Advanced Accounting · Amalgamation of Companies

Entries and Balance Sheet in Books of Transferee Company (AS 14)

Updated 4 October 2026 · Fact-checked

In the transferee's books, you record the transferor's assets and liabilities, discharge the purchase consideration, and treat reserves as the AS 14 method requires. Pooling uses book values and preserves reserves. Purchase balances with goodwill or capital reserve. Cancel inter-company balances and holdings, remove unrealised profit, then combine both balance sheets.

Understand Entries and Balance Sheet in Books of Transferee Company

When one company (the transferor) is absorbed by another (the transferee), the transferee must bring the transferor's business into its own books. You do this with a single set of journal entries, then redraw the balance sheet.

AS 14 allows two methods. The pooling of interests method is used for an amalgamation in the nature of merger. Assets, liabilities and reserves of the transferor are taken at their existing carrying amounts, and the transferor's reserves keep their identity. The purchase method is used for an amalgamation in the nature of purchase. The consideration is the aggregate of the shares and other securities issued and the payments made in cash or other assets to the transferor's shareholders. The transferor's assets and liabilities are incorporated at existing carrying amounts or at allocated fair values. The transferor's reserves are not carried forward, except statutory reserves. These are recorded in the transferee's books with a matching debit to Amalgamation Adjustment Reserve.

The difference is where the balancing figure goes. Under pooling, when all the assets and liabilities are taken over at book values, net assets taken over equal the transferor's share capital plus its reserves. If only some assets or liabilities are taken over, this equality does not hold, so always compute net assets from the items actually taken over. The shares issued may differ from the transferor's share capital. If more shares are issued, the excess is deducted from the reserves taken over, so the total reserves incorporated are reduced by that excess. If fewer shares are issued, the shortfall is added to reserves. Under purchase, the excess of consideration over net assets taken over is goodwill, and a shortfall is capital reserve.

Then come the adjustments between the two companies. Debtors and creditors owed between them are cancelled, because a company cannot owe itself. If the transferee already holds shares of the transferor, those shares are not exchanged. Consideration is paid only for shares held by outsiders, and the investment is cancelled. If stock on hand includes profit made by one company on goods sold to the other, that profit is unrealised from the combined entity's view and is removed. Amalgamation expenses are charged to the Statement of Profit and Loss. Share issue costs are dealt with under the law.

Finally, you prepare the post-amalgamation balance sheet by adding the transferee's own balances to the incorporated balances, after cancelling inter-company items. Present it in the Schedule III format.

Key rules to remember

Net assets taken over: Net assets = Assets taken over − Liabilities taken over; Take only the assets and liabilities that the scheme says are taken over. Under the purchase method, use existing carrying amounts or the fair values to which the consideration is allocated.
Goodwill or capital reserve (purchase method): Goodwill = Consideration − Net assets; Capital reserve = Net assets − Consideration; If the transferee holds transferor shares, add the carrying amount of that investment to the consideration paid to outsiders.
Pooling adjustment: Adjustment in reserves = Share capital issued − Share capital of transferor; If the issue is larger, deduct the excess from the transferor's reserves taken over. If smaller, add the difference to reserves. The transferor's reserves are incorporated at book values, and the total incorporated is reduced or increased by this adjustment.
Shares held by transferee: Consideration payable to outsiders = Value of shares not held by the transferee; The investment in the transferor is credited in the entry. It is not paid for with new shares.
Unrealised profit in stock: Unrealised profit = Inter-company stock on hand × Profit % on selling price (or cost) charged; Reduce stock and debit the reserve or profit balance of the company that made the profit.
Inter-company owings: Debtors due from the other company = Creditors due to the other company → cancel both; Remove the amount once from each side of the combined balance sheet.

How to solve Entries and Balance Sheet in Books of Transferee Company questions

Use this order for any problem. It keeps entries, adjustments and the final balance sheet in the right sequence.

