TYBAF SEM-V FINANCIAL ACCOUNTING-V-munotes

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1 1
UNDERWRITING OF SHARES &
DEBENTURES
Unit Structure
1.1 Introduction
1.2 Underwriting
1.3 Underwriting Commission
1.4 Provision of Companies Act with respect to Payment of underwriting
commission
1.5 Underwriters, Sub -underwriters & Brokers
1.6 Types of underwriting
1.7 Marked, Unmarked & Firm -underwriting applications
1.8 Accounting treatment for underwriting of shares & debentures
1.9 Liability of the underwriters in respect of underwriting contract
1.10 Illustration
1.1 INTRODUCTION
In case of P ublic Ltd. companies, a minimum subscription must be
received in order to name that issue as a successful one. When a company
goes in for an initial public offer (IPO), it may face certain uncertainty
about whether its offer of shares or other securities w ill be subscribed in
full or not. If the public issue does not get fully subscribed, the project for
which the funds are being raised cannot be implemented. As per law, it is
required that if the company is not able to collect 90% of the offer amount,
then it needs to compulsorily return the money to those who have
subscribed to the shares . Companies in order to ensure minimum
subscription take the help of the procedure called underwriting. If the
whole or a certain portion of the shares or debentures of t he company is
not applied for by the public, the underwriters themselves apply or
persuade others to apply for those shares or debentures. The underwriters,
as risk -takers, are entitled to get commission at prescribed rates.
Depending upon the risk assessm ent of the issue, the underwriters decide
on their amount of commission.
1.2 UNDERWRITING
Underwriting means guaranteeing to subscribe to an agreed number of
shares or debentures for a certain consideration. The public companies munotes.in

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Financial Accounting
2 enter into underwriting ar rangements when it goes for IPO. The person or
institution who underwrites the issue is cal led “underwriters and the
commission so paid is known as “Underwriting Commission .
1.3 UNDERWRITING COMMISSION
A commission is given to the underwriters for underwriting work, this
commission is known as Underwriting Commission. This commission is
found out on the issue price of the shares and debentures underwritten.
Commission to the underwriters is paid on the whole of issue underwritten
irrespective of the fact that whole of the issue has been subscribed by the
public or not. Underwriting commission c an be paid only when it is
authorised by the Articles of Association
1.4 PROVISION OF COMPANIES ACT WITH RESPECT
TO PAYMENT OF UNDERWRITING COMMISSION
Section 40 (6) of the Companies Act 2013, provides that a company may
pay commission to any person in con nection with the subscription or
procurement of subscription to its securities, whether absolute or
conditional, subject to the following conditions which are prescribed under
Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) the payment of such commission shall be authorized in the company’s
articles of association
(b) the commission may be paid out of proceeds of the issue or the profit
of the company or both
(c) the rate of commission paid or agreed to be paid shall not exceed, in
case of shares, five percent (5%) of the price at which the shares are issued
or a rate authorised by the articles, whichever is less, and in case of
debentures, shall not exceed two and a half per cent (2.5 %) of the price at
which the debentures are issued, o r as specified in the company’s articles,
whichever is less;
(d) the prospectus of the company shall disclose –
 the name of the underwriters; – the rate and amount of the
commission payable to the underwriter; and
 the number of securities which is to be u nderwritten or subscribed
by the underwriter absolutely or conditionally.
(e) there shall not be paid commission to any underwriter on securities
which are not offered to the public for subscription;
(f) a copy of the contract for the payment of commission is delivered to
the Registrar at the time of delivery of the prospectus for registration.
Thus, the Underwriting commission is limited to 5% of issue price in case
of shares and 2.5% in case of debentures. The rates of commission given munotes.in

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Underwriting o f Shares &
Debentures
3 above are maximum r ates. The company is free to negotiate lower rates
with underwriters.
In short:
 Underwriting commission may be paid in cash or in fully paid -up
shares or debentures or a combination of all these.

 Companies Act, 2013 provides that payment of commission sho uld be
authorized by Articles of Association and the maximum commission
payable will be as under:

In case of shares 5% of the issue price of the share
In case of
debentures 2.5% of the issue price of
debenture

1.5 UNDERWRITERS, SUB -UNDERWRITERS&
BROKER S
Underwriters: The person or institutions underwriting a public issue of
shares and debentures are called underwriters. The underwriters may be
individuals, partnership firms, joint stock companies, banks and financial
institutions. Ex: ICICI, SFC’s, LIC etc. A person can only act as an
underwriter if he/she a certificate granted by SEBI.
Sub-underwriters: An underwriter may appoint several underwriters to
work under him/her. Such underwriters are termed as sub -underwriters
They have no contract with the co mpany. They get their remuneration
from the underwriters who are responsible to them.
Brokers: Brokers only help in getting the shares or debentures sold and do
not offer any guarantee to take the unsubscribed shares. Consideration
paid to the brokers is k nown as brokerage.
1.6 TYPES OF UNDERWRITING
An underwriting agreement may be of any one of the following types:
(a) Complete Underwriting : If the whole of the issue of shares or
debentures of a company is underwritten, it is said to be complete
underwriting . It may be written by:
I. One firm/institution (or)
II. More than one person/institution
If the full issue is underwritten by one underwriter, then his liability will
be equal to the number of shares or debentures underwritten minus shares
applied for. munotes.in

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Financial Accounting
4 Ex: If S Ltd. makes a public issue of 40,000 equity shares of 10 each at a
premium of 490 per share and the entire issue of 40,000 equity shares is
underwritten by A, B & C in the ratio of 2:2:1.
(b) Partial Underwriting: If a part of the issue of shares or debenture o f a
company is underwritten, it is said to be partial underwriting. Such an
underwriting may be done by one underwriter or by a number of
underwriters. In case of partial underwriting, the company is treated as
‘underwriter’ for the remaining part of the i ssue.

Ex: If S Ltd. makes a public issue of 40,000 equity shares of 10 each at a
premium of 490 per share and the 20,000 equity shares are underwritten
by A, B & C in the ratio of 2:2:1, it is called partial underwriting.

(c) Firm Underwriting: It is a firm commitment by an underwriter to
take up a specified number of shares or debentures of the company
irrespective of the number of shares or debentures subscribed by the
public. In firm underwriting, the underwriters are committed to take up
the agreed numbe r of shares or debentures in addition to unsubscribed
shares or debentures, if any. Even if the issue is over -subscribed, the
underwriters are liable to take up the agreed number of shares of
debentures.

Suppose a company has issued 4,00,000 shares of Rs .10 each out of which
underwriting is 30,000 shares. Public subscribed for all 4,00,000 shares.
As 30,000 shares are reserved for underwriters, only 4,00,000 – 30,000
i.e., 3,70,000 shares will be issued to pubic and application money of
remaining 30,000 s hares will be returned to the public.

Normally, an underwriter cannot set off his firm underwriting liability, but
if the contract provides setting off firm underwriting out of underwriting
liability, it may be done.
1.7 MARKED, UNMARKED & FIRM -UNDERWRITI NG
APPLICATIONS
Marked Application: When shares and debentures of the company are
issued to the public, whatever shares and debentures are issued by the
underwriters to the public, they place a seal of their name and address on
the application form; and whe n the form bearing seal of the underwriters is
received by the company, it becomes clear to the company as how many
forms are due to the efforts of a particular underwriter. Such applications
bear the stamp of the underwriter and the credit for these appli cations are
given to the individual underwriter. This is necessary in the case of such
companies whose shares are underwritten by a number of underwriters.
Unmarked Application: The ‘unmarked’ applications are those
applications which bear no stamp of an u nderwriter. These applications
are received by the company directly from the public. When there is more
than one underwriter, the unmarked applications are divided amongst
Underwriters in the ratio of their gross liability. munotes.in

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Underwriting o f Shares &
Debentures
5 Firm Underwriting applications:
1. When credit for firm underwriting given to individual
underwriter: Firm underwriting shall be deducted from the gross
liability first and the calculation shall be done without considering the
firm underwriting and after determining the liability on accou nt of
underwriting, firm underwriting is added.

2. When the credit for firm underwriting not given to individual
underwriter: If the credit for the firm underwriting is not to be given
to individual underwriter, those shall be treated as unmarked
application s.
Types of
Application Treatment
Marked Application Always credited to the individual underwriter
Unmarked Always distributed among all the underwriters
Firm Underwriting The applications for the firm shares are either
credited to individual underwrite r or credited to
all depending upon the conditions of underwriting
agreement

Note: The distinction between marked and unmarked applications
becomes immaterial when the whole issue is subscribed by only one
underwriter. When the issue is fully subscribed, the distinction between
marked and unmarked applications becomes immaterial.
1.8 ACCOUNTING TREATMENT FOR
UNDERWRITING OF SHARES & DEBENTURES
Date Particulars Amount
1 When shares & debentures are
allotted to underwriters in
respect to their liability Underwriters A/c Dr..
To Share Capital A/c (or)
ToDebenturesA/c
To Securities Premium A/c With the value of the
shares & debentures
taken up by the
underwriters

2 When commission becomes
payable to the underwriters Underwriting Commissi on A/c Dr..
To Underwriters A/c With the amount of
commission due on
the total issue price of
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Financial Accounting
6 3 When the net amount due from
the underwriters on the shares or
debentures taken up by them is
received
Bank A/c Dr..
To Underwriters A/c With the net amount
due
4 When the net amount due to the
underwriters for commission on
the shares or debentures
underwritten
Underwriters A/c Dr.. To Bank A/c With the net amount
due


1.9 LIABILITY OF THE UNDERWRITERS IN RESP ECT
OF UNDERWRITING CONTRACT
Statement showing Net and Total liability of underwriters:
No Particulars Basis A B
A Gross Liability Ratio of shares
underwritten XXX XXX
B Less: Marked
Application (excluding
firm underwriting) Actual XXX XXX
C Balance (A – B) XXX XXX
D Less: Unmarked
applications allotted in
the ratio of gross
liability Ratio of gross liability XXX XXX
E Balance (C – D) XXX XXX
F Less: Firm
Underwriting Actual or Ratio of
Gross Liability XXX XXX
G Net liability as per
agreement (if no
balance is negative) (E – F) XXX XXX
H Add: Firm
Underwriting XXX XXX
I Total Liability XXX XXX

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Underwriting o f Shares &
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7 Statement showing the Net Amount Due From/To of Underwriters
No Particulars A B
A Total Liability (including firm underwriting) (No
of shares) xxx xxx
B Amount due on total liability xxx xxx
C Less: amount already paid on Firms Applications xxx xxx
D Amount due on net liability xxx xxx
E Less: Underwriting Commission xxx xxx
F Net amount due to underwriters (if DNet amount from underwrite rs (if D>E) xxx xxx

Practical Problems
Q.1. Alpha Ltd. was incorporated on 1st April 2022 and issued a
prospectus inviting applications for 500,000 equity shares at Rs. 10 each
per share. The whole issue was fully underwritten by four individuals, as
shown in the following:
 W: 200,000 shares
 X: 150,000 shares
 Y: 100,000 shares
 Z: 50,000 shares
Applications were received for 450,000 shares, of which the marked
applications were as follows:
 W: 220,000 shares
 X: 90,000 shares
 Y: 110,000 shares
 Z: 10,000 shar es
Required: Calculate the liabilities of individual underwriters. (Full
Underwriting)



