MCom I Semester Corporate Accounting Amalgamation Reconstruction Study Material Notes ( Part 3 )

MCom I Semester Corporate Accounting Amalgamation Reconstruction Study Material Notes ( Part 3 ): Reconstruction Accounting for External Reconstruction Journal Entries Discussion Questions Long Answer Questions Short Answer Questions Numericals :

CTET Paper Level 2 Set X Model Paper Multiple Questions Answer in English

Reconstruction

Reconstruction implies the reorganization of the financial structure of a company. It involves only one company. The object of reconstruction is not a merger but merely to reorganize or reconstitute the capital structure of an existing company. It may be carried out either with or without liquidation of the company. Thus, it is of two types

1 Internal Reconstruction: Under it neither any new company is formed nor any existing company is liquidated. It is a process by which the assets and liabilities of a company are brought to their fair values and accumulated losses and fictitious assets are written off by reducing the paid-up value of shares and/or varying the rights attached to different classes of shares and compounding with the creditors and debenture holders. In effect, it is the process of capital reduction and so a special resolution and sanction of the court are essential for it. This is discussed in detail in the next chapter.

2. External Reconstruction: In this case, an existing company is liquidated and a new company is formed with more or less the same or similar name to take over almost all the assets and liabilities of the liquidating company. The new company is composed substantially of the shareholders of the liquidating company. Thus, in case of external reconstruction, there is one transferor (or vendor) company and one transferee (purchasing) company.

Difference between External Reconstruction and Amalgamation

1 In external reconstruction only one company is involved while in amalgamation two or more companies are involved.

2. In external reconstruction an existing company is taken over by a newly formed company whereas in amalgamation two or more companies are taken over by a newly formed company or one or more existing companies are absorbed or taken over by an existing company.

3. In external reconstruction the transferor company is transferred to another company consisting substantially of the same shareholders whereas in amalgamation transferor company or companies are transferred to an outsider company.

4. In case of external reconstruction all the assets and liabilities do not pass to the new company and all the shareholders need not become the shareholders in the transferee company whereas in case of amalgamation all the rights and liabilities of the transferor companies are transferred to the transferee company and almost all the shareholders of transferor company/companies become the shareholders in the transferee company.

( Part 3 ) Amalgamation Reconstruction

Accounting for External Reconstruction

AS-14 is mainly concerned with accounting for amalgamations. Hence, accounting for external reconstruction is not covered under it. Although there is no complete merger in external reconstruction but there is substantial transfer of shareholders, assets and liabilities of transferor company to the transferee company and the transferee company usually continues the business of the transferor company, it is essentially covered under the category ‘amalgamation in the nature of merger’. However, if the number of dissenting shareholders is significant and/or if assets and liabilities are incorporated at their fair or revised values, it would be appropriate to follow the accounting procedure pertaining to amalgamation in the nature of purchase. The accounts of transferor company would be closed in the usual manner through realisation account. But in the books of transferee company, accounting treatment would depend on the terms of reconstruction.

Illustration 22. The Balance Sheet of Kanpur Silk Mills Ltd. is as follows:

The company decided to go into voluntary liquidation with a view to reconstruct the company under the name of the New Kanpur Silk Mills Company Ltd. The following scheme receives the approval of shareholders and creditors :

(1) Assets and liabilities are to be taken over by the New Company.

(2) Sundry creditors to be discharged by a cash composition of 75 paisa in the rupee.

(3) 200 debentures to be redeemed at 75% of their value; for the balance of 14% debentures, 15% debentures in the new company are to be issued at par.

(4) 1.00,000 shares of Rs. 10 each credited at Rs. 6 paid-up to be issued by the new company to the shareholders of the old company, the unpaid amount on the shares to be paid immediately on allotment.

(5) Employees’ Provident Fund is to be maintained.

(6) The book value of the assets to be reduced proportionately.

Give journal entries for closing the books of the old company and opening entries those of the new company

Efforts to secure sufficient new capital to pay off the creditors and place the concern on a sound basis having proved unsuccessful, it was decided to reconstruct and the following scheme was submitted to and approved by the shareholders and creditors :

(a) The company to go into voluntary liquidation and a new company having a nominal capital of Rs. 1,00,000 to be formed to take over the assets and liabilities of the old company.

(b) The assets to be taken over at book values, with the exception of Patent Right which were to be subject to adjustment.

