III Sem BCOM Corporate Accounting SSM 1-5 Modules

Corporate Accounting
Semester – III
B.com Regular
Student Study Material
Edition: 2023
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INDEX
Sl. No. Module Page No.
1 Module - 1 6-27
2 Module - 2 28-92
3 Module - 3 93-109
4 Module - 4 110-136
137- 147
5 Module - 5

Program: Bachelor of Commerce
Course: CORPORATE ACCOUNTING
Code:
Course Credits No. of Hours per Week Total No. of Teaching Hours
3Credits 4Hours 55Hours
PADEGOGY: (SYNCHRONIZE)-Classroom Lecture & work sheet explanation Tutorials,

Book reviews Group Discussion, Seminar, Case studies & (ASYNCHRONIZE) Field work &
Skill development activities, etc.,
Course objectives.
1.To develop awareness about corporate accounting with the provision of Companies Act to enable
employability.
2. Calibrate the procedure involved in Amalgamation, Absorption & External reconstruction of
companies.
3. Construct the Reconstruct Externally of capital structure in the financial statement of Joint stock
company ltd.
4. To enable the students to ascertain the financial performance of the companies as per accounting
standards.
5. To understand the implication of failure in performance of Co’s & unethical accounting practices on
the society
Module: 1. Valuation & Underwriting of shares. 14 Hours.

Meaning – need for valuation – factors affecting valuation – methods of valuation – Assets Backing
or Intrinsic value method – Yield method – Fair value method. Term used in Underwriter &
underwriting – calculation of underwriting commission – Types – Complete - Partial underwriting -
Pure underwriting – firm underwriting - Marked application – unmarked application -–– Preparation
of statement showing allocation of gross and net liability of an underwriter – SEBI guidelines for
underwriting.
Module-2: Mergers and Acquisition 20 Hours

Meaning, definition & types - Calculation of purchase consideration under net asset and net
payment basis adopting Accounting Standards 14 - Purchase and merger method; Treatment of
fractional shares - Liquidation expenses met by amalgamated company - Passing journal
entries - Preparation of ledger accounts in the books of the amalgamated company - Journal
entries and preparation of ledger accounts in the books of the purchasing company -
Incorporating entries - Finding out goodwill or capital reserve - Preparation of balance sheet as
per Schedule III
Module-3: Liquidation 06 Hours

Voluntary Liquidation-preparation of Liquidator’s Statement of Affairs- order of payment- calculation of
commission on Assets Realized- Payment to unsecured creditors- Payment to unsecured creditors other
than preferential creditors calculation of prorate-treatment of uncalled capital-liability of contributors.

Module-4: Company Final Accounts 14 Hours
Requirements of Companies Act for the presentation of profit and loss account and balance
sheet of a company (vertical method) - Treatment of items like depreciation, interest on
debentures, tax, dividends, interim, proposed, unclaimed, interest on capital, CDT, Managerial
remuneration (theory only) - Commission after charging such commission - Preparation of
balance sheet as per Companies Act (simple problems only) - Final Accounts Managerial
remuneration - problems.
Module-5: Contemporary Trends in Accounting 3 Hours

Human Resource Accounting - Forensic Accounting - Accounting - Inflation Accounting -
Environmental Accounting
COURSE OUTCOMES
COs OUTCOME BL
Exposure to the process to acquire the shares through valuation of shares &
CO 1 Underwriting of shares for trading along with accounting treatments 3
Developing an insight on Mergers and Acquisitions of Companies and to help in

CO2 the preparation of accounts in the books of both vendor and purchasing companies 3
Summarize accounting transactions and prepare final accounts according to Schedule
III
CO3 of Companies Act, 2013 2
Analysing the provisions of Companies Act, 2013 for liquidation and the hierarchy of
CO4 settlement of claims at the time of liquidation 3
CO5 Exposure to the contemporary trends in the accounting world. 3
Reference Books
• R.L. Gupta and M. Radhaswamy, Corporate Accounting, 2019
• S N Maheshwari, Corporate Accounting 2020
• Jain and Narang,Corporate Accounting, 2019
• Vikas Publishing, Corporate Accounting S N Maheshwari - 2019
• Dr. V. Rajasekaran & Dr. R.Lalitha , Corporate Accounting 2019
• 5. Mukherjee & Hanif, Amitabh Mukherjee Mohammed Hanif Tata, Corporate Accounting, McGraw-Hill
Education, 2

MODULE: 1 VALUATION AND UNDERWRITING OF SHARES
Structure
1.1. INTRODUCTION- Valuation of Shares
1.1,1 MEANING
1.1.2 METHODS OF VALUATION OF SHARES

1.1.2.1 Net Asset Method or Intrinsic Value Meth
1.1.2.2 Yield Method Or Earning Capacity Method.
1.1.2.3 Fair value Method
1.2 INTRODUCTION- Underwriting of shares.
1.2.1 – MEANING
1.2.2- TYPES OF UNDERWRITING
1.2.2.1 On the basis of number of shares or debentures underwritten.
1.2.2.1(A) Complete underwriting.
(B) Partial underwriting.
1.2.2.2. On the basis of liability of the underwriters.

1.2.2.2 (A) Pure or open underwriting.
(B) Firm underwriting.
1.2.3. UNDERWRITING COMMISSION
1.2.4. MARK AND UNMARK APPLICATION
1.2.5. CALCULATION OF UNDERWRITER LIABILITY.
1.3. TERMINAL QUESTIONS.
1.1. Introduction
Share valuation is a technique of determining the actual worth of a company using quantitative
techniques or the process of knowing the value of a company’s share. The share value will vary
depending on the market demand and supply. There are many circumstances where value of
shares is required for various accounting purpose. Always the shares are having two values after
the shares are listed in the stock exchanges. The common way of valuing a stock share is by
calculating the price to Earnings Ratio.
(a) Par value – Value which was fix up by the companies at the time of issue the shares to
the public for subscription.
6
(b) Market Value- Value quoted in stock exchange.
However, when the share is not listed in any Stock exchange, the market value must be
ascertained. Such calculation of value of shares is discussed in this chapter.
The various circumstances Warranting valuation of shares are:
(i) When a Block of shares are purchased or sold. (For the purpose of Investment)
(ii) When one class of shares are converted into another class. (Normally it happened when
convertible preference shares are issued by the companies. In this process preference
shareholders are getting Equity shares in future.)
(iii) When Amalgamation and absorption of companies are taken place. (This procedure is
common at the time of Business purchase to settle the purchase consideration price as
per negotiation)
(iv) When shares are to be sold in the absence of stock market. (To purchased or sold the
Private companies shares)
(v) When a companies in Nationalized.
(vi) Shares are to be provided as a security for loans and advances. (Against the security the
company is taken loan from the credit financial Institution).
(vii) When the assets of Finance or Investment Companies are to be valued.
• Factors to be considered while valuing the Shares
The value of shares of a company is influenced by many factors. The following are some of the
important factors that are to be taken into consideration, while valuing the shares of a company:
1. The nature of business of the company.
2. The stability of earnings of the company.
3. The earning capacity of the company.
4. The capacity of management of the company.
5. The demand for and the supply of shares of the company.
6. The economic and political conditions in the country.
7. The value of goodwill of the company.
8. The progress of the company.
9. The nature of competition.
7
1.1.2 METHODS OF VALUATION OF SHARES
The various methods of valuation of shares can be broadly classified into three types. They are:
1.1.2.1 Net Asset Method or Intrinsic Value Method
1.1.2.2 Yield Method
1.1.2.3 Earning Capacity Method.
1.1.2.1 NET ASSETS METHOD OR INTRINSIC VALUE METHOD
Under this method, the value of shares is determined by adding the market values of all assets
including unrecorded assets, Goodwill, and Investments and deducting from that, the total
liabilities payable to outsiders i.e., Secured Loans, unsecured loans and current liabilities. The
amount so arrived is called net value of assets available to shareholders. From the value of net
assets available to shareholders, the total paid up Preference Share Capital and arrears of
preference dividend, if any, must be deducted. The resulting balance is the net value of assets
available for Equity Shareholders. The intrinsic value of each Equity Share is calculated by dividing
the net assets available for Equity Shareholders by number of Equity Shares.
The Intrinsic value of each Equity Share can be calculated as follows:
Calculation of Intrinsic value per Share
Amt Amt
Particulars (₹) (₹)
Market value of Assets:
Goodwill xxx
Land & Buildings xxx
Plant & Machinery xxx
Furniture xxx
Patents & Trade Marks xxx
Motor vehicles xxx
Investments xxx
Cash in hand xxx
Cash at Bank xxx
Sundry debtors xxx
Bills receivable xxx
Stock in Trade xxx
Prepaid Expenses etc. xxx
xxx
Less: Total liabilities:
Debentures xxx
Mortgage loans xxx
Unsecured loan xxx
Fixed deposits from public xxx
8
Sundry Creditors xxx
Bills payable xxx
Bank overdraft xxx
Unclaimed dividend Provision for taxation xxx
Proposed dividend xxx
Employees Provident Fund xxx
Workmen's Savings Bank Account xxx
Depreciation Fund etc. xxx xxx
Net value of Assets available to shareholders xxx
Less: Amounts payable to

Preference Shareholders:
(a) Arrears of preference dividend xxx
(b) Preference Share Capital xxx xxx
Net value of Assets available for Equity Shareholders xxx
𝑁𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

Intrinsic value of equity share = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
Key points
1) The assets must be considered at their MARKET VALUES at the time of valuation, but not at
book values.
2) When there are both fully paid and partly paid shares, the following procedure must be adopted
in calculating their market values.
Illustration :1 Following is the balance sheet of Mahendra Co. Ltd as on 31.3.2023
Liabilities Amt (₹) Assets Amt(₹)
Share Capital: Fixed Assets 4,00,000
1,000, 8% Preference Shares of
100 each 1,00,000 Current Assets 2,50,000
30,000 Equity Shares of 10 each 3,00,000 Preliminary Expenses 20,000
Discount on Issue
Debenture Redemption Fund 50,000 Debentures 5,000
6% Debentures 1,00,000 Profit & Loss Account 45,000
Depreciation Fund 1,00,000
Sundry Creditors 70,000
7,20,000 7,20,000
Calculate the value of the Equity Share under net assets method after considering the following
information:
1. Debenture interest is due for 1 year.
2. Current assets include Book Debts of which ₹12,000 which were doubtful for which no
provision has been made.
9
Solution:
Calculation of intrinsic value per share Amt (₹) Amt (₹)
Market values of Assets:
Fixed Asset 4,00,000
Current Asset (2,50,000 - 12,000) 2,38,000 6,38,000
Less: Total Liabilities:
6% Debentures 1,00,000
Depreciation Fund 1,00,000
Interest on debentures due 6,000 (2,76,000)
Net Assets available for Shareholders 3,62,000
Less: Preference Share Capital (1,00,000)
Net Assets available for Equity
Shareholders 2,62,000
𝑵𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒂𝒔𝒔𝒆𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔

Intrinsic value of equity share =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔
2,62,000
= 30,000
= ₹8.73 per share
Key Points
1. Preliminary Expenses, Discount on Debentures and Profit and Loss Account (loss) are fictitious
assets and are not realizable assets. So, they should not be taken into account, while calculating
the market values of all assets.
2. Debenture Redemption Fund is an accumulated profit and depreciation fund is a liability.
3. When depreciation fund or accumulated depreciation is given in the problem, it indicates that
fixed assets are shown in the books at its original cost. Hence, while calculating net assets
available to equity shareholders; Depreciation Fund must be deducted. However, when market
value of assets is given, depreciation fund need not be deducted.
Illustration :2 (Intrinsic Value Method)
Following is the Balance Sheet of McGrath Ltd. as on 31st March 2022:
Liabilities ₹ Assets ₹
Capital: Fixed Assets:
3,000 Shares of 100 each 3,00,000 Land & Buildings 1,50,000
General Reserve 50,000 Machinery 1,00,000
Investments at Cost (Market
Profit and Loss Account 25,000 value of ₹40,000) 45,000
Creditors 40,000 Debtors 1,00,000
10
Provision for Taxation 20,000 Stock Cash 40,000
Provident Fund 10,000 10,000
4,45,000 4,45,000
Additional Information:
(a) Goodwill is taken at ₹50,000.
(b) Depreciate Machinery @ 10% and increase Land and Buildings to ₹1,80,000.
(c) Provide 8% towards bad debts.
(d) 20% is the normal rate of dividend declared by similar type of business on their paid capital,
however the company could declare only 18% dividend for up the current year.
Calculate the intrinsic value of shares of the Company.
Calculation of intrinsic value per share Amt (₹) Amt (₹)
Market values of Assets:
Goodwill 50,000
Land & Buildings 1,80,000
Machinery ( 1,00,000- 10,000) 90,000
Investment 40,000
Debtors ( 1,00,000-8,000) 92,000
Stock 40,000
Cash 10,000 5,02,000
Provision for Taxation 20,000
Provident Fund 10,000
(70,000)
Net Assets available for Shareholders 4,32,000

Less: Preference Share Capital NIL
Net Assets available for Equity
Shareholders 4,32,000
𝑵𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒂𝒔𝒔𝒆𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔

Intrinsic value of equity share =
4,32,000
= 3,000
= ₹144. per share
1.1.2.2 Yield Method:
This method, assumes that the company would continue to exist and would not dispose of its
Assets. The market values of assets and liabilities are not taken into account for calculation of the
value of the shares. Under this method, the profits available for equity dividend are taken into
11
account while calculating the value of each equity share.
The following steps are to be taken into account while calculating the value of each Equity Share
Step 1: Calculate the average profits of the company on the basis of the available data.
Step 2: Calculate the profits available for dividends after deducting provision for tax and various
appropriations towards reserves.
Step 3: Calculate the profits available for equity dividends by deducting the dividends payable to
preference shareholders.
Step 4: Calculate the Capitalized profit by using the formula.
𝑷𝒓𝒐𝒇𝒊𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔
Capitalized profits = 𝑿 𝟏𝟎𝟎
𝑵𝒐𝒓𝒎𝒂𝒍 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏
Step 5: Calculate the market value or yield value of each Equity Share by using the formula
𝑪𝒂𝒑𝒊𝒕𝒂𝒍𝒊𝒔𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕𝒔
Market value per share =
Illustration :3 From the following information, calculate the value of an equity share under yield
method.
(1) The paid-up share capital of a company consists of 1000, 15% preference shares of ₹100 each
and 20,000 equity shares of ₹10 each.
(2) The average annual profit of the company, after providing for depreciation and taxation
amounted to ₹75,000. It is considered necessary to transfer ₹10,000 to General Reserve before
declaring dividend.
(3) The normal return expected by investors on equity shares from this type of business carried
on by the company is 10%.
Solution:
Step 1. Calculation of Average Profits
₹
Average annual profits 75,000
Step 2 & 3. Calculation of profits available for dividends to equity
shareholders
₹
Average profits of the company (after depreciation and Tax) 75,000
Less: Transfer to General Reserve Profits available for dividend 10,000
65,000
Less: Preferential dividend (15% of ₹1,00,000) 15,000
Profits available for equity shareholders 50,000
Step 4. Calculation of Capitalised Profits
𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
Capitalised profits = 𝑋 100
𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛
50,000
= 𝑋 100
10
12
= ₹5,00,000
Step 5. Calculation of Market Value per Share
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
Market value per share =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
5,00,000
=
20,000
= ₹25 per share
Q) Following are the particulars of XYZ Limited:

₹
Equity Shares of 10 each 4,00,000
Current Liabilities 1,30,000
Current Assets 2,00,000
Fixed Assets 5,50,000
Goodwill 50,000
The profits for the last three years were ₹51,600, ₹52,000 and ₹51,650 respectively. 20% is
transferred to reserve. Normal rate of return is 10%. Compute the value of Shares under:
1. Net assets method
2. Yield method
1. Net Asset Method
Calculation of Intrinsic value per share
Particulars ₹ ₹
Market value of Assets:
Fixed Assets 5,50,000
Current Assets 2,00,000
Goodwill 50,000 8,00,000
Current Liabilities 1,30,000 2,30,000
Net Assets available for Equity Shareholders 5,70,000
𝑁𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠

Intrinsic value per equity share =
5,70,000
=
40,000
= ₹14.25 per share
Yield Method
a) Calculation of Average profits
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
Average profits =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
51,600+52,000+51,600
=
3
13
1,55,250
=
3
= ₹51,750
b) Calculation of profits available for Dividends to Equity Shareholders
Particulars Amt (₹)

Average profits of the company 51,750
Less: Transferred to reserve (51,750 x 20%) 10.350
Profits available for Equity dividend 41,400
c) Calculation of Capitalised Profits

𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
Capitalised profits = 𝑋 100
𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒
41,400
= 𝑋 100
10
= ₹4,14,000
d) Calculation of Market value per share
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
Market price per share =
4,14,000
=
40,000
= ₹10.35
3. EARNING CAPACITY METHOD

Sometimes, the rate of dividend declared by a company is much less than the rate of earnings of
the company because of writing off of accumulated losses and also retention of profits. The
earning capacity method is an improvement over the yield method and it gives the proper value of
Equity Shares.
Under this method, the following steps are to be followed for calculating the market value of
shares.
Step 1: Calculate the rate of earnings of the company by using the formula.
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒑𝒓𝒐𝒇𝒊𝒕𝒔
Rate of earnings = 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅 𝑿 𝟏𝟎𝟎
Step 2: Calculation of market value per share

The market value per share can be calculated by using the formulae.
𝑹𝒂𝒕𝒆 𝒐𝒇 𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔
The market value per share = 𝑵𝒐𝒓𝒎𝒂𝒍 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏 𝑿 𝑷𝒂𝒊𝒅 𝒖𝒑 𝒗𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
(1) Underwriting of Shares

INTRODUCTION
14
A public company cannot make the first allotment of shares unless it gets the minimum
subscription from the public. In order to get minimum subscription from the public, a public
company, generally enters into an underwriting agreement with one or more underwriters.
Meaning of Underwriting
Underwriting is an agreement entered into by a company with one or more persons, called
underwriter or underwriters, who undertake to take up the whole or a certain portion of the
unsubscribed shares or debentures of a company for a certain remuneration called underwriting
commission.
Meaning of Underwriters
Underwriters are those who underwrite the shares or debentures issued by public companies.
They may be individuals or institutions like banks, specialized financial institutions, firms and
joint stock companies.
Underwriting Commission
The underwriters are entitled to some consideration for the risk they undertake in underwriting
the shares or debentures of a public company. The consideration payable to the underwriters by a
public company for underwriting the shares or debentures is called underwriting commission.
Maximum limit of Underwriting Commission
For the services rendered by the underwriters, they are entitled to a maximum commission of 5%
of the issue price of the shares and 2% of the issue price of the debentures. No underwriting
commission is payable to any one on shares and debentures not offered to the public.
Advantages of Underwriting
Underwriting of shares and debentures has several advantages. The important advantages of
underwriting are:
1. As underwriters guarantee the sale of shares and debentures, subscription of capital of the
company becomes certain.
2. When there is an underwriting arrangement, a company is relieved from the trouble of raising
the required capital.
3. When there is an underwriting arrangement, a company can be sure of getting the required
capital within a specified period of time.
15
4. When there is an underwriting arrangement, a company need not bother about money market
conditions.
5. When there is an underwriting arrangement, the underwriters provide expert advice to the
company as regards the issue of shares and debentures.
ACCOUNTING ENTRIES
The following are the entries to be passed when the shares are undersubscribed by the public, for
which the underwriter is liable to subscribe for:
1. When shares or debentures are issued at par:
Underwriter's A/C Dr.
To Share Capital / Debentures A/C
[With the nominal value of shares or debentures allotted to underwriter).
2. When shares or debentures are issued at a premium:
To Share Premium / Debenture Premium A/C
3. When shares or debentures are issued at a discount:
Discount on issue of Shares/Discount on Issue of Deb. A/C Dr.
4. When underwriting commission becomes due to the underwriter:
Commission on Issue of Shares A/C Dr.
Commission on Issue of Debentures A/C Dr.
To Underwriter's A/C
5. Now, an entry has to be passed for the balance due from the underwriter
to the company, which will be received in cash:
Bank A/C Dr.
To Underwriter's A/C
Note: If the balance is due from the company to the underwriter, the above entry will be reversed.
Shares may also be issued by the company to the underwriter for the balance.
16
Example: 1 A Company issues 10,000 equity shares of ₹ 100 each at par 500 debentures of
₹.1,000 each at ₹. 950. The whole of the issue has been underwritten by Jones & Co. for a
commission of 4% on shares and 2% on debentures (Nominal value). The whole of the shares
were applied for, but applications for 400 debentures were received. All the applications were
accepted. Give the journal entries to record the above transactions, assuming that all amounts due
have been received.
1.2.4. Marked and Unmarked Applications

When the issue of shares or debentures of a company is underwritten by two or more
underwriters, to determine the liability of each underwriter, it becomes necessary that the
applications for shares or debentures should bear the official stamp of each underwriter.
The applications received by the company bearing the official stamp of the individual underwriter
or the respective underwriters are called marked applications, and applications received by the
company directly from the public which do not bear the official stamp of the underwriter or
underwriters are called unmarked applications.
CALCULATION OF UNDERWRITERS' LIABILITY
Liability of underwriters refer to the number of shares, the underwriters must subscribe, on
account of underwriting agreement. The procedure of ascertaining underwriters' liability differs
from one situation to another. The following chart gives the various situations under which
underwriters' liability can be calculated.
Statement showing Underwriter's Liability
PARTICULARS NUMBER OF SHARES
Gross Liability XXX
Less Unmarked application (xx)
Total XXX
Less Marked application (xx)
Total XXX
Add: Firm Underwriting xx
Net Liability of an Underwriter XXX
Key Points
17
1. When the shares of the company are fully or over-subscribed by the public, then, the
underwriters have no liability, although their individual marked forms are less than their gross
liability.
2. When the number of underwriters is more than one, unmarked applications can be apportioned
on any of the two bases given below:
(a) Gross liability basis: i.e., apportioning unmarked applications in the ratio of their original
underwriting proportion.
(b) Remaining liability basis: i.e., in the ratio of remaining liabilities, ascertained after deducting
marked applications from gross liability.
Note: In the absence of specific instruction in the problem, students are advised to follow Gross
Liability Ratio, for apportioning unmarked applications.
3. Surplus, if any, of any underwriter must be adjusted against other underwriter's liability, in
their 'Gross Liability' Ratio.
4. When there is no clear-cut information about treatment of firm underwriting, they must be
treated on par with unmarked applications.
5. When firm underwriting is not included in total subscription (Le., when subscription is
excluding firm underwriting) then, it must be considered as 'on par with unmarked applications."
6. When the problem states that relief has to be provided for firm applications, they must be
treated as 'marked applications'.
7. When there is firm underwriting by the underwriters, the calculation of total liability of
underwriters depends on, whether the firm underwriting is (a) on par with Marked applications
or (b) on par with unmarked applications.
(a) When firm underwriting (included in total subscription) is treated on par with unmarked
application, the format for calculating total liability for each underwriter will be as follows:
Statement showing Underwriter's Liability Underwriters
PARTICULARS A B C Total
Gross Liability XXX XXX XXX XXX
Less: Unmarked application (Total applications
received -Total Marked application) (xx) (xx) (xx) (xx)
Total XXX XXX XXX XXX
Less Marked application (xx) (xx) (xx) (xx)
Net Liability of an Underwriter XXX XXX XXX XXX
18
Add: Firm Underwriting xx xx xx xx
Total Liability of an Underwriter XXX XXX XXX XXX
Note:
(a) when the total subscription is “excluding firm underwriting” , the above given format itself
is applicable.
(b) when firm underwriting (included in total subscription) is treated “ on par with Marked
application”, the format for calculating total liability, for each underwriter will be as
follows:
Statement showing Underwriter's Liability Underwriters

PARTICULARS A B C Total
Gross Liability XXX XXX XXX XXX
Less: Unmarked application ( Total applications
received less Total Marked application plus firm
underwriting ) (xx) (xx) (xx) (xx)
Total XXX XXX XXX XXX
Less Marked application plus firm underwriting (xx) (xx) (xx) (xx)
Net Liability of an Underwriter XXX XXX XXX XXX
Add: Firm Underwriting xx xx xx xx
Total Liability of an Underwriter XXX XXX XXX XXX
Types of Underwriting
Underwriting contracts can be broadly classified into two types namely:
1. On the basis of number of shares or debentures underwritten.
2. On the basis of liability of the underwriters.
1. On the basis of number of shares or debentures underwritten by the underwriters,
underwriting contracts may be classified into two types. They are:
(a) Complete underwriting.
(b) Partial underwriting.
Complete Underwriting
A complete underwriting is one under which the whole of the issue of shares or debentures of a
company is underwritten by one or more underwriters.
EXAMPLE-1 Complete Underwriting
A company that was incorporated on 1 January 2019 issued a prospectus inviting applications for
19
500,000 equity shares at ₹.10 each per share. The whole issue was fully underwritten by four
individuals, as shown in the following:
A: 200,000 shares B: 150,000 shares C: 100,000 shares D: 50,000 shares
Applications were received for 450,000 shares, of which the marked applications were as follows:
A: 220,000 shares B: 90,000 shares C: 110,000 shares D: 10,000 shares Calculate the liabilities of
individual underwriters.
Note: When the entire issue is underwritten by a single underwriter, it is not necessary to
distinguish between marked and unmarked applications. In this case, the liability for the
underwriter would be 50,000 shares.
(b) Partial underwriting.
A partial underwriting is one under which a part of the issue of shares or debentures of a company
is underwritten by one or more underwriters. Under partial underwriting along with the
underwriters some numbers of shares are issued by the companies for public subscription. The
unmark applications are considered as the mark applications of the companies.
EXAMPLE 2: PARTIAL UNDERWRITING
A company issued 100,000 shares valued at ₹.100 per share. The shares were underwritten as
follows:
X: 30,000 shares
Y: 50,000 shares
The public applied for 70,000 shares.
Determine the liability of X, Y, and the company.
NOTES: Marked applications are not given in the problem. Therefore, applications are credited to
underwriters including the company, based on gross liability. The company itself should be
20
treated as an underwriter for 20,000 shares.
Alternatively, the calculations can be made as follows:
2. On the basis of liability of the underwriters

On the basis of liability of the underwriters, underwriting contracts may be classified into two
types. They are:
(a) Pure or open underwriting.
(b) Firm underwriting.
Pure Underwriting
A pure underwriting is an arrangement under which an underwriter or underwriters agree to take
up the shares or debentures of a company only when the shares or debentures underwritten by
him or them is not fully subscribed by the public.
Firm Underwriting
A firm underwriting is an arrangement under which an underwriter or underwriters make
definite commitment to take up certain shares or debentures of a company, irrespective of the
number of shares or debentures subscribed by the public.
Features of Firm Underwriting
21
1. When the issue of shares or debentures are fully subscribed or over-subscribed, the
underwriters are required to take up the shares or debentures which they agreed to take up under
the firm
2. The underwriting agreement. The underwriter or underwriters get priority over the general
public in the allotment of shares, if there is over subscription.
EXAMPLE 3: FIRM UNDERWRITING
Wipro Limited issued 10,000 shares valued at ₹. 100 each. The entire issue was underwritten as
follows:
A: 50% B: 30% C: 20%
In addition, there was firm underwriting as follows:
A: 1,000 shares B: 750 shares C: 500 shares
The total subscription, including firm underwriting, was 8,000 shares. The subscription included
the following marked applications:
A: 1,500 shares B: 2,000 shares C: 750 shares
Calculate the liability of the underwriters.
Illustration: 1
The following underwriting takes place:
A: 5,000 shares B: 3,000 shares C: 2,000 shares
In addition, there is firm underwriting:
A: 1,000 shares B: 500 shares C: 1,500 shares
22
The shares issued amount to 10,000 shares. The total subscription, including firm underwriting,
was 8,500 shares, and the forms included the following marked forms:
Calculate the allocation of liability of the underwriters.
Illustration :2
A company issued a prospectus inviting applications for 20,000 equity shares valued at ₹. 100 per
share. The whole issue was fully underwritten by three underwriters as follows:
Applications were received for 16,000 shares, of which marked applications were as follows:
Show how the liability of the underwriting should be completed.
1.3 TERMINAL QUESTIONS

1. The following is the Balance Sheet of Bangalore Trading Co. Ltd.
Balance Sheet as at 31.3.2022
2,000 6% preference shares of
₹100 each 2,00,000 Fixed Assets 3,00,000
30,000 equity shares of ₹10 each 3,00,000 Current Assets 3,00,000
23
Liabilities 1,00,000
6,00,000 6,00,000
The Market value of Fixed assets is 10% more than book value. The market value of current assets
is 5% less than book value. There is an unrecorded liability of 5,000. Assume preference shares
have no priority either as to repayment of capital or dividend. You are required to value the equity
share.
2) Briefly explain the various methods of valuing goodwill.

