CA Inter

SSA Notes on

Advanced
Accounting
Volume – 2

Dr CMA T K Sridhar
CMA CS Yamuna Sridhar
June, 2024

SINGAR BOOKS AND PUBLICATIONS

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 ADVANCED ACCOUNTING
CONTENT
Volume 1 Page
1 Introduction to Accounting Standards 1.1
2 Framework for Preparation and Presentation 2.1
of Financial Statements
3 Applicability of Accounting Standards 3.1
4 Presentation and Disclosures Based Accounting Standards
4.1 AS 1: Disclosure of Accounting Policies 4.1.1
4.2 AS 3: Cash Flow Statement 4.2.1
4.3 AS 17: Segment Reporting 4.3.1
4.4 AS 18: Related Party Disclosures 4.4.1
4.5 AS 20: Earnings Per Share 4.5.1
4.6 AS 24: Discontinuing Operations 4.6.1
4.7 AS 25: Interim Financial Reporting 4.7.1
5 Assets Based Accounting Standards
5.1 AS 2: Valuation of Inventory 5.1.1
5.2 AS 10: Property, Plant and Equipment 5.2.1
5.3 AS 13: Accounting for Investments 5.3.1
5.4 AS 16: Borrowing Costs 5.4.1
5.5 AS 19: Leases 5.5.1
5.6 AS 26: Intangible Assets 5.6.1
5.7 AS 28: Impairment of Assets 5.7.1
6 Liabilities Based Accounting Standards
6.1 AS 15: Employee Benefits 6.1.1
6.2 AS 29: Provisions, Contingent Liabilities and Contingent Assets 6.2.1
7 Accounting Standards Based on
Items Impacting Financial Statements
7.1 AS 4: Contingencies and Events Occurring after the Balance Sheet Date 7.1.1
7.2 AS 5: Net Profit or Loss for the Period, Prior Period Items and 7.2.1
Changes in Accounting Policies
7.3 AS 11: The Effects of Changes in Foreign Exchange Rates 7.3.1
7.4 AS 22: Accounting for Taxes on Income 7.4.1
 8 Revenue Based Accounting Standards
8.1 AS 7: Construction Contracts 8.1.1
8.2 AS 9: Revenue Recognition 8.2.1

Volume 2
9 Other Accounting Standards
9.1 AS 12: Accounting for Government Grants 9.1.1
9.2 AS 14: Accounting for Amalgamations NA
10 Accounting Standards for Consolidated Financial Statements
10.1 AS 21: Consolidated Financial Statements 10.1.1
10.2 AS 23: Accounting for Investments in Associates in Consolidated 10.2.1
Financial Statements
10.3 AS 27: Financial Reporting of Interests in Joint Ventures 10.3.1
11 Financial Statements of Companies 11.1
12 Buyback of Securities 12.1
13 Amalgamation of Companies 13.1
14 Accounting for Reconstruction of Companies 14.1
15 Accounting for Branches Including Foreign Branches 15.1
 9. OTHER ACCOUNTING STANDARDS
9.1. AS 12: ACCOUNTING FOR GOVERNMENT GRANTS

Applicable:
Government Grants: [Cash or in Kind]
1. Subsidies,
2. Cash incentives,
3. Duty drawback, etc.

Recognition:
Only on reasonable assurance of receipt of grants
fulfilment of conditions attached with it [past or future compliance]

Not Applicable:
1. Government assistant
2. Government participation in the ownership of enterprise

Accounting Treatment: Approaches

1. Capital approach:
grant is treated as part of shareholders’ funds [promotor’s contribution]
capital reserve
2. Income approach:
grant is treated as income
for a period or periods

Scope of Government grants | Accounting on Receipt & Refund

1. Non-monetary (in kind):
a. Concessional rate: Assets are recorded at acquisition rate
b. Free of Cost: assets are recorded at nominal value (say ₹100)
2. related to specific fixed assets (depreciable assets):
a. Method I: Government grants
On receipt: Book value – Grant
On refund: Book value + Grant
b. Method II: and
On receipt: Credit to Deferred Government Grant A/c
recovered to income as equal as the depreciation
On refund: Debit to Deferred Government Grant A/c (reversal)
Any P/L is transferred to P/L A/c

Accounting for Government Grants 9.1.1

c. related to revenue:
On receipt: Credit in P/L A/c [as income or deduct from exp.]
On refund: Debit in P/L A/c
d. In the nature of promoters’ contribution:
On Receipt: Credit in Capital Reserve A/c [capital approach]
On Refund: Debit in Capital Reserve A/c

Refund of Government grants is due to non-fulfilment of condition:

(an Extraordinary item)

Disclosure:
1. The accounting policy adopted for government grants,
including the method of presentation in the financial statements;
2. The nature and extent of government grants recognized in the financial statements,
including grants of non-monetary assets given at a concessional rate or free of cost

Practical Problems
Related to revenue + non-monetary grants:
Question 1: Shiva Limited has received a grant of ₹15 crores from the Government for
setting up a manufacturing unit in a backward area. Out of this grant, the company
distributed ₹2 crores as dividend. Also, Shiva Limited received land free of cost from the
State Government but it has not recorded it at all in the books as no money has been spent.
In the light of AS-12 examine, whether the treatment of both the grants is correct.1

Monetary grants + non-depreciable asset:

Question 2: During the year 2013-14, Purvi Limited received a grant from the Government
of India amounting to ₹35 lakh towards purchase of a piece of land for ₹140 lakh.
You are required to show the accounting treatment of the above transaction in the books of
Purvi Limited, as per AS-12.
Answer:
Method I Method II
Land A/c Dr 140 Land A/c Dr 140
To Bank A/c 140 To Bank A/c 140
Bank A/c Dr 35 Bank A/c Dr 35
To Land A/c 35 To Capital Reserve 35

1
Grant can’t be used for other purpose [dividend payment] | The book value @ nominal value say ₹100

Sahasri Singar Academy 9.1.2

Monetary Grants + Depreciable Asset
Question 3: Jayakrishna Mills Ltd. runs a modern wheat flour mill. The CFO has prepared
the draft accounts, duly considering the mandatory accounting standards. Following note
appears. “The company purchased on 15.06.2013, special purpose machinery for ₹75 lakhs. It
received a State Government grant for 10% of the price. The machine has an effective life of
10 years”.
What is the proper method accounting treatment for the above?
Answer:
Method I Method II
Machinery A/c Dr 75 Machinery A/c Dr 75
To Bank A/c 75 To Bank A/c 75
Bank A/c Dr 7.5 Bank A/c Dr 7.5
To Machinery A/c 7.5 To Deferred Govt. Grants A/c 7.5
Depre. A/c (P/L A/c) Dr 6.75 Depreciation A/c (P/L A/c) Dr 7.5
To Asset A/c 6.75 To Asset A/c 7.5
Deferred Govt. Grants A/c Dr 0.75
To P/L A/c 0.75

In case of refund fully due to non-fulfilment of condition in the next year

Method I Method II
Machinery A/c Dr 7.5 Deferred Govt. Grants A/c Dr 6.75
To Bank A/c 7.5 P/L A/c Dr 0.75
To Bank A/c 7.5

Depreciation A/c (P/L A/c) Dr 7.58 Depreciation A/c (P/L A/c) Dr 7.5
To Asset A/c 7.58 To Asset A/c 7.5
(67.5 – 6.75 + 7.5)/9

Accounting for Government Grants 9.1.3

In case of refund of ₹4 lakhs due to non-fulfilment of condition in the next year
Method I Method II
Machinery A/c Dr 4 Deferred Govt. Grants A/c Dr 4
To Bank A/c 4 To Bank A/c 4

Depreciation A/c (P/L A/c) Dr 7.19 Depreciation A/c (P/L A/c) Dr 7.5
To Asset A/c 7.19 To Asset A/c 7.5
(67.5 – 6.75 + 4)/9 Deferred Govt. Grants A/c Dr 0.31
To P/L A/c 0.31
(7.5 – 0.75 –4)/9

Promoters Contributions
Question 4: Top & Top Limited has set up its business in a designated backward area which
entitles the company to receive from the Government of India a subsidy of 20% of the cost of
investment. Having fulfilled all the conditions under the scheme, the company on its
investment of ₹50 crore in capital assets has received ₹10 crore from the Government in
January, 2020 (accounting period being 2020-21). The company wants to treat this receipt as
an item of revenue and thereby reduce the losses on profit and loss account for the year
ended 31st March, 2022.
Keeping in view the relevant Accounting Standard, discuss whether this action is justified or
not.

Sahasri Singar Academy 9.1.4

 9.2. AS 14: ACCOUNTING FOR AMALGAMATIONS

Refer: Chapter 13 Amalgamation of Companies

Amalgamation for Companies 9.2.1

Sahasri Singar Academy 9.2.2
 10. ACCOUNTING STANDARDS FOR
CONSOLIDATED FINANCIAL STATEMENT
10.1. AS 21: CONSOLIDATED FINANCIAL STATEMENTS

Group of companies: are the companies comprises

1. Holding company and its
2. Subsidiary company/ies

Section 2(46) of the Companies Act, 2013

Holding company: in relation to one or more other companies, means a company of which
such companies are subsidiary companies.

Section 2(87) of the Companies Act, 2013

Subsidiary company: as a company in which the holding company
1. Controls the composition of the Board of Directors
2. Controls more than one-half of the total share capital
Either at its own or together with one or more of its subsidiary companies

Section 19 of the Companies Act, 2013

Prohibits a subsidiary company from holding shares in the holding company.
Except: the subsidiary company
1. Holds such shares as the legal representative of a deceased member or
2. Holds such shares as a trustee; or
3. Is a shareholder even before it became a subsidiary company of the holding company
The subsidiary company shall have a right to vote in the cases 1 & 2 but not for 3rd case

Applicable AS 21 & AS 13 for holding company:

1. For CFS, AS 21 Consolidated Financial Statement is followed
2. For standalone statement, AS 13 Accounting for Investments is followed

Objectives of AS 21:
Lays down principles and procedures for preparation and presentation of CFS.
Holding company requires CFS,
as the subsidiary company impacts holding company’s financial results

Consolidated Financial Statements 10.1.1

CFS:
1. Consolidated Balance Sheet
2. Consolidated Profit & Loss Statement
3. Notes to Accounts, other statements and explanatory material
4. Consolidated Cash Flow Statement, if parent company’s own financial statements.

AS 21: Definitions
Parent: is an enterprise that has one or more subsidiaries
Subsidiary: is an enterprise that is controlled by another enterprise (i.e. parent)
Control:
1. The ownership, directly or indirectly through subsidiary/ies, of more than one-half of the
voting power of an enterprise; or
2. Control of the composition of the board of directors in the case of a company or
of the composition of the corresponding governing body in case of any other enterprise
so as to obtain economic benefits from its activities.
Group: is a parent and all its subsidiaries
Minority Interest: net assets and net results of operations are not owned by the parent
Equity: is the residual interest in the assets after deducting all its liabilities
CFS: are the financial statements of a group presented as those of a single enterprise.

CFS, as per Companies (Accounts) Amendment Rules, 2016, but

conditions for exemptions from preparation of CFS
1. Being subsidiary company and all its other members, having been intimated in writing,
do not object to the company not presenting CFS
2. A company whose securities are not listed or are not in the process of listing
3. Its ultimate or any intermediate holding company files CFS
with the registrar which are in compliance with the applicable ASs.

Scope of AS 21
1. AS 21 should be applied in the preparation and presentation of CFS
for a group of enterprises under the control of a parent
2. AS 21 should be applied in accounting for investments in subsidiaries
in the separate financial statements of a parent
3. In the presentation of CFS, other ASs also apply in the same manner as they apply to the
separate statements
4. This standard does not deal with:
a. Methods of accounting for amalgamations and their effects on consolidation,
including goodwill arising on amalgamation (AS 14)
b. Accounting for investments in associates (AS 13)
c. Accounting for investment in joint ventures (AS 13)

Sahasri Singar Academy 10.1.2

Section 2(87) of the Companies Act, 2013
Subsidiary includes associate company and joint venture, hence
Company having no subsidiary but has an associate and joint venture
Then such company should prepare CFS as per
AS 23: Accounting for Associates in CFS
AS 27: Financial Reporting of Interest in Joint Ventures

The consolidation of financial statements of the company

shall be made in accordance with the provisions of
Schedule III of the Companies Act 2013 and the applicable ASs.
But ASs not applicable for a company covered u/s 129(3)

Exclusion from preparation of CFS

As per AS 21, a subsidiary should be excluded from consolidation when
1. Control is intended to be temporary (less than 12 months) because the subsidiary is
acquired and held exclusively with a view to its subsequent disposal in the near future;
or
2. It operates under severe long-term restrictions which significantly impair its ability to
transfer funds to the parent.
In this case follow AS 13: accounting for investments.

Consolidation of a subsidiary which is a LLP or a Partnership Firm – is required.

Advantages of CFS
1. Single source document
2. Intrinsic value of share
3. Acquisition of subsidiary
4. Evaluation of holding company in the market

Steps for preparing consolidated statements

1. Calculate the percent of holding
2. Segregate the P/L in to capital and revenue profit
3. Calculate cost of control [goodwill or capital reserve]
4. Calculate minority interest
5. Consolidated financial statement
Balance sheet | Income statement | Cashflow statement | Notes to accounts
6. Disposal of subsidiary [applicable at final level]

Consolidated Financial Statements 10.1.3

Adjustments
1. Dividend out of pre-acquisition or post-acquisition profit
2. Bonus shares out of pre-acquisition or post-acquisition profit
3. Revaluation of assets / liabilities
4. Mutual Owings [Debtors & Creditors | BR & BP | Debentures & Investments]
5. Unrealized profit on unsold stock or unused asset [downstream & Upstream]

Formats
1 Calculation of ratio of shares held by holding company and outsiders
Holding Company Sharesheldbyholdingcompany ××
%
Totalsharesinsubsidiarycompany
Minority Interest Sharesheldbyoutsiders ××
%
Totalsharesinsubsidiarycompany

2 Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
1 Reserve and Surplus
2 Capital Reserve
3 Profit or Loss
4 Over (Under) Valuation of Assets
5 Change in Depreciation

3 Cost of Control 4 Minority Interest

Cost of Acquisition ××× Cost of Acquisition
− Net Worth 1 Book Value ×××
1 Book Value ××× 2 Profit ×××
2 Capital Profit ××× 3 Bonus Shares ×××
3 Bonus Shares ××× Minority Interest ×××
4 Pre-acquisition Dividend ××× ×××
Goodwill (Capital Reserve) ×××

Net worth
1. Liabilities side approach: Share + Capital Profit
2. Asset side approach: Assets - Liabilities

Receipt of dividend from subsidiary’s pre-acquisition profit

Bank A/c Dr. ×××
To Investment in Subsidiary A/c ×××

Note: When interest in a subsidiary company is acquired in blocks, the cost of control or
goodwill is computed as if all the blocks are purchased on the date when a control is
achieved. However, if shares are acquired in major blocks, then for each block “analysis of
profit” will be computed after considering the dates of acquisition.

Sahasri Singar Academy 10.1.4

Practical Questions
Wholly owned subsidiary company:
100% holding | 100% voting rights | No minority interest
Question 1: Prepare consolidated financial statement from the following B/S.

Particulars Note H Ltd S Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments 40 shares in S Ltd., 600
2 Current assets 400 300
Total 2,500 800
Answer:
1 Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 40 100%
% %
Totalsharesinsubsidiarycompany 40
Sharesheldbyoutsiders 0%
%
Totalsharesinsubsidiarycompany

2 Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 200 - 200 - - -

3. Cost of Control 4. Minority Interest

Cost of Acquisition 600
1 Book Value 400 -
2 Capital Profit 200 600 -
Goodwill (Capital Reserve) -

Consolidated Financial Statements 10.1.5

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus 600
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,700
II ASSETS
1 Non-current assets
Tangible Assets 2,000
2 Current assets 700
Total 2,700

Wholly owned subsidiary company

Question 2: Prepare consolidated financial statement from the following B/S.

Particulars Note H Ltd S Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,400 500
Investments 40 shares in S Ltd., 700
2 Current assets 400 300
Total 2,500 800

Sahasri Singar Academy 10.1.6

Answer:
1 Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 40 100%
% %
Totalsharesinsubsidiarycompany 40
Sharesheldbyoutsiders 0%
%
Totalsharesinsubsidiarycompany

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 200 - 200 - - -

(3) Cost of Control (4) Minority Interest

Cost of Acquisition 700
1 Book Value 400 -
2 Capital Profit 200 600 -
Goodwill (Capital Reserve) 100

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus 600
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,700
II ASSETS
1 Non-current assets
Intangible Assets 100
Tangible Assets 1,900
2 Current assets 700
Total 2,700

Consolidated Financial Statements 10.1.7

Minority Interest & Capital Reserve
Question 3: Prepare consolidated financial statement from the following B/S.
Particulars Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,800 500
Investments [60% shares in S Ltd.,] 300 -
2 Current assets 400 300
Total 2,500 800
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 60%
%
Totalsharesinsubsidiarycompany
Sharesheldbyoutsiders 40%
%
Totalsharesinsubsidiarycompany

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 200 - 120 - 80 -

(3) Cost of Control (4) Minority Interest

Cost of Acquisition 300
1 Book Value 240 Book Value 160
2 Capital Profit 120 360 Profit [Total] 80
Goodwill (Capital Reserve) (60) 240

Sahasri Singar Academy 10.1.8

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus + Capital Reserve 660
Minority Interest 240
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 3,000
II ASSETS
1 Non-current assets
Tangible Assets 2,300
2 Current assets 700
Total 3,000

Minority Interest & Goodwill

Question 4: Prepare consolidated financial statement from the following B/S.
Particulars Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,700 500
Investments of shares in S Ltd., 400 -
2 Current assets 400 300
Total 2,500 800
Note: H Ltd company acquired 24 shares in S Ltd, when S Ltd had ₹100 in reserves and
surplus.

Consolidated Financial Statements 10.1.9

Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 24 60%
% %
Totalsharesinsubsidiarycompany 40
Sharesheldbyoutsiders 40%
%
Totalsharesinsubsidiarycompany

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 100 100 60 40 60 40

(3) Cost of Control (4) Minority Interest

Cost of Acquisition 400
1 Book Value 240 Book Value 160
2 Capital Profit 60 300 Profit [Total] 80
Goodwill (Capital Reserve) 100 240

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus(600+60) 660
Minority Interest 240
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 3,000
II ASSETS
1 Non-current assets
Intangible Assets 100
Tangible Assets 2,200
2 Current assets 700
Total 3,000

Sahasri Singar Academy 10.1.10

Revaluation of Assets without depreciation
Question 5: Prepare consolidated financial statement from the following B/S.
Particulars Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments of shares in S Ltd., 600 -
2 Current assets 400 300
Total 2,500 800
Note: H Ltd company acquired 32 shares in S Ltd, when S Ltd had ₹300 in reserves and
surplus. The non-current asset of S Ltd company is valued at ₹600 on the date of acquisition.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 32 80%
% %
Totalsharesinsubsidiarycompany 40
Sharesheldbyoutsiders 8 20%
% %
Totalsharesinsubsidiarycompany 40

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 300 (100) 240 (80) 60 (20)
Revaluation Profit 100 100 - 80 20

(3) Cost of Control (4) Minority Interest

Cost of Acquisition 600
1 Book Value 320 Book Value 80
2 Capital Profit 240 Profit [Total] 40
3 Revaluation Profit 80 640 Revaluation profit 20
Goodwill (Capital Reserve) (40) 140

Consolidated Financial Statements 10.1.11

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600-80+40) 560
Minority Interest 140
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,800
II ASSETS
1 Non-current assets
Tangible Assets [1,500+500+100] 2,100
2 Current assets 700
Total 2,800

Revaluation of Assets with Depreciation

Question 6: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 540
Investments [80%shares in S Ltd.,] 600 -
2 Current assets 400 260
Total 2,500 800
Note:
1. Date of acquisition of shares in S Ltd by H Ltd – 1.10.2021
When S Ltd had ₹100 in reserves and surplus A/c
2. The non-current asset of S Ltd being ₹600 on 1.4.2021 was revalued at ₹670 on the date of
acquisition.

Sahasri Singar Academy 10.1.12

Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Sharesheldbyholdingcompany 80%
%
Totalsharesinsubsidiarycompany
Sharesheldbyoutsiders 20%
%
Totalsharesinsubsidiarycompany

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 100 100 80 20 80 20

(3) Revaluation of Assets Date NCA

(a) Book Value 31.03.22 540
(b) − Depreciation [Balancing Figure] 2021-22 60
(c) Book Value 01.04.21 600
(d) Rate of Depreciation 60 10%
%
600
(e) Depreciation (a)×(d) up to 01.10.21 30
(f) Book Value as on the date of acquisition 01.10.21 570

NCA
(4) Revaluation of Assets Date H Ltd MI
BV Revised Change
Value as on(3) 01.10.21 570 670 100 80 20
− Depreciation 30 35 (5) (4) (1)
Value as on 31.10.07 540 635 95

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 600
1 Book Value 320 Book Value 80
2 Capital Profit 80 Profit [Total] 40
3 Revaluation Profit 80 480 Revaluation profit [20-1] 19
Goodwill (Capital Reserve) 120 139

Consolidated Financial Statements 10.1.13

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+80-4) 676
Minority Interest 139
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,915
II ASSETS
1 Non-current assets
Intangible Assets 120
Tangible Assets [1,500+540+95] 2,135
2 Current assets 660
Total 2,915

Mutual Owings
Question 7: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 100
3 Current liabilities [Creditors] 500 100
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. H Ltd acquired 30 shares for ₹500 in S Ltd on 1.10.21
2. S Ltd had ₹100 in reserves on 1.4.21
3. Investment of H Ltd includes investment in debenture of ₹100 at book value in S Ltd.
4. The creditors of H Ltd includes ₹50 payable to S Ltd

Sahasri Singar Academy 10.1.14

Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 30 75%
% %
Total shares in subsidiary company 40
Shares held by outsiders 10 25%
% %
Total shares in subsidiary company 40

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 100 100 100 75.0 25.0
Reserve and Surplus [CY] 100 50 50 37.5 37.5 12.5 12.5

(3) Mutal Owings S Ltd H Ltd

(i) Deduct ₹100 from debenture ₹100 from investment
(ii) Deduct ₹50 from debtors ₹50 from creditors

(4) Cost of Control (5) Minority Interest

Cost of Acquisition 500.0
1 Book Value 300.0 Book Value 100
2 Capital Profit 112.5 412.5 Profit [Total] 50
Goodwill (Capital Reserve) 87.5 150

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000.0
𝑏 Reserves and surplus (600+37.5) 637.5
Minority Interest 150.0
2 Non-Current liabilities [Debentures] 400.0
3 Current liabilities [Creditors] 550.0
Total 2,737.5
II ASSETS
1 Non-current assets
Intangible Assets 87.5
Tangible Assets 2,000.0
2 Current assets 650.0
Total 2,737.5

Consolidated Financial Statements 10.1.15

Mutual Owings and Unrealized Profit on Unsold Stock [Downstream]
Question 8: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Equity Share of ₹10 each 1,000 400
(b) Reserves and surplus 600 200
(2) Non-Current liabilities [Debentures] 400 0
(3) Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
(1) Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
(2) Current assets 400 300
Total 2,500 800
Note:
1. H Ltd acquired 90% shares in S Ltd when S Ltd had ₹150 in reserves
2. H Ltd sold goods costing ₹40 for ₹50 to S Ltd and the amount was unpaid as on the year
end.
S Ltd sold 50% of such stock.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 90%
%
Total shares in subsidiary company
Shares held by outsiders 10%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 150 50 135 45 15 5

(3) Mutal Owings H Ltd S Ltd

Deduct ₹50 from debtors ₹50 from creditors

Sahasri Singar Academy 10.1.16

 (4) Unrealized Profit on Unsold Stocks (downstream) Stock H Ltd S Ltd
Proportion of unsold stock × Profit % (₹5) (₹5) -

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 600
1 Book Value 360 Book Value 40
2 Capital Profit 135 495 Profit [Total] 20
Goodwill (Capital Reserve) 105 60

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+45-5) 640
Minority Interest 60
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 650
Total 2,750
II ASSETS
1 Non-current assets
Intangible Assets 105
Tangible Assets 645
2 Current assets 2,000
Total 2,750

Mutual Owings and Unrealised Profit on Unsold Stock [Upstream]

Question 9: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 0
3 Current liabilities [Creditors] 500 200
Total 2,500 800

Consolidated Financial Statements 10.1.17

 II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. H Ltd acquired 90% shares in S Ltd when S Ltd had ₹150 in reserves
2. S Ltd sold goods costing ₹40 for ₹50 to H Ltd and the amount was unpaid as on the year
end H Ltd sold 50% of such stock.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 90%
%
Total shares in subsidiary company
Shares held by outsiders 10%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 150 50 135 45 15 5

(3) Mutal Owings S Ltd H Ltd

Deduct ₹50 from debtors ₹50 from creditors

(4) Unrealized Profit on Unsold Stocks (upstream) Stock H Ltd S Ltd

Proportion of unsold stock × Profit % (₹5) (₹4.5) (₹0.5)

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 600
1 Book Value 360 Book Value 40.0
2 Capital Profit 135 495 Profit [15+5-0.5] 19.5
Goodwill (Capital Reserve) 105 59.5

Sahasri Singar Academy 10.1.18

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000.0
𝑏 Reserves and surplus (600+45-4.5) 640.5
Minority Interest 59.5
2 Non-Current liabilities [Debentures] 400.0
3 Current liabilities [Creditors] 650.0
Total 2,750.0
II ASSETS
1 Non-current assets
Intangible Assets 105.0
Tangible Assets 2,000.0
2 Current assets 645.0
Total 2,750.0

Dividend out of pre-acquisition profit & credited in P/L A/c

Question 10: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. H Ltd acquired 80% shares in S Ltd when S Ltd had ₹100 in reserves
2. S Ltd declared and paid 10% dividend out of pre-acquisition profit and H Ltd credited
the dividend received in its P/L A/c.

Consolidated Financial Statements 10.1.19

Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 80%
%
Total shares in subsidiary company
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 60 140 48 112 12 28

Note: Capital profit = ₹100 – ₹40 (Dividend) = ₹60

(3) Dividend out of pre-acquisition profit H Ltd S Ltd

400 × 10% = 40 ₹32 ₹8
Rectification entry for H Ltd share of dividend
P/L A/c Dr ₹32
To Investment A/c ₹32

(4) Cost of Control (5) Minority Interest

Cost of Acquisition 400
1 Book Value 320 Book Value 80
2 Capital Profit 48 Profit 40
3 Dividend from pre-acquisition profit 32 400
Goodwill (Capital Reserve) 0 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+112-32) 680
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,900

Sahasri Singar Academy 10.1.20

 II ASSETS
1 Non-current assets
Tangible Assets 2,000
2 Current assets 900
Total 2,900

Dividend out of pre-acquisition profit & credited in Investment A/c

Question 11: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. H Ltd acquired 80% shares in S Ltd when S Ltd had ₹100 in reserves
2. S Ltd declared and paid 10% dividend out of pre-acquisition profit and H Ltd credited
the dividend received in its Investment A/c.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 80%
%
Total shares in subsidiary company
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 60 140 48 112 12 28
Note: Capital profit = ₹100 – ₹40 (Dividend) = ₹60

Consolidated Financial Statements 10.1.21

 (3) Dividend out of pre-acquisition profit H Ltd S Ltd
400 × 10% = 40 ₹32 ₹8
Correctly recorded [no adjustment is required]

(4) Cost of Control (5) Minority Interest

Cost of Acquisition 600
1 Book Value 320 Book Value 80
2 Capital Profit 48 368 Profit 40
Goodwill (Capital Reserve) 232 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+112) 712
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,932
II ASSETS
1 Non-current assets
Intangible Assets 232
Tangible Assets 2,000
2 Current assets 700
Total 2,932

Dividend out of post-acquisition profit

Question 12: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -

Sahasri Singar Academy 10.1.22

 3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 300 -
2 Current assets 700 300
Total 2,500 800
Note:
1. H Ltd acquired 80% shares in S Ltd when S Ltd had ₹100 in reserves
2. S Ltd declared and paid 10% dividend out of post-acquisition profit and H Ltd credited
the dividend received in its P/L A/c.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 80%
%
Total shares in subsidiary company
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 100 100 80 80 20 20

Note: Dividend out of post-acquisition profit declared and paid – no adjustment is required

(4) Cost of Control (5) Minority Interest

Cost of Acquisition 300
1 Book Value 320 Book Value 80
2 Capital Profit 80 400 Profit 40
Goodwill (Capital Reserve) (100) 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+80+100) 780

Consolidated Financial Statements 10.1.23

 Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 3,000
II ASSETS
1 Non-current assets
Tangible Assets 2,000
2 Current assets 1,000
Total 3,000

Proposed dividend out of post-acquisition profit [declared but not adjusted in books]
Question 13: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 300 -
2 Current assets 700 300
Total 2,500 800
Note:
1. H Ltd acquired 80% shares in S Ltd when S Ltd had ₹100 in reserves
2. S Ltd declared but not paid 10% dividend out of post-acquisition but no entry was made
in the books of S Ltd & H Ltd.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 80%
%
Total shares in subsidiary company
Shares held by outsiders 20%
%
Total shares in subsidiary company

Sahasri Singar Academy 10.1.24

 (2) Total Capital Revenue H Co. S Co.
Profit Profit CP RP CP RP
Reserve and Surplus [PY] 160 100 60 80 48 20 12
Note: Total profit = ₹200 – ₹40 (Dividend) = ₹160

(3) Dividend out of pre-acquisition profit H Ltd S Ltd

400 × 10% = 40 ₹32 ₹8
Not adjusted hence added in P/L A/c MI

(4) Cost of Control (5) Minority Interest

Cost of Acquisition 300
1 Book Value 320 Book Value 80
2 Capital Profit 80 400 Profit 40
Goodwill (Capital Reserve) (100) 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+48+32+100) 780
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 3,000
II ASSETS
1 Non-current assets
Tangible Assets 2,000
2 Current assets 1,000
Total 3,000

Note: even omitting the adjustment for dividend will not make any change in CFS

Consolidated Financial Statements 10.1.25

Dividend partly out of pre-acquisition profit & credited in P/L A/c
Question 14: Prepare consolidated financial statement from the following B/S.

31.3.2022 Note H Ltd S Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 300 -
2 Current assets 700 300
Total 2,500 800

Note:
1. H Ltd acquired 80% shares in S Ltd when S Ltd had ₹100 in reserves
2. S Ltd declared and paid 10% dividend of which 50% out of pre-acquisition profit and H
Ltd credited the dividend received in its P/L A/c.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 80%
%
Total shares in subsidiary company
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 80 120 64 96 16 24

Note: Capital profit = ₹100 – 50% of ₹40 (Dividend) = ₹80

Sahasri Singar Academy 10.1.26

 (3) Dividend out of pre-acquisition profit H Ltd S Ltd
400 × 10% × 50% = 20 ₹16 ₹4
Correctly recorded [no adjustment is required]

(4) Dividend out of pre-acquisition profit H Ltd S Ltd

400 × 10% × 50% = 20 ₹16 ₹4
Rectification entry for H Ltd share of dividend
P/L A/c Dr ₹16
To Investment A/c ₹16

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 300
1 Book Value 320 Book Value 80
2 Capital Profit 64 Profit 40
3 Dividend out of pre-acquisition profit 16 400
Goodwill (Capital Reserve) (100) 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+96-16+100) 780
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 3,000
II ASSETS
1 Non-current assets
Tangible Assets 2,000
2 Current assets 1,000
Total 3,000

Consolidated Financial Statements 10.1.27

Bonus shares out of pre-acquisition profit
Question 15: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. On 1.10.21, H Ltd acquired 24 shares in S Ltd when S Ltd had ₹150 in reserves
2. S Ltd declared 1 bonus share for every 3 shares held out of pre-acquisition profit.
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 24 + 8 (bonus) 80%
% %
Total shares in subsidiary company 40
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus [PY] 200 50 150 40 120 10 30
Note: Capital profit = ₹150 – ₹100 (Bonus share) = ₹50

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 600
1 Book Value including bonus share 320 Book Value 80
2 Capital Profit 40 360 Profit 40
Goodwill (Capital Reserve) 240 120

Sahasri Singar Academy 10.1.28

 Consolidated Balance Sheet Note H Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+120) 720
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,940
II ASSETS
1 Non-current assets
Intangible Assets 240
Tangible Assets 2,000
2 Current assets 700
Total 2,940

Bonus shares out of post-acquisition profit

Question 16: Prepare consolidated financial statement from the following B/S.
31.3.2022 Note H Ltd S Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 400
𝑏 Reserves and surplus 600 200
2 Non-Current liabilities [Debentures] 400 -
3 Current liabilities [Creditors] 500 200
Total 2,500 800
II ASSETS
1 Non-current assets
Tangible Assets 1,500 500
Investments [shares in S Ltd.,] 600 -
2 Current assets 400 300
Total 2,500 800
Note:
1. On 1.10.21, H Ltd acquired 24 shares in S Ltd when S Ltd had ₹150 in reserves
2. S Ltd declared 1 bonus share for every 3 shares held out of post-acquisition profit.

Consolidated Financial Statements 10.1.29

Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Shares held by holding company 24 + 8 (bonus) 80%
% %
Total shares in subsidiary company 40
Shares held by outsiders 20%
%
Total shares in subsidiary company

(2) Total Capital Revenue H Co. S Co.

