Anda di halaman 1dari 56

1

INDEX

Chapter
No. Name of the Chapter Page No.

1 Mergers and Acquisition of Companies 4to 32

2 Internal Reconstruction 33 to 41

3 Liquidation Of Companies 41 to 45

4 Holding Company Accounts 46 to 50

5 Recent Development in Accounting 51to 54

Books Reference 55

2
3
CHAPTER 1

MERGERS AND ACQUISITION OF COMPANIES

Meaning of Amalgamation And Acquisition of Companies

As per Accounting standard 14, Amalgamation includes

1. MERGER

2. ACQUISITION
(1) Merger refers to f two or more existing companies (vendor companies) being wound up
in the process for instance ‘ A‘ ltd and ‗B‘ Ltd winding up their business and form a new
company called ‗AB ‗Ltd constitute. In short ―Two or more liquidations and one
formation‖.

Acquisition or Takeover refers to (2) a- A company gets liquidated and is sold to another
company. In short ―One liquidation and no formation‖ or Absorption

(2) b- A company gets liquidated and in place of it a new company is formed. In short ―One
liquidation and one formation‖ or External Reconstrution

Types of Amalgamation
I. Amalgamation in the nature of Merger
II. Amalgamation in the nature of Purchase

Amalgamation in the nature of Merger is an amalgamation which satisfies the following


conditions:

i. All the assets and liabilities of the transferor company, after amalgamation
becomes, the assets and liabilities of the transferee company.
ii. Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company become equity shareholders of the transferee company by
virtue of the amalgamation.
iii. The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
iv. The business of the transferor company is intended to be carried on after the
amalgamation , by the transferee company.
v. No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial

4
statements of the transferee company except to ensure uniformity of accounting
policies.

Amalgamation in the nature of Purchase is an amalgamation which does not satisfy


one or more of the above conditions.

Accounting For Amalgamation


Two methods of accounting for amalgamation

(A) Pooling of interest method (B) Purchase method

Pooling of interest Method is applicable for amalgamation in the nature of Merger.


Under pooling of interest method, all assets, liabilities and reserves of the transferor
company will be recorded by the transferee company at Book Values unless any
adjustment is required due to different accounting policies followed by these companies.

Purchase Method is adopted for amalgamation in the nature of Purchase Under this
method assets and liabilities of the transferor company will be recorded by the transferee
company at Agreed Values.

Difference between Pooling of interest method and Purchase Method


Pooling of Interest Method Purchase Method
1.All assets and liabilities of Transferor 1. Only assets and liabilities taken over by
Co. will be incorporated in the books of Transferee Co. will be incorporated
Transferee Co. 2.Only Statutory Reserve of the
2. All reserves of Transferor Co. will be Transferor Co will be recorded in the books
recorded in the books of Transferee Co. of Transferee Co.
3. The assets and liabilities of Transferor 3.The assets and liabilities of Transferor
Co. will be recorded in the books of Co. will be recorded in the books of
Transferee Co. at Book Values. Transferee Co. at Agreed Values.
4.Any difference between Purchase 4. Any difference between Purchase
Consideration and value of assets and consideration and value of assets and
liabilities taken over , must be adjusted liabilities taken over , must be treated as
against general reserve. Goodwill or Capita Reserve, as the case
may be.

Statutory Reserve: Reserve to be maintained as per the requirements of any law or


legislation only in case of Amalgamation in the nature of purchase. Eg: Investment
allowance reserve; Development Rebate Reserve; Workmen Compensation Fund, Foreign
Project Reserve; Export Profit Reserve etc.

Statutory Reserve must be treated like any other liability in the Realization a/c in the
books of Transferor Co. In the books of Transferee Co. the following entry will be passed
to incorporate the Statutory Reserve:

5
Amalgamation Adjustment A/c Dr

To Statutory Reserve

ACCOUNTING PROCEEDURE

 Calculation of Purchase Consideration


 Discharge of Purchase Consideration
 Closing the books of the Transferor Company ( Vendor Company)
 Passing Opening entries in the books of Transferee Company(Purchasing
Company)

Purchase Consideration refers to the consideration payable by the Transferee Co. to the
Transferor Co. for taking over the assets and liabilities of the Transferor Company.

Methods of Calculating Purchase Consideration

i. Lump sum Method: Lump sum amount or fixed amount will be given as
P.C.
ii. Net Payment Method: P.C. will be the total of the payments made by
Transferee Co. to Transferor Co. (As per A.S.14 only payment for the
Equity Shareholders & Preference Shareholders are taken for the purpose
of Purchase Consideration.)

Example: X Ltd is absorbed by Y Ltd. Y ltd agrees to make the following payments:

a. Cash at Rs.5 per share for 10,000 shares of Rs.10 each issued by X ltd.
b. Issued two shares of Rs.20 each for every 5 shares held in X ltd.
c. Discharge Rs.1, 00,000 12% Debentures of X ltd at 10% premium by
issuing Debentures in Y ltd at par.
d. Rs.50, 000 cash to creditors of X ltd in final settlement of their
account.
Determine the amount of purchase consideration as per A.S.14.

Calculation of Purchase Consideration

As the various payments are mentioned in the question specifically Net Payment Method is
followed.

Payment to Equity Share holders:


By Cash (5x10, 000) = 50,000
By shares (10,000x2/5x20) = 80,000
Purchase consideration = 1, 30,000

As per A.S.14 consideration given to the Equity share holders & Preference share holders
(Owners) only will be considered for calculating Purchase consideration. Any payment

6
given to the Debenture holders & Creditors (Outsiders) are not considered for calculating
purchase consideration.

iii. Net Asset Method:


P.C. = Assets taken over (at taken over values)—Liabilities Taken
Over (at taken over Value)

Example: Calculate purchase consideration from the following.

The Assets of X ltd are valued at Rs. 1,00,000 ; The liabilities are valued at Rs.40,000;
Rs.20,000 cash is to be paid to the share holders of X ltd and the balance is to be discharged
by issue of shares of Rs.10 each.

(Since all the payments are not given net payment method cannot be followed. So Net Asset
Method.)

Solution
Various Assets taken over = 1, 00,000
Less liabilities taken over = 40,000
Purchase consideration = 60,000
60,000 is discharged by cash Rs.20, 000 and shares of Rs.40,000

How to identify which Method

If the problem specifies any method adopt the method specified.


If the amount of P.C. is given: Lump sum Method

When all the payments is given specifically Net Payment Method

When the Payments is given with the statement ―Balance in ---- (cash or shares) ―Net Asset
Method

Some times all the payments and agreed value of Assets and Liabilities will be given in that
case follow Net Payment Method.

Closing the books of Transferor Company


Journal Entries

1. For transfer of various Assets including cash at their book Value

Realization Account Dr

To Individual Asset A/C

(All assets except cash & Bank whether taken over or not transfer to Realization A/C.
Cash& Bank will be transferred to Realization A/C only when it is taken over by the
7
purchasing Co. The items which are given under Miscellaneous Expenditure on the Asset
side of the Balance sheet will not be transferred to Realization A/C. It will be transferred to
Equity Share holders A/C.)

2. For transfer of various liabilities and Statutory reserve

Individual Liability A/c Dr

To Realization A/c

3. For Purchase consideration Due


Transferee Company A/c Dr
To Realization A/c

4. For Receipt of Purchase Consideration


Equity shares in Purchasing Company A/c Dr
Preference Shares in Purchasing Company A/c Dr
Cash/ Bank A/c Dr
To Transferee Company A /C

5. For sale of Assets not taken over by the Purchasing Company


Cash / Bank A/c Dr
To Realization A/c

6. For Payment of Liabilities Not taken over by the Purchasing Company


Realization A/c Dr
To Cash/ Bank A/c

7. For Preference share capital Due


a. Payable at Par
Preference Share Capital A/c Dr
To Preference shareholders A/c

b. Payable at a Higher Value


Preference Share Capital A/c Dr
Realization A/c Dr
To Preference Shareholders A/c

c. Payable at a Lower Value


Preference Share Capital A/c Dr
To Realization
To Preference Shareholders A/c

8. For Transfer of Share capital, Reserves & Surplus


Equity Share Capital A/c Dr

8
Reserve A/c Dr
Profit & Loss A/c Dr
To Equity Shareholders A/C
9. For transfer of Miscellaneous Expenditure
Equity Shareholders A/c Dr
To Preliminary Expenses A/C
To Underwriting Commission A/C
To Discount on Issue of Shares or Debentures A/C
To P/L A/c
Note: In case of Amalgamation in the nature of Merger Only Share Capital must
be transferred to Equity Shareholders A/c and all other items relating to
Shareholders must be transferred to Realizations A/c.
10. For Payment of Realizations Expenses
a. If it is paid by the Vendor Company
Realizations A/c Dr
To Cash/Bank A/c
b. If it is paid by Transferee Company

i. Transferee Company A/c Dr


To Cash/Bank A/c

ii. Cash /Bank A/c Dr


To Transferee Company A/c

(Or Alternatively No Journal entry is required)


11. For Closing Realizations Account
i. In case of Profit
Realizations A/c Dr
To Equity Shareholders A/c
ii. In case of Loss
Equity Shareholders A/c Dr
To Realizations A/c
12. For final payment made to Preference Shareholders
Preference Shareholders A/c Dr
To Shares in Purchasing Company A/c
To Cash/ Bank A/c
13. For the final Payment made to Equity Shareholders
Equity Shareholders A/c Dr
To Equity Shares in Transferee Company A/c
To Cash / Bank A/c

Note: When the purchasing company issues Debentures for discharge of Vendor
Co. Debentures in the books of Vendor Co. it is treated as taken over and

9
transferred to Realizations A/c. And in the books of Purchasing Co. the discharge
must be recorded.