1Identify the method: pooling (merger) or purchase. Check if the question states that the conditions of AS 14 are met, or gives the method.
2Compute the purchase consideration, only for the shares not held by the transferee. Show the working.
3List the assets and liabilities taken over, at book or fair values as the method requires. Compute net assets.
4Pass the main entry in the transferee's books: debit assets taken over, credit liabilities, credit the transferor (or the liquidator) with the consideration, and credit the investment in transferor's shares if any.
5Balance the entry. In pooling, incorporate the transferor's reserves and deduct any excess of shares issued over the transferor's share capital from them. In purchase, record goodwill or capital reserve and handle statutory reserves.
6Pass adjusting entries: cancel inter-company debtors and creditors, charge amalgamation expenses, and discharge the consideration with share issue entries. Remove unrealised profit as an adjustment when you prepare the post-amalgamation balance sheet. It is not part of the takeover entries.
7Add the transferee's balances to the incorporated balances and prepare the new balance sheet. Check that total assets equal total equity and liabilities.

Quickest way: Net-assets shortcut for entries and balance sheet

When to use it: Use it in 15-20 mark practical questions when time is short and the balance sheet is the main requirement.

Write the consideration and net assets figures first. The balancing figure (reserve adjustment, goodwill or capital reserve) falls out immediately.
Set up a three-column working: transferee, transferor taken over, combined. Fill the adjustments in a separate column.
Apply each adjustment once: cancel inter-company debtors and creditors, cancel the investment, and reduce stock for unrealised profit.
Add across, then verify that total assets equal total liabilities and equity before writing the final balance sheet.
For MCQs, find the one figure asked for (goodwill, capital reserve, reserves or total assets) and compute only that. Option values are often traps from skipping a cancellation.
In written answers, label the method and show each entry with a narration. Step marks are given for each correct entry and working note.

Common mistakes in Entries and Balance Sheet in Books of Transferee Company

Paying shares to the transferee for shares it already holds in the transferor.
Students compute consideration on all of the transferor's shares by habit.
Fix: Compute the consideration only for shares held by outsiders. Credit the investment account in the entry for the shares held.
Carrying the transferor's reserves forward under the purchase method.
The pooling rule is applied to both methods.
Fix: Under purchase, do not incorporate the transferor's reserves. Only statutory reserves are recorded, with a matching debit to Amalgamation Adjustment Reserve.
Leaving inter-company debtors and creditors in the new balance sheet.
The balances are in different companies' books, so they appear unrelated.
Fix: Cancel the amount from both debtors and creditors (or bills) when combining. Show the cancellation as a separate adjustment.
Ignoring unrealised profit in stock.
The question mentions it only in a note, and students skip it.
Fix: Read all notes first. Reduce stock by the unrealised profit and debit the reserve or P&L of the company that booked it.
Putting the pooling difference in goodwill, or ignoring it in reserves.
Goodwill is learned as the standard balancing figure.
Fix: In pooling there is no goodwill. The excess of shares issued over the transferor's share capital is deducted from the reserves taken over. A shortfall is added to them.
Showing the total of the balance sheet without checking if it balances.
Time pressure, and many adjustments across columns.
Fix: Add assets and equity plus liabilities separately. If they differ, recheck cancellations and the reserve adjustment.

Worked examples

Example 1

A Ltd absorbs B Ltd in an amalgamation in the nature of merger. Balance sheet of B Ltd: equity share capital ₹10,00,000; general reserve ₹2,00,000; profit and loss balance ₹1,00,000; creditors ₹3,00,000; fixed assets ₹8,00,000; stock ₹3,00,000; debtors ₹4,00,000; cash ₹1,00,000. A Ltd issues 1,20,000 equity shares of ₹10 each at par to B Ltd's shareholders. Balance sheet of A Ltd: equity share capital ₹20,00,000; general reserve ₹5,00,000; profit and loss ₹3,00,000; creditors ₹4,00,000; fixed assets ₹15,00,000; stock ₹6,00,000; debtors ₹5,00,000; cash ₹6,00,000. A Ltd owes B Ltd ₹50,000. This amount is included in A Ltd's creditors (₹4,00,000) and in B Ltd's debtors (₹4,00,000). The scheme provides that the excess of shares issued over B Ltd's share capital is adjusted against B Ltd's general reserve. Pass the entries in A Ltd's books and prepare the balance sheet after amalgamation.

