Journal Entries and Ledger Accounts in Books of Transferor (AS 14)

Understand Journal Entries and Ledger Accounts in Books of Transferor

Key rules to remember

Realisation Account sides

Debit: assets taken over (book value) + realisation expenses paid by transferor. Credit: liabilities taken over + purchase consideration

The balancing figure is profit (credit side larger) or loss (debit side larger). Only items taken over by the transferee go in.

Profit or loss on realisation

Profit or loss = (Liabilities taken over + Purchase consideration) − (Assets taken over + Realisation expenses)

If positive it is a profit and is credited to Equity Shareholders A/c. If negative it is a loss and is debited.

Amount due to equity shareholders

Equity share capital + Reserves and surplus + Profit on realisation (or − Loss) + any other credit balance of equity holders

This must equal shares of the transferee plus cash paid to equity holders. Use it as your closing check.

Value of shares in transferee

Number of shares × agreed issue price (including premium)

Record Shares in Transferee at issue price, not just face value. Premium is part of the purchase consideration.

Cash left to distribute

Opening cash and bank + Cash from transferee + other cash realised − Realisation expenses − Liabilities paid − Preference shareholders paid in cash

This is the cash paid to equity shareholders. Bank must close to zero.

How to solve Journal Entries and Ledger Accounts in Books of Transferor questions

1. 1Read which assets and liabilities the transferee takes over. Mark the items not taken over (often cash and bank, or some liabilities).
2. 2Calculate the purchase consideration (or use the figure given) and split it into shares, debentures and cash.
3. 3Open the Realisation Account. Debit taken-over assets at book value and credit taken-over liabilities. Credit the purchase consideration from the Transferee Company.
4. 4Add the realisation expenses paid by the transferor to the debit side. If the transferee pays them, make no entry.
5. 5Balance the Realisation Account and transfer the profit or loss to the Equity Shareholders Account.
6. 6Record the receipt of consideration: Dr Cash, Shares in Transferee, Debentures in Transferee; Cr Transferee Company A/c.
7. 7Transfer share capital, reserves and P&L balance to the shareholders' accounts. Pay preference shareholders as agreed.
8. 8Distribute the balance of the Equity Shareholders Account in shares and cash. Check that Bank, Shares in Transferee and every other account close to zero.

Quickest way: Realisation total, then single check

Common mistakes in Journal Entries and Ledger Accounts in Books of Transferor

• Putting cash and bank into the Realisation Account when the transferee does not take them over.

  Students transfer every asset in the balance sheet by habit, as in dissolution of a firm.

  Fix: Read the question first. Transfer only what the transferee takes over. Untaken cash stays in the transferor's books and is used in the final settlement.

• Treating Transferee Company A/c as credited when consideration is due.

  Students think of it like a creditor.

  Fix: The transferee owes you the consideration, so it is an asset-type debit: Dr Transferee Company A/c, Cr Realisation A/c. It is credited only when you receive shares, debentures or cash.

• Passing an entry for liquidation expenses that the transferee pays.

  Students assume all liquidation costs hit the transferor.

  Fix: Debit the Realisation Account only for expenses the transferor itself pays. If the transferee bears them, there is no entry in the transferor's books.

• Recording shares in the transferee at face value instead of the issue price.

  The premium is forgotten when shares are issued above par.

  Fix: Shares in Transferee = number of shares × issue price. The premium is part of the purchase consideration, so ignoring it leaves the books out of balance.

• Putting profit on realisation on the wrong side of the Equity Shareholders Account.

  Students mix up the effect on the Realisation Account itself with the effect on the shareholders.

  Fix: A profit is debited to Realisation A/c and credited to Equity Shareholders A/c. A loss is credited to Realisation A/c and debited to Equity Shareholders A/c.

• Not settling preference shareholders separately.

  All capital is moved to a single shareholders' account.

  Fix: Transfer preference capital to a Preference Shareholders A/c and settle it as agreed, in preference shares of the transferee or cash. Only the remainder belongs to equity shareholders.

Worked examples