Opening entries in the books of Purchasing Co. (Transferee Co.)Purchase Method

1. For Purchase Consideration Payable


Business Purchase A/c Dr
To Liquidator of Transferor Co. A/c

2. For Discharge of Purchase Consideration


Liquidator of Transferor Co. A/c Dr
To Equity Share Capital A/c
To Preference Share Capital A/c
To Cash/Bank A/c
( If the shares are issued at a premium or at a Discount by the Purchasing Co. ‗
Discount on Issue of Shares‘ or ‗Securities Premium‘ is to be adjusted)

3. For incorporation of the various Assets & Liabilities taken over


Plant & Machinery A/c Dr
Land & Building A/c Dr
Other Fixed Assets A/c Dr
Debtors A/c Dr
Stock A/c Dr
Cash/Bank A/c Dr
Goodwill A/c (Balancing Figure) (if any)
To Creditors A/c
To Bills payable A/c
To Other Liabilities A/c
To Business Purchase A/c
To Capital Reserve A/c (Balancing Figure) (if any)
(Assets & Liabilities taken over will be incorporated at Agreed Value
. If the total Debit is more than the total credit it will be shown as Capital
Reserve & if the total Credit is more than the total Debit it will be shown as
Goodwill).

For Incorporation of Statutory Reserve:


Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
4. For making payment to Debentures & other Liabilities
Debentures (of Vendor Co.) A/c Dr
To Debentures A/c (of Purchasing Co.)
5. For Payment of Realizations Expense
Goodwill (or Capital Reserve) A/c Dr
To Cash/ Bank A/c

10
6. For set off of Goodwill against Capital Reserve
Capital Reserve A/c Dr
To Goodwill A/c

Opening entries in the books of Purchasing Co. (Pooling of Interest Method)

1. Business Purchase A/c Dr

To Liquidator Of Transferor Company A/c

2. Liquidator of Transferor Co. A/c Dr


To Equity Share Capital A/c
To Preference Share Capital A/c
To Cash/Bank A/c
( Issue of shares at a premium or Discount is to be adjusted)
3. Various Assets A/c Dr
To Various Outside Liabilities A/c
To Reserve( other than General Reserve)
To P/L A/c
To Business Purchase A/c
(balancing figure will be General Reserve)
4. Debentures (of Vendor Firm) A/c Dr
To Debentures ( of Purchasing Co.)
5. For Payment of Realisation Expenses by the Transferee Co.
Profit & Loss OR Reserve A/c Dr
To Cash/Bank A/c
ExampleI

Vikas Ltd and Mohith Ltd carrying on similar business decided to amalgamate and a new
Co. Vikmo Ltd is to be formed to take over the assets and liabilities of both the companies
and it is agreed that fully paid equity shares of Rs.100 each shall be issued by the new Co. to
the value of net asset of each of the old Co.

Balance sheet as on 31.03.2012

Liabilities Vikas Ltd MohithLtd Assets Vikas Ltd MohithLtd


Share Capital Goodwill 10,000 4,000
(Shares of Rs.50 1,00,000 80,000 Land & Building 34,000 20,000
each) 40,000 --- Plant& Machinery 48,000 32,000
General Reserve 6,000 ---- Furniture 10,000 15,000
P& L A/c 8,000 16,000 Stock 20,000 15,000
Creditors 8,000 --- Cash 16,000 600
Bills Payable --- 16,000 Debtors 24,000 14,000
Bank Overdraft P&L A/c --- 11,400
1,62,000 1,12,000 1,62,000 1,12,000

11
All tangible assets are taken over at book values and goodwill of Vikas Ltd. is to be valued
at Rs.24,000 while that of Mohith is valueless.

Pass Journal entries and prepare necessary ledger Accounts in the books of Vikas Ltd &
Mohith Ltd and incorporation entries and Balancesheet in the books of Vikmo Ltd.

As all the payments are not given in the question it is Net Asset Method

Calculation of Purchase Consideration ( Net Asset Method)

Vikas Ltd Mohith Ltd

Various Assets taken over at Agreed Values:

(Here it is taken over at Book value)

Goodwill 24,000 -

Land & Building 34,000 20,000

Plant & Machinery 48,000 32,000

Furniture 10,000 15,000

Stock 20,000 15,000

Cash 16,000 600

Debtors 24,000 14,000

Total 1,76,000 96,600

Less Liabilities Taken Over:

Creditors 8,000 16,000

Bills Payable 8,000

Bank Overdraft -- 16,000

Total 16,000 32,000

Purchase Consideration 1,60,000 64,600


12
Discharge of Purchase Consideration

By Shares Of Rs.100 each:

For Vikas Ltd 16,000 shares of Rs.100 each=1,60,000

For Mohith Ltd 646 shares of Rs.100 each= 64,600

Journal entries in the books of Vikas Ltd

Particulars Debit Credit

13
Realizations Account Dr 1,62,000
To Goodwill 10,000
To Land & Building 34,000
To Plant & Machinery 48,000
To Furniture 10,000
To Stock 20,000
To Cash 16,000
To Debtors 24,000
( Being the assets closed by transferring to Realisation A/c)
2. Creditors A/c Dr 8,000
BillspayableA/c Dr 8,000
To Realisation 16,000
(Being the various outside liabilities closed by transferring to
realization A/c)
3.VikasLtdA/c Dr 1,60,000
To Realisation 1,60,000
( Being the Purchase consideration due)
4.EquitySharesinVikmoLtdA/c Dr 1,60,000
To Vikmo Ltd 1,60,000
( Being the purchase consideration received by shares)
5 Equity Share Capital A/c Dr 1,00,000
General Reserve A/c Dr 40,000
P &L A/c Dr 6,000
To Equity Shareholders 1,46,000
( Being the capital , reserves & surplus transferred to
shareholders Account)
6 Realisation A/c Dr 14,000
To Equity shareholders 14,000
( Being profit on realization transferred to shareholders A/c)
7 Equity Shareholders A/c Dr 1,60,000
To Equity shares in Purchasing company 1,60,000
( Being the final payment given to equity shareholders )

Ledger Accounts in the books of Vikas Ltd

Realisation Account

14
Particulars Amount Particulars Amount
To Goodwill 10,000 By Creditors 8,000
To Land &Building 34,000 By Bills Payable 8,000
To Plant & Machinery 48,000 By Purchasing Company 1,60,000
To Furniture 10,000
To Stock 20,000
To Cash 16,000
To Debtors 24,000
To Equity Share holders ( B/F) 14,000
1,76,000 1,76,000

Vikmo Ltd Account


Particulars amount Particulars Amount
To Realisation 1,60,000 By Equity Shares in Vikmo 1,60,000
1,60,000 Ltd 1,60,000
Equity Shares in Vikmo Ltd A/c

Particulars Amount Particulars Amount


To Vikmo Ltd 1,60,000 By Equity shareholders 1,60,000
1,60,000 1.60,000
Equity Shareholders A/c

Particulars Amount Particulars Amount


To Equity shares in Vikmo Ltd 1,60,000 By Equity share capital 1,00,000
By General Reserve 40,000
By P &L A/c 6,000
By Realisation 14,000
1,60,000 1,60,000
Ledger Accounts in the books of Mohith Ltd

Realisation Account

Particulars Amount Particulars Amount


To Goodwill 4,000 By Creditors 16,000
To Land & Building 20,000 By Bank Overdraft 16,000
To Plant & Machinery 32,000 By Vikmo Ltd 64,600
To Furniture 15,000 By Equity Shareholders 4,000
To Stock 15,000
To Cash 600
To Debtors 14,000

1,00,600 1,00,600

Vikmo Ltd

Particulars Amount Particulars Amount

15
To Realisation 64,600 By Equity Shares 64,600
64,600 64,600

Equity Shares in Vikmo Ltd

Particulars Amount Particulars Amount


To Vikmo Ltd 64,600 By Equity Shareholders 64,600
64,600 64,600
Equity Shareholders Account

Particulars Amount Particulars Amount


To P& L A/c 11,400 By Equity Share Capital 80,000
To Equity Shares in Vikmo 64,600
Ltd 4,000
To Realisation 80,000 80,000

Journal Entries in the books of Vikmo Ltd

Particulars Debit Credit


1. Business Purchase A/c Dr 2,24,600
To Liquidator of Vikas Ltd 1,60,000
To Liquidator of Mohith Ltd 64,600
( Being Purchase consideration Payable)
2. Liquidator of Vikas Ltd A/c Dr 1,60,000
Liquidator of Mohith Ltd A/c Dr 64,600
To Equity Share Capital 2,24,600
( Being Purchase consideration discharged by Shares)
3. Goodwill A/c Dr 24,000
Land & Building A/c Dr 54,000
Plant & Machinery A/c Dr 80,000
Furniture A/c Dr 25,000
Stock A/c Dr 35,000
Cash A/c Dr 16,600
Debtors A/c Dr 38,000
To Creditors 24,000
To Bills Payable 8,000
To Bank Overdraft 16,000
To Business Purchase 2,24,600
( Being the incorporation of various assets and liabilities
taken over)

Balance Sheet of Vikmo Ltd

16
Liabilities Amount Assets Amount
Equity Share Capital 2,24,600 Goodwill 24,000
Creditors 24,000 Land & Building 54,000
Bills Payable 8,000 Plant & Machinery 80,000
Bank Overdraft 16,000 Furniture 25,000
Stock 35,000
Cash 16,600
Debtors 38,000
2,72,600 2,72,600

Absorption of Companies
Absorption ( Acquisition) refers to purchase of an existing company or companies by
another existing company.