Profit Profit CP RP CP RP
Reserve and Surplus 200 150 50 120 40 30 10

(5) Cost of Control (6) Minority Interest

Cost of Acquisition 600
1 Book Value including bonus share 320 Book Value 80
2 Capital Profit 120 440 Profit 40
Goodwill (Capital Reserve) 160 120

Consolidated Balance Sheet Note H Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000
𝑏 Reserves and surplus (600+40) 640
Minority Interest 120
2 Non-Current liabilities [Debentures] 400
3 Current liabilities [Creditors] 700
Total 2,860
II ASSETS
1 Non-current assets
Intangible Assets 160
Tangible Assets 2,000
2 Current assets 700
Total 2,860

Sahasri Singar Academy 10.1.30

[Bonus shares]
Question 17: On 31.03.2011, A Ltd. acquired 1,05,000 shares of B Ltd. for ₹12,00,000. The
Balance Sheet of B Ltd. as on that date was as under:

The Balance Sheet of B Ltd. as on 31.03.2011 Note ₹in ‘000

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Share capital of ₹10 each, fully paid up 1,500
𝑏 Reserves and surplus
Securities Premium -
Pre-incorporation profits 30
Profit and Loss A/c 60
2 Current liabilities [Trade Payables] 75
Total 1,665
II ASSETS
1 Non-current assets [Tangible Assets] 1,050
2 Current assets 615
Total 1,665

The B/Ss’ of A Ltd and B Ltd as on 31.03.2012 Note A Ltd B Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Share capital of ₹10 each [before bonus shares] 4,500 1,500
𝑏 Reserves and surplus
Securities Premium 900 -
Pre-incorporation Profits - 30
General Reserve 6,000 1,905
Profit and Loss A/c 1,575 420
2 Current liabilities [Trade Payables] 555 210
Total 13,530 4,065
II ASSETS
1 Non-current assets
𝑎 Tangible Assets 7,920 2,310
𝑏 Investments in B Ltd at cost 1,200 -
2 Current assets 4,410 1,755
Total 13,530 4,065

Consolidated Financial Statements 10.1.31

Directors of B Ltd. made a bonus issue on 31.03.2012 in the ratio of one equity share of ₹10
each fully paid for every two equity shares held on that date.
Calculate as on 3.03.2012 the following:
Cost of Control / Capital Reserve
Minority Interest
Consolidated Profit and Loss Account in each of the following cases
o Before Issue of Bonus Shares
o Immediately after the Issue of Bonus Shares
It may be assumed that Bonus Shares were issued out of Post-Acquisition Profits by using
General Reserve.
{CMA Final D13, 10 Marks}
Answer:
(1) Calculation of ratio of shares held by holding company and outsiders
Holding Company Sharesheldbyholdingcompany 105,000 70%
% %
Totalsharesinsubsidiarycompany 150,000
Minority Interest Sharesheldbyoutsiders 45,000 30%
% %
Totalsharesinsubsidiarycompany 150,000

(2) Before Bonus Shares Total Capital Revenue A Ltd [70%] B Ltd [30%]
Profit Profit CP RP CP RP
1 Profit or Loss 420 60 360 42 252.0 18 108.0
2 General Reserve 1,905 - 1,905 1,333.5 571.5
3 Pre-incorporation Profits 30 30 - 21 9
Total 2,355 90 2,265 63 1,585.5 27 679.5

(3) After Bonus Shares Total Capital Revenue A [70%] B [30%]

Profit Profit CP RP CP RP
1 Profit or Loss 420 60 360 42 252.0 18 108.0
2 General Reserve after Bonus 1,155 - 1,155 - 808.5 346.5
3 Pre-incorporation Profits 30 30 - 21 9
Total 1,605 90 1,515 63 1,060.5 27 454.5
4 Bonus Shares 750 750 525 225

Sahasri Singar Academy 10.1.32

 Before Bonus Shares
(4) Cost of Control (5) Minority Interest
Cost of Acquisition 1,200 Book Value 450.0
1 Book Value 1,050 Capital Profit(2) 27.0
2 Capital Profit(2) 63 1,113 Revenue Profit(2) 679.5
Goodwill 87 Minority Interest 1,156.5
Before Bonus Shares
(4) Cost of Control (5) Minority Interest
Cost of Acquisition 1,200 Book Value 450.0
1 Book Value 1,050 Capital Profit(3) 27.0
2 Capital Profit(3) 63 Revenue Profit(3) 454.5
3 Bonus Shares 525 1,638 Bonus Shares 225.0
Capital Reserve 438 Minority Interest 1,156.5

Before Bonus Shares After Bonus Shares

1 Reserves and surplus A Ltd B Ltd Total A Ltd B Ltd Total
Securities Premium 900.0 - 900.0 900.0 - 900.0
Pre-incorporation Profit - -
Capital Reserve 438.0
General Reserve 6,000.0 1,333.5 7,333.5 6,000.0 808.5 6,808.5
Profit and Loss A/c 1,575.0 252.0 1,827.0 1,575.0 252.0 1,827.0

Consolidated P/L A/c

Question 18: H Ltd and its subsidiary S Ltd provide the following information for the year
ended 31st March, 20X3:
₹ in lakhs
Particulars H Ltd S Ltd
Sales and other income 5,000 1,000
Increase in Inventory (closing less opening)) 1,000 200
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50

Consolidated Financial Statements 10.1.33

Other Information:
H Ltd. sold goods to S Ltd. of ₹120 lakhs at cost plus 20%. Inventory of S Ltd. includes such
goods valuing ₹24 lakhs. Administrative expenses of S Ltd. include ₹5 lakhs paid to H Ltd.
as consultancy fees. Selling and distribution expenses of H Ltd. include ₹10 lakhs paid to S
Ltd. as commission.
H Ltd. holds 80% of equity share capital of ₹1,000 lakhs in S Ltd. prior to 20X1-20X2. H Ltd.
took credit to its Profit and Loss Account, the proportionate amount of dividend declared
and paid by S Ltd. for the year 20X1-20X2.
Prepare a consolidated statement of profit and loss.
Answer:
Consolidated Statement of Profit and Loss of H Ltd.
and its subsidiary S Ltd. for the year ended on 31.03.2013
Particulars Note In Lakhs
1 Revenue from operations 1 5,865
2 Total Income 5,865
3 Expenses
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished goods 3 (1,196)
Employee benefit expenses 4 950
Finance cost 5 150
Depreciation and amortization expense 6 150
Other expenses 7 535
Total expenses 1769
Profit 4,096

Notes to Accounts ₹ in lakhs

1 Revenue from operations
Sales and other income
H Ltd 5,000
S Ltd 1,000
6,000
− Inter – company sales (120)
Consultancy fees received by H ltd. from S Ltd (5)
Commission received by S Ltd. from H Ltd (10) 5,865

Sahasri Singar Academy 10.1.34

 2 Cost of material purchased/consumed
H Ltd 800
S Ltd 200
1,000
− Purchases by S Ltd. from H Ltd. (120) 880
Direct expenses (Production)
H Ltd. 200
S Ltd. 100 300
1,180
3 Changes of inventories of finished goods
H Ltd 1,000
S Ltd 200
− Unrealized Profits ₹24𝑙𝑎𝑘ℎ𝑠 × 20
(4) 1,196
120

4 Employee benefits and expenses

Wages and salaries:
H Ltd 800
S Ltd 150 950
5 Finance cost
Interest:
H Ltd 100
S Ltd 50 150
6 Depreciation
H Ltd 100
S Ltd 50 150
7 Other expenses
H Ltd 200
S Ltd 100
− Consultancy fees received by H Ltd. from S Ltd. (5) 295
Selling and distribution Expenses
H Ltd 200
S Ltd 50
− Commission received by S Ltd. from H Ltd. (10) 240
535

Consolidated Financial Statements 10.1.35

Other problems:
Net worth: asset side approach
Question 1: A Ltd. acquired 60% shares of B Ltd., @ ₹20 per share. Following is the extract of
B/S of B Ltd.

₹
10,00,000 Equity Shares of ₹10 each 1,00,00,000
10% Debentures 10,00,000
Trade Payables 55,00,000
Property, Plant and Equipment 70,00,000
Investments 45,00,000
Current Assets 68,00,000
Loans and Advances 22,00,000

On the same day B Ltd., declared dividend at 20% out of pre-acquisition profit and as agreed
between both the companies’ property, plant and equipment were to be depreciated @ 10%
and investment to be taken at market value of ₹60,00,000. Calculate the goodwill or capital
reserve to be recorded in CFS.
Answer:
1 Assets ₹ ₹
PPE [70 – 10%] 63,00,000
Investments at MV 60,00,000
Current Assets 68,00,000
Loans and Advances 22,00,000 2,13,00,000
− Liabilities
Trade Payables 55,00,000
10% Debentures 10,00,000 65,00,000
Net Assets of B Ltd., 1,48,00,000

2 Cost of Control
Cost of Acquisition 1,20,00,000
− Net worth [148 × 60%] 88,80,000
− Pre-acquisition dividend 12,00,000 1,00,80,000
Goodwill 19,20,000

Sahasri Singar Academy 10.1.36

Price = yield capitalization
Question 2: Variety Ltd., holds 46% of the paid-up share capital of VR Ltd. The share were
acquired at a market price of ₹17 per share. The balance of shares of VR Ltd., are held by a
foreign collaborating company. A memorandum of understanding has been entered into
with the foreign company providing for the following:
1. The shares held by the foreign company will be sold to Variety Ltd. The price per share
will be calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean
40% of the average of pre-tax profits for the last 3 years, which were ₹30 lakhs, ₹40 lakhs
and ₹65 lakhs
2. The actual cost of the shares to the foreign company was ₹5,40,000 only. The profit that
would accrue to them be taxable at an average rate of 30%. The tax payable will be
deducted from the proceeds and Variety Ltd., will pay it to the Government.
3. Out of the net consideration, 50% would be remitted to the foreign company
immediately and the balance will be and unsecured loan repayable after two years.
The above agreement was approved by all concerned for being given effects to on 1.4.2023.
The total assets of VR Ltd., as on 31st march, 2023 was ₹1,00,00,000. It was decided to write
down PPE by ₹1,75,000. Current liabilities of VR Ltd., as on the same date were ₹20,00,000.
The paid-up share capital of VR Ltd., was ₹20,00,000 divided into 2,00,000 equity shares of
₹10 each.
Find out goodwill / capital reserve to Variety Ltd., on acquiring wholly the shares of VR Ltd.
Answer:
1 Computation of Purchase Consideration
30𝑙 + 40𝑙 + 65𝑙
𝑌𝑖𝑒𝑙𝑑 = 40% × ₹18 𝑙
3
₹18 𝑙
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑉𝑅 (𝑢𝑛𝑑𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑖𝑛𝑔 𝑦𝑖𝑒𝑙𝑑) = ₹120 𝑙
15%
No. of shares 2𝑙
Value of VR
𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₹60
𝑁𝑜 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 54% [2 𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 × 54% × ₹60] ₹64.8 𝑙

2 Discharge of purchase consideration after TDS

Purchase consideration ₹64.8 𝑙
− Cost of acquisition by foreign company ₹5.4 𝑙
Capital gains ₹59.4 𝑙
Tax on gain @ 30% ₹17.82 𝑙

Payment of purchase consideration (50%) after TDS

𝑃𝑎𝑦𝑚𝑒𝑛𝑡: 50%(₹64.8 𝑙 − ₹17.82 𝑙) ₹23.49 𝑙
𝑈𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝐿𝑜𝑎𝑛: 50%(₹64.8 𝑙 − ₹17.82 𝑙) ₹23.49 𝑙

Consolidated Financial Statements 10.1.37

 3 Cost of Control ₹ ₹
Cost of acquisition
46% of shares @ price (2𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 × 46% × ₹17) 15,64,000
54% of shares @ price (2𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 × 54% × ₹60) 64,80,000 80,44,000
− Net worth:
PPE – Current liabilities (100𝑙 − 1.75𝑙 − 20𝑙) 98,25,000 78,25,000
Goodwill 2,19,000

Sahasri Singar Academy 10.1.38

 10.2. AS 23: ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN
CONSOLIDATED FINANCIAL STATEMENTS

Objective
To lay down principles and procedures for recognising the investments in associates
and its effect on the financial operations of the group in the CFS
For CFS, Reference to AS 23 is compulsory for the companies following AS 21
For standalone financial statement, AS 13 is applicable

Associates: in which the investor has significant influence but not subsidiary or joint venture
Significant influence: is the power to participate in the financial and / or operating policy
decisions of the investee but not control over those polices.

Significant influence the economic decision making by

1. Having some voting power
Shareholding is 20% to 50% still not an associate
if no significant influence is demonstrated
Shareholding is less than 20% still an associate
if significant influence is demonstrated
2. Representation on the board of directors
3. Participation in policy-making decisions
4. Material transactions (influencing inter-company transactions)
Sale of goods and services, sharing technical knowledge etc.,
5. Interchange of managerial personnel
6. Provision of essential technical information

Control exists when parent company has either:

1. The ownership, directly or indirectly through subsidiary(ies), of more than one-
half of the voting power of an enterprise.
2. Or control of the composition of the board of directors in the case of a company
or of the composition of the corresponding governing body in case of any other
enterprise so as to obtain economic benefits from subsidiary company’s activities.

If any company is controlling the composition of governing body of

gratuity trust, provident fund trust etc.,
since the objective is not the economic benefit and therefore it will not be included in CFS.

Accounting for Investments in Associates in Consolidated Financial Statements 10.2.1

Conditions for an enterprise (other than company) is considered to control:
1. A person cannot be appointed as director / member without the exercise in his favour by
that enterprise of such a power as aforesaid; or
2. A person’s appointment as director / member follows necessarily from his appointment
to a position held be him in that enterprise; or
3. The director / member is nominated by that enterprise or a subsidiary thereof.

Question: A Ltd., has 70% holding in C Ltd., and B Ltd., also has 28% holding in the same
company. Find out holding company & associate.1

Question: A Ltd., is holding 90% share in B Ltd., and 10% shares in C Ltd., and B Ltd., is
holding 11% shares in C Ltd.2

Associates accounted for using the equity method:

Equity Method of Accounting
1 Investment (At cost) initially ××
− Net worth (not to be negative) ××
Goodwill / (Capital Reserve) ××

2 Carrying Amount = Book Value ××

+/− Investor’s share in the profit / loss of associate ××
+/− Investor’s proportionate interest from changes in associates’ equity ××
− Distribution (dividend) from associate received ××
××
3 Eliminate unrealized profits and losses
4 Investor’s share in associates profit or loss should be computed after
cumulative preference share whether or not dividend has been declared

1
A Ltd., is the parent of C Ltd., & C Ltd., will be an associate of B Ltd.,
2
A Ltd., is the parent of B Ltd., &
A Ltd., with B Ltd., holding (10% + 11% = 21%) hence C Ltd., is an associate of A Ltd.
Anyhow for CFS, the holding = 19.9% (10% + 90% 𝑜𝑓 11%)

Sahasri Singar Academy 10.2.2

Question: A Ltd., acquire 45% of B Ltd., share on April 01, 2023, the price paid was
₹15,00,000. Following are the extracts of balance sheet of B Ltd., as of 1st April, 2023:

Paid up equity share capital ₹10,00,000

Securities premium ₹1,00,000
Reserve & surplus ₹5,00,000

B Ltd., has reported net profits of ₹3,00,000 and paid dividends of ₹1,00,000 for the year
ended 31st March, 2024. Calculate the amount at which the investment in B Ltd., should be
shown in the consolidated balance sheet of A Ltd., as on March 31, 2024.
Answer:
Equity Method of Accounting
Calculation of GW / CR [Initially]
1 Investment (At cost) 15,00,000
− Net worth (not to be negative) (45% 𝑜𝑓 [10𝑙 + 1𝑙 + 5𝑙]) 7,20,000
Goodwill / (Capital Reserve) 7,80,000

Calculation of carrying amount investment [31.03.2024]

2 Carrying Amount = Book Value [Net worth + Goodwill] 15,00,000
+ Investor’s share in the profit / loss of associate [45% 𝑜𝑓 3𝑙] 1,35,000
− Dividend paid [45% 𝑜𝑓 1𝑙] 45,000
15,90,000

Question: A Ltd., acquired 10% stake of B Ltd., on April 01 and further 15% on October 01 of
the same year. Other information is as follows:
Cost of Investment for 10% ₹1,00,000 and for 15% ₹1,55,000
Net asset on April 01 ₹8,50,000 and on October 01 ₹10,00,000
1. What is the amount of goodwill or capital reserve arising on significant influence?1
2. Also calculate the amount of goodwill or capital reserve arising on significant influence
if Cost of Investment for 10% ₹80,000 and for 15% ₹1,35,000.2

1
GW = ₹20,000
2
CR = ₹20,000

Accounting for Investments in Associates in Consolidated Financial Statements 10.2.3

Circumstances under which equity method is followed
Equity method is followed by the enterprises having significant influence
Except in the following cases
1. Control is intended to be temporary (& disposed in near future [less than 12 months])
2. Operates under severe long-term restrictions,
which significantly impair its ability to transfer funds to the investor
In both the above cases, investment is treated as investment according to AS 13.

An investor should discontinue the use of the equity method from the date that:
1. It ceases to have significant influence in an associate
but retains, whether in whole or in part, its investment
2. The use of the equity method is no longer appropriate
because the associate operates under severe long-term restrictions
that significantly impair its ability to transfer funds to the investor.
After cessation, investment is treated as investment according to AS 13.
The reason for not applying AS 23 should be disclosed.

Application of the Equity Method:

1. Many of the rules are similar to AS 21
2. Investment in as associate should be recorded as per the equity method
from the date when such relation comes in effect.
3. Investment in the associate is recorded at cost
and any difference in the cost and investor’s share in equity
on the date of acquisition is shown as goodwill or capital reserve.
4. Step acquisition in case of an associate [acquisition by lot]
5. Eliminate unrealized profits (investor’s share) due to inter-company transaction
6. Any loss on inter-company transactions are not eliminated to the extent that such loss is
not recoverable. Otherwise such losses are written off from CFS fully.
7. Discontinue to recognize – once the carrying amount becomes 0 or negative
Additional losses are provided if there is any obligations
If the associate subsequently reports profits, resume including profit after the profit
equals the net losses that have been recognized.
8. Follow same reporting date for financial statements & CFS.
9. Follow same accounting policies for financial statements & CFS.
10. The carrying amount of investment should be reduced for permanent decline

Sahasri Singar Academy 10.2.4

Contingencies
In accordance with AS 4, the investor discloses in the CFS
1. Its share of the contingencies and capital commitments of an associate for which it is
also contingently liable; and
2. Those contingencies that arise because the investor is severally liable for the liabilities
of the associate

Why is equity method of accounting adopted for investment in associates?

Investor’s interest is not only to earn revenue from investment (20% to 50%),
but also participate in decision making process
Hence, investor’s CFS are prepared under equity method to express the significant influence

Disclosure
1. Disclose proportion of ownership interest in CFS
2. Investment in associates is classified as long-term investments &
disclosed separately in the consolidated B/S & income statement
3. Disclose if the reporting date is different between financial statement & CFS
4. Disclose if the policies are different between financial statement & CFS
5. Disclose the reason if equity method of accounting is not followed
6. GW / CR should be disclosed separately though it is included in the carrying amount.

Relevant explanation to AS 23
Treatment of proposed dividend in associates in CFS
In case an associate has made a provision for proposed dividend (i.e., dividend declared
after the reporting period but it pertains to that reporting year) in its financial statements,
the investor’s share of the results of operations of the associate should be computed without
taking into consideration of the proposed dividend.

Consideration of potential equity shares

for determining whether an investee is an associate
The potential equity shares of the investee held by the investor should not be taken into
account for determining the voting power of the investor.

Question: A Ltd., acquired 40% share in B Ltd., on April 01, 2021 for ₹10 lakhs. On that date
B Ltd., had 1,00,000 equity shares of ₹10 each fully paid and accumulated profits of
₹2,00,000. During the year 2021-2022, B Ltd., suffered a loss of ₹10,00,000; during 2022-2023

Accounting for Investments in Associates in Consolidated Financial Statements 10.2.5

loss of ₹12,50,000 and during 2023-24 again a loss of ₹5,00,000. Show the extract of
consolidated balance sheet of A Ltd., on all the four dates recording the above events.
Answer: under equity method
Year 2020 – 2021
1 Calculation of goodwill / capital reserve ₹ ₹

Cost of investment 10,00,000

− 40% of equity or net worth
Equity shares 10,00,000
Reserves & Surplus 2,00,000
12,00,000 4,80,000
Goodwill 5,20,000

2 Consolidated B/S (Extract) as on 1.4.2021 [Assets]

Investment in Associate as per AS 23
Share of net assets on 1.4.2021 4,80,000
+ Goodwill 5,20,000 10,00,000

Year 2021 – 2022

1 Calculation of carrying amount of investment as at 31.3.2022
Investment in Associate as per AS 23
Share of net assets on 1.4.2021 4,80,000
+ Goodwill 5,20,000
− Loss for the year 2021-22 (10 𝑙 × 40%) 4,00,000 6,00,000

2 Consolidated B/S (Extract) as on 1.4.2022 [Assets]

Investment in Associate as per AS 23
Share of net assets on 1.4.2021 4,80,000
− Loss for the year 2021-22 (10 𝑙 × 40%) 4,00,000
+ Goodwill 5,20,000 6,00,000

Year 2022 – 2023

1 Calculation of carrying amount of investment as at 31.3.2023
Investment in Associate as per AS 23
Carrying amount of investment on 1.4.2022 6,00,000
− Loss for the year 2021-22 (12.5 𝑙 × 40%) 5,00,000 1,00,000

Sahasri Singar Academy 10.2.6

 2 Consolidated B/S (Extract) as on 1.4.2023 [Assets]
Investment in Associate as per AS 23
Share of net assets on 1.4.2021 4,80,000
− Loss for the year 2021-22 & 2022-23 ((10 𝑙 + 12.5 𝑙) × 40%) 9,00,000
+ Goodwill 5,20,000 1,00,000

Year 2023 – 2024

1 Calculation of carrying amount of investment as at 31.3.2024
Investment in Associate as per AS 23 {should not be negative}
Carrying amount of investment on 1.4.2022 1,00,000
− Loss for the year 2021-22 (5 𝑙 × 40%) 2,00,000 0

2 Consolidated B/S (Extract) as on 1.4.2023 [Assets]

Investment in Associate as per AS 23 {should not be negative}
Share of net assets on 1.4.2021 4,80,000
− Loss for the year 2021-22 to 2023-24 ((10 𝑙 + 12.5 𝑙 + 5 𝑙) × 40%) 11,00,000
+ Goodwill 5,20,000 0

Accounting for Investments in Associates in Consolidated Financial Statements 10.2.7

10.3. AS27: FINANCIAL REPORTING OF INTEREST IN JOINT VENTURE

Introduction:
Joint Venture: A contractual arrangement whereby two or more parties
carry an economic activity under joint control

Agreements like: sharing of risk and expense, collaboration of know-how and skill-set
e.g., Hindustan, TATA Starbucks Ltd, TATA SIA Airlines Ltd., (Vistara), etc.,
Parities can be individual, BOI, AOP, Company, firm.

AS 27 deals with three broad types / forms of joint ventures (JV) –

1. Jointly controlled operations (JCO)
2. Jointly controlled assets (JCA) and
3. Jointly controlled entities (JCE)

If an investor in joint venture, which does not have joint control,

should report its interest in a joint venture in its CFS
in accordance with AS 13, AS 21, and AS 23.

Scope:
AS 27 should be applied in accounting for interests in joint ventures and
The reporting of joint venture assets, liabilities, income and expenses
in the financial statements of venturers and investors,
regardless of the structures or forms under the joint venture activities take place.

The provisions of AS 27 need to be referred to for CFS only

when CFS is prepared and presented by the venturer

Proportionate consolidation is a method of accounting and reporting

whereby a venturer’s share of each of the assets, liabilities, income and expenses
of a jointly controlled entity is reported
as separate line items in the venturer’s financial statements.

Financial Reporting of Interest in Joint Venture 10.3.1

Contractual Arrangement: Can be in the form of
written contract, minutes of discussion between parties (ventures),
articles of the concern or by-laws of the relevant JV.
Contractual arrangement should include:
The activity, duration and reporting obligations of the JV
The appointment of the board of directors or
equivalent governing body of the joint venture and the voting rights of the venturers
Capital contributions by the venturers
The sharing by the venturers of the output, income, expenses or results of the JV.

Jointly Controlled Operations (JCO): Features

1. Each venturer has his own separate business
2. There is no separate entity for joint venture business
3. All ventures are creating their own assets and maintain them
4. Each venturer record only his own transactions without any separate set of books
maintained for the JV business
5. There is a common agreement between all of them
6. Venturers use their assets for the JV business
7. Venturers met the liabilities created by them for the JV business
8. Venturers met the expenses of the JV business from their funds
9. Any income earned or revenue generated from the JV
is shared by the venturers as per the contract

In respect of its interests in JCO,

a venturer should recognize in its separate financial statements and consequently in its CFS
1. The assets that it controls and the liabilities that it incurs; and
2. The expenses that it incurs and its share of the income that it earns from the JV
Separate accounting records may not be required for the JV however,
the venturers may prepare accounts for internal management reporting purposes

Question: Mr. A, Mr. B and Mr. C entered into a JV to purchase a land, construct and sell
flats. Mr. A purchased a land for ₹60,00,000 on 1.1.2021 and for the purpose he took loan
from a bank for ₹50,00,000 @ 8% interest p.a. He also paid registering fees ₹60,000 on the
same day. Mr. B supplied the material for ₹4,50,000 from his godown and further he
purchased the materials for ₹5,00,000 for the JV. Mr. C met all other expenses of advertising,

Sahasri Singar Academy 10.2.2

labour and other incidental expenses which turnout to be ₹9,00,000. On 30.6.2021 each of the
venturer agreed to take away one flat each to be valued at ₹10,00,000 each flat and rest were
sold by them as follow: Mr. A for ₹40,00,000; Mr. B for ₹20,00,000 and Mr. C for ₹10,00,000.
Loan was repaid on the same day by Mr. A along with the interest and net proceeds were
shared by the partners equally.
You are required to prepare the draft Consolidated P/L A/c and JV A/c in the books of each
venturer.
Answer:
₹ ‘000
Draft Consolidated Profit & Loss A/c
Particulars ₹ Particulars ₹

To A: Purchase of Land 60,00 BY Sale of flats

A: Registration fees 60 A 40,00
B: Materials 9,50 B 20,00
C: Other expenses 9,00 C 10,00 70,00
Interests 2,00
Profits Flats taken by
A 6,30 A 10,00
B 6,30 B 10,00
C 6,30 18,90 C 10,00 30,00
1,00,00 1,00,00

In the Books of Mr. A: Joint Venture A/c

To Bank Loan 50,00 By Bank (sale of flats) 40,00
Bank: (Land) 10,00 Land & Building 10,00
Bank (Reg. Fee) 60 Bank (from Mr. B) 14,20
Bank (Interest) 2,00 Bank (from Mr. C) 4,70
Profit on JV 6,30
68,90 68,90

In the Books of Mr. B: Joint Venture A/c

To Purchases: (Materials) 4,50 By Bank (sale of flats) 20,00
Bank: (Materials) 5,00 Land & Building 10,00
Bank (to Mr. A) 14,20
Profit on JV 6,30
30,00 30,00

Financial Reporting of Interest in Joint Venture 10.3.3

 In the Books of Mr. C: Joint Venture A/c
To Bank: (Expenses) 9,00 By Bank (sale of flats) 10,00
Bank (to Mr. A) 4,70 Land & Building 10,00
Profit on JV 6,30
20,00 20,00

Jointly Controlled Assets (JCA): Features

1. There is no separate legal identity
2. There is a common control over the joint assets
3. Venturers use this asset to derive some economic benefit to themselves
4. Each venturer incurs separate expenses for their transactions.
5. Expenses on jointly held assets are shared by the venturers
6. In their financial statement, venturer shows only their share of the asset and
total income earned by them along with total expenses incurred by them.
7. Since the assets, liabilities, income and expenses are already recognized
in the separate financial statements of the venturer and
consequently in its CFS, no adjustments or other consolidation procedures are required
in respect of these items when the venturer presents CFS.
8. Financial statements may not be prepared for the joint venture,
although the venturers may prepare accounts
for internal management reporting purposes
so that they may assess the performance of the JV

Differences between JCO & JCA

Particulars JCO JCA
1 Assets Own assets Jointly owned assets
2 Agreement for Joint operations to earn income Jointly construct & maintain
an asset to generate revenue
3 Sharing of Expenses and revenues Only expenses

Question: A Ltd., B Ltd., and C Ltd., decided to jointly construct a pipeline to transport the
gas from one place to another that was manufactured by them. For the purpose following
expenditure was incurred by them:
Building ₹12,00,000 to be depreciated @ 5% p.a.,
Pipeline for ₹60,00,000 to be depreciated @ 15% p.a.,

Sahasri Singar Academy 10.2.4

Computers and other electronics for ₹3,00,000 to be depreciated @ 40% p.a., and
Various vehicles of ₹9,00,000 to be depreciated @ 20% p.a.
They also decided to equally bear the total expenditure incurred on the maintenance of the
pipeline that comes to ₹6,00,000 each year.
You are required to show the consolidated B/S and
extract of statement of P&L for each venturer.
Answer:
Consolidated Balance Sheet
Particulars Nt ₹
I EQUITY AND LIABILITIES
Shareholders’ funds
Equity Share of ₹100 each 1 71,40,000
Total 71,40,000
II ASSETS
Non-current assets: PPE 2 71,40,000
Total 71,40,000

Note
1 Share capital
A Ltd., 23,80,000
B Ltd., 23,80,000
C Ltd., 23,80,000 23,80,000

2 PPE Before Dep Dep. After Dep.

Land & Building
A Ltd., 4,00,000 20,000 3,80,000
B Ltd., 4,00,000 20,000 3,80,000
C Ltd., 4,00,000 20,000 3,80,000 11,40,000
Plant & Machinery
A Ltd., 20,00,000 3,00,000 17,00,000
B Ltd., 20,00,000 3,00,000 17,00,000
C Ltd., 20,00,000 3,00,000 17,00,000 51,00,000
Computers
A Ltd., 1,00,000 40,000 60,000

Financial Reporting of Interest in Joint Venture 10.3.5

 B Ltd., 1,00,000 40,000 60,000
C Ltd., 1,00,000 40,000 60,000 1,80,000
Vehicles
A Ltd., 3,00,000 60,000 2,40,000
B Ltd., 3,00,000 60,000 2,40,000
C Ltd., 3,00,000 60,000 2,40,000 7,20,000
71,20,000

In the Books of A Ltd., | B Ltd., | C Ltd.,

Extract of Statement of P&L
Particulars Nt ₹
I Depreciation and amortization expense 1 4,20 000
Other operating expenses (pipeline expenses) 2,00,000

Extract of Statement of P&L

II ASSETS
Non-current assets: PPE 2 23,80,000

Note
1 Depreciation and amortization expenses
Land & Building 20,000
Plant & Machinery 3,00,000
Computers 40,000
Vehicles 60,000 4,20,000
2 PPE [after depreciation] Book value Depreciation
Land & Building 4,00,000 20,000 3,80,000
Plant & Machinery 20,00,000 3,00,000 17,00,000
Computers 1,00,000 40,000 60,000
Vehicles 3,00,000 60,000 2,40,000
23,80,000

Sahasri Singar Academy 10.2.6

Jointly Controlled Entity (JCE): Features
1. Venturer creates a new entity (corporation, firms, etc.,) for JV business
2. Each venturer contributes cash or other resources to the JCE
3. These contributions are included in the accounting records of the venturer and
are recognized in its separate financial statements as an investment in the JCE
4. Contractual arrangement for joint control over the economic activity of JCE
5. JCE purchases its own assets, creates its own liabilities, expenses incurred & sales made
6. The net result of the JCE is shared in the agreed ratio
7. JCE maintains its own accounting records and
prepares and presents financial statements in the same way
as other enterprises in conformity with the requirements applicable to that JCE

Question: A Ltd., a UK based company entered into a JV with B Ltd., in India, wherein B
Ltd., will import the goods manufactured by A Ltd., on account of JV and sell them in India.
A Ltd., and B Ltd., agreed to share the expenses & revenues in the ratio of 5 : 4 respectively
whereas profits are distributed equally. A Ltd., invested 49% of total capital but has equal
share in all the assets and is equally liable for all liabilities of the JV. Following is the trail
balance of the JV at the end of the first year:

Particulars Dr Cr
Purchases 9,00,000
Other expenses 3,06,000
Sales 13,05,000
Property, Plant & Equipment 6,00,000
Current Assets 2,00,000
Unsecured Loans 2,00,000
Current Liabilities 1,00,000
Capital 4,01,000

Closing inventory was valued at ₹1,00,000.

You are required to prepare the CFS.

Financial Reporting of Interest in Joint Venture 10.3.7

Answer:
Consolidated P&L A/c
Particulars Nt ₹
Revenue from operations 1 13,05,000
A Total Revenue 13,05,000
− Expenses
Purchases 2 9,00,000
Other expenses 3 3,06,000
Changes in inventories of FG 4 (1,00,000)
B Total Expenses 11,06,000
Profit Before Tax (A – B) 1,99,000

Consolidated B/S
I Equity and Liabilities
1 Shareholders’ Funds
Share capital 5 4,01,000
Reserves and Surplus 6 1,99,000
2 Non-current liabilities
Long term borrowings 7 2,00,000
3 Current Liabilities 8 1,00,000
9,00,000
II ASSETS
1 Non-current assets: PPE 9 6,00,000
2 Current Assets
Inventories 10 1,00,000
Other current assets 11 2,00,000
9,00,000

Sahasri Singar Academy 10.2.8

 Notes to Accounts
Revenue from Operations
1 Sales
A Ltd. 7,25,000
B Ltd. 5,80,000 13,05,000
2 Purchases
A Ltd. 5,00,000
B Ltd. 4,00,000 9,00,000
3 Other Expenses
A Ltd. 1,70,000
B Ltd. 1,36,000 3,06,000
4 Closing Inventory
A Ltd. 50,000
B Ltd. 50,000 1,00,000
5 Share Capital
A Ltd. 1,96,490
B Ltd. 2,04,510 4,01,000
6 Reserves and Surplus [P&L]
A Ltd. 99,500
B Ltd. 99,500 1,99,000
7 Long-term Borrowings
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000
8 Current Liabilities
A Ltd. 50,000
B Ltd. 50,000 1,00,000
9 Property, Plant & Equipment
A Ltd. 3,00,000
B Ltd. 3,00,000 6,00,000
10 Inventories
A Ltd. 50,000
B Ltd. 50,000 1,00,000
11 Inventories
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000
For every separate entity, it can be recorded as investment (AS 13)

Financial Reporting of Interest in Joint Venture 10.3.9

CFS of a Venturer:
Proportionate consolidation is a method of accounting and
reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses
of a JCE is reported as separate line items in the venturer’s financial statements.

