Advanced Accounting · Amalgamation of Companies

Purchase Consideration and Its Calculation (CA Intermediate)

Updated 4 October 2026 · Fact-checked

Purchase consideration is what the transferee company pays to the shareholders of the transferor company: shares, securities, cash or other assets. Liabilities taken over are not part of it. Under the net payment method, add what shareholders receive. Under the net assets method, take agreed asset values less liabilities taken over.

Understand Purchase Consideration and Its Calculation

When one company takes over another in an amalgamation, the company that is taken over is the transferor and the one that takes over is the transferee. The transferee must pay for the business. That price is the purchase consideration.

AS 14 describes it as the aggregate of the shares and other securities issued, and the payment made in cash or other assets by the transferee company to the shareholders of the transferor company. The key words are *to the shareholders*. Money paid to creditors (including debenture holders paid as creditors) or to the liquidator is not purchase consideration. But shares, debentures or other securities that the transferee issues to the transferor's shareholders are part of it.

There are three methods of computing purchase consideration. In the lump sum method the agreement fixes one amount. In the net payment method you add up what each class of shareholder actually receives. In the net assets method you take the agreed value of assets taken over and subtract the liabilities taken over.

The intrinsic value basis is not a fourth method of computing purchase consideration. It fixes the share exchange ratio, that is, the number of shares to be issued only. You work out the value per share of both companies and use the ratio to find how many shares to issue. Purchase consideration is then computed by the net payment method: shares issued × the issue or fair value per share, plus any cash or other payment.

If the transferee takes over every asset and liability and pays shareholders in full at the agreed values, the net payment and net assets methods give the same figure. If a question gives both, check that they agree. A mismatch usually means you missed an item, or that the shares are issued at a value different from the net assets agreed.

Once purchase consideration is fixed, it is compared with the net assets taken over. The difference is goodwill or capital reserve under the purchase method. That part is covered in the amalgamation entries topics.

Key rules to remember

Purchase consideration (net payment method): PC = Value of shares issued + Cash paid + Other assets or securities given, all to shareholders (equity and preference); Value shares at the issue price or fair value stated in the question, so any premium is included.
Purchase consideration (net assets method): PC = Agreed value of assets taken over − Liabilities taken over; Include only the assets and liabilities the transferee actually takes. Use agreed or fair values, not book values, if given.
Lump sum method: PC = Fixed amount given in the agreement; No working needed. Then find how it is discharged (shares, cash) if asked.
Intrinsic value per share: Intrinsic value per equity share = (Assets − Outside liabilities − Preference share capital) ÷ Number of equity shares; Assets at agreed or fair values. Do this for both companies on the same basis. It is used only to fix the exchange ratio.
Shares to be issued (intrinsic value basis): Shares issued = (Intrinsic value per share of transferor ÷ Intrinsic value per share of transferee) × Shares of transferor; This fixes the number of shares only, not purchase consideration. The ratio holds only when both companies' shares are valued on the same basis. PC is then found by the net payment method: shares issued × the issue or fair value per share given in the question.
What is excluded: Liabilities taken over, payments to creditors (including debenture holders paid as creditors), and liquidation expenses paid by the transferee are NOT part of PC. Shares, debentures and other securities issued to the transferor's shareholders ARE part of PC.; Excluded items are not paid to the transferor's shareholders. Debentures that the transferee issues to the transferor's shareholders in discharge of their shares are consideration, so include them.

How to solve Purchase Consideration and Its Calculation questions

Use this order for any purchase consideration question. It stops you mixing up payments to shareholders with other payments.

1Read the terms and identify which method is asked: a fixed sum, payment terms for shareholders, or a net assets basis. If shares are to be issued on an intrinsic value basis, that fixes the number of shares only. PC is still found by the net payment method.
2List the classes of shareholders of the transferor: equity and each class of preference.
3For each class, write what they receive: number of shares, value per share (issue price or fair value), and any cash.
4If the exchange ratio is not given, compute intrinsic value per share for both companies and then the shares to be issued.
5Handle fractions: if cash is paid for fractional shares, include that cash in PC. Do not drop it.
6Add all amounts, including any debentures or other securities issued to the transferor's shareholders. Leave out liabilities, payments to creditors (including debenture holders paid as creditors), and expenses borne by the transferee.
7Cross-check with the net assets method where the data allows: assets taken over less liabilities taken over.
8Show the working in a neat table or note so you earn step marks, then state the final figure clearly.

Quickest way: Shareholder-by-shareholder table

When to use it: Use it in the written paper and in MCQs where terms are given per share class.

Draw three columns: class of shareholder, shares or cash received, amount.
Multiply shares issued by the stated value per share, including premium.
Add the cash column, then total.
In MCQs, cross out options that include liabilities or the transferee's own expenses.
If net assets are given, compute assets minus liabilities as a quick check against your total.
In the written answer, label the working 'Computation of purchase consideration' and show each line so marks are awarded even if the total slips.