Eg: Altd takes over Bltd

Difference between Amalgamation & Absorption of Companies

Amalgamation Absorption
1. Involves formation of new company Does not involve formation of new company
2. Two or more companies are One or more companies are liquidated.
liquidated

The Accounting procedure is same as Amalgamation

 In the books of the Transferee Company while preparing the Balance sheet
after absorption the existing assets of the company plus the assets taken over
from the Transferor company is to be shown on the asset side & the existing
liabilities plus liabilities taken over is to be shown on the Liability side.

Inter Company Owings & Unrealised Profits

Inter –company owings refers to the amount due from Transferee company to Transferor
Company or from Transferor company to Transferee company. After absorption both
companies will become one company and the owings no more exist. In absorption Inter-
company owings must be set-off.

In the books of Transferee company the following entry is to be passed ( to the extent of
Inter company owing)

Sundry Creditors A/c Dr

To Sundry Debtors

Unrealised Profit In case of absorption , if one company hold stock of goods purchased
from the other company i.e., if purchasing company holds stock of goods purchased from

17
vendor company or vice versa, the profits included in the value of such goods is called
Unrealised Profits

It Can be adjusted by passing the following entry in the books of the purchasing company

Goodwill or Capital reserve A/c Dr

To Stock A/c

Inter company holding : means purchasing company holding shares of vendor company or
vendor company holding shares of purchasing company or both purchasing company and
vendor company mutually holding shares of other company.

External Reconstruction
External Reconstruction refers to Closing or Liquidating the old company and starting a new
company by the same management to come out of its financial difficulties.

The Accounting procedure is same as in the case of amalgamation in the nature of


Purchase.

Note : Usually in case of External Reconstruction Partly Paid Shares will be issued by the
purchasing company as part of Purchase Consideration. In the books of Purchasing company
an extra journal entry will be passed for making the Call and Collecting the money.

Example 2

Following is the Balance sheet of Bharat co.Ltd as on 31st March 2001

Balance Sheet of Bharat Co.Ltd

Liabilities Rs. Assets Rs.


Equity share capital Good will 30,000
(5,000 shares of Rs.100 each) 5,00,000 Building 3,00,000
Machinery 2,70,000
Reserve fund 1,00,000 Investments 1,50,000
P& L a/c 50,000 Stock 2,00,000
10% debenture 2,00,000 Debtors 60,000
Creditors 1,00,000 Cash 40,000
Dividend provisions 50,000
Tax provisions 50,000
10,50,000 10,50,000

18
India Co.Ltd. Purchased the business of Bharat Co.Ltd on the following terms:

a) All the assets except cash & good will are taken over.

b) 800 shares of Rs. 100 each of Indian co. are issued at an agreed value of Rs.125 per share
in full settlement of accounts of creditors.

c) 5 equity shares of Rs. 110 each in India Co. are issued to equity share holders at an agreed
value of Rs.125 per share for every 4 shares held in Bharat Co.

d) Cash Rs.40 per share held in Bharat Ltd is paid to equity share holders.

e) 10% debentures are discharged at 20% premium by issue of necessary amount of 12%
debentures in India Ltd., at 4% discount

Close the books of Bharat Co.Ltd & pass opening Journal entries in the books of India Co.Ltd

Ans: 2. calculation of purchase consideration: Payment made to each item of liability is


specifically given. Hence, the Net payments method of calculating purchase consideration
must be adopted.

Payment towards Equity Share holders:

I In equity shares of India co. Ltd.

(5,000 shares = Rs. 40 per share per share in cash) 7,81, 250

5,000 shares x Rs. 40 per share 2,00,000

Purchase consideration 9,81250

II Discharge of purchase consideration Rs.

In Equity shares 7,81,250

In cash 2,00,000

9,81,250

III. Closing the books of Vendor Company:

Books of Bharat Co. Ltd.

Realization a/c

19
Particulars Amt(Rs.) Particulars Amt(Rs.)

To Good will a/c 30,000 By 10% debentures 2,00,000


To Building a/c 3,00,000 By Tax provision a/c 50,000
To Machinery a/c 2,70,000 By Creditors a/c 1,00,000
To Investments a/c 1,50,00 By India co. Ltd.a/c
To Stock a/c 2,00,000 Purchase consideration 9,81,250
To Debtors a/c 60,000
To Equity share holder a/c 3,21,250

13,31,250 13,31,250

Particulars Amt(Rs.) Particulars Amt(Rs.)

To realization a./c By Equity shares


9,81,250 India co. Ltd. a/c 7,81,250
By Bank A/c 2,00,000

9,81,250 9,81,250

Equity share holder Account

Particulars Amt(Rs.) Particulars Amt(Rs.)


To equity shares By Equity shares
India co. Ltd. a/c 7,81,250 Capital a/c 6,00,000
To bank a/c 2,40,000 By Reserve fund a/c 1,00,000
By P & L a/c 50,000
By dividend provision a/c 50,000
By realization a/c 3,21,250
(profits)
10,21,250 9,81,250

20
Bank A/c

Particulars Amt(Rs.) Particulars Amt(Rs.)

To Cash A/c 40,000 By Equity share holders a/c 2,40,000


To India co Ltd. A/c 2,00,000

2,40,000 2,40,000

Equity shares in India

Particulars Amt(Rs.) Particulars Amt(Rs.)

To India co Ltd. A/c 7,81,250 By Equity share holders 7,81,000

7,81,250 7,81,250

Notes:

1) Tax provision a/c can also be transferred to equity shareholders a/c if there is no for
liability due.
2) Goodwill is not taken over, However, Goodwill being an intangible asset cannot be
realized separately and hence no entry for its realization has been shown.
3) While closing the books of accompany, Bank a/c must be opened Hence in this
problem, cash balance has been shown as deposit made in the bank

21
IV. Opening entries in the books of purchasing company:

Books of India company Ltd.

Journal Entries

1) Business purchase a/c 9,81,250


To liquidator of Bharat Co. Ltd a/c 9,81,250
(Being purchase consideration due recorded)

2) Liquidator of Bharat Co. Ltd. Dr. 9,81,250


To Equity share capital a/c 6,25,000
(6,250 x Rs. 100 per share)
To securities premium a/c 1,56,250
To Bank a/c 2,00,000
(Being purchase consideration discharged
recorded

Building a/c 3,00,000


Machinery a/c 2,70,000
Investment a/c 1,50,000
Stock a/c 2,00,000
Debtors a/c 60,000
Goodwill a/c (B/F) 3,91,250
To tax provision a/c 50,000
Bharat Co a/c

(Rs. 2,00,000 _ premium Rs. 40,000)


To Creditors a/c 1,00,000
To Business purchases a/c 9,81,250
(Being assets & Liabilities taken over
incorporated & the balance transferred to
Goodwill recorded )

10% Debentures of Bharat Co. Ltd. a/c Dr 2,40,000


Discount on issue of debentures a/c Dr 10,000
To 12% debentures a/c 2,50,000
(Being 12% debentures issued towards 12%
debentures issued towards 10% debentures of
Bharat co at a discount of 4%

Creditors (of Bharat Ltd. a/c) Dr. 1,00,000


To share capital a/c 80,000
(800 shares & Rs. 100 per share)
To securities premium a/c 20,000
(800 shares x Rs. 25 per share)
Being discharge recorded

22
Note: Calculation of discount on debentures:

If debentures price is Rs. 100 @ 4% is Rs. 4, Hence debenture price after discount is Rs. 96,
Rs. 2, 40,000 worth of 12% debentures must be issued towards f10% debentures of Bharat Co
Ltd. At 4% discount. Therefore, Rs. 2, 40,000 is equivalent to 96. Proportionate value of 4 is
the discount.