Proportionate consolidation method is followed except in the following cases:

1. Investment is intended to be temporary
2. JV operates under severe long-term restrictions,
which significantly impair its ability to transfer fuds to the venturers.
In both the above cases, investment of venturer is treated as investment as per AS 13

A venturer should discontinue to use proportionate consolidation method from date that:
1. It ceases to have joint control but retains its investment
2. The use of the proportionate consolidation method is no longer appropriate because the
JV operates under severe long-term restrictions that significantly impair its ability to
transfer to the venturers.

From the date of discontinuing the use of the proportionate consolidation method,
1. If interest in entity is more than 50%, investments in such JV
should be accounted for in accordance with AS 21, CFS.
2. If interest is 20% or more but up to 50%, investments are to be accounted
for in accordance with AS 23, Accounting for Investment in Associates in CFS
3. For all other cases investment in JV is treated as per AS 13, Accounting for Investment
4. For this purpose, the carrying amount of the investment at the date
on which JV relationship ceases to exist should be regarded as cost thereafter.

Following are the features of Proportionate Consolidation Method:

1. Stress is given on substance over form i.e., more importance is given to the share of
venturers in the P&L of the venture from the share of assets and liabilities rather than
the nature and form of the JV.
2. Venturer’s share of joint assets, liabilities, expenses, income are shown on the separate
lines in the CFS
3. Most of the provisions of Proportionate Consolidation Method are similar to the
Provisions of AS 21.
4. Same reporting date for the financial statements of JCE & venturers

Sahasri Singar Academy 10.2.10

5. Same policies are followed for the financial statements of JCE & venturers
6. Any asset or liabilities should not be adjusted by another asset or liabilities
Similarly any income or expense cannot be adjusted with another income or expense
But done only if legally allowed
7. On the date when interest in JCE is acquired, GW or CR is recognized
GW = Interest of venturer in net asset of the JCE < the cost of investment
CR = Interest of venturer in net asset of the JCE > the cost of investment
8. An investor who don’t have joint control in the entity will treat like AS 23.

Question: A Ltd., entered into a JV with B Ltd., on 1:1 basis and a new company C Ltd., was
formed for the same purpose and following is the B/S of three companies:

Particulars A Ltd., B Ltd., C Ltd.,

Share capital 10,00,000 7,50,000 5,00,000
Reserves & Surplus 18,00,000 16,00,000 12,00,000
Loans 3,00,000 4,00,000 2,00,000
Current Liabilities 4,00,000 2,50,000 1,00,000
Property, Plant and Equipment 30,50,000 26,25,000 19,50,000
Investment in JV 2,50,000 2,50,000 -
Current Assets 2,00,000 1,25,000 50,000

Prepare the B/S of A Ltd., and B Ltd., under proportionate consolidation method.
Answer:
Consolidated B/S of A Ltd.
I Equity and Liabilities
1 Shareholders’ Funds
Share capital 10,00,000
Reserves and Surplus 1 24,00,000
2 Non-current liabilities 2 4,00,000
3 Current Liabilities 3 4,50,000
42,50,000
II ASSETS
1 Non-current assets: PPE 4 40,25,000
2 Current Assets 5 2,25,000
42,50,000

Financial Reporting of Interest in Joint Venture 10.3.11

 Notes to Accounts [A Ltd]
1 Reserves and Surplus [P&L]
A Ltd. 18,00,000
C Ltd. 6,00,000 24,00,000
2 Long-term Borrowings
A Ltd. 3,00,000
C Ltd. 1,00,000 4,00,000
3 Current Liabilities
A Ltd. 4,00,000
C Ltd. 50,000 4,50,000
4 Property, Plant & Equipment
A Ltd. 30,50,000
C Ltd. 9,75,000 40,25,000
5 Current Assets
A Ltd. 2,00,000
C Ltd. 25,000 2,25,000

Consolidated B/S of B Ltd.

I Equity and Liabilities
1 Shareholders’ Funds
Share capital 7,50,000
Reserves and Surplus 1 22,00,000
2 Non-current liabilities 2 5,00,000
3 Current Liabilities 3 3,00,000
37,50,000
II ASSETS
1 Non-current assets: PPE 4 36,00,000
2 Current Assets 5 1,50,000
37,50,000

Notes to Accounts [B Ltd]

1 Reserves and Surplus [P&L]
B Ltd. 16,00,000
C Ltd. 6,00,000 22,00,000

Sahasri Singar Academy 10.2.12

 2 Long-term Borrowings
B Ltd. 4,00,000
C Ltd. 1,00,000 5,00,000
3 Current Liabilities
B Ltd. 2,50,000
C Ltd. 50,000 3,00,000
4 Property, Plant & Equipment
B Ltd. 26,25,000
C Ltd. 9,75,000 36,00,000
5 Current Assets
B Ltd. 1,25,000
C Ltd. 25,000 1,50,000

Transactions between a venturer and JV

When the venturer transfers or sells assets to JV,
The venturer should recognize only that portion of the P/L which is attributable to the
interest of the other venturers.
The venturer should recognize the full amount of any loss only when the contribution or
sale provides evidence of a reduction in the net realisable value of current assets or an
impairment loss.
When the venturer from the JV purchases the assets,
Venturer will not recognize his share of profits in the JV of such transaction
unless he disposes off the assets.
A venturer should recognize his share of the losses resulting from these transactions in the
same way as profits except that losses will be recognized in full immediately only when they
represent a reduction in the net realisable value of current assets or an impairment loss.
In case the JV is in the form of JCE,
then provisions for above the para will be followed only for CFS and not for venturer’s own
financial statement. In the books of venturer, P&L from such transactions are recognized in
full.

Question: A and B established a separate vehicle i.e., entity J, wherein each operator has a
50% ownership interest and each takes 50% of the output. On formation of the JV, A
contributed a property with fair value of ₹110 crore and agreed to contribute his experience
over the years towards this venture; and B contributed equipment with a fair value of ₹120

Financial Reporting of Interest in Joint Venture 10.3.13

crore. The carrying values of the contributed assets were ₹100 crore and ₹80 crore,
respectively.
Answer:
₹ in crores
A’s gain in CFS: ₹
A’s share in the fair value of asset contributed by B (50% of 120) 60
− A’s share in the carrying value of asset contributed by A to the JV (50% of 100) 50
Gain recognized by A 10

Reporting interests in JV in the Financial Statements of an Investor

The investors who don’t have joint control over the entity recognized his share of net results
and his investments in JV as per AS 13. In the CFS it is recognized as per AS 13, AS 21 or AS
23 as appropriate.

Operators of JV
Payment to operators is recognized as expense in CFS
and in the books of the operators as per AS 9, Revenue Recognition.
The operator may be any of the ventures,
in this case any amount received by him,
as management fees for the service will be recognized as stated above in this Para.

Disclosure
A venturer should disclose the aggregate amount of the following contingent liabilities,
unless the probability of loss is remote, separately from the amount of other contingent
liabilities:
1. Any contingent liabilities that the venturer has incurred in relation to its interests in JV
and its share in each of the contingent liabilities which have been incurred jointly with
other venturers.
2. Its share of the contingent liabilities of the JV themselves for which it is contingently
liable; and
3. Those contingent liabilities that arise because the venturer is contingently liable for the
liabilities of the other ventures of a JV
A venturer should disclose the aggregate amount of the following commitments in respect
of its interests in JV separately from other commitments:

Sahasri Singar Academy 10.2.14

1. Any capital commitments of the venturer in relation to its interests in JV and its
share in the capital commitments that have been incurred jointly with other
ventures; and
2. Its share of the capital commitments of the joint ventures themselves.
A venturer should disclose a list of all JV and description of interest in significant JV.
In respect JCE, the venturer should also disclose the proportion of ownership interest, name
and country of incorporation or residence.
A venturer should disclose, in its separate financial statements, the aggregate amounts of
each of the assets, liabilities, income and expenses related to its interests in the JCE

Financial Reporting of Interest in Joint Venture 10.3.15

 11. PRESENTATION OF FINANCIAL STATEMENTS (SCHEDULE III)

Framework for Preparation and Presentation of Financial Statements

Accounting Standards Board (ASB) of ICAI issued a framework
Relevant in context of Companies (Accounting Standards) Rules, 2021
As amended from time to time notified by the Central Government and
Accounting Standards issued by the ICAI

The principal areas covered by the framework are as follows:

1. Components of financial statements
2. Objectives of financial statements
3. Assumptions underlying financial statements
4. Qualitative characteristics of financial statements
5. Elements of financial statements
6. Criteria for recognition of elements in financial statements
7. Principles for measurement of financial elements
8. Concepts of capital and capital maintenance

Purpose of the framework: is to assist

1. Preparation of financial statement in compliance with AS &
In dealing with the topics not yet covered by any AS
2. ASB in its task of development and review of AS
3. ASB in promoting harmonization of regulations, AS and procedures
relating to the preparation and presentation of financial statements
by providing a basis for reducing the number of alternative accounting treatments
permitted by AS
4. Auditors in forming an opinion
as to whether financial statements conform to the AS
5. Users in interpretation of financial statements
6. Those who are interested in the work of ASB
with information about its approach to the formulation of AS

Status and Scope of the Framework

Applicable – general purpose financial statements (prepared for external users)
Not applicable – special purpose financial reports (e.g., computation for tax purpose)
Note: AS will prevail over those of the framework in case of conflict

Presentation of Financial Statements 11.1

Components of Financial statements / general purpose financial statement
1. Profit & Loss Statement
2. Balance Sheet
3. Cash Flow Statement
4. Notes to Accounts – explanations

Objectives and Users of Financial Statements

Users Purpose / Objective

Internal: Management Profitability

Employees To claim bonus
External: Lenders To know the solvency position
Suppliers To decide the credit policy
Customers To ensure prompt supply of material
Government To levy tax and control
Investors To invest
Public For employment

Fundamental Accounting Assumptions

1. Going Concern
It is assumed that enterprise has long life (no intention for liquidation)
2. Consistency
Same accounting policy is followed from one accounting period to another.
3. Accrual
Transactions are recorded when they occur (not paid)

Going Concern:
Question: Balance sheet of a trader on 31st March, 2023 is given below:

Liabilities ₹ Assets ₹
Capital 60,000 PPE 65,000
Profit and Loss Account 25,000 Stock 30,000
10% Loan 35,000 Trade Receivable 20,000
Trade Payables 10,000 Deferred expenditure 10,000
Bank 5,000
1,30,000 1,30,000

Sahasri Singar Academy 11.2

Additional Information:
1. The remaining life of PPE is 5 years. The pattern of use of the asset is even. The net
realisable value of PPE on 31.03.2024 was ₹60,000
2. The trader’s purchase and sales in 2023-24 amounted to ₹4 lakh and ₹4.5 lakh
respectively
3. The cost and net realisable value of stock on 31.03.2024 were ₹32,000 and ₹40,000
respectively
4. Expenses (including interest on 10% loan of ₹3,500 for the year) amounted to ₹14,900.
5. Deferred expenditure is amortized equally over 4 years.
6. Trade receivables on 31.03.2024 is ₹25,000, of which ₹2,000 is doubtful. Collection of
another ₹4,000 depends on successful re-installation of certain product supplied to the
customer.
7. Closing trade payable is ₹12,000, which is likely to be settled at 5% discount.
8. Cash balance on 31.3.2024 is ₹37,100.
9. There is an early repayment penalty for the loan ₹2,500.
You are required to prepare P&LA/c and B/S of the trader in both cases
a. assuming going concern &
b. not assuming going concern.
Answer:
P/L A/c for the year ended 31st March, 2024
Case (A) Case (B) Case (A) Case (B)
To Debit ₹ ₹ By Credit ₹ ₹
Op. Stock 30,000 30,000 Sales 4,50,000 4,50,000
Purchases 4,00,000 4,00,000 Cl. Stock 32,000 40,000
Expenses 14,900 14,900 Tr. Payables 600
Depreciation 13,000 5,000
PDD 2,000 6,000
Deferred Exp 2,500 10,000
Loan penalty - 2,500
Net Profit 19,600 22,200
4,82,000 4,82,000 4,82,000 4,82,000

Balance Sheet as at 31st March, 2024

Liabilities ₹ ₹ Assets ₹ ₹
Capital 60,000 60,000 PPE 52,000 60,000
Profit and Loss A/c {Op} 25,000 25,000 Stock 32,000 40,000
Profit and Loss A/c {CY} 19,600 22,200 Trade Receivable 23,000 19,000
10% Loan 35,000 37,500 Deferred expenditure 7,500 Nil
Trade Payables 12,000 11,400 Bank 37,100 37,100
1,51,600 1,56,100 1,51,600 1,56,100

Presentation of Financial Statements 11.3

Accrual Basis
Question:
1. A trader purchased article A on credit in period 1 for ₹50,000
2. He also purchased article B in period 1 for ₹2,000 in cash.
3. The trader sold article A in period 1 for ₹60,000 in cash.
4. He also sold article B in period 1 for ₹2,500 on credit.
Profit and Loss A/c of the trader by two basis of accounting are shown below. A look at the
cash basis profit and loss a/c will convince any reader of the irrationality of cash basis of
accounting,
Answer:
Profit and Loss A/c
Period 1
Debit Cash Credit Credit Cash Credit
To Purchase 2,000 52,000 By Sales 60,000 62,500
Net profit 58,000 10,500
60,000 62,500 60,000 62,500
Period 2
Purchase 50,000 By Sales 2,500
Net Loss 47,500
50,000 50,000

The Qualitative Characteristics of Accounting Information

1. Understand ability by the users who has reasonable knowledge
2. Relevance to the decision makers [predictive and confirmatory roles from the past]
3. Reliability, free from material error and bias
4. Comparability of financial statements of one year with the financial statements another
year of the same company or other company

True and Fair View: Not dealt by the framework but ensures

Elements of financial statements

1. Asset:
A resource (tangible or intangible)& (cost or value measurable reliably)
Controlled by the enterprise as a result of past events (not merely legal ownership)
included for lessee in case of asset possessed under financial lease
excludes technical talent of employee as it is not controlled by the enterprise
From which future (not current) economic benefits
are expected to flow to the enterprise

Sahasri Singar Academy 11.4

2. Liability:
A present obligation of the enterprise
legally enforceable due to
A binding contract | statutory requirement | normal business practice
Arising from past events
The settlement of which is expected to result in
an outflow of a resource embodying economic benefits
3. Equity: owners’ claim (capital & reserves)
4. Income: increase in economic benefits during the accounting period
5. Expenses: decrease in economic benefits during the accounting period

Measurement of Elements of Financial Statements

1. Historical cost: the acquisition price
2. Current cost: cash or cash equivalent payable to acquire the asset currently
3. Realisable value: cash or cash equivalent realisable on disposal of the asset
4. Present value (value in use):present value of the future net cash inflows

Capital Maintenance or net asset maintenance

1. Financial capital maintenance at historical cost
Retained Profit = Closing equity – Opening equity
2. Financial capital maintenance at current purchasing power
Retained Profit = Closing equity – Opening equity at indexed value
3. Physical capital (maintenance at current costs)
Retained Profit = Closing equity – Opening equity at current value
Note:
1. Closing equity is after adjusting drawings & additional capital
2. To maintain the capital, drawings is restricted to leave the retained profit zero or more

Question: A trader commenced business on 01.01.2023 with ₹12,000 represented by 6,000

units of a certain product at ₹2 per unit. During the year 2023 he sold these units at ₹3 per
unit and had withdrawn ₹6,000. The price of the product at the end of the year is ₹2.50 per
unit. The price index applicable to the product at the year-end is 120.
Answer:
1. Financial capital maintenance at historical cost
Retained Profit = Closing equity – Opening equity
12,000 − 12,000 = 0
2. Financial capital maintenance at current purchasing power
Retained Profit = Closing equity – Opening equity at current value
12,000 − 12,000 × 120% = −2,400
3. Physical capital maintenance at current costs
Retained Profit = Closing equity – Opening equity at current value
12,000 − 6,000𝑢 × 2.5 = −3,000
To maintain the capital, drawings is restricted to leave the retained profit zero or more

Presentation of Financial Statements 11.5

Company: an artificial person created by law with a perpetual succession and a common seal
Features of Company
1 Incorporated association 7 Not a citizen
2 Separate legal entity 8 Transferability of shares
3 Perpetual succession 9 Maintenance of books
4 Common seal 10 Periodic audit
5 Limited Liability 11 Right to access to information
6 Distinction between owner and management

Types of Companies
1. Government Company:
Not less than 51% of paid-up capital is held by Government (Central / State)
2. Foreign Company:
Incorporated outside Indian but operated in India (even electronically)
3. Private Company:
Restrict share transfer | Members ≤ 200 except OPC | Prohibits public subscription
4. Public Company:
not private company + private company being subsidiary of public company
5. One Person Company: member = one
6. Small Company: not public company | paid up < 50 lakhs (5 crore if prescribed)
Turnover < 2 crores (20 crore if prescribed)
7. Listed Company: shares listed in recognized stock exchange (else unlisted)
8. Unlimited Company: liability of members are unlimited
9. Company Limited by Shares: liability of members limited to face value of shares
10. Company Limited by Guarantee: liability of members limited to an amount in MOA
11. Holding Company: company having subsidiary company
12. Subsidiary Company: Controls BOD | holds > 50% shares by holding company

Financial Statements: (S. 129: GAAP and provision of Companies Act & S. 133: follow all AS)
1. Balance Sheet as per Part I of Schedule III of the Companies Act, 2013
2. Profit and Loss as per Part II of Schedule III of the Companies Act, 2013
3. Cash Flow Statement
(not required for OPC | small companies) (SEBI required for listing)
4. Changes in equity
5. Notes to accounts (S. 134: requires Board report)
6. SEBI requires listing company to prepare consolidated financial report as per AS 21 & 23

Sahasri Singar Academy 11.6

 Balance Sheet as per Part I of Schedule III of the Companies Act, 2013
Name of the Company…………...
Particulars Note CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Share capital | Calls in arrear | Forfeiture ×××× ××××
[Show 5 years details]
[Source of SC not required]
𝑏 Reserves and surplus (CR | CRR | SP | P/L) ×××× ××××
𝑐 Money received against share warrants ×××× ××××
2 Share application money pending allotment ×××× ××××
3 Non-current liabilities
𝑎 Long-term borrowings (debentures | deposits) ×××× ××××
𝑏 Deferred tax liabilities (Net) ×××× ××××
𝑐 Other Long-term liabilities (PF | Gratuity) ×××× ××××
𝑑 Long-term provisions ×××× ××××
4 Current liabilities
𝑎 Short-term borrowings ×××× ××××
𝑏 Trade payables ×××× ××××
𝑐 Other current liabilities ×××× ××××
𝑑 Short-term provisions ×××× ××××
Total ×××× ××××
II ASSETS
1 Non-current assets
𝑎 Property, Plant and Equipment ×××× ××××
𝑖 Tangible assets ×××× ××××
𝑖𝑖 Intangible assets ×××× ××××
𝑖𝑖𝑖 Capital work-in-progress ×××× ××××
𝑖v Intangible assets under development ×××× ××××
𝑏 Non-current investments ×××× ××××
𝑐 Deferred tax assets (net) ×××× ××××
𝑑 Long-term loans and advances ×××× ××××
𝑒 Other non-current assets ×××× ××××
2 Current assets
𝑎 Current investments ×××× ××××
𝑏 Inventories (RM | WIP | FG | Loose Tools) ×××× ××××
𝑐 Trade receivables ×××× ××××
𝑑 Cash and cash equivalents ×××× ××××
𝑒 Short-term loans and advances ×××× ××××
𝑓 Other current assets ×××× ××××
Total ×××× ××××

Presentation of Financial Statements 11.7

 P/L Statement as per Part II of Schedule III of the Companies Act, 2013
Particulars Note CY PY
𝑖 Revenue from operations ××× ×××
𝑖𝑖 Income [> 1% of revenue or ₹1,00,000] | Other income ××× ×××
𝒊𝒊𝒊 Total Revenue (𝑖 + 𝑖𝑖) ××× ×××
𝒊v Expenses
Cost of materials consumed
Purchases of stock in trade ××× ×××
Opening stock – closing stock [RM | WIP | FG] ××× ×××
[Record the changes only]
[WIP not required if the change is insignificant]
Employee benefits [salaries | PF | ESOP | ESPP | Staff welfare] ××× ×××
Finance Costs ××× ×××
Depreciation and amortization expenses ××× ×××
Expenses [> 1% of revenue or ₹1,00,000] | Other expenses ××× ×××
Total Expenses ××× ×××
𝑣 Profit before exceptional and extraordinary items and tax(𝑖𝑖𝑖 + 𝑖𝑣) ××× ×××
𝑣𝑖 Exceptional Items ××× ×××
𝑣𝑖𝑖 Profit before extraordinary items and tax (𝑣 + 𝑣𝑖) ××× ×××
𝑣𝑖𝑖𝑖 Extraordinary Items ××× ×××
𝑖𝑥 Profit before tax(𝑣𝑖𝑖 + 𝑣𝑖𝑖𝑖) ××× ×××
𝑥 Tax: Current tax | Deferred tax ××× ×××
𝑥𝑖 Profit / Loss for the period from continuing operations (𝑖𝑥 + 𝑥) ××× ×××
𝑥𝑖𝑖 Profit / Loss from discontinuing operations ××× ×××
𝑥𝑖𝑖𝑖 Tax: Current tax | Deferred tax ××× ×××
𝑥𝑖𝑣 Profit for the period from discontinuing operations (𝑥𝑖𝑖 + 𝑥𝑖𝑖𝑖) ××× ×××
𝑥𝑣 Profit / Loss(𝑥𝑖 + 𝑥𝑖𝑣) ××× ×××
𝒙𝒗𝒊 Earnings per equity shares
1. Basic ××× ×××
2. Diluted ××× ×××

Sahasri Singar Academy 11.8

Question: Under what headings will you show the following items in the B/S of a Company?
1. Sinking Fund1
2. Patents and Copyright2
3. Unsecured Loan only3
4. Loose Tools4
5. Mortgage loan5
6. Interest Accrued but not due on loans6
7. Public Deposit7

Question: Name four items which are required to be disclosed under the head ’Inventories’
as per Schedule III disclosure requirement.8

Money Received against Share Warrants

Shown as a separate line item in B/S
In case of Listed Companies, share warrants are issued to promoters & others
in terms of the guidelines for preferential issues viz.
SEBI (Issue of Capital and Disclosure Requirements), Guidelines, 2009.
Share Warrants ultimately form part of the Shareholder's Funds.
Since Shares are yet to be allotted against the same,
these are not reflected as part of Share Capital, but as a separate line - item.

Share Application money pending allotment – a separate line item in B/S.

Other provisions:
1. Treated as a separate line item after shareholders’ funds and before non-current
liabilities
If share application money not exceeding the issued capital and to the extent not
refundable
2. Cases treated as ‘other current liabilities’
a. If the company's issued capital is more than the authorized capital,
and approval of increase in authorized capital is pending,

1
Reserves and surplus
2
Non-Current Assets and intangible Assets
3
Non-Current Liabilities
4
Current Assets – inventories
5
Non-current liabilities
6
Current liabilities
7
Non-current liabilities
8
RM | WIP | FG | Stock in trade | Loose tools | goods in transit

Presentation of Financial Statements 11.9

 the amount of share application money received over and above the authorized
capital
b. The share application money to the extent refundable.
c. Calls paid in advance including interest accrued on it

Schedule III disclosure requirement in respect of cash and cash equivalents

Cash and Cash Equivalents is reported under the heading Current Assets and further
classified as
1. Balances with Banks
2. Cheques, Drafts on Hand
3. Cash on Hand
4. Other (Specify nature).
Notes:
Earmarked Balances with Banks (e.g. for Unpaid Dividend) shall be separately stated
Balances with Banks to the extent held as margin Money or Security against the
Borrowings, Guarantees, and Other Commitments shall be disclosed separately.
Repatriation restrictions, if any, in respect of Cash and Bank Balances shall be separately
stated
Bank Deposits with more than 12 months Maturity shall be disclosed separately.

Question 1: Prepare the Balance Sheet as at 31.03.2021 from the particulars furnished by M/s
PRAN Ltd. as per revised Schedule III of the Companies Act;

Particular ₹ Particulars ₹
Share Capital 7,50,000 Capital Redemption Reserve 20,000
Calls in Arrear 5,000 Investment in 6% GP Notes (tax free) 3,00,000
Land 2,20,000 Profit and Loss Account 65,000
Building 2,00,000 Goodwill 25,000
Plant and Machinery 2,50,000 Cash in Hand 10,000
General Reserve 50,000 Debtor 1,00,000
Loan from IDBI 1,00,000 Stock 25,000
Sundry Creditors 1,50,000

Sahasri Singar Academy 11.10

Answer:
Balance Sheet as at 31.03.2012
I Equity & Liabilities Note Current Previous
No. year year
1. Shareholders’ Funds:
𝑎 Share Capital 1 7,45,000 ---
𝑏 Reserve & Surplus 2 1,35,000 ---
2. Non-current Liabilities: 3 1,00,000 ---
3. Current Liabilities: [Trade payable] 4 1,50,000 ---
Total 11,30,000
II Assets:
1. Non-Current assets:
𝑎 Property, Plant & Equipment
𝑖 Tangible Assets 5 6,70,000 ---
𝑖𝑖 Intangible Assets 6 25,000 ---
𝑏 Non-Current Investment 7 3,00,000 ---
2. Current Assets:
𝑎 Inventories 8 25,000 ---
𝑏 Trade Receivable 9 1,00,000 ---
𝑐 Cash & Cash Equivalent 10 10,000 ---
Total 11,30,000

Notes ₹ ₹
1 Share Capital Share capital 7,50,000
(-) Calls in Arrear 5,000 7,45,000
2 Reserve & Surplus General Reserve 50,000
Capital Redemption Reserve 20,000
Profit & Loss A/c 65,000 1,35,000
3 Long Term Borrowings Loan from IDBI 1,00,000 1,00,000
4 Trade Payables Sundry Creditors 1,50,000 1,50,000
5 Tangible Assets Land 2,20,000
Building 2,00,000
Plant & Machinery 2,50,000 6,70,000
6 Intangible Assets Goodwill 25,000
7 Non-Current Investments Investment in 6% G.P. Notes 3,00,000
8 Inventories Stock 1,00,000
9 Trade Receivables Debtors 10,000
10 Cash & Cash Equivalents Cash in Hand 25,000

Presentation of Financial Statements 11.11

Question 2: The following is the Trial Balance of Omega Limited as on 31.03.2018
In ₹ ‘000
Particulars Debit Particulars Credit
Land at cost 220 Equity Capital (Shares of ₹10each) 300
Plant and Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.03.2018) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1,670 1,670

Additional Information:
1. The Authorized Share Capital of the Company is 40,000 shares of ₹10 each
2. The Company on the advice of independent valuer wish to revalue the land at ₹3,60,000
3. Declared final dividend @10% (over Interim Dividend of ₹18,000)
4. Suspense account of ₹4,000represents cash received for the sale of some of the machinery
on 01.04.2017. The cost of the machinery was ₹10,000 and the accumulated depreciation
thereon being ₹8,000
5. Depreciation is to be provided on plant and machinery at 10% on cost
You are required to prepare Omega Limited’s Profit and Loss Statement for the year
ended 31.03.2018 and the Balance Sheet as on that date in accordance with the
Companies Act, 2013 in the Vertical Form along with the Notes on Accounts. Ignore
previous years’ figures and taxation.
Answer:
Balance sheet Omega Limited as on 31stMarch, 2018
Particulars Note ₹ in ‘000
I Equity & Liabilities
1 Shareholders‟ Funds:
𝑎 Share Capital 1 300
𝑏 Reserves & Surplus 2 530
2 Non-Current Liabilities [10% Debentures] 200

Sahasri Singar Academy 11.12

 3 Current Liabilities [Trade payables] 52
Total 1,082
II Assets
1 Non-Current Assets [PPE] 3 880
2 Current Assets:
𝑎 Inventories 86
𝑏 Trade Receivables 96
𝑐 Cash & bank balances 20
Total 1,082

Profit and Loss Statement for the year ended 31st March, 2018
Particulars Note ₹ in ‘000
𝑖 Revenue from Operation 700
𝑖𝑖 Other Income: (profit on sale of P&M) 2
𝒊𝒊𝒊 Total Revenue (𝑖 + 𝑖𝑖) 702
𝒊𝒗 Expenses:
𝑎 Purchases 320
𝑏 Finance Costs (Debenture interest) 20
𝑐 Depreciation (10% of 760*) 76
𝑑 Other expenses (60+30+88) 4 120
Total Expenses 536
𝒗 Profit for the year (𝑖𝑖𝑖 + 𝑖𝑣) 166

Notes to accounts
1 Equity share capital ₹in ‘000
Authorized: 40,000 shares of ₹10 each 400
Issued, Subscribed &Called up: 30,000 shares of ₹10 each 300 300
2 Reserves & Surplus
Securities Premium Account 40
Revaluation Reserve (360-220) 140
General Reserve 130
Profit & Loss: Opening balance 72
+ Profit for the period 166
− Appropriations: Interim Dividend (18) 220 530

Presentation of Financial Statements 11.13

 3 Tangible Assets [PPE] Land P&M Total
Balance 220 770
− Disposed off 10
− Depreciation(172 − 8 + 76) 240
+ Appreciation 140
360 520 880
4 Other expenses
Factory expenses 60
Selling expenses 30
Administrative expenses 30 120

Question 3: ABC Ltd. provides the following Trial Balance as on 31st March 2017

Particulars Dr Cr
Equity Share Capital: 3,50,000 × ₹10 35,00,000
10% Debentures 3,00,000
Motor Van 4,00,000
Machinery 20,00,000
Land and Building 12,00,000
12% Long Term Govt. Securities 2,00,000
Sales 60,00,000
Sales Return 3,00,000
Interest on Debenture 22,500
Purchase 36,00,000
Purchase Returns 4,00,000
Opening Stock 3,00,000
Discount 7,500
Carriage Outward 1,50,000
Rent and Rates 50,000
Income from Govt. Securities 24,000
Trade Receivables 10,00,000
Trade Payables 2,00,000
Advertisement 1,50,000
Bad Debt 20,000
Salaries 6,72,000

Sahasri Singar Academy 11.14

 Misc. Expenditure 30,000
Contribution to P.F. and Gratuity Funds 1,00,000
Cash at Bank and in hand 2,22,000
Total 1,04,24,000 1,04,24,000

Additional Information:
1. Closing Stock as on 31stMarch 2017 was ₹3,50,000.
2. Depreciation Rates: Motor Vehicle 10%, Machinery 20% and Land & Building 5%.
3. Misc. expenditure includes ₹20,000 as audit fees.
4. Interest on debenture is payable quarterly and the last quarter's interest is yet to be paid.
5. Trade receivables include a sum of ₹25,000 due from Mr. X who has become insolvent
and only 25 paisa in a rupee is expected to be recoverable from him.
6. Create a provision for doubtful debt @ 2% on trade receivables.
7. Provide for income tax ₹1,50,000.
Prepare a Statement of Profit and Loss for the year ended on 31stMarch 2017 and a Balance
Sheet as on that date.
Answer: Notes to Accounts
Particulars ₹
1 Employee Benefit Expenditure
Salaries 6,72,000
Contribution to P.F. 1,00,000
7,72,000
2 Finance Cost
Interest on loan 22,500
Outstanding Interest 7,500
30,000
3 Other Expenditure
Discount 7,500
Carriage 1,50,000
Rent 50,000
Advertisement 1,50,000
Bad Debt 20,000
Audit fees 20,000
Misc. Exp. 10,000

Presentation of Financial Statements 11.15

 Provision for B/D 38,250
4,45,750
4 Trade Receivable
Total Receivable 10,00,000
(-) Provision @ 2% 38,250
9,61,750
𝑷𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 = 38,250
25,000 × 0.75 + (10,00,000 − 25,000) × 0.02

5 Fixed Assets Motor Van Machine L&B Total

Balance 4,00,000 20,00,000 12,00,000 36,00,000
− Depreciation 40,000 4,00,000 60,000 5,00,000
3,60,000 16,00,000 11,40,000 31,00,000

Statement of Profit and Loss

for the year ended on 31.03.2017
Particulars Note ₹
𝑖 Revenue from operation (sales less returns) [60-3] 57,00,000
𝑖𝑖 Other Income (Income from investment) 24,000
𝒊𝒊𝒊 Total revenue 57,24,000
𝒊𝒗 Expenses:
Purchase less return [36-4] 32,00,000
Changes in inventory i.e., opening less closing [3-3.5] (50,000)
Employee Benefit expenses 1 7,72,000
Finance cost 2 30,000
Depreciation 5,00,000
Other expenses 3 4,45,750
48,97,750
𝑣 Profit before exceptional and extraordinary items and tax 8,26,250
𝑣𝑖 Exceptional items Nil
𝑣𝑖𝑖 Profit before extraordinary items and tax 8,26,250
𝑣𝑖𝑖𝑖 Extraordinary items Nil
𝑖𝑥 Profit before tax 8,26,250
𝑥 Tax (provision for tax) 1,50,000
𝑥𝑖 Profit after tax 6,76,250

Sahasri Singar Academy 11.16

 Balance Sheet as on 31.03.2017
I Equity and Liabilities Note ₹
1 Shareholders' Funds
𝑎 Share Capital 35,00,000
𝑏 Reserve and Surplus (Balance of Profit) 6,76,250
2 Non-current liabilities (10% Debentures) 3,00,000
3 Current Liabilities
Trade Payable 2,00,000
Outstanding interest 7,500
Provision for Tax 1,50,000
Total 48,33,750
II Assets
1 Non-current Assets
𝑎 Fixed Assets (Tangible) 5 31,00,000
𝑏 Non-current Investment (12% Govt. Sec.) 2,00,000
2 Current Assets
Inventories 3,50,000
Trade Receivable 4 9,61,750
Cash and cash equivalent 2,22,000
Total 48,33,750

Payment of Dividend
Dividend: is a distribution of divisible profit but such distribution may entail a release of
asset. Dividend includes interim dividend also [S. 2(35)]
Section 123: Sources for payment of Dividend
1. Out of current year’s profit [after depreciation]
2. Out of previous years’ accumulated profit [after depreciation]
3. Out of the aggregate of profit mentioned in (1) and (2) above
4. Out of state subsides (Money provided by Central Government or State Government for
the payment of dividends in pursuance of a guarantee given by that Govt.)
Apart from above sources, dividend can be paid out of profits made on sale of assets subject
to the fulfilment of certain conditions.