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Financial Accounting
8 Solution:
Details W X Y Z Total No of shares
underwritten 2,00,000 1,50,000 1,00,000 50,000 5,00,000 Less: Marked
Application (2,20,000) (90,000) (1,10,000) (10,00 0) (4,30,000) Balance (20,000) 60,000 (10,000) 40,000 70,000 Less: Unmarked
Applications (8,000) (6,000) (4,000) (2,000) (20,000) Balance (28,000) 54,000 (14,000) 38,000 50,000 Surplus of W &
Y distributed to
X & Z in ratio of
15:5 +28,000 (31,500) +14,000 (10,500) NIL Net Liability NIL 22,500 NIL 27,500 50,000
Num ber of unmarked applications =Total shares applied for – Marked
Applications
= 4,50,000 – 4,30,000
= 20,000 shares
Q.2. Beta Ltd. issued 100,000 shares valued at Rs. 100 per shar e. The
shares were underwritten as follows:
 X: 30,000 shares
 Y: 50,000 shares
The public applied for 70,000 shares.
Required: Determine the liability of X, Y, and the company (Partial
Underwriting)
Solution:
X Y Company Total
Gross Liability 30,000 50,000 20,000 1,00,000
Less: Application received in
the ratio of 30:50:20 21,000 35,000 14,000 70,000
Net Liability 9,000 15,000 6,000 30,000

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Underwriting o f Shares &
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9 Q.3. Deni Limited issued 10,000 shares valued at Rs. 100 each. The entire
issue was underwritten as follows:
 A: 50%
 B: 30%
 C: 20%
In addition, there was firm underwriting as follows:
 A: 1,000 shares
 B: 750 shares
 C: 500 shares
The total subscription, including firm underwriting, was 8,000 shares. The
subscription included the following marked applications:
 A: 1,500 shares
 B: 2,000 shares
 C: 750 shares
Required: Calculate the liability of the underwriters. (Firm Underwriting)
Solution:
A B C Total
Gross Liability 5,000 3,000 2,000 10,000
Less: Marked
Application (1,500) (2,000) (750) (4,250)
Balance 4,500 1,000 1,250 5,750
Less: Unmarked
Application (5:3:2) (1,875) (1,125) (750) (3,750)
Balance 2,625 (125) 500 2,000
Surplus of B to be
distributed between
A & C in ratio 5:2 (89) +125 (36) -
Balance 1,536 - 464 2,000
Add: Firm
underwriting 1,000 750 500 2,250
Net Liability 2,536 750 964 4,250

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Financial Accounting
10 Q.4. Sardar Limited issued to public 1,50,000 equity shares of Rs. 100
each at par. Rs. 60 per share was payable along with application and the
balance on allotment. This issue was underwritten equally by Ali, Bali and
Charlie for a commission of 2.5 per cent. Applications for 1,40,000 shares
were received as per details:
Underwriter Firm
Application Marked
Application Total
Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked
Applica tions 7,000
Total 1,40,000

It was agreed to credit the unmarked applications equally to Ali and
Charlie. Sardar Limited accordingly made the allotment and received the
amounts due from the public. The underwriters settled their accounts.
Prepare a s tatement showing the liability of the underwriters.
Solution: Statement showing underwriters liabilities
Name of the
Underwriters Ali Bali Charlie Total
Gross Liability 50,000 50,000 50,000 1,50,000
Less: Marked
Applications (40,000) (46,000) (34,000) (1,20,000)
Less: Unmarked to
be distributed
between Ali &
Charlie (1:1) (3,500) - (3,500) (7,000)
Less: Firm
Underwriting (5,000) (5,000) (3,000) (13,000)
Balance 1,500 (1,000) 9,500 10,000
Surplus of Bali
distributed between
Ali & Charlie in
ratio (1:1) (500) +1,000 (500) -
Balance 1,000 - 9,000 10,000
Add: Firm
Underwriting 5,000 5,000 3,000 13,000
Net Liability (no. of
shares) 6,000 5,000 12,000 23,000 munotes.in

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Underwriting o f Shares &
Debentures
11 Amount due @ Rs.
60 per share 3,60,000 3,00,000 7,20,000 13,80,000
Less: Amount paid
on firm ap plication (3,00,000) (3,00,000) (1,80,000) (7,80,000)
Less: Underwriting
Commission @
2.5% on issue price (1,25,000) (1,25,000) (1,25,000) (3,75,000)
Net Liability (in Rs.) (65,000) (1,25,000) 4,15,000 2,25,000

Q.5. K Ltd. issued for subscription 25,0 00 shares at a premium of Rs. 10
each The issue was underwritten as follows:
A: 15,000 shares; B: 7,500 shares & C: 2,500 shares.

Firm application is as follows:
A: 2,500 shares; B: 1,000 shares & C: 500 shares.
Out of the total issue, 22,500 shares i ncluding firm underwriting were
subscribed. Marked form details:
A: 8,000 shares; B: 5,000 shares & C: 2,500 shares.

Required:
 If the firm underwriting shares are treated as unmarked application,
then what is the net liability of each underwriter?

 If the firm underwriting shares are treated as marked application, then
what is the net liability of each underwriter?
Solution:
When firm underwriting shares are treated as unmarked application:
Particulars A B C Total
Gross Liability 15,000 7,500 2,500 25,000
Less: Marked
applications (5,500) (4,000) (2,000) (11,500)
Less:
Unmarked
Applications* (6,600) (3,300) (1,100) (11,000)
Balance 2,900 200 (600) 2,500
Surplus of C
(150:75) (400) (200) +600 -
Balance 2,500 - - 2,500
Add: Firm
Underwriting 2,500 1,000 500 4,000
Net Liability 5,000 1,000 500 6,500
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Financial Accounting
12 *Calculation of net unmarked application:
Unmarked Applications 7,000
Add: Firm underwriting 4,000
11,000
When firm underwriting shares are treated as marked application:
Particulars A B C Total
Gross Liability 15,000 7,500 2,500 25,000
Less: Marked
applications
(including firm
underwriting) (8,000) (5,000) (2,500) (15,500)
Less:
Unmarked
Applications (4,200) (2,100) (700) (7,000)
Balance 2,800 400 (700) 2,500
Surplus of C
(150:75) (467) (233) +700 -
Balance 2,333 167 - 2,500
Add: Firm
Underwriting 2,500 1,000 500 4,000
Net Liability 4,833 1,167 500 6,500

Q.6. Sam Ltd invited applications from public for 1,00,000 equity shares
of Rs. 10 each at a premium of Rs. 5 per share. The entire is sue was
underwritten by the underwriters A, B, C and D to the extent of 30%,
30%, 20% and 20% respectively with the provision of firm underwriting
of 3,000, 2000, 1,000 and 1,000 shares respectively. The underwriters
were entitled to the maximum commission permitted by law. The
company received applications for 70,000 shares from public out of which
applications for 19,000, 10,000, 21,000and 8,000 shares were marked in
favour of A, B, C and D respectively. Calculate the liability of each of the
underwriters . Also ascertain the underwriting commission payable to the
different underwriters.








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Underwriting o f Shares &
Debentures
13 Solution:
Statement showing the Liability of Underwriters

Details A B C D
Gross Liability 30,000 30,000 20,000 20,000
Less: Marked
Applications (19,000) (10,00 0) (21,000) (8,000)
Less:
Unmarked
Applications (5,700) (5,700) (3,800) (3,800)
Balance 5,300 14,300 (4,800) 8,200
Surplus of C
distributed
between A, B
& D in the
ratio 3:3:2 (1,800) (1,800) +4,800 (1,200)
Balance 3,500 12,500 Nil 7,000
Add: Firm
Underwriting 3,000 2,000 1,000 1,000
Total Liability 6,500 14,500 1,000 8,000

Underwriters Commission as per law:
A: 30,000 x 15 x 5% = 22,500
B: 30,000 x 15 x 5% = 22,500
C: 20,000 x 15 x 5% = 15,000
D: 20,000 x 15 x 5% = 15,000

Q.7. Rambo Ltd. came out with an issue of 45,00,000 equity shares of Rs.
10 each at a premium of Rs. 2 per share. The promoterstook 20% of the
issue and the balance was offered to the public. The issue was equally
underwritten by A & Co; B & Coand C & Co.

Each underwriter took fi rm underwriting of 1,00,000 shares each.
Subscriptions for 31,00,000 equity shareswere received with marked
forms for the underwriters as given below:
A & Co. 7,25,000 shares
B & Co. 8,40,000 shares
C & Co. 13,10,000 shares
Total 28,75,000 shares

The unde rwriters are eligible for a commission of 5% on face value of
shares. The entire amount towardsshares subscription has to be paid along
with application.


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Financial Accounting
14 You are required to:
(a) Compute the underwriter’s liability (number of shares);
(b) Compute the a mounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Scorpio Ltd. relating to
underwriting
Solution:
Total no. of shares issued 45,00,000
Less: Shares taken over by
the promoter 9,00,000
Shares offered to general
public 36,00,000

Statement showing the liability of underwriters
Details A & Co B & Co C & Co
Gross Liability 12,00,000 12,00,000 12,00,000
Less: Marked
Application (7,25,000) (8,40,000) (13,10,000)
Less: Unmarked
Applications (75,000) (75,000) (75,0 00)
Balance 4,00,000 2,85,000 (1,85,000)
Less: Firm
Underwriting (1,00,000) (1,00,000) (1,00,000)
Balance 3,00,000 1,85,000 (2,85,000)
Surplus of C &
Co to be
allocated to A &
Co and B& Co in
ratio 1:1 (1,42,500) (1,42,500) +2,85,000
Balance 1,57,500 42,500 N
Add: Firm
Liability 1,00,000 1,00,000 1,00,000
Total Liability 2,57,500 1,42,500 1,00,000

Calculation of unmarked applications:
Total Subscriptions 31,00,000
Less: Marked applications (28,75,000)
Total Unmarked Applications 2,25,000
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Underwriting o f Shares &
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15 State ment Showing the Amount Due from (due to) Underwriters
Details A & Co B & Co C & Co
Number of shares to be
subscribed (including firm
underwriting) 2,57,500 1,42,500 1,00,000
Amount payable @ Rs. 12 each 30,90,000 17,10,000 12,00,000
Less: Amount paid o n firm
application @ Rs. 12 each on
1,00,000 shares 12,00,000 12,00,000 12,00,000
Balance payable 18,90,000 5,10,000 Nil
Underwriting @ 5% on
12,00,000 shares @ 10 each 6,00,000 6,00,000 6,00,000
Amount received/(paid) 12,90,000 (90,000) (6,00,000)

Journal Entries
In the books of Scorpio Ltd.
Date Particulars Debit
(INR) Credit
(INR)
Bank A/c Dr..
To Share Application A/c 36,00,000 36,00,000 A & Co A/c Dr..
B & Co A/c Dr.
Share Application A/c
To Equity Share Capital A/c
To Securitie s Premium A/c 18,91,000 5,10,000 36,00,000 50,00,000 10,00,000 Underwriting Commission A/c
Dr..
To A & Co A/c
To B & Co A/c
To C & Co A/c 18,00,000 6,00,000 6,00,000 6,00,000 Bank A/c Dr..
To A & Co A/c 12,90,000 12,90,000 B & Co A/c Dr..
C & Co A/c Dr..
To Bank A/c 90,000 6,00,000 6,90,000
Points to be noted: Unless it has been otherwise agreed, the underwriters’
liability is to be determined without taking intoconsideration the number
of shares taken up ’firm’ by him.In the examination if nothing is
mentioned, the position should be cleared by way of a note.Students are
free to adopt any assumptions in such situation. munotes.in