2. Problem of Amalgamation under Net assets Method)

X company Ltd. & Y Company Ltd. Have agreed to amalgamate & to form a new
company called Z co Ltd. This has taken over both the company‘s assets & liabilities as
per their Book value .Balance sheet given below:

Balance Sheet of X co Ltd.

As on 31-12-2000

Liabilities Rs. Assets Rs.

Share Capital Good will 30,000


Subscribed & Paid up capital 5,00,000 Land & Building 2,00,000
50,000 shares of Rs. 10 each
Reserve & Surplus
General Reserve 1,50,000 Plant & Machinery 1,50,000
Surplus : 50,000 2,00,000 Furniture 50,000
Creditors 80,000 Investment in Govt.
Bills payable 20,000 Securities 2,00,000
80,000 Stock 90,000
Debtors 80,000
8,00,000 8,00,000

Balance Sheet of Y co Ltd.

As on 31-12-2000

23
Liabilities Rs. Assets Rs.

Share Capital Land & Building 3,00,000


Subscribed & Paid up capital 8,00,000 Plant & Machinery 2,50,000
shares of Rs. 10 each
Reserve & Surplus Patents 1,50,000
General Reserve 3,00,000
Surplus 1,00,000 4,00,000 Furniture 50,000
Secured loans 1,50,000 Investment 4,50,000
Unsecured loans 50,000 Stock 1,20,000
Creditors 60,000 Debtors 90,000
Bills payable 40,000 Bank 80,000
15,00,000 15 ,00,000

You are required to close the books of X co. & Y Co. and give Balance sheet of Z Co.
which has authorized capital of Rs. 25, 00,000, along with opening journal entries.

Ans: Since no details of payments made by Z Co., to X Co & Y co have been specified &
since no lump sum amount of purchase consideration has been given Net Assets method is
used to calculate purchase consideration.

X Co Y Co

Asses taken over:


Land & Buildings 2,00,000 3,00,000
Plant Machinery 1,50,000 2,50,000
Furniture 50,000 50,000
Patents - 1,50,000
Investments 2,00,000 4,50,000
Stock 90,000 1,20,000
Debtors 80,000 1,20,000
Bank balance 30,000 90,000
8,00,000 15,00,000
Less : Liabilities taken over -
Secured loans - 1,50,000
Unsecured loans 50,000
Creditors 80,000 60,000
Bills payable 20,000 40,000
Purchase consideration 7,00,000 12,00,000

II. Discharge of purchase consideration


X Co Y Co
Rs. Rs.
In Equity Shares of Z co 7,00,000 1,200,000
7,00,000 1,200,000

24
III closing the books of vendor companies

In the Books of X company Ltd,,

Realization a/c

Particulars X Co Y co Particulars X co Y Co

To land and Building 2,00,000 3,00,000 By Secured loans - 1,50,000

To Plant & Machinery 1,50,000 2,50,000 By Unsecured loans - 50,000

a/c

To Furniture 50,000 50,000 By creditors 80,000 60,000

To Patents - 1,50,000 By Bills payable 20,000 25,000

To Investments 2,00,000 4,50,000 By Z co a/c 7,00,000 12,00,000

To Stock a/c 90,000 1,20,000

To Debtors a/c 80,000 1,20,000

To bank a/c 30,000 90,000

8,00,000 15,00,000 8,00,000 15,00,000

Z co a/c

Particulars X Co Y co Particulars X co Y Co
To realization 7,00,000 12,00,000 By shares in Z –c0 7,00,000 12,00,000
(Purchase
consideration)
7,00,000 12,00,000 7,00,000 12,00,000

Shareholders a/c

Particulars X Co Y co particulars X co Y Co
To shares in Z Co a/c 7,00,000 12,00,000 By shares capital a/c 5,00,000 8,00,000
By General reserve 1,50,000 3,00,000
a/c
By profit & Loss a/c 50,000 1,00,00
Total 7,00,000 12,00,000 7,00,000 12,00,000

25
III. Opening entries & Balance sheet in the book of purchasing company

Business purchase a/c 19,00,000

To liquidator of X Co a/c 7,00,000

To liquidator of Y co a/c 12,00,000

(being purchase consideration due recorded

Liquidator of X co a/c 7,00,000

Liquidator of Y co a/c 12,00,000

To equity share capital a/c 19,00,000

( Being final settlement made by the Co.)

Land building a/c 5,00,000

Plant & Machinery a/c 4,00,000

Furniture a/c 1,00,000

Patents a/c 1,50,000

Investments a/d 1,50,000

Stock a/c 6,50,00

Debtors a/c 2,10,000

Bank a/c 1,20,000

To secured loan 1,50,000

To Unsecured loan a/c 50,000

To Creditors 1,40,000

To Bills payable a/c 60,000

To Business purchase a/c 19,00,000

(Being assets & Liabilities taken over


incorporated recorded

26
Balance sheet as on 1st January 2001

A-(EQUITIES&LIABILITIES)

Share Capital
Authorized capital 25,00,000
Issued & subscribed paid up capital 19,00,000
2) Reserves & Surplus ---
Non Current Liabilities

3) Secured loans 1,50,000


4) Unsecured loans 50,000
5) Current liabilities & Provisions
Creditors 1,40,000
Bills payable 60,000

23,00,000

B- (ASSETS) Rs.

Fixed Assets

Land building 5,00,000

Plant & Machinery 4,00,000

Furniture 1,00,000

Patents 1,50,000

Investments -----

Government security 2,00,000

Other securities 4,50,000

Current assets and Loans & Advances

Stock a/c 2,10,000

Debtors a/c 1,70,000

Bank a/c 1,20,000

23,00,000

27
3. Problems on External Reconstruction:

Pavani Company after a series of heavy losses resolves to go into voluntary liquidation
& to reconstruct by means of a new company under the name of new Pavani Company.
On the date of reconstruction the Balance sheet of Pavani. Company as follows:

Balance Sheet of Pavani Company

Liabilities Rs. Assets Rs.

Capital 2,00,000 share or Rs. 5 10,00,000 Building 3,92,500


each
Sundry Debtors 30,000 Machinery 2,39,000

Bank loan 15,000 Motor lorry 19,400

Bills payable 10,000 Stock 91,410

Sundry Debtors 1,09,100

Bank 3,590

10,55,000 10,55,000

The following is the scheme of reconstruction:

1) The new company is to take over the assets of the old company & not the
liabilities.
2) Capital of the new company is to consist of 5,00,000 shares of Rs. 5 each
3) The new company is to issue 2,80,000 shares or Rs. 5 each credited with Rs. 2.50
per shares as paid up to the old company & to pay to it Rs. 1,00,000 in cash by
way of purchase consideration
4) The balance of Rs. 2, 50 per share payable by members of the new company is
duly received.
Record the journal entries in the books of both the companies & prepare the Balance
sheet of the new company.

Ans. Calculation of purchase consideration

Since the total payments made by purchasing company to vendor company is specified. Net
payments method of calculating purchases consideration must be adopted.

Payment in shares of New Pavani C


28
Rs. 2,80,0000 shares x Rs. 2.50 each 7, 00,000

Payment in cash 1, 00,000

Purchase consideration 8, 00,000

II Discharge of purchase consideration

In shares of new Pavani company 7, 00,000

In cash 1, 00,000

-----------

8, 00,000

III. Closing the books of Vendor Company

Books of Pavani Company

Journal entries

1) Realization a./c Dr 8,55,000

To Buildings a/c 3,92,500

To Machinery a/c 2,39,000

To Motor Lorry a/c 19,400

To Stock a/c 91,410

To Sundry debtors a/c 1,09,100

To bank a/c 3,590

(Being Assets transfer to realization entry)

Sundry Creditors Dr 30,000

Bank loan a/c 15,000

Bills payable 10,000

To Realization a./c 55,000

(Being liabilities transfer to realization)

29
Share Capital a/c 10,00,000

To shareholders a/c 10,00,000

(Being capital transfer shareholders account)

Share holders a/c Dr. 2,00,000

To Profit & Loss a/c 2,00,000

(Being transfer entry)

New Pavani co a/c 8,00,000

To Realization a/c 8,00,000

(Being purchase consideration due recorded)

Shares in new Pavani co a/c 7,00,000

Bank a/c 1,00,000

To New Pavani Co a/c 8,00,000

Shareholders a/c 7,00,000

To shares in new company 7,00,000

(Being purchase consideration discharged


recorded

Realization a/c 55,000

To Bank a/c 55,000

(Being creditors, Bank loan & Bills payable not


taken over paid recorded)

30
Shareholders a/c 55,000

To Realization 55,000

(being loss on realization transferred recorded

Shareholders a/c 45,000

To Bank a/c 45,000

(Being balance paid recorded)

III Opening entries & Balance sheet in the books of purchasing company

Business Purchase a/c Dr 8,00,000

To liquidator of Pavani Co a/c 8,00,000

(Being purchase consideration due recorded)

Liquidator of Pavani co a/c Dr 8,00,000

To share capital a/c 7,00,000

To Bank a/c 1,00,000

(Being purchase consideration discharged


recorded)

Building 3,92,500

Machinery 2,39,000

Motor lorry 19,400

Stock 91,410

Sundry Debtors 1,09,100

Bank 3,590

31
To Business purchase a/c 8,00,000

To capital Reserve a/c (b/f) 55,000

(Being assets & liabilities taken over


incorporated recorded)

Share call a/c 7,00,000

To share capital 7,00,000

(Being the balance of Rs. 2.50 per share due


recorded

Bank a/c 7,00,000

To Share call a/c 7,00,000

(Being call money received recorded)

Balance sheet of New Bhavani Ltd as on…….

