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Questions and Answers
Which of the following best describes the term 'amalgamation' in a business context?
Which of the following best describes the term 'amalgamation' in a business context?
- The process of a company selling off its assets to pay off debts.
- The merging of two or more companies into a new entity or the acquisition of one company by another. (correct)
- A temporary partnership between two companies for a specific project.
- The liquidation of a company's assets to distribute among its shareholders.
In an amalgamation, the Purchase Consideration (PC) is always equal to the calculated net asset value of the business being acquired.
In an amalgamation, the Purchase Consideration (PC) is always equal to the calculated net asset value of the business being acquired.
False (B)
What are the two primary methods used to calculate Purchase Consideration (PC) in amalgamation scenarios?
What are the two primary methods used to calculate Purchase Consideration (PC) in amalgamation scenarios?
lump sum amount method and the net asset method
In the context of amalgamation, equity and preference shareholders are generally considered as the _______ of the company.
In the context of amalgamation, equity and preference shareholders are generally considered as the _______ of the company.
Match the following items related to the calculation of the Net Asset Value:
Match the following items related to the calculation of the Net Asset Value:
Parag Limited has 40,000 equity shares. As per the amalgamation agreement with Anurag Limited, for every four shares in Parag, five shares of ₹10 each in Anurag will be issued at a 10% premium. What is the total Purchase Consideration (PC) for Parag Limited?
Parag Limited has 40,000 equity shares. As per the amalgamation agreement with Anurag Limited, for every four shares in Parag, five shares of ₹10 each in Anurag will be issued at a 10% premium. What is the total Purchase Consideration (PC) for Parag Limited?
When solving amalgamation problems, ledger entries are primarily used when solving from the perspective of the new company.
When solving amalgamation problems, ledger entries are primarily used when solving from the perspective of the new company.
In the case of Chirag Limited's amalgamation with Anurag Limited, if Anurag allots 7% preference shares of ₹100 each for the 6% preference shares of Chirag Limited, how many 7% preference shares will be issued for every five 6% preference shares of Chirag?
In the case of Chirag Limited's amalgamation with Anurag Limited, if Anurag allots 7% preference shares of ₹100 each for the 6% preference shares of Chirag Limited, how many 7% preference shares will be issued for every five 6% preference shares of Chirag?
In the context of journal entries for a new company after amalgamation, the 'Business Purchase Account' is typically _______, while the 'Liquidator of the Old Company' is credited.
In the context of journal entries for a new company after amalgamation, the 'Business Purchase Account' is typically _______, while the 'Liquidator of the Old Company' is credited.
Chirag Limited's Net Asset Value is ₹1,640,000. If the PC towards preference shareholders is ₹240,000, and the balance is discharged by issuing equity shares of ₹10 each in Anurag Limited at a 10% premium, approximately how many equity shares will be issued?
Chirag Limited's Net Asset Value is ₹1,640,000. If the PC towards preference shareholders is ₹240,000, and the balance is discharged by issuing equity shares of ₹10 each in Anurag Limited at a 10% premium, approximately how many equity shares will be issued?
Flashcards
Amalgamation
Amalgamation
Merging or takeover of one company by another, with payment (Purchase Consideration) given to the owners of the acquired business.
Purchase Consideration (PC)
Purchase Consideration (PC)
Payment provided by the acquiring business to the owners of the business being acquired during amalgamation.
Net Asset Method
Net Asset Method
A method to calculate Purchase Consideration by subtracting the total liabilities from the total assets of a business.
Shareholders as Owners
Shareholders as Owners
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Net Asset Method Formula
Net Asset Method Formula
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Anurag issues PC to Parag
Anurag issues PC to Parag
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Capital Reserve (Amalgamation)
Capital Reserve (Amalgamation)
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Chirag Limited Preference Share Exchange
Chirag Limited Preference Share Exchange
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General Entries: New Company
General Entries: New Company
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Study Notes
Amalgamation Overview
- Amalgamation involves the merging of two companies or the takeover of one company by another
- The acquiring business provides payment, known as Purchase Consideration (PC), to the owners of the business being acquired.
