Amalgamation, absorption and reconstruction

Basis

Amalgamation

Absorption

Liquidation

Two or more
companies were
liquidated
One new company
is formed

One or more
company
liquidated
No new company
is formed

New Company

External
Reconstruction
One company
liquidated
One new company
is formed

Net payment method

Purchase consideration Add all the payments to the vendor company
Net asset method
Purchase consideration realized value of assets taken total liabilities paid

Journal entries in a vendor company

1. For closing all assets
Realisation a/c Dr
To All assets a/c(book value)
2. For closing all liabilities
Liabilities a/c Dr
To Realisation a/c (book value)
3. For receiving purchase consideration
Bank a/c
Shares a/c
Debentures a/c
To Realisation a/c
4. For realization expenses paid
Realisation a/c
To cash a/c
5. For liabilities not taken
Realisation a/c Dr.

6.
7.
8.

9.

To cash
For assets not taken by purchasing company
Cash a/c Dr
To Realisation a/c
For realization profit (b/f in the debit side)
Realisation a/c Dr
To equity shareholders a/c
For closing equity share capital, general reserve, P&L a/c ) liability side)
Equity share capital a/c Dr
General Reserve a/c Dr
Profit and loss a/c Dr
To Equity shareholders a/c
For closing P&L a/c, discount on issue of shares or debentures &
Preliminary expenses(asset side)
Equity shareholders a/c Dr.
To profit and loss a/c
To discount on issue of shares or debentures
To preliminary expenses

Ledger accounts in the books of vendor company\

1. Realisation A/c
Particulars
To all assets (book value)
To cash
(liabilities not taken paid)
To cash
(Realisation expenses)
To Debentures holders(paid)
To Equity shareholders (b/f)

Amount Particulars
Amount
By all liabilities(book value)
By Debentures ( Book value)
By purchasing company a/c
(pc received)
Shares
Debentures
Cash

2. Preference share capital a/c

Particulars
To Bank a/c
To Realisation a/c

Amount

Particulars
By opening capital
By Realisation a/c (b/f)

Amount

3. Equity share holders a/c

Particulars
To P & L A/c
To Preliminary exp (Asset
side)
To Realisiation a/c(loss)
To Equity shares from PC
To Cash (b/f)

Amount

Particulars
By opening capital
By P&l(liability side)
By General Reserve
By Realisation a/c (profit)
By dividend equalization
fund

Amount

Cash a/ c should be prepared it will tally

1. Except cash means cash should not be transferred to realization a/c
2. If no information is given, cash in hand should be transferred to
realization a/cs debit side.
3. Business means creditors are taken/paid by purchasing company
4. If no information is given all the liabilitiesshould be paid in cash
Balance sheet
Liabilities
Profit and loss a/c
General Reserve a/c
Sinking fund a/c
Dividend equalization fund
Accident compensation fund

Assets
Preliminary expenses
Discount on issue of share and
debenture
Profit and loss a/c
Underwrtting commission

The above assets should be transferred to debit side of equity

shareholders a/c and the above liabilities should obe transferred to credit
side of equity shareholders a/c
Treatment of realization expenses
1. For realisaion expenses paid by vendor company
Realisation a/c Dr.

To cash a/c
2. Realization expenses paid by purchasing company are added while
calculating the purchase consideration
Realisation a/c Dr
To cash a/c
In the books of purchasing company
Goodwill a/c Dr
To bank a/c
No entry is passed in the books of vendor company because the realization
expenses are paid by purchasing company. In the books of purchasing company the
following entry is passed
Good will a/c
To Bank a/c
Calculation of purchase consideration
Net payment method
Business purchase a/c
To liquidator of Vendor co
(Being PC due)
Assets a/c
Goodwill a/c
To liabilities
\To Business purchases a/c)
(Being assets and liabilities taken)
Liquidator of vendor co.
To Debentures
To Premium on debentures
(Being PC received)