Lecture Notes: Amalgamation Accounting - Transferor Company

Introduction

• This lecture covers the accounting treatment in the books of the transferor company (vendor/selling company) during amalgamation.
• Previous videos covered the concept of amalgamation and issues related to purchase consideration using the net payment and net asset methods.

Key Concepts

Definition of Transferor Company

• The company losing its existence to become part of another company.
• Example: ABC Limited becomes part of XYZ Limited and loses its existence.

Balance Sheet Items

• Assets: Always have a debit balance.
• Liabilities: Always have a credit balance.
• Capital (Equity): Always have a credit balance.
• Fictitious Assets: No resale value, include items like advertising expenses, preliminary expenses.

Accounting Treatment

Closing the Books

• Reverse each balance sheet item:
  • Assets: Credit to cancel.
  • Liabilities: Debit to cancel.
  • Capital: Debit to cancel.
• Utilize a Realization Account (a nominal account) to consolidate items.

Steps in the Process

1. Transfer of Assets and Liabilities:

   • Transfer all assets (except fictitious) to the realization account.
   • Transfer all liabilities to the realization account.

2. Fictitious Assets Handling:

   • Moved to the equity shareholder account as they bear losses.

3. Purchase Consideration:

   • Record in the realization account at market value.
   • If paid by transferee, no entry in transferor's books.

4. Handling Non-Taken Over Assets/Liabilities:

   • The transferor company must sell assets or settle liabilities itself.

Journal Entries

Entry Types

1. Transferring Assets & Liabilities:

   • Example: Realization Account Debit to Various Assets

2. Cancelling Capital & Reserves:

   • Example: Equity Share Capital Account Debit to Equity Shareholder Account

3. Handling Purchase Consideration:

   • Entry for due: Transferee Company Account Debit to Realization Account
   • Entry for receipt: Equity Shares/Cash Account Debit to Transferee Company Account

4. Realization Expenses & Non-Taken Over Items:

   • Expenses by transferor: Realization Account Debit to Bank Account
   • Assets sold: Bank Account Debit to Realization Account

5. Payment to Shareholders:

   • Preference Shareholders: Preference Shareholders Account Debit
   • Equity Shareholders: Equity Shareholders Account Debit

6. Closing Realization Account:

   • Profit/Loss transferred to equity shareholders.

Ledger Accounts

Key Accounts

• Realization Account: Consolidates all asset and liability transfers.
• Equity Shareholder Account: Records payments and receives profits/losses.
• Preference Shareholder Account: Handles preference share capital and payments.
• Transferee Company Account: Shows purchase consideration breakdown.
• Bank Account: Cross-postings from payment-related entries.

Important Notes

• Don't close realization account before opening preference shareholder account to check for extra payments.
• Cross-posting is essential across ledgers to properly account for all items.

These notes summarize the detailed accounting process and journal entries required for handling amalgamation in the books of the transferor company. They provide a framework for making entries and preparing necessary ledger accounts.