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Financial Accounting
16 Q.8. A entered into an underwriting agreement with B Ltd. for 60% of the
issue of 15% Rs. 50,00,000 deben tures with a firmunderwriting of Rs.
5,00,000. Marked applications were for Rs. 35,00,000 debentures.
Calculate the liability of the underwriterand the commission payable to
him.
Solution: A’s liability is limited to 60% of Rs. 50,00,000 i.e., Rs.
30,00,0 00. Marked applications were received for Rs. 35,00,000. The
issue isoversubscribed but there is a firm underwriting. Therefore, the
liability of the underwriter is limited to the extent of firm underwritingi.e.,
Rs.5,00,000.
Commission is payable @ 2.5% o f issue price. Therefore, the amount of
commission will be = 2.5% of Rs. 30,00,000 = Rs. 75,000(assuming that
debentures were issued at par)
EXERCISE
Objective type:
1. Define Underwriting & Underwriting Commission
2. What are the provisions of Companies Act wit h respect to payment of
underwriting commission
3. Explain the difference between underwriters, sub -underwriters &
brokers.
4. What are the different types of underwriting?
5. Explain the following terms:
a. Marked Application
b. Unmarked Application
6. What is Firm Underwr iting?
Multiple Choice:
Select the best choice to complete each sentence or answer each question
below:
1. The payment of commission to underwriter(s) is to be authorised by
A: the board of directors
B: the articles of association
C: the memorandum of asso ciation
2. A share broker or merchant banker can act as a underwriter provided he
holds a certificate granted by
A: Government of India
B: Company Law Board
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Underwriting o f Shares &
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17 3. In respect of every underwritten issue, the merchant banker(s) shall
undertake a minimum obligation of
A. 5% of the total underwriting commitment or ~ 35 lacs
whichever is less
B. 10% of the total underwriting commitment or ~ 20 lacs
whichever is less
C. 5% of the total underwriting commitment or ~ 25 lacs
whichever is less.
4. As per the pr ovision of the Companies Act, 2013, in case of shares, the
commission paid or agreed tobe paid does not exceed
A 2%
B 2.5%
C 5%
5. As per the provision of the Companies Act, 2013, in case of debentures,
the commission paid or agreedto be paid does not exceed
A 2%
B 2.5%;
C 5%
Answers: 1 - B; 2 - C; 3 - C; 4 - C; D - B
Practice Questions
1. Cybertech Ltd. issued 1,00,000 shares for public subscription and these
were underwritten by A, B & C in the ratio of 25%, 30% & 45%
respectively. Appli cations were received for 80,000 shares and of these
applications for 16,000 shares had the stamp of A, those for 20,000 shares
had the stamp of B and those for 24,000 shares had the stamp of C. The
remaining applications did not bear any stamp. Calculate the net liability
of underwriters in shares.
(Answer: A – 4,000 shares; B – 4,000 shares; C – 12,000 shares)

2. Sampada Ltd. was formed with a capital of 2,00,000 equity shares of
Rs.10 each. All shares were issued to public for subscription. Issue was
underwritten as follows: Ajay: 80,000 shares; Bijo: 60,000 shares & Rajat:
60,000 shares. Marked application were received in favour of Ajay for
32,000 shares, Bijo for 58,000 shares and Rajat for 42,000 shares.
Applications for 30,000 shares was not marked. Calculate the net
liabilities of underwriters in shares.
(Answer: Ajay – 32,000 shares; Bijo – NIL; Rajat – 6,000 shares)

3. Aaadinath Co. Ltd was incorporated on 01.06.2022, issued a prospectus
inviting applications for 5 lakhs equity shares of Rs.10 ea ch. The whole munotes.in

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Financial Accounting
18 issue was fully underwritten by A, B, C & D as follows A -2,00,000. B –
1,50,000 C -1,00,000 & D50,000 shares. Applications were received for
4,50,000 shares of which marked applications were as follows: A -
2,20,000: B – 1,10,000; C – 90,000; D -10,000. You are required to find
out the Net liability of each underwriter and also calculate the commission
received by each underwriter as per Company’s Act of 2013.
(Answer: Net Liability A – Nil; B – 17,500; C – Nil; D – 32,500
Underwriters Commission A – 2,00,000*10*5% = Rs. 1,00,000
B – 1,50,000*10*5% = Rs. 75,000
C – 1,00,000*10*5% = Rs. 50,000
D – 50,000*10*5% = Rs. 25,000)
4. Meena Ltd has authorised company of Rs.50,00,000 divided into
1,00,000 equity shares of Rs.50 each. The Company issued for
subscription 50,000 shares at a premium of Rs.10 each. The entire issue
was underwritten as follows: A -30,000 (firm underwriting 5,000), B -
15,000 (firm Underwriting 2,000), C -5,000(Firm Underwriting 500). Out
of the total issue 45,000 shares including firm underwriting wee
subscribed. The following were the marked applications: A -16,000, B -
10,000, C -4,000. Calculate the liability of each underwriter.
(Answer: A – 9,667; B – 2,333 & C – 500)
5. A joint stock company resolved to issue 10 lakh equity shares of Rs. 10
each at a premium of Re 1 per share. One lakh ofthese shares was taken up
by the directors of the company, their relatives, associates and friends, the
entire amount beingreceived forthwith. The remaining shares were offered
to the public, the entir e amount being asked for with applications.The
issue was underwritten by X, Y and Z for a commission @ 2% of the issue
price, 65% of the issue was underwrittenby X, while Y’s and Z’s shares
were 25% and 10% respectively. Their firm underwriting was as
follows:X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The
underwriters were to submit unmarked applications forshares underwritten
firm with full application money along with members of the general
public.Marked applications were as follows: X 1,19,500 shares; Y 57,500
shares and Z 10,500 shares.Unmarked applications totalled 7,00,000
shares.Accounts with the underwriters were promptly settled.You are
required to:
(i) Prepare a statement calculating underwriter’s liability for shares other
than shares u nderwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
(Answer: Liability of underwriters in shares: X – 4,000; Y – NIL; Z –
8,500
Amount Due From (Due To) Underwriters
X – (Rs. 84,700); Y – (Rs.49,500); Z – Rs. 7 3,700
 munotes.in

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19 2
BUY BACK OF EQUITY SHARES
Unit Structure
2.0 Objectives
2.1 Introduction
2.2 Difference between Buy Back and Redemption of Shares
2.3 Guidelines for Buy back
2.4 Journal Entries for Buy Back of Equity Shares
2.0 OBJECTIVES
After studying the unit the st udents will able to:
 Distinguish between Redemption of Preference shares and buy back of
Equityshares.
 Understand the need and objectives of Buy Back.
 Explain the Legal provision for Buy Back.
 To prepare the balance sheet post buyback
2.1 INTRODUCTION
Whe n any company buys back its shares from the existing shareholders it
is called as buy back of equity shares. Usually shares are bought back at a
price higher than its market price.
Buyback is done in order to reduce the number of shares outstanding
thereb y increasing the share in dividend per share.
2.2 DIFFERENCE BETWEEN BUY BACK AND
REDEMPTION OF SHARES
 Buy back is associated with Equity shares whereas redemption is
related to Preference Shares and Debentures.

 Equity is a permanent capital of the comp any and has no maturity term
therefore it cannot be redeemed on the other hand preference shares
and debt instruments are issued with a fixed maturity term therefore
they are redeemed on maturity.

 Company cannot buy back its entire equity capital but a co mpany has
to redeem the entire amount of preference capital and debt capital on
its maturity date.
 Company has to follow the guidelines of SEBI and section 68 in
buying back its Equity shares but the provisions of 68 are not munotes.in

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Financial Accounting
20 applicable for redemption of Pr eference shares or other Debt
Instruments.

 Buyback of equity shares results in consolidation of capital but
redemption of preference shares and debt instruments results in
cancellation of such capital.
Following are the reasons for buy back: -
 To increase the dividend per share -
Due to decrease in number of shares outstanding after buy back the
share in dividend per share increases. Thus the company is able to give
better returns to its equity shareholders.

 Optimum utilization of capital -
Buyback is done using free reserves of the company. Company having
sufficient amount of free reserves can only opt for buy back of equity.
Company utilizes free reserves to pay off equity shareholders which
helps in optimum utilization of funds and mobilization of the idl e
funds.

 Improve the EPS Ratio -
Buy back leads to decrease in number of outstanding shares which
further leads to improvement in companies Earnings per Share.

 To enhance the consolidation of stake in the company -
Decrease in number of outstanding shares of a company also leads to
consolidation in the stake of company which gives better returns to the
remaining shareholders.

 To support the share price -
If a company’s share is underperforming in the market than buyback
of share may help the company in imp roving its ratios and return to
equity shareholders which in turn will attract the attention of investors
thereby improving its market price.

 To improve the ratios of the company -
Buyback helps the company to improve its return on equity, return of
capita l employed and net worth of the company. Improvement in the
ratios depicts a positive image of the company in the eyes of investors
and also helps in improving its performance in the market.
Advantages of Buyback: -
 Improves the EPS Ratio -
Buy back leads to decrease in number of outstanding shares which
further leads to improvement in companies Earnings per Share.



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Buy Back o f Equity
Shares
21  Mode of Internal Reconstruction -
It is one of the ways a company can use to correct its capital structure
without requiring the permissions fr om the Company Law Board or
the Court.

 Improves the ratios of the company -
Buyback helps the company to improve its return on equity, return of
capital employed and net worth of the company. Improvement in the
ratios depicts a positive image of the compan y in the eyes of investors
and also helps in improving its performance in the market.

 Increases the dividend per share -
Due to decrease in number of shares outstanding after buy back the
share in dividend per share increases. Thus the company is able to give
better returns to its equity shareholders.

 Optimum utilization of capital -
Buyback is done using free reserves of the company. Company having
sufficient amount of free reserves can only opt for buy back of equity.
Company utilizes free reserves to pa y off equity shareholders which
helps in optimum utilization of funds and mobilization of the idle
funds.

 Acts as a booster -
If a company’s share is underperforming in the market than buyback
of share may help the company in improving its ratios and retur n to
equity shareholders which in turn will attract the attention of investors
thereby boosting its market price.
Disadvantages of Buyback: -
 Fake Picture of a company -
Buyback of share helps in boosting some ratios like EPS, Return on
Investments and Retur n on Equity but this improvement in the ratio is
because of the decline in number of outstanding equity shares and not
because of the increase in profits of the company thus it depicts a fake
picture to the investors of the company.

 Reduces the retained e arnings of the company -
Company has to use its free reserves for the purpose of buy back of
shares therefore company pays off its equity shareholders from its
retained earnings thereby reducing the funds of the company.

 Miss the opportunity -
Company may m iss some of the immediate market opportunities, even
though if they are more profitable and revenue generating projects, due
to lack of funds.


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Financial Accounting
22 Methods of Buy Back: -
Equity shares can be bought back at either Par, Premium or Discount.
 Whenever company buys back the equity shares at a price higher than
its face value it is called as buy back at premium.

 When such buy back is done at a price equal to face value it is called
as buy back at par and

 When such buy back is done at a price less than the face value of
shares it is called as buy back at discount.
2.3 GUIDELINES FOR BUY BACK
 Provisions of Section 68:
 Articles of Association -
Articles of Association of the company should authorize such buy
back of shares.

 Special Resolution -
Company willing to buy back up to 25 % of aggregate capital and reserves
should pass a special resolution in shareholders meeting of the company.

 Board Resolution -
For buy back of shares up to 10% of Paid up capital and free reserves a
company needs the approval from its b oard of directors.

 Fully Paid Shares -
Only fully paid equity shares can be brought back.

 Twelve Months -
The company should complete the process of buyback within a period of
twelve months from the date of passing of special resolution.

