Lecture Notes: Accounting Treatment in the Books of Transferor Company

Introduction

• Sahab Academy presentation on amalgamation.
• Focus on accounting treatment in the books of the transferor (vendor/selling) company.
• Previous videos covered the concept of amalgamation and problems on purchase consideration using net payment and net asset methods.

Key Concepts

Transferor Company

• A company that loses its existence to become part of another company.
• Examples: If XYZ Limited acquires ABC Limited, ABC becomes the transferor company.
  • ABC dissolves, liquidates, and loses existence (old company).
  • XYZ is the transferee company (new company).

Accounting Treatment

• Objective: Close the books of the liquidated company.
• Reverse each balance sheet item:
  • Assets: Typically have a debit balance, reverse by crediting.
  • Liabilities: Typically have a credit balance, reverse by debiting.
  • Capital: Typically have a credit balance, reverse by debiting.
  • Fictitious Assets: E.g., advertisement expense, underwriting commission, should be canceled.

Realization Account

• Open a nominal account to close balance sheet items by:
  • Assets: Transfer to realization account (except fictitious assets).
  • Liabilities: Transfer to credit side of realization account.
  • Capital: Transfer to equity and preference shareholder accounts.
  • Fictitious Assets: Borne by equity shareholders.

Process

1. Cancel and transfer assets and liabilities to the realization account.
2. Transfer capital and reserves to relevant shareholder accounts.
3. Handle fictitious assets by transferring to equity shareholders.
4. Record purchase consideration at market value.
5. Manage realization expenses according to who pays (transferor/transferee).
6. Account for any unfollowed assets/liabilities.
7. Distribute purchase consideration to shareholders.

Journal Entries

• Modern Rules of Accounting:
  • Asset increase: Debit
  • Asset decrease: Credit
  • Liability increase: Credit
  • Liability decrease: Debit
• Entries include:
  1. Transfer assets to realization account.
  2. Transfer liabilities to realization account.
  3. Transfer capital to shareholder accounts.
  4. Bypass fictitious assets to equity shareholder account.
  5. Purchase consideration due and receipt entries.
  6. Handle assets/liabilities not taken over.
  7. Payment of realization expenses.
  8. Payment distribution to preference and equity shareholders.

Ledger Accounts

• Types of accounts to prepare:
  • Realization Account
  • Equity Shareholder Account
  • Preference Shareholder Account
  • Transferee Company Account
  • Bank Account

Procedures

1. Empty balance sheet through realization account.
2. Cross-post capital and reserves to shareholder accounts.
3. Handle fictitious assets in equity shareholder account.
4. Record payments from purchase consideration.
5. Utilize standard ledger formats for presentation.

Conclusion

• Follow step-by-step process for proper accounting.
• Understand the importance of closing books and handling each account with care.
• Adapt the learning to exam requirements and specific syllabus.