Following is the Balance Sheet of Surya Ltd., as on 31-3-2022
Liabilities Assets
Equity share capital (₹10
each) 16,00,000 Goodwill 2,00,000
Other Fixed
Reserves and Surplus 3,00,000 Assets 24,00,000
Current
10% Debentures 4,00,000 Assets 4,00,000
Creditors 4,00,000
Provision for tax 3,00,000
30,00,000 30,00,000
On the above date, an independent valuation of goodwill and other fixed assets was made at
₹3,00,000 and ₹30,00,000 respectively. Current assets include Debtors of ₹2,00,000 out of which
15% is bad. The net profits of the company for the past 3 years were ₹2,40,000, ₹2,80,000 and
₹3,05,000 of which 20% was placed to reserve. The normal rate of return is 10%. Calculate the
value of share by net assets method and yield method.
3) The following particulars are available in relation to X Ltd.
(i) Capital, 450, 6% preference shares of 100 each fully paid and 4,500 equity shares of ₹10 each
fully paid.
(ii) External liabilities ₹7,500.
(iii) Reserves and Surplus ₹3,500.
(iv) The average expected profit (after taxation) earned by the Company ₹8,500.
(v) The normal profit earned on the Market value of Equity Shares (fully paid) of the same type of
companies is 9%.
(vi) 10% of the profits after tax each year is transferred to reserves.
24
Calculate the intrinsic value per Equity Share and the value per Equity share according to yield
basis. Assume that out of total assets, assets worth ₹350 are fictitious.
4) From the information given below and the Balance Sheet of A Ltd. on 31st March 2023, find the
value of its Equity Shares by intrinsic value method and yield method.
(a) Company's prospects for 2022-23 are good;
(b) Buildings are now worth ₹3,50,000;
(c) Profits for the last three years have shown an annual increase of ₹50,000. The annual transfer
to reserve is 25% of net profit;
(d) Preferential Shares have preference as to Capital and Dividend;
(e) Normal rate of return expected is 15%.
Balance Sheet as at 31-3-2023
1,000, 8% Preferential Shares of
₹100 each fully paid 1,00,000 Buildings 70,000
4,000 Equity Shares of ₹100 each
fully paid 4,00,000 Furniture 3,000
Reserves 1,50,000 Stock (Market value) 4,50,000
Investment (at cost)
Profit & Loss A/c: (Face value 4,00,000) 3,35,000
Balance on 1.4.2021 80,000 Debtors 2,80,000
Add: Profit for 2021-22 (before
transfer to reserve) 4,30,000 Bank 60,000
Creditors 48,000 Preliminary Expenses 10,000
12,08,000 12,08,000
5) Balance Sheet of Diamond Ltd. As on 31.12.2022

Share Capital: Land & Buildings 1,10,000
25
Issues, Subscribed and paid up: 2,000
shares of ₹100 each 2,00,000 Plant & Machinery 1,30,000
General Reserve 40,000 Patents & Trade Marks 20,000
Profit & Loss Account 32,000 Stock 48,000
Sundry Creditors 1,28,000 Debtors 88,000
Income tax reserve 60,000 Bank 52,000
Preliminary expenses 12,000
4,60,000 4,60,000
The expert valuer valued the land and buildings at ₹2,40,000, Goodwill at ₹1,60,000 and plant and
machinery at ₹1,20,000. Out of the total debtors, it is found that debtors of ₹8,000 are bad. The
profits of the company have been as follows:
2019-20 ₹90,000
2020-21 ₹80,000
2021-22 ₹1,06,000
The company follows the practice of transferring 25% of profits to general reserve. Similar type of
companies each at 10% of the value of their shares. Ascertain the value of shares of the company
under:
(i) Intrinsic value method;
(ii) Yield value method;
(iii) Fair value method.
6) On March 31, 2022, the Balance Sheet of a limited company reveals the following position:
Issued capital in 10
shares 4,00,000 Fixed assets 5,00,000
Reserves 90,000 Current assets 2,00,000
Profit & Loss A/c 20,000 Goodwill 40,000
26
Current liabilities 1,30,000
7,40,000 7,40,000
On March 31, 2022, the fixed assets were independently valued at ₹3,50,000 and the goodwill at
₹50,000. The Net Profits for the three years were: 2019-20- ₹51,600; 2020-21- ₹52,000; 2021-22 -
₹51,650 of which 20% was placed under reserve, this proportion being considered reasonable in
the industry in which the company is engaged and where a fair investment return may be taken at
10%. Compute the value of the company's shares by (a) the Net Assets method, (b) the Yield Value
method and (c) the Earning Capacity method
7) A Co. Ltd. has Authorized Capital of Rs. 50,00,000 divided into 1,00,000 Equity Shares of Rs. 50
each. The Company issued for subscription 50,000 Shares at a premium of Rs. 10 each. The entire
issue was underwritten as follows:
X-30,000 Shares (Firm underwriting -5,000 Shares)
Y-15,000 Shares (Firm underwriting -2,000 Shares)
Z- 5,000 Shares (Firm underwriting -1,000 Shares)
Out of the total issue 45,000 Shares including firm underwriting were subscribed. The
following were the marked forms:
X-16,000 Shares: Y-10,000 Shares: Z-4,000 Shares.
Calculate the liability of each underwriter assuming (a) shares underwritten are treated as
marked application. (b) Shares underwritten are treated as unmarked applications.
8) Sam Ltd. invited applications from public for 1,00,000 equity shares of Rs. 10 each at a premium
of Rs. 5 per share. The entire issue was underwritten by the underwriters A, B, C and D to the
extent of 30%, 30%, 20% and 20% respectively with the provision of firm underwriting of 3,000,
2,000, 1,000 and 1000 shares respectively. The Underwriters were entitled to the maximum
commission permitted by law.
The Company received applications for 70,000 shares from public out of which applications for
19,000, 10,000, 21,000 and 8,000 shares were marked in favour of A, B, C, and D respectively.
(A) Calculate the Liability of each one of the underwriters treating
27
(i) firm underwriting shares on par with marked applications
(ii) firm underwriting shares on par with unmarked applications
(B) Also ascertain the underwriting commission payable to the different underwriters.
9) M/s Cyber-tech Ltd. issued 1,00,000 shares for public subscription and these were
underwritten by A, B and C. Applications were received for 80,000 shares and of these application
for 16,000 shares had the stamp of A, those for 20,000 shares had the stamp of B and those for
24,000 shares had the stamp of C. The remaining applications did not bear any stamp.
On the basis of above information, workout the liability of the individual underwriters.
10) Super India Ltd. issued 75,000 equity shares. The whole of the issue was underwritten as
follows:
A-50%; B-25%; and C-25%.
Applications for 60,000 shares were received in all, out of which applications for 15,000 shares
had the stamp A, those for 7,500 shares that of B and those for 15,000 shares that of C. The
remaining applications for 22,500 shares did not bear any stamp. Determine the liability of the
underwriters.
11) Sardar Limited issued to public 1,50,000 equity shares of Rs. 100 each at par. Rs. 60 per share
was payable along with application and the balance on allotment. The issue was underwritten
equally by Ali, Bali and Charlie for a commission of 5 per cent. Applications for 1,40,000 shares
were received as per details below:
Firm Marked
Underwriter Application Application Total
Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked applications 7,000
Total 1,40,000
It was agreed to credit the unmarked applications equally to Ali and Charlie. Sardar Limited
accordingly made the allotment and received the amounts due from the public. The underwriters
28
settled their accounts.
You are required to:
Prepare a statement showing the liability of the underwriters
Reference Books
• Jain and Narang, Corporate Accounting, 2019
• 5. Mukherjee & Hanif, Amitabh Mukherjee Mohammed Hanif Tata, Corporate Accounting,
McGraw-Hill Education, 2
29
MODULE: 2 MERGER AND ACQUISITION OF SHARES
Structure
2.1 Introduction
2.2 Meaning
2.3 Types of Amalgamation
2.4 Amalgamation in the Nature of Merger
2.5 Amalgamation in the Nature of Purchase
2.6 Purchase consideration
2.6.1 Net Payments method
2.6.2 Net assets method
2.6.3 Exchange method
2.7 Treatment of fractional shares
2.8 Accounting treatment
Difference between the Two Methods of Accounting
2.9 Summary
2.10 Terminal questions
Learning Objectives:
• To understand the meaning and types of amalgamation

• To be able to calculate the purchase consideration under net assets
method, net paymentsmethod and share exchange method
• To study the accounting treatment in the books of the vendor company
and the purchasingcompany.
2.1 Introduction:
The concept of amalgamation is very popular now as more companies carrying

on similar businesses join together to consolidate their market share and reap
economies of scale. This chapter explains the accounting treatment followed
during amalgamation.
2.2 Meaning:
In general sense the Amalgamation of companies refers to the formation of new company to take
over the business of two or more existing companies, The transferor Company (Vendor) being
wound-up in the process for instance if two companies ‘company A’ and ‘company Windup their
businesses and form a new company ( for example ‘C’ company is formed) to take over their
existing business, the process is called Amalgamation of companies. In other words Amalgamation
refers to two or more companies are liquidated; one new company is constituted.
The main features ofamalgamation are
2.2.1 Liquidation of two or more companies and
2.2.2 Formation of a new company.
The two companies involved are – Transferor Company and Transferee
30
Company. The companies that liquidate are referred to as the transferor
companies (or vendor companies) and
the new company formed is referred to as the transferee company.
The Institute of Chartered Accountants of India (ICAI) has issued Accounting

Standard – (AS- 14) for amalgamation. This standard is applicable for
amalgamation and absorption of companies. Reconstruction means reorganizing
the capital structure of the company. There are two types of reconstruction –
internal and external. Intern
al reconstruction is carried out by internally reorganizing the company without
resorting to liquidation. In the case of external reconstruction, a new company is
formed to take over the business of an old company.
In other words –
Amalgamation refers to two or more companies being liquidated and a
new company beingformed to take over the business of the two companies.
Absorption refers to the purchase of a company (which will be
liquidated) by an existingcompany. No new company will be formed.
External reconstruction refers to a new company being formed to carry on
the business of anold company which will be liquidated.
The accounting treatment to be followed for amalgamation, absorption and

external reconstruction are the same even though they are conceptually
different. In this chapter the concept of amalgamation will be studied in detail.
2.3 Types of amalgamation:
AS -14 has classified amalgamation under the following two types:

1. Amalgamation in the nature of merger and
2. Amalgamation in the nature of purchase.
Note: In both cases, Amalgamation includes Absorption and External Reconstruction.
2.3.1 Amalgamation in the Nature of Merger:

Amalgamation in the nature of merger is an amalgamation which satisfies the
followingconditions:
• All the assets and liabilities of the transferor company, after amalgamation
becomes, the assets and liabilities of the transferee company.
• Shareholders holding not less than 90% of the face value of the equity shares of the
2transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
• The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
31
company is discharged by the transferee company wholly by the issue of equity
shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
• The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
• No adjustment is intended to be made to the book values of the assets and

liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
2.3.2 Amalgamation in the Nature of Purchase:

Amalgamation in the nature of purchase is an amalgamation which does not
satisfy one or more of the above conditions. That is, an amalgamation can be
considered as amalgamation in the nature of purchase when-
2.3.2.1 All the assets and the liabilities of the transferor
company does not become the assets and liabilities of
the transferee company after amalgamation; or
2.3.2.2 Shareholders holding not less than 90% of the face
value of the equity shares of the transferor company
do not become equity shareholders of the transferee
company by virtue of the amalgamation; or
2.3.2.3 The consideration for amalgamation is given by
transferee company in the form of cash, debentures
etc., with or without equity shares of the transferee
company; or
2.3.2.4 The transferee company is not intending to carry on
the business of the transferor company, after
amalgamation; or
2.3.2.5 The assets and liabilities of the transferor company
are incorporated in the books of transferee company
at adjusted values.
2.4 Purchase Consideration:
Purchase consideration refers to the cash and non-cash payments made by the
purchasing company to the shareholders of the selling company/companies.
Non-cash items include shares, debentures and other securities like debentures
issued by the transferee company. In other words it is the payment made by
the new company for taking over the assets and liabilities of the vendor
company.
Para 3(g) of AS-14 defines the term Purchase Consideration as the “aggregate of
the shares and other securities issued and the payment made in the form of cash
or other assets by the transferee company to the shareholders of the transferor
32
company”.
Purchase consideration can be computed under the following three methods:

1. Net payments method
2. Net assets method and
3. Exchange method.
2.4.1 Net Payments method:

Under this method, purchase consideration is calculated as the total of payments
made in the
form of shares, debentures, other securities and cash to the shareholders of the
vendor/transferor company. According to AS–14, purchase consideration
includes the amount paid to shareholders only – both equity and preference
shareholders. Payments made to debenture holders and creditors will not form a
part of the purchase consideration.
EXAMPLE: 1
Calculate Purchase Consideration from the following information.
a) Cash Payment of ₹. 50,000
b) Issue 80,000 equity shares of ₹. 10 each fully paid at ₹.15 per share
c) Issue of 50,000 Pref, shares of ₹. 10 each ₹.6 per share paid up
d) Issue of 30,000 debentures of ₹, 10 each at a discount of 10%.
Solution Under Net payment Method
Cash 50,000
80,000 equity shares of ₹. 10 each
fully paid at ₹.15 per share (80,000 x15) 1,20,000
50,000 Pref, shares of ₹. 10 each ₹.6 per share

(50,000X 6) 3,00,000
30,000 debentures of ₹, 10 each
( Issued at a discount of 10%. Ie 300,000x10%
= 30,000, 3,00,000-30,000) 2,70,000
-------------------
Purchase Consideration 18,20,000
--------------------
33
2.4.2 Net assets method:
In this method, purchase consideration will be the excess of assets over
liabilities. The purchasing company will take over assets and liabilities at certain
value (also known as agreed values/taken over values), which may or may not be
the balance sheet values. In other words, assets and liabilities will be considered
at the agreed values for calculating the purchase consideration.
EXAMPLE: 2 Calculate Purchase Consideration from the following information.
Purchase Consideration = Assets taken over (at ‘an agreed

values) – Liabilities taken over (at an agreed values)
Total Assets at Book value- ₹. 5,00,000
Assets are taken over at 10% less than the book value
Total Liabilities - 2,00,000
Liabilities not taken over ₹. 50,000
Liquidation expenses of ₹. 5,000 is to be borne by the Purchasing company.
Solution Under Net Assets Method.
Value of assets taken over (10% less than the B.V-
5,00,000 X 10%= 50,000, 5,00,000- 50,000) 4,50,000
Less: Value of Liabilities Taken over
(Total liability – Liability not taken over
2,00,000- 50,000) (1,50,000)
-------------------
2.4.2 Exchange method:

Under this method, the purchasing company allots its shares to the shareholders of
the vendor company on the basis of a certain ratio. This ratio is usually determined
based on the intrinsic value or market value of the shares.
34
Illustration 1 (Intrinsic Value)
Number of shares issued 10,000 shares of Rs.10 each. The net asset or intrinsic
value of shares of B Ltd. is Rs.13. Calculate purchase consideration payable by A
Ltd.
Solution:
2.5 Treatment of Fractional Shares:
In some cases while calculating the purchase consideration, the number of

shares to be allotted maybe as a fractional or decimal value. Since shares cannot
be allotted as a fraction, these shares will be aggregated by the purchasing
company. It will be sold in the market and individual shareholders will be
compensated. For example, if the purchasing company is to allot 1 share for
every 3 shares held and there are 10,000 shares in the vendor company, then the
number ofshares to be allotted will be as follows:
=
3,333.33
shares3
The company will allot 3,333 shares and the fractional share of 1/3 will be sold
in the market andcash will be paid to the shareholders.
2.6 Accounting Treatment:
There are two methods of accounting for amalgamation, viz.,

2.6.1 The pooling of interests methods; and
2.6.2 The purchase method.
The pooling of interest method is adopted for accounting only when the
“amalgamation is in the nature of merger” and, The Purchase Method is adopted
for accounting in case of “amalgamationin the nature of purchase.”
1. Under pooling of interests method, all assets, liabilities and reserves of the
transferor/vendor company will be recorded by the transferee company at
book values unless any adjustment is required due to different accounting
35
policies followed by these companies.
2. Under purchase method, assets and liabilities of the transferor company,
taken over, will be recorded in the books of Transferee Company at agreed
values. In this case, no reserves (other than statutory reserves) of the
transferor company will be recorded in the books of Transferee Company.
.6.1 Difference between the Two Methods of Accounting
Pooling of Interests Method Purchase Method
1. All assets and liabilities of 1. Only assets and liabilities taken
Transferor Company will be over by Transferee Company will
incorporated in the books of beincorporated in its books.
Transferee Company.
2. All reserves of Transferor Company 2. Other than Statutory Reserves (see
will be recorded in the books of below), no other reserves of the
Transferee Company. Transferor Company will be
recordedin the books of Transferee
Company.
3. The assets and liabilities of 3. The assets and liabilities of
Transferor Company will be recorded Transferor Company will be
in the books of Transferee Company recorded in the books of Transferee
at book values. Company at agreed values.
4. Any difference between purchase 4. Any difference between purchase
consideration and value of assets and consideration and value of assets and
liabilities taken over must be adjusted liabilities taken over must be treated
against general reserves. as goodwill or capital reserves, as the
case may be.
Statutory Reserve:
It refers to the reserves to be maintained as per the requirements of any law or legislation
only in case of Amalgamation in the nature of purchase (Purchase Method).
In the books of the vendor company, it should be treated like any other liability.
In the books of the purchasing company, statutory reserve must be transferred to
“Amalgamation Adjustment Account” and appears in the Balance Sheet. The following entry
should be passed toincorporate the reserve:
Amalgamation adjustment A/c Dr.
To Statutory Reserve A/c
It will appear in the balance sheet as follows:

36
Statutory Reserve will be recorded on the liabilities side under “Reserves & Surplus” and
Amalgamation Adjustment Account will be recorded on the asset side under
“Miscellaneous Expenses and losses”.
If the statutory reserve need not be maintained by the purchasing company, the above
entry will be reversed to eliminate the reserve. Acquisitions/Absorption:
2.7. Meaning of Absorption:-
Absorption refers to purchase of an existing company or companies by another

existingcompany. It is not governed by AS 14.
E.g. A Ltd acquires the business of B Ltd. Here A Ltd is purchasing company and B
Ltd isVendor Company.
Reasons for absorption:

1. To avoid cut-throat competition
2. To obtain economies of large scale production.
Differences between Absorption/ Acquisitions and Amalgamation/Mergers:-
Amalgamation Absorption
1. It is governed by AS 14 promulgated by 1. It is not governed by AS–14.
ICAI
2. Involves formation of a new company. 2. Does not involve formation of new company.
3. Liquidates two Or more existing 3. Liquidates only one existing company.

companies
Differences between Absorption and

Amalgamation:-Classification of Accounts:
The following table gives the list of items classified under various categories:
37
Trade Liabilities Accumulated Provision and Statutory
Liabilities Profits Accumulated Reserves
losses
1. Creditors 1. Trade Creditors 1. Profit and Loss 1. Provision for 1. Investments
or trade 2. Bills payable (Credit) Depreciation Allowance
creditor 3. Bank overdraft. 2. General Reserve or Reserve
4. Debentures 3. Reserve Fund Depreciation 2. Development
2. Bills 5. Loans 4. Revenue Reserve Fund Rebate
payable 6. Pension Fund 5. Debenture Sinking 2. Provision for Reserve
7. Provident Fund Fund or Doubtful 3. Workman
8. Super Debenture Debt Compensation
Annulation Redemption Fund 3. Provision for Fund
Fund 6. Capital Investments 4. Foreign
9. Workman Redemption 4. Profit and Project
Savings bank Reserve Loss Account Reserve
account 7. Shares forfeited (Debit) 5. Export Profit
10. Workman Account 5. Preliminary Reserve etc
Profit Sharing 8. Share Premium Expenses
Fund Account 6. Discount on
11. Provision for 9. Workman issue of
Taxation Compensation Shares and
12. Unclaimed Fund Debentures
dividend 10.Workman i.e., expenses
13. Outstanding Accident Fund or not yet
expenses Fatal Accident written off
11.Insurance Fund
12.Dividend
Equalization Fund
13. Dividend Rebate
Reserve
Steps involved in the accounting procedure of Amalgamation, Absorption

and ExternalReconstruction of Companies.
a. Calculation of purchase consideration
b. Ascertainment of discharge of purchase consideration
c. Closing the books of Vendor Company or transferor company
d. Passing opening entries in the books of purchasing company (i.e., Transferee Company).
Step 1. Calculation of purchase consideration

Step 2. Discharge of purchase consideration: After calculating the purchase
consideration, the way in which it will be discharged by the purchasing company
must be determined. The consideration can be settled by paying cash and allotting
shares (equity and preference shares).
38
Step 3. Closing the books of Transferor Company: The following journal entries are
to be passedunder the purchase method of accounting:
(i) For transfer of assets including cash at the balance

sheet value:Realisation A/c Dr.
To Individual asset A/c
(ii) For transfer of all liabilities including debentures and
statutory reserves:Individual liability A/c Dr.
To Realisation A/c
(iii) For purchase consideration due:

Purchasing company A/c Dr.
To Realisation a/c
(iv) For payment of realization expenses:

(1) If paid by the vendor company:
Realisation A/c Dr.
To Cash / Bank A/c
(2) If paid by the
purchasing
company:No
entry.
(v) For sale of assets not taken by the purchasing

company: Cash / Bank A/c Dr.
To Realisation a/c
(vi) For payment of liabilities not taken over by the

purchasing company:Realisation A/c Dr.
To Cash / Bank A/c
(vii) For preference share capital due:

(1) Payable at par:
Preference share capital A/c Dr.
To Preference shareholders a/c
(2) Payable at a higher value:
Preference share capital A/c Dr.Realisation A/c Dr.
To Preference shareholders a/c
(3) Payable at a lower value:
Preference share capital a/c Dr.
To Realisation A/c
To Preference shareholders A/c
(viii) For closing realization a/c:
39
(1) In case of profit:
Realisation A/c Dr.
To Equity shareholders a/c
(2) In case of loss:
Equity shareholders A/c Dr.
To Realisation A/c
(ix) For transfer of share capital, reserves and profits:

Equityshare capital A/c Dr.
Reserve A/c Dr.
P/L A/c Dr.
To Equity shareholders a/c.
(x) For transfer of preliminary expenses, underwriting commission, discount

on issue ofshares and debentures and P/L (loss) a/c:
Equity shareholders A/c Dr.
To preliminary expenses A/c
To underwriting commission a/c
To discount on issue of shares and
debentures A/c ToP/L a/c.
(xi) For receipt of purchase consideration:

Equity shares in purchasing company A/c Dr.
Preference shares in purchasing company A/c
Dr. Cash / Bank A/c Dr.
To purchasing company A/c
(xii) For final payment made to preference shareholders:

Preference shareholders A/c Dr.
To cash a/c
To shares/debentures in purchasing company a/c
(xiii) For final payment made to equity

shareholders: Equity shareholders A/c Dr.
To Equity shares in purchasing company
To Cash/ Bank A/c.
Step 4 Opening entries in the books of the purchasing company:
Pooling interest method Purchase method

1. For purchase consideration payable 1. For purchase consideration payable
Business purchase A/c Dr. Business purchase A/c Dr.
To Liquidator of purchasing co. a/c To Liquidator of purchasing co. a/c
40
2. For incorporation of assets, liabilities & 2. For incorporation of assets and
reserves: liabilities:
Individual assets A/c Dr. Individual assets a/c Dr (Revised values) Bank
General reserve (bf) A/c Dr. A/c Dr.
To creditors A/c Goodwill (bf) A/c Dr.
To bills payable A/c To Individual liabilities A/c (Revised values)
To reserves A/c To capital reserve (bf) A/c
To P/L A/c
To business purchase A/c To
general reserve (bf) A/c
3. For discharge of purchase 3. For discharge of purchase consideration:
consideration: Liquidator of purchasing co. A/c Dr. Discount
Liquidator of purchasing co. A/c Dr. on issue of securities A/c Dr.
Discount on issue of securities a/c Dr. To bank A/c
To bank A/c To equity share capital A/c
To equity share capital A/c To preference share capital A/c
To preference share capital A/c To debentures A/c
To debentures A/c To securities premium A/c
To securities premium A/c
4. For making payment to debentures 4. For making payment to debentures and other
and other liabilities: liabilities:
Debentures / liability A/c Dr. Debentures / liability A/c Dr.
Discount on issue of debentures A/c Dr. Discount on issue of debentures A/c Dr.
To debentures A/c To debentures a/c
To premium on issue of debentures To premium on issue of debentures A/c
A/c
5. Payment of realization expenses: 5. For payment of realization expenses:
Reserves A/c Dr. Goodwill / Capital reserve A/c Dr.
To cash A/c To cash A/c
6. For incurring formation expenses: 6. For incurring formation expenses:
Preliminary expenses a/c Dr. Preliminary expenses a/c Dr.
To cash A/c To cash A/c
7. For incorporation of statutory reserve:
Amalgamation adjustment a/c Dr
To Statutory reserve A/c
8. If statutory reserve need not be

maintained:
Statutory reserve A/c Dr.
To amalgamation adjustment a/c
Formation Expenses:
41
It is also known as preliminary expenses and are incurred at the time of incorporation.
After the liquidation of the old companies when the new company is formed it may
incur formation expenses.
Illustration for
Amalgamation
Illustration1. (Net assets method)
1. On 1 Jan 2014 A Ltd and B Ltd were amalgamated into C Ltd on the
basis of thefollowing balance sheet.
Equities and Liabilities A B
Shareholders fund Paid
up capital Reserves and 2,24,000 1,75,000
Surplus Export profit
reserve Reserves 5,000 3,000
P and L Account 8,000 12,000
Current Liabilities 11,000 4,000
Creditors
5,000 6,000
Total 2,53,000 2,00,000
Assets A B
Non-Current Assets 80,000 32,000