 Maximum amount of Buy Back -
The amount to be paid in case of buy back of shares shouldnot exceed
25% of Paid up capital + Free reserves of the company

 Maximum Number of shares -
The number of shares to be brought back by the company in any financial
year should not exceed 25% of it paid capital.

 Debt -Equity ratio -
Post buy back Debt -Equity ratio should not exceed 2: 1

 Issue of same class of shares -
A company cannot issue the same class of shares which it has brought
back with in a period of six months from the date of c ompletion of the
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Buy Back o f Equity
Shares
23
 Destroy the shares -
Once the buyback process is complete the company should physically
destroy the shares brought back by it.

 Capital Redemption Reserve -
A company should transfer a sum equal to capital value of shares b ought
back minus the capital value of new issue of shares to the Capital
Redemption Reserve Account.

 Use of C.R.R -
Company shall use the balance in Capital Redemption Reserve Account
only for the purpose of issue of Bonus Shares.
2.4 JOURNAL ENTRIES FOR B UY BACK OF EQUITY
SHARES
Date Particulars l/f Debit Credit Conversion of Partly paid shares into fully
paid:
Share final call A/c Dr
To Share Capital A/c

Cash / Bank A/c Dr
To Share final call A/c

×××




×××



×××





×××
New Issue of Shares:
At par
Cash / Bank A/c Dr
To Share capital A/c
At Premium
Cash / Bank A/c Dr
To Share capital A/c
To Se curities P remium A/c
At Discount
Cash / Bank A/c Dr
Discount on Issue of Shares A/c Dr
To Share capital A/c

×××


×××



×××
×××


×××


×××
×××



×××
Sale of Investments :
At Profit
Cash / Bank A/c Dr To Investments A/c
To Profit & Loss A/c
At Loss
Cash / Bank A/c Dr Profit & Loss A/c Dr
To Investments A/c

×××



×××
×××



×××
×××



××× munotes.in

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Financial Accounting
24 Tran sfer to CRR:
Free Reserves A/c Dr To Capital Redemption Reserve A/c
×××

××× Buy back of shares:
At par
Equity Share capital A/c Dr
To Equity Shareholders A/c
At Premium
Equity Share capital A/c Dr
Premium on Buyback A/c Dr
To Equity Shareholders A/c
At Discount
Equity Share capital A/c Dr
To Equity Shareholders A/c
To Securities Premium A/c

×××

××× ×××

×××


×××


×××

××× ××× Payment to Equity Shareholders:
Equity Shareholders A/c Dr To Cash / Bank A/c
×××

××× Closing Premium on Redemption A/c:
Securities Premium A/c Dr
To Premium on Redemption A/c
×××

×××
Examples of Free Reserves:
 Profit & Loss Account
 General Reserve
 Securities Premium
 Sinking Fund
 Dividend Equalization Reserve
Other Reserves not available for Buy -back:
 Revaluation Reserve
 Capital Redemption Reserve
 Debenture Redemption Reserve
 Forfeited Shares Account
 Capital Reserve
 Statutory Reserve


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Buy Back o f Equity
Shares
25 Practical Sums
Illustration 1:
Amit &Co. Ltd., wishes to buy back 10,000 Equity Shares of ` 10 each.
For this purpose , the company decided to issue an equivalent amount of
new preference shares of `10 each. Assume that the company complies
with the buy -back conditions .
Solution:
Journal Entries in the books of Amit & Company Limited for the year
ended___.
Particulars Debit ` Credit `
Bank Account ………… …… ……..….Dr.
To Preference Share Capital A/c
[Being 10,000 Preference shares issued at par] 1,00,000
1,00,000 Equity Share Capital A/c…………………Dr.
To Equity Shareholders A/c
[Being Equity Shares due for buy -back] 1,00,000
1,00,000 Equity Shareholders A /c………………….Dr.
To Bank A/c
[Being satisfied the claim of Equity Shareholders] 1,00,000
1,00,000
Note: - Transfer to C.R.R = 0.
The entire amount of buyback is supported by way of the new issue of
Equity Shares.
Illustration 2:
Maruti Ltd. furnishes the following summarized Balance Sheet as at 31st
March, 2021.
Particulars ` In ‘000’ ` In ‘000’ Equity & Liabilities:
Issued & Subscribed Capital -
5,00,000 Equity shares of ` 10 each fully paid Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities P remium
Profit & Loss Account
Non-Current Liabilities - 10% Debentures
Current Liabilities & Provisions
TOTAL 20 8,000 1,000 2,500 5,000 11,520 400 40 16,960 munotes.in

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Financial Accounting
26 Assets:
Fixed Assets
Non-Current Investments
Current Assets, Loans & Advances
(including Cash & Bank balance)
TOTAL 5,750 6,210 5,000 . 16,960
The company passed a resolution to buy back 20% of its equity capital at a
premium of ` 5 per share. For this purpose, it sold its investments of
`30,00,000 for `35,00,000.
Solution:
Date Particulars Debit `
In ‘000’ Credit `
In ‘000’
1. Bank A/c………………………….Dr
To Investment A/c
To Profit & Loss A/c
[Being Sale of Investment at Profit] 3,500 3,000 500 2. Equity Share Capital A/c…………..Dr
Premium on Buyback A/c…………Dr
To Equity Sharehold ers A/c
[Being the amount due on Buyback of 20%
Equity Capital] 1,000 500 1,500 3. Securities Premium A/c……………Dr
To Premium on Buyback A/c
[Being Premium on buyback written off
with the balance in Securities Premium] 500 500 4. Revenue Reserve A/c…… …… ……Dr
To Capital Redemption Reserve A/c
[Being transferred to C.R.R to the extent
buyback ] 1,000 1,000 5. Equity Shareholders A/c ……….......Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 1,500 1,500

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Buy Back o f Equity
Shares
27 Balance Sheet as at 31st March 2021. (after buy back of shares)
Particulars ` In ‘000’ ` In ‘0 00’ Equity & Liabilities:
Issued & Subscribed Capital -
4,00,000 Equity shares of 10 each fully paid Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss A ccount
Capital Redemption Reserve
Non-Current Liabilities - 10% Debe ntures
Current Liabilities & Provisions
TOTAL
Assets:
Fixed Assets
Non-Current Investments
Current Assets, Loans & Advances
(including Cash and bank balance)
TOTAL 20 7,000 500 3,000 1,000 5,750 3,210 7,000 4,000 12,520 400 40 15,960 15,960
Illustration 3:
Following is the summarized Balance sheet of Vishal Ltd. As at 31st
March, 2021.
Liabilities Amount
` Assets Amount
`
4,00,000 Equity Shares of `
10 each
50,000 11 .5% Preference
Shares of ` 10 each
Revenue Reserve
Profit & Loss Acco unt
Securities Premium
Creditors 40,00,000 5,00,000 4,50,000 7,00,000 1,50,000 15,00,000 Fixed Assets
Stock
Debtors
Bank 40,00,000 10,00,000 6,00,000 7,00,000 TOTAL 73,00,000 TOTAL 73,00,000 munotes.in

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Financial Accounting
28 The company bought back 1,00,000 Equity Shares at par after co mplying
with the legal formalities.
Solution:
Journal Entries in the books of Vishal Ltd. For the year ended 31st March,
2021.
Particulars Debit ` Credit `
Equity Share Capital A/c …… ……..Dr
To Equity Shareholders A/c
[ Being Equity shares due for buy back at par] 10,00,000 10,00,000 Revenue Reserve A/c………………Dr
Profit & Loss A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy
back] 4,50,0 00 5,50,000 10,00,000 Equity shareholders A/c……………Dr
To Bank A/c
[Being payment made to the Equity Shareholders] 10,00,000 10,00,000
Illustration 4:
The summarized Balance sheet of Uma Ltd., shows the following balances
as at 31st March, 2022.
Amt. `.
1,00,000 Equity Shares of ` 10 each ( `8 Paid up) 8,00, 000
Securities Premium 50,000
General Reserve 1,00,000
Capital Redemption Reserve 1,00,000
Profit & Loss Account 1,50,000
The company decided to purchase 20,000 Equity shares at 10% Discount
out of the reserve. The Company m ade a final call for the purpose of
buyback and call money was duly received. The company incurred `
5,000 worth of buyback expenses. Check if the company’s decision is
within the frame work of section 68 and pass necessary journal entries in
the books of the company. munotes.in

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Buy Back o f Equity
Shares
29 Solution:
Journal Entries in the books of Uma Ltd., for the year ended 31st March,
2022.
Particulars Debit ` Credit `
Equity Share Final Call A/c…………….Dr
To Equity Shar e Capital A/c
[Being Final Call made for ` 2 per share] 2,00,000 2,00,000 Bank A/c………………………………..Dr
To Equity Share Final Call A/c
[Being Final Call money received] 2,00,000 2,00,000 Equity Share Capital A/c……………….Dr
To Discount on Buyback A/c
To Equity Shareholders A/c 2,00,000 20,000 1,80,000 Discount on Buyback A/c………………Dr
To Capital Reserve A/c
[Being transfer of balance in Discount A/c] 1,00,000 1,00,000 General Reserve A/c……………………Dr
Profit & Loss A/c……………………….Dr
To Capital Redemption Reserve A/c
[Being transfer of Buyback amount to C.R.R. A/c] 1,00,000 1,00,000 2,00,000 Equity Shareholders A/c………………..Dr
To Bank A/c
[Being payment made for buyback of Equity share] 1,80,000 1,80,000 Buyback Expenses A/c………………….Dr
To Bank A/c
[Being Buyback expenses incurred & paid] 5,000 5,000


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Page 30

Financial Accounting
30 Working Notes:
1. Maximum Number of Shares that can be bought back Under Section 68:
25 % of No. of Equity Shares outstanding in the market
= 1,00,000 *25%
= 25,000 shares
Since the company decided to buyback 20,000 Equity shares, this
condition is fulfilled by the compa ny.
2. Maximum Amount Payable on Buy back= 25% of Capital + Reserves
Equity Capital - 10,00,000
Securities Premium - 50,000
General Reserve - 1,00,000
Profit & Loss A/c - 1,50,000
TOTAL Own Fund = 13,00,000
25% = `3,25,000.
Since Company is paying `. 1,80,000. The amount paid by the company
on buyback is within the range of section 68.
4. Post Buy Back Debt Equity Ratio should not exceed 2:1:
Since the company does not have any Deb t Capital nor does it issues any
debt instrument during buyb ack, theref ore there is n o question of
exceeding the Debt –Equity Ratio.
Therefore buyback is completely within the limits of Section 68.
Illustration 5:
The Balance sheet of Asians Ltd. As at 31. 04.21 was as follows:
Liabilities Amount ` Assets Amount ` Equity shares of Rs.10 each Securities Premium
General Reserve
Profit & Loss A/c
Debenture
Current Liabilities 6,00,000
1,45,000
1,00,000
1,50,000
7,00,000
1,05,000 Fixed Assets
Investments
Current assets 10,00,000 4,00,000
4,00,000
TOTAL 18,00,000 TOTAL 18,00,000 munotes.in

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Buy Back o f Equity
Shares
31 Calculate the maximum number of number of shares to be bought back
and the offer price to be paid on buy back. Assuming that the buyback is
done pass necessary journal entries in the books of the company.
Solution:
Particulars Debit ` Credit ` Equity Sh are Capital A/c…………..Dr
Premium on Buy back A/c…………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of 20% Equity
Capital] 1,50,000 98,750 2,48,750 Securities Premium A/c……………Dr
To Premium on Buy back A/c
[Being Premium on buyback written off with the
balance in Securities Premium] 98,750 98,750 Profit & Loss A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy back] 1,50,000 1,50,000 Equity Shareholders A/c ……….......Dr
To Ban k A/c
[Being Payment made for the buyback of Equity] 2,48,750 2,48,750
Working Note:
1.Maximum No. of Shares that can be bought back:
25% of Equity Shares outstanding in the Mar ket
= 25% of 60,000
= 15,000 Shares.