(A)Equities & Liabilities

Share capital

2, 80,000 shares of Rs. 5 each 14, 00,000

Reserves & Surplus

Capital reserve 55,000

Secured loans -
Unsecured loans -
Current liabilities & Provisions -
Total 14,55,000

32
(B) Assets Rs.

Fixed Assets

Building 3,92,500

Machinery 2,39,000

Motor lorry 19,400

Investments -

Current assets 91,410

Stock

Debtors 1,09,100

Bank balance 6,03,590

(Rs. 3,590 + Rs.


7,00,000 – Rs. 1,00,000)

Total 14,55,000

33
CHAPTER –II

INTERNAL RECONSTRUCTION
Meaning

It is an arrangement under which a company instead of going into liquidation reconstructs


itself internally by merely altering or reducing the capital of its shareholders and claims of its
debenture holders and creditors with their consent There is no liquidation and no formation of
any company.

Forms of Internal Reconstruction

1. Re-organisation or Alteration of Share Capital


2. Reduction of Share Capital and Other Liabilities

Re-organisation or Alteration of Share Capital

It means rearrangement of the capital of the company which may include increase in the
share capital by making fresh issue of shares or consolidation or subdivision of shares

Consolidation of shares means converting a lower denomination share into a higher


denomination share

Subdivision of shares means splitting up of larger denomination shares into smaller


denomination shares

Reduction of capital

It is an arrangement under which generally the capital of the members and sometimes , even
the claims of debenture holders and creditors of the company are reduced with their consent.
The amount made available is utilized in writing off accumulated losses, fictitious assets and
the overvalued portion of other assets.

Difference between Internal Reconstruction & External Reconstruction

Internal Reconstruction External Reconstruction


No Liquidation of any company One company is liquidated
No formation of any new company A new company is formed
Requires court‘s confirmation Court‘s confirmation is not required
Slow and tedious process Can be carried out easily
Accumulated losses can be set off against Accumulated losses cannot be set off against
future profits future profits

34
JOURNAL ENTRIES ON REDUCTION OF CAPITAL

PARTICULARS LF DR CR
1. For Reduction of Equity Share Capital
Old Equity Share Capital A/c Dr
To New Equity Share Capital a/c
To Capital Reduction a/c

2. For Reduction of Preference Share Capital


Old Preference Share Capital A/c Dr
To New Preference Share Capital a/c
To Capital Reduction a/c
3. For reduction of the amount due to Debenture holders
( whenever debenture holders forego their claims)
Debenture holders A/c Dr
To Capital Reduction a/c
4. For reduction of the amount due to Creditors
Creditors A/c Dr
To Capital Reduction a/c
5. For appreciation in the value of Assets
Concerned Asset A/c Dr
To Capital Reduction a/c
6. For the payment of Reconstruction Expenses
Reconstruction Expenses A/c Dr
To Bank a/c
7. For utilization of Capital Reduction A/c in writing off
accumulated losses and various fictitious assets
Capital Reduction A/c Dr
To Profit & Loss a/c
To Preliminary Expenses a/c
To Discount on issue of shares & Debenture a/c
To Underwriting commission a/c
To Reconstruction Expenses a/c
To Goodwill a/c
To Patents or Trade Marks a/c
To Fixed Assets (depreciation or Overvalued)
To Capital Reserve ( Balance if any)

Note

If in the problem it is said that share capital is reduced to an equal number of fully paid shares
of Rs. – each , it is implied that face value of the share has changed. On the other hand if it
is just mentioned that share capital is reduced to Rs. – each it is implied that face value has
not changed but only the paid up value has changed.

35
If the face value has not changed instead of the first journal entry the following entry is to be
passed

Share Capital A/c Dr

To Capital Reduction a/c

( Being the reduction in the paid up capiral)

Note: (1) In case of Debentures if the old debentures are exchanged by new Debentures
the journal entry can be

Old Debentures A/c Dr


To New Debentures.
(2) On the other hand if the Debenture holders are settled by making the
payment or giving some assets two journal entries are required to be passed.
i. Debenture A/c Dr
To Debenture holders a/c
ii. Debenture holders A/c Dr
To Stock or Debtors or Cash
To Capital reduction (amount sacrificed)

Example 1

Balance Sheet of a private company stood as follows on 31.12.2013

Liabilities Amount Assets Amount


19,000 Shares of Rs.100 each 19,00,000 Land & Building 1,00,000
Creditors 1,00,000 Machinery 2,60,000
Debentures 1,00,000 Furniture 20,000
Stock 3,70,000
Debtors 1,80,000
Goodwill 2,00,000
Profit & Loss A/c 9,70,000
21,00,000 21,00,000
The company is to be reconstructed as follows:

a. Shares of Rs.100 are to be reduced to an equal number of fully paid shares of Rs.40
each.
b. To issue 1,000 new shares of Rs.40 each as fully paid up to debenture holders in full
settlement.
c. The amount available is to be utilized in writing off the goodwill and profit & loss
A/c and the balance in writing down the value of machinery.
d. Authorised capital of the company is 20,000 shares of Rs.100 each.

Give the necessary journal entries. Prepare Capital Reduction A/c and Reconstructed
Balance Sheet.

36
Journal Entries

Particulars Debit Credit


1. ( Old) Equity Share Capital A/c Dr 19,00,000
To ( New) Equity Share Capital (19,000x40) 7,60,000
To Capital Reduction (19,000 x60) 11,40,000
( Being the conversion of 19,000 shares of Rs.100
each to Rs.40 each)

2. Debentures A/c Dr 1,00,000


To Debenture holders 1,00,000
(Being the debentures transferred to debenture
holders account)
3. Debenture holders A/c Dr 1,00,000
To Equity share capital (1,000x40) 40,000
To Capital Reduction 60,000
(Being 1,000 shares of Rs.40 each are issued to
Debenture holders as final settlement)
4. Capital Reduction A/c Dr 12,00,000
To Profit & loss A/c 9,70,000
To Goodwill 2,00,000
To Machinery 30,000
( Being the utilization of capital reduction account
in writing off P& L A/c, Goodwill & Machinery)

Capital Reduction Account

Particulars Amount Particulars Amount


To Profit & Loss a/c 9,70,000 By old Equity share 11,40,000
To Goodwill 2,00,000 Capital
To Machinery 30,000 By Debenture holders 60,000
12,00,000 12,00,000
Reconstructed Balance Sheet as on 31.12.2013

Sources of Funds Amount Amount


Shareholders Fund:
Share Capital
20,000 shares of Rs.100 each Rs.40 paid up 8,00,000
Reserves & Surplus ---
Long Term Loans ---
Total 8,00,000
Application of Funds:
Fixed Assets:
Land & Buildings 1,00,000
Machinery 2,30,000
Furniture 20,000
3,50,000 3,50,000
Current Assets:
Stock 3,70,000
Debtors 1,80,000

37
5,50,000
Less Current Liabilities:
Creditors 1,00,000
Working Capital 4,50,000
Total 8,00,000

Example 2

Following is the Balance Sheet of N Ltd as on 31st March 2013

Liabilities Amount Assets Amount


12,000 7% Preference Share Buildings 2,00,000
Capital (Rs.50 each) 6,00,000 Plant 3,00,000
15,000 Equity shares of Rs.50 Goodwill 4,00,000
each fully paid 7,50,000 Stock 4,00,000
12% Loan Creditors 5,75,000 Debtors 3,00,000
Trade Creditors 2,00,000 Preliminary Expenses 15,000
Other current liabilities 40,000 Profit & Loss A/c 5,50,000
21,65,000 21,65,000

The company adopted the following scheme of reconstruction

1. The equity share capital is to be reduced to Rs.2.50 each fully paid and the equity
share holders to subscribe to new equity shares of Rs.2.50 each at the rate of 3 shares
for one share held.
2. The preference dividend which is in arrear for 3 years to be cancelled against the
issue of two new equity shares for every Rs.100 dividend in arrears.
3. The preference share capital is to be reduced to 10% preference shares of Rs.10 each
fully paid and preference shareholders to subscribe new equity shares of Rs.2.50 each
at the rate of 2 shares for one share held.
4. 12% loan creditors to forego Rs.125000 and accept 10% preference shares of Rs.10
each fully paid for the balance of claim. They also agreed to subscribe 12,000 new
equity shares of Rs.2.50 each.
5. The directors of the company to subscribe 40,000 equity shares of Rs.2.50 each .
6. Trade creditors to sacrifice 10% of their claim and be paid immediately 50% of the
remaining claim.
7. The intangible and fictitious assets to be written off completely and the balance be
utilized to write off Plant and stock in proportion to their book value.