Goodwill 50,000 60,000
Buildings 41,000 10,000
Plant 42,000 33,000
Current Assets 23,000 40,000
Stock 17,000 25,000
Debtors
Cash
Total 2,53,000 2,00,000
Additional Information:
1. Export profit reserve to be maintained for 3 years in new company.
2. Provide 5% reserve for doubtful debts of both the companies.
3. Goodwill to be valued at 3 years purchase of last two years
average profits. Theprofits were:
42
A Ltd – 13,000 and 18,000
B Ltd – 4,000 and 6,000
4. The entire amount of P.C was discharged by allotment of equity shares in C Ltd.
Buildings 45,000
Plant 41,000
Stock 42,000
Debtors 21,850
Cash 17,000
Goodwill 46,500
2,13,350
Less: Liabilities Creditors
(5,000)
5. C Ltd agreed to take over Building at 10% less, remaining assets and
liabilities at book value.Journalize in books of A Ltd and B Ltd. Prepare
relevant ledger Accounts.
Purchase Consideration for A Ltd
In the books of A Ltd
Buildings 54,000
Plant 10,000
Stock 33,000
Debtors 38,000
Cash 25,000
Goodwill 15,000
1,75,000
Less: liabilities
Creditors 6,000
Journal Entries in the books of A Ltd
43
SL NO PARTICULARS LF DEBIT CREDIT
1 Realization A/c Dr 2,48,000

To Buildings 50,000
To Plant 41,000
To stock 42,000
To Debtors 23,000
To Gash 12,000
To Goodwill 80,000
[Being assets transferred to realization at
book value]
2 Creditors A/c Dr 5,000
To Realization A/c 5,000
[Being liabilities transferred to
realization at book value]
3 Export Profit Reserve A/c Dr 5,000
[Being statutory reserve transferred to
realization]
3 C company Ltd A/c Dr 2,08,350
To Realization A/c 2,08,350
[Being P.C due from C Ltd]
4 Equity shareholders A/c Dr 34,650
[Being Realization loss transferred to share
holders A/c]
5 Equity shares of C Ltd A/c Dr 2,08,350
To C Ltd A/c 2,08,350
[Being P.C. received in the form of equity
shares]
6 Paid up capital A/c Dr 2,24,000
To Equity Shareholders A/c 2,24,000
[Being equity share capital called back]
7 Reserve fund A/c Dr 8,000
P&L A/c Dr 11,000
To Equity shareholders A/c 19,000
[Being accumulated profits transferred to
shareholders A/c]
8 Equity shareholders A/c 2,08,350
Dr 2,08,350
To Equity Shares in C Limited Account
A/c
[Being full settlement made]
44
Ledger accounts in the books of A Ltd
Realization Account
To Buildings 50,000 By Creditors 5,000

To Plant 41,000 By export profit reserve 5,000
To Stock 42,000 By C Ltd (P.C) 2,08,350
To Debtors 23,000 By shareholders A/c 34,650
To Cash 17,000
To Goodwill 80,000
2,53,000 2,53,000
C Limited Account
To Realization A/c 2,08,350 By Equity Shares in CLimited 2,08,350
Account
Equity Shares in C Limited Account

To C Ltd A/c 2,08,350 By Equity Share Holders 2,08,350
Account
Equity Share Holders Account

To Realization A/c To 34,650 By paid up capitalBy 2,24,000
Equity Shares in C Limited 2,08,350 Reserve 8,000
Account By P and L Account 11,000
2,43,000 2,43,000
purchase Consideration for B Ltd

Journal Entries in the books of B Ltd
1 Realization A/c Dr 2,00,000
To Buildings 60,000
To Plant 11,000
To stock 33,000
To Debtors 40,000
To cash 25,000
To goodwill 32,000
[Being assets transferred to
realization A/c at book value]
45
2 Creditors A/c Dr 6,000
[Being liabilities transferred to
realization at book value]
3 C company Ltd A/c Dr 1,69,000
To Realization A/c 1,69,000
[Being P.C due from C Ltd]
4 Equity shareholders A/c Dr 22,000
[Being Realization loss
transferred to shareholders
A/c]
5 Equity shares holders A/c Dr 1,69,000
To C Ltd A/c 1,69,000
[Being P.C. received in the form
of equity shares]
6 Paid up capital A/c Dr 1,75,000
[Being equity share capital
called back]
7 Reserve fund A/c Dr 12,000
P&L A/c Dr 4,000
[Being accumulated profits
transferred to shareholders
A/c]
8 Equity shareholders A/c Dr 1,69,000
To equity shares of C Ltd A/c 1,69,000
[Being full settlement made]
Ledger accounts in the books of B Ltd

Realization
Account
To Buildings 60,000 By Creditors 6,000

To Plant 10,000 By export profit 3,000
To Stock 33,000 reserve 1,69,000
To Debtors 40,000 By C Ltd (P.C) 22,000
To Cash 25,000 By Equity shareholders
To Goodwill 32,000 A/c
2,00,000 2,00,000
C Limited Account
1,69,000 By Equity Shares in C 1,69,000
Limited Account
46
Equity Shares in C Limited Account
To C Ltd A/c 1,69,000 By Equity Share Holders 1,69,000
Account
Equity Share Holders Account

To Equity Shares in C 1,69,000 By paid up capital 1,75,000
Limited Account 22,000 By Reserve 12,000
To Realization A/c By P&L A/c 4,000
1,91,000 1,91,000
47
5OTE: In the above problem, it is given specifically as export profit is to be maintained for 3years that is why it
is treated as statutory reserve
Illustration 2: (Fractional shares) Following is the Balance Sheet of Star Ltd.

Equities and liabilities Amount
Equity share capital 2,00,000
General reserve 1,00,000
Capital redemption reserve 1,00,000
Development rebate reserve 40,000
Debenture redemption account 60,000
Creditors 1,00,000
Outstanding bills 70,000
6,70,000
Assets Amount
Intangible assets 1,30,000
Fixed assets 3,00,000
Current assets 2,00,000
Unwritten off expenses 40,000
6,70,000
The transferee company is Zee Ltd. which took away assets except debtors of Rs.30,000, these
were later on collected by the Star Ltd., and could realize only Rs.28,000. Zee Ltd. also agreed to
pay trade liabilities. The purchase consideration is the exchange of three shares of Rs.20 each in
Zee Ltd. for two shares in Star Ltd. fractions totaling 15 shares which Zee Ltd agreed to pay in
cash. The cost of liquidation amounted to Rs.500 which the transferee company agreed to bear.
Assume that sufficient shares are sold to pay liabilities not taken over.
You are required to give journal entries in the books of Star Ltd. Assume that the shares of Zee
Ltd. are quoted in the market at Rs.52.
Solution: Calculation of purchase consideration:
Purchase consideration is calculated by net payment method. Rs.
30,000
Less: Fractions 15
Shares issued 29,985
20 5,99,700
780
Total Purchase Consideration 6,00,480
Journal of Star Ltd.
Date Particulars Rs. Rs.
48
Realisation Account Dr. 6,30,000
To Intangible Assets 1,30,000
AccountTo Fixed Assets 3,00,000
Account 2,00,000
To Current Assets Account
(Being transfer of assets taken over by Zee Ltd.)
Sundry Creditors Dr. 1,00,000
AccountO/S Bills Dr. 70,000 1,70,000
Account
To Realisation Account
(Being transfer of trade liabilities taken over by Zee Ltd.)
Zee Ltd. Account Dr. 6,00,480
To Realisation Account 6,00,480
(Being entry for purchase consideration)
Bank Account (Amount collected) Dr. 28,000
To Realisation Account 28,000
(Being collection of debtors not taken over)
Realisation Account Dr. 98,480
To Equity Share holders Account 98,480
(Being profit on realisation transferred to shareholders a/c)
Equity Share Capital Dr. 2,00,000

AccountGeneral Reserve Dr. 1,00,000
Account Dr. 1,00,000
Capital Redemption Reserve Account Dr. 40,000
Development Rebate Reserve Account Dr. 60,000 5,00,000
Debenture Redemption Reserve Account
To Equity Share holders Account
(Being Transfer of accumulated profits and share capital
toshareholders a/c)
Equity Shareholders Account Dr. 40,000
To Unwritten-off Expenses Account 40,000
(Being transfer of expenses to Shareholders A/c)
Shares in Zee Ltd. Account Dr. 5,99,700
Bank Account Dr. 780
To Zee Ltd. A/c 6,00,480
(Being receipt of purchase consideration)
Bank Account Dr. 41,236
To Shares in Zee Ltd. Account 15,860
To Profit on Sale of Shares Account 25,376
(Being Sale of 793 shares of Rs. 20 each at market price of
Rs. 52 each)
49
Profit on Sale of Shares Account Dr. 25,376
To Equity Shareholders Account 25,376
(Being transfer of profit on sale of shares)
Equity Shareholders Account Dr. 5,83,856
To Shares in Zee Ltd. Account 5,83,840
To Bank Account
(Being payment to shareholders)
Realisation Account To Dr. 70,000
Bank Account 70,000
(Being payment of outstanding bills not taken over by Zee
Ltd.)
Working notes:
1) Debtors of Rs.30, 000 included in current assets are not taken over by Zee Ltd. and hence
not transferred to realisation account.
2) Outstanding bill is not a trade liability.
3) Bank Account
Rs. Rs.
To Debtors 28,000 By Equity Shareholders 16
To Zee Ltd. 780 By Outstanding Bills 70,000
15,860
25,376
Rs.32)
70,016 70,016
4) In order to pay the outstanding bills (not taken over by Zee Ltd.) it is necessary to sell some
shares.
Calculation of shares to be sold in the market:

Amount to be paid to outstanding bills Rs.
Less: Amount available 70,000
Collection from debtors 28,000
Received from Zee Ltd. 780 28,780
Amount to be collected from the sale of shares 41,220
Market price per share 52
Shares
Illustration 3:
1. A Ltd and B Ltd agreed to amalgamate the business the scheme resulted in formation of C
Ltd, the share capital included combined capital of A Ltd and B Ltd for the purpose of
acquiring assets and liabilities in exchange of shares of C Ltd. The B/S of A Ltd and B Ltd on
50
31.12.2001 were as follows:
Equities and Liabilities A B
Share capital 1,00,000 1,40,000
Reserves 1,70,000 1,00,000
Creditors 40,000 90,000
Bank O/d - 90,000
Total 3,10,000 4,20,000
Assets A B
Fixed assets(exclusive of goodwill) Stock 1,20,000 1,80,000
Debtors Cash
at bank 60,000 1,10,000
80,000 1,30,000
50,000 -
Total 3,10,000 4,20,000
1. The P.C was to be based on Net assets of the company as shown in their books, subject to an
addition to compensate A Ltd for its super profit record. This addition was to be paid based
on weighted average of the net profit of A Ltd for 3 years ended 31.12.2001. The weighs for
the purpose for the calendar year 1999, 2000 and 2001 were 1, 2 and 3 respectively. The
profits for the year ended 31.12.1999 20,000, 31.12.2000 80,000, 31.12.2001 1, 20,000.
2. The shares in C Ltd were to be issued A & B Ltd at a premium of the agreed Net assets value
of those companies.
3. In order to increase Working Capital C Ltd increased its authorized capital by Rs. 2,00,000
and proceeded to issue 12,000 shares of 10 each at a price of 15/ share.
Close books of A & B Ltd, Journalize in C Ltd and prepare Balance Sheet.
Calculation of Goodwill for A Ltd

Year Profits Weights Products
1999 20,000 1 20,000
2000 80,000 2 1,60,000
2001 1,20,000 3 3,60,000
6 5,40,000
51
Goodwill =5,40,000/90,000=6
Calculation of Purchase consideration of A Ltd
Fixed assets Stock 1,20,000

Debtors 60,000
Bank 80,000
50,000
3,10,000
Less: Creditors 40,000
2,70,000
Add Goodwill 90,000
3,60,000
Calculation of P.C B Ltd

Stock 1,10,000
Debtors 1,30,000
4,20,000
Less: Bank O/d 90,000
Creditors 90,000
2,40,000
Combined shares of A & B

2,40,000
= 24,000 shares
10
Total purchase consideration = 6,00,000
Total shares available = 24,000
6,00,000
Rupees per share =
24,000
Companies received shares of Rs.10 at premium of Rs. 15
3,60,000
A company will receive
25
2,40,000
B company will receive
25
=9,600 shares
52
In the books of A Ltd
Realization A/c
To fixed assets 1,20,000 By creditors 40,000
To stock 60,000 By AB Ltd[P.C] 3,60,000
To debtors 80,000
To Bank 50,000
To equity share holders 90,000
4,00,000 4,00,000
C Ltd A/c
To realization 3,60,000 By equity shares of C 3,60,000
Ltd(14,400x25)
3,60,000 3,60,000
Equity shares in C Ltd A/c

To C Ltd 3,60,000 By equity shares 3,60,000
holders
3,60,000 3,60,000
Equity shareholders A/c

To equity shares of C Ltd 3,60,000 By equity share capital 1,00,000
By reserves 1,70,000
By realization 90,000
3,60,000 3,60,000
In the books of B Ltd
Realization A/c
To fixed assets 1,80,000 By creditors By 90,000
To stock 1,10,000 bank O/d By 90,000
To debtors 1,30,000 AB Ltd[P.C] 2,40,000
4,20,000 4,20,000
C Ltd A/c
To realization 2,40,000 By equity shares of C 2,40,000
Ltd
2,40,000 2,40,000
Equity shares in C Ltd A/c

To C Ltd 2,40,000 By equity shares 2,40,000
holders
2,40,000 2,40,000
Equity shareholders/c
53
To equity shares of C Ltd 2,40,000 By equity share capital 1,40,000
By reserves 1,00,000
2,40,000 2,40,000
Journal Entries
SL PARTICULARS LF DEBIT CREDIT
N
O
1 Business purchase A/c To Dr 3,60,000
liquidator of A Ltd 3,60,000
[Being business acquired for a
consideration]
2 Business purchase A/c To Dr 2,40,000 2,40,000
liquidator of B Ltd
[Being business acquired for a
consideration]
3 Fixed Assets A/c Dr 1,20,000
Stock A/c Dr 60,000
Debtors A/c Dr 80,000
Bank A/c Dr 50,000
Goodwill A/c Dr 90,000 40,000
To creditors 3,60,000
To business purchase A/c [Being
business acquired &assets
& liabilities taken over]
4 Fixed Assets A/c Dr 1,80,000
Stock A/c Dr 1,10,000
Debtors A/c Dr 1,30,000
To creditors 90,000
To Bank O/d 90,000
To business purchase 2,40,000
[Being assets & liabilities taken over
transferred to ledger]
5 Liquidator of A Ltd A/c Dr 3,60,000
To share of C Ltd 3,60,000
[Being P.C paid by issue of shares at
premium]
6 Liquidator of B Ltd A/c Dr 2,40,000
To share of C Ltd 2,40,000
[Being P.C paid by issue of shares at
premium]
54
7 Share capital A/c Dr 1,20,000
Share premium A/c Dr 60,000
To bank A/c 1,80,000
[Being shares issued to public]
Bank A/c
To balance B/d 50,000 By balance B/d 90,000
To share capital 1,20,000 By balance C/d 1,40,000
To share premium 60,000
2,30,000 2,30,000
Balance Sheet of C Ltd as on 31.12.2001

Equities and liabilities Rs
Share capital
Authorized(44,000x10) 4,40,000
Issued capital(36,000x10) 3,60,000
Reserves and surplus

Share premium(12,000x5+24,000x15) 4,20,000
Long term loans
Current liabilities
Creditors
1,30,000
Total 9,10,000
Assets
Tangible assets
Other Fixed assets 3,00,000
Intangible assets
Goodwill
90,000
Noncurrent investments
Noncurrent assets
Current assets
1,70,000
Stock
2,10,000
Debtors
1,40,000
Bank
Total 9,10,000
55
Illustration: 4: Two companies A company Ltd and B company Ltd agreed to amalgamate to
form a new company AB company Ltd. The new company registered with an authorized capital
of Rs. 40,00,000 divided into shares of Rs. 10 each to take assets and liabilities of both the
companies subject to the following adjustment.
1. The goodwill of A company was agreed at 2 years purchase of super profits at
10% return on capital employed. The average profits of the company for the last 5
years was 2,50,000.
2. The goodwill of B Company was to be considered worthless.
3. The plant and machinery of A.co Ltd were taken at 10,50,000 while the
buildings of B company at 1,10,000.
4. The debentures of A company are to be discharged by the issue of 6%
debentures.
5. The debtors and B/R of A Company were to be taken over subject to a
provision of 10% and 5% respectively.
6. The cash and debtors of B Company were to be retained by the liquidator of that
company to be utilized for paying of creditor, B/P and O/S liability.
On the date of amalgamation Balance Sheet were:
Equities and Liabilities A

Shareholders funds
Share capital (50,000 shares of 10 each) 5,00,000
Reserves And Surplus
Reserve funds 10,00,000
Employee compensation fund 15,000
Contingency reserve 85,000
Non Current Liabilities
5% debentures
Current Liabilities 5,00,000
Creditors 1,00,000
Employees P.F 2,00,000
Employees savings bank deposit 1,50,000
O/s liability 50,000
Total 26,00,000
Assets A
Non-Current Assets
Land and buildings 7,00,000
Plant and machinery 11,00,000
Furniture 2,00,000
Current Assets
Stock 3,00,000
Debtors 1,50,000
B/R 40,000
Bank balance
56
Cash 1,00,000
10,000
Total 26,00,000
Balance Sheet of B Ltd

Equities and Liabilities B
Shareholders fund
Share capital (1,50,000 shares of 10 each) 15,00,000
Current Liabilities
Creditors 1,00,000
B/P 50,000
O/S liabilities 20,000
Total 16,70,000
Assets B
Non-Current Assets
Goodwill 1,00,000
Land and building 10,00,000
P&M 1,00,000
Furniture 50,000
Current Assets
Stock 1,40,000
Debtors 1,00,000
Bank 80,000
P&L A/c 1,00,000
Total 16,70,000
AB co. Ltd allotted 1, 50,000 shares of Rs. 10 each respectively to each of the amalgamating
companies. Balance of amount due to A company was paid in cash. Prepare necessary A/c’s in
the book of A company and B Company. Journalize in the books of AB company and prepare
Balance Sheet there from
57
Soln:
Calculation of P.C
A co. [Calculation of Capital employed]
Land and building 7,00,000
Furniture 2,00,000
Stock 3,00,000
Debtors 1,35,000
B/R 38,000
Bank 1,00,000
Cash 10,000
25,33,000
2,00,000
Less: Employees P.F 1,50,000
Employees deposits 50,000
O/S liability 1,00,000
Creditors 5,00,000
Debentures
Capital employed 15,33,000
Calculation of Goodwill
Average profit 2,50,000
Normal return on capital employed (1,53,300)
(10% of 15,33,000)
Super profits 96,700
Goodwill = 96,700 x 2 = 1,93,400

Total net worth = 17,26,400 [15,33,000+1,93,400]
Payment of Net Worth

Shares 1, 50,000 x 10 = 15,00,000
Cash = 2,26,400
Realization A/c
To land & Building 7,00,000 By creditors 1,00,000
To plant and Machinery 11,00,000 By employees P.F 2,00,000
To furniture 2,00,000 By employees savings 1,50,000
To stock 3,00,000 By debentures 5,00,000
To debtors 1,50,000 By O/S liability 50,000
To B/R 40,000 By employee 15,000
To bank 1,00,000 compensation fund
To cash 10,000 By AB co. Ltd[P.C] 17,26,400
To Equity share holders 1,41,400
27,41,400 27,41,400
AB Company Ltd
58
To realization 17,26,400 By equity shares in AB
Company Ltd 15,00,000
By cash 2,26,400
17,26,400 17,26,400
Equity shares in AB Company Ltd

To AB Co Ltd 17,26,400 By equity shareholders 15,00,000
a/c 2,26,400
By cash
17,26,400 17,26,400

To equity shares in AB 15,00,000 By equity share capital 5,00,000
Company Ltd By Reserve fund 10,00,000
To cash 2,26,400 By Contingency reserve 85,000
By realization 1,41,400
17,26,400 17,26,400
B company Ltd
1,30,000 shares of 10 each – 13,00,000
Realization A/c
To land & Building 10,00,000 By AB Co. [P.C] 13,00,000
To plant and Machinery 1,00,000 By Equity shareholders 90,000
To furniture 50,000 A/c
To stock 1,40,000
To Goodwill 1,00,000
13,90,000 13,90,000
AB Co.
To realization 13,00,000 By equity shares in AB 13,00,000
Co Ltd
13,00,000 13,00,000
Equity shares in AB Company Ltd

To AB Co Ltd 13,00,000 By equity shareholders 13,00,000
a/c
13,00,000 13,00,000
Creditors A/c
To bank 1,20,000 By balance B/d 1,00,000
By O/s liabilities 20,000
59
1,20,000 1,20,000
Debtors A/c
To balance B/d 1,00,000 By bank 1,00,000
1,00,000 1,00,000
B/P A/c
To bank 50,000 By balance B/d 50,000
50,000 50,000
Bank A/c
To balance B/d 80,000 By creditors 1,00,000
To debtors 1,00,000 By O/S Liability 20,000
By B/P 50,000
By equity share holders 10,000
1,80,000 1,80,000

To equity shares in AB Co 13,00,000 By Equity share capital 15,00,000
Ltd 90,000
To realization 1,00,000
To P&L A/c 10,000
To Bank
15,00,000 15,00,000
Journal Entries in AB Ltd

SL PARTICULARS LF DEBIT CREDIT
N
O
1 Business purchase A/c Dr 17,26,400
To liquidator of X co. 17,26,400
[Being business acquired of A co. for a
consideration]
2 Business purchase A/c Dr 13,00,000
To liquidator of B co. 13,00,000
[Being business acquired of B co. For a
consideration]
60
3 Land & Buildings A/c Dr 7,00,000
Plant & machinery Dr 10,50,000
Furniture A/c Dr 2,00,000
Stock A/c Dr 3,00,000
Debtors A/c Dr 1,35,000
B/R A/c Dr 38,000
Bank A/c Dr 1,00,000
Cash A/c Dr 10,000
Goodwill (B/F) A/c Dr 1,93,400 1,00,000
To creditors 5,00,000
To Debentures
To O/S Liability 50,000
To employees provident fund 2,00,000
To employee savings 1,50,000
To liquidator of A co. 17,26,400
[Being assets and liabilities taken over
transferred to ledger, balance to
goodwill]
4 Land & Buildings A/c Dr 11,00,000
Plant & machinery Dr 1,00,000
Furniture A/c Dr 50,000
Stock A/c Dr 1,40,000 13,00,000
To liquidator of B co. 90,000
To capital reserve
[Being assets and liabilities taken over
transferred to ledger, balance to
goodwill]
5 Liquidator of A Co. Ltd A/c Dr 17,26,400
To shares of AB Co. Ltd 17,26,400
[Being P.C discharged by issue of
shares and cash]
6 Liquidator of B Co. Dr 13,00,000
To equity share of AB co. Ltd 13,00,000
[Being P.C discharged by issue of
shares]
7 Employee compensation fund A/C Dr 15,000
To Amalgamation adjustment reserve ( 15,000
Being statutory reserve incorporated)
Cash A/c
To balance B/d 1,00,000 By liquidator of A Ltd 2,26,400
To balance C/d 1,26,400
2,26,400 2,26,400
61
Balance sheet of AB Company Ltd
Equities and Liabilities Rs
Share capital
Authorized capital 40,00,000
Issued and subscribed capital 28,00,000

Employee compensation fund 15,000
Long term loans
Debentures 5,00,000
Current liability
Creditors 1,00,000
O/S liability 50,000
Employees P.F 2,00,000
Employees savings deposits 1,50,000
Bank over draft 1,26,400
39,41,400
Assets Rs
Tangible assets
Land & Building 18,00,000
Plant & Machinery 11,50,000
Furniture 2,50,000
Intangible assets
Goodwill 1,93,400
Less: Capital reserve (90,000) 1,03,400
Noncurrent investment
Noncurrent assets
Amalgamation adjustment reserve
15,000
Current Assets
Stock
Debtors 4,40,000
B/R 1,35,000
Cash 38,000
10,000
39,41,400
ILLUSTRATION PROBLEMS ON ABSORPTION/ACQUSITION
1) With a view to expand business and also affect economies, the Bright Light Limited and Sun
Light Limited decided to amalgamate and for this purpose the Bright Light Limited was
62
absorbed by Sun Light Limited. The assets and liabilities of the two companies are given below:
Bright Light Limited. Cash Rs.5,000. Investment Rs.10,000, Reserves, Rs.10,000. debentures
Rs.60,000, Machinery Rs.70,000, Book Debts Rs.45,000, Creditors Rs.30,000, Workmen
Compensation Reserve Rs.10,000, Stock Rs.10,000 and Goodwill Rs.20,000.
Sun Light Limited. Capital Rs.40,000, Investments Rs.10,000, Reserves Rs.25,000, Debentures
Rs.50,000, Machinery Rs.60,000, Book Debts Rs.10,000, Creditors Rs.20,000, Workmen
Compensation Fund Rs.5,000, Stock Rs.5,000 and Cash Rs.2,000.
You are told that the shareholders of Bright Light Limited consisted of Rs.100 shares, called
Rs.50 and that of Sun Light Limited Rs.100 shares called Rs.40.
It was agreed that the shareholders of Bright Light Limited were to be issued such number of
Re.1 shares of Sun Light Limited at their intrinsic value as would equal the intrinsic value of the
Bright Light Limited shares. The debtors of Sun Light Limited include Rs.5,000 due by Bright
Limited and the investments include Rs.5,000 paid up value of shares in Bright Light Limited.
The stocks of Bright Light Limited include Rs.2,000 worth of stock bought from Sun Light
Limited invoiced at 10% profit on sale price by Sun Light Limited.
Give journal entries in Sun Light’s Books and also the Balance Sheet of Sun Light Limited after
amalgamation taking amalgamation in the nature of purchase.
Solution:
Calculation of Intrinsic Value of Shares of Bright Ltd.