2. Maximum Amount to be paid for buy back:
25% of Own Fund
Equity Capital 6,00,000
Securities Premium 1,45,000
General Reserve 1,00,000
Profit & Loss A/c 1,50,000
Total Own Fund 9,95,000
25% of 9,9 5,000 = 2,48,750

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Page 32

Financial Accounting
32 4. Post Buyback Debt –Equity Ratio :
Debt 7,00,000
Therefore minimum Own Fund Post Buy back Should be at least half of
Debt i.e ` 3,50,000
Amount available for buy back = 9,95,000 – 3,50,000 = 6,45,000/ -

4. Determination o f Offer Price:
Total amount payable on buyback shall be Minimum of workin g not
no. 2 and 3 above
= ` 2,48,750
Offer price per share = Amount Payable on Buyback /Maximum no. of
Shares to be bought back
= 2,48,750 / 15,000
= ` 16.58/ - per share
Illustration 6:
Zoomba Ltd. resolved to buy back 3,00,000 fully paid equity sh ares of `10
each at `13 per share. For the purpose, it issued 10,000 13% preference
shares of `100 each at par, the total sum being payable with applications.
The company uses ` 9,50,000 of its balance in Securities Premium
Account apart from its adequate balance in General Reserve Account to
fulfill the legal requirements regarding buy -back.
Pass journal entries for all the transactions involved in the buy -back.
Solution:
Journal Entries in the books of Zoomba Ltd., for the year ended 31st
March, ____.
Particulars Debit ` Credit `
Bank A/c………………………….......Dr
To 13% Preference Share Capital A/c
[Being issue of Preference shares at par] 10,00,000 10,00,000 Equity Share Capital A /c……………..Dr
Premium on Buy back A/c……………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of 20%
Equity Capital] 30,00,000 9,00,000 39,00,000 munotes.in

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Buy Back o f Equity
Shares
33
Securities Premium A/c……………….Dr
To Premium on Buy back A/c
[Being Premium on buyback written o ff
with the balance in Securities Premium] 9,00,000 9,00,000 General R eserve A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transferred to C.R.R to the extent of
buyback] 20,00,000 20,00,000 Equity Shareholders A/c ………...........Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 39,00,000 39,00,000

Working Note:
1. Transfer to Capital Redemption Reserve A/c.
= Capital Value of Buy back - Capital value of New Issue of Shares
= 30,00,000 – 10,00,000
= 20,00,000
Illustr ation 7:
Sanjivani Ltd., a private company, had issued capital of ` 40 lakh divided
into equity shares of ` 10 each. The balance in the Security Premium
Account was ` 2 lakh and General Reserve ` 6 lakh. The company
decided to buy -back 1,00,000 shares of ` 10 each at ` 8 per share. The
company had issued 50,000, 10% Preference Sh ares ` 10 each 3 months
back for the purpose of buy -back of equity shares. Record the transaction
in the Journal of the company.
Solution:
Journal Entries in the books of Sanjivani Ltd., for the year ended 31st
March, ____.
Particulars Debit ` Cred it `
Bank A/c………………………….......Dr
To 10% Preference Share Capital A/c
[Being issue of Preference shares at par] 5,00,000 5,00,000 Equity Share Capital A/c……………..Dr
To Discount on buy back A/c ………Dr
To Equity Shareholders A/c
[Being the amount due o n Buy back of Equity
Capital at discount] 10,00,000 1,00,000 9,00,000 munotes.in

Page 34

Financial Accounting
34 Discount on buy back A/c …………….Dr
To Capital Reserve A/c
[Being Discount on buyback written off] 1,00,000 1,00,000 General Reserve A/c…………………..Dr
To Capital Redemption Reserv e A/c
[Being transfer to C.R.R to the extent of buy
back] 5,00,000 5,00,000 Equity Shareholders A/c ………...........Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 9,00,00 0 9,00,000
Working Note:
1. Transfer to Capital Redemption Reserv e A/c.
= Capital Value of Buy back - Capital value of New Issue of Shares
= 10,00,000 – 5,00,000
= 5,00,000
Illustration 8:
Sea Ltd., furnishes the following summarized Balance Shee t as at 31st
March, 2021.
Particulars Amount ` Amount `
Equity & Liabilities:
3,50,000 Equity shares of ` 10 each
2,000 12% Preference Shares of `100 each Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss Account
Curre nt Liabilities & Provisions 35,00,000 2,00,000 5,00,000 35,00,000 20,00,000 30,00,000 14,00,000
TOTAL 1,41,00,000 munotes.in

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Buy Back o f Equity
Shares
35
Assets:
Fixed Assets
Investments
Current Assets 95,00,000 31,00,000 15,00,000 TOTAL 1,41,00,000
The company passed a resolution t o buy back 20% of its equity capital @
`. 40 per share.
In ac cordance to support this buyback, company sold all its investments
for ` 25,00,000.
You are required to pass necessary journal entries in the books of the
company also prepare the Vertical Balan ce Sheet post buyback.
Solution:
Journal Entries in the b ooks of Sea Ltd., for the year ended 31st March,
2021.
Particulars Debit ` Credit `
Bank A/c………………………….......Dr
Profit & Loss A/c……………………..Dr
To Investment A/c
[Being sale of investment at loss] 25,00,000 6,00,000 31,00,000 Equity Share Capital A/c ……………..Dr
Premium on Buy back A/c……………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of 20%
Equity Capital] 7,00,000 21,00,000 28,00,000 Securities Premium A/c……………….Dr
Profit & Loss A/c……………………...Dr
To Premium on Buy back A/c
[Bein g Premium on buyback written off] 20,00,000 1,00,000 21,00,000 munotes.in

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Financial Accounting
36
Profit & Loss A/c……………………...Dr
To Capital Redemption Reserve A/c
[Being transferred to C.R.R to the extent of
buy back] 7,00,000 7,00,000 Equity Shareholders A/c ………...........Dr
To Ba nk A/c
[Being Payment made for the buyback of
Equity] 28,00,000 28,00,000
Post buyback Balance sheet of Sea Ltd., as at 31st March, 2021.
Particulars Amount ` Amount `
Equity & Liabilities:
2,80,000 Equity shares of ` 10 each
2,000 12% Preferenc e Shares of `100 each Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss Account
Capital Redemption Reserve
Current Liabilities & Provisions 28,00,000 2,00,000 5,00,000 35,00,000 NIL 16,00,000 7,00,000 14,00,000
TOTAL 1,07,00,000 Assets:
Fixed Assets
Investments
Current Assets 95,00,000 NIL 12,00,000 TOTAL 1,07,00,000
I. SELF -PRACTICE
Illustration 1:
The Balance sheet of Ram Ltd. as at 31 -3-2022 i s as follows.
Liabilities Amount ` Assets Amount `
SHA RE CAPITAL:
Equity shares of Rs.10 each 50,00,000 Fixed Assets Investments 80,00,000 50,00,000 munotes.in

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Buy Back o f Equity
Shares
37 RESERVES & SURPLUS:
Securities Premium
General Reserve
Profit and loss account
SECURED LOANS:
Debentures
CURRENT LIABILITIES &
PROVISIONS: 5,00,000 25,00,000 20,00,000 40,00,000 50,00,000 Current
assets 60,00,000
TOTAL 1,90,00,000 TOTAL 1,90,00,000
Keeping in view all the legal requirements, ascertain the maximum no. of
equity shares tha t 0 Victory Ltd. can buy back if price settled is Rs.20 per
share. Assume that the buy -back is carried out actually at the legally
permissible terms, record the entries in the journal of Victory Ltd. and
prepare its balance sheet thereafter.
Illustration 2 :
The summarized Balance Sheet of Somnath Ltd. As on 1s t March 2021 is
as Follows: -
Particulars Amount `
Equity & Liabilities:
6,00,000 Equity shares of Rs. 10Each Fully Paid
Securities Premium
Profit and Loss Account
13% Debentures
Creditors 60,00,00 0 4,00,000 20,00,000 18,00,000 20,00,000 TOTAL 1,22,0 0,000 Assets:
Fixed Assets
Investments
Current Assets 70,00,000 25,00,000 27,00,000 TOTAL 1,22,00,000
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Financial Accounting
38 Ascertain the maximum number of equity shares the company can
buyback at the maximum possibl e price under the law as on 31st March,
2021. Assuming t he buyback is actually carried out, record the journal
entries in the books of Somnath Ltd. Also prepare Notes to accounts with
respect to share Capital and Reserve & Surplus as they would appear in
Notes to accounts Forming part of the Balance Sheet of So mnath Ltd. As
on 31st March, 2021.
Illustration 3:
The Balance sheet of Green Tea Ltd. as on 31 -3-2022 is as follows:
Liabilities Amount ` Assets Amount ` SHARE CAPITAL:
Equity shares of Rs.10 each
Preference Shares of Rs.100
each.
RESERVES & SURPLU S:
Securities Premium A/c
General Reserve
Profit and Loss account
SECURED LOANS:
Debentures
CURRENT LIABILITIES:
Current liabilities Provisions 4,00,000 1,00,000 1,50,000 1,00,000 1,00,00 0 7,00,000 2,00,000 FIXED ASSETS:
Net block
Investments
CURRENT
ASSETS:
Current Assets 9,00,000 2,00,000 6,50,000
TOTAL 17,50,000 TOTAL 17,50,000
Keeping in view all the legal requirements, ascertain the maximum no of
equity shares that Green Tea Ltd can buy back @ Rs.25 per share, being
the c urrent market price. Assume that the buy -back is carried out actually
on the changed terms and accordingly record the entries in the journal of
GreenTea Ltd and prepare its balance sheet thereafter.
II. Multiple Choice Questions
i. Equity share capital (Rs.10 ) Rs.10, 00,000
General reserve Rs.12, 00,000
Profit and loss account Rs. 1, 00,000
Securities premium Rs. 2, 00,000
The maximum buyback is ________.
a) Rs.45, 00,000
b) Rs. 6 , 25,000
c) Rs.5, 50,000
d) Rs.3, 00,000
Answer: Rs. 6, 25,000 munotes.in

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Buy Back o f Equity
Shares
39 ii. Company can buy back________.
a) Preference shares
b) Equity shares
c) Debentures
d) Capital
Answer: Equity shares
iii. Buyback of shares can be out of________.
a) Profits only
b) Proceeds of fresh issue only
c) Capital profit only
d) Free reserve or securities Premium for proceeds of shares
Answer: Free reserve or securities Premium for proceeds of shares
iv. Which of the following is a free reserve for the purpose of buyback
of shares?
a) workmen compensation fund
b) capital redemption reserve
c) debenture redemption reserve
d) forfeited shares account
Answer: forfeited shares account
v. In case of equity shares are brought back out of to reserve, amount
equal to face value of equity shares bought back should be
transferred to________.
a) general reserve account
b) development rebate re serve
c) sinking fund account
d) capital redemption reserve account
Answer: capital redemption reserve account
III. State Whether True or False
i. The buyback of equity shares should be authorized by Articles of
Association.
ii. Buyback of equity shares can be made out of proceeds of an earlier
issue of preference shares.
iii. Partly paid equity shares can be bought back.
iv. Buy back of shares increases the Earnings per Share of the company.
v. Due to buyback of shares there is reduction in the share capital.