Presentation of Financial Statements 11.17

Declaration and payment of dividend [S.123]
1. Out of the accumulated profits of the previous year
2. Conditions to be fulfilled for dividend from profits of any years in case of inadequate
profit in the PY
a. Rate of dividend ≤ 3 preceding years’ average rate of dividend
b. Amount drawn ≤ 1/10th of paid-up share capital & free reserves
c. Amount drawn should be utilized first to set off losses
d. Reserve after withdrawal > 15% of paid-up share capital & free reserves
e. Dividend can be declared only after set off of previous years losses

Partly paid shares – proportional payment of dividend [S.51 - if article provides]

Calls in advance – no dividend

Transfer to reserves
1. BOD can transfer a part of the profits to reserves [S.123(1)]
2. Appropriation under law: banking companies & commitment at the time of loan
3. Apart from the above, provide for losses and arrears of depreciation

State the conditions to be satisfied for payment of dividend out of capital profits.
Also state for payment of dividend out of
1. Revaluation of Fixed Assets, and
2. On re-issue of forfeited shares.
a) They have to be realized in cash and
b) They remain as profits even after revaluation of all assets and liabilities.
c) AOA does not prohibit company for the purpose.
{CMA inter D09 & J11, 2~3 marks}
1. No, dividend cannot be declared out of Profit on revaluation of fixed assets since it’s a
national profit which is not realized in cash and is obtained from revaluation of capital
assets.
2. Yes, Dividend can be declared out of profits on reissue of forfeited shares only if
conditions are satisfied.

Sahasri Singar Academy 11.18

Managerial Remuneration
Schedule V Part II:
Section I - Remuneration payable by companies having profits
Section 197 of the Companies Act 2013:
Maximum Limits of Managerial Remuneration a percent on the basis of Net Profit

Situation: If the company having

1 only one Whole Time Director, Managing Director or Manager 5%
2 more than one Whole Time Director or Managing Director or Mangers 10%
3 Other Director (not being Whole Time Director / Managing Director) 1%
– where there is a Whole Time Director / Managing Director / Manager
4 Other Director (not being Whole Time Director / Managing Director) 3%
– any other case
5 Overall Maximum Remuneration to Director and Manager 11%

Note: Net profit as per section 198 for the purpose of managerial remuneration is as under
Profit as per books ×××
Subsidies and bounties received from Government / public authority Credited
Premium on issue of shares and debentures Not credited
Profit on sale of forfeited shares Not credited
Profit of a capital nature [profit on sale of undertaking] Not credited
Profit from sale of PPE except balancing charge Not credited
Profit on revaluation of assets and liabilities Not credited
Income tax Not deducted
Voluntary payment of compensation, damages or payments Not deducted
Loss of a capital nature Not deducted
Depreciation as per Companies Act Deducted
All usual working charges Deducted
Directors’ remuneration Deducted
Bonus or commission Deducted
Tax notified on excess or abnormal profits Deducted
Tax on business profit imposed for special reasons Deducted
Interest on debentures, secured and unsecured loans Deducted
Repairs not being capital nature Deducted

Presentation of Financial Statements 11.19

 Outgoings [contributions u/s 181] Deducted
Depreciation u/s 123 Deducted
Carry forward loss Deducted
Compensation or damages to be paid for any legal liability Deducted
or breach of contract
Insurance against the above risk Deducted
Bad debt Deducted

Section II - Remuneration payable by companies having no profits or inadequate profit:

Situation: Effective Capital [EC] Yearly limit of remuneration

1 Negative or less than 5 crores 60 lakhs
2 5 crores to 100 crores 84 lakhs
3 100 crores to 250 crores 120 lakhs
4 250 crores and above 120 lakhs + 0.01% [EC – 250 crores]

Note: Remuneration can exceed the limit by special resolution [Pro rata payment in case the
period is less than one year]

Section III – Remuneration [more than the limit specified in the above] payable by
companies having no profit or inadequate profit.
[new company for 7 years, sick company & NCLT under IBC]

Section IV – Perquisites not included in managerial remuneration

1. PF, Superannuation fund or annuity if not taxable
2. Gratuity <= ½ month salary for each completed years of service
3. Encashment of leave at the end of tenure
4. For expatriate managerial person (including a non-resident Indian)
a. Children education allowance [2 children | WEL of Actual or ₹12,000 p.m.]
b. Holiday passage for children [Economy class p.a. or First class once in two years]
c. Leave travel concession

Sahasri Singar Academy 11.20

Explanation I: Effective Capital
₹
Aggregate paid up share capital ×××
[excluding Share application money + Advances against shares]
Securities premium + Reserves and surplus – Losses [excluding revaluation reserve] ×××
Long-term loans and deposits ×××
[excluding working capital loans, ODs, short-term loans]
- Investments [Except in case of investment companies] ×××
Effective capital [Negative effective capital if < 0] ×××

Explanation II: Date of effective capital

Note: date of effective capital is as on last date of financial year preceding to the previous
year in which appointment is made. [in case of new company, the date of appointment is
taken]

Explanation III: Family – spouse, dependent children and dependent parents of the
managerial person

Question: You are provided with the following information for AD Vita Ltd. for the year

𝑎 Net profit before provision for income tax and ₹13,87,600

Managerial remuneration, but after depreciation
𝑏 Depreciation provided in the Books ₹4,15,000
𝑐 Depreciation allowable under Schedule II ₹3,09,000

You are required to calculate the Managerial remuneration

𝑎 When there is only one whole-time Directors;
𝑏 When there are two whole-time Directors;
𝑐 When there are two whole-time Directors and one Manager.
{CMA inter J12, 6 marks}

Presentation of Financial Statements 11.21

Answer:
Calculation of profit for Managerial Remuneration
Particulars ₹
Net profit before tax and remuneration but after depreciation 13,87,600
+ Depreciation provided in books 4,15,000
18,02,600
− Depreciation allowable under schedule II 3,09,000
14,93,600

Calculation of managerial remuneration

𝑎 When there is only one whole time director 5% of 14,93,600 74,680
𝑏 When there are two whole timer directors 10% of 14,93,600 1,49,360
𝑐 When there are two whole time directors & one manager 1,64,296
11% of 14,93,600 to directors and to Manager

Sahasri Singar Academy 11.22

 12. BUY-BACK OF SECURITIES

Divisible Profits Non-divisible profits

1 General reserve 1 Securities Premium A/c
2 Reserve fund 2 Forfeited Shares A/c
3 Dividend equalization fund 3 Profit Prior to Incorporation
4 Insurance fund 4 Capital Reserve from Forfeiture of Shares.
5 Workmen’s compensation fund 5 Capital Reserve from Revaluation of Assets.
6 Workmen’s accident fund 6 Unclaimed Dividend A/c.
7 Voluntary debenture redemption a/c
8 Voluntary debenture sinking fund
9 Profit and loss account.

Section 68: Buy Back of Shares

A Company can purchase its own shares from
Free reserves; (create CRR to that extent of NV of shares) or
Securities premium account; or
Proceeds of any shares or other specified securities other than an earlier issue of the
same kind

Conditions for buy back:

1. There must be an authorization in the articles for the buy-back.
2. A special resolution must be passed in meeting of the company for authorizing the BBS,
3. All the shares of the company must be fully paid-up.
4. The buy-back is completed within 12 months of the passing of special resolution.
5. The test for buy-back
a. Resource: The buy-back ≤ 25% of the paid up capital and free-reserves
b. Shares Outstanding: The buy-back ≤ 25% of its number of paid-up equities
c. Debt-Equity Ratio: ≤ 2

Objectives of Buy back of shares.

To increase promoters holding.
Increase earnings per share.
To maintain a target capital structure.
Support share value.
To prevent takeover.
To pay surplus cash not required by business.

Buy-Back of Securities 12.1

Modes of buy back
1. Purchase from Open Market
2. Fixed Price Tender Offer
3. Dutch Auction Buy Back [Book-Building Process]
4. Selective Buy Back [Odd Lots]
5. Employees Stock Option

Escrow A/c: means an account in any (designated bank) in which money is held until a
specified duty is performed, i.e., till the consideration for buy-back of shares is paid to the
shareholders.
SEBI Regulation: Margin maintainable in the account is
1. If the consideration payable does not exceed ₹100 crores, 25% of the consideration;
2. If the consideration payable exceeds ₹100 crores, 25% up to ₹100 crores, and 10%
thereafter.

Equity shares with differential rights:

1. As per the Companies Act 2013, companies can issue equity shares with differential rights
Subject to the fulfilment of certain conditions
Dealt in rule 4 under the Companies (Share Capital and Debentures) Rules, 2014.
2. Differentiation by
Superior dividend | Superior voting right | Diluted voting rights
3. Not eligible for Preference Shares

Practical Problems
Question 1: The following is the Balance Sheet of DELTA LTD. as on 31.03.2010
₹ in lakhs
Balance Sheet of Delta Ltd., [31.03.2010] Note ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 8.00
𝑏 Reserves and surplus 1 10.80
2 Non-current liabilities [12% Debenture] 20.00
3 Current liabilities [Sundry Creditors] 5.20
Total 44.00
II ASSETS
1 Non-current assets 2 27.00
2 Current assets 3 17.00
Total 44.00

Sahasri Singar Academy 12.2

 1 Reserves and Surplus ₹ in lakhs
Securities Premium 1.50
Revenue Reserve 7.80
Profit and Loss A/c 1.50
Total 10.80
2 Non-current assets:
Fixed Assets 22.50
Non-Trade Investment 4.50
27.00
3 Current Assets
Stock in Trade 5.80
Debtors 4.20
Cash at Bank 7.00
17.00

The company bought back 20,000 shares at ₹30 each. The transaction in respect of buy back
was financed by sale of 4/5th of the non-trade investment for ₹6.20 lakhs
Show important accounting entries in the book of the company to record buy back and also
show the balance sheet after buy back.

Journal Entries.
Particular Dr ₹ ₹
1 Bank A/c Dr. 6.20
To Investment 3.60
To P& L A/c 2.60
(Being 4/5th of the investment sold )
2 Equity Share Capital Dr. 2.00
Buy Back premium A/c Dr. 4.00
To Equity Shareholder A/c 6.00
(Being buy back of 20,000 shares )
3 Equity Shareholder A/c Dr. 6.00
To Bank A/c 6.00
4 Securities Premium A/c Dr. 1.50
P/L A/c Dr. 1.50
Revenue Reserve Dr. 1.00
To buy Back premium A/c 4.00
(Being closing of buy back premium A/c)

Buy-Back of Securities 12.3

 5 Revenue Reserve A/c Dr. 2.00
To Capital Redemption Reserve A/c 2.00
(Being face value of share transferred to CRR A/c )

Balance Sheet of Delta Ltd., Note ₹ in lakhs

as on 31st March, 2010 No.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 6.00
𝑏 Reserves and surplus 1 9.40
2 Non-current liabilities [Debenture] 20.00
3 Current liabilities [Creditors] 5.20
Total 40.60
II ASSETS
(1) Non-current assets 2 23.40
(2) Current assets 3 17.20
Total 40.60

1 Reserves and Surplus ₹ in lakhs

Capital Redemption Reserve 2.00
Revenue Reserve 4.80
Profit and Loss A/c 2.60
Total 9.40
2 Non-current assets:
Fixed Assets 22.50
Non-Trade Investment 0.90
Total 23.40
3 Current Assets
Stock in Trade 5.80
Debtors 4.20
Cash at Bank 7.20
Total 17.20

Sahasri Singar Academy 12.4

Redemption of Preference Shares and Buy-back of Equity
Question 2: The following was the balance sheet of Diamond Ltd. as at 31st March, 2014

Balance Sheet of Delta Ltd., Note ₹ in lakhs

as on 31 March, 2010
st No.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share 1 10,000
𝑏 Reserves and surplus 2 8,100
2 Non-current liabilities [9% Debenture] 4,000
3 Current liabilities [Creditors] 3 4,900
Total 27,000
II ASSETS
(1) Non-current assets 4 18,000
(2) Current assets 5 9,000
Total 27,000

1 Reserves and Surplus ₹ in lakhs

10% Redeemable Preference Shares of ₹10 each, fully paid up 3,000
Equity shares of ₹10 each fully paid up 7,000
Total 10,000
2 Reserves and Surplus
Capital Redemption Reserve 1,100
Securities Premium 700
General Reserve 5,800
Profit and Loss Account 500
Total 8,100
3 Current liabilities
Creditors 3,800
Sundry Provisions 1,100
4,900
4 Non-current assets:
Property, Plant & Equipment 15,000
Non-Trade Investment 3,000
Total 18,000
5 Current Assets
Cash at Bank 1,450
Other current Assets 7,550
Total 9,000

Buy-Back of Securities 12.5

On 1st April, 2014 the company redeemed all of its preference shares at a premium of 10%
and bought back 10% of its equity shares ₹11 per share. In order to make cash available, the
company sold all the investment for ₹3,200 lakhs and raised a bank loan for the balance.
Pass journal entries for all the above mentioned transaction including cash transactions and
prepare the company’s balance sheet immediately thereafter. The amount of securities
premium has been utilized to the maximum extent allowed by law.
Answer:
Particular Dr Dr Cr
₹ ₹
1 Bank A/c Dr. 3,200
To Investment 3,000
To Profit & Loss A/c 200
(Being sale of Investment and profit thereon)
2 Bank A/c Dr. 870
To Bank Loan A/c 870
(Being loan taken from bank )
3 10% Redeemable Preference Share Capital A/c Dr. 3,000
Premium on redemption of preference shareholders A/c Dr. 300
To Preference Shareholders A/c 3,300
(Being redemption of preference share)
4 Preference Shareholder A/c Dr. 3,300
To Bank A/c 3,300
(Being payment of amount due to preference shareholders)
5 Securities Premium A/c Dr. 370
To Premium on redemption of preference share A/c 300
To Premium on buy-back of equity share A/c 70
(Being use of securities premium used for premium on redemption)
6 Equity share capital A/c Dr. 700
Premium on Buyback Dr. 70
To Equity Shareholders A/c 770
7 General Reserve A/c Dr. 3,370
Securities Premium A/c Dr. 330
To Capital redemption reserve A/c (700 + 3,000) 3,700
(Being creation of capital redemption reserve)
8 Equity shareholder A/c Dr. 770
To Bank A/c 770
(Being Payment of amount due to equity shareholders).

Sahasri Singar Academy 12.6

 Balance Sheet of Delta Ltd., Note ₹ in lakhs
as on 31st March, 2010 No.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share 1 6,300
𝑏 Reserves and surplus 2 7,930
2 Non-current liabilities [9% Debenture] 4,870
3 Current liabilities [Creditors] 3 4,900
Total 24,000
II ASSETS
(1) Non-current assets 15,000
(2) Current assets 4 9,000
Total 24,000

1 Reserves and Surplus ₹ in lakhs

Equity shares of ₹10 each fully paid up [7,000 – 700] 6,300
Total 6,300
2 Reserves and Surplus
Capital Redemption Reserve (1,100 + 3,700) 4,800
Securities Premium (700 – 300 – 70– 370) 0
General Reserve (5,800 – 3,370) 2,430
Profit and Loss Account (500 + 200) 700
Total 7,930
3 Non-Current liabilities
9% Debentures 4,000
Bank Loan 870
Total 4,870
3 Current liabilities
Sundry Creditors 3,800
Sundry Provision 1,100
Total 4,900
4 Current Assets
Cash at Bank (1,450 + 3,200 + 870 – 3,300 – 770) 1,450
Other current Assets 7,550
Total 9,000

Buy-Back of Securities 12.7

Calculation of Maximum Number of Buy-back shares
Question 3: XYZ Ltd. has the following capital structure on of 31st March 2015.

Particulars ₹ in crores
a Equity Share capital (Shares of ₹10 each) 300
b Reserves:
General reserve 270
Security Premium 100
Profit and Loss A/c 50
Export Reserve (Statutory reserve) 80
c Loan Funds 800

The shareholders have on recommendation of Board of Directors approved vide special

resolution at their meeting on 10th April 2015 a proposal to buy back maximum permissible
equity shares considering the huge cash surplus following A/c of one of its divisions.
The market price was hovering in the range of ₹25 and in order to induce existing
shareholders to offer their shares for buy back, it was decided to offer a price of 20% above
market.
Advice the company on maximum number of shares that can be bought back and record
journal entries for the same assuming the buyback has been completed in full within the
next 3 months.
If borrowed funds were ₹1,200 crores, and 1500 crores respectively would your answer
change?
Answer:
In crores
Maximum shares for buy back [WEL] I II III
a 25% of Shares (25% × 30) 7.5 7.5 7.5
b 25% of net worth 25% × (300 + 270 + 100 + 50) 6 6 6
30
c Debt equity ratio [WN] 8 3 -
6 3 -
WN
𝐷𝑒𝑏𝑡
Let number of shares bought back be X @ ₹30 = =2
𝑁𝑒𝑡 𝑤𝑜𝑟𝑡ℎ
𝑁𝑒𝑡 𝑤𝑜𝑟𝑡ℎ = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑓𝑢𝑛𝑑 − 𝐶𝑅𝑅 𝑖. 𝑒. , 𝐹𝑉 𝑜𝑓 𝐵𝐵𝑆 − 𝐵𝐵𝑆 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑁𝑒𝑡 𝑤𝑜𝑟𝑡ℎ = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑓𝑢𝑛𝑑 − 𝐵𝐵𝑆 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

Sahasri Singar Academy 12.8

 Method 1 Method 2
𝑫𝒆𝒃𝒕 𝑫𝒆𝒃𝒕
Situation =𝟐 𝐗 =𝟐 𝐗
𝑷𝒓𝒐𝒑𝒓𝒊𝒆𝒕𝒐𝒓𝒔′ 𝑭𝒖𝒏𝒅 𝑷𝒓𝒐𝒑𝒓𝒊𝒆𝒕𝒐𝒓𝒔′ 𝑭𝒖𝒏𝒅
800 800
I =2 8 =2 10.67
720 − 10𝑋 − 30𝑋 720 − 30𝑋
1,200 1,200
II =2 3 =2 4
720 − 10𝑋 − 30𝑋 720 − 30𝑋
1,500 1,500
III =2 Nil =2 Nil
720 − 10𝑋 − 30𝑋 720 − 30𝑋

Particulars Dr I II
Dr Cr Dr Cr
a Equity Shareholders A/c Dr 180 90
To Bank A/c 180 90
(Being purchase of shares from public)
b Share capital A/c Dr 60 30
Security premium A/c Dr 100 60
General reserve A/c (balancing figure) Dr 20 -
To Equity Shareholders A/c 180 90
(Being cancellation of shares bought on buy back)
c General reserves A/c Dr 60 30
To Capital redemption reserve A/c 60 30
(Being transfer of reserves to CRR to the extent capital is
redeemed)

Buy-Back of Securities 12.9

 13. AMALGAMATION OF COMPANIES

Amalgamation as per AS-14 [applicable for transferee company]

Particulars Method
1 Method of amalgamation Merger Purchase
2 Method of accounting Pooling of Interest Purchase

As per AS14, the below categories will be called amalgamation

Existing New Minimum Number
Companies Company of Companies dissolved
1 Amalgamation A, B, C, D …. Z ‘AZ’ 2
2 Absorption A, B, C, D …. Z 1
3 Reconstruction
External A A new 1
Internal1 A → A (reduced )(Year) Nil

Conditions for amalgamation in the nature of merger:

1. Transferor company's assets / liabilities become transferee's.
2. 90%+ shareholders become transferee's equity shareholders.
3. Consideration settled with transferee's equity shares (mostly).
4. Transferor's business continues with transferee.
5. No adjustments to asset / liability book values except for accounting policy uniformity.
6. Retain all transferor's reserves & surpluses.
Non-compliance with any condition nullifies merger classification.

Steps
1. Calculation of Purchase consideration
2. Closing the books of transferor company
3. Pass journal entries & B/S of Transferee company after amalgamation

1
AS14 is not applicable

Amalgamation of Companies 13.1

Methods of Purchase Consideration:
1. Lump sum method
Purchase consideration = lump sum value given

2. Net asset method

Assets [at realisable value] ×××
− Liabilities [at payable value] ×××
Purchase consideration ×××

3. Net payment method

Equity shares given ×××
+ Preference shares given ×××
+ Cash, etc., given ×××
Purchase consideration ×××

4. Intrinsic value method / share exchange ratio

Transferee Transferor
Assets [at realisable value] ××× ×××
− Liabilities [at payable value] ××× ×××
𝒂 Net worth ××× ×××
𝒃 No. of shares ××× ×××
𝒂 ×× ××
Intrinsic Value [IV] per share (𝒃)
Share exchange ratio [reverse of IV] ×× ××

Closing the books of transferor company

Steps
1. Open ledgers:
a. Realisation A/c
b. Purchase Consideration A/c
c. Purchasing Company A/c
d. Equity Share Holders A/c [if needed Preference Share Holders A/c & Bank A/c]

2. Record the B/S items (once)

a. Assets – Debit side of Realisation A/c [@ Book Value]
Realisation A/c Dr. ×××
To Asset @ Book Value ×××

Sahasri Singar Academy 13.2

 b. Liabilities – Credit side of Realisation A/c [BV]
Liabilities A/c @ Book Value Dr. ×××
To Realisation A/c ×××

c. Equity Share Capital & Reserve & Surplus – Equity Share Holders A/c
Equity Share Capital A/c Dr. ×××
Reserve & Surplus A/c Dr.
To Equity Share Holders A/c ×××

3. Incorporate Purchase Consideration

Purchase Consideration A/c Dr. ×××
To Realisation A/c [Asset @ RV] ×××

Due Entry for Purchase Consideration

Purchasing Company A/c Dr. ×××
To Purchase Consideration A/c ×××

Payment Entry for Purchase Consideration

Share Capital [purchasing company] A/c Dr. ×××
Debenture A/c [purchasing company] or Bank A/c Dr. ×××
To Purchasing Company A/c ×××

Distribution of Purchase Consideration

Equity Share Capital [Selling company] A/c Dr. ×××
To Share Capital [purchasing company] A/c Dr. ×××
To Debenture A/c [purchasing company] or Bank A/c ×××

Special adjustments:
a. Assets / liabilities not taken by purchasing company
b. Realisation Expenses
c. In case of discharge of purchase consideration by equity share capital,
Then it may be recorded at
Face value or
Issue price i.e. Face value + securities premium

Amalgamation of Companies 13.3

4. Close the ledgers:
a. Realisation A/c & Transfer P/L to Equity Shareholders A/c
b. Purchase Consideration A/c
c. Purchasing Company A/c
d. Equity Shareholders A/c [if needed Preference Share Holders A/c & Bank A/c]

Pass journal entries & B/S of Transferee company after amalgamation

Method of Amalgamation Purchase Merger
Business purchase a/c Dr. ×× Dr. ××
To Liquidator of Selling Company ×× ××

Assets A/c Dr. 𝑅𝑉 Dr. 𝐵𝑉

Goodwill A/c [Loss] Dr. 𝐿𝑜𝑠𝑠 Dr. 𝑁𝐴
To Liabilities A/c 𝑅𝑉 𝐵𝑉
To Capital Reserve A/c [Gain] 𝑃𝑟𝑜𝑓𝑖𝑡 𝑁𝐴
To Reserves & Surplus A/c 𝑁𝐴 ×× ±𝑃/𝐿
To Business Purchases A/c ×× ××

Liquidator of Selling Company Dr. ×× Dr. ××

To Share Capital ×× ××
To Cash / Debenture ×× ××

Note
Purchase Pooling
1 Profit or Loss on absorption
Profit on absorption credited in Capital Reserve Reserves & Surplus
Loss on absorption debited in Goodwill Reserves & Surplus

2 Reserves & Surplus of Transferor Company Not considered Maintained

3 Statutory Reserve Ref: Entry No adjustment
4 Assets & Liabilities are recorded at Realisable value Book value

Sahasri Singar Academy 13.4

Entry: [Only under purchase method]
On Creation
Amalgamation Adjustment A/c Dr ×××
To Statutory Reserve A/c ×××

Balance Sheet of Transferee Company ₹

Reserves and Surplus
- Statutory Reserve A/c ×××
- Amalgamation Adjustment A/c (×××)

On Cancellation
Statutory Reserve A/c Dr ×××
To Amalgamation Adjustment A/c ×××

Debenture issue – is it part of purchase consideration?

Issue of To Status Purchase Consideration
1 Debentures Shareholders Purchase consideration Include
(ESC & PSC)
2 Debentures Debentures Settlement of debt Not include

Example: Calculate Purchase Consideration (PC)

Transferee Transferor ₹ Part of PC
1 Equity Shareholder Equity Shareholder 1,000 1,000
Preference Shareholder Preference Shareholder 500 500
Debenture Equity Shareholder 500 500
(not under pooling method)
Bank (for fractional share Equity Shareholder 250 250
in case of pooling method)
Purchase Consideration 2,250

2 Equity Shareholder Equity Shareholder 1,000 1,000

Preference Shareholder Preference Shareholder 500 500
Debenture Debenture-holder 500 No
Bank Equity Shareholder 250 250
Purchase Consideration 1,750

Amalgamation of Companies 13.5

Additional Adjustments:
1. Realisation Expenses
a. Paid by transferor company
Realisation A/c Dr ×××
To Bank A/c ×××

b. Paid by transferee company

Purchase Merger
Goodwill / Capital Reserve A/c Dr ××× 𝑁𝐴
Reserves & Surplus A/c 𝑁𝐴 Dr ×××
To Bank A/c ××× ×××

c. Partially paid by transferor company & transferee company

Pass the entries in (a) & (b) with respective amount

d. Paid by transferor company & reimbursed by transferee company

In the books of transferor company
Either:
On spending
Purchasing Company A/c Dr ×××
To Bank A/c ×××
On reimbursing
Bank A/c Dr. ×××
To Purchasing company A/c ×××
Or: omit
In the books of transferee company
Purchase Merger
Goodwill / Capital Reserve A/c Dr ××× 𝑁𝐴
Reserves & Surplus A/c 𝑁𝐴 Dr ×××
To Bank A/c ××× ×××

2. Intercompany Owings
a. Debtors & Creditors
Creditors A/c Dr ×××
To Debtors A/c ×××

Sahasri Singar Academy 13.6

 b. Bills Receivable & Bills Payable
Bill Payable A/c Dr ×××
To Bills Receivable A/c ×××

The amount should be the lesser of BR and BP,

considering bills discounted or bills endorsed.

c. Loans and Advances & Borrowings

Borrowings A/c Dr ×××
To Loans & Advances A/c ×××

3. Unrealized Profit on Unsold Stock [in the books of purchasing company]

a. If such stock is included in the inventory of the selling company,
record the stock at its value, excluding any unrealized profit, in the journal entry
b. If such stock is included in the inventory of the purchasing company,
Pass the following entry

Goodwill / Capital Reserve A/c Dr ×××

To Stock A/c ×××

4. Exchange ratio for issue of debentures [or preference share]

Example: 10% debenture holders of transferor company will get 12.5% debenture from
transferee company, but the interest remains the same.
𝑂𝑙𝑑 𝑟𝑎𝑡𝑖𝑜
𝑬𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒊𝒐 =
𝑁𝑒𝑤 𝑟𝑎𝑡𝑖𝑜

Disclosures:
In the first financial statements following the amalgamation
1. Names and general nature of business of the amalgamating companies
2. Effective date of amalgamation for accounting purposes
3. The method of accounting used to reflect the amalgamation; and
4. Particulars of the scheme sanctioned under a statue

Amalgamation of Companies 13.7

Additional disclosures, in case of pooling of interest method
1. Description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation
2. The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof.
Additional disclosures, in case of purchase method
1. Consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
2. The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortization of any
goodwill arising on amalgamation.

Amalgamation after the B/S date:

Disclosure: AS 4 ‘Contingencies and Events Occurring After the B/S Sate’

PRACTICAL QUESTIONS

1. Calculation of Purchase Consideration

2. Basic problem for absorption [purchase method | merger method]
3. Basic problem for amalgamation [purchase method | merger method]
4. Comprehensive problem for absorption [purchase method | merger method]
5. Comprehensive problem for amalgamation [purchase & merger method | AAA]
6. Unrealized profit on unsold stock & Intercompany owing
7. Fractional Shares – treatment

Purchase Consideration
Question 1: The B/S of SSA Ltd Co & SBP Ltd Co are given below.

Particulars SSA SBP

Equity Share Capital (₹10 each) 5,000 3,000
Reserves and Surplus 2,000 500
Current Liabilities 3,000 1,500
10,000 5,000
Non-current assets 7,000 3,000
Current assets 3,000 2,000
10,000 5,000

Sahasri Singar Academy 13.8

SSA Ltd absorbs SBP Ltd as on the above B/S date
Calculate purchase consideration & state method of calculation of purchase consideration
under the following alternatives.
1. SSA Ltd takes over the business of SBP Ltd for ₹3,000 and the payment is made in the
form of equity share capital
2. SSA Ltd takes over all assets and liabilities at the book value and the consideration is
paid in the form of equity share capital.
3. SSA Ltd takes over the business of SBP Ltd and issues equity share capital of ₹2,000,
preference share capital of ₹1,000 and cash ₹200 as purchase consideration.
4. SSA Ltd takes over the business of SBP Ltd and issues equity share capital of ₹2,000,
preference share capital of ₹1,000 and balance in cash as purchase consideration.
5. SSA Ltd takes over the business of SBP Ltd by issuing its shares at the intrinsic value.
Answer:
1. Method: Lump sum & Purchase consideration – ₹3,000.
2. Method: Net Asset Method
Assumed Boov Value = Market Value ₹
Non-current assets 3,000
+ Current assets 2,000
5,000
− Current Liabilities 1,500
Purchase Consideration 3,500

3. Method: Net Payment Method

Assumed Boov Value = Market Value ₹
Equity Share Capital 2,000
+ Preference Share Capital 1,000
+ Cash 200
Purchase Consideration 3,500

4. Method: Net Asset Method

Assumed Boov Value = Market Value ₹
Non-current assets 3,000
+ Current assets 2,000
5,000
− Current Liabilities 1,500
Purchase Consideration 3,500
Mode of Payment of Purchase Consideration
− Equity Share Capital 2,000
− Preference Share Capital 1,000
Cash (balance) 500

Amalgamation of Companies 13.9

5. Method: Intrinsic Value Method or Share Exchange Ratio Method
Assumed Boov Value = Market Value SSA SBP
₹ ₹
Non-current assets 7,000 3,000
+ Current assets 3,000 2,000
10,000 5,000
− Current Liabilities 3,000 1,500
1 Net worth 7,000 3,500
2 Number of equity shares 500 300
1
Intrinsic Value per hare (2) 14 11.67
Share Exchange Ratio (SER) 11.67 : 14

𝑺𝒉𝒂𝒓𝒆𝒔 𝒐𝒇 𝑺𝑺𝑨 𝒐𝒇𝒇𝒆𝒓𝒆𝒅 𝒕𝒐 𝑺𝑩𝑷

11.67
= 𝑁𝑜 𝑜𝑓 𝑆𝐵𝑃 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝑆𝐸𝑅 = 300 × = 250 𝑠ℎ𝑎𝑟𝑒𝑠
14
Without securities premium of ₹4 [14 - 10] per share

Absorption [Preparation of B/S after absorption under merger & purchase method]
Question 2: The B/S of SSA Ltd Co & SBP Ltd Co are given below.

