed Assets:
6,000 – 8% Preference shares of Goodwill 60,000
Rs 100 each 6,00,000 Patents & Trade Marks 40,000
50,000 Equity Shares of Rs 10 Building 3,00,000
each 5,00,000 Plant & Machinery 3,00,000
Reserves & Surplus: Furniture 1,00,000
Capital Reserves 50,000 Current Assets:
Secured Loans: Stock 1,50,000
5% Debentures of Rs 100 each 3,00,000 Sundry Debtors 75,000
Debentures Interest Due 50,000 Bank 1,00,000
Current Liabilities: Cash 25,000
Sundry Creditors 1,80,000 Misc. Expenditure not w/o:
Discount on Debentures 30,000
Profit & Loss Account 5,00,000
16,80,000 16,80,000

Note: Preference dividend is in arrears for three years.

The following scheme of reconstruction was prepared and duly approved by the court.
(1) The Preference shares shall be converted into equal number of 9% Preference Shares
of Rs 50 each.
(2) The equity shares shall be reduced to Rs. 3 each. However, the face value will remain
the same.
(3) 5% Debentures shall be converted into equal number of 6% Debentures of Rs. 75
each. The debenture holders also agreed to waive 50% of the accrued interest.
(4) Arrears of Preference dividend is to be reduced to one year’s dividend which is paid
in cash.
(5) The Sundry creditors agreed to waive 30% of their claims and to accept Equity shares
for Rs 30,000 in part settlement of their renewed claims.
(6) The assets are to be revalued as under:
Building Rs. 3,50,000
Plant & Machinery Rs. 2,50,000
Furniture Rs. 80,000
Stock Rs. 1,00,000
Sundry Debtors Rs. 70,000

(7) Intangible assets and fictitious assets are to be written off.

Pass Journal Entries. Prepare Capital Reduction Account and Balance Sheet after
Reconstruction in the books of the Paramount Ltd.