Amalgamation Accounting in the Books of the Transferor Company

Understand Amalgamation Accounting in Books of Transferor

Key rules to remember

Profit or loss on realisation

Σ credits (liabilities taken over + purchase consideration + sale proceeds of assets not taken over) − Σ debits (book value of all assets transferred to realisation, whether taken over or sold + liquidation expenses borne by transferor)

A positive balance is a profit, credited to equity shareholders' account. A negative balance is a loss, debited to it.

Amount due to equity shareholders

Equity share capital + reserves and surplus (credit balances) + realisation profit − realisation loss − accumulated losses

Preference shareholders are normally settled first at the amount they are entitled to.

Cash left to pay shareholders

Opening bank + cash from sale of assets not taken over + cash consideration − liabilities paid in cash − liquidation expenses paid

This must agree with the cash balance in the equity shareholders' account. If not, recheck the workings.

Entry for assets transferred

Realisation A/c Dr. (book value of all assets other than cash and bank, including assets to be sold) to Assets A/c (each one)

Cash and bank are usually excluded, unless the question says the transferee takes them over. Assets not taken over are still debited here; the cash from their sale is credited to realisation later.

Entry for purchase consideration

Transferee Co. A/c Dr. to Realisation A/c

Then: Shares in Transferee Dr., Bank Dr. to Transferee Co. A/c, as and when received.

How to solve Amalgamation Accounting in Books of Transferor questions

1. 1Read the scheme. Note which assets and liabilities the transferee takes over, and which stay with you.
2. 2Fix the purchase consideration. It is either given or computed (net assets, net payment or lump sum, as stated).
3. 3Open the realisation account. Debit all assets transferred at book value. Credit liabilities taken over. Credit the purchase consideration (as a debit to the transferee's account).
4. 4Enter the leftover items. Assets not taken over that are sold: credit realisation, debit bank. Liabilities not taken over that are paid: debit realisation for any loss or credit for any gain. Liquidation expenses borne by you: debit realisation.
5. 5Balance the realisation account. Transfer the profit or loss to the equity shareholders' account. Where the question requires it, share it with preference holders.
6. 6Prepare the settlement. Close reserves and accumulated profits or losses into the shareholders' accounts. Settle preference shareholders first, then equity shareholders, with shares of the transferee and cash.
7. 7Check that the bank, transferee and shareholders' accounts all close to nil. Write the answer in the order the question asks: journal entries or ledger accounts.

Quickest way: Net gain shortcut for the realisation profit

Common mistakes in Amalgamation Accounting in Books of Transferor

• Debiting assets in the realisation account at the price the transferee pays instead of at book value.

  Students mix up the transferee's entries with the transferor's. The transferee records at agreed values.

  Fix: In the transferor's books, always use book values. The agreed value only affects the purchase consideration.

• Forgetting to credit liabilities taken over, or crediting liabilities that the transferee does not take over.

  The question lists items in a different order from the balance sheet, and it is easy to miss a clause.

  Fix: Tick each balance sheet item against the scheme. A liability not taken over is settled by you, so it does not go to the realisation account unless a gain or loss arises.

• Transferring reserves and accumulated losses to the realisation account.

  Students treat them as assets or liabilities to be realised.

  Fix: Reserves and P&L balances are owners' funds. Close them to the equity shareholders' account, not to realisation.

• Counting liquidation expenses twice or posting them to the wrong side.

  The expenses may be paid by the transferor or by the transferee, and questions word this differently.

  Fix: If the transferor bears them, debit realisation and credit bank. If the transferee bears them, make no entry in your books.

• Not checking that the bank account closes to nil.

  Students stop once the shareholders' account looks balanced.

  Fix: Add opening bank, cash received, then deduct payments and expenses. The result should equal the cash paid out to shareholders. If not, a mistake exists.

• Treating the purchase consideration as the amount received by equity shareholders only.

  Preference shareholders are also paid out of the consideration.

  Fix: Split the consideration between preference and equity holders as the scheme states. Settle preference holders first.

Worked examples