Pass journal entries and prepare the reconstructed balance sheet.

38
Solution

Journal Entries in the books of N Ltd

Particulars LF Debit Credit


1.Old Equity Share Capital A/c Dr 7,50,000
To New Equity Share Capital (15,000x2.50) 37,500
To Capital Reduction (15,000x47.50) 7,12,500
( Being 15,000 equity shares of Rs.50 each reduced to 2.50 each
and the balance transferred to capital reduction account)
2. Bank A/c Dr 1,12,500
To Equity Share Capital (45,000x2.50) 1,12,500
( Being new equity shares issued to the existing share holders at
the rate of 3 per share held)
3. Arrears of Preference Dividend A/c Dr 6,300
To Equity Share Capital 6,300
( Being arrears of preference dividend paid off in the form of 2520
equity shares of Rs.2.50 each)
4. Old 7% Preference Share Capital A/c Dr 6,00,000
To New 10% Preference Share Capital (12,000x10) 1,20,000
To Capital Reduction (12,000 x40) 4,80,000
( Being 12,000 7% preference shares of Rs.50 each reduced to
Rs.10 each fully paid )
5. Bank A/c Dr 60,000
To Equity Share Capital 60,000
( Being new equity shares issued to preference share holders at the
rate of two per share held)
6. 12% Loan Creditors A/c Dr 5,75,000
To 10% Preference Share Capital 4,50,000
To Capital Reduction 1,25,000
( Being 12% loan creditors sacrificed 1,25,000 and the balance
was settled by 10% preference Shares)
7.Bank A/c Dr 30,000
To Equity Share Capital 30,000
( Being 12,000 new equity shares issued to Loan creditors)
8.Bank A/c Dr 1,00,000
To Equity Share Capital 1,00,000
( Being 40,000 equity shares of Rs.2.50 each were allotted to
Directors)
9.Trade Creditors A/c Dr 1,10,000
To Bank 90,000
To Capital Reduction 20,000
( Being trade creditors sacrificed 10% of their claim and 50% of
the remaining amount paid off)

10.Capital Reduction A/c Dr 13,37,500


To Arrears of Preference Dividend 6,300
To Goodwill 4,00,000
To Preliminary Expenses 15,000
To Profit & Loss A/c 5,50,000

39
To Plant 1,56943
To Stock 2,09,257
( Being Capital reduction a/c is utilized to write off the past
losses, arrears of dividend, goodwill, fictitious assets and plant and
Stock)

Reconstructed Balance Sheet as on 1.4.2013

Sources of Funds Amount Amount


Shareholders Fund:
Equity Share Capital
1,38,520 shares of Rs.2.50 each fully paid 3,46,300
10% Preference Share Capital
57,000 Preference shares of Rs.10 each fully paid 5,70,000
Reserves & Surplus ---
9,16,300
Long Term Loans ---
Total 9,16,300

Application of Funds:

Fixed Assets:
Buildings 2,00,000
Plant (3,00,000—1,56,943) 1,43,057
3,43,057
Current Assets:
Stock 1,90,743
Debtors 3,00,000
Bank 2,12,500
7,03,243
Less Current Liabilities
Trade Creditors 90,000
Other current liabilities 40,000 1,30,000
5,73,243
Total 9,16,300

Note

In the case of Internal Reconstruction, there is no formation of a new company


or liquidation of an existing company. According to the adjustments given in the
question journal entries are to be passed and a reconstructed balance sheet is to
be prepared.

1. Here the first adjustment includes two points.(a) One is the reduction of the Equity
share capital of Rs.50 each to Rs.2.50 each. Here the face value of the equity share has
changed . So the Old equity shares are to be cancelled and new equity shares are to be
credited and the balance will be transferred to capital reduction a/c.

40
(b) Existing Equity Share holders have to subscribe new equity shares . The ratio is for
one share three share. So for 15,000 shares 45,000 shares (15,000x3) @ Rs.2.50 per
share. Second journal entry is for the subscription of shares.

2. It says about the Arrears of Preference Dividend. In the problem if the payment of
the arrears is not mentioned it is to be ignored otherwise according to the information
given in the question it is to be considered. According to the second adjustment 3 years
dividend is in arrear and it is to be settled by the issue of 2 new equity shares for every
100 rupees.

Calculation of Arrears of Dividend

7% Preference Share Capital (12000 shares of Rs.50 each) 6,00,000


So the Dividend for one year =6,00,000x7/100= 42,000
(Arrear for three years ) for three years =42,000x3= Rs.1,26,000
Settlement is for every Rs.100 (two shares of Rs.2.50 each i.e Rs.5 each) Rs.5
Therefore for Rs.1,26,000 = 1,26,000x5/100 =Rs.6,300
Number of Shares= 6,300/2.50 =2,520 shares

3.According to the first part of the third adjustment 7% Preference shares of Rs.50 each
is reduced to 10% Preference shares of Rs.10 each fully paid. For that 7% preference
share capital is to be cancelled and 10% preference share capital is to be credited.
Second Part is about the issue of new equity shares to the preference share holders. The
ratio is for one share held two shares . So for 12,000 shares held 24,000 (12,000x2)
shares are to be issued @2.50 each

4.Next adjustment is regarding the Laon creditors. Total amount of Loan creditors is
5,75,000. They agreed to sacrifice Rs.1,25,000. The remaining amount (5,75,000—
1,25,000 =4,50,000) will be discharged by the issue of 10% preference shares of Rs.10
each and for that one entry is to be passed. The next entry is for the subscription of
12,000 new equity shares

5.It is about the issue of 40,000 Equity shares of Rs.2. 50 each to the Directors. for that
one journal entry is to be passed.

6.Regarding the Trade creditors according to the information 10% of their


claimRs.20,000 will be sacrificed (2,00,000x10/100=20,000) . Of the remaining amount
50% is to be paid immediately. (2,00,000—20,000=1,80,000) 1,80,000x50/100=90,000.
Remaining 90,000 will continue as creditors.

7. Finally the Capital Reduction A/c will be utilized to write off all fictitious and
Intangible assets. And the balance amount in the CR A/c will be utilized to write off
Plant & Stock in proportion to their book value.

Total amount available in the CR A/c =13,37,500

Amount used for Intangible & Fictitious Assets = 9,71,300

41
Balance Amount Available to write of Plant & Stock = 3,66,200

Book Value of Plant & Stock is 3,00,000 & 4,00,000

Ratio = 3,00,000:4,00,000 = 3:4

Plant value to be written off = 3,66,200x 3/7 =1,56,943

Stock value to be written off =3,66,200 x 4/7 =2,09,257

CHAPTER-III

LIQUIDATION OF COMPANIES
Meaning

Liquidation means the termination of the legal existence of a company. Liquidation or


winding up is a legal term which refers to the procedure through which the affairs of the
company are wound up by law. According to the Companies Act ,1956 winding up of a
company has been defined as , ― the process whereby its life is ended and its property is
administered for the benefit of its creditors and members‖.

Liquidator or Administrater

Liquidator is the person, who is appointed to conduct the winding up proceedings of the
company. He is appointed to take control of the company, collect its assets, pay its debts and
finally distribute any surplus amount to the members in accordance with their rights.

Types of Liquidation

I. Compulsory Winding Up by the Court


II. Voluntary winding up.( It can be either member‘s voluntary winding up or
Creditor‘s voluntary winding up)
III. Voluntary winding up under the supervision of the court.

Compulsory winding up takes place when the company is directed to be wound-up by an


order of court.

Grounds for compulsory winding up (Sec.433)

i. If the company has, by special resolution, resolved that the company be wound up
by the court.
ii. If a default is made in delivering the statutory report of the Registrar of companies
or in holding the statutory meeting of the company.
iii. If the company does not commence its business within a year from its
incorporation or suspends its business for a whole year.

42
iv. If the number of members falls below seven in case of a public company or below
two in case of a private company.
v. If the company is unable to pay its debts.
vi. If the court is of the opinion that it is just and equitable that the company should
be wound up.

Voluntary winding up can be either ‗Member‘s Voluntary Winding up‘ or ‗Creditors


Voluntary winding up‘

Voluntary Winding up under the supervision of Court

After the passing of a resolution for voluntary winding up , the court makes an order that
the voluntary winding up can continue , but subject to such supervision of the court is called
Voluntary winding up under the supervision of the court.

Contributory ― Every person liable to contribute to the assets of a company in the event of
its being wound up ,and includes the holder of any shares which are fully paid up and also
any person alleged to be a contributory‖.

Functions of Liquidator

Realise the assets of the company

Collect the money due from the contributories

Distribute the amount realized in the order of preference as per rule329 of Companies Act.

Maintain and submit the record of receipts and payments of cash to the court in case of
compulsory winding up .

