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Sem V Amalgamation - & - Absorption

Amalgamation involves combining two or more partnerships into a newly formed partnership. The primary reason is to achieve synergy benefits like larger market share, improved profitability, and economies of scale. Absorption refers to one partnership acquiring another, where the absorbed partnership dissolves and its operations transfer to the absorbing partnership. Both result in one enlarged partnership, but amalgamation forms a completely new partnership while absorption maintains the absorbing partnership's existing name and identity.

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228 views3 pages

Sem V Amalgamation - & - Absorption

Amalgamation involves combining two or more partnerships into a newly formed partnership. The primary reason is to achieve synergy benefits like larger market share, improved profitability, and economies of scale. Absorption refers to one partnership acquiring another, where the absorbed partnership dissolves and its operations transfer to the absorbing partnership. Both result in one enlarged partnership, but amalgamation forms a completely new partnership while absorption maintains the absorbing partnership's existing name and identity.

Uploaded by

Anita Soni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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AMALGAMATION OF PARTNERSHIPS

Amalgamation is the combination of two or more firms into a new firm formed for the purpose of
carrying on business.

Reasons: the primary reason for amalgamation is to obtain SYNERGY. Other reasons include to:

i. Gain larger market share


ii. Improve profitability
iii. Obtain benefits of economies of scale

For amalgamation to take place the combining firms are dissolved and the partners in the dissolved
firms now become partners in the newly formed firm. The assets of the old firms (including goodwill),
which are to be taken over by the new firm may be revalued to reflect their economic worth as at the
date of the amalgamation.

Steps:

i. Close the books of the amalgamating firms;


ii. Calculate/compute the Purchase Consideration;
iii. Open the books of the new firm (opening entries and SOFP).

Purchase consideration
This is the value given in exchange by the firm (purchaser) that is acquiring another firm (vendor). Hence
it is the price paid to acquire a firm. The New firm is considered in this case as the Purchaser, while the
old firms are the vendors. However, no cash is actually paid/received during amalgamation, as resources
are simply being transferred from the old firms to the new firm. Hence purchase consideration is simply
the Net Assets taken over by the new firm at agreed values.

Closing the books:

i. Close current accounts and reserves to Capital Account;


ii. Assets: close all assets to realisation account, except cash and bank;
iii. Assets not taken over by new firm will either be sold or taken over by partners;
iv. Liabilities: close all liabilities to be taken over to the realisation account
v. Liabilities not taken over by new firm may be paid off or taken over by partners.
vi. Realisation/Dissolution Costs: if borne by the old firms, it should be debited to the
realisation account; otherwise ignore.

If balance of cash/bank is to be taken over by the new firm, transfer the balance to Realisation account;
otherwise it should be paid to partners as agreed.

vii. Ascertain the purchase consideration; debit the amount to the New firm account and Credit
Realisation account.
viii. Profit or Loss on realisation should be ascertained and written off to the capital account in
the profit sharing ratio.
ix. The balances in the capital accounts are transferred to the new firm account.

ABSORPTION OF ONE PARTNERSHIP BY ANOTHER

Absorption refers to the acquisition of one firm by another firm. Absorption/Take-over is another type
of business combination aimed at achieving growth. The purchasing partnership becomes bigger as a
result of the take-over, while the absorbed partnership is dissolved (ceases to exist).

Forms of Absorption

a. Partners of the absorbed firms become partners in the absorbing (purchasing) firm. This is in
principle similar to amalgamation;
b. Partners of the absorbed firm are paid an agreed price (purchase consideration) for their firm,
and they do not become partners in the purchasing firm.

Amalgamation Vs Absorption

Absorption and amalgamation are similar from the view point that they are both methods of combining
two or more partnerships (firms) into one. Their differences are highlighted below:

Amalgamation Absorption
1 All the amalgamating firms are Only the firms taken over are dissolved , and their
dissolved, and their operations taken operations are taken over by the purchasing/absorbing
over by a newly formed partnership partnership
2 The new firm that is taking over The purchasing/absorbing firm, which is taking over the
operations of the dissolved firms has a operations of the dissolved partnership, may continue to
new name and identity. maintain its name and identity.

Purchase Consideration

Just as in Amalgamation, the purchase consideration is the value of the Net Assets taken over by the
absorbing partnership. However, if the absorbing firm pays an agreed sum to the owners of the
absorbed firm, the sum so paid is the purchase consideration.

The implication of this is that it is possible for the agreed sum to be different from the Net Assets taken
over. Where the agreed sum (purchase consideration) is higher than the Net Assets taken over, the
excess represents goodwill; and where the agreed sum (purchase consideration) is lower than the Net
Assets taken over, the difference represents reserves.

Closing the books of the absorbed firm (Steps involved):

i. Close current accounts and reserves to Capital Account;


ii. Assets: close all assets to realisation account, except cash and bank;
iii. Assets not taken over by purchasing firm will either be sold or taken over by partners;
iv. Liabilities: close all liabilities to be taken over to the realisation account
v. Liabilities not taken over by new firm may be paid off or taken over by partners.
vi. Realisation/Dissolution Costs: if borne by the firm being absorbed, it should be debited to
the realisation account; otherwise ignore.
vii. If balance of cash/bank is to be taken over by the absorbing firm, transfer the balance to
Realisation account; otherwise it should be paid to partners as agreed. If the partners of the
absorbed firm are paid off, the bank/cash account should be left alone and closed to the
capital accounts at the end of the process.
viii. Ascertain the purchase consideration; debit the amount to the Absorbing firm account and
Credit Realisation account.
ix. Profit or Loss on realisation should be ascertained and written off to the capital account in
the profit sharing ratio.
x. The balances in the capital accounts are transferred to the Absorbing firm account; OR
xi. Where the partners of the absorbed firm are paid an agreed price, the purchase
consideration received should be debited to bank/cash account and credited to the
absorbing firm account.

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