Common mistakes in Purchase Consideration and Its Calculation

Adding liabilities taken over to purchase consideration.
Students think the transferee 'pays' for liabilities when it takes them over.
Fix: PC is paid to shareholders only. Liabilities taken over are deducted in the net assets method and never added in the net payment method.
Valuing shares issued at face value when a premium or fair value is stated.
Students see shares of ₹10 each and stop there.
Fix: Use the issue price or fair value given. PC includes the premium part.
Leaving out preference shareholders.
The question focuses on the equity exchange ratio.
Fix: Every class of shareholder of the transferor is paid by the transferee. Add preference consideration too.
Including payments to debenture holders or creditors as creditors, or liquidation expenses borne by the transferee.
These are also cash flows linked to the amalgamation.
Fix: Only consideration to the transferor's shareholders counts. Payments to creditors, including debenture holders paid as creditors, and the transferee's expenses are separate entries. But do not leave out debentures or other securities the transferee issues to the transferor's shareholders in discharge of their shares: those are part of PC.
Not deducting preference share capital when calculating intrinsic value per equity share.
Students use total net assets divided by equity shares.
Fix: Subtract outside liabilities and preference capital, then divide by equity shares.
Ignoring cash paid for fractional shares.
Students round shares and forget the cash settlement.
Fix: Cash for fractions goes to shareholders, so include it in purchase consideration.

Worked examples

Example 1

Alpha Ltd is absorbed by Beta Ltd. Alpha has 50,000 equity shares of ₹10 each and 5,000 preference shares of ₹100 each. Terms: for every 2 equity shares, 3 equity shares of ₹10 each in Beta (fair value ₹15 each) plus ₹4 cash per Alpha equity share; preference shareholders get 5,000 preference shares of ₹100 each in Beta at par. Beta takes over all liabilities of ₹6,00,000 and pays liquidation expenses of ₹20,000. Compute purchase consideration.

Show the solution

Equity shares issued = 50,000 × 3 ÷ 2 = 75,000 shares.
Value of equity shares = 75,000 × ₹15 = ₹11,25,000.
Cash to equity shareholders = 50,000 × ₹4 = ₹2,00,000.
Preference shareholders: 5,000 × ₹100 = ₹5,00,000.
Total = ₹11,25,000 + ₹2,00,000 + ₹5,00,000 = ₹18,25,000.
Liabilities of ₹6,00,000 and liquidation expenses of ₹20,000 are not paid to shareholders, so they are excluded.

Answer: Purchase consideration = ₹18,25,000.

Example 2

X Ltd is taken over by Y Ltd. X Ltd has 1,00,000 equity shares of ₹10 each; its assets are agreed at ₹18,00,000 and outside liabilities are ₹3,00,000. Y Ltd has 2,00,000 equity shares of ₹10 each and 10% preference capital of ₹10,00,000; its assets are agreed at ₹52,00,000 and outside liabilities are ₹10,00,000. The number of shares is fixed on the intrinsic value basis. Y Ltd's shares have a fair value of ₹20 each and are issued to X Ltd's shareholders at that value. Find the shares issued and purchase consideration.

Show the solution

Intrinsic value of X share = (₹18,00,000 − ₹3,00,000) ÷ 1,00,000 = ₹15.
Y Ltd: ₹52,00,000 − ₹10,00,000 − ₹10,00,000 (preference) = ₹32,00,000.
Intrinsic value of Y share = ₹32,00,000 ÷ 2,00,000 = ₹16.
Shares to be issued = 1,00,000 × 15 ÷ 16 = 93,750 shares. The intrinsic value basis ends here: it fixes the number of shares only.
Purchase consideration is found by the net payment method: 93,750 × ₹20 = ₹18,75,000 (₹10 face value + ₹10 premium per share).
Cross-check with net assets: ₹18,00,000 − ₹3,00,000 = ₹15,00,000. It does not agree, because the shares are issued at ₹20 and not at their intrinsic value of ₹16. PC stays at ₹18,75,000, as the question gives the value of the shares issued. The ₹3,75,000 difference (₹18,75,000 − ₹15,00,000) is dealt with as goodwill in the amalgamation entries.

Answer: Y Ltd issues 93,750 equity shares of ₹10 each at ₹20 each; purchase consideration = ₹18,75,000.

Exam tips

Always show a 'Computation of purchase consideration' working note. Step marks are given even if the final figure differs.
Read the question for which assets and liabilities are taken over. If the transferee does not take some of them, do not use them in the net assets method.
Look for traps such as liquidation expenses, payments to creditors and debenture holders as creditors, and fractional shares paid in cash. Remember that debentures issued to the transferor's shareholders are part of PC.
For MCQs, compute the net payment total first and use the net assets figure to check it.
If intrinsic value is asked, show the value per share of both companies separately before the exchange ratio, and remember it gives the number of shares only.

Practice questions from Amalgamation of Companies

Purchase Consideration and Its Calculation in other exams

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

Purchase Consideration and Its Calculation: frequently asked questions

What is the difference between the net assets method and the net payment method?

The net payment method adds up what the transferor's shareholders receive in shares, cash and other assets. The net assets method takes the agreed value of assets taken over and deducts liabilities taken over. If everything is taken over and paid fully at the agreed values, both give the same figure.

Are liabilities taken over part of purchase consideration?

No. They are not paid to the shareholders of the transferor. They are deducted from assets in the net assets method and are left out in the net payment method.

How is the intrinsic value method used to find the share exchange ratio?

Compute the intrinsic value per equity share of each company after deducting outside liabilities and preference capital. Divide the transferor's value by the transferee's value to get the exchange ratio, which holds when both are valued on the same basis. Multiply it by the transferor's shares to get shares to be issued. This fixes the number of shares only. PC, by the net payment method, = shares issued × the issue or fair value per share given in the question.

Does purchase consideration include premium on shares issued?

Yes, if the shares are issued at a premium or valued at fair value above face value. Use the issue price or fair value in the question when valuing shares issued.