Page 66 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 4: Amalgamation: Accounting Treatment

notes

Did u know? The balance of the Profit and Loss Account of the transferor company should
be aggregated with the corresponding balance of the transferee company, or transferred to
the general reserve, if any.

purchase method

Purchase method of amalgamation is adapted by the transferee Company, when amalgamation
is in the nature of purchase. The following points are kept in mind at the time of passing of
accounting entries under this method:

(i) In preparing the transferee company’s financial statements, the assets and liabilities of
the transferor company should be incorporated at their existing carrying accounts or,
alternatively, the consideration should be allocated to the individual identifiable assets
and liabilities on the basis of their fair values at the date of amalgamation.
(ii) The reserves (whether capital or revenue or arising on revaluation) of the transferor
company, other than the statutory reserves, should not be included in the financial
statements of the transferee company.
(iii) Any excess of the amount of the consideration over the value of net assets of the transferor
company acquired by the transferee company should be recognised in the transferee
company’s financial statements as goodwill arising on amalgamation. If the amount of the
consideration is lower than the value of the net assets acquired, the difference should be
treated as capital reserve.
(iv) The goodwill arising on amalgamation should be amortised to income on a systematic
basis over its useful life. The amortisation period should not exceed five years unless a
somewhat longer period can be justified.
(v) Where the requirements of the relevant statute for recording the statutory reserves in the
books of the transferee company are complied with, statutory reserves of the transferor
company should be recorded in the financial statements of the transferee company. The
corresponding debit should be given to a suitable account head (e.g. Amalgamation
Adjustment Account), which should be disclosed as a part of ‘Miscellaneous Expenditure’
or other similar category in the balance sheet. When the identity of the statutory reserves
is no longer required to be maintained, both the reserves and the aforesaid account should
be reversed.
!

Caution Purchase method of amalgamation is adapted by the transferee Company, when
amalgamation is in the nature of purchase.
Accordingly, the following journal entries are made in the books of Transferee Company to
incorporate the financial statements of the transferor company:
(1) For recording the purchase consideration-
Business Purchase Account Dr.
To Liquidator of Transferor Company

(Being purchase price due to the liquidator of the transferor company)
(2) For recording the assets, liabilities and reserves taken over-
Sundry Assets (individually) A/c Dr.
To Sundry Liabilities (individually) A/c

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