Balance sheet of Bright Light Limited is prepared to find out capital which is not given in the
question.
Balance sheet of Bright Light Limited
Share capital
Share Capital (Balancing figure) 1,000 shares of Rs.100 each Rs.50 50,000
called up
Reserves 10,000
Workmen’s Compensation 10,000
Long term loans
Debentures 60,000
Current liabilities
Creditors 30,000
1,60,000
Assets Amount
Intangible assets
Goodwill 20,000
Fixed assets
Machinery 70,000
Current assets
Investments 10,000
63
Stock 10,000
Debtors 45,000
Cash 5,000
1,60,000
Total Assets 1,60,000

Less: Liabilities
Debentures 60,000
Creditors 30,000
90,000
intrinsic worth of 1,000 shares 70,000
Therefore, intrinsic value per share Rs.70.
1,000
Calculation of Intrinsic Value of Shares of Sun Light Limited
Balance sheet of Sun Light Limited is prepared to find out the value of goodwill (not given in the
question). There is an excess of liabilities over assets and the difference has been assumed to be
goodwill.
Balance sheet of Sun Light Limited

Share capital
Share Capital: 1,000 shares of Rs.100 each Rs.40 per share called up 40,000
Reserves (including Rs.2,000 resulting from the increase in the value 27,000
of shares in Bright Light Ltd.)
Long term loans
Debentures 50,000
Current liabilities
Creditors 20,000
1,42,000
Assets Amount
Intangible assets 53,000
Goodwill(Balancing figure)
Fixed assets
Machinery 60,000
Current assets
Investment in Bright Light Ltd 100 shares @ Rs.70 per share)
Rs.7,000
64
Other investments Rs.5,000 12,000
Stock 5,000
Debtors 10,000
Cash 2,000
1,42,000
Note: Sun Light Limited has an investment of Rs.5,000 in Rs.50 paid-up shares of Bright
65
Light Limited. Therefore, number of shares held is
5,00
Rs.500
=100. the intrinsic worth of a

share of Bright Light Ltd. is Rs.70 share, so value of 100 shares is Rs.7,000 (i.e
Rs.70).
Intrinsic value of shares of Sun Light Limited is as follows:
Total Assets 1,42,000
Less: Liabilities
Debentures 50,000
Creditors 20,000
70,000
Intrinsic worth of 1,000 shares 72,000
Therefore, intrinsic value per share Rs.72
1,000
Calculation of Purchase Consideration:

Purchase Price of the business of Bright Light Limited is equal to the intrinsic value of shares
held by shareholders (other than Sun Light Limited) of Bright Light Limited.
Total number of shares of Bright Light Limited = 1,000

Less: Number of shares held by Sun Light Ltd. 100
Shares held by outsiders 900
Intrinsic worth of 900 shares @ Rs.70 is Rs. 63,000.
Intrinsic value of a share of Sun Light Ltd. is Rs.72.
Hence, the number of shares to be issued by Sun Light Ltd. to pay the purchase price
of Rs.63,000 is = 875 shares. Therefore, purchase consideration is 875 shares of
Rs.63,000
Rs.72.
66
Note. While calculating purchase consideration, shares have been valued at their paid-up value
of Rs.40 each and not at the intrinsic value of Rs.72 each.
Journal Entries in Books of Sun Light Ltd.
Date Particulars Rs. Rs.

Business Purchase A/c Dr. 35,000
To Liquidators of Bright Ltd. 35,000
(Being the amount of purchase consideration)
Machinery Account Dr. 70,000
Investment Account Dr. 10,000
Stock Account (Rs. 10,000 less 10% on Rs. 2,000) Dr. 9,800
Debtors Account Dr. 45,000
Cash Account Dr. 5,000 60,000
To Debentures Account 30,000
To Creditors Account 35,000
To Business Purchase A/c
To Capital Reserve Account 14,800
(Balance Figure)
(Being assets and liabilities taken over)
Liquidators of Bright Light Ltd. Dr. 35,000
To Share Capital Account 35,000
(Being payment of purchase price by issue of 875
shares of Rs. 100 each, Rs. 40 paid up)
Sundry Creditors Account Dr. 5,000
To Sundry Debtors Account 5,000
(Being cancellation of amount due by Bright Light
Ltd)
Capital Reserve Account To Dr. 7,000
Investment Account 7,000
(Being investment in shares of Bright Light Ltd.,
eliminated on takeover of Bright Ltd’s business)
Balance Sheet of Sun Light Ltd.

Share capital
Authorized Capital
…shares of Rs.100 each
Paid-up capital
1,875 shares of Rs.100 each, Rs.40 paid up (Of the above 875 shares
have been issued in pursuance of the purchase of business of Bright 75,000
Light Ltd.)
Capital Reserve 7,800
67
Reserves 27,000
Long term loans
Debentures 1,10,000
Current liabilities
Creditors 45,000
2,69,800
Assets Amount
Intangible assets
Goodwill 53,000
Fixed assets
Machinery 1,30,000
Current assets
Investments 15,000
Stock 14,800
Debtors 50,000
Cash 7,000
2,69,800
2) The Balance Sheet of Novelty Company as on 31-12-2001 was as follows:

Share capital
2000 shares at Rs.100 each 2,00,000
Reserve fund 20,000
Long term loans
Current liabilities
Loan from X (A Director) 40,000
Creditors 80,000
4,40,000
Assets Amount
Intangible assets
Goodwill 35,000
Fixed assets
Buildings 85,000
Machinery 1,60,000
Current assets
Stock 55,000
Debtors 65,000
Cash at bank 34,000
Miscellaneous expenses
Discount on Debentures 6,000
4,40,000
68
This company was agreed to be purchased by Marvel Company on the following terms:
(a) Marvel Company to acquire all assets at book value less 10% except cash, which is retained
in the Novelty Company. The goodwill is to be valued on the following lines:
The Goodwill is to be valued at 4 years purchase of the excess average profit of 5 years over 8%
of the combined share capital and reserve fund.
(b) Marvel Company to take over creditors at 5% Discount.
(c) The purchase consideration to be paid as to Rs.1,50,000 in cash and the balance in shares of
Rs.10 each, valued at Rs.12,50 each.
The average profits for the last years is Rs.30,100, the expenses of realisation are Rs.4,000
Prepare the necessary ledger accounts in the books of Novelty Company and journal entries in
the books of Marvel Company.
Solution:
Note: Since all the assets are not taken over at book value by transfer company, it cannot be
amalgamation in the nature of merger (i.e., pooling of interest method cannot be used).
Note: I. Calculation of Purchase Consideration:

The problem states that purchase consideration should be paid upto Rs. 1,50,000 in cash and
‘Balance in Shares’. Hence, Net Assets Method of calculating Purchase Consideration must be
adopted.
(i) Calculation of Value of Goodwill:

Average Profits of last 5 years 30,100
Less: 8% of combined share capital and reserve fund 8% of 17,600
(Rs.2,00,000 + Rs.20,000)
Excess 12,500
Goodwill = 4 years purchase of Excess
= Rs.50,000.
(ii) Calculation of Purchase Consideration’s (Net Assets Method)

A. Assets Taken Over Rs,
Goodwill 50,000
Buildings (Rs.85,000 – Rs.8,500) 76,500
Machinery (Rs. 1,60,000 – Rs.16,000) 1,44,000
Stock (Rs.55,000 – Rs.5,500) 49,500
Debtors (Rs.65,000 – Rs.6,500) 58,500
3,78,500
Less: Liabilities Taken Over
Trade Creditors (Rs.80,000 – Rs.4,000) 76,000
Purchase Consideration (A-B) 3,02,500
69
II. Discharge of Purchase Consideration:
In Cash 1,50,000
In Equity Shares (Balancing Figure) 1,52,500
3,02,500
Rs.1,5 2,500
No. of shares issued:
Rs.12.50 per 12,200 shares Closing the Books of Vendor Company:
Books of Novelty Company

Dr. Realisation A/c Cr.
Particulars Rs. Particulars Rs.
To Goodwill A/c 35,000 By Loan from X 40,000
To Building A/c 85,000 By Creditors A/c 80,000
To Machinery A/c 1,60,000 By Marvel Co. Ltd. A/c 3,02,500
(Purchase Consideration)
To Stock A/c 55,000 By Equity Shareholders A/c 21,500
(Loss, being balancing
figure, transferred)
To Debtors A/c 65,000
To Banks A/c (X’s loan) 40,000
To Bank A/c (Realisation 4,000
Exps)
4,40,000 4,44,000
Dr. Marvel Company A/c Cr.

To Realisation A/c (Purchase 3,02,500 By Equity Shares in Marvel Co. 1,52,500
Consideration) A/c
By Bank A/c 1,50,000
3,02,500 3,02,500
Dr. Equity Shareholders A/c Cr.

To Discount on issue of 6,000 By Equity Share Capital A/c 2,00,000
Debentures A/c
To Equity Shares in Marvel 1,52,500 By Reserve Fund A/c 20,000
Co. A/c
To Realisation A/c (loss) 21,500
To Bank A/c (Balancing 40,000
figure)
2,20,000 2,20,000
70
Dr. Debenture Holders A/c Cr.
To Bank A/c 1,00,000 By 5% Debentures A/c 1,00,000
1,00,000 1,00,000
Dr. Bank A/c Cr.
To Balance b/d 34,000 By Debenture holders A/c 1,00,000
To Marvel Co. A/c 1,50,000 By Realisation A/c
(X’s loan) 40,000
By Realisation A/c (Expenses) 4,000
By Equity Shareholders A/c 40,000
1,84,000 1,84,000
Dr. Equity Shares in Marvel Co. A/c Cr.
To Marvel Co. A/c 1,52,500 By Equity Shareholders A/c 1,52,500
1,52,500 1,52,500
Notes:
1. Loan of X is not taken over and hence has been discharged by paying cash.
2. Debentures are not taken over. Hence, they are discharged by paying cash. The treatment can
also be given turnover Realisation A/c like any other liability not taken over.
III. Opening entries in the Books of Purchasing Company.
Books of Marvel Ltd.

Journal Entries.
Sl. Particulars Rs. Rs.
No
1 Business Purchase A/c Dr. 3,02,500
To Liquidators of Novelty Co. A/c 3,02,500
(Being purchase consideration due recorded)
2 Liquidator of Novelty Co. A/c To Dr. 3,02,500
Equity Share Capital A/c . 1,22,000
(12,200 shares at Rs.10 each)
To Securities Premium A/c 30,500
(12,200 shares at Rs.10 each)
To Bank A/c 1,50,000
(Being purchase consideration discharged recorded)
71
3 Goodwill A/c Dr. 50,000
Building A/c Dr. 76,500
Machinery A/c Dr. 1,44,000
Stock A/c Dr. 49,500
Debtors Dr. 58,500 76,000
To Trade Creditors A/c To 3,02,500
Business Purchase A/c
(Being assets and liabilities taken over incorporated
recorded).
3) The following is the Balance Sheet of D Ltd., on 31-12-2001.
Share capital
4000 shares at Rs.100 each 4,00,000
General Reserve 50,000
Profit & Loss a/c 5,600
Long term loans
Current liabilities
Creditors 1,28,700
Dividend equalization fund 24,000
8,58,300
Assets Amount
Fixed assets
Buildings 1,70,000
Machinery 4,00,000
Current assets
Investments 50,600
Stock 1,40,500
Debtors 80,700
Cash at bank 16,500
8,58,300
D Ltd. was absorbed by N Ltd. on the above mentioned date on the following terms and
conditions:
1) N Ltd. to assume all liabilities and to acquire all assets except investments which were sold
by D Ltd., for Rs.45,500.
2) Discharge the Debenture debt at a discount of 5% by the issue of 7% Debentures in Ltd.
3) Issue two shares of Rs.60 each in N Ltd., at Rs.65 per share and also to pay Rs.2 in cash to
the shareholders of D Ltd. in exchange for one share in D Ltd.
4) Pay the cost of absorption Rs.1,500.
5) D Ltd. sold in the open market one fourth of the shares received from N Ltd. at the average
rage of Rs.63 per share.
Show the realisation accounts, Bank Account and Shareholders account in the books of D
Ltd. Under Business Purchase Method.
72
Solution:
1. Calculation of Purchase Consideration:
Payment made to each item of liability is specifically given in the problem. Hence, ‘Net
Payment Method’ of calculating purchase consideration must be adopted.
Payment towards equity shareholders:
Rs.
In Equity Shares of N Ltd.
5,20,000
8,000
Note: Issue of Debentures for discharging of 5% Debentures of D Ltd cannot form a part of
Purchase Consideration. Exchange of Debentures can be recorded, only in the books of N Ltd.
Hence, the Debentures of D Ltd. are to be treated as being taken over. Similarly, payment
towards Absorption Expenses cannot from a part of Purchase Consideration, as it is not a
payment made towards Shareholders.
II. Discharge of Purchase Consideration

Rs.
In Equity Shares of N Ltd.
(8,000 shares of Rs.60 each at Rs.65 per share) 5,20,000
In Cash (8,000) 8,000
III. Closing the books of Vendor Company

Books of D Ltd.
Dr. Realisation A/c Cr.
To Building A/c 1,70,000 By Creditors A/c 1,28,700
To Plant & Machinery A/c 4,00,000 By 5% Debentures A/c 2,50,000
To investments A/c 50,600 By N Ltd’s A/c 5,28,000
(Purchase Consideration)
To Debtors A/c 1,40,500 By N Ltd. A/c (Expenses) 1,500
To Stock A/c 80,700 By Bank A/c 45,500
(investment sold)
To Bank A/c 16,500
To Equity Shares in NLtd. A/c 4,000
(loss on sale)
To Bank A/c (Expenses) 1,500
(Balancing figure, being
profits transferred)
9,53,700 9,53,700
73
Dr. N Ltd. A/c Cr.
To Realisation A/c (Purchase 5,28,000 By Equity Shares in N. Ltd. A/c 5,20,000
Consideration)
To Realisation A/c (Expenses) 1,500 By Bank A/c 9,500
5,29,500 5,29,500
Dr. Equity Shares in N Ltd. A/c Cr.
To N Ltd’s A/c 5,20,000 By Bank A/c 1,26,000
share)
By Realisation A/c (loss on 4,000
sale)
Rs.2
per
share)
By Equity Shareholders A/c 3,90,000
(Balancing figure)
5,20,000 5,20,000
Dr. Equity Shareholders A/c Cr.

To Equity Shares in N Ltd. A/c 3,90,000 By Equity Shareholders A/c 4,00,000
To Bank A/c 1,79,500 By General Reserve A/c 50,000
(Balancing figure)
By Profit & Loss A/c 5,600
By Dividend Equalisation Fund 24,000
A/c
By Realisation A/c (Profits) 89,900
5,69,500 5,69,500
Dr. Bank A/c Cr.

To Balance b/d 16,500 By Realisation A/c 16,500
To N Ltd’s. A/c 9,500 By Realisation A/c (Expenses) 1,500
To Equity Shares in N Ltd. A/c 1,26,000 By Equity Shareholders A/c 1,79,500
(Sale of 2000 shares at Rs.
63 per share)
To Realisation A/c 45,500
(Investment sold)
74
1,81,000 1,81,000
Notes:
1. Bank balance is taken over by N Ltd. hence; it has been transferred to Realisation A/c.
2. Investment A/c, instead of transferring to Realisation A/c, can be shown as a separate A/c.
Only the loss on sale can be transferred to Realisation A/c.
3. Shares are allotted to N Ltd., at Rs.65 per share. One-fourth of such shares (i.e., 2,000) are
sold at Rs.63 per share. Hence, loss per share is Rs.2 (i.e. Rs.65- Rs.63). Rs.4,000 transferred
to Realisation Account.
IV. Passing Opening Entries in the books of Purchasing Company.
Books of N Ltd.
Journal Entries
No
To Liquidators of D Ltd. A/c 5,25,000
(Being purchase consideration due recorded)
2 Liquidator of D Ltd. A/c Dr. 5,28,000
To Equity Share Capital A/c . 5,28,000
To Share Premium A/c or Securities Premium A/c
To Bank A/c
(Being purchase consideration discharged recorded)
3 Building A/c Dr. 1,70,000
Plant & Machinery A/c Dr. 4,00,000
Debtors A/c Dr. 1,40,500
Stock A/c Dr. 80,700
Bank A/c Dr. 16,500
Goodwill A/c Dr 86,5000
To Creditors A/c 1,28,700
To 5% Debentures A/c (of D Ltd.) 2,37,500
(Rs.2,50,000 – Rs.12,500)
To Business Purchase A/c 5,28,000
(Being assets and liabilities taken over incorporated
recorded).
4 5% Debentures of D Ltd. A/c Dr 2,37,500
To 7% Debentures A/c 2,37,500
(Being issue of 7% Debentures to discharge 5%
Debentures of D Ltd)
75
5 Goodwill A/c 1,500
1,500
Dr
To Bank A/c
(Being payment to P Ltd., for
meeting Realization expenses recorded)
4) The position of A Company and B Company was as follows:

Liabilities A ltd B ltd
Share capital
Equity Shares of Rs.10 each 5,00,000 7,00,000
Profit & Loss A/c - 1,50,000
Work men compensation fund 1,00,000 -
Long term loans
5% Debentures 1,00,000 -
Current liabilities
Creditors 2,00,000 2,00,000
9,00,000 10,50,000
Assets A ltd B ltd
Intangible assets
Goodwill 1,00,000 3,50,000
Fixed assets
Fixed assets 3,00,000 5,00,000
Current assets
Stock and Debtors 3,50,000 1,00,000
Cash at bank - 1,00,000
Profit and loss account 1,50,000 -
9,00,000 10,50,000
B Company agreed to acquire A Company on the following terms:

(a) Shares of A Company are to be considered as worth Rs.6 each and shares of B
Company are to be considered as worth Rs.12.50 each, which are taken as the
basis for calculation of purchase consideration.
(b) When paying the purchase consideration, the B Company agreed to pay 1/4th in
the form of cash and the balance in shares of B Company.
(c) It was decided to issue along with Purchase consideration 5% Debentures of Rs.95
each for every 5% Debentures of Rs.100 each in Company.
Prepare the Journal Entries in the Books of A Company and B Company and also
Balance Sheet in the Books of B Company. Under business purchase method.
Assume that workmen’s compensation fund (statutory reserve to be continued for 2
more years).
76
Solution: Calculation of Purchase Consideration (Market Price Method)
Rs.
3,00,000
Mode of Payment
75,000
2. By Equity Shares (2,25,000/ 12.50 = 18,000 shares)
18,000 shares of Rs.10 each at an agreed value of Rs.12.5 per share
2,25,000
Journal Entries in the Books of A Company (Vendor Company)

No
1 Realisation A/c Dr. 7,50,000
To Fixed Assets A/c 3,00,000
To Stock, Debtors 3,50,000
To Goodwill A/c 1,00,000
(Being assets transferred)
2 5% Debentures A/c Dr 1,00,000
Creditors A/c . 3,00,000
Worker’s Compensation Fund A/c Dr 1,00,000
To Realisation A/c Dr 5,00,000
(Being liabilities transferred)
3 B Company A/c Dr. 3,00,000
To Realisation A/c 3,00,000
(Being Purchase Consideration due).
4 Cash A/c Dr 75,000
Equity Shares in B Company A/c Dr 2,25,000
To B Company A/c 3,00,000
(Being receipt of purchase consideration)
5 Equity Shareholders A/c Dr 50,000
To Realisation A/c 50,000
(Being losses on Realisation transferred)
6 Equity Share Capital A/c Dr 5,00,000
(Being shares capital transferred)
7 Equity Shareholders A/c To Dr 1,50,000
Profit and Loss A/c 1,50,000
(Being transfer of accumulated loss)
8 Equity Shareholders A/c Dr 3,00,000
To Cash A/c 75,000
To Equity Shares in B Company A/c 2,25,000
(Being final payment made to equity shareholders)
77
Journal Entries in the Books of B Company (Purchasing Company)
No
To Liquidator’s of A Company A/c 3,00,000
(Being Purchase Consideration due)
2 Fixed Assets A/c Dr. 3,00,000
Stock, Debtors A/c Dr 3,50,000
To Creditors A/c 2,00,000
To 5% Debentures A/c 95,000
To Business Purchase A/c 3,00,000
To Capital Reserve A/c (Bal. Fig.) 55,000
(Being assets and liabilities taken over)
3 Amalgamation Adjustment A/c Dr. 1,00,000
To Workmen’s compensation Fund A/c 1,00,000
(Being incorporation of statutory reserve recorded).
4 Liquidator’s of A Company A/c Dr 3,00,000
To Cash A/c 3,00,000
To Equity Shares Capital A/c
To Share Premium A/c
(Being payment of purchase consideration)

5 5% Debentures A/c Dr 95,000
To 5% Debentures in B Company A/c 95,000
(Being discharge of Debentures)
Balance Sheet of B Company as on 1.1.1991

Liabilities Amount
Share capital
Share capital shares of 10 each 8,80,000
Profit and loss account 1,50,000
Share premium 45,000
Capital reserve 55,000
Work men compensation fund 1,00,000
Long term loans
5% Debentures (95 each) 95,000
Current liabilities
Creditors (2,00,000+2,00,000) 4,00,000
17,25,000
Assets Amount
Fixed assets
78
Intangible assets
Goodwill 3,50,000
Current assets
Stock and Debtors 4,50,000
Cash at bank 25,000
Amalgamation adjustment account 1,00,000
17,25,000
2.8 Summary :
The concept of amalgamation refers to the liquidation of two or more companies

and the formation of a new company. Purchase consideration is the amount
payable by the purchasing company to the shareholders of the selling company.
It is calculated under three methods – Net Assets Method, Net Payment Method
and Exchange Method. Two types of accounting treatment are followed – Pooling
Interest Method (Merger Method) and Purchase Method (Purchase Method of
Amalgamation). The steps followed while solving problems are – calculation of
purchase consideration, discharge of purchase consideration, closing the
accounts of transferor company, opening entries in the books of the transferee
company and preparation of balance sheet after amalgamation.
Absorption leads to dissolution of one existing company. The purchasing

company will give the purchase consideration to the transferee company. The
books of accounts of the vendor company is closed after passing the entries and
after passing the opening entries in the books of transferee company all the
assets and liabilities which being over by the transferee company are
incorporated.
79
2.9 Terminal Question
5 Marks questions.
1. What are the features of amalgamation in the nature of merger?
2. What are the features of amalgamation in the nature of purchase?
3. Write a short note on, Amalgamation, Absorption & External reconstruction
4. Differentiate between pooling interest method of accounting and
purchase method ofaccounting.
5. What are the different methods of purchase consideration?
9 &12 marks
Problems on Amalgamation (Profit on Conversion)
1. The following is the Balance Sheet of Eastern Sugar Co. Ltd.
Equities and Liabilities Amount

Share capital
Share capital ( share of Rs 10 each) 3,00,000
Profit and loss account 50,000
Long term loans
5% debentures 70,000
Current liabilities
Creditors 30,000
4,50,000
Assets Amount
Intangible assets
Goodwill 70,000
Current assets
Stock 1,80,000
Debtors 2,00,000
4,50,000
The following is the balance sheet of Western Sugar Co. Ltd.
80
Share capital
Share capital ( share of 10 each ) 2,00,000
Reserves and
surplusProfit and 42,000
loss accountCurrent
liabilities Creditors 58,000
3,00,000
Assets
Current assets
Stock 80,000
Debtors 2,20,000
3,00,000
Above two companies amalgamate and form a New Company Called East-West Sugar Co.
Ltd. The average profits of Eastern and Western Sugar Companies have been Rs.30,000 and
Rs.20,000 respectively. East-West Sugar Co. Ltd. agree to take over both the companies for
a sum of Rs.6,00,000 and in addition to discharge all liabilities Rs.1,00,000 to be paid in
cash and the balance in shares at face value.
Debtors of the two companies to be written off by 10%. The profit on conversion
is to be divided between the shareholders of two companies in the same proportion as the
profits previously earned by them.
Prepare ledger accounts to close the two sugar companies and pass opening entries is
the booksof East-West Sugar Co. Ltd.
ANS: PC for Eastern sugar Ltd- 3,30,000 + Profit on conversion 30,000=3,60,000 &
Western sugar LtdLtd-2,20,000 + Profit on conversion 20,000= 2,40,000, Amount
transferred to Eq. Shareholders account ₹.10,000 & (2,000) , Goodwill 1,20,000 Bal -
fig
2) The following are the Balance Sheet of X Ltd and Y Ltd. as on 31st March 2005.
XY Ltd., is formed to take over X Ltd. and Y Ltd., for the following consideration.
X Ltd.
(i) Issue of 4,80,000 Equity Shares of Rs. 10 each of XY Ltd. at par to the equity shareholders.
(ii) Issue of 15% preference shares of Rs.100 each of XY Ltd. to discharge the preference
shareholders of X Ltd. at 10% Premium.
YLtd.
(i) Issue of 3,50,000 equity shares of Rs. 10 each of XY Ltd., at par, to the equity shareholders.
(ii) Issue of 15% preference shares of Rs. 100 each of XY Ltd. and discharge the preference
81
shareholders of Y Ltd. at 10% premium.
The debentures of X Ltd. and Y Ltd. will be converted into equivalent number of debentures of XY
Ltd. The statutory reserves are to be maintained for two more years.
Close the books of X Ltd. and Y Ltd. and show the opening entries and balance sheet of XY Ltd. on
the assumption that the amalgamation is in the nature of merger
ANS: PC for X Ltd-72,20,000 & Y Ltd-53,70,000, Amount transferred to Eq.
Shareholders account ₹. (2,00,000) & 5,00,000 , G/R Bal -Fig- 60,000 B/S Total-
1,65,00,000
Q;3 The following are the balance sheets of A Co. Ltd. and B Co. Ltd. as on 31-12-2021. On
that date they decided to amalgamate their business and form a new AB Co. Ltd. The
authorized capital of AB Co. Ltd. will be ₹.14,00,000 divided into ₹.10,00,000 equity shares of
Rs. 10each and ₹.4,00,000 12% preference shares of Rs.100 each.
Equities and liabilities A co ltd B co ltd