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40 3
AS 14 - AMALGAMATION, ABSORPTION
& EXTERNAL RECONSTRUCTION - I
Unit Structure :
3.0 Objectives
3.1 Introduction
3.2 Accounting S tandard 14 Issued By the Institute of Chartered
Accounts o f India
3.3 Types o f Amalgamation
3.4 Distinction Between Amalgam ation in the Nature of Merger a nd
Purchase
3.5 Purchase Consideration
3.6 Accounting Procedure in the Books o f Transferor Company
3.7 Accounting Procedure in the Books o f Transferee Company
3.8 Practicle Problems
3.9 Exercise
3.0 OBJECTIVES
After readi ng this unit, learner will be able:
• To acquaint the knowledge of Amalgamation, Absorption, and
External Reconstruction

• To understand the different methods of Amalgamation

• To compute the Purchase Consideration amount

• To be aware of the various methods of determining Purchase
Consideration.

• To apply practically the procedures of the Amalgamation Accounting
for a company.
3.1 INTRODUCTION
1. Amalgamation:
A merger of two or more companies into a single entity is known as an
amalgamation. The assets and lia bilities of the merging companies become
part of the merged company in an amalgamation. In exchange for their munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
41 shares in the merging companies, the shareholders of the merging
companies receive shares in the merged company.
Example: Suppose Company A and Co mpan y B merge to form Company
C. Company A and Company B shareholders receive shares in Company
C in proportion to their respective shareholdings in the merging companies
or as determined by the terms of amalgamation.
2. Absorption:
Absorption is a type o f am algamation in which one company absorbs
another, and the absorbed company goes out of business. In exchange for
their shares in the absorbed company, the absorbed company's
shareholders receive shares in the absorbing company.
For instance, if Company A ab sorbs Company B, Company B ceases to
exist. Company B shareholders receive shares in Company A in
proportion to their shareholding in Company B or as determined by the
terms of absorption.
3. External Reconstruction:
When a company has been making loss es for several years and is facing a
financial crisis, it can sell its business to another newly
incorporated company. In reality, the new company is formed to take over
the old company's assets and liabilities. This is known as external
reconstruction. In simple words, external reconstruction refers to the sale
of an existing company's business to a new company formed for the
purpose. External reconstruction involves the liquidation of one company
and the formation of a new one. The liquidated company is k nown as
"Vendor Company," while the new company is known as "Purchasing
Company." Vendor company shareholders become purchasing company
shareholders.
3.2 ACCOUNTING STANDARD 14 ISSUED BY
INSTITUTE OF CHARTERED ACCOUNTS OF
INDIA
1. Scope : Accounting Standa rd 14 (AS -14) is a standard issued by the
Institute of Chartered Accountants of India that provides guidance on
amalgamation accounting. The standard applies to all companies involved
in amalgamations, whether listed or unlisted, and it requires the accrua l
basis of accounting to be used in the preparation of financial statements.
2. Amalgamation : According to AS -14, an amalgamation is a
combination of two or more companies to form a new company, pursuant
to the provisions of the Companies Act, 1956 or any other applicable
statute. It involves the acquisition of one company by another, and after
the amalgamation, the acquired company is dissolved and ceases to exist.
3. Transferor Company : The transferor company is the company that
transfers its assets, li abilities, and reserves to another company, known as munotes.in

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Financial Accounting
42 the transferee company, in an amalgamation. The transferor company is
also known as the vendor company.
4. Transferee Company : The transferee company is the company into
which the transferor company is amal gamated, or the company that
acquires the assets, liabilities, and reserves of the transferor company in an
amalgamation. The transferee company is also known as the purchasing
company.
AS-14 also provides guidance on the accounting treatment of
amalga mations, such as accounting methods, disclosures, and financial
statements for each type of amalgamation. It establishes the principles for
determining the accounting policies, disclosures, and financial statements
for amalgamations, and it requires the co nsolidated financial statements of
the merging companies to provide a true and fair view of the merged
entity's financial position, performance, and cash flows.
3.3 TYPES OF AMALGAMATION
AS-14, "Accounting for Amalgamations", recognizes two types of
amalga mation:
1. Amalgamation in the nature of merger :
Amalgamation in the nature of merger is a type of amalgamation that
satisfies all the following conditions:
a. All assets and liabilities of the transferor company become assets and
liabilities of the transf eree company.

b. Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already
held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.

c. The consideration for the amalgamation is discharged only by the issue
of equity shares in the transferee company, except that cash may be
paid in respect of any fractional shares.

d. The business of the transferor company is intended to be carried on, in
whole or in part, by the transferee company.

e. No adjustment is intended to be made to the book value of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company, except to ensure
uniformity of accounting policies.
If an amalgamation satisfies all the above conditions, it is considered to be
an amalgamation in the nature of merger and is accounted for using the
pooling of interests method. munotes.in

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As 14 - Amalgamation,
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Reconstruction - I
43 2. Amalgamation in the nature of purchase :
If Amalgamationdoes not satisfy any one of the above five conditions then
it willbe regarded as Amalgamation in the nature of purchase AS-14
requires diffe rent accounting treatments for these two types of
amalgamations. In the case of an amalgamation in the nature of merger,
the pooling of interests method is used to account for the amalgamation,
while in the case of an amalgamation in the nature of purchase , the
purchase method is used.
3.4 DISTINCTION BETWEEN AMALGAMATION IN
THE NATURE OF MERGER AND PURCHASE
Merger Purchase
1. Shareholders of the transferor
company who own 90% of the face
value of the transferee company
become shareholders of the transfere e
company. 1. Transferor company
shareholders may not become
transferee company shareholders.
2. There is a genuine polling of the
amalgamating companies' assets and
liabilities. 2. There is no genuine polling of
the amalgamation companies'
assets and lia bilities. 3. Shareholders' interests are also pooled. 3. There may be no pooling of shareholder interests.
4.The values of assets and liabilities, as
well as reserves, represent the same
values of the merging companies. 4. The assets and liabilities of t he
merging companies may have
different values.

Amalgamation in the nature of merger is not covered in the Mumbai
University T.Y.B.Com syllabus, so it will not be covered in this book.
3.5 PURCHASE CONSIDERATION
Purchase consideration is the amount paid by the transferee company
(purchaser) to the transferor company (vendor) in exchange for acquiring
the assets and liabilities of the transferor company in an amalgamation.
AS-14 provides the following techniques for calculating the purchase
consideration:
1. Net Assets Method: In this method, the purchase consideration is
calculated as the excess of the fair value of the net assets acquired over
the consideration paid to the transferor company. The net assets are
calculated as the difference between the fair v alue of the assets
acquired and the fair value of the liabilities assumed.

For example, if the fair value of the assets acquired from the transferor
company is Rs. 20,000 and the fair value of the liabilities assumed is Rs.
12,000, the net assets would be Rs. 8,000. If the transferee company pays
Rs. 10,000 to the transferor company, the net assets method would result
in a purchase consideration of Rs. 2,000. munotes.in

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Financial Accounting
44 Particulars Amount
(`) Amount
(`)
Revised Values of Assets taken over at
agreed values(excluding fictitious assets)
Goodwill XX Land & Buildings XX Plant & Machinery XX Furniture & Fittings XX Motor vehicles XX Investments XX Inventories XX Trade Receivable XX Bills Receivable XX Cash & Cash Equivalent XX Bank XX Total XX
Less: Revised Values of Liabilities taken
over at agreed value
Trade Payables XX Bills payables XX Bank overdraft XX Debentures XX Total (XX)
Purchase consideration XX

2. Net Payment Method: The purchase consideration in this method is
equal to the net payment made by the transferee company to the
transferor company. The net payment is calculated as the difference
between the total amount of cash or cash equivalents or any securities
acquired from the transferor company and the total amount of
paymen ts made to the transferor company.

For example, if the transferee company say Nandini Ltd. buys assets and
liabilities worth Rs. 75,000 from the transferor company say Ragini Ltd.
and pays Rs. 40,000 in form of equity shares in transferee company, pay s
Rs. 30,000 in form of Preference shares in transferee company, Rs. 20,000
in form of Debentures in transferee company, Rs. 10,000 in form of cash,
the net payment method results in a Rs. 25,000 purchase consideration.

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
45 Statement Showing Calculation of P urchase Consideration

Particulars Amount Amount Equity Shares in Nandini Ltd. 40,000 Preference Shares in Nandini Ltd. 30,000 Debentures in Nandini Ltd. 20,000 Cash 10,000 Total 1,00,000 Less: Net Assets Taken Over (75,000) Purchase Considera tion 25,000
3. Lumpsum Method: The transferee may provide the amount of
purchase consideration directly, eliminating the need to calculate the
purchase consideration.
For example, Soma Ltd. agrees to buy out Manappa Ltd. business
for ` 95,00,000. So the PC is ` 95,00,000.

4. Exchange of shares Method / Intrinsic value Method: The intrinsic
value of the shares of both companies is calculated using this method,
and the transferor company then issues the shares to the transferee
company based on these val ues.
3.6 ACCOUNTING PROCEDURE IN THE BOOKS OF
TRANSFEROR COMPANY
If Ledger Accounts are to opened :
1. Realisation A/c
2. Equity Shareholders A/c
3. Preference Shareholders A/c
4. Cash/ Bank A/c
5. Liabilities not taken over A/c
6. Transferee company’s A/c
7. Equity Shares in transferee company A/c
8. Preference Shares in transferee company A/c



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Financial Accounting
46 If Journal Entries are to be passed
Sr.
No. Particulars Dr.
Rs Cr.
Rs.
1 Recording Purchase of Business
Business Purchase A/c Dr. XX
To Liquidator of transferor company XX
(The entry should be passed at purchase consideration
amount.)
2 Recording of assets and liabilities taken over
Sundry assets A/c Dr. XX
( With Agreed values)
Goodwill A/c (if any) Dr. XX
To Sundry Liabilities A/c XX
To Business Purchase A/c XX
To Capital Reserve A/c XX
3 Recording Discharge of purchase consideration
Liquidator of transferor company A/c Dr. XX
Discount on issue of shares A/c Dr. XX
To Equity Share Capital A/c. XX
To Prefe rence Share Capital A/c. XX
To Securities Premium A/c. XX
4 Discharge of Liabilities of Transferor Company
Debentures of Transferor Company A/c Dr. XX
Discount on issue of Debentures A/c Dr. XX
To new Debentures A/c. XX
To Sec urities Premium A/c. XX
5 Recording of payment of liquidation expenses
Capital Reserve/ Goodwill A/c. Dr. XX
To Cash/Bank A/c. XX
6 Recording of Expenses incurred by the transferee
company for its own formation.
Preliminary Expense s A/c. Dr. XX
To Cash / Bank A/c XX munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
47
7 Recording of Statutory Reserve of transferor company
Amalgamation adjustment A/c Dr. XX
To Statutory Reserve A/c. XX
8 Adjusting of mutual indebtedness of transferor &
transferee company
Sundry Creditors A/c. Dr. XX
To Sundry Debtors A/c. XX

3.7 ACCOUNTING PROCEDURE IN THE BOOKS OF
TRANSFEREE COMPANY
Sr.
No. Particulars Dr.
Rs Cr.
Rs.
1 Recording Purchase of Business
Business Purchase A/c Dr. XX
To Liquidator of tran sferor company XX
(The entry should be passed at purchase
consideration amount.)
2 Recording of assets and liabilities taken
over
Sundry assets A/c Dr. XX
( With Agreed values)
Goodwill A/c (if any) Dr. XX
To Sundry Liabil ities A/c XX
To Business Purchase A/c XX
To Capital Reserve A/c XX
3 Recording Discharge of purchase
consideration
Liquidator of transferor company A/c Dr. XX
Discount on issue of shares A/c Dr. XX
To Equity Share Capital A/c. XX
To Preference Share Capital A/c. XX
To Securities Premium A/c. XX munotes.in