Particulars SSA SBP

Equity Share Capital (₹10 each) 5,000 3,000
Reserves and Surplus 2,000 500
Current Liabilities 3,000 1,500
10,000 5,000
Non-current assets 7,000 3,000
Current assets 3,000 2,000
10,000 5,000

SSA Ltd absorbs SBP Ltd as on the above B/S date for a lump sum consideration of (a) ₹2,500
& (b) ₹4,000
Prepare B/S of SSA Ltd after absorption under
1. Purchase method
2. Pooling of interest method

Sahasri Singar Academy 13.10

Answer:
B/S of SSA Ltd Purchase Consideration
(After absorption) (a) ₹2,500 (b) ₹4,000
Purchase Pooling Purchase Pooling
Equity Share Capital (₹10 each) 7,500 7,500 9,000 9,000
Reserves and Surplus
- Reserves and Surplus 2,000 3,000 2,000 1,500
- Capital Reserve 1,000
Current Liabilities 4,500 4,500 4,500 4,500
10,000 15,000 15,500 15,000
Non-current assets
- Intangible Asset: Goodwill - - 500 -
- Tangible Assets 10,000 10,000 10,000 10,000
Current assets 5,000 5,000 5,000 5,000
15,000 15,000 15,500 15,000

Amalgamation [Preparation of B/S after amalgamation under merger & purchase method]
Question 3: The B/S of SSA Ltd Co & SBP Ltd Co are given below.

Particulars SSA SBP

Equity Share Capital (₹10 each) 5,000 3,000
Reserves and Surplus 2,000 500
Current Liabilities 3,000 1,500
10,000 5,000
Non-current assets 7,000 3,000
Current assets 3,000 2,000
10,000 5,000

SSA Ltd and SBP Ltd amalgamated to form a new entity, SET Ltd, with an estimated
purchase consideration of (a) ₹9,000 & (b) ₹12,000. SET Ltd issued ESC of ₹10 each, allocated
to SSA Ltd and SBP Ltd according to their respective net worth ratios as part of the purchase
consideration.
Prepare B/S of SET Ltd after absorption under
1. Purchase method
2. Pooling of interest method

Amalgamation of Companies 13.11

Answer:
B/S of SET Ltd Purchase Consideration
(After amalgamation) (a) ₹9,000 (b) ₹12,000
Purchase Pooling Purchase Pooling
Equity Share Capital (₹10 each) 9,000 9,000 12,000 12,000
Reserves and Surplus
- Reserves and Surplus 1,500 (1,500)
- Capital Reserve 1,500
Current Liabilities 4,500 4,500 4,500 4,500
10,000 15,000 16,500 15,000
Non-current assets
- Intangible Asset: Goodwill - - 1,500 -
- Tangible Assets 10,000 10,000 10,000 10,000
Current assets 5,000 5,000 5,000 5,000
15,000 15,000 16,500 15,000

Absorption [comprehensive problem for merger & purchase method]

Question 4: The B/S of SSA Ltd Co & SBP Ltd Co are given below.

Particulars SSA SBP

Equity Share Capital (₹10 each) 5,000 3,000
Reserves and Surplus 2,000 500
Current Liabilities 3,000 1,500
10,000 5,000
Non-current assets 7,000 3,000
Current assets 3,000 2,000
10,000 5,000

SSA Ltd absorbs SBP Ltd as on the above B/S date for a lump sum consideration of ₹3,000
Requirements:
1. Pass journal entries for dissolution of SBP Ltd. Co.
2. Prepare ledger account for dissolution of SBP Ltd. Co
3. Also required the following under purchase method & pooling of interest method
a. Pass journal entries for absorption in the books of SSA Ltd. Co.
b. Prepare B/S of SSA Ltd. Co. after absorption

Sahasri Singar Academy 13.12

Answer:
Dissolution of SBP Ltd
Realisation A/c
Particulars ₹ Particulars ₹
To Non-current assets 3,000 By Current Liabilities a/c 1,500
Current Assets 2,000 Purchase Consideration 3,000
Equity Shareholders A/c 500
5,000 5,000
Purchase Consideration
Particulars ₹ Particulars ₹
To Realisation A/c 3,000 By SSA Ltd 3,000
3,000 3,000
SSA Ltd Co
Particulars ₹ Particulars ₹
To Purchase Consideration 3,000 By ESC of SSA Ltd 3,000
3,000 3,000
Equity Share Capital Ac/s
Particulars ₹ Particulars ₹
To Equity Shareholders A/c 3,000 By Balance b/d 3,000
3,000 3,000
Equity Shareholders A/c
Particulars ₹ Particulars ₹
To ESC of SSA Ltd 3,000 By Equity Shareholders A/c 3,000
Realisation A/c (Loss) 500 Reserves and Surplus 500
3,500 3,500

Journal Entries in the Books of SBP Dr Cr

1 Realisation A/c Dr 3,500
To Non-current assets A/c 3,000
To Current assets A/c 500
2 Current liabilities Dr 1,500
To Realisation A/c 1,500
3 Equity Share Capital A/c Dr 3,000
Reserves & Surplus A/c Dr 500
To Equity Shareholders A/c 3,500

Amalgamation of Companies 13.13

 4 Purchase Consideration A/c Dr 3,000
To Realisation A/c 3,000
5 SSA Ltd. Co. A/c Dr 3,000
To Purchase Consideration A/c 3,000
6 ESC of SSA Ltd. Co. A/c Dr 3,000
To SSA Ltd. Co. A/c 3,000
7 Equity Shareholders A/c Dr 3,000
To ESC of SSA Ltd. Co. A/c 3,000
8 Equity Shareholders A/c Dr 500
To Realisation A/c 500

In the books of SSA Ltd. Co.

Journal Entries – SSA Purchase Pooling
Dr Cr Dr Cr
1 Business Purchase A/c Dr 3,000 3,000
To Liquidator of SBP Ltd A/c 3,000 3,000
2 Non-current Assets A/c Dr 3,000 3,000
Current Assets A/c Dr 2,000 2,000
To Current Liabilities A/c 1,500 1,500
To Business Purchase A/c 3,000 3,000
To Capital Reserve A/c [profit] 500 NA
To Reserves & Surplus A/c [profit] NA 500
3 Liquidator of SBP Ltd A/c Dr 3,000 3,000
To Equity Share Capital A/c 3,000 3,000

B/S of SSA after Absorption Purch Pooling

Equity Share Capital (₹10 each) 8,000 8,000
Reserves and Surplus
- Reserves 2,000 2,500
- Capital Reserve 500 NA
Current Liabilities 4,500 4,500
15,000 15,000
Non-current assets 10,000 10,000
Current assets 5,000 5,000
15,000 15,000

Sahasri Singar Academy 13.14

Amalgamation [comprehensive problem for merger & purchase method]
Question 5: The B/S of SSA Ltd Co & SBP Ltd Co are given below.

Particulars SSA SBP

Equity Share Capital (₹10 each) 5,000 3,000
Reserves and Surplus 2,000 500
Current Liabilities 3,000 1,500
10,000 5,000
Non-current assets 7,000 3,000
Current assets 3,000 2,000
10,000 5,000

SSA Ltd and SBP Ltd are amalgamated to form a new company SET Ltd., as on the above
B/S date. The purchase consideration is payable by ESC of ₹10 each and valued at ₹15. The
purchase consideration is calculated after revaluation of assets and liabilities as per the
following
For SSA Ltd
1. 80% of non-current assets are valued at ₹6,000 and balance are valued at 10% less than
the book value.
2. Current assets are reduced by ₹200
3. Current liabilities are reduced to ₹2,660.
4. Reserves and surplus includes a statutory reserve of ₹200 to be maintained further
period of 4 years.
For SBP Ltd
1. Current assets are increased by ₹400
2. Goodwill is valued at ₹200.
3. There is an unrecorded liability of ₹100
Requirements:
1. Pass journal entries for dissolution of SSA Ltd and SBP Ltd
2. Prepare ledger account for dissolution of SSA Ltd and SBP Ltd
3. Also required the following under purchase method & pooling of interest method
a. Pass journal entries for amalgamation in the books of SET Ltd.
b. Prepare B/S of SET Ltd. Co. after amalgamation.

Amalgamation of Companies 13.15

Answer:
Purchase Consideration SSA SBP
Assets
Goodwill NA 400
Non-current assets
20 90 7,260 3,000
(6,000 + × 7,000 × )
100 100
Current assets 2,800 2,400
10,060 5,400
Liabilities
Current Liabilities 2,660 1,500
Unrecorded Liabilities NA 100
2,660 1,600
Purchase Consideration [PC] 7,400 3,800
𝑷𝑪
No of shares ( ) 4,93.33 253.33
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑺𝒉𝒂𝒓𝒆 𝒊.𝒆. ₹𝟏𝟓

ESC [recorded at face value] 4,930 2,530

Cash for fractional share [at ₹15 per share] 5 5
Total PC [ESC valued at FV] [Ref: Note] 4,935 2,535

Note:
Assumed, that the PC is recorded at face value i.e., ₹10 of shares issued.
Other way, the PC can be recorded at issue price i.e., ₹15 [ESC – ₹10 & SP – ₹5]

Dissolution of SSA Ltd & SBP Ltd

Realisation A/c
Particulars SSA SBP Particulars SSA SBP
₹ ₹ ₹ ₹
To Non-current assets 7,000 3,000 By Current Liabilities 3,000 1,500
Current Assets 3,000 2,000 Purchase Consideration 4,935 2,535
Equity Shareholders A/c 2,065 965
10,000 5,000 10,000 5,000
Purchase Consideration
To Realisation A/c 4,935 2,535 By SSA Ltd 4,935 2,535
4,935 2,535 4,935 2,535

Sahasri Singar Academy 13.16

 SSA Ltd Co
To Purchase Consid. 4,935 2,535 By ESC of SSA Ltd 4,930 2,530
Cash A/c 5 5
4,935 2,535 4,935 2,535
Equity Shareholders A/c
To ESC of SSA Ltd 4,930 2,530 By Equity Share Capital A/c 5,000 3,000
Cash A/c 5 5 Reserves and Surplus 2,000 500
Realisation A/c (Loss) 2,065 965
7,000 3,500 7,000 3,500

Journal Entries in the Books of SBP SSA SBP

Dr Cr Dr Cr
1 Realisation A/c Dr 10,000 3,500
To Non-current assets A/c 7,000 3,000
To Current assets A/c 3,000 500

2 Current liabilities Dr 3,000 1,500

To Realisation A/c 3,000 1,500

3 Equity Share Capital A/c Dr 5,000 3,000

Reserves & Surplus A/c Dr 2,000 500
To Equity Shareholders A/c 7,000 3,500

4 Purchase Consideration A/c Dr 4,935 2,535

To Realisation A/c 4,935 2,535

5 SSA Ltd. Co. A/c Dr 4,935 2,535

To Purchase Consideration A/c 4,935 2,535

6 ESC of SSA Ltd. Co. A/c Dr 4,930 2,530

Cash A/c Dr 5 5
To SSA Ltd. Co. A/c 4,935 2,535

7 Equity Shareholders A/c Dr 4,935 2,535

Amalgamation of Companies 13.17

 To ESC of SSA Ltd. Co. A/c 4,930 2,530
To Cash A/c 5 5

8 Equity Shareholders A/c Dr 2,065 965

To Realisation A/c 2,065 965

In the books of SET Ltd. Co.

Journal Entries – SET Ltd Purchase Pooling
Dr Cr Dr Cr
1 Business Purchase A/c Dr 7,470 7,470
To Liquidator of SSA Ltd A/c 4,935 4,935
To Liquidator of SBP Ltd A/c 2,535 2,535

2 Non-current Assets A/c Dr 10,260 10,000

Current Assets A/c Dr 5,200 5,000
To Current Liabilities A/c 4,260 4,500
To Business Purchase A/c 7,470 7,470
To Capital Reserve A/c [profit] 3,730 NA
To Statutory Reserve A/c NA 200
To Reserves & Surplus A/c [profit] NA 2,830

3 Liquidator of SSA Ltd A/c Dr 4,935 4,935

Liquidator of SBP Ltd A/c Dr 2,535 2,535
To Equity Share Capital A/c 7,460 7,460
To Cash A/c 10 10

4 Amalgamation Adjustment A/c Dr 200 NA

To Statutory Reserve A/c 200 NA

B/S of SSA after Absorption Nt Purch Pooling

Equity Share Capital (₹10 each) 7,460 7,460
Reserves and Surplus 1 3,730 3,030
Current Liabilities 4,260 4,500
15,450 14,990

Sahasri Singar Academy 13.18

 Non-current assets 10,260 10,000
Current assets 5,190 4,990
15,450 14,990

Note Purch Pooling

1 Reserves and Surplus
Capital Reserve 3,730 NA
Reserves & Surplus A/c 2,830
Statutory Reserve A/c 200 200
Amalgamation Adjustment A/c (200)
3,730 3,030

Amalgamation [Comprehensive problem]

Question 6: the B/Ss of A Ltd & B Ltd are given below
₹ in thousands
Particulars Nt A Ltd B Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,000 500
𝑏 12% Preference Share of ₹100 each 400 200
𝑐 Reserves and surplus: [P&L A/c] 200 200
2 Non-current liabilities [10% Debentures] 200 100
3 Current liabilities 200 200
Total 2,000 1,200

II ASSETS
1 Non-current assets 1,200 800
2 Current assets 800 400
Total 2,000 1,200

A new company AB Ltd is formed to take over the company A and company B in the
following terms
For A
1. Equity shareholders of company A will get each equity share in company AB for every
share held in company A
2. Equity share holder of company A will get ₹5 for every equity share held in company A

Amalgamation of Companies 13.19

3. 12% preference share holder will get 15% preference share capital of AB in equal
numbers
4. 10% Debenture holders will get 12.5% debenture in AB, where the interest available for
the debenture holders remains the same as in company A.
For B
1. Equity shareholders of company B will get each equity share in company AB for every
share held in company B
2. 15% preference share capital of AB is given to the preference share holder of B, so as to
maintain the preference dividend receivable in company AB is same as before.
3. 10% debenture holders of B will get equal number of 12.5% debenture of company AB.
4. The balance if any is payable in the form debenture.
5. The good will of Co. B is ₹100,000.
Answer:
Step 1: Calculation of Purchase consideration:
Purchase consideration of A Ltd [Net Payment Method]
1 Equity share capital (100 × ₹10) 1,000
2 Cash (100 × ₹5) 500
3 15% of preference share capital (4 × ₹100) 400
Purchase Consideration 1,900
Debentures issued to Debenture Holders 1601

Purchase consideration of B Ltd [Net Asset Method]

Assets
Fixed Assets 800
Current Assets 400
Goodwill 100 1,300
− Liabilities
Current liabilities 200
12.5% debenture of company AB 100 300
Purchase consideration 1,000
Mode of payment
Equity share capital (50 × ₹10) 500
12%
Preference share capital (200 × ) 160
15%

Debenture [Balance] 340

1,000

1 𝑂𝑙𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

Issue debenture to maintain the same amount of interest = × 𝐷𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

Sahasri Singar Academy 13.20

 Realisation A/c
Particulars A B Particulars A B
₹ ₹ ₹ ₹
To Fixed Assets 1,200 800 By 10% Debenture 200 100
Current Assets 800 400 Current liabilities 200 200
Equity shareholders A/c 300 100 Purchase consideration 1,900 1,000
2,300 1,300 2,300 1,300
Purchase Consideration
To Realization 1,900 1,000 By AB & Co. 1,900 1,000
1,900 1,000 1,900 1,000
AB Ltd Co
To Purchase Consid. 1,900 1,000 By Equity share holder 1,000 500
Preference share holder 400 160
Cash 500 ---
Debenture --- 340
1,900 1,000 1,900 1,000
Equity Shareholders A/c
To ESC of AB & Co. 1,000 500 By Equity share capital 1,000 500
Cash A/c 500 --- Reserve fund 200 200
Debenture of AB & Co. --- 340 Realization Profit 300 100
Preference Share holders --- 40
1,500 840 1,500 840
Preference Shareholders A/c
To PSC of AB & Co. 400 160 By Preference share capital 400 200
Equity share holders 40
400 200 400 200

Amalgamation of Companies 13.21

 Entry of incorporation in the books of company AB
Purchase Pooling of Interest
Business purchase a/c Dr. 2,900 Dr. 2,900
To liquidator of company A 1,900 1,900
To liquidator of company B 1,000 1,000

Fixed Assets a/c Dr. 2,000 Dr. 2,000

Current Assets a/c Dr. 1,200 Dr. 1,200
Goodwill a/c Dr. 360 Dr. NA
Profit / Loss A/c NA 360
To Current liabilities 400 400
To Debenture 260 260
To Purchase consideration 2,900 2,900

Liquidator of company A Dr. 1,900 Dr. 1,900

Liquidator of company B Dr. 1,000 Dr. 1,000
To Equity share capital 1,500 1,500
To Cash 500 500
To Preference share capital 560 560
To Debenture 340 340

If debenture adjusted separately

10% debenture a/c Dr. 300 Dr. 300
To 12.5% debenture a/c 260 260
To Goodwill 40 NA
To Profit and Loss A/c NA 40

Sahasri Singar Academy 13.22

 Balance Sheet of AB Ltd Nt Purchase Pooling
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,500 1,500
𝑏 12% Preference Share of ₹100 each 560 560
𝑐 Reserves and surplus: [P&L A/c] NA (360)
2 Non-current liabilities [10% Debentures] 600 500
3 Current liabilities 400 400
Total 3,060 2,700

II ASSETS
1 Non-current assets
Tangible assets 2,000 2,000
Intangible assets [Goodwill] 360 NA
2 Current assets 700 700
Total 3,060 2,700

Intrinsic value method:

Question 6A: Continue with the previous problem; calculate purchase consideration using
intrinsic value method [share exchange ratio].
Company A Ltd will take over company B Ltd in their intrinsic value method after
considering the following points
1. B Ltd has goodwill ₹100.
2. The fixed assets of A Ltd and B Ltd are increased by 10% and 5%.
3. The current liabilities of A Ltd are decreased by 5% and there is an unrecorded liability
of ₹50 in B Ltd.

Amalgamation of Companies 13.23

Amalgamation with intercompany owing &
Unrealized profit on unsold stock – stock sold by transferor company
Question 7: Gold Ltd., (the Transferee Company) & Silver Ltd., (the Transferor Company)
amalgamate in an exchange of the stocks from Gold Ltd., and the pre-amalgamated balance
sheets of the respective companies are as follows:
₹ in lakhs
Particulars Nt Gold Silver
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 80 40
𝑏 Reserves and surplus 50 40
2 Current liabilities 60 20
Total 190 100

II ASSETS
1 Non-current assets 110 60
2 Current assets 80 40
Total 190 100

Note Gold Silver

1 Current liabilities
Trade Creditors 40 15
Bills Payable 20 5
60 20

2 Current Assets
Stock 40 15
Sundry Debtors 20 15
Bills Receivable 10 5
Cash and Bank 10 5
80 40

For each share held in Silver Ltd., 2 shares of Gold Ltd., were given in exchange (Face Value:
₹10; Share premium ₹25) as the market price of Gold Ltd., is ₹35. The fair market value of the
non-current assets and stock of silver Ltd. was assessed at ₹70 lakh and ₹20 lakh
respectively.

Sahasri Singar Academy 13.24

Also consider the following:
Silver Ltd sold goods worth ₹10 lakhs (including 25% profit on cost) to Gold Ltd on credit.
Gold Ltd immediately accepted bills for ₹5 lakhs, leaving ₹5 lakhs unsettled.
Silver Ltd discounted Gold Ltd's bills for ₹1 lakh and endorsed ₹1 lakh to creditors.
Gold Ltd sold 60% of the goods received from Silver Ltd.
Required
Pass journal entries in the books of Gold Ltd and
Prepare the post-amalgamated balance sheet of Gold Ltd.,
under the ‘Pooling’ and the ‘Purchase’ Methods.
Answer:
Purchase consideration includes securities premium
₹ in lakhs
B/S of Gold Ltd. Nt Purchases Pooling
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 160.0 160.0
𝑏 Reserves and surplus 1 250.0 49.2
2 Current liabilities 2 72.0 72.0
Total 372.0 281.2

II ASSETS
1 Non-current assets
Tangible assets 180.0 170.0
Intangible assets [Goodwill] 185.8
2 Current assets 3 116.2 111.2
Total 372.0 281.2

Note Purchase Pooling

1 Reserves and Surplus
P/L A/c 50 (150.8)
Securities Premium 200 200
250 49.2
2 Current liabilities
Trade Creditors 50 50
Bills Payable 22 22
72 72

Amalgamation of Companies 13.25

 3 Current Assets
Stock 59.2 54.2
Sundry Debtors 30 30
Bills Receivable 12 12
Cash and Bank 15 15
116.2 111.2

Note: PC with securities premium considered

Purchase Consideration ₹
Share capital 2 80
4 𝑠ℎ𝑎𝑟𝑒𝑠 × × ₹10
1
Securities premium 2 200
4 𝑠ℎ𝑎𝑟𝑒𝑠 × × ₹25
1
Total 280

Entry of incorporation in the books of Gold Ltd

Purchase Pooling
Business purchase a/c Dr. 280 Dr. 280
To liquidator of Silver Ltd. 280 280

Non-current assets a/c Dr. 70 Dr. 60

Stock a/c Dr. 20 Dr. 15
Trade debtors a/c Dr 15 Dr. 15
Bills receivable a/c Dr. 5 Dr. 5
Cash and bank a/c Dr 5 Dr 5
Goodwill a/c Dr. 185 Dr. NA
Profit / Loss a/c NA 200
To Trade creditors a/c 15 15
To Bills payable a/c 5 5
To Purchase consideration 280 280

Liquidator of Silvar Ltd Dr. 280 Dr. 280

To Equity share capital 80 80
To Securities premium 200 200

Sahasri Singar Academy 13.26

 Bills payable a/c Dr. 3 Dr. 3
Creditors a/c Dr. 5 5
To Bills receivable a/c 3 3
To Debtors a/c 5 5

Goodwill a/c Dr. 0.8 Dr. NA

P/L a/c Dr. NA Dr. 0.8
To Stock a/c 0.8 0.8

Other-way: Purchase consideration excludes securities premium

₹ in lakhs
B/S of Gold Ltd. Nt Purchases Pooling
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 160.0 160.0
𝑏 Reserves and surplus 1 64.2 49.2
2 Current liabilities 2 72.0 72.0
Total 296.2 281.2

II ASSETS
1 Non-current assets
Tangible assets 180.0 170.0
2 Current assets 3 116.2 111.2
Total 296.2 281.2

Note Purchase Pooling

1 Reserves and Surplus
Profit and loss a/c 50.0 49.2
Capital reserve a/c 14.2 NA
64.2 49.2
2 Current liabilities
Trade creditors 50 50
Bills payable 22 22
72 72

Amalgamation of Companies 13.27

 3 Current Assets
Stock 59.2 54.2
Sundry debtors 30.0 30.0
Bills receivable 12.0 12.0
Cash and bank 15.0 15.0
116.2 111.2

Note: PC without securities premium considered

2
Purchase Consideration by ESC = 4 𝑠ℎ𝑎𝑟𝑒𝑠 × × ₹10 = ₹80
1

Entry of incorporation in the books of Gold Ltd

Purchase Pooling
Business purchase a/c Dr. 80 Dr. 80
To liquidator of Silver Ltd. 80 80

Non-current assets a/c Dr. 70 Dr. 60

Stock a/c Dr. 20 Dr. 15
Trade debtors a/c Dr 15 Dr. 15
Bills receivable a/c Dr. 5 Dr. 5
Cash and bank a/c Dr 5 Dr 5
To Capital reserve a/c 15 NA
To Profit and loss a/c NA 0
To Trade creditors a/c 15 15
To Bills payable a/c 5 5
To Purchase consideration 80 80

Liquidator of Silvar Ltd Dr. 80 Dr. 80

To Equity share capital 80 80

Bills payable a/c Dr. 3 Dr. 3

Creditors a/c Dr. 5 5
To Bills receivable a/c 3 3
To Debtors a/c 5 5

Sahasri Singar Academy 13.28

 Capital reserve a/c Dr. 0.8 Dr. NA
Profit and loss a/c Dr. NA Dr. 0.8
To Stock a/c 0.8 0.8

Amalgamation with intercompany owing &

Unrealized profit on unsold stock – stock sold by transferee company
Question 7A: Gold Ltd., (the Transferee Company) & Silver Ltd., (the Transferor Company)
amalgamate in an exchange of the stocks from Gold Ltd., and the pre-amalgamated balance
sheets of the respective companies are as follows:
₹ in lakhs
Particulars Nt Gold Silver
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 80 40
𝑏 Reserves and surplus 50 40
2 Current liabilities 60 20
Total 190 100

II ASSETS
1 Non-current assets 110 60
2 Current assets 80 40
Total 190 100

Note Gold Silver

1 Current liabilities
Trade Creditors 40 15
Bills Payable 20 5
60 20

2 Current Assets
Stock 40 15
Sundry Debtors 20 15
Bills Receivable 10 5
Cash and Bank 10 5
80 40

Amalgamation of Companies 13.29

For each share held in Silver Ltd., 2 shares of Gold Ltd., were given in exchange (Face Value:
₹10; Share premium ₹25) as the market price of Gold Ltd., is ₹35. The fair market value of the
non-current assets and stock of silver Ltd. was assessed at ₹70 lakh and ₹20 lakh
respectively.
Also consider the following:
Gold Ltd sold goods worth ₹10 lakhs (including 25% profit on cost) to Silver Ltd on
credit.
Silver Ltd immediately accepted bills for ₹5 lakhs, leaving ₹5 lakhs unsettled.
Gold Ltd discounted Silver Ltd's bills for ₹1 lakh and endorsed ₹1 lakh to creditors.
Silver Ltd sold 60% of the goods received from Silver Ltd.
Required
Pass journal entries in the books of Gold Ltd and
Prepare the post-amalgamated balance sheet of Gold Ltd.,
under the merger method and the purchase method.
Answer:
Purchase consideration includes securities premium
Balance sheet & purchase consideration – similar to question number 7
₹ in lakhs
Entry of incorporation in the books of Gold Ltd
Purchase Pooling
Business purchase a/c Dr. 280 Dr. 280
To liquidator of Silver Ltd. 280 280

Non-current assets a/c Dr. 70 Dr. 60

Stock a/c Dr. 19.2 Dr. 14.2
Trade debtors a/c Dr 15 Dr. 15
Bills receivable a/c Dr. 5 Dr. 5
Cash and bank a/c Dr 5 Dr 5
Goodwill a/c Dr. 185.8 Dr. NA
Profit / Loss a/c NA 200.8
To Trade creditors a/c 15 15
To Bills payable a/c 5 5
To Purchase consideration 280 280

Liquidator of Silvar Ltd Dr. 280 Dr. 280

To Equity share capital 80 80
To Securities premium 200 200

Sahasri Singar Academy 13.30

 Bills payable a/c Dr. 3 Dr. 3
Creditors a/c Dr. 5 5
To Bills receivable a/c 3 3
To Debtors a/c 5 5

Absorption [Liquidation expenses]

Question 8: The following is the Balance Sheet of Moonlite Ltd., as on 31st March, 2024:

Particulars Nt
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 20,000 Equity Shares of ₹100 each 20,00,000
𝑏 Reserves and surplus 1 3,25,000
2 Non-current liabilities: 10% Debentures
3 Current liabilities 2 75,000
Total 24,00,000
II ASSETS
1 Non-current assets 3 14,00,000
2 Current assets 4 10,00,000
Total 24,00,000

Note ₹
1 Reserves and Surplus
General Reserve 1,40,000
Profit and Loss A/c 85,000
Plant Replacement Reserve 1,00,000
3,25,000
2 Current liabilities
Sundry Creditors 55,000
Provision for Unexpired Warranties 20,000
75,000
3 Non-current assets:
Patents and Trademarks 1,90,000
Factory Land & Building 10,00,000

Amalgamation of Companies 13.31

 Vehicles 2,10,000
14,00,000
4 Current Assets
Inventories 4,20,000
Sundry Debtors 4,80,000
Cash in Hand 30,000
Cash at Bank 70,000
10,00,000

Note: A customer had lodged a claim for ₹5,000 towards defective parts purchased from the
company, which Moonlite Ltd., has decided to meet form the provision for warranties.
Moonlite Ltd., is taken over by Sunshine Ltd., as at the closure of business hours on
31.03.2024. All assets and liabilities (except cash) are taken over. Land & Building are valued
at ₹12,00,000 prior to the acquisition. Expenses of absorption amount to ₹60,000 which are
borne by Moonlite Ltd., and Sunshine Ltd., in the ratio of 4:6.
Show the journal entries in the books of Moonlite Ltd., assuming that entire sale
consideration of ₹30 lakhs was met by Sunshine Ltd., in the form of equity shares of ₹10 each
in their company.
Answer:
Journal Entries – Moonlight Ltd. Dr. Cr.
₹ ₹
Revaluation of land and building
Factory Land & Building A/c Dr. 2,00,000
To Revaluation Reserve A/c 2,00,000

Claim paid
Provision for Unexpired Warranties A/c Dr. 5,000
To Cash A/c 5,000

Assets transferred to realisation a/c

Realization A/c Dr. 25,70,000
To Patents & Trademarks A/c 1,90,000
To Factory Land & Building A/c 12,00,000
To Vehicles a/c 2,10,000
To Intangibles A/c 4,20,000
To Sundry Debtors A/c 4,80,000

Sahasri Singar Academy 13.32

 To Cash & Bank A/c 70,000

Liabilities transferred to realisation a/c

Provision for Unexpired Warranties A/c Dr. 15,000
Sundry Creditors A/c Dr. 55,000
To Realization a/c 70,000

Realisation expenses paid by Moonlight

Realization A/c Dr. 24,000
To Cash A/c 24,000

Purchase consideration
Sunshine Ltd., A/c Dr. 30,00,000
To Realization A/c 30,00,000

Payment of purchase consideration

Share in Sunshine Ltd., A/c Dr. 30,00,000
To Sunshine Ltd., 30,00,000

Transferrable to shareholders a/c

Share Capital A/c Dr. 20,00,000
General Reserve A/c Dr. 1,40,000
Profit & Loss A/c Dr. 85,000
Plant Replacement Reserve A/c Dr. 1,00,000
Revaluation Reserve A/c Dr. 2,00,000
Realization A/c [balance & gain] Dr. 4,76,000
To Equity Shareholders A/c 30,01,000

Settlement of shareholders’ due

Equity shareholders A/c Dr. 30,01,000
To Share in Sunshine Ltd., A/c 30,00,000
To Cash A/c 1,000

Journal Entries – Sunshine Ltd.

Amalgamation of Companies 13.33

 Realisation expenses paid by Sunshine Ltd.
Goodwill a/c / Capital reserve a/c Dr. 36,000
To Cash a/c 36,000

Absorption: Liquidation expenses [reimbursed]

Question 9: Following is the balance sheet of Y Ltd., as at 31st March 2024:

Particulars Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 2,50,000 – Equity Share of ₹10 each [₹8 paid up] 20,00,000
𝑏 1,00,000 – 10% Preference Shares of ₹10 each 10,00,000
𝑐 Reserves and surplus 1 13,60,000
2 Non-current liabilities
3 Current liabilities 2 7,00,000
Total 50,60,000
II ASSETS
1 Non-current assets 3 28,00,000
2 Current assets 4 22,60,000
Total 50,60,000

Note ₹
1 Reserves and Surplus
General Reserve 5,60,000
Profit & Loss A/c 8,00,000
13,60,000
2 Current liabilities
Sundry Creditors 4,00,000
Workmen’s Profit Sharing Fund 3,00,000
7,00,000
3 Non-current assets
Goodwill 8,00,000
Building 7,00,000
Plant & Machinery 13,00,000
28,00,000

Sahasri Singar Academy 13.34

 4 Current Assets
Stock 7,00,000
Sundry Debtors 9,00,000
Bank 6,60,000
22,60,000

X Ltd., decided to absorb the business of Y Ltd., at the respective book values of assets and
trade liabilities except building which was valued at ₹12,00,000 and Plant & Machinery at
₹10,00,000.
The purchase consideration was payable as follows:
a. Assumption of trade liabilities;
b. Payments of liquidation expenses ₹5,000 and workman’s Profit Sharing fund at 10%
premium.
c. Issue on one equity share of ₹10 each fully paid at ₹11 per share for every Preference
share and every equity share of Y Ltd., and a payment of ₹4 per equity share in cash.
Calculate the purchase consideration; show the necessary Ledger Accounts in the books of Y
Ltd., and opening Journal entries of X Ltd.,
Answer:
Calculation of Purchase Consideration ₹ ₹
Cash for liquidation expenses 5,000
Cash for workmen’s profit sharing fund 3,30,000
Cash for ESC (2,50,000 × ₹4) 10,00,000 13,35,000
Equity shares for Preference shareholders (1,00,000 × 11) 11,00,000
Equity shares for Equity shareholders (2,50,000 × 11) 27,50,000 38,50,000
Net Purchase Consideration 51,85,000

In the Books of Y Ltd.