Share capital
Shares of Rs 10 each 3,00,000 4,00,000
General reserve 60,000 80,000
Profit and loss account 40,000 60,000
Current liabilities
Creditors 40,000 60,000
Bills payable 20,000 30,000
4,60,000 6,30,000
Assets A co ltd B co td
Fixed assets
Land and building 1,50,000 1,90,000
82
Plant and machinery 1,00,000 1,50,000
Intangible assets
Goodwill 60,000 55,000
Current assets
Stock 50,000 90,000
Debtors 70,000 80,000
Bank 30,000 65,000
4,60,000 6,30,000
The purchase consideration was agreed as under:
(1) A Co. Ltd.: The assets and liabilities were taken over at book values except:
a) Land & Buildings valued at Rs. 1,75,000; and
b) Plant & Machinery at 10% less than the book value.
The consideration being:
c) Equity shareholders of A Co. Ltd. will be paid cash of Rs. 5 per share, and
d) Four equity shares of Rs. 10 each in AB Co. Ltd. for every three shares in A Co. Ltd.
(2) B Co. Ltd.: All the assets except goodwill and bank balance are taken over at book values
and the liabilities with respect to creditors only are taken over, whereas bills payable were to
be paid off before amalgamation by B Co. Ltd.
The consideration being:
The equity shareholders of B Co. Ltd. will receive:
(iii) Rs.1,00,000 12% preference shares of Rs.100 each fully paid;
(iv) Three equity shares of Rs.10 each in AB Co. Ltd. in exchange for every four equity shares
in B Co. Ltd.; and
(v) The balance in cash
Of the remaining equity shares of AB Co. Ltd. 20,000 equity shares were issued to public and
the cash was duly received.
Write up the necessary ledger accounts to close the books of A Co. Ltd. and B Co. Ltd.
2. A Ltd. and B Ltd., doing business in the same field, decided to amalgamate to avoid
unnecessary competitions and secure economy in production and marketing. Following were
the Balance Sheets as on 31st December 2001.
Equities and liabilities A co ltd B co ltd

Share capital
Equity share of 10 each 10,00,000 5,00,000
8% preference shares of 10 each 5,00,000 3,00,000
Reserve Fund 1,60,000 1,10,000
P & L A/c 70,000 50,000
Workmen’s SB A/c 1,30,000 -
Export Profit Reserve 36,000 -
Long term loans
10 % debentures of 100 each 5,00,000 -
83
8% debentures of 100 each - 2,50,000
Current liabilities
Other liabilities 2,50,000 3,14,000
TOTAL 26,46,000 15,24,000
Assets A co ltd B co ltd
Intangible assets
Good will - 1,00,000
Fixed assets
Land and buildings 15,30,000 8,10,000
Furniture and fittings 30,000 26,000
Current assets
Investments 20,000 10,000
Stock 3,05,000 1,87,000
Sundry Debtors 1,25,000 69,000
Bills Receivable 19,000 11,000
Cash and Bank 74,000 38,000
Miscellaneous expenses 63,000 33,000

26,46,000 15,24,000
The amalgamation was effected on 1-1-2002. The purchase consideration payable by the new
company AB Ltd. was as follows:
For A Ltd.
3. Equity shareholders to get one equity share of Rs.10 each in AB Ltd., valued at Rs.12 per
share, for every equity share in A Ltd.
4. 8% Preference shareholders to get 10% preference shares in AB Ltd., equal to their claim.
5. 10% Debenture holders to get sufficient 12.5% Debentures of AB Ltd. so as to get the same
amount of interest they were getting in A Ltd.
For B Ltd.
1. 4 Equity shares of Rs.10 each in AB Ltd., valued at Rs.12 per share for every 5 equity
shares in B Ltd.
2. 8% Preference shareholders to get 90% of their claim in 10% Preference shares in AB Ltd.,
in full satisfaction.
3. 8% Debenture holders to get sufficient 12.5% Debentures of AB Ltd. so as to get the same
amount of interest as they were getting in B Ltd.
AB Ltd, took over all the assets and liabilities of both companies at their book values
except Land and Buildings, Plant and Machinery and Stock of A Ltd., which were taken over at
Rs.18,50,000, Rs.3,20,000 and Rs.2,80,000 respectively and investments of B Ltd. at Rs.16,000.
The liquidation Expenses of A Ltd., came to Rs.13,000 and that of B Ltd. to Rs.9,000. Balance
of Cash and Bank was transferred to AB Ltd.
The Authorized capital of AB Ltd. is 2,50,000 Equity Shares of Rs.10 each and 1,00,000, 10%
Preference shares of Rs.10 each. Export profit reserve (statutory Reserve) is to be maintained for
three more years.
84
Prepare Purchase Consideration statements, close the books of A Ltd. and B Ltd. and prepare
opening Balance Sheet of AB Ltd. under amalgamation in the nature of purchase.
3. Deva Ltd., and Asura Ltd., carrying on similar business agreed for amalgamation by
transferring their undertaking to a new company, Devasura Ltd.
The balance sheets of the two companies as on the date of transfer were as follows:
Equities and liabilities D co ltd A co ltd
Share capital
Equity Shares of Rs.100 each 5,00,000 3,00,000
6% Preference Shares of Rs.100 each 5,00,000 2,50,000
General Reserve 2,00,000 70,000
P & L A/c 1,15,000 50,000
Long term loans

5% Debentures - 40,000
Current liabilities
Sundry creditors 75,000 35,000
13,90,000 7,50,000
Assets D co ltd A co ltd
Fixed assets
Land and buildings 4,65,000 2,55,000
Furniture and fittings 79,000 34,000
Current assets
Stock 81,500 52,000
Debtors 56,000 24,600
Cash at bank 87,000 22,500
Cash in hand 6,400 3,900
Preliminary expenses 55,100 -

13,90,000 7,50,000
The terms of agreement were as follows:
2. The purchase consideration consisted of:
a) The assumption of liabilities of both the companies
b) The discharge of the debentures in Asura Ltd. at a premium of 5% by Devasura Ltd. by
the issue of 7% debentures
c) The issue of 10 equity shares of Rs.10 each at a premium of Rs.2 per shares for each
preference share held in both the companies
d) The issue of 10 equity shares of Rs.10 each at a premium of Rs.2 per share and Rs.22 in
cash for each equity share in Deva Ltd., and 5 equity shares of Rs.10 each at a premium
of Rs.2 per share and Rs.80 in cash for every equity share in Asura Ltd
3. All the assets and liabilities of the two companies were taken over at their book values except
that a provision @ 5% to be raised on debtors
85
4. In order to raise working capital and to pay the purchase consideration Devasura Ltd. decided
to issue 30,000 equity shares of Rs.10 each at a premium of Rs.2.50 per share.
Prepare ledger accounts in the books of Deva ltd., pass opening entries and prepare
balance sheet in the books of a new company.
5. Following are the balance sheets of Arun Ltd. and Udaya Ltd. which agree to
amalgamate their business and form a new company called “Arunodaya Ltd.” with an
authorized capitalof Rs.25,00,000 divided into 25,000 shares of Rs.100 each:
Equities and liabilities Arun Udaya
Share capital
Shares of 100 each 5,00,000 4,00,000
General reserve 90,000 -

Profit and loss account 1,00,000 -
Long term loans
8% debentures 75,000 -
Public deposits - 2,00,000
Current liabilities
Creditors 1,00,000 50,000
Bills payable 25,000 15,000
8,90,000 6,65,000
Assets Arun Udaya
Intangible assets
Good will 1,00,000 37,500
Fixed assets
Buildings 1,00,000 1,25,000
Current assets
Investments 2,50,000 1,50,000
Stock 75,000 50,000
Debtors 40,000 30,000
Bank 75,000 35,000
-
8,90,000 6,65,000
86
PROBLEMS ON ABSORPTION:
1. Problem on absorption with calculation of purchase consideration under net payment method
without statutory reserve)
The following is the Balance Sheet of Ashwini Company Ltd. on 31.3.2002.

Share capital
Share Capital (Shares of Rs.10 each) 2,00,000
Reserve Fund 25,000
Workmen Compensation Fund 10,000
Dividend Rebate Reserve 10,000
Profit & Loss A/c 5,100
Depreciation Fund (Land & Buildings) 20,000
Long term loans
Debentures 1,00,000
Current liabilities
Creditors 30,000
4,00,100
Assets Amount
Fixed assets
Machinery 1,50,000
Furniture 2,500
Work in progress 30,000
Current assets
Stock 60,000
Debtors 25,000
Cash in hand 100
Cash at bank 12,500
4,00,100
The company is absorbed by Jaswant Company Ltd. on the above date. The consideration
for the absorption is the discharge of debentures at a premium of 5%, taking over the
trade liability and a payment of Rs.7 in cash and one share of the face value of Rs.5 in
Jaswant Company Ltd. (Market value Rs.8 per value) in exchange for one share in Ashwini
Company Ltd. The cost of liquidation Rs.500 is to be met by the purchasing company.
Calculate purchase consideration and the journal entries in the books of both the
companies. Under Purchase Method (i.e., Amalgamation in the nature of purchase).
87
2. The following is the Balance Sheet of Fair Deal Ltd. as on 31st March 2001:

Share capital
90,000 Equity Share of Rs.10 each 9,00,000
General reserve 1,20,000
Profit & Loss A/c 52,000
Long term loans
Current liabilities
Creditors 3,18,600
17,90,600
Assets Amount
Fixed assets
Machinery 2,25,000
Furniture 75,000
Intangible assets
Trade marks 35,000
Current assets
Stock 5,60,000
Debtors 3,00,000
Investments 1,15,000
Bank 55,600
17,90,600
Assume all liabilities and to acquire all assets except investments, which were
sold by Fair DealLtd. at 90% of book value.
Discharge the Debentures of Fair Deal ltd., at a discount of 10% by the issue of
14% Debenturesof Rs.100 each in Nathan Ltd.
Trade Marks were found useless
Issue of one equity share of Rs.10 in Nathan Ltd. issued at Rs 12 and a cash
payment of Rs 3 forevery share in Fair Deal Ltd.
Pay the cost of absorption for 5,800.
Fair Deal Ltd. sold in the open market half of the shares received from Nathan
Ltd. at Rs.15 pershare.
Show the necessary Ledger Accounts in the books of Fair Deal Ltd., and
Opening JournalEntries in the books of Nathan Ltd. under Business
Purchase Method.
3. The following is the Balance Sheet of D Ltd. as on 30th June, 2004:

Private circulation only 88

Share capital
15,000 equity shares of Rs.10 each 1,50,000
10,000 6% cumulative preference shares of Rs.10 each 1,00,000
Long term loans
5% Debentures of Rs.100 each 50,000
Current liabilities
Employees’ Profit Sharing A/c 14,000
Bank Overdraft 20,000
Contingent Liability
Arrears of Cumulative Preference Dividend Rs.12,000
4,28,000
Assets Amount
Intangible assets
Goodwill 20,000
Fixed assets
Machinery 1,50,000
Current assets
Stock 80,000
Debtors 1,20,000
Cash at bank 8,900
Commission and brokerage on issue of shares 4,000
4,28,000
st
C Ltd. agreed to absorb D Ltd. from 1 July, 2004 on the following terms:
1) C Ltd. has to take over all tangible assets except cash.
2) C Ltd. has is to take over debentures of D Ltd.
3) It has to issue one equity shares of Rs.10 each and make a payment of
Rs.4 in cash inexchange of every two equity shares in D Ltd.
4) Sundry creditors will receive 90% of the sums due to them in fully paid
equity shares inRs.10 each in C Ltd. in full settlement of their claims.
5) Preference Shareholders will be issued 5%
debentures in C Ltd.Show the necessary ledger
accounts to close the books of D Ltd.
4. Following is the Balance Sheet of D Company Ltd as on Dec 31st 2000.


Share capital
4,000 shares of 100 4,00,000
eachReserves and
surplus Free Reserves 50,000
Profit & Loss account 5,600
Long term loans
5% debentures 2,50,000
Current
liabilities 1,28,000
Creditors 24,400
Dividend Equalization fund
8,58,000
Assets Amount
Fixed assets
Land and 1,70,000
buildings 4,00,000
Machinery
Current assets 80,700
Stock 1,40,000
Debtors 50,000
Investment 17,300
sBank
8,58,000
D ltd was absorbed by N ltd based on the above B/S, subject according to the following
terms.
(a) The purchasing company shall assume all the liabilities including the
debentures and acquireall the assets except investments which were sold by
the liquidating unit for Rs.45,500.
(b) The purchase company shall issue 2 shares of Rs.60 each at a premium of Rs.5
per share andalso to pay Rs.2 in cash to the shareholders, for every single
share.
(c) The purchasing company agreed to bear liquidation expenses of Rs.1,500.
(d) D ltd sold ¼ th of the shares received in the open market, averaged at
Rs.63 per share.Show the accounts as they appear in the Books of D company
ltd.
Reference Books

McGraw- Hill Education, 2

MODULE:3 LIQUIDATION OF COMPANY
5.1. Meaning of Liquidation

5.2. Modes / Forms of Liquidation
5.3. Contributory
5.4. Liquidator
5.4.1 Liquidators Remuneration
5.4.2 Liquidator’s Final Statement
5.6 Meaning of Related Terms
5.7 Preferential Payments
5.8 Summary
5.9 Questions
5.10 Answers
Learning Objective
• To clearly understand all the provisions of the companies act for

liquidation.
• To know the kinds of liquidations and to understand parties
involved in the process of liquidation.
• To know hierarchy of the company liabilities.
5.1. Introduction
Liquidation is usually the last stage of a workout plan or bankruptcy proceeding for a company. It
occurs when it has been determined that a company cannot continue on as a viable entity and it is
believed that there exists more value in the assets of the company than in the company as a going
concern. Occasionally a company’s assets will be liquidated when the owner
decides to quit, not because he has gone bankrupt but because he doesn’t want to go through the
effort and trouble of finding a buyer.
5.2. Meaning of Liquidation

One of the main characteristics of a Joint Stock Company is that it is createdby law and therefore it can
come to an end only through a legal process.
“The legal process, by which a joint stock company is brought to an end i.e.,completely closed down, is
called liquidation or winding up”.
In this process of winding up of the company, its assets are realised, liabilities are paid off and the
surplus, if any is distributed among the members in accordance with their rights. A company which
is wound up need not necessarily be a bankrupt (Insolvent) company, even solvent companies are
liquidated.

5.3. Modes / Forms of Liquidation
Under Sec 425 (1) of the Companies Act provides that a company can be liquidated in any of the
following three ways.
I. Compulsory Winding Up:
Is a winding up which is brought by an order of the court. Compulsory winding up takes place in any of
the following circumstances.
1. If the company has passed a special resolution to the effect that itshould be wound up, by
the court
2. When company (Public Company) has failed to hold the statutorymeeting or file the
statutory report with the Registrar of Company
3. If the Company has not commenced its business within a year ofits incorporation or has
suspended its business for a whole year
4. If the number of members has fallen below seven in case of publiccompany or below two in
the case of private company
5. If the company is unable to pay its debts
6. If the court is of the opinion that it is Just and equitable that thecompany should be
wound up.
II. Voluntary Winding Up:
A company can be wound up voluntarily under following circumstances:By an Ordinary Resolution:
• Where the duration of the company was fixed by the articles and
the period has expired.
• Where the articles provided for winding up on the occurrence of
any event and the specified event has occurred.
By a Special Resolution:
When a resolution is passed by members in all other cases for voluntary winding up, it must be
notified to the public by an advertisement in the official Gazette and in newspaper.
Types of Voluntary Winding Up:
III. Voluntary Winding Up Under the Supervision of the Court:
When a company is being wound up voluntarily, the court on an application presented to it for the
court’s interference by any of the members or the creditors may order that the voluntary winding up
should be under its (court)supervision. The object of a supervision order is to ensure the protection of
interests of all persons concerned with the company, the contributories and creditors.

5.4. Contributory
Is a person who has agreed to contribute to the assets of company in the event of liquidation. According
to Section 428 of the Companies Act, a contributory is “every person liable to contribute to the assets of
a company in the event of it being wound up, and includes holder of any shares which are fully paid up
and also any person alleged to be a contributory.
5.5. Liquidator
Are persons appointed specially for conducting the liquidation or winding up proceedings of the
company.
In case of:
1. Compulsory Winding up – Official Liquidator is appointed bythe court.

2. Voluntary Winding up:
(a) Members – Liquidator is appointed by members duringenveloping their general
meeting.
(b) Creditors – Creditors and members of the Companynominate the liquidator.
3. Supervision of Court – Liquidator may be appointed by themembers or the creditors
or by the court.
5.5.1 Liquidators Remuneration
Liquidator normally gets his remuneration in the form of commission, which is usually based on value
on assets realized and payments made to creditors. If the amount is sufficient to make full payment of
unsecured creditors, the commission is calculated as follows:
LR= Amount due to unsecured creditors x % of commission

100
If the amount is not adequate, then commission is calculated as follows:
LR= Amount available for unsecured creditors x % of commission100 + % of commission
5.5.2 Liquidator’s Final Statement
At the time of liquidation, the liquidator realizes all the assets and discharges the liabilities and capital.
The statement prepared to record such receipts and payments is called “Liquidator’s final statement of
Account”.
…. Company Ltd.
Liquidator’s Final Statement of Account.
Receipts Amount Payments Amount

Cash-in-hand xxx Secured Creditors xxx
Cash at Bank xxx Legal charges (including xxx
liquidation expenses)
Assets Realized Liquidator’s Remuneration xxx
Marketable Securities xxx Debenture Holders:
Bills Receivable xxx Outstanding Interest on xxx
Debenture
Trade Debtors xxx Debentures xxx
Loans and Advances xxx Preferential Creditors xxx
Stock-in-trade xxx Unsecured Creditors xxx
Work–in–Progress xxx Calls-in-Advance (if any) xxx
Plant & Machinery xxx Arrears on Dividend on xxx
preference share
cumulative
Furniture & Fixtures xxx Preference shareholders xxx
Patent, trademarks etc xxx Equity shareholders xxx
Investments xxx
Surplus realized from secured xxx
creditors (if any)
Calls in arrears xxx
Amount received from calls on xxx
shares
Meaning of Related Terms
1. Secured creditors: Any creditor or lender who takes collateral (security) for the extension
of credit, loan is called a secured creditor. In other words, it refers to such liability which has
security of company’s property. To ascertain whether the liability is fully secured, the
realizable value of security should be compared withthe liability.
2. Unsecured creditors: An individual or institution that lends money without obtaining
specified assets as collateral
3. Preferential creditors: are in nature of unsecured creditors who have priority of claims
over other unsecured creditors, under section 530 of the Companies Act.
5.7 Preferential Payments

1. Any kind of revenue due to government or local authorities within12 months before the date
of commencement of liquidation.
2. Any compensation, lay off or retrenchment of employees payable to any of the worker as
per industrial dispute Act within 12 months before the day of commencement of
liquidation.
3. Any wage of salary due to any employee for period not exceeding 4 months within 12
months before the start of winding up provided the amount payable to one employee
does not exceed Rs. 20000.
4. All accrued holiday remuneration becoming payable to any employee on the
termination of his services.
5. Contribution payable by the company as an employer under the employees state
insurance Act.
6. The expenses of any investigation held under section 235 or 237.
7. Advance received from any person for the purpose of making thepreferential payments.
8. All sums due to any employee with regards to provident fund, a pension fund, a gratuity

and other fund maintained for welfare ofthe company.
Preference dividend
• Preference dividend declared but not paid must be treated as
“Unsecured creditors” and paid accordingly.
• In case of cumulative preference shares, if dividends are in arrearsfor one or more years, but
not declared, it must be paid before paying preference share capital.
Note: when share capital of the company includes fully paid shares and partlypaid shares, the difference
amount must be paid first on fully paid shares andbalance if any, must be proportionately distributed.
Illustrations: 1
1) The amount due to the unsecured creditors is Rs.20,000 and the amount available for the
payment of unsecured creditors before charging such commission is Rs.3,50,000 and 3%
commission is to be paid on the amount available to unsecured creditors. Calculate the
remuneration payable to the liquidator.
Liquidators’ remuneration = Amount due to unsecured creditors
100
Percentage of commission = 2, 00, 000 X 3

100
= Rs.6,000
(Note: the amount available is sufficient to pay the unsecured creditorscompletely)
2) From the following information available calculate the liquidator’sremuneration payable
Creditors to be paid Rs.3,00,000 Commission to be paid on

the amount
paid to creditors 2%
Total amount available Rs.102000
Liquidators’ remuneration = amount available for unsecured creditors X % ofCommission.

100 + % of commission
= 102000 × 2
100 + 2
= Rs.2,000
3) The following particulars related to a limited company which has gone into voluntary
liquidation. You are required to prepare the liquidators final account allowing for his
remuneration at 2% on the amount realized. 2% on the amount distributed to unsecured
creditors other than preferential creditors.
Preferential Creditors 10,000

Unsecured Creditors 32,000
Debentures 10,000

Assets Realized:
Land & Building 20,000
Plant & Machinery 18,650
Fixtures 1,000
The liquidation expenses amount to Rs. 1000.
Solution:
… Company Liquidators Final Statement
Receipts Amount Payments Amount

Land & Building 20,000 Liquidation expenses 1000
Plant & Machinery 18,650 Remuneration of liquidator
Fixtures & Fittings 1,000 2% on 39,650 793
2% on unsecured creditors 350
Debentures 10,000
Unsecured creditors (0.547 17,507
paisa in a rupee) (Balancing
figures)
39,650 39,650

Calculation of Remuneration on Unsecured Creditors:
Assets realized 39,650

(-) Payments 21,793
17,857
2
17857 350
102
4. A limited company went into voluntary liquidation with thefollowing liabilities:
Trade creditors 12,000

Capital
10,000 preference share of Rs. 10 each Rs. 7 called up (Prior rights) 70,000
10,000 ordinary shares of Rs. 10 each Rs. 9 called 90,000
(-) Calls in arrears 2000 2,000 88,000
Cash received in anticipation of calls (calls in advanced)
On preference shares 24,000
On ordinary shares 4,000 28,000
The assets realised Rs. 2,00,000. Expenses on liquidation amounted to Rs. 2000 and liquidator’s
remuneration Rs. 3,000. Prepare liquidator’s final statement of account.
Solution:
... company Liquidator’s Final Statement
Assets Realised 2,00,000 Liquidation expenses 2,000
Calls in arrears collected 2,000 Liquidation remuneration 3,000
Unsecured creditors
Trade creditors 12,000

Calls in advance 28,000
Preference share holders 70,000
Equity shareholder @ Rs. 67,000
6.70 per share (Balancing
figure)
2,02,000 2,02,000
5 The Balance Sheet of ‘B’ Ltd as on 31.12.09 was as follows:

Share capital
8,000 preference shares of Rs.10 each 80,000
12,000 equity shares of Rs.10 each 1,20,000
Long term loans
Interest outstanding on debentures 8,000
Current liabilities
Bank loan 4,00,000

Creditors 2,00,000
9,08,000
Assets Amount
Fixed assets
Land & Building 25,000
Current assets
Stock 5,25,000
Debtors 1,00,000
Miscalleneous expenses

9,08,000
The company went into liquidation on that date. Prepare liquidator’s statement
after taking into account the following.
1. Liquidation expenses and Liquidator’s remuneration amountedto Rs.3,000 and Rs.10,000

respectively.
2. Bank loan was secured by a pledge of stock.
3. Debentures and interest there on are secured by a floating chargeon all assets.

4. Fixed assets were realised at book value and current assets at 80%of book value.
Solution:
‘B’ Ltd Liquidator’s

Final Statement
Assets Realised Liquidation Expenses 3,000
Land & Building 25,000 Liquidation remuneration 10,000
Other fixed assets 2,00,000 8% Deb 1,00,000 1,08,000
+Interest Outstanding
8,000
Debtors (1,00,000 80%) 80,000 Creditors 200000
Surplus from stock held as security 20,000 Preference share holders 4,000
by bank
(5,25,000 80% = 4,20,000)
(4,20,000 – 4,00,000)
3,25,000 3,25,000
6) Balance Sheet of Soma Ltd as on December 31, 2009.

Share capital
1,000, 6% preference shares of Rs. 100 each 1,00,000
2,000, equity shares of Rs.100 each, fully paid 2,00,000
3,000 equity shares of Rs.100 each Rs. 50 paid 1,50,000
Long term loans
Unsecured Loan (Mortgage on Land & Building) 1,00,000
Current liabilities

Income Tax 10,000
7,50,000

Assets Amount
Fixed assets
Plant & Machinery 2,20,000
Current assets
Stock 1,00,000
Debtors 1,00,000
Cash at Bank 30,000
Miscalleneous expenses
Profit & Loss A/c 1,00,000

7,50,000
The company went into liquidation on 01 Jan, 2010. Preference dividend were arrears for 3 years. The
arrears are payable on liquidation. The assets were realised as follows:
Land & Building – 2,40,000Plant & Machinery – 1,80,000

Stock – 70,000
Debtors – 60,000
The expenses of liquidation amounted to 8,000. The liquidator is entitled for commission at 2% on
assets realised and 3% on amount distributed to unsecured creditors. Prepare liquidator’s statement of
accounts. All paymentsare made on June 30, 2010.
Liquidator’s Statement of Accounts

Assets Realised Liquidation expenses
Cash at Bank 30,000 2% on 5,50,000 11,000
Sundry Debtors 60,000 3% on 1,00,000 distributed 3,000
on unsecured creditors
Stock in trade 70,000 Liquidation expenses 8,000
Plant & Machinery 1,80,000 Debentures holders
Surplus from securities (24,00,000 1,40,000 Principal 1,00,000 1,03,000
– 10,000) (Land & Building) (+) Interest 3,000
Income Tax
Unsecured Creditors 90,000

Preference Shareholders
Capital 1,00,000
+ Dividends (6000 3) 1,18,000
18,000
Equity Shareholders
Rs. 57.40 on 2000 shares 1,14,800
Rs. 7.40 on 3,000 shares 22,200
4,80,000 4,80,000
Working Note:
1) Debentures holders are entitled interest upto the payment date.

