Journal Entries in the Books of Transferor Company

Understand Journal Entries in the Books of Transferor Company

Key rules to remember

Realisation Account debits

Dr: assets taken over (book value) + expenses paid by transferor + loss on realisation (if any)

Do not debit fictitious assets or the profit and loss debit balance here. They go to Equity Shareholders Account. Assets not taken over are not transferred.

Realisation Account credits

Cr: liabilities taken over + purchase consideration due from transferee + profit on realisation (if any)

Liabilities not taken over are paid separately by the transferor. The purchase consideration is credited, not the net assets.

Profit or loss on realisation

Profit = Purchase consideration – (Assets taken over – Liabilities taken over) – Expenses borne by transferor

A negative result is a loss. Transfer to Equity Shareholders Account.

Entry for transfer of assets

Realisation A/c Dr; To each asset account

Use book value. Show each asset separately.

Entry for transfer of liabilities

Liability accounts Dr; To Realisation A/c

Only liabilities the transferee takes over.

Entry for purchase consideration

Transferee Company A/c Dr; To Realisation A/c

Pass this at the total amount due, before the form of payment.

Entry for receipt of consideration

Shares / Debentures in Transferee A/c Dr; Bank A/c Dr; To Transferee Company A/c

Record shares at the value included in the purchase consideration.

Closing the shareholders

Equity Share Capital, Reserves, P&L (credit) Dr; To Equity Shareholders A/c. Equity Shareholders A/c Dr; To Shares in Transferee, Bank

Debit balances such as P&L loss go to the debit of Equity Shareholders A/c. Realisation profit is credited and loss is debited.

How to solve Journal Entries in the Books of Transferor Company questions

1. 1Read which assets and liabilities the transferee takes over. Note any asset not taken over (often cash or bank) and any liability the transferor settles itself.
2. 2Pass the entry to transfer assets taken over to the Realisation Account at book value. Leave out fictitious assets and the debit balance of profit and loss.
3. 3Pass the entry to transfer liabilities taken over to the Realisation Account. Include debentures if the transferee takes them over or exchanges them.
4. 4Record the purchase consideration: Transferee Company A/c Dr, To Realisation A/c. If it is not given, compute it first as the question directs.
5. 5Record any realisation expenses. If the transferor pays them, debit Realisation A/c and credit Bank. If the transferee bears them, pass no entry.
6. 6Find the profit or loss on realisation and transfer it to Equity Shareholders A/c. Then close preference share capital through Preference Shareholders A/c, settled by the transferee.
7. 7Transfer equity share capital, reserves and the profit and loss balance (and any loss or fictitious asset) to Equity Shareholders A/c.
8. 8Record receipt of shares and cash from the transferee. Pay equity shareholders with shares and any cash left. Check that every account is nil.

Quickest way: Draw the four ledgers first

Common mistakes in Journal Entries in the Books of Transferor Company

• Transferring assets to Realisation A/c at the amount of purchase consideration or at market value.

  Students mix up the transferor's books with the transferee's books, where fair values may be used.

  Fix: In the transferor's books, always transfer assets and liabilities at their book values. The consideration is a separate credit.

• Transferring the profit and loss debit balance or preliminary expenses to Realisation A/c.

  They are shown on the assets side of the balance sheet, so they look like assets.

  Fix: These are fictitious assets. Debit them to Equity Shareholders A/c, along with the other accumulated balances.

• Passing an entry for realisation expenses when the transferee bears them.

  Students see the word expenses and pass an entry automatically.

  Fix: Pass an entry only if the transferor pays. If the transferee bears them, no entry appears in the transferor's books.

• Putting the profit or loss on realisation into reserves or the P&L account.

  The transferor is closing, but students keep the habit of the going-concern books.

  Fix: Transfer profit by crediting Equity Shareholders A/c, and loss by debiting it.

• Transferring assets not taken over, such as cash, to Realisation A/c.

  Students move every balance sheet asset without checking the question.

  Fix: Transfer only assets the transferee takes over. Keep the others to be used for paying outsiders or shareholders.

• Treating preference shareholders as part of equity shareholders.

  Both are shareholders, so the payment seems the same.

  Fix: Close preference share capital through Preference Shareholders A/c, and settle it first, usually by the transferee's preference shares. Then settle equity shareholders.

Worked examples