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Financial Accounting
48
4 Discharge of Liabilities of Transferor
Company
Debentures of Transferor Company A/c
Dr. XX
Discount on issue of Debentures A/c Dr. XX
To new Debentures A/c. XX
To Securities Premium A/c. XX
5 Recording of payment of liquidation
expenses
Capital Reserve/ Goodwill A/c. Dr. XX
To Cash/Bank A/c. XX
6 Recording of Expenses incurred by the
transferee company for its own
formation.
Preliminary Expenses A/c. Dr. XX
To Cash / Bank A/c XX
7 Recording of Statutory Reserve of
transferor company
Amalgamation adjustment A/c Dr. XX
To Statutory Reserve A/c. XX
8 Adjusting of mutual indebtedness of
transferor & transfer ee company
Sundry Creditors A/c. Dr. XX
To Sundry Debtors A/c. XX

3.8 PRACTICLE PROBLEMS
Illustration 1. (Payment Method)
Given below are the extracts from the Balance Sheets of Y Ltd. as at 31st
March, 2019.
Particulars Rs. (in Lakhs)
Equity Share Capital of Rs. 10 each 10.00
8% Pref. Share Capital of Rs. 100 each 2.00
Reserves and Surplus 3.00
12% Debentures of Rs. 100 each 1.00
Current Liabilities 2.20
Non-Current Assets 12.80
Current Assets 5.40 munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
49 X Ltd. absorbs Y Ltd. as on that date on the following terms:
1. 12% Debentures of Y Ltd. are to be discharged by X Ltd. by issuing
such number of its 15% Debentures of Rs. 100 each so as to maintain
the same amount of interest.

2. The issue of such an amount of fully paid 9% Preference Shares in X
Ltd. at 125% as is sufficient to discharge 8% Preference Shares in Y
Ltd. at a premium of 20%.

3. The Equity Shareholders of Y Ltd. will receive the requisite number of
Equity Shares of X Ltd. The Equity Shares of X Ltd. are to be of a
nominal value o f Rs. 10 each credited as Rs. 8 paid up and valued at
Rs. 15 per share.

4. The transferee company shall pay the cost of absorption which
amounts to Rs. 1 ,00,000.
Show the calculation and discharge of Purchase Consideration.
Solution.
Calculation and Disc harge of Purchase Consideration
Particulars Rs.
1920, 9% Preference Shares [(2 ,00,000 +
20%)/125) X Rs. 125] 2,40,000 100000 Equity Shares [100000 X 15] 15,00,000 Total Purchase Consideration 17,40,000
Note. According to AS -14, the amount paid by the purchasing company to
discharge the debenture holders and the liquidation expenses the of
Vendor Company are not considered as part of purchase consideration.
Illustration 2.
Calculate the amount of purchase consideration payable by Mini Limited
to Maxi Limited. The Summary Ba lance Sheet of Maxi Limited as on
March 31, 2012 is as follows:
Liabilities Amount Assets Amount
Equity Share Capital
(Shares of Rs. 10) 1,50,000 Goodwill 30,000 8% Pref. Share Capital
(Shares of Rs. 10) 60,000 Land 35,000 Capital Reserve 8,000 Building 40,000 General reserve 14,000 Machinery 1,00,000 Profit and Loss A/c 3,000 Investment 25,000 munotes.in

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Financial Accounting
50 7.5% Debentures (Rs.
100 each) 30,000 Stock 24,000 Sundry Creditors 12,000 Debtors 15,000 Outstanding Expenses 8,000 Cash & Bank 13,000 Share Issue
Expenses 3,000 Total 2,85,000 Total 2,85,000
Mini Limited decided to take over Maxi Limited by issuing 6 Equity
Shares of Rs. 10 each fully paid and Rs. 6.50 in cash for every 5 Equity
Shares held in Maxi Ltd. The Preference Shareholder s are to be paid at
premium of 15% by issue of 10% Preference Shares in Mini Ltd.
Debenture holders of Maxi Ltd. will be paid 9.5% Debentures of Mini Ltd.
for equal value. Realisation expenses of Rs. 7 ,500 are to be borne and paid
by Mini Ltd to Maxi Ltd.
Solution.
Calculation of Purchase Considerati on (Net Payment Method)
Payment to Old
No. Exchange
Ratio New
No. Issue
Price Amount Equity
Shareholders
Equity Shares
Cash 15,000 15,000 5:6
5:1 18,000 3,000 10.00 6.50 1,80,000 19,500 Preference
Share holders
10% preference
Shares
Rs. 60000 +
15% Premium 69,000 Total Purchase
Consideration 2,68,500

Note: Payment to debenture holders and payment for realization expenses
will not be considered for calculation of Purchase consideration (As per
AS 14)
Illustration 3. (Net Asset Method)
Homer Ltd. and Illiad Ltd. Propose to amalgamate.
Goodwill may be taken at Rs. 96 ,000 for Homer Ltd. and Rs. 38 ,000 for
Illiad Ltd. The Stock of Homer Ltd. and Illiad Ltd. to be taken at Rs.
2,04,000 and Rs. 1 ,42,000 respectively. You are required to find out the
purchase cons ideration receivable by both the companies on the basis of
the Net Assets Method. Their financial position as on December 31, 2012
were: munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
51 Liabilities Homer Illiad Assets Homer Illiad
Share
Capi tal:
Equity
Shares of
Rs. 10 each 500000 200000 Fixed Assets
(at cost less
depreciation) 400000 100000 Reserves
and Surplus:
General
Reserve
P & L A/c 200000 100000 20000 30000
Investment
100000 Current
Liabilities:
Creditors 100000 50000 Current
Assets:
Stock
Debtors
Cash & Bank 200000 170000 30000 130000 60000 10000 Total 900000 300000 Total 900000 300000 Solution:
Purchase Consideration
Particulars Homer (Rs) Illiad (Rs)
Assets Goodwill (as given) 96,000 38,000 Fixed Asset s 4,00,000 1,00,000 Investment 1,00,000 - Stock (Agreed Value) 2,04,000 1,42,000 Debtors 1,70,000 60,000 Cash & Bank 30,000 10,000 Total 10,00,000 3,50,000 Less. Creditors 1,00,000 50,000 Net Assets / Purchase Consideration 9,00,000 3,00,000




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Financial Accounting
52 Illustration 4
The balance sheet of Shivam Ltd as on 31st December 2020 was below.

Liabilities Amou nt Assets Amount
Equity share capital
of Rs. 10 each 150000 Goodwill 20000 11.5% Preference
share capital of Rs.
100 each 50000 Building 49000 Securities Premium 10000 Plant 115000 General reserve 10000 Furniture 5000 Profit & Loss A/c 5000 Investment 10000 Workmen
Compensation Fund 5000 Stock 20000 Bills Payable 6000 Debtors 15000 Creditors 8000 Bills Receivable 5000 Provident Fund 6000 Cash at Bank 10000 Preliminary
Expenses 1000 Total 250000 Total 250000
Small Limited wants to take over the business on the following terms and
valuation:

Goodwill: Rs. 30000 Building: Rs. 60000
Plant: Rs. 100000 Furniture: R s. 4000

Investment at book value.
Stock at Rs. 15000, Debtors at 10% provision, Bills receivable a t par, cash
is not taken over.

The purchase consideration is to be satisfied to the extent of Rs. 40000 by
payment in cash, and balance is payable in equi ty shares of Rs. 10 each.






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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
53 Solution
Calculation of Purchase Consideration
Particulars Amt Amt
Assets taken over
Goodwill 30000 Building 60000 Plant 100000 Furniture 4000 Investment 10000 Stock 15000 Debtors 15000 Less. R.D.D -1500 13500 Bills Receivable 5000 Total (A) 237500 Liabilities Taken Over Workmen Compensation Fund 5000 Bills payable 6000 Creditors 8000 Provident fund 6000 Total (B) 25000 Purchase Consideration (A – B) 212500
Discharge of Purchase Con sideration.
In Cash Rs. 40000
In equity shares of Rs. 10 each Rs. 172500
Total Rs. 212500
Amalgamation
Illustration 5.
A Ltd. and B Ltd. carry on similar business decided to amalgamate and for
this purpose a new company AB Ltd. was fo rmed to take over assets and
liabilities of both the companies. It is agreed that fully paid shares of Rs.
100 each shall be issued by the New Co. to the value of Net Assets of each
of the old companies.



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Page 54

Financial Accounting
54 Summary Balance Sheet of A Ltd. as at 31st Marc h 2012
Liabilities Amount Assets Amount
Shares of Rs. 50
each 50000 Goodwill 5000 General reserve 20000 Land and Building 17000 Profit and Loss A/c 3000 Plant and
Machinery 24000 Sundry Creditors 4000 Stock 10000 Bills Payable 4000 Debtors 12000 Furniture & Fittings 5000 Cash at Bank 8000 Total 81000 Total 81000
Summary Balance Sheet of B L td. as at 31st March 2012
Liabilities Amount Assets Amount
800 Shares of Rs. 50
each 40000 Goodwill 2000 Bank Overdraft 8000 Land and Building 10000 Sund ry Creditors 8000 Plant and
machinery 16000 Stock 7500 Furniture and
Fittings 7500 Debtors 7000 Cash 300 Profit and Loss A/c 5700 Total 56000 Total 56000
The following is the accepted scheme of valuation of business of the two
companies:
A Ltd:
(a) to provide for reserve for bad debts at the rate of 5% on Debtors
(b) to write off Rs. 400 from stock; and
(c) to write off 33 1/3% from plant and machinery

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Page 55

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
55 B Ltd:
(a) to eliminate its goodwill and profit & loss a/c balance
(b) to write off bad debts Rs. 1000 and to provide reserve of 5% on the
balance of debtors;
(c) to write off Rs. 140 0 from the value of stock.
You are required to pass the journal entries in the books of A Ltd. & B
Ltd. giving effects to the above transactions. Also pass the journal entries
in the books of AB Ltd.
Solution
Statement of Purchase Consideration (Net Asse t Method)
Particulars A Ltd. B Ltd. AB Ltd.
Assets: Goodwill 5000 - 5000 Land and Building 17000 10000 27000 Plant and Machinery 16000 14400 30400 Furniture and Fittings 5000 7500 12500 Stock 9600 6100 15700 Debtors 12000 6000 18000 Cash 8000 300 8300 Total (A) 72600 44300 116900 Less. External Liabilities Reserve for Bad Debts 600 300 900 Creditors 4000 8000 12000 Bills Payable 4000 - 4000 Bank Overdraft - 8000 8000 Total (B) 8600 16300 24900 Purchase Consideration (A –
B) 64000 28000 92000 Fully paid shares of Rs. 100
each AB Limited 64000 28000 92000
Note: Assets for which valuation is not given are taken at book value. Eg .
Land & Building, Furniture etc.
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Page 56