(C) The creditors to be discharged by the new company on the following terms:

Preferential to be paid in full

Unsecured to be discharged by cash composition of 50 paise in a rupee                                                                                                                                                                                500

Unsecured to be discharged by the issue of 13% debentures fully paid at a bonus of 10%13,400

12,600

(d) 5,000 shares of Rs. 10 each, Rs. 5 paid up to be issued to the shareholders in the old company,                                                                                                                         26,500

balance Rs. 2.50 payable on first call and Rs. 2.50 on final call.

(e) The cost of liquidation amounting to Rs. 250 to be paid by the new company as part of the purchase consideration.

Pass the Journal entries to close the books of the old company and also the opening entries in the new company’s books. It is to be assumed that all the shares and debentures have been allotted and all cash in respect of shares has been received.

Solution :

Purchase Consideration :                                    Rs.

5,000 Shares @ Rs. 10 each, Rs. 5 paid up            25,000

Cash (Liquidation expenses)                                          250  

25,250

( Part 3 ) Amalgamation Reconstruction

Discussion Questions

Long Answer Questions

1 What do you understand by amalgamation of companies ? Discuss merits and demerits of amalgamation.

2. What is purchase consideration as per AS-14 ? How is it calculated ?

3. State the conditions for amalgamation in the nature of merger. Explain the method of accounting applicable to this type of amalgamation with the help of journal entries in the books of transferee company.

4. (a) What is purchase consideration and how is it determined ? Can it exceed “Net Value of a company ?

(b) When a company is absorbed by another company, what entries are made in the books of absorbed and absorbing companies ?

5. What accounting entries are made in the books of Amalgamating Company and Amalgamated Company?

6. Discuss the accounting methods of amalgamation.

7. (a) Distinguish between amalgamation and external reconstruction.

(b) Distinguish between mergers and acquisitions.

8. Write a note on the following:

(a) Indian Accounting Standard 14,

(b) Accounting for Internal Reconstruction

Short Answer Questions

(i) State the conditions of amalgamation in the nature of the merger.

(ii) How is purchase consideration determined in Amalgamation?

(iii) Explain pooling of interest method of amalgamation

(iv) Explain pooling of interest method of accounting treatment of amalgamation in the books of transferee company.

(v) What is purchase consideration as per AS-14? How is it calculated?

(vi) Differentiate between external reconstruction and internal reconstruction.

(vii) Explain the main objects of reconstruction.

(viii) What is Amalgamation? Is it different from merger? What is the pooling of interest method of amalgamation?

(ix) Distinguish between

(i) the pooling of interest method and

(ii) the purchase method of recording transactions relating to amalgamation.

(x) Briefly explain the methods of accounting for amalgamation as per Accounting Standard –

Numerical

(1) X Ltd. is absorbed by Y Ltd., the consideration being the take over of liabilities; the payment of cost of absorption as a part of purchase consideration not exceeding Rs. 8,000 (actual cost Rs. 7,000); the payment of debentures of Rs. 1,00,000 at a premium of 10% in 12% debentures issued at 96%; and allotment of 6 equity shares of Rs. 10 each fully paid for every 4 shares in X Ltd. The number of shares of X Ltd. is 2,00,000 of Rs. 10 each fully paid. Calculate purchase consideration.

(Answer : Rs. 30,00,000)

(ii) Shikh Ltd agrees to issue 3 shares of Rs. 10 each, Rs. 9 paid up at market value of Rs. 15 per share for every 5 shares in the transferor company. The transferor company has Rs. 5,00,000 paid up share capital of Rs. 10 each, Rs. 5 paid up, market value of these shares is Rs. 8. Find out purchase consideration.

(Answer: Purchase Consideration 60,000 shares at Rs. 15 = Rs. 9,00,000)

(iii) Sun Ltd., the purchasing company, agrees to issue two shares of Rs. 100 each. Rs. 80 paid up (quoted in the market at Rs. 150) for every three shares held in Moon Ltd., the vendor company. Moon Ltd. has Rs. 3,00,000 paid up capital of Rs. 100 share each, Rs. 50 paid up (quoted in the market at Rs. 50). Find out purchase consideration.

(Answer: 4,000 shares Rs. 80 paid Rs. 3.20,000)

( Part 3 ) Amalgamation Reconstruction