2) Amount Payable to Equity Shareholders: Amount available to Equity
Shareholders = 1,37,000
Amount totally payable = 2,00,000 + 1,50,000 = 3,50,000.
Therefore Loss to the equity shareholder = 3,50,000 – 1,37,000
= 2,13,000
Therefore Loss per share = Therefore, Refund per share
=
Fully paid = 100–42.6 = 57.40 per sharePartly paid = 50–42.6 =
7.50 per share
5.8 Summary
• Winding up of a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An administrator called a
liquidator is appointed and he takes control of the company, collects its debts and finally
distributes any surplus among the members in accordance with their rights.
• Contributory: Is a person who has agreed to contribute to the
assets of company in the event of liquidation
• Modes of Winding up of the company:
1. By the Tribunal i.e. compulsory winding
2. Voluntary winding up, which may be
(a) Member’s voluntary winding up;
(b) Creditor’s voluntary winding up;
• Liquidator can be released from the relevant duties in a winding-

up proceedings:
1. All the assets of the company have been realized (i.e. all assetshave been sold and
converted to cash);
2. Investigations related to the winding-up proceedings arecompleted; and
3. A final dividend (if any) has been paid to the creditors to settlethe debts
• Liquidators Remuneration
a. Language used for calculating liquidators remuneration can beany of the following six:

i. Percentage (%) on assets realized.
ii. Percentage (%) of all assets/ gross assets/ total assets
iii. Percentage (%) of payment to unsecured creditors
iv. Percentage (%) of payment to secured creditors
v. Percentage (%) of payment to members/shareholders
vi. Percentage (%) of payment to equity shareholders.
5.9 Questions
Self assessment questionsObjective type:
1) State whether the following statements are true of false
a) Insolvency is a necessary condition for liquidation.
b) A contributory can only be a present member of theliquidated company.
c) Interest on liabilities is payable upto the date of actualpayment if the company
is solvent and upto the commencement of the insolvency proceedings in case the
company is insolvent.
2) Fill in the blanks
a) A company can be liquidated in any of three ways……....
b) Fraudulent preference takes place when one creditor is… to another creditor in
the matter of payment of
his dues.
c) When a company is wound up, all persons who ceased to be the shareholders within
a year before the winding up areplaces in the……
3) Choose the right answer
a) Creditors voluntary winding up of a company applies to :
i. Insolvent companies
ii. Solvent companies
b) A joint stock company can be liquidated under:
i. Section 420 of the Companies Act,1956
ii. Section 425 of the Companies Act,1956
c) Preferential creditors are in the nature of:
i. Unsecured creditors who have priority of claims
ii. Secured creditors
d) If the amount due to unsecured creditor is Rs.10,00,000 and the amount
available for unsecured creditors before charging commission on amount paid to
unsecured creditor is Rs.4,12,000. 3% commission is to be paid to the liquidator on
the amount paid to unsecured creditors, theliquidators remuneration will be:
i. Rs.12,000
ii. Rs.12,360
iii. Rs.30,000

5 Mark
1. Give the meaning of liquidation of a company.

2. Distinguish between insolvency and liquidation.
3. Mention the methods of winding up of company.
4. Illustrate any five the functions of liquidators?
5. Write a short note on
(i) Secured creditors (ii) Un secured creditors
(iii) Preferential creditors
6. Contributors - Discuss
9 Mark and 12 Mark
1. What do you mean by Liquidation of a company?Describe the different

modes of winding up.
2. Give a Performa of liquidator’s final statement with imaginaryfigures.

3. What do you mean by the term contributories
4. Explain the preferential creditors as given under the IndianCompanies Act.
5. Write a note on Liquidation of a company
Terminal Questions
1) Following particulars relate to a limited company which is undergoing voluntary

liquidation. Prepare the liquidators final account after remunerating the liquidator at 3%
on amount realized and 2% on amount paid to unsecured creditors. (Excluding
preferential creditors)
1. Share Capital: 1000 preference shares of 100/- fully paid20,000 equity shares of
10/- fully paid.
4,000 equity shares of 10/-, 80% paid.
2. Assets realized Rs.3,08,000/- excluding the amount realized by sale of securities held
by the secured creditors.
3. Secured coeditors (security realised Rs. 54,000) Rs.46,000.
4. Unsecured creditors 2,83,698.
5. Preferential creditors 8000/-
6. Debentures with floating charge on the assets 1,00,000.
7. expenses on liquidation Rs.3,000/-
8. Call of Rs.2/- per share on partly paid equity share was duly received except one
particular share holder owning 400 shares failed to make the payment.
Prepare liquidators final statement of accounts.
2) The Rock Star Ltd went into voluntary liquidation on 1st Jan, 2009 at which date the

dividend on its preference shares was two years in arrears. The subscribed capital of the
company consistedof.
10,000 6% cumulative preference shares of Rs.10 each paid which were preferential both as the
dividend and capital.
20,000 equity shares of Rs.10 each (Rs.6.25 per shares called & paid up) 15,000 equity shares of Rs.10
each (Rs.7.50 per share called & paid)
The assets realized Rs.2,62,750, the cost & expenses of liquidation came to Rs.11,500 and the
liabilities amounted to 2,20,000.
Prepare the liquidator’s final statement of account as it would appear assuming that he was able get in
all the cash due from share holders in respect of suchcalls as he found it necessary to make.
Note: It is not stated in Memorandum of Association or Article of Association that the arrears of
preference dividend were to be paid in the event of windingup.
3) Prakash Ltd., went into voluntary liquidation of 31st December2002 when their balance
sheet was

Share capital
2000, 6% preference shares of 2,00,000
Rs.100 each
1,000, equity shares of Rs.100 Rs.75 75,000
paid up
3,000 equity shares of Rs.100 60 1,80,000
paid
Long term loans
5% Debentures–with floating 1,00,000
charge
Interest outstanding 5,000
Current liabilities
Creditors 1,45,000
7,05,000
Assets Amount
Fixed assets
Intangible assets
Patents 40,000
Current assets
Stock 55,000
Debtors 1,10,000
Cash at bank 30,000

7,05,000

Points to be considered for liquidation.
The company went into liquidation on the above date. The preference dividend were in
arrears for two years and payable onliquidation as per articles of association.
Creditors include a loan for Rs.50,000 on mortgage of L/B. The assets were realized as
follows:
Land and building – 1,20,000 Plant and machinery –

2,00,000Patents – 30,000
Stock – 60,000
Sundry debtors – 80,000
The expenses of liquidation amounted to Rs.10,900. The liquidator is entitledto a commission of 3% on

all assets realized expect cash and a commission of 2% on amounts distributed among unsecured
creditors. Preferential creditorsamount to Rs.15,000. Assume that the payment was made on June 30.
Prepare the liquidators of statement
4) A company went into voluntary liquidation on 1-1-1993. The liquidators are entitled to
3% remuneration on the assets realizedand 2% on the total final amount distributed to all
the share holders. The following was position of the company on the date of liquidation.
a) Assets realized (including the sales given as security) Rs.5,00,000.
b) Liquidation expense 9,000.
c) Creditors (including salaries treated as preferential Rs. 6,000/- and a loan for Rs.
25,000/- for which assets offered as security realized Rs.18,000/-) Rs.68,000/-.
5,000, 6% pref. shares of 30 each, last dividend paid was on 31-12- 1991 amount
Rs.1,50,000/-
d) Rs.10,000/- equity shares of Rs.10/-, 9 paid – Rs.90,000/-
e) General reserve 1,20,000/- and profit & loss A/c. 20,000/-
As per the articles of company the preference holders have a right to receive 1/3rd of the surplus
remaining after the payment made to equity capital and any arrears of dividend.
Prepare the liquidators account showing the necessary calculations andworking.
5) On 31st December 1989, a company was liquidated and itsbalance sheet was

Share capital
2000, 6% cumulative pref. shares of 100/- 2,00,000
1000, 7% non-cumulative pref. shares of 100/- 1,00,000
5000 equity shares of 100, 80 paid up 4,00,000
12,500 equity shares of 100, 40 paid up 5,00,000
Current liabilities
Creditors 9,95,000
Bank o/d (floating charge on assets) 25,000
22,20,000
Assets Amount
Fixed assets
Intangible assets
goodwill 2,50,000
Current assets
Stock 4,85,000
Debtors 3,62,000
Cash 3,000

22,20,000
1. The dividends on cumulative pref. shares are in arrears for 2 yearsand on non-cumulative
shares, it is not paid from past 4 years.
2. sundry creditors include
a. Income tax due Rs.2,50,000/-
b. Municipal taxes Rs.4,000/-
c. Wages of factory workers Rs.10,000/-
d. Fully secured loan by mortgaging the building Rs.2,00,000/-
3. The liquidator realized the assets as buildings Rs.2,25,000/,machinery Rs.1,00,000/- stock
3,00,000/- and debtors Rs.3,00,000/-
4. The liquidator shall get 3% of the amount realized from the sale of assets and 2% on the
amount paid to unsecured creditors including preferential.
The liquidation expense amounted to Rs. 5,000/- (but it wasestimated at Rs.7,200/-)

Prepare the final statement of accounts
6) The balance sheet of the company on 31.12.2005 was
Share capital:
6,000, 5% Cumulative preference share of Rs.100 each fully paid. 6,00,000
50,000 equity share of Rs.10 each fully called. 5,00,000

Less; calls in arrears 25,000
4,75,000

50,000
Share premium 1,00,000
Long term loans 2,500
5% Debentures
Interest O/S on Debentures 58,000
Current liabilities 1,15,000
Bank overdraft
Creditor (including Preferential creditors Rs.15,000)
14,00,500
Assets Amount
Fixed assets
Freehold properties 5,80,000
Plant 2,89,000
Motor Vehicles 57,500
Current assets
Stock 1,86,000
Debtors 74,000

14,00,500
The preference dividends are in arrears from 1st January 2008. The company’s Articles provide for the
payment of premium of Rs.12.50 per share along with any arrears of dividend to the cumulative
preference shareholders in the event of liquidation of the company and payable in priority to the
equityshareholders.
The bank O/D was guaranteed by the directors who duly implemented theirguarantee.
Liquidator realized the assets:
Property Rs.7,00,000; plant Rs.2,40,000; Motor Vehicles Rs.50,000; StockRs.1,50,000; Debtors

Rs.60,000.
The calls in arrears were duly collected by him.
The trade creditors agreed to receive 5% less than their claims.
The cost of liquidation Rs.2, 750. The liquidator’s remuneration was 2.5% onthe total amount realized
and 1% on the amount paid to unsecured creditors.
Prepare the liquidators Final statement of Account, indicating the amountrepaid on each equity
share by the liquidation.
Reference Books
McGraw-Hill Education, 2
MODULE 4
COMPANY FINAL ACCOUNT
4.1 Introduction
4.1.1 Provisions Applicable for the preparation of the financial statements of a
company
4.1.2 Introduction to Schedule VI of Companies Act 1956
4.2 Salient features of the Revised Schedule VI
4.3 Format of balance sheet (According to schedule VI – Revised)
4.3.1 Items appearing under the head EQUITY AND LIABILITIES
4.3.2 Items appearing on Assets side of Balance Sheet
4.4 Format of Statement of Profit and Loss
4.4.1 General instructions for preparation of statement of profit and loss
4.5. Accounting Treatment for certain items while preparing the final accounts of a Joint
Stock Company
4.6. Distinction between Reserves and Provision
4.7. Solved Problems
4.8 Net Profits
4.9 Formulae for calculation of Managerial Remuneration
Objective
• To study the corporate financial statement.
• To understand the meaning of different types of accounts.
• To analyze the provisions given for certain specific items under different acts.
• This chapter will guide you to prepare Final Accounts .
Final accounts of companies:
4.1 Introduction:
Under Section 210 of the Companies Act, 1956 and 96 of Indian company act 2013 at the
annual general meeting of a company, theBoard of Directors of the company shall lay before
the company:
1) Company carrying on business for profit:
(a) A balance sheet as at the end of the period:
(b) A profit & loss account for that period.
2) Company not carrying on business for profit
(a) A balance sheet as at the end of the period;
(b) An Income and expenditure account for that period instead of profit and loss
account.
The purpose of preparing the Balance Sheet & Profit and Loss Account of the company is to
give a true and fair view of the state of affairs of the company as at the end of the financial
year.
4.1.1 Provisions Applicable for the preparation of the financial statements of a company:
The provisions for the preparation of the final accounts of the companies would be based on
the respective Acts which govern that specific type of company. In case of companies governed
by specific Acts the provisions for the preparation of final accounts would be laid down in
specific Acts.
➢ The following are the companies whose preparation of final accounts is governed by
specific Acts.
o Insurance company
o Banking company or
o Any company engaged in generation or supply of electricity or
o Any other class of company for which a Form of balance sheet or Profit and loss
account has been prescribed under the Act governing such class of company.
1.1.2 Introduction to Schedule III of Companies Act 2013:

Schedule III of Companies Act, 2013 divided into 3 divisions:
Division I – Financial Statements for a company whose Financial Statements are required to comply
with the Companies (Accounting Standards) Rules, 2006.
Division II – Financial Statements for a company whose financial statements are drawn up in
compliance of the Companies (Indian Accounting Standards) Rules, 2015.
Division III – Financial Statements for a Non-Banking Financial Company (NBFC) whose financial
statements are drawn up in compliance of the Companies (Indian Accounting Standards) Rules,
2015.
Schedule III to the Companies Act, 2013 deals with the form of Balance Sheet
and Profit and Loss Account and classified disclosure to be made therein and it applies uniformly to
all the companies registered under the Companies Act, 2013, for the preparation of financial
statements of an accounting year. The original schedule VI, with minor amendments from time to
time, has been in force for more than fifty years. To keep pace with the changes inthe economic
philosophy leading to privatization and globalization and consequent desired changes/reforms in
the corporate financial reporting practices, the Ministry of Corporate Affairs, Government of India,
has revised the above-mentioned schedule and through its notification No. F. No. 2/6/2008-C. L-V.
It has also notified that the text of the Revised Schedule VI to the Companies Act, 1956 shall come
into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year
commencing on or after 1/4/2011. The primary focus of the revision has been to bring the
disclosures in financial statements at par, or at least very close, to the international corporate
reporting practices.

1.2 Salient features of the Revised Schedule III:
➢ A vertical format for presentation of balance sheet with classification of Balance Sheet
items into current and non-current categories.
➢ A vertical format of Statement of Profit and Loss with classification of expenses based on
nature.
➢ Deletion of part III of the original schedule requiring presentation of balance sheet
abstract and general business profile.
➢ The revised schedule VI has eliminated the concept of “Schedules” and such information
is now to be furnished in terms of “Notes to Accounts.
➢ While preparing the Balance-Sheet. “Cash and Cash Equivalents‟ will be shown under
“Current Assets‟, and include the following:
• Balances with banks Cheques, drafts on hand;
• Cash on hand;
• Others
➢ Earmarked balances with banks (For examples, for unpaid dividend) shall be separately
stated.
➢ Balances with banks held as margin money or security against the borrowings,
guarantees, other commitments shall be disclosed separately.
➢ Revised Schedule VI does not contain any specific disclosure for items included in Old
Schedule VI under the head, “Miscellaneous Expenditure”. As per AS-16 borrowing cost and
discount or premium relating to borrowing could be amortized over loan period. Further, share
issue expenses (like Underwriting commission), discount on issue of shares, before
commencement expenses (Preliminary expenses) discount/ premium on borrowing, etc. are
excluded from As-26. These items be amortized over period of benefit i.e., normally 3-5 years.
The draft guidance note issued by ICAI suggests that unamortized portion of such expenses be
shown under the head “Other Current/Non-current Assets” depending on whether the amount
will be amortized in the next 12 months or thereafter.
➢ The “Dr. Balance of Statement of Profit & Loss A/c” will be disclosed under the head,
Reserves & Surplus as a negative figure.
➢ No change in the format of cash flow statement as per revised schedule and therefore its
preparation continues to be as per AS-3 on cash flow statement.
➢ The vertical format of financial statements as per SCHEDULE VI (REVISED) and the major
structural changes in the classification and disclosure of information in the financial
statements are discussed below in detail.
1.3 Format of balance sheet (According to schedule III – Revised):
BALANCE SHEET
Balance Sheet as at 31st March, 2022
Figures as at Figures as at the
Note
Particulars theend of end of previous
No
current reporting period
reporting
period

I. EQUITY AND LIABILITIES
(1) Shareholder's Funds
(a) Share Capital 1
(b) Reserves and Surplus 2
(c) Money received against share warrants 3
(2) Share application money pending allotment

(3) Non-Current Liabilities
(a) Long-term borrowings 4
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities
(d) Long term provisions
(4) Current Liabilities 5

(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total
4.3.1 Items appearing under the head EQUITY AND LIABILITIES

(1) Shareholders’ Funds
(a) Share capital: - Under the head „Share Capital‟, some of the important items to be shown
are as under:
(i) Number and amount of shares authorized.
(ii) Number of shares issued, subscribed and fully paid up and subscribed but not fully
paid up.
(iii) Par value per share.
(iv) A reconciliation of the number of shares outstanding at the beginning and at the
end of the reporting period.
(v) Shares in the company held by each shareholder holding more than 5% shares
specifying the number of shares held.
(vi) Aggregate number and class of shares allotted or fully paid up for consideration
other than cash.
(vii) Aggregate number and class of shares allotted as fully paid up by way of bonus
shares.
(viii) Calls unpaid showing aggregate value of calls unpaid by directors and officers.
(ix) Share forfeited amount.
(b) Reserves and Surplus:- Under this head the following items are shown;
(i) Capital Reserve
(ii) Securities Premium (Reserve)
(iii) Capital Redemption Reserve.
(iv) Debenture Redemption Reserve
(v) Revaluation Reserve
(vi) Share Options Outstanding Account
(vii) Other reserves (a) General Reserve (b) Tax Reserve (c) Subsidy Reserve
(d)Amalgamation Reserve
(viii) Surplus i.e, balance in Statement of Profit and Loss.
In case the final balance of the Statement of profit and loss shows a debit balance the same
should be shown as deduction from the totals of reserves.
(c) Money received against share warrants: A share warrant is a financial instrument which
gives the holder the right to acquire equity shares. A disclosure of the money received
against share warrants is to be made since shares are yet to be allotted against the share
warrants. These are not shown as part of share capital but to be shown as a separate line
item.
(2) Share application money pending allotment:

If company has issued shares but date of allotment falls after the balance sheet date, such
application money pending allotment will be shown in the following manner:
(i) Share application money not exceeding the issued capital and to extent not refundable is
to be disclosed under this line-item.
(ii) Share application money to the extent refundable or where minimum subscription is not
met, such amount shall be shown separately under the other current liabilities.
(3) Noncurrent liabilities: A non-current Liability is a liability which is not classified as current-
liability. A liability is classified as current when it satisfies any one of the following conditions:
(i) It is expected to be settled in the company’s normal operating cycle. Operating cycle
means the time between the acquisitions of assets for processing and their realization in cash
or cash equivalents. It may vary from few days to few years. Where the operating cycle
cannot be identified, it is assumed to have a duration of 12 months.
(ii) It is held for the purpose of being traded.
(iii) It is due to be settled within 12 months after the reporting date.
(iv) The company does not have an unconditional right to offer settlement of the liability for
at least 12 months after the reporting date.
Hence, the liabilities which are not classified as current shall be classified as non – current.
(a) Long Terms borrowings (Debentures, Long Term Loans etc.)
(b) Deferred Tax Liabilities (Net).
(c) Other Long Term Liabilities (Trade payables on account of purchase of Fixed Assets
and interest accrued there on, Provisional Fund contribution)
(d) Long Term provisions: All provisions for which the related claims are expected to
be settled beyond 12 months after the reporting date are classified as non-current
provisions. (Provision for employee benefits, Provision for Warranties).
(4) Current Liabilities:

(a) Short term borrowings (Loans repayable on demand from banks and other parties,
Deposits, Loans and advances from related parties)
(b) Trade Payables: A trade payable refers to the amount due on account of goods
purchased or services received in the normal course of business.
(c) Other Current Liabilities (Unpaid dividends, Interest accrued and due/ not due on
borrowings, income received in advance, Calls in advance and interest thereon.)
(d) Short Term Provisions: All Provisions for which the related claim is expected to be settled
within 12 months after the reporting period are classified as short term provisions &
shown under the head „Current Liabilities‟(Provision for doubtful debts, Provision for tax,
Proposed dividend.)
4.3.2 Items appearing on Assets side of Balance Sheet:
There are mainly two types of assets
(i) Current Assets and
(ii) Non-current Assets
Current Asset defined:
1. An asset shall be classified as current when it satisfies any of the following criteria:
(a) It is expected to be realized in, or is intended for sale or consumption in the company’s
normal operating cycle; (An operating cycle is the time between the acquisition of assets for
processing and their realization in cash and cash equivalents. Where the normal operating
cycle cannot be identified, it is assumed to have a duration of 12 months).
(b) It is held primarily for the purpose of being traded;
(c) It is expected to be realised within twelve months after the reporting date; or
(d) It is cash or cash equivalents unless it is restricted from being exchanged or used to settle
a liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current

(a) Fixed Assets
(i) Tangible Assets: Tangible assets are assets which can be physically seen and touched.
(Land, Building, Plant and Equipment, Furniture & Fixture, Vehicles, Office Equipment,
Others)
(ii) Intangible Assets: Intangible assets are assets which are not tangible classified as given
below: (Goodwill, Brands/trademarks, Computer Software, Mastheads and Publishing Titles,
Mining Right, Copyrights and patents and other intellectual property rights, Recipes,
formulae, models, designs, Licenses and franchise, Others.)
(iii) Capital Work in Progress.
(iv) Intangible Assets under Development – like patents, intellectual property rights, etc.
which are being developed by the company
(b) Non-Current Investments – Investments which are not held for purpose of resale
(Investment property, Equity Instrument, Preference shares, Government Securities,
Debentures, Mutual Funds etc).
(c) Deferred Tax Assets (Net) –
(d) Long-term Loans and Advances – Capital Advances, Security Deposits, etc.
2. Current Assets
(a) Current Investments – Investment which are held to be converted into cash within a short
period i.e., within 12 months (Investments in Equity Instrument, Preference shares,
Government Securities, Debentures, Mutual Funds etc.)
(b) Inventories: Inventories include the following:

(i) Raw material
(ii) Work-in-progress
(iii) Finished goods
(iv) Goods acquired for trading
(v) Stores and spares
(c) Trade Receivable: Trade receivables refer to the amount due on account of goods held or
services rendered in the normal course of business.
(d) Cash and Cash Equivalents – As discussed in the salient features of revised Schedule in
General Instructions.
(e) Short-term Loans and Advances
(f) Other Current Assets (Prepaid expenses, and advance taxes)
3. Contingent Liabilities and Capital Commitments

(a) Contingent Liabilities- Those liabilities which may or may not arise because they are
dependent on a happening in future. It is not recorded in the books of accounts but is
disclosed in the Notes to Accounts for the information of the users. (Claims against the
company not acknowledged as debts, Guarantees, Other money for which the company is
contingently liable.)
(b) Capital Commitments – Financial commitments due to activities agreed by the company
to be undertaken by it in future. (Uncalled Liability)
4.4 Format of Statement of Profit and Loss:
STATEMENT OF PROFIT AND LOSS

Profit and Loss statement for the year ended 31st March, 2019
Figures as at Figures as
the end of at the end
Note
Particulars current of previous
No
reporting reporting
period period

I. Revenue from operations
II. Other Income
III. Total Revenue (I +II)
IV. Expenses:
Cost of materials consumed
Purchase of Stock-in-Trade
Changes in inventories of finished goods, work-in-
progress and Stock-in-Trade
Employee benefit expense
Financial costs
Depreciation and amortization expense
Other expenses
Total Expenses
V. Profit before exceptional and extraordinary items (III - IV)

and tax
VI. Exceptional Items
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items
IX. Profit before tax (VII - VIII)
X. Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit/ (Loss) from the period from continuing (VII-

operations VIII)
XII. Profit/(Loss) from discontinuing operations
XIII. Tax expense of discounting operations
XIV. Profit/(Loss) from Discontinuing operations (XII -

XIII)
XV. Profit/(Loss) for the period (XI + XIV)
XVI. Earning per equity share:

(1) Basic
(2) Diluted
1.4.1 GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OF PROFIT AND LOSS:

A company shall disclose the following in the notes to accounts to the extent applicable:
A. Revenues from operations:
(i) Revenue from operations shall be classified as:
(a) Sale of products;
(b) Sale of Services;
(c) Other operating revenues (specify nature);
Less:
(d) Discounts, allowances, and returns;
(e) Excise duty / service tax.
(ii) These shall include sales or service charges to customers for the goods and/or services
provided during the period. This section shall include information about duties, taxes,
discounts, allowances and returns in order to determine net sales or net revenues.
B. Cost of sales/services
(i) These are costs directly associated with generating revenues and shall include (to
be disclosed separately):
(a) Change in inventories - Opening (less closing) inventories of finished goods and work-
in-process;
(b) Cost of direct materials consumed arrived at by adding net purchases (purchases less
discounts, returns and allowances plus freight-in) to beginning inventory to obtain direct
materials available. From the cost of direct materials available, the ending inventory is
deducted;
(c) Other external charges (such as the hire of plant and machinery or the cost of casual
labour used in the productive process);
(d) Direct labour (ESOP and ESPP expenses to be disclosed separately);
(e) All direct production overheads;
(f) Depreciation and amortization that can reasonably be allocated to the production
function;
(g) Indirect overheads that can reasonably be allocated to the production function;
(h) Product development expenditure not qualifying for recognition as an intangible asset
and amortization of development expenditure recognized as an intangible asset;
(i) Inventory write downs/reversals;
(j) All direct overheads in providing services;
(k) All allocable indirect overheads in providing services;
(l) Cost of goods traded-in arrived at by adding net purchases (purchases less discounts,
returns, and allowances plus freight-in) to beginning inventory to obtain the cost of goods
available for sale. From the cost of goods available for sale amount, the ending inventory
is deducted;
(m) Other cost of sales.
C.Operating expenses
(i) Operating expenses are those that are incurred in order to generate sales. Operating
expenses shall be classified as:
(a) Selling and marketing expenses;
(b) Administrative expenses;
(c) Depreciation and amortization of assets;
(d) Foreign currency exchange gains / (losses), net.
(ii) Selling and marketing expenses are those expenses that are directly related to the
company’s efforts to generate sales. These items shall include (to be disclosed separately):
(a) Payroll costs of sales, marketing and distribution functions (ESOP and ESPP expenses
to be disclosed separately);
(b) Advertising;
(c) Sales persons’ travel and entertaining;
(d) Warehouse costs for finished goods;
(e) Transport costs arising on the distribution of finished goods;
(f) All costs of maintaining sales out-lets;
(g) Agents commission payable;
(h) Other selling and marketing expenses.
(iii) Administrative expenses are expenses related to the general administration of the
company’s operations. These items shall include (to be disclosed separately):
(a) Payroll costs of office and administrative staff (ESOP and ESPP expenses to be
disclosed separately);
(b) All costs of maintaining the administration buildings;
(c) Bad debts;
(d) Professional costs;
(e) Amount paid to the auditor, whether as fees, expenses or otherwise for services
rendered:
1) As auditor;
2) As advisor or in any other capacity in respect of:
- Taxation matters;
- Company law matters;
- In any other manner.
(f) Directors remuneration;
(g) Insurance expense;
(h) Utilities expense;
(i) Other administrative expenses.
(iv) Depreciation and amortization of assets other than used in the production process and
included in cost of sales.
D. Other income
This shall include (to be disclosed separately):
(a) Interest income;
(b) Dividend income;
(c) Rental on investment properties;
(d) Increase (decrease) in carrying amounts of investments;
(e) Gains and losses on trading derivatives;
(f) Amounts withdrawn, as no longer required, from provisions created previously for

meeting specific liabilities;
(g) Other miscellaneous income.
E. Other expenses
(i) These shall be classified as:
(a) Finance costs.
(b) Others.
(ii) Finance costs shall include (to be disclosed separately):
(a) Interest expense.
(b) Dividends on preference shares classified as debt.
(iii) Others shall include costs related to ‘other income’.
F. Tax Expense- Others

Others shall be specified separately.
G. Any item for which the expense exceeds one percent of the revenues from operations of
the Company or Rs.1,00,000 whichever is higher, shall be shown as a separate and distinct
item under the appropriate head of expense in the notes to accounts and shall not be
combined with any other item.
H. Results from discontinued operations included in the statement of profit and loss i.e.
income (loss) from activities and gain (loss) from disposal of assets/settlement of liabilities
shall be disclosed separately in the notes to accounts.
Rounding off requirements
According to Schedule VI :
Turnover Rounding
Off
➢ Less than one hundred crore To the nearest hundreds, thousands, lakhs or millions
rupees or decimals thereof
➢ One hundred crore rupees or To the nearest lakhs, millions or crores or
more decimalsthereof
1.5. Accounting Treatment for certain items while preparing the final accounts of a Joint Stock
Company:
(1) Goods distributed as Free Samples.

