Page 58 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 4: Amalgamation: Accounting Treatment

Illustration 3 (Purchase Consideration by Intrinsic Worth Method) notes
Following are the Balance Sheets of Aakash Ltd. and Gagan Ltd. as on 31 March, 2011:
st
liabilities aakash ltd. gagan ltd. assets aakash ltd. gagan ltd.
` ` ` `
Share Capital: Fixed Assets:
Shares of ` 10 each 4, 50,000 3, 60,000 At Cost less dep. 4, 20,000 2, 25,000
Reserves 2, 85,000 30,000 Current Assets:
Secured Loans: Stock 1, 26,000 1, 41,000
10% Debentures — 60,000 Trade Debtors 90,000 1, 50,000
Current Liabilities: Bank Balance 2, 40,000 30,000
Sundry Creditors 1, 41,000 96,000
8, 76,000 5, 46,000 8, 76,000 5, 46,000
st
Aakash Ltd. agreed to absorb to Gagan Ltd., as on 31 March, 2011 on the following
terms:
(a) Aakash Ltd. agreed to repay 10% debentures of Gagan Ltd.

(b) Aakash Ltd. agreed to revalue its fixed assets at ` 5, 85,000 to be incorporated in the
books.

(c) Shares of both the companies, to be valued on net assets basis after considering ` 1, 50,000
towards value of goodwill of Gagan Ltd.

(d) The cost of absorption of ` 9,000 is met by Aakash Ltd.
You are required to calculate the net assets and ratios of exchange of shares.
Solution

calculation of net assets
particulars aakash ltd. gagan ltd.
` `
Goodwill – 1, 50,000
Fixed Assets 5, 85,000 2, 25,000
Stock 1, 26,000 1, 41,000
Trade Debtors 90,000 1, 50,000
Bank Balance 2, 40,000 30,000
Total of assets 10, 41,000 6, 96,000
Less: External Liabilities:
10% Debentures 60,000 – –
Sundry Creditors 96,000 1, 41,000 1, 56,000
Net Assets 9,00,000 5, 40,000
Intrinsic worth of a share 9,00,000 5, 40,000
45,000 36,000
= ` 20 = ` 15
On the basis of above calculation, it can be analysed that 4 share of Aakash Ltd., be equal to
3 shares of Gagan Ltd. Thus, the exchange ratio will be 3 : 4.

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