Realisation A/c
Particulars ₹ Particulars ₹
To Goodwill 8,00,000 By Creditors 4,00,000
Building 7,00,000 X Ltd. [PC] 51,85,000
Plant & Machinery 13,00,000 Workmen’s profit 3,00,000
Stock 7,00,000
Sundry Debtors 9,00,000
Bank 6,60,000
Bank (Workmen’s Fund) 3,30,000

Amalgamation of Companies 13.35

 Bank (Expenses) 5,000
Profit 4,90,000
58,85,000 58,85,000
X Ltd Co
To Realization a/c [PC] 51,85,000 By Bank 13,35,000
Equity Shares in X Ltd., 38,50,000
Total 51,85,000 Total 51,85,000
Equity Shareholders A/c
To Preference shareholder 1,00,000 By Equity Shares Capital 20,00,000
Bank 10,00,000 General Reserve 5,60,000
Equity Shares in X Ltd 27,50,000 Profit & Loss A/c 8,00,000
Profit on Realization 4,90,000
Total 38,50,000 Total 38,50,000
Preference Shareholder A/c
To Equity Shares in X Ltd., 11,00,000 By Preference shares capital 10,00,000
Equity shareholder a/c 1,00,000
Total 11,00,000 Total 11,00,000
Bank A/c
To X Ltd., 13,35,000 By Realization A/c 5,000
Workmen’s Profit fund 3,30,000
Equity Shares 10,00,000
Total 13,35,000 Total 13,35,000

In the Books of X Ltd.,

Journal Entries Dr. Cr.
₹ ₹
Business Purchase A/c Dr. 51,85,000
To Liquidator of Y Ltd/. 51,85,000

Building A/c Dr. 12,00,000

Plant & Machinery Dr. 10,00,000
Stock A/c Dr. 7,00,000
Debtors A/c Dr. 9,00,000
Bank A/c Dr. 6,60,000

Sahasri Singar Academy 13.36

 Goodwill A/c (Balancing Figure) Dr. 11,25,000
To Creditors 4,00,000
To Liquidator of Y Ltd., 51,85,000

Liquidator of Y Ltd., Dr. 51,85,000

To Bank 13,35,000
To Equity share Capital 35,00,000
To Share Premium 3,50,000

Some assets / liabilities not taken over

Question 10: Exe Limited was wound up on 31.3.2024 and its balance sheet as on that date
was given below:

Balance Sheet of Exe Ltd., as on 31.03.2024 Nt ₹

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 1,20,000 Equity Share capital [₹10 each] 12,00,000
𝑏 Reserves and surplus 1 5,64,000
2 Non-current liabilities
3 Current liabilities 2 4,86,000
Total 22,50,000
II ASSETS
1 Non-current assets 9,64,000
2 Current assets 3 12,86,000
Total 22,50,000

Note ₹
1 Reserves and Surplus
Profit Prior to Incorporation 42,000
Contingent Reserve 2,70,000
Profit and Loss A/c 2,52,000
5,64,000
2 Current liabilities
Sundry Creditors 2,26,000

Amalgamation of Companies 13.37

 Bills Payable 40,000
Provisions for Income Tax 2,20,000
4,86,000
3 Current Assets
Stock 7,75,000
Sundry Debtors 1,60,000
Less: Provision for Bad Debts 8,000 1,52,000
Bills Receivable 30,000
Cash at Bank 3,29,000
12,86,000

Wye limited took over the following assets at values shown as under:
Non-current assets ₹12,80,000, Stock ₹7,70,000 and Bills Receivable ₹30,000.

Purchase consideration was settled by Wye limited as under:

a. ₹5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference
shares of ₹100 each. The balance was settled by issuing equity shares of ₹10 each at ₹8
per share paid up.
b. Sundry debtors realized ₹1,50,000 and bills payable was settled for ₹38,000.
Income tax authority fixed the taxation liability at ₹2,22,000.
c. Creditors were finally settled with the cash remaining after meeting liquidation expenses
amounting to ₹8,000.
You are required to:
1. Calculate the number of equity shares and preference shares to be allotted by Wye
Limited in discharge of purchase consideration.
2. Prepare the Realization account, Cash / Bank account, Equity Shareholders account and
Wye limited account in the books of Exe limited.
3. Pass journal entries in the books of Wye limited.
Answer:
Calculation of Purchase Consideration
₹ Shares
Stock 7,70,000
Fixed Asset 12,80,000
Bills Receivable 30,000
Purchase Consideration 20,80,000
Settlement of PC

Sahasri Singar Academy 13.38

 By preference shares 5,10,000 5,10,000 5,100
100
By Equity shares [balance] 15,70,000 15,70,000 1,96,250
8

In the Books of Exe Ltd.,

Realisation A/c
Particulars ₹ Particulars ₹
To Fixed assets 9,64,000 By Bills payable 40,000
Sundry Debtors 1,60,000 Sundry Creditors 2,26,000
Bills Receivable 30,000 Provision for Bad Debts 8,000
Stock 7,75,000 Provision for taxation 2,20,000
Bank a/c: Why Ltd A/c (PC) 20,80,000
Bills payable 38,000 Bank A/c (Debtors) 1,50,000
Tax liability 2,22,000
Liquidation Exp. 8,000
Sundry creditors 2,11,000
Equity shareholders (profit) 3,16,000
27,24,000 27,24,000
Wye Ltd Co
To Realization A/c [PC] 20,80,000 By 10% PSC in Wye Ltd., 5,10,000
ESC in Wye ltd., 15,70,000
20,80,000 20,80,000
Equity Shareholders A/c
To 10% PSC in Wye Ltd. 5,10,000 By Equity share capital a/c 12,00,000
ESC in wye Ltd 15,70,000 Profit prior to incorporation 42,000
Contingency reserve 2,70,000
Profit and Loss a/c 2,52,000
Realization a/c (Profit) 3,16,000
20,80,000 20,80,000
Bank A/c
To Balance b/d 3,29,000 By Realization account:
Realization A/c: Bills payable 38,000
Sundry debtors 1,50,000 Tax liability 2,22,000
Liquidation expenses 8,000

Amalgamation of Companies 13.39

 Sundry creditors (Balance) 2,11,000
4,79,000 4,79,000

Journal Entries [WYE Ltd.] Dr. ₹ Cr. ₹

Business purchase A/c Dr. 20,80,000
To Liquidator of Exe Ltd., account 20,80,000
25,00,000

Non-current assets a/c Dr. 12,80,000

Stock Account Dr. 7,70,000
Bills receivable account Dr. 30,000
To Business purchase account 20,80,000

Liquidator of the Exe Lt d. A/c Dr. 20,80,000

To 10% preference share capital a/c 5,10,000
To Equity share capital account 15,70,000

Absorption [Fractional Share]

Question 11: Zee Ltd., agreed to absorb Gulf Ltd., on 31st March, 2024, whose balances stood
as follows:

Particulars Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 80,000 Equity Share of ₹100 each 80,00,000
𝑏 Reserves and surplus [General Reserve] 10,00,000
2 Non-current liabilities -
3 Current liabilities [Sundry Creditors] 10,00,000
Total 1,00,00,000
II ASSETS
1 Non-current assets 70,00,000
2 Current assets
Stock in Trade 10,00,000
Sundry Debtors 20,00,000
Total 1,00,00,000

Sahasri Singar Academy 13.40

The consideration was agreed to be paid as follows:
a) A payment in cash of ₹50 per shares in Gulf Ltd., and
b) The issue of shares of ₹100 each in Zee Ltd., on the basis of 2 Equity Shares (Valued at
₹150) and one 10% Cumulative Preference Shares (valued at ₹100) for every five shares
held in Gulf Ltd., It was agreed that Zee Ltd., will pay in cash for fractional shares
equivalent at agreed value of shares in Gulf Ltd., i.e., ₹650 for five shares of ₹500 paid.
The whole of the Share capital consists of shareholdings in exact multiple of five except the
following holding:

Bharti 116
Sonu 76
Hitesh 72
Jagat 28
Other individuals 8 (eight members holding one shares each)
300

Prepare a statement showing the purchase consideration receivable by above shareholders

in shares and cash.
Answer:
1 Statement of consideration paid for fraction shares
Particular Bharti Sonu Hitesh Jagat Other Total
𝑎 Holding of Shares 116 76 72 28 8 300
𝑏 Payable in cash 1 1 2 3 8 15

2. Number of shares to be issued and cash paid ₹

Exchangeable Shares (80,000 – 15 fraction shares) 79,985
2
Equity shares for exchangeable shares (79,985 × 5) 31,944 150 47,99,100
1
Preference shares for exchangeable shares (79,985 × 5) 15,977 100 15,99,700

₹50 cash for each of 79,985 39,99,250

650
Cash for non-exchangeable shares (15 × ) 1,950
5

Total 1,04,00,000

Amalgamation of Companies 13.41

Additional Problems
Question 1: Anurag Ltd., and Sagar Ltd., were amalgamated on and from 1st April, 2024. A
new company Anusa Ltd., was formed to take over the business of the existing companies.
The balance Sheets of Anurag Ltd., and Sagar Ltd., as on 31st March, 2024 are given below:
₹ in lakhs
Particulars Nt Anurag Sagar
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹100 each 800 750
𝑏 12% Preference Shares of ₹100 each 300 200
𝑐 Reserves and surplus 1 420 330
2 Non-current liabilities: 10% Debentures 60 30
3 Current liabilities 2 420 190
Total 2,000 1,500
II ASSETS
1 Non-current assets 3 1,050 700
2 Current assets 4 950 800
Total 2,000 1,500

Note Anurag Sagar

1 Reserves and Surplus
Revaluation Reserve 150 100
General Reserve 170 150
Investment Allowance Reserve 50 50
Profit & Loss A/c 50 30
420 330
2 Current liabilities
Sundry Creditors 270 120
Bills payable 150 70
420 190
3 Non-current assets:
Land & Building 550 400
Plant & Machinery 350 250
Investments 150 50
1,050 700

Sahasri Singar Academy 13.42

 4 Current Assets
Stock 350 250
Sundry Debtors 250 300
Bills Receivable 50 50
Cash and Bank 300 200
950 800

Additional information:
1. 10% Debenture holders of Anurag Ltd., and Sagar Ltd., are discharged by Anusa Ltd.,
issuing such number of 15% debenture of ₹100 each so as to maintain the same amount
of interest.
2. Preference holders of the two companies are issued equivalent number of 15%
preference Shares of Anusa Ltd., at a price of ₹150 per share (Face Value of ₹100)
3. Investment allowance reserve is to be maintained for 4 more years.
4. Anusa Ltd., will issue 5 equity shares for each Equity shares of Anurag Ltd., and 4
Equity Shares for each equity shares of Sagar Ltd., the shares are to be issued @ ₹30 each
having a face value of ₹10 per share.
Required: Prepare the Balance Sheet of Anusa Ltd., as on 1st April, 2024 after the
amalgamation has been carried out on the basis of amalgamation in the nature of purchase.
Answer:
₹ in lakhs
Balance Sheet of Anusa as at 01.04.24 Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 70,00,000 Equity Shares of ₹10 each 700
𝑏 5,00,000 Preference shares of ₹100 each 500
𝑐 Reserves and surplus 1 1,650
2 Non-current liabilities: 10% Debentures 60
3 Current liabilities 2 610
Total 3,520
II ASSETS
1 Non-current assets 3 1,770
2 Current assets 4 1,350
Total 3,520

Amalgamation of Companies 13.43

 Note ₹
1 Reserves and Surplus
Share premium 1,650
Investment Allowance Reserve 100
Amalgamation Adjustment A/c (100)
1,650
2 Current liabilities
Sundry Creditors 390
Bills payable 220
610
3 Non-current assets:
Goodwill 20
Land & Building 950
Plant & Machinery 600
Investments 200
1,770
4 Current Assets
Stock 600
Sundry Debtors 550
Bills Receivable 100
Cash and Bank 500
1,750

Computation of purchase Consideration

Particulars Anurag Sagar
Ratio ₹ Ratio ₹
Preference share capital 1:1 300 1:1
Securities premium [PSC] 150
Equity share capital[ESC] 5:1 400 4:1 300
Securities premium 800 600
Total 1,650 1,200

Sahasri Singar Academy 13.44

 Net Assets taken over Anurag Sagar
A Assets
Land & Building 550 400
Plant & Machinery 350 250
Investment 150 50
Stock 350 250
Sundry Debtors 250 300
Bills Receivables 50 50
Cash & Bank 300 200
Total (A) 2, 000 1, 500
B Liabilities
Debentures 40 20
Sundry Creditors 270 120
Bills Payables 150 70
Total (B) 460 210
Net Assets taken over (𝑨 − 𝑩) 1, 540 1,290
− Purchase consideration 1, 650 1, 200
Capital reserve / (Goodwill) (110) 90

Amalgamation in the form of merger with inter-company Owings

Question 2: The following were the Balance Sheets of Bimal Ltd., and Robin Ltd., as at 31st
March, 2014:
₹ in lakhs
Particulars Nt Bimal Robin
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 15,000 6,000
𝑏 Reserves and surplus 1 15,370 4,335
2 Non-current liabilities: 12% Debentures - 1,000
3 Current liabilities 2 3,030 1,165
Total 33,400 12,500
II ASSETS
1 Non-current assets 3 22,304 6,700
2 Current assets 4 11,096 5,800
Total 33,400 12,500

Amalgamation of Companies 13.45

 Note Bimal Robin
1 Reserves and Surplus
Securities Premium 3,000 -
Foreign Projects Reserve - 310
General Reserve 9,500 3,200
Profit and Loss A/c 2,870 775
Total 15,370 4,285
2 Current liabilities
Bills payable 120
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
3,030 1,165
3 Non-current assets:
Land & Building 6,000 -
Plant & Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
22,304 6,700
4 Current Assets
Stock 7,862 4,041
Sundry Debtors 2,120 1,020
Bills Receivable - 80
Cash and Bank 1,114 609
11,096 5,750

All the bills receivable held by Robin Ltd., were Bimal Ltd.’s acceptances.
On 1st April, 2024 Bimal Ltd., took over Robin Ltd., in an amalgamation in the nature of
merger. It was agreed that the discharge of consideration for the business, Bimal Ltd., would
allot three fully paid equity shares of ₹10 each at for every two shares held in Robin Ltd., it
was also agreed that 12% debentures in Robin Ltd., would be converted into 13% debentures
in Bimal Ltd., of the same amount and denomination.
Expenses of amalgamation amounting to ₹1 lakh were born by Bimal Ltd.,
You are required to:
a. Pass Journal entries in the books of Bimal Ltd., and
b. Prepare Bimal Ltd.’s Balance Sheet immediately after the merger.

Sahasri Singar Academy 13.46

Answer:
₹ in lakhs
Journal Entries in the books of Bimal Ltd., Dr. Cr.
Business Purchase A/c1 Dr. 9,000
To Liquidator of Robin Ltd. 9,000

Plant & Machinery A/c Dr. 5,000

Furniture & Fitting A/c Dr. 1,700
Stock A/c Dr. 4,041
Debtors A/c Dr. 1,020
Cash at Bank A/c Dr. 609
Bills Receivable A/c Dr. 80
To Foreign Project Reserve A/c 310
To General Reserve (3,200-3,000) 200
To profit & Loss A/c (825-50) 775
To 12% Debenture A/c 1,000
To Sundry Creditors A/c 463
To Sundry Provisions 702
To Business Purchase A/c 9,000

Liquidator of Robin Ltd., A/c Dr. 9,000

To Equity Share Capital a/c 9,000

General Reserve A/c Dr. 1

To Bank A/c 1

12% Debenture A/c Dr. 1,000

To 13% Debenture A/c 1,000

Bills Payable A/c Dr. 80

To Bills Receivable A/c 80

1 3
Allotment of three equity shares of Bimal Ltd., for every two shares held in Robin Ltd.,( ₹6,000 𝑙𝑎𝑘ℎ𝑠 × )
2

Amalgamation of Companies 13.47

 Balance Sheet of Bimal as at 01.04.24 Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Shares of ₹10 each1 24,000
𝑏 Reserves and surplus 1 16,654
2 Non-current liabilities: 13% Debentures 1,000
3 Current liabilities 2 4,115
Total 45,769
II ASSETS
1 Non-current assets 3 29,004
2 Current assets 4 16,765
Total 45,769

Note ₹
1 Reserves and Surplus
Securities Premium 3,000
Foreign Project Reserve 310
General Reserves 9,699
Profit and Loss A/c 16,654
2 Current liabilities
Sundry Creditors 1,543
Bills Payable 40
Sundry Provision 2,532
4,115
3 Non-current assets:
Land & Building 6,000
Plant & Machinery 19,000
Furniture, Fixtures and Fittings 4,004
29,004
4 Current Assets
Stock 11,903
Sundry Debtors 3,140
Cash and Bank 1,722
16,765

1
Includes shares issued in consideration other than cash for ₹9 crores

Sahasri Singar Academy 13.48

Amalgamation [ESCs are issued for debenture holders]
Question 3: ABC Ltd., and PQR Ltd., decided to amalgamate as on 1.4.2024. Their Balance
sheets as on 31.3.2024 were as follows:

Particulars Nt ABC Ltd PQR Ltd

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,50,000 1,40,000
𝑏 9% Preference Shares of ₹100 each 30,000 20,000
𝑐 Reserves and surplus 1 9,000 8,000
2 Non-current liabilities [10% Debentures] 50,000 30,000
3 Current liabilities 2 32,000 19,000
Total 3,01,000 2,45,000
II ASSETS
1 Non-current assets 3 1,80,000 1,45,000
2 Current assets 4 1,21,000 1,00,000
Total 3,06,000 2,45,000

1 ABC Ltd PQR Ltd

Reserves and Surplus
Investment Allowance Reserve 5,000 2,000
Profit and Loss A/c 4,000 6,000
Total 9,000 8,000
2 Current liabilities
Sundry Creditors 25,000 15,000
Tax Provision 7,000 4,000
32,000 19,000
3 Non-current assets:
Building 60,000 50,000
Plant & Machinery 80,000 70,000
Investments 40,000 25,000
1,80,000 1,45,000
4 Current Assets
Stock 36,000 40,000
Sundry Debtors 45,000 35,000
Bank 40,000 25,000
1,21,000 1,00,000

Amalgamation of Companies 13.49

From the following information, you are to prepare the draft Balance sheet as on 01.04.2024
of a new company, NCCI Ltd., which was formed to take over the business of both the
companies and took over all the assets and liabilities:
1. 50% Debentures are to be converted into Equity Share of the new company.
2. Out of the investments, 20% are non-trade investments.
3. Fixed Assets of ABC Ltd. were valued at 10% above cost and that of PQR Ltd., at 5%
above cost.
4. 10% of sundry Debtors were doubtful for both the companies. Stock to be carried at cost.
5. Preference shareholders were discharged by issuing equal number of 9% preference
share at par.
6. Equity shareholders of both the transferor companies are to be discharged by issuing
Equity share of ₹10 each of the new company at a premium of ₹5 per share.
Amalgamation is in the nature of purchase.
Answer:
Balance Sheet of M/s NCCL Ltd., as at 01.04.24 Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 27,799 Equity Share of ₹10 each 2,77,990
𝑏 9% Preference Shares 50,000
𝑐 Reserves and surplus 1 1,38,995
2 Non-current liabilities [10% Debentures] 40,000
3 Current liabilities 2 51,000
Total 5,57,985
II ASSETS
1 Non-current assets 3 3,45,000
2 Current assets 4 2,12,985
Total 5,64,985

Note ₹
1 Reserves and Surplus
Investment Allowance Reserve 7,000
Securities Premium 1,38,985
Amalgamation Adjustment A/c (7,000)
1,38,985
2 Current liabilities
Tax Provision 11,000

Sahasri Singar Academy 13.50

 Sundry Creditors 40,000
51,000
3 Non-current assets:
Building 1,18,500
Plant & Machinery 1,61,500
Investments 65,000
3,45,000
4 Current Assets
Stock 76,000
Sundry Debtors 72,000
Cash and Bank 64,985
2,19,985

Note: Calculation of value of equity share to be issued to transfer or companies.

Particulars ABC Ltd. PQR Ltd. Total
A Assets taken over
Building 66,000 52,500
Plant & Machinery 88,000 73,500
Investment 40,000 25,000
Stock 36,000 40,000
Sundry Debtors 40,500 31,500
Cash & Bank 40,000 25,000
Total 3,10,500 2,47,500
B Liabilities taken over
10% Debentures 50,000 30,000
Sundry Creditors 25,000 15,000
Tax provision 7,000 4,000
Total 82,000 49,000
Purchase Consideration (𝑨 − 𝑩) 2,28,500 1,98,500
− Preference share capital 30,000 20,000 50,000
𝑎 Payment by ESC [Valued at ₹15] 1,98,500 1,78,500
𝑏 𝑎
Number of Equity Shares ( ) 13,233.33 11,900
₹15

1 ESC ((13,233 × ₹10) & (11,900 × ₹10)) 1,32,330 1,19,000 2,51,330

2 Securities Premium ((13,233 × ₹5) & (11,900 × ₹5)) 66,165 59,500 1,25,665

Amalgamation of Companies 13.51

3 Cash for fractional shares (0.33 × ₹15) 5 - 5
𝑐 Debentures outstanding 50,000 30,000
0.5×𝑐
50% Debentures converted in to ESC ( ) 1,666.67 1000
₹15

1 ESC((1,666 × ₹10) & (1,000 × ₹10)) 16,660 10,000 26,660

2 Securities Premium ((1,666 × ₹5) & (1,000 × ₹5)) 8,330 5,000 13,330
3 Cash paid for fractional shares (0.66 × ₹15) 10 - 10
Total ESC Issued [1] 2,77,990
Total Securities Premium [2] 1,38,995

Amalgamation: PC based on profitability & Inter-company Owings

Question: Star and Moon had been carrying on business independently. They agreed to
amalgamate and form a new company Neptune Ltd., with an authorized share capital of
₹2,00,000 divided into 40,000 equity shares of ₹5 each.
On 31st December, 2024, the respective Balance Sheet of Star and Moon were as follows.

Star Moon
₹ ₹
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
− Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250

Additional Information:
a) Revalued figures of Fixed and Current assets were as follows:

Star Moon
₹ ₹
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875

b) The debtors and Creditors-include ₹21,675 owed by Star to Moon.

Sahasri Singar Academy 13.52

The purchase consideration is satisfied by issue of following shares and debentures.
a) 30,000 equity shares of Neptune Ltd., to Star and Moon in the proportion to the
profitability of their respective business based on the average net profit during the last
three years which were as follows:

Star Moon
2012 profit 2,24,788 1,36,950
2013 (Loss) / profit (1,250) 1,71,050
2014 profit 1,88,962 1,79,500

b) 15% debentures in Neptune Ltd., at par to provide an income equivalent to 8% return on

capital employed in their respective business as on 31st December, 2014, after revaluation
of assets.
You are requested to:
1. Compute the amount of debentures and shares to be issued to Star and Moon.
2. A Balance Sheet of Neptune Ltd., showing the position immediately after amalgamation.
Answer:
1 Computation of Amount of Share to be Issued Star Moon
𝒂 Average Net Profit 2,24,788 – 1,250 + 1,88,962 1,37,500 -
3
1,36,950 + 1,71,050 + 1,79,500 - 1,62,500
3
𝒃 Equity share issued 30,000 shares shared [1375 : 1625] 13,750 16,250
𝒄 Equity share value Equity shares × ₹5 68,750 81,250

2 Calculation of Capital employed Star Moon

(After revaluation of Assets) ₹ ₹
Fixed assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
5,04,750 2,73,875
− Liabilities (Current) 2,98,500 90,125
Capital employed 2,06,250 1,83,750
3 Amount of Debenture to be issued.
𝐃𝐞𝐛𝐞𝐧𝐭𝐮𝐫𝐞 𝐢𝐬𝐬𝐮𝐞𝐝 =
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ×
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛𝑑𝑒𝑏𝑒𝑛𝑡𝑟𝑢𝑒
8 8 1,10,000 98,000
𝑆𝑡𝑎𝑟: 2,06,250 × & 𝑀𝑜𝑜𝑛: 1,83,750 ×
15 15

Amalgamation of Companies 13.53

 Notes
4 Calculation of purchase consideration:
Particulars Star ₹ Moon ₹ Total ₹
Equity shares issued 68,750 81,250 1,50,000
15% Debenture issued 1,10,000 98,000 2,08,000
1,78,750 1,79,250 3,58,000
5 Calculation of capital reserve / goodwill
Net assets taken over
Fixed Assets 3,55,000 1,95,000 5,50,000
Current assets 1,49,750 57,200 2,06,950
5,04,750 2,52,200 7,56,950
− Current liabilities 2,76,825 90,125 3,66,950
Net Assets 2,27,925 1,62,075 3,90,000
Goodwill / (Capital Reserve) (5 − 4) (49,175) 17,175 (32,000)

Balance Sheet of Bimal as at 01.04.14 Nt ₹ in lakhs

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 30,000 Equity Shares of ₹5 each 1,50,000
𝑏 Reserves and surplus [Capital Reserve] 32,000
2 Non-current liabilities: 15% Debentures 2,08,000
3 Current liabilities 3,66,950
Total 7,56,950
II ASSETS
1 Non-current assets 5,50,000
2 Current assets 2,06,950
Total 7,56,950

Sahasri Singar Academy 13.54

 14. ACCOUNTING FOR RECONSTRUCTION OF COMPANIES

Procedure of reduction of Share Capital

1. Reduction in unpaid capital
2. Cancellation of lost paid up capital
3. Paying of excess paid up capital

Alteration of Share Capital

Exist → Converted Journal
1 Stock split Dr Cr
1×₹100 Eq. Share Capital 10×₹10 Eq. Share Capital ₹100 ESC Dr ××
To ₹10 ESC ××
2 Consolidation
10×₹10 Eq. Share Capital 1×₹100 Eq. Share Capital ₹10 ESC Dr ××
To ₹100 ESC ××
3 Conversion
𝑎 10×₹10 Eq. Share capital ₹100 Eq. Stocks ₹10 ESC Dr ××
To E. Stock ××
𝑏 ₹100 Eq. Stocks 10×₹10 Eq. Share Capital E. Stock Dr ××
To ₹10 ESC ××
4 Capital reduction
₹10 Eq. Share Capital ₹7 Eq. Share Capital ₹10 ESC Dr ××
[₹7 paid up] [fully paid up] To ₹7 ESC ××
5 Variation of Share Rights
𝑎 10% Pre. Share Capital 12% Pre. Share Capital 10% PSC Dr ××
To 12% PSC ××
𝑏 Cumulative PSC Non-cumulative PSC Cum PSC Dr ××
To Non-cum PSC ××

Distinguish between shares and stock.

Shares Stock
1. Shares may be fully or partly paid up Stocks are fully paid up.
2. Shares are serially numbered. Stocks are not numbered
3. Shares are always registered and Stocks may be registered or unregistered.

Accounting for Reconstruction of Companies 14.1

 non-transferable by mere delivery
4. Shares are of equal nominal value Stocks may be divided into nominal amount
5. Shares are issued when a company is Stocks are not issued when companies are
incorporated incorporated. Only fully paid shares can be
converted into stock.

Entries applicable for capital reduction

Accounting Entries Dr Cr
1 Reduction in liabilities
Liability a/c Dr ××××
To Capital Reduction a/c ××××
2 Increase in Liabilities
Capital Reduction a/c Dr ××××
To Liability a/c ××××
3 Compromise, arrangement, etc.,
Old Liability a/c Dr ××××
To New Liability a/c / Asset a/c ××××
To Capital Reduction a/c (balance) ××××
4 For Increase in value of Assets
Assets a/c Dr ××××
To Capital Reduction a/c ××××
5 To write off the assets
Capital Reduction a/c Dr ××××
To Assets a/c ××××
6 To write off the accumulated losses
Capital Reduction a/c Dr ××××
To Accumulated losses a/c ××××
7 Accumulated gains to CR A/c
Accumulated gain a/c Dr ××××
To Capital Reduction a/c ××××
8 Cr. Balance in Capital Reduction
Capital Reduction a/c Dr ××××
To Capital Reserve a/c / Any Asset a/c ××××
Capital Reduction A/c = Capital reconstruction or Reorganization or Reconstruction A/c

Sahasri Singar Academy 14.2

 Capital Reduction a/c
Debit ₹ Credit ₹
To ↓ 𝐴𝑠𝑠𝑒𝑡𝑠 ××× By ↑ 𝐴𝑠𝑠𝑒𝑡𝑠 ×××
↑ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 & 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ××× ↓ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 & 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ×××
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠 ××× 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝐺𝑎𝑖𝑛𝑠 ×××
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒆𝒔𝒆𝒓𝒗𝒆 (𝑩𝒂𝒍𝒂𝒏𝒄𝒆) ×××
𝒐𝒓 ↓ 𝑨𝒏𝒚 𝒂𝒔𝒔𝒆𝒕
××× ×××
Note:
1. Arrear dividend / interest
a. Appears in B/S may be waived fully or partially – then it is capital reduction credit
b. Appears below the B/S
But waived – no entry
But payable fully or partially – then it is capital reduction debit
2. Capital reduction by reducing liabilities & capital collectively
3. Dissatisfied shareholders’ interest paid off by
Company – usual treatment
Director personally – no entry
4. Share surrender method
5. Reduced or increased to / by

PRACTICAL PROBLEMS
Question 1: Balance Sheet of Weak Company as at 31st March 2020

Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
₹10 Equity Share capital 1000
Profit and Loss A/c (500)
2 Non-current Liabilities [8% Debentures] 300
3 Current Liabilities 200
Total 1,000
II ASSETS
1 Non-current assets 700
2 Current assets 300
Total 1,000

Accounting for Reconstruction of Companies 14.3

The following scheme of reconstruction is sanctioned
1. Non-current assets is written down to ₹650 and current asset is valued at ₹250
2. Non-current liabilities is increased by ₹50 but agreed to forgo ₹100 in total
3. Current liabilities are agreed to forego ₹50
4. One equity share of ₹5 is issued for every one share of ₹10 each.
Required: Pass journal entries for the above and prepare B/S after reconstruction
Answer:
Adjustment Entries
1 Capital Reduction A/c Dr 650
To Non-current Assets A/c 50
To Current Assets A/c 50
To Non-current Liabilities 50
To P/L A/c 500

2 Non-current Liabilities Dr 100

Current Liabilities Dr 50
₹10 ESC A/c Dr 1,000
To ₹5 ESC A/c 500
To Capital Reduction A/c 650

Balance Sheet of Weak Company as at 31st March 2020 and Reduced [2020]
Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 ₹5 Equity Share capital 500
2 Non-current Liabilities [8% Debentures] 250
3 Current Liabilities 150
Total 900
II ASSETS
1 Non-current assets 650
2 Current assets 250
Total 900

Sahasri Singar Academy 14.4

Question 2: The following is the Balance Sheet of Weak Company as on 31st March 2021
Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
₹10 Equity Share capital 7,00,000
₹100-13% Preference Share Capital 1,00,000
Profit and Loss A/c (3,00,000)
2 Non-current Liabilities [8% Debentures] 3,00,000
3 Current Liabilities
Current Liabilities 39,00,000
Provision for taxation 3,00,000
Total 50,00,000
II ASSETS
1 Non-current assets 15,00,000
2 Current assets 35,00,000
Total 50,00,000

Additional Information:
The following schemes of reorganization are sanctioned:
1 Non-current assets are to be written down by 33.33%.
2 Current assets are to be revalued at ₹27,00,000.
3 Preference shareholders decide to forego their right to arrears of dividend which are in
arrears for 3 years.
4 The taxation liability of the company is settled at ₹4,00,000 and the same is paid
immediately.
5 One of the creditors of the company to whom the company owes ₹25,00,000 and decides
to forego 50% of the claim. He is allotted 1,00,000 equity shares of ₹5 each in part of
satisfaction of the balance of his claim
6 The rate of interest on debentures is increased to 11%. The debenture holders surrender
their debentures of ₹25 each.
7 The existing equity and preference shares are reduced to ₹5 and ₹75 each respectively.
Answer:
Adjustment Entries
₹10 Equity share capital a/c Dr 7,00,000
To ₹5 Equity Share Capital 3,50,000
To Capital Reduction a/c 3,50,000

Accounting for Reconstruction of Companies 14.5

 ₹100 Preference share capital a/c Dr 1,00,000
To ₹75 Preference Share Capital 75,000
To Capital Reduction a/c 25,000

8% debentures a/c Dr 3,00,000

To 11% debentures a/c 2,25,000
To Capital Reduction a/c 75,000

WN Liability to creditors 25,00,000

− Liability foregone - 50% 12,50,000
12,50,000
− Equity shares allotted @ ₹5 each 5,00,000
Balance 7,50,000

Creditors a/c Dr 17,50,000

To Capital Reduction a/c 12,50,000
To Equity Share capital a/c 5,00,000

Provision for Taxation a/c Dr 3,00,000

Capital Reduction a/c Dr 1,00,000
To Cash a/c 4,00,000

Capital Reduction a/c Dr 16,00,000

To Fixed assets a/c 5,00,000
To Current asset a/c 8,00,000
To Profit and Loss a/c 3,00,000

Capital Reduction a/c

Particulars ₹ Particulars ₹
To Cash 1,00,000 By Equity Shares 3,50,000
Fixed assets 5,00,000 Preference Shares 25,000
Current asset a/c 8,00,000 8% Debentures 75,000
Profit and Loss a/c 3,00,000 Creditors 12,50,000
17,00,000 17,00,000

Sahasri Singar Academy 14.6

 The Balance Sheet of Weak Company as on 31st March 2021 and Reduced
Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
₹5 Equity Share capital 8,50,000
₹75-13% Preference Share Capital 75,000
2 Non-current Liabilities [11% Debentures] 2,25,000
3 Current Liabilities 21,50,000
Total 33,00,000
II ASSETS
1 Non-current assets 10,00,000
2 Current assets 23,00,000
Total 33,00,000

Question 3: The following is the Balance sheet of Weak Ltd. as on 31.3.2022:

Particulars Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹100 each 1,00,00,000
𝑏 12% Cum. Preference Shares of ₹100 each 50,00,000
𝑐 Reserves and Surplus 1 (6,00,000)
2 Non-current liabilities [10% Debentures of ₹100 each] 40,00,000
3 Current liabilities 2 51,00,000
Total 2,35,00,000

II ASSETS
1 Non-current assets 3 1,35,00,000
2 Current assets 1,00,00,000
Total 2,35,00,000

Accounting for Reconstruction of Companies 14.7

 Note
1 Reserves and Surplus
Preliminary Expenses (2,00,000)
Profit & Loss A/c (4,00,000) (6,00,000)
2 Current liabilities
Sundry Creditors 50,00,000
Provision for Taxation 1,00,000 51,00,000
3 Non-current assets:
Fixed Assets 1,25,00,000
Investments [Market Value ₹9,50,000] 10,00,000 1,35,00,000

The following scheme of reorganization is sanctioned:

1. All the existing equity shares are reduced to ₹40 each.
2. All preference shares are reduced to ₹60 each.
3. The rate of interest on debentures is increased to 12%. The debenture holders
surrender their existing debentures of ₹100 each and exchange the same for fresh
debentures of ₹70 each for every debenture held by them.
4. One of the creditors of the company to whom the company owes ₹20,00,000 decides
to forgo 40% of his claim. He is allotted 30,000 equity shares of ₹40 each in full
satisfaction of his claim.
5. Fixed assets are to be written down by 30%.
6. Current assets are to be revalued at ₹45,00,000.
7. The taxation liability of the company is settled at ₹1,50,000.
8. Investments to be brought to their market value.
9. It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.
Working Note:
Capital Reduction Account
₹ ₹
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
P & L A/c 4,00,000 12%Pre. Share capital 20,00,000
Preliminary expenses 2,00,000 10% Debentures 12,00,000
Fixed assets 37,50,000 Sundry creditors 8,00,000
Current assets 55,00,000
Investment 50,000
Capital Reserve (balance) 50,000
1,00,00,000 1,00,00,000

Sahasri Singar Academy 14.8

Answer:
Journal Entries in the books of Weak Ltd. ₹ ₹
1 Equity share capital (₹100) A/c Dr. 1,00,00,000
To Equity Share Capital (₹40) A/c 40,00,000
To Capital Reduction A/c 60,00,000

2 12% Preference Share capital (₹100) A/c Dr. 50,00,000

To 12% Preference Share Capital (₹60) A/c 30,00,000
To Capital Reduction A/c 20,00,000

3 10% Debentures A/c Dr. 40,00,000

To 12% Debentures A/c 28,00,000
To Capital Reduction A/c 12,00,000

4 Sundry Creditors A/c Dr. 20,00,000

To Equity Share Capital (₹40) A/c 12,00,000
To Capital Reduction A/c 8,00,000

5 Provision for Taxation A/c Dr. 1,00,000

Capital Reduction A/c Dr. 50,000
To Bank A/c 1,50,000

6 Capital Reduction A/c Dr. 99,50,000

To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000

Accounting for Reconstruction of Companies 14.9

 Particulars Nt ₹
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹40 each 52,00,000
𝑏 12% Cum. Preference Shares of ₹60 each 30,00,000
𝑐 Reserves and Surplus [CR] 50,000
2 Non-current liabilities [12% Debentures of ₹100 each] 28,00,000
3 Current liabilities 30,00,000
Total 1,40,50,000
II ASSETS
1 Non-current assets 87,50,000
Non-current Investments 9,50,000
2 Current assets 43,50,000
Total 1,40,50,000

Question 4: The following is the Balance Sheet of Rocky Ltd., as at March 31,2024:
₹ in lakhs
Particulars Nt
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 500
𝑏 Reserves and surplus 1 (392)
𝑐 Non-current liabilities 2 448
2 Current liabilities 3 219
3 Total 775

II ASSETS
1 Non-current assets 4 526
2 Current assets 5 249
Total 775

Sahasri Singar Academy 14.10

 Note ₹
1 Reserves and Surplus
Capital Reserve 6
Profit & Loss A/c (390)
Discount on Issue of Debenture (8)
(392)
2 Non-current Liabilities
12% Debentures 400
Outstanding Debenture Interest 48
448
3 Current liabilities
Trade Creditors 165
Outstanding Directors’ Remuneration 10
Other Outstanding Expenses 11
Provisions 33
219
4 Non-current assets
Goodwill 15
Land and Building 184
Plant and Machinery 286
Furniture and Fixtures 41
526
5 Current Assets
Stock 142
Sundry Debtors 80
Cash at Bank 27
249

The following scheme of internal reconstruction was framed, approved by the court, all the
concerned parties and implemented:
1. All the equity shares are to be converted into the same number of fully-paid equity
shares of ₹2.50 each.
2. Directors agree to forego their outstanding remuneration.
3. The debentures holders also agree to forego outstanding interest in return of their 12%
debentures being converted into 13% debentures.