Show the solution

Method: pooling of interests, since the amalgamation is a merger. Purchase consideration = 1,20,000 × ₹10 = ₹12,00,000.
Net assets of B Ltd = ₹16,00,000 − ₹3,00,000 = ₹13,00,000. All assets and liabilities are taken over at book values, so this equals share capital ₹10,00,000 + reserves ₹3,00,000.
Excess of shares issued over B's share capital = ₹12,00,000 − ₹10,00,000 = ₹2,00,000. Under pooling, this excess is adjusted against the reserves of B Ltd taken over. As the scheme provides, it is set against B's general reserve. B's general reserve of ₹2,00,000 is therefore fully absorbed, so no general reserve of B is incorporated. B's profit and loss balance of ₹1,00,000 is incorporated. Net reserves brought in from B = ₹3,00,000 − ₹2,00,000 = ₹1,00,000.
Entry 1 (in A Ltd's books): Debit Fixed assets ₹8,00,000, Stock ₹3,00,000, Debtors ₹4,00,000 and Cash ₹1,00,000 (total ₹16,00,000). Credit Creditors ₹3,00,000, Liquidator of B Ltd ₹12,00,000 and Profit and loss ₹1,00,000 (total ₹16,00,000). No credit is given to General reserve, because B's general reserve of ₹2,00,000 is exactly used up by the ₹2,00,000 excess of shares issued. The entry balances. Check: ₹16,00,000 − ₹3,00,000 = ₹13,00,000 = ₹12,00,000 + ₹1,00,000. No 'Amalgamation adjustment' account is debited. That account is used only for statutory reserves under the purchase method.
Entry 2: Debit Liquidator of B Ltd ₹12,00,000; credit Equity share capital ₹12,00,000.
Entry 3 (passed after Entry 1, once B's debtors of ₹4,00,000 are incorporated in A Ltd's books): Debit Creditors ₹50,000 (A Ltd's own creditors, the amount A owes B); credit Debtors ₹50,000 (the amount due from A Ltd, included in B's debtors taken over). This cancels the inter-company owing.
Combine the reserves. B's general reserve incorporated is nil, and A Ltd's general reserve of ₹5,00,000 remains as it is. Profit and loss = A Ltd's ₹3,00,000 + B Ltd's ₹1,00,000 = ₹4,00,000. Total reserves = ₹5,00,000 + ₹4,00,000 = ₹9,00,000.
Equity share capital = ₹20,00,000 + ₹12,00,000 = ₹32,00,000. Creditors = ₹4,00,000 + ₹3,00,000 − ₹50,000 = ₹6,50,000.
Assets: Fixed assets = ₹15,00,000 + ₹8,00,000 = ₹23,00,000. Stock = ₹6,00,000 + ₹3,00,000 = ₹9,00,000. Debtors = ₹5,00,000 + ₹4,00,000 − ₹50,000 = ₹8,50,000. Cash = ₹6,00,000 + ₹1,00,000 = ₹7,00,000. Total = ₹47,50,000.
Check: Equity and liabilities = ₹32,00,000 + ₹5,00,000 + ₹4,00,000 + ₹6,50,000 = ₹47,50,000. It balances.

Answer: Balance sheet of A Ltd after amalgamation: share capital ₹32,00,000; general reserve ₹5,00,000 (A Ltd's own, since B's general reserve of ₹2,00,000 is fully absorbed by the ₹2,00,000 excess of shares issued, as the scheme provides); profit and loss ₹4,00,000; creditors ₹6,50,000; total ₹47,50,000. Assets: fixed assets ₹23,00,000; stock ₹9,00,000; debtors ₹8,50,000; cash ₹7,00,000; total ₹47,50,000.

Example 2

P Ltd takes over Q Ltd in an amalgamation in the nature of purchase. Q Ltd has 50,000 equity shares of ₹10 each. P Ltd already holds 10,000 of these shares, with a carrying amount of ₹1,50,000. P Ltd takes over all assets at the agreed value of ₹14,00,000 and all liabilities of ₹4,00,000. The outside shareholders hold 40,000 shares and receive 2 equity shares of ₹10 each of P Ltd, issued at par, for each Q Ltd share held (80,000 shares in all). The stock lying with Q Ltd at the takeover date was bought from P Ltd at a price that includes ₹20,000 of profit booked by P Ltd. This stock is among the assets taken over, and the agreed value of ₹14,00,000 includes it at that price. Pass the entries in P Ltd's books and state how the unrealised profit is dealt with.

