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CMA Intermediate · Financial Accounting · Amalgamation of Partnership Firms

Firm P and Firm Q amalgamate. Firm P has a Rs 40,000 claim against Firm Q for goods sold on credit, and both balances appear in the books. The new firm takes over the assets and liabilities of both firms, and the inter-firm debt is to be settled on amalgamation. What is the correct treatment in preparing the new firm's opening balance sheet?

The Rs 40,000 mutual debt is eliminated from both debtors and creditors in the new firm's opening balance sheet. Since the new firm takes over both firms, it would otherwise owe and be owed the same amount, so the two cancel and inflate nothing.

  1. AShow the Rs 40,000 as both debtors and creditors of the new firm
  2. BShow the Rs 40,000 as creditors only
  3. CShow the Rs 40,000 as debtors only
  4. DEliminate the Rs 40,000 from both debtors and creditors because the new firm cannot owe itselfCorrect

Explanation

After amalgamation, the new firm holds both the receivable from Q and the payable by Q, so the claim and obligation cancel out. Only the net external balances are carried. Showing both would overstate assets and liabilities.

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