Goods distributed as free samples must be treated as distributed for advertisement
purposes. It must be deducted from purchases and must be added to the advertisement
expenses in profit and loss statement.
(2) Goods destroyed by fire/accident.
When any goods are destroyed by fire/accident, the book value of such goods must be
credited to Trading Account and the actual loss (i.e. Book Value – amount payable by the
Insurance Company) must be debited to profit and loss account. The amount payable by the
Insurance Company must be included under “current assets and advances” on the Asset side
of the Balance Sheet.
(3) Debentures interest.
Debentures interest is a charge on profits and hence, the amount of debentures interest is to
be shown under financial cost in profit and loss account. If the debentures interest given in
Trial balance is less than the actual amount of debenture interest, the difference is treated as
outstanding debenture interest. The amount of outstanding debenture interest must be
added to debenture interest in Profit and Loss account and must be shown under the head
other current liabilities in the Balance Sheet.
(4) Transfer fee on Shares.
The transfer fee on shares is an income to the company. Hence, it must be shown under
other income in profit and loss account.
(5) Calls in Arrears.
The share call money called by the company but not yet paid by the members is called “calls
in arrears”. Calls in arrears, appear in trial balance. It should be deducted from the called up
capital under share capital in the balance sheet.
(6) Calls in Advance.
The share call money paid by the members but not called by the company is called calls in
advance. Calls in advance received by a company should be shown separately in the Balance
Sheet under other current liabilities.
(7) Forfeited Shares.
The cancellation of shares by the Board of Directors of the company for non-payment of
share allotment money or share call money or both is called “Forfeiture of Shares.” It should
be shown in the balance sheet separately under the head – “share capital”
(8) Sinking Fund.
Sinking fund is a fund created out of profits for the redemption of a debt or replacement of
an asset. It should be shown under the head “Reserves and Surplus” in the balance sheet.
(9) Contingent Liabilities.

Contingent liabilities are those liabilities which may or may not arise in future. In other words,
liabilities which may arise on the happening of certain future events are called contingent
liabilities. For example, liability on B/R discounted, claims against the company not
acknowledged as debts, arrears of divided on cumulative preference shares etc. are
Contingent Liabilities. If there are contingent liabilities, they have to be shown as a foot-note
to the balance sheet.
(10) Preliminary Expenses.
Preliminary expenses are expenses incurred before the commencement of the business of a
company (in case of a new company) or expenses incurred on expansion of business like
expenses on issue of shares, discount on issue of shares. It has to be written off from the
profits of the company. The unwritten off portion has to be shown in the balance sheet
under the head “other non-current assets” in the balance sheet.
When there is an adjustment for writing off preliminary expenses, the amount to be written
off must be shown under depreciation and amortization expenses in profit and loss account
and must be deducted from the preliminary expenses under “Other Non-current assets” in
the Balance Sheet.
(11) Underwriting Commission.
Commission and brokerage paid for underwriting shares or debentures appearing in the trial
balance must be shown under “Other Non-current assets” in the Balance sheet.
(12) Discount on Issue of Shares and Debentures.
Discount on issue of shares and debentures appearing in the trial balance must be shown
under “Other Non-current assets” in the balance sheet.
(13) Interim Dividend.
Interim dividend is the dividend declared by the Directors of a company between two annual
general meetings. If the amount Interim dividend appears in the trial balance It must be
shown as an appropriation from profit under reserves and surplus in balance sheet.
(14) Final Dividend.
The dividend declared by a company at its annual general meeting of the Shareholders is
called Final Dividend or Proposed Dividend. Final dividend is treated in the same way as
interim dividend.
The proposed dividend, generally, appears in the adjustment. It must be subtracted as an
appropriation from profit balance under reserves and surplus Notes, and must be shown
under short term provisions in balance sheet.
(15) Unclaimed Dividend.
Unclaimed dividend refers to dividend declared by the company but not claimed by the
Shareholders. Unclaimed dividend is a liability for the company. Hence, it must be shown
under “Other current liabilities” in the balance sheet.
(16) Preference Dividend.
Preference dividend is the dividend payable to preference shareholders on the preference
share capital. Preference shareholders have priority over equity shareholders as regards
payment of dividend. The treatment for this is the same as in case of dividends to Equity
Shareholders.
(17) Income Tax and Provision for Taxation.
According to Income Tax Act, 1961, every company is liable to pay tax on the assessed profits
of the company. Such tax payable by the company is called, Income Tax. The amount of
Income Tax estimated and provided for at the end of the accounting year is called provision
for Income Tax or provision for Taxation. Income tax and provision for tax must be subtracted
from profit before tax to calculate profit after tax in profit and loss account. If provision for
taxation is given in the adjustments, it must be first subtracted from profit before tax in profit
and loss account and then it shall be shown under “short term provisions” in balance sheet.
(18) Advance Payment of Income Tax.
The actual amount of Income Tax liability of a company will be determined only in the
subsequent year. But every company is required to pay a certain amount of income tax in
advance in the same accounting year itself. The amount of income tax paid by the company
in advance is called “Advance payment of income tax.”
The advance payment of income tax shall be adjusted against the income tax after actual
amount of income tax is determined in the subsequent year. Until it is adjusted against the
income tax, it is considered as an asset and it is shown under “Short term Loans and
Advances” in balance sheet.
(19) Tax Deducted at Source (TDS).
It refers to a deduction made for tax liability from an income or a payment. TDS would appear
in Trial Balance. If the deduction is from an income, TDS would have a debit balance and if
the deduction is from a payment, it would have a Credit balance. In case of debit balance, it
must be shown under “Short term Loans and advances” under assets. In case of credit
balance, it must be shown under “Other current Liabilities” in the Balance Sheet.
(20) Reserve Fund.
Reserves represent the undistributed profits invested in the total net assets within the
business. A reserve fund denotes a reserve which is invested outside the business. The term
fund is used where the amount is represented by an outside investment which is distinct
from the business assets.
It always appear in Trial Balance and will be shown in the Balance Sheet under the head
“Reserves and Surplus.” When there is an adjustment for transfer of profits to
Reserves/Reserve Fund, the amount of transfer shall be subtracted from the profit balance
and added to Reserve/Reserve Fund under the head “Reserves and Surplus” in the Balance
Sheet.
(21) Provisions.
According to the Companies Act, 1956, the term “Provision” means any amount written off
or retained by way of providing for depreciation, renewals or diminution in the value of
assets or retained by way of providing for any known liability of which the amount cannot be
determined with substantial accuracy.
Examples for provisions are: (a) Provision for depreciation, (b) Provision for bad debts, (c)
Provision for discount on debtors, (d) Provisions for repairs and renewals, (e) Provision for
contingencies, (f) Provision for taxation etc.
Provision is a charge on profit and must be debited to profit and loss account. These
provisions will be normally either deducted on the asset side of the balance sheet or shown
on the liabilities side of the balance sheet.
1.6. Distinction between Reserves and Provision:
Reserves Provisions
• These are created by subtracting from • These are created by subtracting these
Profit balance under reserve and surplus. provisions from revenues before
Hence it is an appropriation of profit. appropriations.
• When profit is not adequate, it is not
created. • It must be made irrespective of the
• Reserve is for an unknown contingency. profit or loss.
• Reserve is long term in nature. • Provisions are for a known liability.
• Provision is short-term in nature.
1.7. Solved Problems:

Illustration:1
Situation 2: Profit after charging commission:
Profit before commission
 Rate
100 + Rate
Steps for calculation of Managerial Remuneration:
Step 1: Calculate the net profit for the purpose of Managerial Remuneration.
Step 2: Calculate Managerial Remuneration according to the ceiling limit.
Step 3: Prepare the re-drafted P/L a/c, if required.
Illustration 1
Under which heading and sub-headings will the following items appear in the Balance Sheet of a company as per
Schedule III, Part-1 of the Companies Act, 2013?
(i) Capital Reserve
(ii) Goodwill
(iii)Sundry Debtors
(iv) Sundry Creditors
(v) Loose Tools
(vi) Provision for Tax
Solution:
Item Main Group Sub-Group
(i) Capital Reserve Share holders' Fund Reserves and Surplus
(ii) Goodwill Non-Current Assets Fixed Assts Intangible
(iii) Sundry Debtors Current Assets Trade Receivable
(iv) Sundry Creditors Current Liabilities Trade Payable
(v) Loose Tools Current Assets Inventories
(vi) Provision for Tax Current Liabilities Short Term Provision
Illustration 2
Schedule III, Part-I of the Companies Act, 2013?
(i) Debentures
(ii) Sinking Fund
(iii) Interest Accrued on Investment
(iv) Outstanding Expenses
(v) Bank Overdraft
(vi) Proposed Dividend
Solution:
Long Term
(i) Debentures Non-current Liabilities Borrowings
(ii) Sinking Fund Shareholders' Fund Reserves and Surplus
(iii) Interest Accrued on
Investment Current Assets Other Current Assets
Current Liabilities Other Current
(iv) Outstanding Expenses songs Liabilities
Short Term
(v) Bank Overdraft Current Liabilities Borrowings
(vi) Proposed Dividend Current Liabilities Short term Provision
Illustration 3:
Schedule III, Part-I of the Companies Act, 2013?
(i) Bills Payable
(ii) Bills Receivable
(iii) Trade Marks
(iv) Work-in-progress
(v) Prepaid Insurance
(vi) Stores and Spare Parts
Solution:
(i) Bills Payable Current Assets Trade payables
(ii) Bills Receivable Current Assets Trade Receivable
Non-current
(iii) Trade Marks Assets Fixed Assets Intangible
(iv) Work-in-progress Current Assets Inventories
(v) Prepaid Insurance Current Assets Other Current Assets
(vi) Stores and Spare
Parts Current Assets Inventories
Illustration 4:
From the following particulars calculate reserves and surplus for the year ending 31st March 2016.
(i) P&LA/c balance from last year Rs. 62,500
(ii) Net Profit for the year before tax Rs. 5,40,000 (provision for tax at 40% )
(iii) Transfer to General reserve Rs. 52,500, Dividend Equalization fund 40,000 and development reserve Rs.
37,500
(iv) Dividend on 7.5% on preference shares Rs. 3,00,000
(v) Dividend on 12.5% on 50,000 equity shares of Rs. 10/-Rs. 7.50 called-up (calls in arrears Rs. 13,000).
(vi) Corporate dividend tax of 20.36%.
Solution:
Reserves and Surplus

Particulars Amount Amount Amount
Reserves
Opening Balance Nil
Add: Transfers to General Reserves 52,500
Development Reserve 37,500
Dividend Equalization Fund 40,000 1,30,000
Opening Balance of Profit and Loss Account 62,500
Earning After Tax (EAT) (5,40,000 - 2,16,000) 3,24,000
3,86,500
Less: Appropriations
Transfer to General reserve 52,500
Dividends on Preference Shares (7.5% of Rs. 3,00,000) 22,500
Dividends on Equity Share (5,00,000 × 7.5 X =3,75,000-13,000-
3,62,000 at 12.5%) 42,250
CDT on Dividends (67,750 at 20.36%) 13,794
Dividend equalization fund 40,000
Development reserve 37,500 2,11,544 1,74,956

Total 3,04,956
Illustration 5:
You are required to prepare financial statements from the following trial balance
of Haria Chemicals Ltd. for the year ended 31st March, 2022.
Particulars Debit ₹ Particulars Credit ₹

Stock 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of 10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Bills payable 1,25,000
Bad debts 35,000 Creditors 1,56,000
Commission 1,20,000 Sales 42,68,000
Purchases 23,19,000 Rent received 46,000
Plant and Machinery 8,60,000 Transfer fees 10,000
Rentals 25,000 Profit & Loss account 1,39,000
Current account 45,000
Cash 8,000 Provision for depreciation
Interest on bank loans 1,16,000 On machinery 1,46,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipment 2,45,000
Goodwill 2,65,000
Debtors 2,87,000
Bills receivable 1,53,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 72,000
Distribution freight 54,000
Debenture interest 20,000
85,35,000 85,35,000
Additional information: closing stock on 31.3.2022 ₹.8,23,000.
Solution:
BALANCE SHEET of Haria Chemicals Ltd as at 31.3.2022
Figures as at
the end of
Note as at31.3.22
Particulars previous
No ₹
reporting
period
I. EQUITY AND LIABILITIES

(1) Shareholder's Funds
(a) Share Capital 1 25,00,000
(b) Reserves and Surplus 2 7,50,000
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-Current Liabilities

(a) Long-term borrowings 3 11,45,000
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities
(d) Long term provisions
(4) Current Liabilities

(a) Short-term borrowings
(b) Trade payables 4 2,81,000
(c) Other current liabilities
(d) Short-term provisions
Total 46,76,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 5 32,70,000
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets (preliminary expenses) 10,000
(2) Current assets

(a) Current investments
(b) Inventories 8,23,000
(c) Trade receivables 2,87,000
(d) Cash and cash equivalents 6 53,000
(e) Short-term loans and advances 7 2,33,000
(f) Other current assets 46,76,000
Total
STATEMENT OF PROFIT AND LOSS

Profit and Loss statement for the year ended 31st March, 2022
figures for Figures as
the year at the end
Note
Particulars ended on of previous
No
31.3.20 reporting
₹ period
I. Revenue from operations 42,68,000
II. Other Income 8 56,000
III. Total Revenue (I +II) 43,24,000
IV. Expenses:
Cost of materials consumed 9 21,76,000
Purchase of Stock-in-Trade
Changes in inventories of finished goods, work-in-
progress and Stock-in-Trade
manufacturing and other expenses 10 14,01,000
Employee benefit expense
Financial costs 11 1,36,000
Depreciation and amortization expense
Other expenses
Total Expenses 37,13,000
V. Profit before exceptional and extraordinary items (III - IV) 6,11,000

and tax
VI. Exceptional Items -
VII. Profit before extraordinary items and tax (V - VI) 6,11,000
VIII. Extraordinary Items
IX. Profit before tax (VII - VIII) 6,11,000
X. Tax expense:
(1) Current tax -
(2) Deferred tax -
XI. Profit/(Loss) for the period (IX - X) 6,11,000
XII. Earning per equity share:

(1) Basic 2.44
(2) Diluted
Notes to accounts ₹
1 Share capital
Authorised:
Equity share capital of Rs.10 each 25,00,000
Issued and subscribed:
Equity share capital of Rs.10 each 25,00,000
2 Reserves and surplus

Balance as per last profit and loss account 1,39,000
Balance as per current profit and loss account 6,11,000
7,50,000
3 Long term borrowings

Bank loans 6,45,000
11,45,000
4 Trade payables
Creditors 1,56,000
Bills payable 1,25,000
2,81,000
5 Tangible assets
Goodwill 2,65,000
Freehold land 15,46,000
Furniture 2,00,000
Fixtures 3,00,000
Plant and machinery (8,60,000 - 1,46,000) 7,14,000
Tools and equipment 2,45,000
32,70,000
6 Cash and cash equivalents

Current account balance 45,000
Cash 8,000
53,000
7 Short term loans and advances
Loan to directors 80,000
Bills receivables 1,53,000
2,33,000
8 Other income
Rent received 46,000
Transfer fees 10,000
56,000
9 Cost of materials consumed

Opening stock 6,80,000
Add: purchases 23,19,000
29,99,000
Less: closing stock 8,23,000
21,76,000
10 Manufacturing and other expenses

Consumables 84,000
Wages 9,00,000
Bad debts 35,000

Discount 40,000
Rentals 25,000
Commission 1,20,000
Advertisement 20,000
Dealer's aids 21,000
Transit insurance 30,000
Trade expenses 72,000
Distribution freight 54,000
14,01,000
11 Interest and other financial charges
Interest and bank loans 1,16,000
Debenture interest 20,000
1,36,000
12 Other expenses -
4.8 Net Profits:

‘Net profits’ for this purpose is not the same as the net profits depicted in profit and loss
account. For calculating the net profits, the following points must be considered:
(1) Credits allowed (i.e. incomes which can be considered):
➢ Bonus are subsidies received from any Government, or any public authority
constituted or authorized in this behalf, by any Government, unless and except in so
far as the Central Government otherwise directs;
➢ Difference between original cost of fixed asset and its written down value when a
fixed asset is sold for an amount in excess of its written down value. (Reserve Profits).
(2) Credits not allowed (i.e. incomes which cannot be considered):

➢ Premium on shares or debentures of the company, which are issued or sold by the
company;
➢ Profits on sale (re-issue) of forfeited shares by the company;
➢ Profits of a capital nature including profits from the sale of any undertakings of the
company or of any part thereof;
➢ Profits from the sale of any immovable property or fixed asset of capital nature,
comprised in any of the undertakings of the company, unless the business of the
company consists, whether wholly are partly, of buying and selling any such
property or assets. (Capital Profits).
(3) Deductions Allowed (i.e. expense and loss which can be deducted):
➢ All the usual working charges;
➢ Directors remuneration;
➢ Bonus or commission paid or payable to any member of the company’s staff, or to
any engineer, technician or person employed or engaged by the company, whether
on a whole-time or on a part-time basis;
➢ Any tax notified by the Government as being in the nature of a tax on excess or
abnormal profits;
➢ Any tax on business profits imposed for reasons or in special circumstances and

notified by the Central Government in this behalf;
➢ Interest on debentures issued by the company;
➢ Interest on mortgages executed by the company and on loans and advances
secured by a charges on its Fixed or Floating Assets;
➢ Interest on Unsecured loans and Advances;
➢ Expenses on repairs, whether to immovable or to movable property, provided the
repairs are not of a capital nature;
➢ Depreciation at a rate specified in schedule 15 (as per section 350 of companies
act);
➢ Excess of expenditure over interest which arising in calculation of net profit for the
purpose of Managerial Remuneration (to the extent not set of earlier);
➢ Any sum paid by way of insurance against the way of risk of meeting like
compensation or damages specified above;
➢ Debts considered as bad or written off or adjusted during the year of account;
➢ Outgoing inclusive of contribution- i.e. contribution to charitable and other funds
not related to the company’s business or to the welfare of the employees ( amount
not exceeding 50,000 or 5% of the average net profits of the 3 preceding years,
whichever is greater);
➢ Amount paid as cess;
➢ Excess of written down value of an asset sold, discarded, demolished or destroyed,
over its sale value. (Reserve Profits).
➢ Deductions not allowed (i.e. expenses and losses which cannot be deducted):
Income tax and super tax payable by the company under the Indian Income Tax
Act,1922, or any other tax on the income of the company.
➢ Any compensation, damages or payments made voluntarily;
➢ Loss of a capital nature, including loss on sale of the undertakings of the company
or any part thereof;
The following are the formats for computing ‘net profits’ for the purpose of managerial
remuneration:
Gross profit + credits allowed – deductions allowed.

(OR)
Net profit as per profits and loss accounts + deductions not allowed (but found in profit and
loss account) – credits not allowed (but found in profit and loss account).
4.9 Formulae for calculation of Managerial Remuneration:
Situation 1: Profit before charging commission:
Profit before commission  Rate

100

4.10Terminal Questions:
Section A: (5 marks):
1) Write any five differences between reserve and provision.
2) Explain the following items:
a) Preliminary expenses.
b) Goods distributed as samples
c) Provision for taxation.
d) Unclaimed dividend.
e) Debenture interest.
3) Give an imaginary form of the profit and loss statement of a limited company.
4) How do you deal with the following items:
a) Advance payment of tax.
b) Forfeited shares.
c) Underwriting commission.
d) TDS
e) Goods destroyed by fire/accident.
5) Prepare a summarized form the balance sheet of a company as per companies act (withimaginary
figures).
6) From the following particulars, show the workings under ‘reserves and Surplus” head in abalance
sheet.
a) P/L account balance brought forward 1,00,000
b) Net profit before tax (Provision for
Taxation 40%) 8,75,000
c) Transfer to reserve fund 1,25,000
d) The share capital consists of the following:
i) 10,000 12% Preference shares of Rs.100 each fully paid.
ii) 10,000 equity shares of Rs.100 each, Rs.80 paid.
e) The directors proposed a dividend of 20% on Equity shares.
f) Ignore corporate dividend tax.
7) Prakash ltd. carried forward balance of Rs.20,50,000 in the P/L a/c for the year ended on 31st march
2022. During the year 2021-2022, it made a profit of ₹.52,40,000 before charging depreciation and
manager’s commission. Depreciation for year 2021-2022 amounted to ₹. 8,40,000 and a commission
of 5% on net profit before charging such commission was to be paid to the manager. It was decided
that following decision be carried out:
a) Transfer ₹.12,50,000 to the General Reserve.
b) Transfer ₹.5,00,000 to the Dividend Equalization Reserve.
c) Pay the year’s dividend on ₹.50,00,000 11% Cumulative Preference shares.
d) Pay 20% dividend on Rs.60,00,000 Equity share capital.
e) Pay ₹.77,000 dividend on tax-free Preference share ( tax rate is 23%).
f) Transfer ₹.7,50,000 to Debenture Redemption Fund.
g) Ignore CDT.
Prepare the notes for reserves and surplus showing the above appropriations.

Section C: (9 & 12 Marks)
1. The Bangalore manufacturing company, having an authorized capital of Rs.10,00,000 hadissued
20,000 shares of Rs. 10 each. The other details on 31-12-2022. were as follows.
Amount
Particulars
(₹)
Stock on 1-1-2022 93,210
Manufacturing wages and expenses 64,490
Purchases 2,10,730
Carriage inwards 6,760
Carriage outwards 4,630
Advance payment of income tax 7,145
Bank loan (5%) 25,000
Interest on bank loan 625
Sundry Debtors 82,200
P/L a/c (1-1-2022) 4,320
Cash and Bank balance 4,390
Machinery 71,305
Electric ChargesFactory
Office 7,105
1,700
Salary 12,500
Audit Fee 625
Furniture 2,500
Return outwards 4,905
Returns inwards 6,320
Commission paid 4,320
Transfer Fee 20
Sales 3,84,950
Investment 75,000
Equipment 6,250
Share Capital 2,00,000
Calls in Arrears 500
Adjustments:
1. Write off 1/3 of preliminary expenses.
2. Machinery to be depreciated by 10% and Furniture by 5%.
3. Manufacturing wages due ₹. 945 and salary Rs.600
4. Interest on bank loan has been paid upto 30-6-2022 only.
5. The closing stock was valued at ₹. 64,420 and equipment were valued at ₹. 5,000 atthe end of
the year.
6. Create reserve for bad debts @ 5% on debtors.
7. A further reserve of 2.5% is to be created on debtors for discount.
8. They have proposed to pay a dividend of 5% (on paid up capital) for the current yearafter
providing ₹.11,500 for taxation.
Prepare Final Accounts.
2. The directors of Good Luck ltd. ask you to prepare the profit and loss account for the yearend 31st
march 2022 and the balance sheet as on that date.
The balances in the books, after closing the Trading Account are as below.
Particulars Debit (₹.) Credit
(₹.)
Equity Share Capital (Authorized and subscribed in shares of 4,00,000
Rs.100 each)
8% Preference Share Capital (Authorized and subscribed in 2,00,000
shares of Rs.100 each)
Plant at cost 3,00,000
Land and Building at cost 5,00,000
Depreciation up to 31-12-2008
On Plant 1,00,000
On Land and Building 1,50,000
Dividend equalization reserve 10,000
Investment in Shares 2,00,000
Stock 70,000
Cast at bank 60,000
Debtors 50,000
Profit & loss a/c 1-4-2018 25,000
Creditors 30,000
Income tax deduction at source on dividend 2,200
Establishment expenses 15,000
Rent & taxes 6,000
Audit Fee (including Rs.1,000 paid for other services) 2,500
Managing director’s minimum remuneration 12,000
Directors Fee 2,000
Sundry Expenses 6,000
Dividend (gross) 10,000
Miscellaneous receipts 2,300
Trading account balance 3,04,400
Income tax for previous year not provided 6,000
12,31,700 12,31,700
You ascertained that,

1. Depreciation to be charged on the written down value of Plant @ 10%; Land andBuilding @
5%.
2. The directors proposed to recommend a dividend of 15% on equity shares.
3. Provision for taxation is to be made at 55%.
4. The managing director is entitled to 5% of the net profit subject to a minimum of₹.12,000
per annum.
5. A sum of Rs.15,000 is to be transferred to Dividend Equalization Reserve.
3. Following is the trial balance of Western ltd. as on 31-12-2020. The authorized

capital ofthe company is ₹.10,00,000 in shares of ₹.100 each.
Particulars Debit ₹. Credit ₹.