- In amalgamation scenarios, equity and preference shareholders act as owners of the company
Purchase Consideration (PC) Calculation Methods
- PC calculation is determined using either the lump sum amount method or the net asset method
- The net asset method involves determining the value of a business based on its assets and liabilities
- Net Asset Method Formula: Asset Value - Liability Value = Business Value
- The final PC agreement may be higher, lower, or equal to the calculated business worth, depending on the specific agreement
Solving Amalgamation Problems
- Once the PC is calculated, establish whether to solve the problem from the perspective of the old (closing) company or the new company
- To solve for old company can involve ledger entries or journal entries
- Solving for the new company involves journal entries
- Parag Limited and Chirag Limited decided to amalgamate and form a new company named Anurag Limited
- Anurag provides PC to the owners of Parag and Chirag for acquiring their businesses
Parag Limited Amalgamation Specifics
- Parag Limited assets and liabilities are taken over at book value
- For every four equity shares in Parag Limited, five equity shares of ₹10 in Anurag Limited will be issued at a 10% premium, reflecting a PC arrangement
Chirag Limited Amalgamation Specifics
- 6% preference shares of Chirag Limited will be allotted for 7% preference shares of ₹100 each in Anurag Limited
- For every five 6% preference shares of Chirag, four 7% preference shares will be issued
- A portion of PC towards preference shares has been specified, while the balance of the PC is discharged by issuing equity shares of ₹10 each in Anurag Limited at a 10% premium
Parag Limited PC Calculation
- The PC for Parag is calculated as: for every 4 shares, 5 shares will alloted
- Based on 40,000 shares in Parag Limited, calculate (40,000 * 5) / 4 = 50,000 shares in Anurag are to be issued
- Shares worth ₹10 originally issued at a 10% premium result in a share price of ₹11
- Total PC = 50,000 shares * ₹11 = ₹550,000
Parag Limited: Business Worth Assessment
- It's important to check advantages against the value
- Assets: plant and machinery at ₹800,000, stock at ₹650,000, debtors at ₹950,000, and bank balance at ₹650,000
- Liabilities: creditors at ₹750,000
- Total assets amount to ₹3,050,000
- Net Business Worth = ₹3,050,000 (Assets) - ₹750,000 (Liabilities) = ₹2,300,000
- ₹2,300,000 worth of business acquired at ₹550,000 leads to a gain named Capital Reserve
Chirag Limited PC Calculation (Preference Shares)
- Calculation: for every 5 shares, 4 shares will be alloted
- Chirag has 3,000 preference shares, resulting in (3,000 * 4) / 5 = 2,400 shares
- Each share is worth ₹100, so the total preference share value = 2,400 * ₹100 = ₹240,000 PC (Preference Shares)
Chirag Limited PC Calculation (Equity Shares)
- Plant and Machinery is valued at ₹850,000, and Stock is valued at ₹660,000 from its current assets.
- Total assets amount to ₹2,680,000
- Debentures amount to ₹290,000, and Creditors amount to ₹750,000 from its liabilities.
- Liability Total: ₹1,040,000
- PC calculation proceeds with asset value - liability value, so business value is ₹1,640,000
- To calculate PC for Chirag equity share holders; ₹1,640,000 - ₹240,000 = ₹1,400,000
Chirag Limited Equity PC Issuance
- 1,400 to be paid with equity shares and an added 10% premium, results in 14/- per share
- ₹1,400 / ₹11 = 127 shares
Necessary actions
- Calculate Purchase Consideration
- Provide general entries in the books of Anurag Limited
- Balance Sheet of Anurag Limited
Business Purchase
- Purchase of business from merger to closing values accounts of the old company
General Entries: New Company (Anurag Limited)
- 1st entry: Business Purchase Account Debit to Liquidator of Parag and Liquidator of Chirag. Sum of both parties to then result to whole owed to acquire
- 2nd entry: value comes from all assets minus sum of all liabilities, resulting in a debit or credit to capital reserve
- 3rd entry: payment from new company should equate to debit on Liquidator, with credit to share premium and equity shares
- Statuary reserve can trigger an entry, due to a loss
Adjustments: Chirag and Parag
- One company's debt to another, is a credit against debt, against what is owed from debt
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