Accounting for Reconstruction of Companies 14.11

4. The existing shareholders agree to subscribe for cash, fully paid equity shares of ₹2.50
each for ₹125 lakhs.
5. Trade creditors are given the option of either to accept fully-paid shares of ₹2.50 each
for the amount due to them or to accept 80% of the amount due in cash. Creditors for
₹65 lakhs accept equity shares whereas those for ₹100 lakhs accept ₹80 lakhs in cash in
full settlement.
6. The assets are revalued as under:
Land and Building – 230 lakhs
Plant and Machinery – 220 lakhs
Stock – 12 lakhs
Debtors – 76 lakhs
Pass journal entries for all the above mentioned transactions and draft the company’s
Balance Sheet immediately after the reconstruction.
Answer:
₹ in lakhs
Journal Entries in the books of P Ltd.
Particulars Dr. ₹ Cr.₹
Equity share capital A/c (₹10) Dr. 500
To Equity share capital (₹2.50 each) A/c 125
To Capital Reduction A/c 375

Directors Remuneration Outstanding A/c Dr. 10

To Capital Reduction A/c 10

12% Debenture A/c Dr. 400

Debenture interest outstanding A/c Dr. 48
To 13% Debenture 400
To Capital Reduction A/c 48

Bank A/c Dr. 125

To Equity share application A/c 125

Equity share application A/c Dr. 125

To Equity share capital (₹2.50 each) 125

Trade creditors A/c Dr. 165

Sahasri Singar Academy 14.12

 To Equity share capital (₹2.50 each ) A/c 65
To Bank A/c 80
To Capital Reduction A/c 20

Land and Buildings A/c Dr. 46

To Capital Reduction A/c 46

Capital Reduction A/c Dr. 499

Capital Reserve A/c Dr. 6
To Goodwill A/c 15
To Plant and Machinery A/c 66
To Stock A/c 22
To Debenture A/c 4
To Discount on issue of Deb. A/c 8
To Profit and Loss A/c 390

Balance Sheet of Rocky Ltd. (and Reduced) Nt ₹

as on 31st March, 2024
I EQUITY AND LIABILITIES
1 Shareholders’ funds
1,26,000 Equity Share of ₹2.50 each 315
[26,00 shares issued for consideration other than cash]
2 Non-current liabilities [13% Debentures] 400
3 Current liabilities 1 44
Total 759
II ASSETS
1 Non-current assets 2 491
2 Current assets 3 268
Total 759

Notes ₹ ₹
1 Current liabilities
Outstanding Expenses 11
Provisions 33 44

Accounting for Reconstruction of Companies 14.13

 2 Non-current assets:
Land and Building 230
Plant and Machinery 220
Furniture and Fixtures 41 491

3 Current Assets
Stock 120
Sundry Debtors 80
− Provision for Bad Debt 4 76
Cash at Bank 72 268

Note: Goodwill has been written off under reconstruction scheme.

Working Notes:
₹ in lakhs
1 Capital Reduction A/c
Debit ₹ Credit ₹
To Goodwill 15 By Equity share capital A/c 375
Plant and Machinery 66 Director’s Remuneration 10
Stock 22 Debenture Interest outstanding 48
Debtors 4 Trade creditor’s 20
Discount on issue of Debenture 8 Capital Reserve 6
Profit and Loss A/c 390 Land and Building 46
505 505

2 Equity share capital as on 31st March, 2002 (after reconstruction) ₹

Equity share capital (₹2.50 each) 125
+ Fresh issue 125
+ Equity share issued to creditor’s 65
315
3 Cash at Bank as on 31st March, 2002 (after reconstruction)
Cash at Bank (Before reconstruction) 27
+ Proceeds from issued for equity shares 125
152
− Payments made to creditors 80
72

Sahasri Singar Academy 14.14

Question 5: Green Limited had decided to reconstruct the Balance Sheet since it had
accumulated huge losses. The following is the Balance Sheet of the Company on 31.3.2021
before reconstruction.
₹ in thousands
Balance Sheet as at 31st March 2021 of Green Limited
Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Share capital
Authorized: 1,50,000 Equity shares of ₹50 each 7,500
Subscribed and paid up Capital:
50,000 Equity shares of ₹50 each 2,500
1,00,000 Equity shares of ₹50 each, ₹40 per share paid up 4,000 6500
𝑏 Reserves and surplus: Profit and Loss A/c (2,000)
2 Non-current liabilities
12% First Debentures 500
12% Second Debentures 1,000 1,500
3 Current liabilities 500 500
Total 6,500
II ASSETS
1 Non-current assets
𝑎 Tangible assets
Building 1,000
Plant 1,000
Computers 2,500 4,500
𝑏 Intangible assets – Goodwill 2,000
Total 6,500

The following is the interest of Mr. X and Mr. Y in Green Limited;

Mr. X (₹) Mr. Y (₹)
12% First Debentures 300 200
12% Second Debentures 700 300
Sundry Creditors 200 100
1200 600
Fully paid up ₹50 shares 300 200
Partly paid up shares (₹40 paid up) 500 500

Accounting for Reconstruction of Companies 14.15

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
1. Uncalled capital is to be called up in full and such shares and the other fully paid up
shares be converted into equity shares of ₹20 each.
2. Mr. .X is to cancel ₹700 of his total debt (other than share amount) and to pay ₹200 to the
company and to receive new 14% first Debentures for the balance amount.
3. Mr. Y is to cancel ₹300 of his total debt (other than equity shares) and to accept new 14%
First Debentures of the balance.
4. The amount thus rendered available by the scheme shall be utilized in writing off of
Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the balance
sheet of the reconstructed company.
Answer:
₹ in thousands
1 Note X Y Total
12% I Debentures 300 200 500
12% II Debentures 700 300 1000
Creditors 200 100 300
Cash 200 - 100
1,400 600 2.000
Waiver: Capital Reduction 700 300 1,000
Issue: 14% Debenture 700 300 1,000

Journal Entries in the books of MO Ltd.

Particulars Dr. ₹ Cr. ₹
Bank A/c Dr. 1,000
To Equity Share Capital Amount 1,000

Equity share capital A/c (₹50) Dr. 7,500

To Equity share Capital A/c (₹20) 3,000
To Capital Reduction A/c 4,500

12% First Debenture A/c Dr. 500

12% Second debenture A/c Dr. 1,000
Sundry Creditors A/c Dr. 300
Cash A/c Dr. 200

Sahasri Singar Academy 14.16

 To Capital Reduction A/c 1,000
To 14% I Debentures 1,000

Capital Reduction A/c Dr. 5,500

To Goodwill A/c 2,000
To Profit and Loss A/c 2,000
To Computer A/c 1,500
Note 2:
Capital Reduction A/c
₹ ₹
To Goodwill A/c 2,000 By Equity Share Capital A/c 4,500
P & L A/c 2,000 X 700
Computers (Bal. Fig.) 1,500 Y 300
5,500 5,500

Balance Sheet as at 31st March 2021 of Green Limited

(₹in…………)
Particulars Nt CY PY
I EQUITY AND LIABILITIES
1 Shareholders’ funds
Share capital of ₹20 each 3,000
2 Non-current liabilities(14% First Debentures) 1,000
3 Current liabilities 200
Total 4,200
II ASSETS
1 Non-current assets (Tangible assets)
Building 1,000
Plant 1,000
Computers 1,000
2 Current assets 1,200
Total 4,200

Accounting for Reconstruction of Companies 14.17

Question 6: The Balance Sheet of Y Limited as on 31st March, 2024 was as follows:
Particulars Nt
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 5,00,000 Equity Share of ₹10 each 50,00,000
𝑏 9% - 20,000 Preference Shares of ₹100 each 20,00,000
𝑐 Reserves and Surplus 1 (16,00,000)
2 Non-current liabilities 2 17,60,000
3 Current liabilities 3 8,40,000
Total 80,00,000
II ASSETS
1 Non-current assets 4 65,00,000
2 Current assets 5 15,00,000
Total 70,00,000

Note
1 Reserves and Surplus
Discount on Issue of Debentures (1,00,000)
Profit & Loss A/c (15,00,000) (16,00,000)
2 Non-current Liabilities
10% First Debentures 6,00,000
10% Second Debentures 10,00,000
Debenture Interest Outstanding 1,60,000 17,60,000
3 Current liabilities
Trade Creditors 5,00,000
Directors’ Loan 1,00,000
Bank Overdraft 1,00,000
Outstanding Liabilities 40,000
Provision for Tax 1,00,000 8,40,000
4 Non-current assets
Goodwill 10,00,000
Patent 5,00,000
Land and Building 30,00,000
Plant and Machinery 10,00,000
Furniture and Fixtures 2,00,000
Computers 3,00,000
Trade Investment 5,00,000 70,00,000
5 Current Assets
Stock 10,00,000
Debtors 5,00,000 15,00,000
Note: Preference dividend is in arrears for last three years.

Sahasri Singar Academy 14.18

A holds 10% first debentures for ₹4,00,000 and 10% second debentures for ₹6,00,000.He is
also creditors for ₹1,00,000.B holds first debentures for ₹2,00,000 and 10% second debentures
for ₹4,00,000 and is also creditors for ₹50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the
court.
1. All the equity shares be converted into fully paid equity shares of ₹5 each.
2. The preference shares be reduced to ₹50 each and the preference shareholders agree to
forego their arrears to preference dividends in consideration of which 9% preference
shares are to be converted into 10% preference shares.
3. Mr. “A” is to cancel ₹6,00,000 of his total debt including interest on debentures and to
pay ₹1 lakh to the company and to receive new 12% debentures for the Balance amount.
4. Mr. “B” is to cancel ₹3,00,000 of his total debt including interest on debentures and to
accept new 12% debentures for the balance amount.
5. Trade creditors (other than A and B) agreed to forego 50% of their claim.
6. Directors to accept settlement of their loans as to 60% thereof by allotment of equity
shares and balance being waived.
7. There were capital commitments totaling ₹3,00,000.These contracts are to be cancelled on
payment of 5% of the contract price as a penalty.
8. The Directors refund ₹1,10,000 of the fees previously received by them.
9. Reconstruction expenses paid ₹10,000.
10. The taxation liability of the company is settled at ₹80,000 and the same is paid
immediately.
11. The assets are revalued as under:
₹
Land and Building 28,00,000
Plant and Machinery 4,00,000
Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade investment 4,00,000

Pass Journal entries for all the above mentioned transactions including amounts to be
written off of Goodwill, Loss in Profit and Loss Account and Discount on issue of
debentures. Prepare Bank Account and working of allocation of Interest on Debentures
between A and B.

Accounting for Reconstruction of Companies 14.19

Answer: Journal Entries in the books of P Ltd.
Particulars Dr. ₹ Cr. ₹
Equity share capital A/c (₹10) Dr. 50,00,000
To Equity share capital (₹5 each) A/c 25,00,000
To Capital Reduction A/c 25,00,000

9% Pre share capital (₹100 each ) A/c Dr. 20,00,000

To 10% Pre share capital A/c (₹50 each) 10,00,000
To Capital Reduction A/c 10,00,000

10% First Debenture A/c [WN1] Dr. 6,00,000

10% Second debenture A/c Dr. 10,00,000
Trade creditors A/c Dr. 1,50,000
Interest on Debenture outstanding A/c Dr. 1,60,000
Bank A/c Dr. 1,00,000
To 12% New Debenture A/c 11,10,000
To Capital Reduction A/c 9,00,000

Trade creditor’s A/c Dr. 1,75,000

To Capital Reduction A/c 1,75,000

Director’s loan A/c Dr. 1,00,000

To Equity share Cap. (₹5) A/c 60,000
To Capital Reduction A/c 40,000

Capital Reduction A/c Dr. 15,000

To Bank A/c 15,000

Capital Reduction A/c Dr. 1,10,000

To Bank A/c 1,10,000

Capital Reduction A/c Dr. 10,000

To Bank A/c 10,000

Provision for Tax a/c Dr. 1,00,000

To Bank A/c 80,000

Sahasri Singar Academy 14.20

 To Capital Reduction A/c 20,000

Capital Reduction A/c Dr. 47,20,000

To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 15,00,000
To Discount on issue of debenture A/c 1,00,000
To Land and Buildings A/c 2,00,000
To Plant and Machinery A/c 6,00,000
To Furniture and Fixture A/c 1,00,000
To Computers A/c 1,20,000
To Trade investments a/c 1,00,000
To Stock A/c 3,00,000
To Debtor’s A/c 2,00,000
Workings:
A B Total
I Debentures 4,00,000 2,00,000 6,00,000
II Debentures 6,00,000 4,00,000 10,00,000
Creditors 1,00,000 50,000 1,50,000
Interest Outstanding 1,00,000 60,000 1,60,000
12,00,000 7,10,000 19,10,000
Cash 1,00,000 -
13,00,000 7,10,000 20,10,000
Waiver: Capital Reduction 6,00,000 3,00,000
Issue: 12% Debenture 7,00,000 4,10,000 11,10,000

Bank A/c
Particulars ₹ Particulars ₹
To A (Reconstruction) 1,00,000 By Balance b/d 1,00,000
Capital Reduction A/c 1,10,000 Capital Reduction A/c 15,000
(paid by directors) (capital penalty paid)
Reconstruction (Expenses paid) 10,000
Provision for tax (tax paid) 80,000
Balance c/d 5,000
2,10,000 2,10,000

Accounting for Reconstruction of Companies 14.21

SHARE SURRENDER METHOD
When shares are surrendered
Eq. Sh. Capital a/c Dr ××
To Sh. Surrender a/c ××
Option 1 Option 2
When shares are cancelled When shares reconverted
Sh. Surrender a/c Dr ×× Sh. Surrender a/c Dr ××
To Cap Reduction a/c ×× To Eq. Sh. Capital a/c ××
+
Reduction of Liabilities
Liabilities Dr ××
To Cap. Reduction a/c ××

Question 7: The business of Rundown Ltd. was being carried on continuously at losses. The
following are the extracts from the Balance Sheet of the company as on 31st March, 2021:

Particulars Nt
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 30,000 Equity Share of ₹10 each 3,00,000
𝑏 8% - 2,000 Preference Shares of ₹100 each 2,00,000
𝑐 Reserves and Surplus 1 (1,15,000)
2 Non-current liabilities [Unsecured loan from Directors] 50,000
3 Current liabilities 2 3,70,000
Total 8,05,000
II ASSETS
1 Non-current assets
Intangible [Goodwill] 50,000
Tangible 3 3,10,000
2 Current assets 4 4,45,000
Total 8,05,000

Sahasri Singar Academy 14.22

 Notes
1 Reserves and Surplus
Securities Premium 90,000
Profit and Loss A/c (2,00,000)
Preliminary Expenses (5,000) (1,15,000)
2 Current liabilities
Creditors 3,00,000
Outstanding Expenses 70,000 3,70,000
[including director’s remuneration 20,000]
3 Non-current assets:
Plant 3,00,000
Loose Tools 10,000 3,10,000
4 Current Assets
Stock 1,50,000
Debtors 2,50,000
Cash 10,000
Bank 35,000 4,45,000

Note: Dividends on Cumulative Preference Shares are in arrears for three years.
The following scheme of reconstruction has been agreed upon and duly approved by court.
1. Equity Shares to be converted into 1,50,000 shares of ₹2 each
2. Equity Shareholders to surrender to the company 90% shares of their holdings.
3. Preference shareholders agreed to forego their rights to arrears of dividends in
consideration of which 8%preference shares converted to 9% preference shares.
4. Sundry creditors agree to reduce their claim by one fifth in consideration of their getting
shares of ₹35,000 out of the surrendered equity shares.
5. Directors agree to forego the amounts due on account of unsecured loan and directors
remuneration.
6. Surrendered shares not otherwise utilized to be cancelled.
7. Assets to be reduced by as under:
Goodwill – 50,000
Tools – 8,000
Stock – 20,000
Plant – 40,000
Sundry Debtors – 15,000
8. Any surplus after meeting losses should be utilized in writing down the value of plant
further.

Accounting for Reconstruction of Companies 14.23

9. Expenses of reconstruction to ₹10000.
10. Further 50000 equity shares were issued to the existing members for increasing the
working capital. The issue was fully subscribed and paid up.
11. Authorized capital was suitably increased.
12. A member holding 100 Equity shares opposed the scheme and his shares were taken
over by the Director in payment of ₹1000 as fixed by the court.
You are required to pass Journal entries for giving effect to the above arrangement and also
to drawn up the resultant balance sheet of the company.
Answer:
Adjusting Entries
Equality Share capital a/c Dr 3,00,000
To Equity Share capital a/c 3,00,000

Equity Share capital a/c Dr 2,70,000

To Share Surrender a/c 2,70,000

8% Preference share capital a/c Dr 2,00,000

To 9% Preference share capital a/c 2,00,000

Creditors a/c Dr 60,000

To Capital Reduction a/c 60,000

Share surrender a/c Dr 35,000

To Equity Share capital a/c 35,000

Directors Loan a/c Dr 50,000

Outstanding Expenses a/c Dr 20,000
To Capital Reduction a/c 70,000

Share surrender a/c Dr 235,000

To Capital Reduction a/c 235,000

Securities Premium A/c Dr 90,000

To Capital Reductions A/c 90,000

Sahasri Singar Academy 14.24

 Capital Reduction a/c Dr 4,45,000
To Goodwill a/c 50,000
To Plant a/c (Balance) 1,47,000
To Tools a/c 8,000
To Debtors a/c 15,000
To Stock a/c 20,000
To Preliminary Expenses a/c 5,000
To Profit and Loss a/c 2,00,000

Capital Reduction a/c Dr 10,000

To Cash a/c 10,000

Cash a/c Dr 1,00,000

To Equity Shares capital a/c 1,00,000

Capital Reduction a/c

Particulars ₹ Particulars ₹
To Goodwill a/c 50,000 By Creditors 60,000
Plant a/c (Balance) 1,47,000 Directors loan 50,000
Tools a/c 8,000 Share surrender 2,35,000
Debtors a/c 15,000 Outstanding Expenses 20,000
Stock a/c 20,000 Securities Premium 90,000
Preliminary Expenses a/c 5,000
Profit and Loss a/c 2,00,000
Cash 10,000
4,55,000 4,55,000

Balance Sheet of Rundown Ltd [and Reduced] Nt

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 1,65,000
𝑏 9% - 2,000 Preference Shares of ₹100 each 2,00,000
𝑐 Reserves and Surplus [Securities Premium] 90,000
2 Non-current liabilities -

Accounting for Reconstruction of Companies 14.25

 3 Current liabilities 1 2,90,000
Total 7,45,000
II ASSETS
1 Non-current assets [Tangible] 2 2,45,000
2 Current assets 3 5,00,000
Total 7,45,000

Note
1 Current liabilities
Creditors 2,40,000
Outstanding Expenses 50,000 2,90,000
2 Non-current assets
Plant 2,43,000
Loose Tools 2,000 2,45,000

3 Current Assets
Stock 1,30,000
Debtors 2,35,000
Cash 1,00,000
Bank 35,000 7,45,000

Question 8: M/s. AXL Ltd. has suffered from continuing losses. The accumulated deficit of
the company now stands at ₹25,00,000, which far exceeds the paid up of the company’s
equity capital. A reconstruction plan has been undertaken to return the operation of the
company to a profitable level. The most recent balance sheet of the company

Particulars Note
I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹100 each 20,00,000
𝑏 12% Preference Shares of ₹100 each 10,00,000
𝑐 Reserves and Surplus (25,00,000)
2 Non-current liabilities 1 15,00,000
3 Current liabilities 2 45,00,000
Total 65,00,000

Sahasri Singar Academy 14.26

 II ASSETS
1 Non-current assets 3 35,50,000
2 Current assets 4 29,50,000
Total 65,00,000

Note
1 Non-current Liabilities
10% Secured Debenture 12,50,000
Arrear Debenture Interest 2,50,000 15,00,000
2 Current liabilities
Bank Overdraft 30,10,000
Creditors (Trade) 14,90,000 45,00,000
3 Non-current assets:
Land & Buildings 25,00,000
Plant & Machinery 10,50,000 35,50,000
4 Current Assets
Stock & Work-in-progress 9,50,000
Debtors 19,75,000
Cash & Bank 25,000 29,50,000

The following further information is available:

1. The debentures are secured on the Land and Buildings, the current market value of
which is ₹9,00,000. The other Land & Building have a current market value of ₹18,00,000
2. The current value of the Plant and Machinery is estimated to be ₹6,00,000
3. Debtors and Stocks have a recoverable value of ₹19,25,000 and ₹7,50,000 respectively
4. The Preference dividend is in arrear for four years.
5. The debenture interest is two years in arrears.

The reconstruction plan, duly approved by the court, the shareholders and the creditors
involves the following actions:
1. The preference shareholders are to forego their arrears of dividends and to accept equity
shares in lieu of preference shares.
2. The equity shares are to be cancelled in exchange for 20,000 equity shares of ₹1 each
3. The preference shares are to be cancelled in exchange for 10,000 equity shares of ₹1 each
4. The debenture holders are to waive of ₹1,25,000 of interest in arrear in exchange for
₹10,000 equity shares of ₹1 each.
5. 40,000 equity shares are to be consolidated into 4,000 equity shares of ₹10 each.

Accounting for Reconstruction of Companies 14.27

6. A right issue of 25 equity shares of ₹10 each for each ₹10 equity shares held is to be
made.
7. The interest rate on debentures is to be raised from 10% to 12%.
8. The trade creditors do not agree to any reduction in their claim but are willing to supply
the reconstructed company and to continue giving credit on normal terms.
9. The bank loan (overdraft) is to continue, but the loan is to be secured by a floating charge
over the assets of the company.
10. The debentures are to be given a fixed security on the total land and buildings.
11. The costs of reconstruction scheme are expected to be ₹50,000.

You are required to prepare the following:

1. A statement showing the amount of capital reduction required.
2. A statement showing how the total reduction is to be achieved as required.
3. Journal entries for the plan of reconstruction.
4. A balance sheet after reconstruction scheme is duly implemented.
Answer:
Capital Reduction Required ₹ ₹
Plant & Machinery (4,50,000)
Stock & WIP (2,00,000)
Debtors (50,000)
Profit & Loss (Debit Balance) (25,00,000)
Cost of Reorganization (50,000)
Land & Building (Gain) 2,00,000 (30,50,000)
Capital Reduction to be achieved
Equity Shares (20,000 × 90) 19,80,000
Preference Shares (10,00,000 − 10,000) 9,90,000
Waiver of Debenture Interest 1,15,000 30,85,000
Balance: Capital Reserve 35,000

Journal Entries for the plan of Reconstruction

Particular Dr. (₹) Cr. (₹)
Equity Shares (₹100) A/c Dr. 20,00,000
Preference Share (₹100) A/c Dr. 10,00,000
To Equity Shares (₹1 each) A/c 30,000
To Capital Reduction A/c 29,70,000

Sahasri Singar Academy 14.28

 Arrear Debentures Interest A/c Dr. 1,25,000
To Equity Shares (₹1) A/c 10,000
To Capital Reduction A/c 1,15,000

Capital Reduction A/c Dr. 30,85,000

Land & Building A/c Dr. 2,00,000
To Plant & Machinery A/c 4,50,000
To Stock & WIP A/c 2,00,000
To Debtors A/c 50,000
To Profit & Loss A/c 25,00,000
To provision for costs A/c 50,000
To Capital Reserve A/c (Balance) 35,000

10% Secured Debentures A/c Dr. 12,50,000

To 12% Secured Debentures A/c 12,50,000

Equity Shares (₹1) A/c Dr. 40,000

To Equity Shares (₹10) A/c 40,000

Bank A/c Dr. 10,00,000

To Equity Shares A/c 10,00,000

Balance Sheet (and reduced) Nt

I EQUITY AND LIABILITIES
1 Shareholders’ funds
𝑎 Equity Share of ₹10 each 10,40,000
𝑏 Reserves and Surplus [Capital Reserve] 35,000
𝑐 Non-current liabilities 1 13,75,000
2 Current liabilities 2 45,50,000
3 Total 70,00,000
II ASSETS
1 Non-current assets 3 33,00,000
2 Current assets 4 37,00,000
Total 70,00,000

Accounting for Reconstruction of Companies 14.29

 Note ₹ ₹
1 Non-current Liabilities
12% Secured Debenture 12,50,000
Arrear Debenture Interest 1,25,000 13,75,000
2 Current liabilities
Bank Overdraft 30,10,000
Creditors (Trade) 14,90,000
Provision for Reorganisation Cost 50,000 45,50,000
3 Non-current assets
Land & Buildings 27,00,000
Plant & Machinery 6,00,000 33,00,000

4 Current Assets
Stock & Work-in-progress 7,50,000
Debtors 19,25,000
Cash & Bank 10,25,000 37,00,000

Sahasri Singar Academy 14.30

 15. ACCOUNTING FOR BRANCHES
INCLUDING FOREIGN BRANCHES

Types of branches and accounting

➢ Dependent branch: whole of the branch controlled by head office
Accounting for Dependent Branch Cost Price Invoice Price
1 Debtors System √ √
2 Stock and Debtors System √ √
3 Memorandum Trading and P/L System √ √

➢ Independent branch: Branch maintains independent accounting records

1. Local branch
2. Foreign branch

Practical Problems
Question: SSA contributed ₹1,00,000 as capital and started trading business in Trichy. Goods
purchased for ₹80,000 and sent goods worth ₹30,000 to SSA(K) (branch office). Also remitted
₹2,000 to its branch for meeting branch expenses.

SSA SSA(K)
₹ ₹
Goods sold in credit 60,000 40,000
Cash received from debtors 60,000 35,000
Administration expenses 6,000 3,000
Selling expenses 4,000 2,000
Closing stock 10,000 5,000
Cash remitted by SSA(K) to SSA 30,000 30,000

Prepare complete P/L A/c of SSA and B/S of SSA.

Also prepare SSA(K) under debtors’ system.

Accounting for Branches Including Foreign Branches 15.1

Answer:
Trading and Profit and Loss A/c [SSA]
To Opening Stock 1,080 By Sales
Goods Sent 13,200 Cash 9,700
Sales Return 102 Credit 3,140
Goods returned 72
Closing Stock [BF] 1,470
14,382 14,382
Unload the reserve Unload the reserve
Closing Stock 245 Opening Stock 180
Goods return 12 Goods sent 2,200
Gross Profit 2,123
2,380 2,380
To Discount 58 By Gross Profit 2,123
Bad Debt 37
Expenses 842
Outstanding Expenses 6
Depreciation 84
Net profit 1,096
2,123 2123

Debtors System/ Stock and Debtors System

Question 1: Widespread Ltd. invoices goods to its branch at cost plus 20%. The branch sells
goods for cash as well as on credit. The branch meets its expenses out of cash collected from
its debtors and cash sales and remits the balance of cash to head office after withholding
₹10,000 necessary for meeting immediate requirements of cash. On 31st March, 2012 the
assets at the branch were as follows:

₹(‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500

During the accounting year ended 31st March, 2013 the invoice price of goods dispatched by
the head office to the branch amounted to ₹1 crore 32 lakhs. Out of the goods received by it,
the branch sent back to head office goods invoiced at ₹72,000. Other transactions at the
branch during the year were as follows:

Sahasri Singar Academy 15.2

 ₹(‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842

On 1stJanuary, 2013 the branch purchased new furniture for ₹1 lakh for which payment was
made by head office through a cheque.
On 31st March, 2013 branch expenses amounting to ₹6,000 were outstanding and cash in
hand was again ₹10,000. Furniture is subject to depreciation @ 16% per annum on
diminishing balance method. Prepare Branch Account in the books of head office for the
year ended 31.3.2013.
{CA inter M01}
Answer: Debtors Method
In the Books of Head Office
Branch A/c
To Debit ₹ By Credit ₹
Balance b/d (Branch Assets) Balance b/d (Branch
Liabilities)
Cash in hand 10
Trade debtors 384
Stock 1,080
Furniture and fittings 500
HO to BO BO to HO
Goods sent to branch A/c 13,200 Goods sent to branch A/c 72
Bank A/c (Payment for 100 Bank (Remittance by BO) 11,700
furniture)
Unloading on Unloading on
Goods return 12 Goods sent 2,200
Closing stock 245 Opening stock 180
Balance c/d (Branch Liabilities) Balance c/d (Branch Assets)
Outstanding expenses 6 Cash in hand 10
Trade debtors 485
Stock 1,470
Furniture and fittings 516
Profit and Loss A/c (Net Profit) 1,096
16,633 16,633

Accounting for Branches Including Foreign Branches 15.3

 WN1: Branch Stock A/c
To Opening Balance 1080 By Branch Cash (Sales) 9700
Goods Sent to HO 13200 Goods returned by BO 72
Sales Return 102 Branch Debtors 3140
Closing Balance 1470
14382 14382
WN2: Branch Debtors
To Balance b/d 384 By Branch Cash 2842
To Branch Stock 3140 Branch expenses [Discount] 58
Branch Stock [Return] 102
Branch Expenses [Bad Debt] 37
Balance c/d 485
3,524 3,524
WN3: Branch Cash to Calculate Remittance to HO
To Balance b/d 10 By Expenses 842
Sales 9700 Remittance branch 11700
Cash 2842 Balance c/d 10
12,552 12,552
WN4: Branch Furniture
To Opening Balance 500 By Depreciation (80 + 4) 84
Bank 100 Balance c/d 516
600 600

WN5: Invoice Price and Cost Price Calculation

Let Cost be 100 5
− Profit on cost 20 1
Invoice Price 120 6

Sahasri Singar Academy 15.4

Answer: under Stock and Debtors Method:
Branch Stock A/c
To Opening Balance 1080 By Branch Cash (Sales) 9700
Goods Sent to HO 13200 Goods returned by BO 72
Sales Return 102 By Branch Debtors 3140
Closing Balance 1470
14382 14382
Branch Adjustment
To Closing Stock 245 By Opening Stock(loading) 180
To Gross Profit 2123 By Goods Sent (consignment) 2188
2368 2368
Branch Debtors
To Balance 384 By Branch Cash 2842
To Branch Stock 3140 Branch expenses [Discount] 58
Branch Stock [Return] 102
Branch Expenses [Bad Debt] 37
Balance C/d 485
3,524 3,524
Branch Cash
To Balance 10 By Exp 842
Sales 9700 Remittance branch 11700
Cash 2842 Balance c/d 10
12,552 12,552
Branch Expenses
To Discount 58 By Branch Profit and Loss 1027
Bad Debt 37
Expenses 842
Outstanding Expenses 6
Depreciation 84
1027 1027
Branch Furniture
To Opening Balance 500 By Depreciation (80 + 4) 84
Bank 100 Balancec/d 516
600 600
Branch Profit and Loss
To Branch Expenses 1027 By Branch Adjustment a/c (GP) 2123
Net Profit 1096
2123 2123

Accounting for Branches Including Foreign Branches 15.5

 Under Double Column Method
Branch Account
Particulars CP IP Particulars CP IP
To Opening Balance 900 1080 By Branch Cash (Sales) 9700 9700
Goods Sent to HO 11,000 13200 Branch Debtors 3140 3140
Sales Return 102 102 Goods returned by BO 60 72
Gross Profit 2,123 Closing Balance 1,225 1470
14,125 14,382 14,125 14,382

Memorandum Trading and P/L Method

Trading and Profit and Loss A/c
To Opening Stock 1,080 By Sales
Goods Sent 13,200 Cash 9,700
Sales Return 102 Credit 3,140
Goods returned 72
Closing Stock [BF] 1,470
14,382 14,382
Unload the reserve Unload the reserve
Closing Stock 245 Opening Stock 180
Goods return 12 Goods sent 2,200
Gross Profit 2,123
2,380 2,380
To Discount 58 By Gross Profit 2,123
Bad Debt 37
Expenses 842
Outstanding Expenses 6
Depreciation 84
Net profit 1,096
2,123 2123

Sahasri Singar Academy 15.6

Treatment of abnormal losses in Branch Account.

