Partnership Accounts
Amalgamation of Firms
Part A: Discussion of basic theories in regard to accounting
for amalgamation of firms including (1) the journal entries in the books of
both the amalgamating and amalgamated firms, and (2) calculation of Purchase
Consideration.
Part B: Two Illustrations with Solutions.
When two firms amalgamate, either
1. Both the firms get
dissolved and a new firm is created to take over the businesses of the two
dissolved firms (this is known as amalgamation by
merger), or
2. One of such firms gets
dissolved and the other firm which takes over the business of the dissolved
firm continues (this is known as amalgamation by
acquisition).
The firm
which is dissolved is called amalgamating firm
(transferor) and the firm which continues is called amalgamated firm (transferee).
Balance sheet of the
amalgamating firm is closed by transferring the assets and liabilities to
Realisation A/c at their book values. Cash/Bank/Overdraft
balances are not transferred to Realisation A/c if they are not taken over by
the amalgamated firm. If the cash/bank/overdraft balances are not transferred
to Realisation A/c, these are transferred to the Bank A/c which is opened
separately in course of dissolution. Cash realised from sale of
assets and cash paid to settle liabilities (the assets and liabilities being those
not taken over by the amalgamated firm) are entered in the Bank A/c. Reserves,
accumulated profits (i.e. profit and loss account credit balance) and accumulated
losses (i.e. profit and loss account debit balance) are also not transferred to
Realisation A/c – these are transferred to Partners’ Capital A/c in their
profit sharing ratio. Realisation A/c is credited with the Purchase
Consideration (amount paid by the amalgamated firm to the partners of the amalgamating
firm for the net assets taken over at agreed values). Finally, Realisation A/c
is closed by transferring the profit or loss on realisation to Partners’ Capital
A/c in their profit sharing ratio. Bank A/c, if
opened separately in course of dissolution, is also closed by transferring the
balance to Partners’ Capital A/c in their profit sharing ratio.
Amalgamated firm makes
entries for assets and liabilities taken over and also for any goodwill or
capital reserve arising out of the acquisition/merger. Finally, the amalgamated
firm prepares its own balance sheet including the assets and liabilities taken over
from the amalgamating firm/firms.
CALCULATION OF PURCHASE CONSIDERATION
(If not given in the problem)
|
Purchase
consideration = |
|
Net assets
taken over + Loss on acquisition by the amalgamated firm (i.e. Goodwill) |
|
OR |
|
Net assets
taken over − Profit on acquisition by the amalgamated firm (i.e. Capital
reserve) |
[Notes:
1. Here,
|
Net assets taken over = |
|
All assets as taken over at
agreed/market price − All liabilities as taken over at agreed/market price. |
2. If there
is no profit or loss on acquisition by the amalgamated firm, purchase
consideration will be equal to the net assets taken over.]
COMPUTATION OF GOODWILL/CAPITAL
RESERVE
(In the books of the amalgamated/transferee
firm)
|
Goodwill = |
Purchase
consideration – Net assets taken over |
|
Capital
reserve = |
Net assets
taken over – Purchase consideration |
JOURNAL ENTRIES
(In the books of the amalgamating/transferor
firm)
JOURNAL ENTRIES
(In the books of the amalgamated/transferee
firm)
Click here for the Journal Entries in the books of Amalgamated Firm in PDF
Amalgamation of Firms
Selected Problems
Illustration: 1
Following is the Balance Sheet of AB & Co. And CD and
Co. As on 31.03.2021
|
Liabilities |
AB (Rs) |
CD (Rs) |
Assets |
AB (Rs) |
CD (Rs) |
|
Bank Loan |
10,000 |
|
Stock |
32,000 |
24,000 |
|
Bills Payable |
30,000 |
40,000 |
Debtors |
18,000 |
30,000 |
|
A’s Capital |
60,000 |
|
Machinery |
60,000 |
20,000 |
|
B’s Capital |
30,000 |
|
Cash |
12,000 |
2,000 |
|
C’s Capital |
|
36,000 |
Furniture |
8,000 |
6,000 |
|
D’s Capital |
|
24,000 |
Investments |
|
18,000 |
|
|
1,30,000 |
1,00,000 |
|
1,30,000 |
1,00,000 |
AB & Co.
absorbed CD & Co. on 01.04.2021 on the following terms:
(a) that the value of
the goodwill of CD & Co. would be Rs 12,000;
(b) that the
investments of CD & Co. to be sold out for Rs 24,000 and the realised cash
will be introduced in the acquiring business;
(c) that the stock of
CD & Co. to be reduced to Rs 22,000;
(d) that the machinery
of CD & Co. will be increased by 40%;
(e) that the furniture of CD & Co. will be reduced by 10%.
It was further
agreed that for AB & Co., following are the adjustments to be made:
(i)
Assets are to be revalued as follows :
Goodwill – Rs 16,000;
Stock – Rs 40,000; Machinery – Rs 84,000; Furniture – Rs 7,200;
(ii)
Bank loan to be repaid.
Show necessary
Ledger Accounts to close the books of CD & Co. and necessary Journal
entries and Balance Sheet in the books of AB & Co. after absorption.
Click here for Solution: 1 (Books of AB & Co. - JE)
Click here for Solution: 1 (Books of AB & Co. - BS)
Illustration: 2
Two partnership
firms, carrying on business under the style of R & Co. (Partners A & B)
and W & Co. (Partners C & D) respectively, decided to amalgamate into
RW & Co. with effect from 1st April 2021. The respective Balance
Sheets of both the firms as on 31st March, 2021 are in below:
|
Liabilities |
R (Rs) |
W (Rs) |
Assets |
R (Rs) |
W (Rs) |
|
B’s Capital |
19,000 |
|
Goodwill |
|
5,000 |
|
C’s Capital |
|
10,000 |
Machinery |
10,000 |
|
|
D’s Capital |
|
2,000 |
Stock-in-trade |
20,000 |
5,000 |
|
Bank Loan |
15,000 |
|
Debtors |
10,000 |
10,000 |
|
Creditors |
10,000 |
9,500 |
Cash in hand |
|
1,500 |
|
|
|
|
A’s Capital |
4,000 |
|
|
|
44,000 |
21,500 |
|
44,000 |
21,500 |
Profit sharing
ratios are: A & B = 1:2; C & D = 1:1. Agreed terms are:
1.
All fixed assets are to be devalued by
20%.
2.
All stock in trade is to be appreciated
by 50%.
3.
R & Co. owes Rs 5,000 to W & Co.
as on 31st March 2013. This is settled at Rs 2,000. Goodwill is to
be ignored for the purpose of amalgamation.
4.
The fixed capital accounts in the new
firm (RW & Co.) are to be: Mr A Rs 2,000; Mr. B Rs 3,000; Mr C Rs 1,000 and
D Rs 4,000.
5.
Mr. B takes over bank loan of R &
Co. and contributed to Mr. A the amount of money to be brought in by Mr. A to
make up his capital contribution.
6.
Mr C is paid off in cash from W &
Co. and Mr. D brings in sufficient cash to make up his required capital contribution.
Pass necessary
Journal entries to close the books of both the firms as on 31st March
2013.
Click here for Solution: 2 (Books of R & Co. - JE) in PDF
Click here for Solution: 2 (Books of W & Co. - JE) in PDF
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