Page 56 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 4: Amalgamation: Accounting Treatment

by the transferee company that must also be added in the purchase consideration. The notes
transferee company may issue the shares and debentures to the transferee company at par
at premium or a discount. In the absence of instruction, the transferee company must issue
the shares, to the transferor company at par in the case of amalgamation of the companies
in the nature of merger, and at market price in case of amalgamation of companies in the
nature of purchase.

(d) Intrinsic Worth Method: Under this method, first of all the intrinsic value of the shares of
the transferor is calculated on the basis of net assets. The net assets are calculated according
to net assets method. Therefore, purchase consideration calculated under this method
becomes equal to the purchase consideration calculated under net assets method. To find out
the intrinsic value of the shares, the net assets of the company are divided by the number of
shares. After finding this value, the rate of exchange of shares between Transferor Company
and Transferee Company is determined. If, in the examination problem, the agreed values
of the shares of both the companies are given, there is no requirement to calculate the
intrinsic values of the shares. Suppose there are two companies Ankit Limited and Shobhit
Limited carrying on business in the same line of activities. Their capitals are ` 24,00,000
and ` 8,00,000 (value of each share, ` 100). The two companies decided to amalgamate in
Akshaye Limited. If each share of Ankit Limited and Shobhit Limited is valued at ` 150
and ` 250 respectively for the purpose of amalgamation, then purchase consideration will
be as follows’:
Ankit Ltd. Shobhit Ltd.
24,000 shares @ ` 150 each 36,00,000 –
8,000 shares @ ` 250 each – 20,00,000
At the time of issuing the shares to the individual shareholders, there may be fraction of shares.
However, the fractional shares cannot be issued by the company. In such a situation, the company
can issue the fractional certificate or pay cash for the fractions.

Did u know? All the payments made by the transferee company only to the shareholders of
the transferor company are the parts of purchase consideration.
Illustration 1 (Calculation of Purchase Consideration by Net Payment Method)
Tom Company Limited agrees to take over the business of Jerry Company Limited, the
consideration being the assumption of trade liabilities ` 62,500, the payment of the cost of
liquidation ` 2,500, the redemption of the ‘Y’ Debentures of ` 2,50,000 at a premium of 10%, the
discharge of ‘X’ Debentures of ` 5,00,000 at a premium of 8% by the issue of 10% Debentures in
the Tom Company Limited and the payment of ` 10 per share in cash and exchange of 2 fully
paid ` 10 in Tom Co. Ltd., at the market price of ` 15 per share for every share in the Jerry Co Ltd.
The share capital of the Jerry Company Ltd. consists of 25,000 shares of ` 25 each fully paid.
Calculate the purchase consideration by net payment method.
Solution

calculation of purchase consideration

`
1. Payments in cash for cost of Liquidation 2,500
2. Payment in cash for redemption of ‘Y’ type Debentures (2,50,000 + 25,000) 2,75,000
3. Payment to ‘X’ type Debentures (New Debentures) 5,40,000
4. Payment to Shareholders:

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