Page 34 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 2: Amalgamation: Basics and their Concepts

2.2.2 Demerits of amalgamation notes

The demerits are as follows:
1. Amalgamation of companies may give rise to problems of over-capitalisation.

2. Amalgamation of companies reduces the expenditure, cost and price of the products of the
bigger companies, smaller businessmen therefore, cannot last for long when confronted by
the bigger players.
3. Upon increasing the size of the business after amalgamation, managerial problems
multiply.

4. The possibilities of exploitation of customers by amalgamated companies are manifold.
5. There is also one more danger of monopoly by the amalgamation of company.
6. Increased production by the amalgamated companies may give rise to problems of proper
distribution and over-production.

7. The event of non-cooperation between the managerial staff of the amalgamated companies,
may retard the growth of the business.

self assessment

Fill in the blanks:
6. An amalgamation in the nature of merger, .................. of interest method is used.

7. Accumulated losses in the transferor company are transferred to .................. .
2.3 important technical terminology used in acquisition of Business

Before proceeding to discuss the accounting methods and calculation of purchase consideration,
the students should know the meaning of the various technical terms which are often used in the
problems of amalgamation. We will discuss the accounting methods and calculation in next unit.
After understanding the meaning of these terms, it would be easy for the students to solve the
examination problem. Some of the most common terms are given below:
l z Business and All Assets: Here, the business means the vendor company’s business, which
includes all assets and all liabilities. In other words, the term ‘business,’ stands for assets
minus all liabilities. While all assets includes cash and bank balance, but shall not include
fictitious assets as preliminary expenses, discount on issue of shares and debentures,
underwriting commission, debit balance of profit and loss accounts etc. All assets will also
include the value of goodwill and prepaid expenses until otherwise stated in the problem.

l z Trade Liabilities: Trade liabilities are those liabilities, which are incurred due to the
purchase of goods of the business. These include the trade creditors and bills payable.

Did u know? Only those assets are transferred to realisation account, which are taken over
by the purchasing company.

l z Liabilities: Liabilities mean all those liabilities which are payable to third parties (except
company and shareholders). These include the trade liabilities and non-trade liabilities.
This means that it is a broader term. Thus, it will not include the accumulated profits or
reserves or funds which are payable to the shareholders and not to the third parties. The term
‘liabilities,’ include both the trade liabilities and non-trade liabilities. The liabilities include
both the financial liabilities and liabilities for expenses i.e. Trade Creditor, Bill Payable,

lovely professional university 29