Stock and Debtors System

Branch Adjustment A/c [up to the loading] Dr. ×××
Branch P/L A/c [profit beyond loading] Dr. ×××
To Branch Stock A/c [Invoice price] ×××

Note: Under debtors’ system, abnormal loss is not recorded.

Stock and Debtors System

Question 2: Concept & Co., with its Head Office at Mumbai has a branch at Nagpur.
Goods are invoiced to the Branch at cost plus 33 1/3%. The following information is
given in respect of the branch for the year ended 31 st March, 2013:

₹
Goods sent to Branch (Invoice Price) 4,80,000
Stock at Branch on 1.4.2012 (Invoice Price) 24,000
Cash sales 1,80,000
Return of goods by customers to the Branch 6,000
Branch expenses (paid in cash) 53,500
Branch debtors balance on 1.4.2012 30,000
Bad debts 1,500
Branch debtors’ cheques returned dishonoured 5,000
Collection from Debtors 2,70,000
Stock at Branch on 31.3.2013 (Invoice Price) 48,000
Branch debtors balance on 31.3.2013 36,500
Discount allowed 1,000

Prepare, under the Stock and Debtors system, the following Ledger Accounts in the
books of the Head Office:
1. Nagpur Branch Stock Account
2. Nagpur Branch Debtors Account
3. Nagpur Branch Adjustment Account.
Also compute shortage of Stock at Branch, if any.
{CA inter M06}

Accounting for Branches Including Foreign Branches 15.7

Answer: Stock and Debtors System
In the books of head office

Nagpur Branch Stock Account

Debit ₹ Credit ₹
To Balance b/d 24,000 By Bank A/c (Cash Sales) 1,80,000
Goods sent Branch 4,80,000 Branch Debtors (Credit Sales) 2,80,000
Branch Debtors 6,000 Stock shortage [Balance]
Branch P/L a/c 1500
Branch Adjustment a/c 500 2,000
Balance c/d 48,000
5,10,000 5,10,000
Nagpur Branch Debtors Account
Balance b/d 30,000 Bank A/c (Collection) 2,70,000
Bank (dishonour of cheques) 5,000 Branch Stock A/c1 6,000
Branch Stock A/c [Balance]2 2,80,000 Bad debts 1,500
Discount allowed 1,000
Balance c/d 36,500
3,15,000 3,15,000
Nagpur Branch Adjustment Account
Branch Stock (loading of loss) 500 Stock Reserve A/c 6,000
[Balance]
Stock Reserve3 12,000 Goods sent to Branch A/c4 1,20,000
Gross Profit c/d5 1,13,500
1,26,000 1,26,000
Profit and Loss A/c
Branch Stock A/c (Cost of loss) 1,500 Gross Profit b/d 1,13,500
Branch Expenses 6 56,000
Net Profit (General P & L A/c) 56,000
1,13,500 1,13,500

𝟏
Note: Loading is 𝟑𝟑 𝟑 % on Cost or 25% on invoice price

1
Loading on opening stock = 24,000  25% = 6,000
2
The balancing figure of Branch Debtors Account is taken as credit sales
3
Loading on Closing Stock = ₹48,000  25% = ₹12,000
4
Loading on goods sent = 4,80,000  25% = ₹1,20,000
5
Gross Profit: (Total sales – Sales Return) × ¼ = {(180,000+ 280,000)-6,000}× ¼ =113,500
6
Total Branch Expenses = Cash expenses + Bad debt + Discount allowed [53,500 +1,500 +1,000 =56,000]

Sahasri Singar Academy 15.8

Stock and Debtors System
Question 3: Mr. Shiv Sunder of Pune has a branch at Dibrugarh. The branch does not
maintain separate books of accounts. The branch has the following assets and liabilities on
31st August, 2001 and 30 September 2001:

31.08.2001 30.09.2001
₹ ₹
Stock of tea 1,80,000 1,50,000
Advance to suppliers 5,00,000 4,50,000
Bank balance 75,000 1,00,000
Prepaid expenses 10,000 12,000
Outstanding expenses 13,000 11,000
Creditors of purchases 3,00,000 To be ascertained

During the month, Dibrugarh branch

a) Received by electronic mail transfer ₹10,00,000 from Pune Head Office.
b) Purchased tea worth ₹12,00,000
c) Sent tea costing ₹12,30,000 to Pune, freight of ₹80,000 being payable at the destination by
the receiver;
d) Paid₹25,000 on office expenses;
e) Paid ₹3,00,000 as advance to suppliers;
f) Paid ₹6,50,000 to suppliers in settlement of outstanding dues.

In addition, Mr. Shiv Sunder informs you that the Pune office had directly paid ₹3,50,000 to
Dibrugarh suppliers by cheques drawn on bank accounts in Pune during the month.
Mr. Shiv Sunder informs you that for the purpose of accounting Dibrugarh branch is not
treated as an outsider. He wants you to write the detailed accounts relating to transactions of
the Dibrugarh branch, namely Dibrugarh Tea Stock A/c, Advance to Suppliers A/c,
Suppliers A/c, Bank A/c and Branch Expenses A/c, as would appear in the books of Pune
Head Office.
{CA inter N97, 10 marks | CMA inter D01, 16 marks}

Accounting for Branches Including Foreign Branches 15.9

Answer:
In the Books of Pune Head Office
Dibrugarh Tea Stock A/c
Date Particulars ₹ Date Particulars ₹
01.09.01 To Balance b/d 1,80,000 30.09.01 By Tea in Transit 12,30,000
30.09.01 Purchases 12,00,000 30.09.01 Balance c/d 1,50,000
13,80,000 13,80,000

Advance to Supplier A/c

Date Particulars ₹ Date Particulars ₹
01.09.01 To Balance b/d 5,00,000 30.09.01 By Suppliers adj. (b/f) 3,50,000
30.09.01 Dibrugarh Bank 3,00,000 30.09.01 Balance c/d 4,50,000
8,00,000 8,00,000

Dibrugarh Suppliers A/c

Date Particulars ₹ Date Particulars ₹
03.09.01 To Advance to Supplier 3,50,000 01.09.01 By Balance b/d 3,00,000
30.09.01 Dibrugarh Bank A/c 6,50,000 30.09.01 Tea Stock A/c 12,00,000
30.09.01 Pune Bank A/c 3,50,000 (Purchases)
30.09.01 Balance c/d (b/f) 1,50,000
15,00,000 15,00,000

Dibrugarh Bank A/c

Date Particulars ₹ Date Particulars ₹
01.09.01 To Balance b/d 75,000 30.09.01 By Advance to Supplier 3,00,000
A/c
30.09.01 Pune Bank 10,00,000 30.09.01 Supplier A/c 6,50,000
A/c
Expenses A/c 25,000
Balance c/d 1,00,000
10,75,000 10,75,000

Branch Expenses A/c

Date Particulars ₹ Date Particulars ₹
01.09.01 To Balance b/d 10,000 01.09.01 By Balance b/d 13,000
30.09.01 Dibrugarh Bank 25,000 30.09.01 Branch P/L b/d 21,000
30.09.01 Balance c/d 11,000 30.09.01 Balance c/d 12,000
46,000 46,000

Sahasri Singar Academy 15.10

Memorandum Trading and P/L A/c
Question 4: From the following particulars, prepare a Memorandum, Trading and Profit &
Loss A/c of Branch and also show the Branch Account as it would appear in the Head Office
Books at the end of the year.

Branch Cash Account

Particulars ₹ Particulars ₹
To Balance 10,500 By Bank 59,000
Sundry Debtors 37,000 Petty Expenses 1,500
Cash Sales 22,500 Balance 9,500
70,000 70,000

Branch Debtors Account

Particulars ₹ Particulars ₹
To Balance 4,000 By Cash 37,000
Sales 60,000 Bills Receivable 2,000
Discount 1,000
Bad debts 500
Balance 23,500
64,000 64,000

Branch Account
Particulars ₹ ₹ Particulars ₹ ₹
To Balance b/d By Balance b/d
Stock 5,000 Expenses outstanding 1000
Cash 10,500 Bank 59,000
Sundry Debtors 4,000 Balance 28,000
Prepaid Expenses 500 20,000
Goods Transferred 60,000
Sundry Expenses 8,000
88,000 88,000
Closing Stock at Branch was ₹6,000 and Expenses outstanding were ₹2,000.
{CMA inter D09, 10 marks}

Accounting for Branches Including Foreign Branches 15.11

Answer:
Memorandum Trading and Profit Account of the Branch
For the year ended 31st March 2009
Particulars ₹ Particulars ₹
To Opening Stock 5,000 By Sales Cash 22,500
Goods Transferred from HO 60,000 Credit 60,000 82,500
Gross Profit 23,500 Closing Stock 6,000
88,500 88,500
Petty Expenses 1,500 Gross Profit 23,500
Other Expenses 8,000
+ Closing Outstanding 2,000
˗ Opening Outstanding 1,000
+ Opening Prepaid Expenses 500 9,500
Discounts 1,000
Bad Debts 500
Net Profit 11,000
23,500 23,500

Branch Account
Particulars ₹ Particulars ₹
To Balance b/d 28,000 By Balance b/d 41,000
Net Profit 11,000 Cash 9,500
Balance c/d Debtors 23,500
(O/s Expenses) 2,000 Stock 6,000
B/R 2,000
41,000 41,000

Inter-branch transfers: [Goods | Remittance | BR & BP]

Goods sent to BO B by BO A as per the direction of HO

HO’s Book BO A’s Book BO B’s Book

B A/c Dr ×× HO A/c Dr ×× Goods A/c Dr ××
To A A/c ×× To Goods A/c ×× To HO A/c ××

Sahasri Singar Academy 15.12

Question 5: Show adjustment Journal entry in the books of Head Office at the end of
April, 2013 for incorporation of inter-branch transactions assuming that only Head
Office maintains different branch accounts in its books.
A. Delhi Branch:
(1) Received goods from Mumbai – ₹35,000 and ₹15,000 from Kolkata.
(2) Sent goods to Chennai – ₹25,000, Kolkata – ₹20,000.
(3) Bill Receivable received – ₹20,000 from Chennai.
(4) Acceptances sent to Mumbai – ₹25,000, Kolkata – ₹10,000.
B. Mumbai Branch (apart from the above):
(1) Received goods from Kolkata – ₹15,000, Delhi – ₹20,000.
(2) Cash sent to Delhi – ₹15,000, Kolkata – ₹7,000.
C. Chennai Branch (apart from the above):
(1) Received goods from Kolkata – ₹30,000.
(2) Acceptances and Cash sent to Kolkata – ₹20,000 and ₹10,000 respectively.
D. Kolkata Branch (apart from the above):
(1) Sent goods to Chennai – ₹35,000.
(2) Paid cash to Chennai – ₹15,000.
(3) Acceptances sent to Chennai – ₹15,000.
Answer:
Journal entry in the books of Head Office
Date Particulars Dr. Dr. Cr.
30.4.03 Mumbai Branch Account Dr. 3,000
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000

WN: Inter – Branch transactions [₹’000]

Delhi Mumbai Chennai Kolkata
A Delhi Branch Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
(1) Received goods 50 35 15
(2) Sent goods 45 25 20
(3) Received Bills receivable 20 20
(4) Sent acceptance 35 25 10
B Mumbai Branch
(1) Received goods 20 35 15
(2) Sent cash 15 22 7
C Chennai Branch
(1) Received goods 30 30
(2) Sent cash and acceptances 30 30
D Kolkata Branch
(1) Sent goods 35 35
(2) Sent cash 15 15
(3) Sent acceptances 15 15
Balance c/d 15 3 70 58
100 100 60 60 120 120 125 125

Accounting for Branches Including Foreign Branches 15.13

Reasons for disagreement of balances between balances in BO as per HO and vice versa
Goods in Transit
Cash in Transit
Proxy Transactions [HO by BO | BO by HO | Depreciation]

HO’s Book BO A’s Book

1 Goods / Cash in transit
Goods / Cash in Transit Dr ×× Or Goods / Cash in Transit Dr ××
To BO A/c ×× To HO A/c ××
Proxy Transaction
[Expenses of BO paid by HO]
2 BO A/c Dr ×× & Expenses A/c Dr ××
To Bank A/c ×× To HO A/c ××
3 [Expenses of HO paid by BO]
Expenses A/c Dr ×× & HO A/c Dr ××
To A A/c ×× To Bank A/c ××

Question 6: Give Journal Entries in the books of Branch A to rectify or adjust the
following:
1. HO expenses ₹3,500 allocated to the Branch, but not recorded in the Branch Books.
2. Depreciation of branch assets, whose accounts are kept by the HO not provided
earlier for ₹1,500.
3. Branch paid ₹2,000 as salary to a H.O. Inspector, but the rupees paid has been
debited by the Branch to Salaries account.
4. H.O. collected ₹10,000 directly from a customer on behalf of the Branch, but no
intimation to this effect has been received by the Branch.
5. A remittance of ₹15,000 sent by the Branch has not yet been received by the H.O.
6. Branch A incurred advertisement expenses of ₹3,000 on behalf of Branch B.
Answer:

Journal Entries
In the books of Branch A In the books of Head Office
Particulars Dr.(₹) Cr.(₹) Particulars Dr.(₹) Cr.(₹)
1 Expenses a/c Dr. 3,500 1 Branch Office a/c Dr. 3,500
To Head office a/c 3,500 To Expenses a/c 3,500
2 Depreciation a/c Dr. 1,500 2 Branch Office a/c Dr. 1,500
To Head office a/c 1,500 To Depreciation a/c 1,500
3 Head office a/c Dr. 2,000 3 Salaries a/c Dr. 2,000
To Salaries a/c 2,000 To Branch Office a/c 2,000

Sahasri Singar Academy 15.14

4 Head office a/c Dr. 10,000 4 Cash a/c Dr. 10,000
To Debtors a/c 10,000 To Branch Office a/c 10,000
5 No entry in branch books 5 Cash in transit a/c Dr. 15,000
To Branch Office a/c 15,000
6 Head Office a/c Dr. 3,000 6 Branch B a/c Dr. 3,000
To Cash a/c 3,000 To Branch A a/c 3,000

Final A/c System:

Question 7: On 31st March, 2013 Kanpur Branch submits the following Trail Balance to its
Head Office at Lucknow:

Debit Balances ₹in lakhs Credit Balances ₹in lakhs

Furniture and Equipment 18 Outstanding Expenses 3
Depreciation on furniture 2 Goods Returned to Head Office 5
Salaries 25 Sales 360
Rent 10 Head Office 80
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 2012 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448 448

Additional Information: Stock on 31st March, 2013 was valued at ₹62 lakhs. On 29th March,
2013 the Head Office dispatched goods costing ₹10 lakhs to its branch. Branch did not
receive these goods before 1st April, 2013. Hence, the figure of goods received from Head
Office does not include these goods. Also, the head office has charged the branch ₹1 lakh for
centralised services for which the branch has not passed the entry.
You are required to:
1. Pass Journal Entries in the books of the Branch to make the necessary adjustments
2. Prepare Final Accounts of the Branch including Balance Sheet, and
3. Pass Journal Entries in the books of the Head Office to incorporate the whole of the
Branch Trial Balance.

Accounting for Branches Including Foreign Branches 15.15

Answer:
Journal entry in the books of Branch Office
Date Particulars Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
Expenses A/c Dr. 1
To Head Office A/c 1

Trading and Profit & Loss Account of the Branch

for the year ended 31st March, 2013
₹ in lakhs ₹ in lakhs
To Opening Stock 60 By Sales 360
Goods received from HO 288 Closing Stock 62
− Returns 5 283
Carriage Inwards 7
Gross Profit c/d 72
422 422
Salaries 25 Gross Profit b/d 72
Depreciation on Furniture 2
Rent 10
Advertising 6
Telephone, Postage & Stationery 3
Sundry Office Expenses 1
Head Office Expenses 1
Net Profit Transferred HO 24
72 72

Balance Sheet as on 31stMarch, 2013

Liabilities ₹in lakhs Assets ₹in lakhs
Head Office 80 Furniture & Equipment 20
+ Goods in transit 10 − Depreciation 2 18
Head Office Stock in hand 62
Expenses 1 Goods in Transit 10
Net Profit 24 115 Debtors 20
Outstanding Expenses 3 Cash at bank and in hand 8
118 118

Sahasri Singar Academy 15.16

 Journal entry in the books of Head Office
Particulars Dr. Dr. Cr.
Branch Trading A/c Dr 355
To Branch A/c 355
[Opening stock + Goods received from HO + carriage inwards] (60+288+7)

Branch A/c Dr 427

To Branch Trading A/c 427
[Total sales + closing stock + Goods returned to HO] [360+62+5]

Branch Trading A/c Dr 72

To Branch Profit and Loss A/c 72
(Gross profit credited to Branch Profit and Loss Account)

Branch Profit and Loss A/c Dr 48

To Branch A/c 48
(Total of branch expenses [25+16+3+1+1+2])

Branch Profit and Loss A/c Dr 24

To Profit and Loss A/c 24
(Net profit at branch credited to (general) Profit & Loss A/c)

Branch Furniture & Equipment Dr 18

Branch Stock Dr 62
Branch Debtors Dr 20
Branch Cash at Bank and in Hand Dr 8
Goods in Transit Dr 10
To Branch A/c 118
(Incorporation of different assets at the branch in H.O. books)

Branch A/c Dr 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding Expenses in H.O. books)

In the Books of HO
Branch Office A/c
Opening Balance 91 Branch Trading A/c 355
Branch Trading A/c 427 Branch P/L A/c 48
Liabilities 3 Assets 118
521 521

Accounting for Branches Including Foreign Branches 15.17

Question 8: From the following information, prepare –
1. Reconciliation of head office a/c in branch office book and branch a/c in the head office
book; and
2. the Trading and Profit & Loss Account of the head office for the year ended 31 st
December, 2001.

Head Office Branch

₹ ₹
Opening Stock 10,000 4,500
Purchases 1,15,000 ---
Sales 2,05,000 1,55,000
Other Expenses 15,200 6,200
Closing Stock 5,200 3,100

The branch book shows the head office a/c as₹9,000 (Cr) and the head office book shows the
Branch a/c as ₹24,000 (Dr). The Branch receives all its supplies from the head office, which
are invoiced at 25% over cost. During the year, the head office sent invoices of ₹1,04,500to
the Branch. The head office credits its sales a/c with the invoice price of the goods sent to the
Branch.
The head office billed the branch for ₹12,000 on 31st December, 2001 representing the
branch’s share of the expenses incurred by the head office. The said expenses had not been
recorded in the books of the branch.
The expenses of the branch are met by the head office from time to time for which cash is
sent in advance to the branch. A sum of ₹3,000 sent to the branch by the head office on 29th
December, 2001 in this connection, was received by the Branch on 3rd January, 2002.
{CMA inter D02, 16 marks}
Answer:
In Branch Books Head Office
Branch Office A/c
Date Particulars ₹ Date Particulars ₹
31.12.01 To Balance c/d 24,000 01.01.01 By Balance b/d 9,000
Cash in Transit A/c 3,000
Branch Expenses 12,000
24,000 24,000
Balance b/d 24,000

Sahasri Singar Academy 15.18

 In Head Office Books Branch
Head Office A/c
Date Particulars ₹ Date Particulars ₹
31.12.01 To Balance b/d 24,000 31.12.01 By Balance c/d 24,000
24,000 24,000
01.01.02 Balance b/d 24,000

Trading and Profit & Loss Accounts

H.O. Branch H.O. Branch
To Opening stock 10,000 4,500 By Sales 2,05,000 1,55,000
Purchase 1,15,000 -- Closing Stock 5,200 3,100
Goods Sent to Branch -- 1,04,500
Goods Profit 85,200 49,100
2,10,200 1,58,100 2,10,200 1,58,100
Other Expenses 15,200 6,200 Gross Profit 85,200 49,100
Stock Reserve 620 -- Stock Reserve 900
Expenses by H.O. -- 12,000
Net Profit 70,280 30,900
86,100 49,100 86,100 49,100

Final A/c System:

Question 9: M/s Shah & Co. commenced business on 1.4.2012 with Head Office at Mumbai
and a Branch at Chennai. Purchases were made exclusively by the Head Office, where the
goods were processed before sale. There was no loss or wastage in processing. Only the
processed goods received from Head Office were handled by the Branch. The goods were
sent to branch at processed cost plus 10%. All sales [whether by Head Office or by the
Branch] were at uniform gross profit of 25% on their respective cost

Following is the Trial Balance as on 31.3.2013.

Head Office Branch
Dr. Cr. Dr. Cr.
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000

Accounting for Branches Including Foreign Branches 15.19

 Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. 8,80,000
31,15,400 31,15,400 10,92,300 10,92,300

Following further information is provided:

1. Goods sent by Head Office to the Branch in March, 2013 of ₹44,000 were not received
by the Branch till 2.4.2013.
2. A remittance of ₹84,300 sent by the Branch to Head Office was also similarly not
received up to 31.3.2013.
3. Stock taking at the Branch disclosed a shortage of ₹20,000 (at selling price).
4. Cost of unprocessed goods at Head Office on 31.3.2013 was ₹1,00,000.
5. Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of
the business as a whole as at 31.3.2013.
Answer:
Trading and P/L A/c
for the year ended 31st March, 2005
in the Books of Shah & Co.
Particulars H.O Branch Total Particulars H.O. Branch Total
₹ ₹ ₹ ₹ ₹ ₹
Purchases 19,69,500 − 19,69,500 Sales 12,80,000 8,20,000 21,00,000
Cost of 50,500 − 50,500 Goods sent to 9,24,000 − −
processing Branch
Goods Stock shortage − 16,000 16,000
received
from H.O. − 8,80,000 − Goods in transit 44,000
Gross profit 3,40,000 1,64,000 5,04,000 Closing stock:
c/d
Processed goods 56,000 2,08,000 2,64,000
Unprocessed 1,00,000 - 1,00,000
goods
23,60,000 10,44,000 25,24,000 23,60,000 10,44,000 25,24,000
Admn. 1,39,000 15,000 1,54,000 Gross profit b/d 3,40,000 1,64,000 5,04,000
Expenses
Selling 50,000 6,200 56,200
Expenses
Stock shortage − 16,000 16,000
Stock reserve 22,909 − 22,909
Net profit 1,28,091 1,26,800 2,54,891
3,40,000 1,64,000 5,04,000 3,40,000 1,64,000 5,04,000

Sahasri Singar Academy 15.20

 Balance Sheet as at 31st March, 2005
Liabilities ₹ Assets ₹
Capital 3,10,000 Debtors
+ Net profit 2,54,891 H.O. 3,09,600
5,64,891 Branch 1,13,600
− Drawings 55,000 5,09,891 Closing stock:
Creditors: Processed goods
H.O. 6,01,400 H.O. 56,000
Branch 10,800 6,12,200 Branch 2,08,000
2,64,000
Less: Stock reserve 18,909 2,45,091
Unprocessed goods 1,00,000
Bank Balance
H.O. 1,52,000
Branch 77,500
Goods in transit 44,000
Less: Stock reserve 4,000 40,000
Cash in transit 84,300
11,22,091 11,22,091

WN 1: Calculation of Closing Stock

1 Stock at Head Office
Cost of goods processed (19,69,500 + 50,500 – 1,00,000) 19,20,000
100
− Cost of goods sent to Branch: (924,000 × ) 8,40,000
110
100
Cost of goods sold (12,80,000 × ) 10,24,000 18,64,000
125
Stock of processed goods with H.O. 56,000

2 Stock at Branch
Goods received from H.O. (at invoice price) 8,80,000
− Invoice value of 100
goods sold: (820,000 × 125) 6,56,000
100
Invoice value of stock shortage:(20,000 × ) 16,000 6,72,000
125
Stock at Branch at invoice price 2,08,000
− Stock Reserve:(208,000 × 10
) 18,909
110
Stock of processed goods with Branch (at cost) 1,89,091

WN2: Stock Reserve:

10
Unrealised profit on Branch stock: (208,000 × ) 18,909
110
10
Unrealised profit on goods in transit: (44,000 × 110) 4,000
22,909

Accounting for Branches Including Foreign Branches 15.21

Foreign branch:
Usually accounts maintained independently
in the currency of the country in which they operate and
translated into Reporting Currency

Foreign Currency Translation

Integral Foreign Operation Non-Integral Foreign Operation
1 Revenue Items Rate at the time of transaction Rate at the time of transaction
(or average rate) (or average rate)
2 B/S items
𝑎 Monetary closing rate closing exchange rate
𝑏 Non-monetary [including contingent liability]
-Purchased Rate on the date of purchase
-Revalued Rate on the date of valuation
𝑐 Closing inventory Closing rate
3 Exchange difference Charged to P/L A/c Foreign currency translation reserve

Foreign Branch: [Reporting currency is ₹]

Question 10: S & M Ltd., Bombay, have a branch in Sydney, Australia. At the end of
31stMarch, 2013, the following ledger balances have been extracted from the books of the
Bombay Office and the Sydney Office:

₹ in `000
Bombay HO Sydney BO
Debit Credit Debit Credit
₹ ₹ A$ A$
Share Capital – 2,000 – –
Reserves and Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Depreciation Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (01.04.2012) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –

Sahasri Singar Academy 15.22

 Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390

The following information is also available:

1. Stock as at 31.3.2013 :
a. Bombay ₹1,50,000
b. Sydney A $ 3,125
2. Head Office always sent goods to the Branch at cost plus 25%.
3. Provision is to be made for doubtful debts at 5%.
4. Depreciation is to be provided on buildings at 10% and on plant and machinery at 20%
on written down values.
5. Outstanding commission to the Managing Director – ₹41
6. Income–tax is to be provided at ₹934.
You are required:
1. To convert the Branch Trial Balance into rupees; use the following rates of exchange

Rate as on Opening Closing Average Fixed asset

₹ / per A$ 20 24 22 18

2. To prepare the Trading and Profit & Loss Account for the year ended 31stMarch, 2013
showing to the extent possible H.O. results and Branch results separately. (Balance
Sheet not required.)
Answer:
(a) S & M Ltd. Sydney Branch TB
as on 31stMarch, 2013
(in ‘000 Rupees)
In ₹ Rate ₹per In A$
Dr. Cr. A$ Dr. Cr.
Plant & Machinery (cost) 200 – HR 18 36,00
Plant & Machinery Dep. Reserve – 130 HR 18 23,40
Debtors / Creditors 60 30 CR 24 14,40 7,20
Stock (1.4.94) 20 – AR 20 4,00

Accounting for Branches Including Foreign Branches 15.23

 Cash & Bank Balances 10 – CR 24 2,40
Purchase / Sales 20 123 AR 22 4,40 27,06
Goods received from H.O. 5 – Act - 1,00
Salaries 45 – AR 22 9,90
Rent 12 – AR 22 2,64
Office expenses 18 – AR 22 3,96
Commission Receipts – 100 AR 22 22,00
H.O. Current A/c – 7 Act - 1,20
390 390 78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
[HR = Historical Rate, OR = Opening Rate, CR = Closing Rate, AR = Average Rate and Act = Actual]

(b) Trading and P/L A/c

for the year ended 31stMarch, 2013 (in thousands)
H.O. Branch Total H.O. Branch Total
To Opening Stock 1,00 4,00 5,00 By Sales 5,20 27,06 32,26
Purchases 2,40 4,40 6,80 Goods sent to 1,00 – 1,00
Goods – 1,00 1,00 Branch
received
from Head Closing Stock 1,50 75 2,25
Office
Gross profit 4,30 18,41 22,71
c/d
7,70 27,81 35,51 7,70 27,81 35,51
Salaries 75 9,90 10,65 Gross Profit B/d 4,30 18,41 22,71
Rent - 2,64 2,64 Commission 2,56 22,00 24,56
receipts
Office 25 3,96 4,21
expenses
Provision for 14 72 86
DD
Depreciation 4,60 2,52 7,12
Balance c/d 1,12 20,67 21,79
6,86 40,41 47,27 6,86 40,41 47,27

General Profit and Loss A/c

To Exchange loss 2,16 By Balance b/d 21,79
Branch Stock Reserve 75×1/5 15 Branch Stock reserve 4
MD’s Remuneration 30

Sahasri Singar Academy 15.24

 MD’s Commission 41
Provision for Income-tax 934
Balance c/d 947
21,83 21,83

Balance Sheet
Liabilities HO BO ₹ Assets HO BO ₹
S. Capital 2000 Land 500
Reserves and Surplus 1,000 Building 1000
Net Profit 947 −Provision for depreciation 200
Creditors 200 720 920 800
Branch Stock Reserve 15 −Depreciation (10%) 80
MD’s Commission 41 720 720
Provision for Taxation 934 Plant and Machinery 2500 3600
−Provision for depreciation 600 2340
1900 1260
−Depreciation (20%) 380 252
1520 1008 2528
Debtors 280 1440
−Provision for DD 14 72
266 1368 1634
Cash 10 240 250
Stock in trade 150 75 225
5,857 5,857

Foreign Branch: [Reporting currency is $]

Question 11: Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai
(India). Mumbai branch furnishes you with its trial balance as on 31stMarch, 2013 and the
additional information given thereafter:

₹in ‘000
Dr. Cr.
Stock on 1stApril, 2012 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240 –

Accounting for Branches Including Foreign Branches 15.25

 Bank balance 420 –
New York office a/c – 1,620
3,360 3,360

Additional information:
1. Computers were acquired from a remittance of US $6,000 received from New York head
office and paid to the suppliers. Depreciate computers at 60% for the year.
2. Unsold stock of Mumbai branch was worth ₹4,20,000 on 31st March, 2013.
3. The rates of exchange may be taken as follows:
on 1.4.2012 @ ₹40 per US $
on 31.3.2013 @ ₹42 per US $
average exchange rate for the year @ ₹41 per US $
4. Conversion in $ shall be made up to two decimals.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2013 and the balance sheet as on that date of Mumbai branch as would appear in the books
of New York head office of Carlin & Co. You are informed that Mumbai branch account
showed a debit balance of US $ 39609.18 on 31.3.2013 in New York books and there were no
items pending reconciliation.
Answer:

Carlin & Co. Ltd. Mumbai Branch

Trial Balance in (US $) as on 31st March, 2013
Dr. Cr Rate ₹ Dr. Cr
₹in ‘000 $ In $
Stock on 1st April, 1998 300 – OR 40 7,500.00 –
Purchases and sales 800 1,200 AR 41 19,512.20 29,268.29
Sundry Debtors and creditors 400 300 CR 42 9,523.81 7,142.86
Bills of exchange 120 240 CR 42 2,857.14 5,714.29
Wages 560 – AR 41 13,658.54 –
Rent, rates and taxes 360 – AR 41 8,780.49 –
Sundry charges 160 – AR 41 3,902.44 –
Computers 240 – Act – 6,000.00 –
Bank balance 420 – CR 42 10,000.00 –
New York office a/c – 1,620 Act 39,609.18
3,360 3,360 81,734.62 81,734.62
[OR = Opening Rate, CR = Closing Rate, AR = Average Rate and Act = Actual]

Sahasri Singar Academy 15.26

 Trading and Profit & Loss Account
for the year ended 31stMarch, 2013
US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
Purchases 19,512.20 Closing stock 10,000.00
Wages and salaries 13,658.54 Gross Loss c/d 1,402.45
40,670.74 40,670.74
Gross Loss b/d 1,402.45 Net Loss 17,685.38
Rent, rates and taxes 8,780.49
Sundry charges 3,902.44
Depreciation on computers 3,600.00
(US $ 6,000 × 0.6)
17,685.38 17,685.38

Balance Sheet of Mumbai Branch as on 31st March, 2013

Liabilities US $ Assets US $ US $
New York Office A/c 39,609.18 Computers 6,000.00
− Net Loss 17,685.38 21,923.80 Less: Depreciation 3,600.00 2,400.00
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95

Accounting for Branches Including Foreign Branches 15.27