III Sem BCOM Corporate Accounting SSM 1-5 Modules
III Sem BCOM Corporate Accounting SSM 1-5 Modules
Semester – III
B.com Regular
Edition: 2023
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 560069
Edition: 2023
( As per NEP)
NOTE:
THE WORKBOOK IS ONLY A DIRECTIVE FOR STUDENTS AND NOT
EXHAUSTIVE TOWARDS THE COURSE. THE STUDENTS MUST REFER
TO THE REFERENCE BOOKS AND READING LISTS MENTIONED.
Developed by:
JAIN UNIVERISTY
JAIN UNIVERSITY
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
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
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
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
1.1,1 MEANING
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.
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(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.
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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
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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
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.
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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
Sundry Creditors 70,000
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
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
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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
Less: Total Liabilities:
Sundry Creditors 40,000
Provision for Taxation 20,000
Provident Fund 10,000
(70,000)
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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 =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔
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
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= ₹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
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1,55,250
=
3
= ₹51,750
b) Calculation of profits available for Dividends to Equity Shareholders
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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.
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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:
Underwriter's A/C Dr.
To Share Capital / Debentures A/C
To Share Premium / Debenture Premium A/C
3. When shares or debentures are issued at a discount:
Underwriter's A/C Dr.
Discount on issue of Shares/Discount on Issue of Deb. A/C Dr.
To Share Capital / Debentures A/C
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.
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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.
Key Points
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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
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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:
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
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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
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treated as an underwriter for 20,000 shares.
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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
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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:
A: 2,000 shares B: 1,000 shares C: 1,000 shares
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:
A: 10,000 shares B: 7,000 shares C: 3,000 shares
Applications were received for 16,000 shares, of which marked applications were as follows:
A: 7,600 shares B: 4,040 shares C: 3,360 shares
Show how the liability of the underwriting should be completed.
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.
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.
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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
Liabilities ₹ Assets ₹
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
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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:
Liabilities ₹ Assets ₹
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
5% Debentures 1,00,000
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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
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(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
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settled their accounts.
You are required to:
Prepare a statement showing the liability of the underwriters
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
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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:
2.1 Introduction:
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
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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.
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
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company”.
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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.
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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:
=
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.
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
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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
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.
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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
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Step 3. Closing the books of Transferor Company: The following journal entries are
to be passedunder the purchase method of accounting:
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(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
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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
Formation Expenses:
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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
Assets A B
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:
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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)
Purchase Consideration 2,08,350
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.
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
Purchase Consideration 1,69,000
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SL NO PARTICULARS LF DEBIT CREDIT
C Limited Account
To Realization A/c 2,08,350 By Equity Shares in CLimited 2,08,350
Account
2,43,000 2,43,000
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2 Creditors A/c Dr 6,000
To Realization A/c 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
To Realization A/c 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
To Equity Shareholders A/c 1,75,000
[Being equity share capital
called back]
7 Reserve fund A/c Dr 12,000
P&L A/c Dr 4,000
To Equity shareholders A/c 16,000
[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]
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Equity Shares in C Limited Account
To C Ltd A/c 1,69,000 By Equity Share Holders 1,69,000
Account
1,91,000 1,91,000
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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
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.
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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)
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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.
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
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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.
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Goodwill =5,40,000/90,000=6
Calculation of Purchase consideration of A Ltd
=9,600 shares
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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
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 shareholders/c
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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]
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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
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
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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.
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Cash 1,00,000
10,000
Total 26,00,000
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
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Soln:
Calculation of P.C
A co. [Calculation of Capital employed]
Land and building 7,00,000
Plant and machinery 10,50,000
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
AB Company Ltd
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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
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
Creditors A/c
To bank 1,20,000 By balance B/d 1,00,000
By O/s liabilities 20,000
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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
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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
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Balance sheet of AB Company Ltd
Equities and Liabilities Rs
Share capital
Authorized capital 40,00,000
Issued and subscribed capital 28,00,000
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
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
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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:
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Stock 10,000
Debtors 45,000
Cash 5,000
1,60,000
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.
Note: Sun Light Limited has an investment of Rs.5,000 in Rs.50 paid-up shares of Bright
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Light Limited. Therefore, number of shares held is
5,00
Rs.500
1,000
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.
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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.
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).
= Rs.50,000.
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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:
3,02,500 3,02,500
2,20,000 2,20,000
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Dr. Debenture Holders A/c Cr.
Particulars Rs. Particulars Rs.
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.
Particulars Rs. Particulars Rs.
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.
Particulars Rs. Particulars Rs.
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.
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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.
Equities and liabilities Amount
Share capital
4000 shares at Rs.100 each 4,00,000
Reserves and surplus
General Reserve 50,000
Profit & Loss a/c 5,600
Long term loans
5% Debentures 2,50,000
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.