Liquidator‘s Final Statement of Account

At the time of liquidation of a company, the liquidator realizes all the assets and discharge the
liabilities and capital. The Statement prepared to record such receipts and payments is called
‗ Liquidator‘s final statement of account. The liquidator must make payments in the
following order.

1. Secured creditors
2. Legal expenses( including liquidation expenses and cost of winding up.
3. Liquidator‘s remuneration
4. Payments to Debenture holders and other creditors having floating charge on the
assets of the company.
5. Payment to Preferential creditors
6. Payments to unsecured creditors
7. Calls in Advance if any
8. Arrears of dividend on cumulative preference shares
9. Amount due to preference share holders
10. Amount due to equity share holders

43
Liquidator‘s Final Statement of Account
Receipts Amount Payments Amount
Cash in hand Xxx Sucured creditors Xxx
Cash at Bank Xxx Legal charges Xxx
Assets Realised: Liqquidator‘s remuneration Xxx
Marketable Securities Xxx Other expenses on liquidation Xxx
Bills Receivable Xxx Debenture holders:
Debtors Xxx Outstanding interest on Xxx
Loans & Advances Xxx debenture Xxx
Stock in trade Xxx Debentures Xxx
Plant & Machinery Xxx Preferential Creditors Xxx
Furniture & Fixtures Xxx Unsecured Creditors Xxx
Patents & trade marks Xxx Calls in advance if any Xxx
Investments Xxx Arrears of dividend on Xxx
Surplus realized from secured Cumulative Preference shares Xxx
creditors ( if any) Xxx Preference share holders Xxx
Calls in Arrears Xxx Equity Share holders
Amount received from calls on
shares Xxx

Preferential Creditors
Creditors to whom the following are due, as preferential creditors under Section 530
of the Companies Act
(I) All revenues ,taxes, cesses and rates due from the company to the Central
Government or a State Government or to a local authority at the relevant date
and having become due and payable within the twelve months next before that
date.
(II) All wages or salaries of any employee, in respect of service rendered to the
company and due for a period not exceeding 4 months within the 12 months
next before the relevant date , and any compensation payable to any workman
under any provision of Chapter V A of the Industrial Dispute Act ,1947,
provided the amount payable to any one claimant does not exceed Rs.20,000
(III) All accrued holiday remuneration becoming payable to any employee or in the
case of his death, to any other person in his right , on the termination of his
employment before ,or by the effect of the winding up order or resolution
(IV) All sums due as compensation under the Workmen‘s Compensation
Act,1923, in respect of death or disablement of any employee of the company
(V) All sums due to an employee , from a provident fund , pension fund or any
other fund for the welfare of the employees , maintained by the company.

44
Example I

S ltd went into voluntary liquidation on 31-12-2012. The balance sheet as on that date
was:
Liabilities Rs. Assets Rs.
Share Capital: Land & Building 2,50,000
5,000, 6% Cumulative Machinery 6,25,000
Preference Shares of Rs.100 5,00,000 Patents 1,00,000
each fully paid Stock 1,37,500
2,500 Equity shares of Rs.100 1,87,500 Debtors 2,75,000
each Rs.75 paid up Cash at bank 75,000
7,500 Equity shares of Rs.100 4,50,000 Profit& loss A/c 3,00,000
each Rs.60 paid up 2,50,000
5% Mortgage Debentures 12,500
Interest outstanding on
debentures 3,62,500
Creditors 17,62,500 17,62,500
The liquidator is entitled to a commission of 3% on all assets realized except cash and
2% on amounts distributed to unsecured creditors.
Creditors include Rs.17,500 for Income-Tax due to Government, Rs.5,000
Outstanding salaries of employees and an award of Rs.15,000 made under
Workmen‘s Compensation Act. It also includes a loan for Rs.1,25,000 secured by
mortgage on Land & Buildings. The preference dividends were in arrears for two
years. The assets realized as follows:
Land & Building 3,00,000
Machinery 5,00,000
Patents 75,000
Stocks 1,50,000
Debtors 2,00,000
Expenses of liquidation amounted to 27,250
Prepare the Liquidator‘s Final Statement of Account.

S Ltd

Liquidators Final Statement of Affairs


Receipts Rs. Payments Rs.
Cash at Bank 75,000 Mortgage loan 1,25,000
Assets Realised: Liquidation Expenses 27,250
Land & Building 3,00,000 Liquidator‘s Remuneration
Machinery 5,00,000 3% on assets realized
Patents 75,000 (12,25,000x3/100) 36,750
Stock 1,50,000 2% on amount distributed to
Debtors 2,00,000 unsecured creditors
12,25,000 (2,37,500x2/100) 4,750 41,500

45
Debenture holders
5% Debentures 2,50,000
O/s Interest on Deb. 12,500 2,62,500
Preferential Creditors:
a. Income Tax 17,500
b. Salaries 5,000
c. Award 15,000 37,500
Unsecured Creditors(balance) 2,00,000
Preference Share Capital5,00,000
Arrears of Dividend
(5,00,000x6/100x2) 60,000 5,60,000
Equity Share holders
2,500 share @15.875 39,688
7,500 shares @.875 6,562
13,00,000 13,00,000

Working Note
Unsecured Creditors:
Total 3,62,500
Less Mortgage loan 1,25,000
Less Preferential
Creditors 37,500
2,00,000

Payment to Equity Share holders

Balance amount available to Equity Share holders 46,250


Less extra amount paid on 2,500 equity share holders(2,500x15) 37,500
Amount available on 10,000 shares 8,750

Amount per share 8,750 ÷ 10,000 = .875 per share


For 2,500 shares( 15+.875) = 15.875 per share = 39,688
For 7,500 shares .875 per share =6,562

46
CHAPTER-1V

HOLDING COMPANY ACCOUNTS

Introduction:
A group represents a holding company and one or more subsidiaries, the holding company
and each one of the subsidiary company are legally separate entities. Each company prepares
and publishes its own accounts as per their requirement of Company Law.

Definition:
When a company holds majority shares of another company, it is called holding company and
the company, the shares of which are held is called ‗Subsidiary Company‘.

Fundamental Principles of Simple Consolidation:

Step1:
While preparing a consolidated balance sheet investment of a holding company in the
equity shares of the subsidiary is replaced by the assets and the liabilities.

Step2:
The share of the outsiders in the net assets is shown on the liabilities side under the
heading ‗Minority Interest‘.

Meaning of ‗Minority Interest‘:

The share of the outsiders in the Net Assets of the company must be shown as a liability
under the heading of Minority Interest.

Calculation of Minority Interest

Face Value of Shares held by Outsiders XXX

Add:-Proportionate share of Capital Profit/


Less:- Proportionate share of Capital Loss XXX

Add:-Proportionate share of Revenue Profit/


Less:- Proportionate share of Revenue Loss XXX

Minority Interest XXX

47
Step2: - Procedure for calculation of Pre- Acquisition Profit

Calculation Of Capital Profits (Pre-Acquisition


Profits)
Reserve on the date of Pre-Acquisit
XXX

Profits on the date of acquisition of shares XXX


Pre-Acquisition Profit
XXX

Calculation Of Post-Acquisition Profit or


Revenue Profit

Reserves created after the date of acquisition of shares XXX


Profits after the date of acquisition of shares XXX

Excess depreciation charged on value of assets XXX

Post-Acquisition Profit XXX

Rule 3:- Calculation of Cost of control (or) Capital Reserve.


While preparing the consolidated B/s, the shares of the Subsidiary Co. held by the
Holding Co. represents the assets & liabilities of the Subsidiary Co. Suppose, S Ltd
owns 100% of the shares of M Ltd it may even be stated as S Ltd owns the entire
business of M Ltd. In this case of such a Company, when the consolidated B/s is
prepared the assets & liabilities of the subsidiary Co. are shown in total in addition to
those of the Holding Co. In other words while preparing the consolidated B/s, the
investment in Subsidiary Co. and its compliment, the paid up capital of the subsidiary
Co. are eliminated.

Example: H Ltd. Acquired 8000 shares of Rs.10 each in S Ltd. On 31/12/2002 the
summarized B/s of H Ltd and S Ltd were as follows:-
48
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share Capital Machinery 60,000 45,000
Shares of Rs.10
each 2,00,000 1,00,000 Furniture 2,000 4,000
Investment: Shares in S
Reserves 10,000 15,000 Ltd 98,000 -
P/c A/c 5,000 4,500 Stock 42,000 65,000
Bank Loan - 21,000 Debtors 18,000 27,000
Creditors 40,000 20,000 B/R 1,000 1,500
B/P 2,000 1,000 Cash 36,000 10,000
2,57,000 1,52,500 2,57,000 1,52,500

On the date of acquisition of shares by H Ltd, the S Ltd had undistributed profits Rs.1, 500
and Reserves amounted to Rs.5, 000.