Fully called capital 8,00,000
Reserve fund 60,000
P&L a/c (1-1-2019) 35,200
6% debenture 4,00,000
Bank overdraft 53,150
Debtors and Creditors 83,200 1,22,400
Purchases and Sales 960,000 12,31,170
Returns 28,000 20,000
Land and building 360,000
Plant and machinery 662,400
Loose tools 37,600
Furniture 14,400
Calls in arrears 6,000
Cash in hand 2,000
5% Govt bond (tax free) (face value ₹. 40,000) 39,520
Bills receivable 54,400
Goodwill 64,000
Motor vehicle 12,000
Interim dividend 18,000
Repairs 3,440
Advertisement 10,160
Audit fee 4,000
Carriage 14,800
Wages 92,800
Insurance 19,600
Sock on 1-1-2009 1,90,400
General expenses 17,200
Debenture interest (less tax at 30%) 8,400
27,21,920 27,21,920
Adjustments:
1. Stock on 31-12-2009 Rs.181700.
2. Create RBD at 5% on debtors.
3. Provide for depreciation @ 5% on Plant and machinery, 7½% on Furniture, 15% onLoose tools and
20% on Motor vehicle.
4. Prepaid insurance ₹. 1600.
5. Transfer ₹.10,000 to reserve fund.
6. Directors declared an interim dividend on 15-8-2006 for six month ending 30-06-2009@ 3%.
7. Wages outstanding ₹. 2400.
8. Write off ¼th of preliminary expenses.
4. Mysore mfg. co. was registered with a nominal capital of ₹. 15,00,000 divided into equity shares of ₹.
100 each. On 31.3.22 the following ledger balances were extracted from the company’s books:
₹. ₹.
Equity capital called and paid up 11,50,000 Preliminary expenses 12,500
Calls in arrears 18,750 Freight and duty 32,750
Plant and machinery 9,00,000 Goodwill 62,500
Stock (1.4.18) 1,87,500 Wages 2,12,000
Fixtures 18,000 Cash in hand 5,875
Debtors 2,17,500 Cash at bank 95,750
Buildings 7,50,000 Directors fees 14,350
Purchases 4,62,500 Bad debts 5,275
Interim dividend paid 18,750 Commission paid 18,000
Rent 12,000 6% Debentures (1.4.18) 7,50,000
General expenses 12,250 Salaries 36,250
Debentures interest 12,500 Sales 10,37,500
Bills payable 95,000 4% Govt securities 1,50,000
General reserve 62,500 Provision for doubtful debts 8,750
P/L a/c (Cr) 1.4.04 36,250 Creditors 1,15,000
Stock on 31.3.05 was estimated at ₹. 2,52,000The
following adjustments were to be made:
1. Final dividend at 5% to be provided.

2. Depreciation on plant and machinery at 10% and on fixtures at 5%.
3. Preliminary expenses to be written off by 20%.
4. ₹. 25,000 were to be transferred to general reserve.
5. Provision for tax to the extent of ₹. 62,500 was to be made.
6. Provision for bad debts to be maintained at 5%.
Prepare the Trading and Profit and loss account and P/L appropriation account for theyear ended
31.3.22and a balance sheet as on that date.
Reference Books
• 5. Mukherjee & Hanif, Amitabh Mukherjee Mohammed Hanif Tata, Corporate Accounting, McGraw-
Hill Education, 2
MODULE 5
Contemporary Trends in Accounting
5.1 Human Resource Accounting.

5.1.1 Meaning
5.1.2 Definition
5.1.3 Objectives Of HRA
5.1.4 Benefits Of Human Resource Accounting:
5.1.5 Limitations Of Human Resource Accounting
5.1.6 Valuation Of Human Resources:
5.2 Forensic Accounting.
5.2.1 Concept Of Forensic Accounting
5.2.2 Definitions Of Forensic Accounting
5.2.3 Practice Of Forensic Accounting
5.3 Green Accounting.
5.3.1 Meaning of Green Accounting
5.3.2 Objectives of Green Accounting
5.3.3 Problems of Green Accounting
5.4 Inflation Accounting.
5.4.1 Meaning of Inflation Accounting
5.4.2.Objectives of Inflation Accounting
5.5 Environmental Accounting.
5.5.1 Meaning Of Environmental Accounting
5.5.2 Scope Of Environmental Accounting
5.1 Human Resource Accounting.

5.1.1 MEANING
Human resource accounting refers to reporting of investment made on the individual employees by the
employer. It includes expenses incurred to recruit, select, train and develop human assets.
5.1.2 DEFINITION
“Human Resource Accounting is the process of identifying and measuring data about human resources
and communicating this information to interested parties.” - According to American Accounting Society
Committee on HRA
“Human Resource Accounting is an attempt to identify and report investments made in human resources
of an organization that are presently not accounted for in conventional accounting practice. Basically it
is an information system that tells the management what changes over time are occurring to the human
resource in the business.” According to Woodruff
“A term used to describe a variety of proposals that seek to report and emphasize the importance of
human resources – knowledgeable, trained and loyal employees in a company earning process and total
assets.” - According to Davidson and Roman L Weel.
5.1.3 OBJECTIVES OF HRA

The main objectives of human resource accounting (HRA) are as follows:
• To assign a monetary value to an organization’s human resources: It helps organizations
estimate the value of their human resources by quantifying the cost of recruiting, training and
retaining employees, as well as the economic value of their skills, knowledge, and experience. This
information can help organizations to better allocate resources and to make informed decisions
about HR investments.
• To track the costs associated with managing human resources: It can help organizations track
the costs associated with managing their human resources, such as recruitment costs, training

expenses, and salaries and benefits. By analyzing this information, organizations can identify areas
where they can reduce costs and increase efficiency.
• To evaluate the effectiveness of human resource management practices: HRA provides a
framework for evaluating the effectiveness of HR practices such as training and development
programs, employee retention strategies, and compensation and benefits policies. By analyzing HR
data, organizations can identify areas where they can improve their HR practices and better support
employee productivity and performance.
• To support decision-making: HRA provides valuable information to support decision-making
about HR management practices, such as determining the optimal level of staffing, identifying
areas for improvement in employee performance, and assessing the impact of changes in
compensation and benefits.
• To comply with legal and regulatory requirements: HRA can help organizations to comply with
legal and regulatory requirements related to HR management, such as equal employment
opportunity regulations, minimum wage laws, and workplace safety regulations. By tracking and
reporting on compliance-related data, HRA can help organizations to avoid penalties and legal
disputes.
5.1.4 BENEFITS OF HUMAN RESOURCE ACCOUNTING:

1) Increase in productivity: Human Resource Accounting helps in identifying the individuals’
contribution so it motivates the employee in productivity as the system becomes very transparent.
2) Invaluable contribution to Human Resource: Department of Human Resource is diverted from

accounting, but under HUMAN RESOURCEA it becomes the integral part of accounting.
3) Decision making is facilitated: Individual statistics are obtained about every employee who helps in
decision making of the organization.
4) Success operation of organization: Individual institution strategy can be easily framed as the expenses
and incomes of each employee is measured and assessed.
5) Investment decision: Investment decision is taken as the basis and can be easily taken as the ready
statistics is available that too with the involvement of human resource.
6) Serves social purpose: Human Resource Accounting helps the management in restructuring their management
styles as per the requirements of the individuals which serves the social purpose in long run.
5.1.5 LIMITATIONS OF HUMAN RESOURCE ACCOUNTING:

1) Not clear: It is still vague and under stage of research, it is very difficult to quantify certain
aspects of spending on human resource.
2) No guidelines: No there is no prescribed standard as to how the human resource accounting is to be
done.
3) Uncertain human life: The exact life span of any other asset can be approximately measured but
human resource cannot be measured this is one opf the major disadvantage.
4) Cannot be owned like physical assets: Physical assets can be purchased and can be held with
registration tag as owners but in case of human assets this becomes impossible. 5) Tax laws do not
recognize this: Indian income tax 1961 does not provide any opportunity and relaxation on the
maintenance of human resource accounting.
5.1.6 VALUATION OF HUMAN RESOURCES:

There are different models in the valuation of human resources. They can
be discussed under the two heads as follows:
Cost Based Models:
(i) Historical Cost Model
(ii) Replacement Cost Model
(iii) Opportunity Cost Model
(iv) Standard Cost Model
(v) Value Based Cost Model
(a) HISTORICAL COST MODEL:

This approach is also called an acquisition cost model. This approach was developed by Brummet,
Flamholtz and Pyle. But the first attempt towards employee valuation was made by a footwear
manufacturing company, R. G. Barry Corporation of Columbus, Ohio with the help of Michigan
University in 1967. This method measures the organization’s investment in employees using the five
parameters: recruiting, acquisition, formal training and familiarization, informal training and informal
familiarization, and experience and development. This model suggests that instead of charging the
costs to profit and loss statement, it should be capitalized in the balance sheet. The process of giving a
status of asset to the expenditure item is called capitalization. In human resource accounting, it is
necessary to amortize the capitalized amount over a period of time. The unamortised cost is shown as
investments in the human assets. If an employee leaves the firm (i.e. human assets expire) before the
expected service life period, then the net value to that extent is charged to the current revenue
(ii) REPLACEMENT COST MODEL
The historical cost model was highly criticised as it only considers the sunk costs which are
irrelevant for decision making. Thus a new model for HRA was conceptualised which took into the
account, the costs that would be incurred to replace its existing human resources by an identical
one. This model measures the cost of replacing an employee. According to Rensis Likert,
replacement cost includes recruitment, selection, compensation, and training cost (including the
income foregone during the training period). The data derived from this method could be useful in
deciding whether to dismiss or replace the staff.
(iii)OPPORTUNITY COST MODEL

This model was advocated by Hekiman and Jones in 1967. This model is also called as Market Value
Model. This model of measuring human resources is based on the concept of opportunity cost (i.e.
the value of an employee in its alternative best use, as a basis of estimating the value of human
resources). The opportunity cost value may be established by competitive bidding within the firm, so
that in effect, managers bid for any scarce employee. A human asset therefore will have a value, only
if it is a scarce resource
(iv) STANDARD COST MODEL
This model was developed by David Watson. This model envisages establishment of a standard cost
per grade of employee updated every year. Replacement costs can be used to develop standard costs
of recruitment, selection, training and developing individuals. Such standards can be used to compare
result with those planned. Variance should be analysed and would form a suitable basis for control.

But under this model, determination of standard cost for each grade of employee is a difficult
process.
(v) VALUE BASED MODELS:
Present Value of Future Earnings Model or Lev and Schwartz Model
Rewards Valuation Model or Flamholtz Model
Certainty Equivalent Net Benefit Model
Chakraborty Model or Aggregate Payment Model
Dasgupta Model or Total Cost Model
1. PRESENT VALUE OF FUTURE EARNINGS MODEL OR LEV AND SCHWARTZ

MODEL
In 1971, Lev and Schwartz proposed an economic valuation of employees, based on the present value of
future earnings, adjusted for the probability of employees’ death, separation or retirement. This method
helps in determining what an employee’s future contribution is worth today.
According to this model, the value of human capital embodied in a person who is ‘r’ years old, is the
present value of his or her future earnings from employment and can be calculated by using the
following formula:
Where, = expected value of a ‘r’ year old person’s human capitalVr = I(t)
(1 + R)t-r
t = the person’s retirement age I(t) = expected annual earnings of the person upto theretirement R =
discount rate.
2. REWARDS VALUATION MODEL OR FLAMHOLTZ MODEL

This model was developed by Flamholtz. He advocated that an individual’s value to an organisation is
determined by the services he is expected to render. This model is an improvement to the Present Value
of Future Earnings Model. The model is based on the presumption that a person’s value to an
organisation depends upon the positions to be occupied by him in the organisation. The movement of
people from one organisational role to another is a stochastic process with rewards. As people move and
occupy different organizational roles, they render services (i.e. rewards) to the organisation. However,
the roles they will occupy in future will have to be determined probabilistically for each individual.
This model suggests a five steps approach for assessing the value of an individual to the organisation.
life.
which he will leave organisation. position for

a specified time period.specified future times.
3. CERTAINTY EQUIVALENT NET BENEFIT MODEL

This model was suggested by Pekin Ogan in 1976. Under this model, the value of human resources is
determined by taking into consideration the certainty with which the net benefits in future will accrue to
the enterprise. The model involves the following steps:
le in future.
with the net benefits from all employees. This will be the value of human resources of the enterprise.
4. CHAKRABORTY MODEL OR AGGREGATE PAYMENT MODEL

This model was suggested by Prof. S.K. Chakraborty in 1976. He was the first Indian to suggest a model
on human resources of an enterprise. Under this model the value of human resources can be calculated
by dividing the employees into two groups – Managerial and non- managerial, and then multiplying
average tenure of group of employees with their average salary. The value thus obtained is discounted at
the expected average after tax return on investment (ROI) over the average tenure period, so that value
of human asset does not fluctuate frequently.
5. DASGUPTA MODEL OR TOTAL COST MODEL

Prof. N. Dasgupta suggested this model in 1978. According to this model the total cost incurred by the
individual upto that position in the organisation should be taken as the value of a person which is
further adjusted by his intelligence level. The value thus calculated is revised time to time on the basis of
age, performance, experience and other capabilities.
5.2 FORENSIC ACCOUNTING

5.2.1 CONCEPT OF FORENSIC ACCOUNTING
The principle point of forensic accounting is not just to see how an extortion was submitted, however to
report it with the most astounding conceivable precision. As indicated by Gomide (2008), a great
Forensic accounting consolidates accounting examination furthermore requires great accounting and
investigative aptitudes). In the talk, EFG referred to that "it falls under general data or certain points, or
subjects as it can be sorted, general articulations
that individuals make to portray the subject, as investigative accounting, or even Forensic auditing".
Forensic accounting can be characterized as help with question in regards to assertions or suspicion of
extortion, which are liable to include case, master assurance, and enquiry by a fitting power, and
examinations of suspected misrepresentation, abnormality or indecency which could possibly prompt
common, criminal or disciplinary procedures. The emphasis is basically on accounting issues, however
the part of the forensic bookkeeper may stretch out to more broad examination which incorporates proof
social affair.
It is a result of the way that by definition, forensic assignments are identified with legal or semi legal
debate determination, that the Forensic specialist requires a fundamental comprehension of the material
statutory and customary law, the law of confirmation and the law of methodology. The most skilfully led
examination will be of no quality to the customer ought to the confirmation accumulated be ruled to be
forbidden or the master accounting witness be found to miss the mark in appreciation of the necessities
of ability, believability, or autonomy.

5.2.2 DEFINITIONS OF FORENSIC ACCOUNTING
According to AICPA (1993): “Forensic accounting is the application of accounting principles, theories,
and discipline to facts or hypotheses at issues in a legal dispute and encompasses every branch of
accounting knowledge.”
Forensic accounting is defined by Zia (2010) as: “The science that deals with the relation and application
of finance, accounting, tax and auditing knowledge to analyze, investigate, inquire, test and examine
matters in civil law, criminal law and jurisprudence in an attempt to obtain the truth from which to render
an expert opinion.”
5.2.3 PRACTICE OF FORENSIC ACCOUNTING

Arnoff, Norman B., and Sue C. Jacobs. (2001) had clarified the administrations rendered by the forensic
accountants are in incredible interest in the accompanying territories:
5.2.3.1 Fraud detection where employees commit Fraud Where the employee enjoys fake exercises:
Where the representatives are gotten to have submitted misrepresentation the forensic accountant tries to
find any benefits made by them out of the assets defalcated, then take a stab at questioning them and
attempting to discover the concealed truth.
5.2.3.2 Criminal Investigation Matters identifying with money related ramifications the administrations
of the forensic accountants are benefited of. The report of the accountants is considered in get ready and
presentation as proof.
5.2.3.3 Outgoing Partner's settlement In the event that the active accomplice is not upbeat about his
settlement he can utilize a forensic accountant who will accurately evaluate his contribution (resources)
and also his liabilities effectively.
5.2.3.4 Cases relating to professional negligence Proficient carelessness cases are taken up by the
forensic accountants. Non-adaptation to Generally Accepted Accounting Principles (GAAP) or
rebelliousness to examining hones or moral codes of any calling they are expected to gauge the
misfortune because of such expert carelessness or deficiency in administrations.
5.2.3.5 Arbitration service Forensic accountants render assertion and intercession administrations for
the business group, since they experience extraordinary preparing in the region of option question
determination.
5.2.3.6 Facilitating settlement regarding motor vehicle accident As the forensic accountant is very much
familiar with complexities of laws identifying with engine vehicles, and other applicable laws in power,
his administrations get to be vital in measuring monetary misfortune when a vehicle meets with a
mishap.
5.3 Green Accounting
5.3.1 Meaning of Green Accounting
A new system of sustainable accounting, known as Green Accounting, has emerged. “It permits the
computation of income for a nation by taking into account the economic damage and depletion in the
natural resource base of an economy.”
It is a measure of sustainable income level that can be secured without decreasing the stock of natural
assets. This requires adjustment of the System of National Accounts (SNA) in terms of stock of natural
assets. In SNA, allowance is made for capital consumption or man-made capital while calculating Net
Domestic Product (NDP). Net Domestic Product (NDP) =GDP- depreciation.
5.3.2 Objectives of Green Accounting
1. Segregation and Elaboration of all Environment related Flows and Stocks of Traditional
Accounts:
The segregation of all flows and stocks of assets related to environment permits the estimation of the
total expenditure for the protection of the environment. A further objective of this segregation is to
identify that part of the gross domestic product that reflects the costs necessary to compensate for the
negative impacts of economic growth, that is, the defensive expenditures.
2. Linkage of Physical Resource Accounts with Monetary Environmental Accounts:
Physical resource accounts cover the total stock or reserves of natural resources and changes therein,
even if those resources are not affected by the economic system. Thus natural resource accounts provide
the physical counterpart of the monetary stock and flow accounts of SEEA.
3. Assessment of Environmental Costs and Benefits:
The SEEA expands and complements the SNA with regard to costing:
(a) The use (depletion) of natural resources in production and final demand;
(b) The changes in environmental quality, resulting from pollution and other impacts of production,
consumption and natural events, on the one hand, and environmental protection, on the other.
4. Accounting for the Maintenance of Tangible Wealth:
The SEEA extends the concept of capital to cover not only human-made but also natural capital. Capital
formation is correspondingly changed into a broader concept of capitalaccumulation allowing for the use
or consumption and discovery of environmental assets.
5. Elaboration and Measurement of Indicators of Environmentally Adjusted Product and Income:
The consideration of the costs of depletion of natural resources and changes in environmental quality
permits the calculation of modified macro-economic aggregates, notably an environmentally adjusted
net domestic product (EDP).
5.3.3 Problems of Green Accounting:
The SEEA method of calculating Green NDP is beset with a number of problems discussed below:
1. SEEA does not include comprehensive natural resource accounting because regional natural resource
accounts are not reflected in the main accounts of the SEEA.
2. It focuses on the use of natural resource for economic activities and ignores the flows and
transformations within the natural resources.
3. The types of data needed for SEEA are not available in the necessary format. Thus lack of data has
been one of the main problems in the SEEA.
4. Another problem arises when environmental data are directly connected with data of existing national
accounts for the preparation of the SEEA. They require assigning of environmental pollution loads to the
appropriate economic activities. However, the costs of preventing pollution can only be determined if
the causes of pollution are identifiable. But the causes of many types of environmental pollution are not
clear. If there are several pollution factors which cause environmental damage, the assignment of this
damage will be highly arbitrary.
5. Another problem arises when some of the consequences of environmental pollution become visible
after a long time. Estimating only the immediate consequences will lead to wrong policy decisions.
6. Unlike the market prices used by the SNA, there is no simple justifiable valuation system for the
SEEA. For different aspects of environmental problems, different valuation problems are used such as
prevention and restoration costs and contingent evaluations based on surveys. There are mainly
theoretical and arbitrary constructions in SEEA.
7. The pricing of all environmental variables in monetary terms in the SEEA has consequences:
(i) The accounting system is restricted to those variables which are easily monetized thereby reducing
the range of the accounting system,
(ii) Monetization of environmental variables and their concentration of only a few aggregates results in a
drastic reduction of the SEEA system.
5.4 INFLATION ACCOUNTING
5.4.1 MEANING OF INFLATION ACCOUNTING
Inflation is that state of affair when money in circulation is more than the production of commodities
and services and purchasing power of money comes down and prices of commodities and services
increases.
Accounting for changing prices (Inflation Accounting) has become synonymous with accounting for
inflation due to the unprecedented pressure of inflationary price rise in most countries in recent decades.
In periods of sustained price rise, historical costs lose their relevance and may even become misleading
as measurements of economic value.
5.4.2 OBJECTIVES OF INFLATION ACCOUNTING
The objective of Inflation Accounting is to adjust historical cost figures for substantive changes in the
general level in the economy, The following are some of the objectives of Inflation Accounting:
(i). To remove the various distortions with which financial statement based on historical costsuffer.
(ii). To provide for more meaningful inter-period comparison.
(iii). To improve the meaning and measurement of income and expenses in the face of changing
the purchasing power of money.
(iv). To improve decision making in the organization.
5.5 ENVIRONMENTAL ACCOUNTING
5.5.1 MEANING OF ENVIRONMENTAL ACCOUNTING
The term “environmental accounting” is open to interpretation. In this guideline, environmental

accounting is the identification, measurement and allocation of environmental costs, the integration of
these environmental costs into business decisions, and the subsequent communication of the information
to a company’s stakeholders. Identification includes a broad examination of the impact of corporate
products, services and activities on all corporate stakeholders. After companies identify the impacts on
stakeholders as far as they can, they measure those impacts (costs and benefits) as precisely as possible
in order to permit informed management decision-making.
Measurements might be quantified in physical units or monetized equivalents. After their environmental
impacts are identified and measured, companies develop reporting systems to inform internal and
external decision makers. The amount and type of information needed for
management decisions will differ substantially from that required for external financial disclosures and
for annual environmental reports.
ORGANIZATIONS USE ENVIRONMENTAL ACCOUNTING FOR SEVERAL REASONS,

INCLUDING THE FOLLOWING:
*To help managers make decisions that will reduce or eliminate their environmental costs; * To better
track environmental costs that may have been previously obscured in overhead accounts or otherwise
overlooked;
*To better understand the environmental costs and performance of processes and products for more
accurate costing and pricing of products;
*To broaden and improve the investment analysis and appraisal process to include potential
environmental impacts; and
* To support the development and operation of an overall environmental management system.

Stakeholders are those with an interest in the environmental effects, activities, products and services of
an organization. Examples of stakeholders include bondholders, shareholders, managers, Board of
Directors, customers, suppliers, regulators, policy makers, employees, consumers, and community and
environmental groups.
5.5.2 SCOPE OF ENVIRONMENTAL ACCOUNTING
The scope of Environmental Accounting (EA) is very wide; it includes corporate, national and
international levels. Here, the emphasis is given on the corporate level accounting. The following aspects
are included in EA: -
(1) From internal point of view, investments are made by the corporate sector for minimization of
losses to environment. It includes investment made into the 67 environment saving equipment devices.
This type of accounting is easy as money measurement is possible.
(2) From external point of view all types of losses to the environment either occur directly or indirectly
due to business operation /activities. It mainly includes:
(a) Degradation and destruction like soil erosion, loss of biodiversity, air pollution, water pollution,
noise pollution, problem of solid waste, coastal and marine pollution.
(b) Depletion of non-renewable natural resources i.e., loss emerged due to over exploitation of non-
renewable natural resources like minerals, water, gas, etc
. (c) Deforestation and Land uses. This type of accounting is not easy as losses to environment cannot
be measured exactly in monetary value. Further, it is very hard to decide that how much loss was
occurred to the environment due to a particular industry. For this purpose, approximate idea can be given
or other measurement of loss like quantity of non- renewable natural resources used, how much sq.
meter area deforested and total area used for business purpose including residential quarters area
employees, etc., how much solid waste produced by the factory, how much wasteful air pass through
chimney in air and what types of elements are included in a standard quantity of wasteful air, type and
degree of noise madeby the factory, etc., can be used.
Terminal Questions
Section A
1. Define Human Resource Accounting.
2. Illustrate the benefits of Human Resource Accounting.
3. Narrate the Objectives of Human Resource Accounting.
4. Write short notes on Forensic Accounting.
5. Define Green Accounting.
6. Write short notes on Inflation Accounting
7. Narrate the concept of Environmental Accounting
8. What are the reasons for using Environmental Accounting.? Explain
Section B
1. Explain the various Cost based models for valuation of Human Resources.
2. Examine Green Accounting and its objectives and limitations in detail.
3. Discuss the Scope of Environmental Accounting.
Reference Books
• 5. Mukherjee & Hanif, Amitabh Mukherjee Mohammed Hanif Tata, Corporate Accounting, McGraw-
Hill Education, 2

III Sem BCOM Corporate Accounting SSM 1-5 Modules

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PADEGOGY: (SYNCHRONIZE)-Classroom Lecture & work sheet explanation Tutorials,

Module: 1. Valuation & Underwriting of shares. 14 Hours.

Module-2: Mergers and Acquisition 20 Hours

Module-3: Liquidation 06 Hours

Private circulation only

Module-5: Contemporary Trends in Accounting 3 Hours

Developing an insight on Mergers and Acquisitions of Companies and to help in

Private circulation only

1.1.2 METHODS OF VALUATION OF SHARES

1.2.2.2. On the basis of liability of the underwriters.

Less: Amounts payable to

𝑁𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝑵𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒂𝒔𝒔𝒆𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔

Net Assets available for Shareholders 4,32,000

𝑵𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒂𝒔𝒔𝒆𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔

Q) Following are the particulars of XYZ Limited:

𝑁𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠

Particulars Amt (₹)

c) Calculation of Capitalised Profits

3. EARNING CAPACITY METHOD

Step 2: Calculation of market value per share

(1) Underwriting of Shares

1.2.4. Marked and Unmarked Applications

Net Liability of an Underwriter XXX

Statement showing Underwriter's Liability Underwriters

Alternatively, the calculations can be made as follows:

2. On the basis of liability of the underwriters

1.3 TERMINAL QUESTIONS

2) Briefly explain the various methods of valuing goodwill.

5) Balance Sheet of Diamond Ltd. As on 31.12.2022

• To understand the meaning and types of amalgamation

The concept of amalgamation is very popular now as more companies carrying

The Institute of Chartered Accountants of India (ICAI) has issued Accounting

The accounting treatment to be followed for amalgamation, absorption and

2.3 Types of amalgamation:

AS -14 has classified amalgamation under the following two types:

Note: In both cases, Amalgamation includes Absorption and External Reconstruction.

2.3.1 Amalgamation in the Nature of Merger:

• No adjustment is intended to be made to the book values of the assets and

2.3.2 Amalgamation in the Nature of Purchase:

2.4 Purchase Consideration:

Purchase consideration can be computed under the following three methods:

2.4.1 Net Payments method:

50,000 Pref, shares of ₹. 10 each ₹.6 per share

Purchase Consideration = Assets taken over (at ‘an agreed

2.4.2 Exchange method:

2.5 Treatment of Fractional Shares:

In some cases while calculating the purchase consideration, the number of

2.6 Accounting Treatment:

There are two methods of accounting for amalgamation, viz.,

It will appear in the balance sheet as follows:

2.7. Meaning of Absorption:-