Accounting Entries and Illustrations on Amalgamation

Understand Accounting Entries and Illustrations on Amalgamation

Key rules to remember

Net payment method

Purchase consideration = Shares issued (at issue price) + Cash paid + Other securities issued to the transferor's shareholders

Include only payments to shareholders. Exclude liabilities the transferee pays to outsiders.

Net asset method

Purchase consideration = Agreed value of assets taken over − Liabilities taken over

Take only the assets and liabilities the transferee actually takes over. Exclude fictitious assets and anything excluded by the scheme.

Purchase method difference

Goodwill (if consideration > net assets taken) or Capital reserve (if consideration < net assets taken)

Net assets taken are at the values the scheme specifies. Statutory reserves are kept if the scheme requires.

Pooling of interests difference

Consideration − Share capital of transferor = adjustment in reserves

If consideration is less than share capital, the surplus is credited to reserves. If more, reserves are debited.

Main entries (purchase method)

Business Purchase A/c Dr. (consideration) to Liquidator of Transferor / Equity Share Capital / Securities Premium; Assets Dr.; to Liabilities; to Business Purchase A/c; Goodwill Dr. or to Capital Reserve

Business purchase account records the consideration. Assets are debited and liabilities credited at agreed values.

How to solve Accounting Entries and Illustrations on Amalgamation questions

1. 1Decide the type: merger (pooling) or purchase. Check whether the question states AS 14 conditions or names the method.
2. 2List the assets and liabilities taken over, and their values. Exclude items the scheme leaves out, such as fictitious assets or specific liabilities.
3. 3Compute purchase consideration by the method that fits the data. If shares and cash are given, use the net payment method. If only asset values are given, use net assets. Cross-check with the other.
4. 4Work out the number of shares to be issued and the securities premium, if any. Use the issue price in the scheme.
5. 5Pass entries: business purchase, assets and liabilities, discharge of consideration, then goodwill, capital reserve or reserve adjustment.
6. 6Apply reserve rules. In pooling, carry over the transferor's reserves in the same form. In purchase, statutory reserves are kept if required. Other reserves are not carried over.
7. 7Prepare the transferee's balance sheet. Add the transferor's items to the transferee's balances, include new capital, and adjust reserves and goodwill. Check that assets equal equity plus liabilities.

Quickest way: Quick check using net assets

Common mistakes in Accounting Entries and Illustrations on Amalgamation

• Including liabilities paid directly to outsiders in the consideration.

  Students add everything the transferee pays.

  Fix: Count only what goes to the transferor's shareholders. Liabilities taken over are deducted under net assets, not added under net payment.

• Taking fictitious assets such as preliminary expenses or the profit and loss debit balance as assets.

  They appear on the transferor's balance sheet.

  Fix: Do not take them over under the purchase method. Leave them out of the asset list unless the scheme says otherwise.

• Using the wrong method for the difference: goodwill in a merger or reserve adjustment in a purchase.

  Students forget to classify the amalgamation first.

  Fix: Decide the type in step one. Pooling gives reserve adjustment. Purchase gives goodwill or capital reserve.

• Ignoring securities premium when shares are issued above par.

  Students credit all shares to share capital.

  Fix: Credit share capital at face value and securities premium for the excess over face value.

• Forgetting the transferee's existing balances when preparing the balance sheet.

  Students show only the transferor's items.

  Fix: Add each line of the transferee's balance sheet to the amalgamation adjustments. Check that the totals match.

• Not eliminating intercompany balances.

  Mutual debtors and creditors are hidden in the data.

  Fix: Cancel mutual owings. Remove unrealised inter-company profit in stock if the question gives it.

Worked examples