Show the solution

Method: purchase. The assets are taken over at the agreed value of ₹14,00,000, and the liabilities at ₹4,00,000.
Net assets taken over = ₹14,00,000 − ₹4,00,000 = ₹10,00,000.
Outsiders hold 50,000 − 10,000 = 40,000 shares. At 2 P Ltd shares for each, P Ltd issues 80,000 shares. Consideration for outsiders = 80,000 × ₹10 = ₹8,00,000.
Add the carrying amount of P Ltd's investment in Q Ltd = ₹1,50,000. Total consideration = ₹9,50,000.
Net assets ₹10,00,000 exceed the consideration ₹9,50,000 by ₹50,000. This is a capital reserve.
Entry 1: Debit Assets taken over ₹14,00,000. Credit Liabilities ₹4,00,000, Liquidator of Q Ltd ₹8,00,000, Investment in shares of Q Ltd ₹1,50,000, Capital reserve ₹50,000. Check: ₹4,00,000 + ₹8,00,000 + ₹1,50,000 + ₹50,000 = ₹14,00,000.
Entry 2: Debit Liquidator of Q Ltd ₹8,00,000; credit Equity share capital ₹8,00,000.
Unrealised profit: P Ltd booked the ₹20,000 profit in its own books when it sold the goods to Q Ltd. Once the two companies are one, the stock is carried ₹20,000 above its cost to the combined entity. This is not part of the takeover entries, so the capital reserve stays at ₹50,000.
When you prepare the post-amalgamation balance sheet, reduce stock by ₹20,000 and reduce P Ltd's profit and loss balance by ₹20,000. If the goods had already been sold outside before the takeover, no adjustment would be needed.

Answer: Capital reserve is ₹50,000 (net assets ₹10,00,000 less consideration ₹9,50,000). Equity share capital increases by ₹8,00,000 (80,000 shares issued at a 2-for-1 exchange for the 40,000 outside shares). The investment in Q Ltd is cancelled. The ₹20,000 unrealised profit is removed in the post-amalgamation balance sheet by reducing stock and P Ltd's profit and loss by ₹20,000 each. It does not change the takeover entries or the capital reserve.

Exam tips

Read the notes under the balance sheets first. Inter-company owings, holdings and unrealised profit are almost always hidden there.
State the method and its basis at the top of your answer. If the question does not name it, say which conditions are met and why.
Show the consideration and net assets as working notes. These get step marks even if a later figure is wrong.
Draw the final balance sheet in Schedule III format with note references. Verify that the totals match before submitting.
In MCQs, check whether the question asks for goodwill, capital reserve, a reserve balance or total assets. Do the one needed calculation and skip the rest.

Practice questions from Amalgamation of Companies

Entries and Balance Sheet in Books of Transferee Company in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Entries and Balance Sheet in Books of Transferee Company: frequently asked questions

What is the difference between the entries under pooling and purchase methods?

Under pooling, the transferor's assets, liabilities and reserves come in at book values, and any excess of shares issued over the transferor's share capital is deducted from the reserves taken over. Under purchase, the consideration is the shares and securities issued plus any cash or other assets paid. The transferor's reserves do not come in, except statutory reserves, which are recorded with a matching debit to Amalgamation Adjustment Reserve. The balancing figure is goodwill or capital reserve.

How are inter-company debtors and creditors treated in the post-amalgamation balance sheet?

They are cancelled, because the combined company cannot owe itself. Reduce debtors of the creditor company and creditors of the debtor company by the same amount. Do the same for bills receivable and payable.

What if the transferee already holds shares in the transferor?

The transferee does not issue shares for these. Purchase consideration is computed only for shares held by outsiders. The investment is credited in the entry and cancelled, and under purchase the investment's carrying amount is added to the consideration to find goodwill or capital reserve.

Why is unrealised profit removed in an amalgamation?

Once the two companies become one, stock that still includes the profit on an inter-company sale is carried above its cost to the combined entity. When you prepare the post-amalgamation balance sheet, you reduce the stock to cost and reduce the profit of the company that booked it. This is not part of the takeover entries.