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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
Purchase Consideration 5,28,000
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.
9,53,700 9,53,700
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Dr. N Ltd. A/c Cr.
Particulars Rs. Particulars Rs.
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.
Particulars Rs. Particulars Rs.
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
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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.
Books of N Ltd.
Journal Entries
Sl. Particulars Rs. Rs.
No
1 Business Purchase A/c Dr. 5,28,000
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 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)
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5 Goodwill A/c 1,500
1,500
Dr
To Bank A/c
(Being payment to P Ltd., for
meeting Realization expenses recorded)
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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
Purchase Consideration 3,00,000
Journal Entries in the Books of A Company (Vendor Company)
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Journal Entries in the Books of B Company (Purchasing Company)
Sl. Particulars Rs. Rs.
No
1 Business Purchase A/c Dr. 3,00,000
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
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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.
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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
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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.
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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.
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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
Plant and machinery 4,80,000 2,40,000
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
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.
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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
Reserves and surplus
General Reserve 2,00,000 70,000
P & L A/c 1,15,000 50,000
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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
Reserves and surplus
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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.
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2. The following is the Balance Sheet of Fair Deal Ltd. as on 31st March 2001:
17,90,600
Assets Amount
Fixed assets
Land and buildings 4,25,000
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.
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
Miscellaneous expenses
Profit and loss account 40,100
Preliminary expenses 5,000
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.
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
• 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
Learning Objective
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.
“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.
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.
• 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.
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
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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.
5.5. Liquidator
Are persons appointed specially for conducting the liquidation or winding up proceedings of the
company.
In case of:
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:
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.
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.
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
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.
Solution:
… Company Liquidators Final Statement
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
Bank Overdraft 20,000
8% Debentures 1,00,000
Interest outstanding on debentures 8,000
Current liabilities
Stock 5,25,000
Debtors 1,00,000
Miscalleneous expenses
The company went into liquidation on that date. Prepare liquidator’s statement
after taking into account the following.
Solution:
6% Debentures 1,00,000
Unsecured Loan (Mortgage on Land & Building) 1,00,000
Current liabilities
Stock 1,00,000
Debtors 1,00,000
Cash at Bank 30,000
Miscalleneous expenses
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:
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.
Working Note:
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;
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
Terminal Questions
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
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
Creditors 1,45,000
7,05,000
Assets Amount
Fixed assets
Land & Building 1,00,000
Plant and machinery 2,50,000
Intangible assets
Patents 40,000
Current assets
Stock 55,000
Debtors 1,10,000
Cash at bank 30,000
Miscellaneous expenses
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.
5) On 31st December 1989, a company was liquidated and itsbalance sheet was
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.
Share capital:
6,000, 5% Cumulative preference share of Rs.100 each fully paid. 6,00,000
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
Miscellaneous expenses
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
• 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
Private circulation only 109
• Dr. V. Rajasekaran & Dr. R.Lalitha , Corporate Accounting 2019
• 5. Mukherjee & Hanif, Amitabh Mukherjee Mohammed Hanif Tata, Corporate Accounting,
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 .
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.
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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.
➢ 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.
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
(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
(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.
(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.
Private circulation only 114
(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).
(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.
Private circulation only 115
(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) Capital Commitments – Financial commitments due to activities agreed by the company
to be undertaken by it in future. (Uncalled Liability)
X. Tax expense:
(1) Current tax
(2) Deferred tax
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
Private circulation only 118
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
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’.
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:
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.
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.
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
Under which heading and sub-headings will the following items appear in the Balance Sheet of a company as per
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:
Item Main Group Sub-Group
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:
Private circulation only 124
Under which heading and sub-headings will the following items appear in the Balance Sheet of a company as per
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:
Item Main Group Sub-Group
(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:
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.
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
X. Tax expense:
(1) Current tax -
(2) Deferred tax -
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
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
12 Other expenses -
(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
➢ 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:
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.
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.
Private circulation only 133
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
Adjustments:
1. Stock on 31-12-2009 Rs.181700.
Private circulation only 135
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
Reference Books
• R.L. Gupta and M. Radhaswamy, Corporate Accounting, 2019
Private circulation only 136
• 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 5
Contemporary Trends in Accounting
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.
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.
life.
le in future.
with the net benefits from all employees. This will be the value of human resources of the enterprise.
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.
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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.
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.
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.
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).
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.
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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.
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.
Private circulation only 145
In periods of sustained price rise, historical costs lose their relevance and may even become misleading
as measurements of economic value.
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.
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.
*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
Private circulation only 146
environmental impacts; and
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
Private circulation only 147
• 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