Page 55 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes and the payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company.” Mode of Payment is generally decided by the mutual
agreement between Transferor Company and Transferee Company. Fair value of the different
elements of the consideration is also considered as the market value of assets. It is to be noted
that purchase consideration must be paid directly to the shareholders of the transferor company.
If any amount is directly paid to the creditors or debenture-holders of the transferee company, it
will not be included in the amount of purchase consideration.
The following methods are used to determine the amount of purchase consideration:
(a) Lump Sum Method: It is the simplest method among the above four methods. Under this
method, no calculation is required. The amount of purchase consideration is clearly given
as a lump sum in the examination problems.

Example: If A Ltd. acquires the business of B Ltd., for ` 35,00,000 will be the purchase
consideration in lump sum.
(b) Net Assets Method: Under this method, the purchase consideration is calculated by adding
the agreed value of all the assets which have been taken over by the transferee (purchasing)
company and deducting there from the total of agreed value of those liabilities, which have
been taken by the transferee company.
In the form of formula:
Purchase consideration = Total of agreed value of assets taken over – Total of agreed value
of liabilities taken over.

At the time of calculating the purchase consideration by this method, the students should
consider the following points:
(i) Only those assets are aggregated which have been taken over by the transferee
company.
(ii) The fictitious assets and miscellaneous expenditure such as preliminary expenses,
debit balance of profits and loss account etc., are never included in the total of
assets.
(iii) In the absence of any contrary information, the book value of the assets and liabilities
taken by Transferee Company is treated as agreed value.
(iv) Only those liabilities are considered, which have been taken over by the transferee
company. In the absence of contrary information, all the liabilities belonging to third
party are assumed to be taken by the transferee company.
(v) Accumulated profits appearing in the liability sides are not considered in calculating
the consideration.
(vi) Payments directly made to the debenture holders and outside liabilities of the
transferor company by the transferee company are not considered.

(c) Net Payment Method: Under this method, the purchase consideration is calculated by
aggregating the payments made by the transferee company to the shareholders of transferor
company in the form of cash, shares, debentures and agreed value of assets given. There is
a point for the students to be noted that all the payments made by the transferee company
only to the shareholders of the transferor company are the parts of purchase consideration.
And the payments made by the transferee company to the outside liabilities, creditors and
debenture holders of the transferor company are not considered into the above aggregation
of payments because it is presumed that outside liabilities are taken over and paid by
the transferor company. If the liquidation expenses of the transferor company are paid

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