Solution:

Working Notes

1) Ratio

Share Capital of S Ltd Rs.1,00,000


No. of shares 10,000 shares
No. of shares in H Ltd acquired 8,000 shares =8,000/10,000= 4/5th
(10,000-8,000)=2,000
No. of shares held by Minority Interest shares=2,000/10,000=1/5th

2) Calculation of Capital Profits or Pre-acquisition Profit:

Reserves on the date of acquisition Rs.5,000


Undistributed Profits Rs.1,500
Total Capital Profits Rs.6,500
Share of Holding Company 6,500*4/5=Rs.5,200
Share of Minority Interest 6500*1/5=Rs.1,300

3) Calculation of Post-acquisition profit or Revenue Profit:

Reserves after the date of acquisition (15,000-5,000)=Rs.10,000


Undistributed profits (4,500-1,500)=Rs.3,000
Total Revenue Profits Rs.13,000
Share of the Holding Co 13,000*4/5=Rs.10,400
Share of the Minority Interest 13,000*1/5=Rs.2,600

49
4) Calculation of Cost of Control or Capital Reserve:

(-) No. of shares held by holing Co. 8,000


Share Capital 8,000*10=Rs.80,000
(+)H Ltd share of Capital Profit Rs.5,200
(Shareholders Fund) Total Rs.85,200
Cost of 8,000 shares in H Ltd 98,000
Goodwill 98000-85200=Rs.12,800

5) Calculation of Minority Interest:

No. of shares held by Minority 2,000*10=Rs.20,000


(+) 1/5th of Capital Profit Rs.1,300
Total Rs.21,300
(+) 1/5th of Revenue Profit Rs.2,600
Total Rs.23,900

CONSOLIDATED B/S OF H LTD & ITS SUBSIDIARY S LTD.

Liabilities Amount Assets Amount


Share Capital: Shares of Rs.10 each 2,00,000 G/W 12,800
Reserves & Surplus: Reserves 10,000 Machinery 1,05,000
P/C A/C H Ltd-5,000 S Ltd-
10,400 15,400 Furniture 6,000
Bank Loan 12,000 Stock 1,07,000
Creditors 60,000 Debtors 45,000
B/P 3,000 B/R 2,500
Minority Interest 23,900 Cash 46,000
3,24,300 3,24,300

INTER COMPANY OWINGS


While preparing the consolidated balance sheet, the following inter company owings should
be eliminated.

1) Internal Debts:

When loans are advanced by the holding company to its subsidiary or vise-versa, the same
will appear as an asset in the balance sheet of the lender and as a liability in the balance sheet
of the borrower company. These being inter-company owings, should be eliminated in the
consolidated B/s.

50
2) Bills of Exchange:

Bills drawn by the holding Co. on its subsidiary or vise-versa appearing as bills receivable in
one balance sheet and B/P in another are again inter company obligations should be
eliminated.

Notes:

When the goods are sold by the Holding Co. to its subsidiary Co. or sold by the subsidiary
Co. to its holding Co. and such goods remain unsold. At the end of the financial year, there
shall be an element of profit included in such goods (this is profit added by the seller of the
goods) should be eliminated while preparing the consolidated B/s.

ISSUE OF BONUS SHARES


When subsidiary Co. issues Bonus Shares out of Pre-acquisition Profit, no adjustment is
essential in preparing the Consolidation B/s. The bonus shares are issued out of Post-
acquisition Profit of the subsidiary. The post-acquisition profit of the subsidiary should be
reduced. The bonus shares issued by the subsidiary to the Minority Shareholders should be
added to Minority Interest from whatever profit such shares are issued.

51
CHAPTER-V

RECENT DEVELOPMENTS IN ACCOUNTING

(a) Human Resource Accounting


Introduction: Human Resource is the most valuable resource of any organization. The value
of human resources depends on how they are utilized by the organization. Human resources
information helps the management to take various important decision.

Definition : It may be defined as the process of valuing human resources ,


recording such value in the books of accounts, and presenting the information in
the financial statements of the business

According to American Accounting Society Committee, “ Human Resource Accounting is


the process of identifying and measuring data about human resources and communicating
this information to interested parties.”

Valuation of Human Resources

It can be cost based method or Value based method

Cost Based Method of Human Resource Valuation

The Different cost based methods of human resource valuation are as follows:

Historical Method : Under this method human resources are valued similarly like any
physical asset. All expenses incurred on recruitment, selection, hiring, training and
development of human resources of the organization will be capitalized and shown as
Investment in the balance sheet. Such capitalized expenditure will be amortized over the
expected useful life of human resources.

Replacement Cost Method : Under this method, the human resources are valued at their
present replacement cost. If a new organization has to be started what will be the cost of
recruiting, selecting , hiring, training and developing human resource to their present
efficiency level will be considered as the value of human resources.

Opportunity Cost Method : Under this method , the value of human resources will be
ascertained on the basis of its alternative use or ability of performing other jobs. According
to this method ,if an employee has no alternative use means he has no value.

Standard Cost Method : According to this method standard cost per grade of an employee ,
for recruiting selecting, hiring ,training and developing will be ascertained year after year.
The aggregate of standard cost of all employees will be the value of human resources.

Total Cost Method : Under this method , the value of an employee of an organization will
be equal to the total of the cost incurred by the employee, the state and the organization

52
towards the education , training etc, to make the employee efficient to his present level or to
make him fit for the organization requirement

Value Based method of Human Resource Valuation

a. Unpurchased Goodwill method or Capitalisation of Super Profit Method: Under this


method, the value of human resources of an organization is equal to the amount
obtained by capitalizing the super profit.
b. Present Value of Future Earning Method: Under this method, the value of human
resources is ascertained by capitalizing the salary considering along with the age of
retirement.
c. Rewards Valuation Method: This method considers the probability of an employee
leaving the organization before retirement or dying before retirement or moving into
another position. Considering such probability expected realizable value of an
employee is calculated.
d. Net Benefit Method: Under this method the value of human resources is equivalent to
the present value of net benefits derived by the organization from the service of its
employees.
e. Total Payment Method :Under this method , the value of human resources must not
be done individually, but in aggregate.

Importance of Human Resources Accounting

1. Provides relevant information to the management


2. It helps in Analysis. The investor or Analyst gets complete information regarding the
effectiveness of application of funds by the organization.
3. It provides an opportunity to the employees for their improvement by giving
awareness about their levels of efficiency and performance.
4. Return on capital employed can be known accurately both in physical and human
resources.
5. Helps the management to reorient their attitudes towards labour and in improving
their administration styles.

Limitations of Human Resource Accounting

1. Measuring the value of human resources is very difficult.


2. Sometimes cost of measuring human resources value is higher than the benefits
derived from it. Which will make the entire effort a waste
3. Human resource is not considered as an asset as per the Law. Due to that it is just
a theoretical concept.
4. The behavior of human resources being unpredictable in nature, the output in any
form is difficult to estimate.

53
(b) Social Responsibility Accounting

Introduction
Social accounting is the process of communicating the social and environmental effects of
organizations economic actions is particular is commonly used in the context of business, or
corporate social responsibility (CSR), although any organization, including NGO‘s, charities,
and government agencies may engage in social accounting.

Definition
Seidler Lee and Seidler Lynn have defined Social Accounting as, ―modification and
application of conventional accounting to the analysis and solutions of problems of a social
nature.

Method of Social Accounting


Cost incurred for the benefit of society and the benefits derived by the society from such cost
incurred will be recorded and presented in the form of final accounts comprising of

(a) Social Income Statement


(b) Social Balance Sheet

(c) Responsibility Of Accounting

Definition
CIMA, London, again briefly defines ‗responsibility accounting‘ as ―a system of accounting
that segregates revenue and costs into areas of personal responsibility in order to assess the
performance attained by persons to whom authority has been assigned.‖

Process of Responsibility Accounting or working of Responsibility


Accounting
1) Responsibility centres within the organization are defined and identified.
2) A plan of objective is set up in terms of a target, budget, standard, or
estimate. The plan is broken up for allocation to each responsibility area or
centre and is communicated to the concerned level of management.
3) The performance is evaluated, i.e., the results of actual operations by each
responsibility area are ascertained.
4) The variances from the plan are analyzed so to fix responsibility on the
responsibility area or centre. The variances are reported to the higher
management.
5) Corrective action is taken and communicated to the individuals
responsible.

54
Benefits of Responsibility Accounting
1) Responsibility Accounting provides a system of closer control, sine the
focus of responsibility accounting is on planning and cost control, rather
than cost ascertainment.
2) It facilitates decentralization of decision-making, by facilitating delegation
of decision making.
3) It necessitates the need of clearly defining and communicating the
corporate objectives and individual goals.
4) It brings in a sense of cost consciousness among the employees of the
organization.
5) It compels and enables management o set realistic plans and budgets.
6) It provides for ‗management by exception‘ by enabling managers to
concentrate on key issues only, which need their attention.
7) It provides for measurement of performance of individuals in an objective
manner, by creating a quantitative basis for evaluation purposes.

55
BOOKS FOR REFERENCE
Advanced Accounting-Volume II

R.L.Gupta

M.Radhaswamy

Advanced Corporate Accounting

Dr.S.N.Maheswari

Advanced Corporate Accounting

S.Anil Kumar

V.Rajesh Kumar

B.Mariyappa

56