Accounting in Books of Transferor Company (Realisation Account)

Understand Accounting in Books of Transferor Company

Key rules to remember

Realisation profit or loss

Profit or (Loss) = PC + liabilities taken over + proceeds of assets sold separately − book value of assets transferred − realisation expenses borne

Use book values of assets transferred. Only assets and liabilities actually taken over by the transferee appear.

Amount due to equity shareholders

Equity share capital + reserves and profits ± realisation profit or (loss) − any other claims settled out of their share

This must equal the shares and cash they receive. Use it as your check.

Cash balance check

Opening cash + cash from transferee + cash from assets sold − payments made = cash paid to equity shareholders

If the figure is negative, recheck whether the transferee paid the liquidation expenses or you missed a receipt.

Discharge of PC entry

Dr Transferee company A/c; Cr Realisation A/c (PC). Then Dr Shares/Cash/Debentures in transferee; Cr Transferee company A/c

The transferee account must close to nil once the full PC is received.

How to solve Accounting in Books of Transferor Company questions

1. 1Read what the transferee takes over. List assets and liabilities taken, and those left behind (often cash and bank loans).
2. 2Compute the PC from the question's method or take the given figure, and note how it is discharged (shares at issue price, cash, debentures).
3. 3Prepare the realisation account: debit assets taken over at book value, credit liabilities taken over and PC, and debit the expenses the transferor bears.
4. 4Find the balancing figure as profit or loss and transfer it to the equity shareholders account.
5. 5Transfer share capital, reserves and accumulated profit or loss to their accounts. Pay preference shareholders and outside liabilities not taken over.
6. 6Record receipt of PC from the transferee in shares, debentures and cash, and pay expenses in the cash account.
7. 7Settle the equity shareholders account by distributing the shares and the remaining cash.
8. 8Check that every account is nil and the cash account closes to zero.

Quickest way: Three-account shortcut: realisation, equity shareholders, cash

Common mistakes in Accounting in Books of Transferor Company

• Including cash and bank balance in the realisation account when the transferee does not take it over

  Students debit all assets on the balance sheet automatically.

  Fix: Read the takeover clause. Items not taken over stay in the books and are used to pay outside claims.

• Valuing assets at the price agreed with the transferee instead of book value

  Students mix up the transferor's books with the transferee's books.

  Fix: The transferor's realisation account uses its own book values. The agreed price is reflected through the PC.

• Adding reserves to the realisation account

  Reserves look like gains on the business.

  Fix: Reserves and profit and loss balance go to the equity shareholders account, not the realisation account.

• Taking the PC at face value of shares instead of issue price

  The question gives nominal value and premium separately.

  Fix: PC equals the number of shares multiplied by the issue price (nominal value plus premium) plus any cash.

• Forgetting realisation expenses and who bears them

  Expenses appear at the end of the question.

  Fix: If the transferor bears them, debit realisation account and credit cash. If the transferee bears them, make no entry in the transferor's books.

• Not closing the transferee company account to nil

  Students stop after crediting PC to realisation.

  Fix: Debit the shares, debentures and cash received in the transferee account until it balances.

Worked examples