Financial Accounting
56 Journal of A Limited
Sr.
No Particulars Dr (Rs) Cr (Rs)
1 Asset s Tfd. Realisation A/c Dr
To Goodwill
To Land and Building
To Plant an d Machinery
To Stock
To Debtors
To Furniture & Fixtures
To Cash
(being the assets transferred to
close the assets a/cs on
amalgamation) 81000 5000 17000 24000 10000 12000 5000 8000 2 Liabilities Tfd.
Sundry Creditors A/c Dr
Bills Payable A/c Dr
To Realisation A/c
(Being transfer of current
liabilities on Amalgamation) 4000 4000 8000 3 Purchase Consideration D ue AB Limited A/c Dr
To Realisation A/c
(Being the purchase
consideration due for take -over
of assets and liabilities) 64000 64000 4 Loss on Realisation Equity Shareholders A/c Dr
To Realisation A/c
(Being the loss on realization
transferred) 9000 9000 5 Capi tal Tfd. Equity Share Capital A/c Dr
To Equity Shareholders A/c
(Being the transfer on
amalgamation to close capital
a/c) 50000 50000 munotes.in

Page 57

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
57 6 Reserves Tfd. General Reserve A/c Dr Profit and Loss A/c Dr
To Equity Shareholders A/c
(Being transfer of reserves etc.
on amalgamation) 20000 3000 23000 7 PC Received
Equity Shares in AB Limited
A/c Dr
To AB Limite d
(Being the purchase
consideration received from AB
Ltd vide agreement) 64000 64000 8 Payment to Equity
Shareholders
Equity Shareholders A/c Dr
To Equity Shares in AB
Limited
(Being the payment of purchase
consideration to Equity
Shareholders vide agreement of
amalgamation) 64000 64000

Journal of B Limited
Sr. No Particulars Dr (Rs) Cr
(Rs)
1 Assets Tfd.
Realisation A/c Dr. To Goodwill
To Land and Building
To Plant and Machinery
To Stock
To Debtors
To Furniture & Fixtures
To Cash
(being the assets transferred to close
the assets a/cs on amalgamation) 50300 2000 10000 16000 7500 7000 7500 300 munotes.in

Page 58

Financial Accounting
58
2 Liabilities Tfd.
Sundry Creditors A/c Dr. Bank Overdraft A/c Dr. To Realisation A/c
(Being transfer of current liabilities
on Amalgamation) 8000 8000 16000 3 Purchase Consideration Due
AB Limited A/c Dr. To Realisation A/c
(Being the purchase consideration
due for take -over of assets and
liabilities) 28000 28000 4 Loss on R ealisation
Equity Shareholders A/c Dr To Realisation A/c
(Being the loss on realization
transferred) 6300 6300 5 Capital Tfd.
Equity Share Capital A/c Dr. To Equity Shareholder s A/c
(Being the transfer on the
amalgamation to close capital a/c) 40000 40000 6 Reserves Tfd.
Equity Shareholders A/c Dr. To Profit and Loss A/c
(Being transfer of reserves etc. on
amalgamation) 5700 5700 7 PC Re ceived
Equity Shares in AB Limited A/c Dr. To AB Limited
(Being the purchase consideration
received from AB Ltd vide
agreement ) 28000 28000 8 Payment to Equity Shareholders
Equity Shareholders A/c Dr. To Equity Shares in AB Limited
(Being the payment of purchase
consideration to Equity Shareholders
vide agreement of amalgamatio n) 28000 28000
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Page 59

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
59 Journal of AB Limited
Sr.
No Particulars Dr (Rs) Cr (Rs)
1 Takeover of A Limited ( Purchase
Consideration)
Goodwill A/c Dr
Land and Building A/c Dr
Plant and Machinery A/c Dr
Furniture Fittings A/c Dr
Stock A/c Dr
Debtors A/c Dr
Cash A/c Dr
To Creditors
To Bills Payable
To Reserve for Bad Debts
To Liquidator of A Ltd.
(Being the assets and liabilities taken
over at agreed value) 5000 17000 16000 5000 9600 12000 8000 4000 4000 600 64000 2 Liquidator of A Ltd. A/c Dr
To Equity Share Capital
(Being payment of purchase
consideration) 64000 64000 3 Takeo ver of B Limited (Purchase
Method)
Land and Building A/c Dr
Plant and Machinery A/c Dr
Furniture Fittings A/c Dr
Stock A/c Dr
Debtors A/c Dr
Cash A/c Dr
To Creditors
To Bank Overdraft
To Res erve for Bad Debts
To Liquidator of B Ltd.
(Being the assets and liabilities taken
over at agreed value) 10000 14400 7500 6100 6000 300 8000 8000 300 28000 4 Liquidator of B Ltd. A/c Dr
To Equity Share Capital
(Being payment of purchase
consideration) 28000 28000


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Page 60

Financial Accounting
60 Illustration 6)
Following is th e summary Balance Sheets of X Ltd. and Y Ltd.
Balance Sheets as on 31st March, 2017
Liabilities X Ltd. Y Ltd Assets X Ltd. Y Ltd.
Equity
Share
Capita l of
Rs. 10
each 7500000 4500000 Building 2500000 1550000 Export
Profit
reserves 300000 300000 Machiner y 3250000 1700000 Profit &
Loss A/c 700000 600000 Stock 2550000 1800000 General
Reserves 200000 450000 Debtors 900000 1000000 12%
Debenture
s of Rs.
100 each 500000 300000 Bank 700000 550000 Sundry
Creditors 700000 550000 Share
Issue
Expenses - 100000 Total 9900000 6700000 Total 9900000 6700000
Z Ltd. was formed to acquire all assets and liabilities of X Ltd. and Y Ltd.
on the following terms:
1. Z Ltd. to have an authorized share capital of Rs. 5 crores divided into
500000 equity shares of Rs. 100 eac h.

2. The business of both companies were taken over for a total price of Rs.
1.2 crores to be discharges by Z Ltd. by issue of equity shares of Rs.
100 e ach at a premium of 20%.

3. The shareholders of X Ltd. and Y Ltd. to get shares in Z Ltd. in the
ratio of net assets values of their respective shares.

4. The Debentures of both the companies to be converted into equivalent
number of 14% Debentures of Rs. 10 0 each in Z Ltd. at a discount of
10%.



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Page 61

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
61 5. All the tangible assets of both companies are taken over by Z Ltd. at
book values except the following:

Assets X Ltd. Y Ltd
Building 2800000 1820000 Machinery 3150000 1600000
6. Sundry Creditors of X Ltd. and Y Ltd. are taken over at Rs. 650000
and Rs. 500000 respectively.

7. Statutory reserves are to be mainta ined for 3 years more.
You are required to :-
1. Compute purchase consideration of X Ltd. and Y Ltd.
2. Pass Journal Entries in the books of Z Ltd.
3. Prepare a balance sheet after amalgamation. Apply purchase method.
Solution.
Purchase Consideration and Settleme nt
Particulars X Ltd Y Ltd Z Ltd (BS)
Assets Taken Over
Building 2800000 1820000 4620000 Machinery 3150000 1600000 4750000 Stock 2550000 1800000 4350000 Debtors 900000 1000000 1900000 Bank 700000 550000 1250000 (A) 10100000 6770000 16870000 Liabilities Taken Over Debentures 450000 270000 720000 Creditors 650000 500000 1150000 (B) 1100000 770000 1870000 Net Assets (A – B) 9000000 6000000 15000000 Purchase Consideration (in
ratio of 9:6)
X Ltd. : 120000 X 9 / 15
Y Ltd. : 120000 X 6 / 15 7200000 4800000 12000000 No of Shares (@ Rs. 120 each) X Ltd. : 7200000 / 120
Y Ltd. : 4800000 / 120 60000 40000 100000 munotes.in

Page 62

Financial Accounting
62 Journal of Z Ltd.
Sr.
No Part iculars Dr (Rs) Cr (Rs)
1 Business Purchase A/c Dr.
To Liquidator of X Ltd
To Liquidator of Y Ltd.
(Being the purchase of business as
per agreement) 12000000 7200000 4800000 2 Building A/c Dr
Machinery A/c Dr
Stock A/c Dr
Debtors A/c Dr
Bank A/c Dr
To 12% Debentures of X
Ltd A/c
To Sundry Creditors A/c
To Business purchase A/c
To Capital reser ve A/c
(Being the assets and liabilities of X
Ltd. taken over recorded) 2800000 3150000 2550000 900000 700000 450000 650000 7200000 1800000 3 Liquida tor of X Ltd. A/c Dr
To Equity Share Capital A/c
To Securities P remium A/c
(Being the purchase consideration of
X Ltd. discharged) 7200000 6000000 1200000 4 12% Debentures of X Ltd. A/c Dr
Dis. on issue of debentur es A/c Dr
To 14% Debentures A/c
(Being the issue of 12% Debentures
to 14% Debenture holders of X Ltd. ) 450000 50000 500000 5 Building A/c Dr
Machinery A/c Dr
Stock A/c Dr
Debtors A/c Dr
Bank A/c Dr
To 12% Debentures of Y Ltd A/c
To Sundry Creditors A/c
To Business purchase A/c
To Capital reserve A/c
(Being the assets and liabilities of Y
Ltd. taken over recorded) 1820000 1600000 1800000 1000000 550000 270000 500000 4800000 1200000 munotes.in

Page 63

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
63
6 Liquidator of Y Ltd. A/c Dr
To Equity Share Capital A/c
To Securities Prem ium A/c
(Being the purchase consideration
of Y Ltd. discharged) 4800000 4000000 800000 7 12% Debent ures of Y Ltd. A/c Dr
Dis. on issue of debentures A/c Dr
To 14% Debentures A/c
(Being the issue of 12% Debentures
to 14% Debenture h olders of Y Ltd ) 270000 30000 300000 8 Amalgamation Adj st Res. A/c Dr
To Export Profit Reserv e A/c (X) To Export Profit Reserve A/c (Y) (Being the identity of Statutory
Reserves retained) 600000 300000 300000
Balance Sheet of Z Ltd. as at 3 1.03.2017 (After Amalgamation)
No. Particulars Note
No. Amount
(Rs)
I Equity and Liabilities
1. Shareholders’ Fund a. Share Capital 1 10000000 b. Reserves and Surplus 2 5000000 2. Non-Current Liabilities Long Term Borrowings (14%
Debentures) 800000 3. Current Liabilities Trade Payables 1150000 Total 16950000 II Assets 1. Non-Current Assets a. Property, Plant & Equipment Tangible Assets 3 9370000 b. Other Non -Current Assets 4 80000 2. Current Assets a. Inventories 4350 000 b. Trade Receivables 1900000 c. Cash & Cash Equivalent (Bank) 1250000 Total 16950000 munotes.in

Page 64

Financial Accounting
64 Note s to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Authorised Shares : 500000 Equity Shares
of Rs. 100 each 50000000 Issue d and Fully paid up shares:
100000 Equity Shares of Rs. 100 each 10000000 2. Reserves and Surplus a. Capital Reserve (on Amalgamation) 3000000 b. Export Profit Reserve 600000 c. Security premium 2000000 d. Amalgamation Adjustment Reserve (600000) Total 5000000 3. Tangible Assets Building 4620000 Machinery 4750000 Total 9370000 4. Other N on-Current Assets Discount on issue of Debentures
(Assumed, amortizable after 12 months) 80000 Total 80000 Note:
1. Amalgamation Adjustment Reserve is t reated as a separate line item
under “Reserves” vide the amendment in AS 14 by the MCA
2. Alternatively , Discount on issue of debentures may be written off
against Security premium.





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Page 65

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
65 Illustration 7
Aqua Engineers Ltd, a newly formed company acquired the business of
Beeta Ltd. as on 31.03.2017. The summary Balance Sheet of Beeta Ltd. as
on that date was as under :

Liabilities Amount Assets Amount
Equity Shares of Rs.
10 each fully paid 150000 Goodwill 20000 General Reserve 25000 Land and Building 80000 Export Profit reserve 8000 Plant 80000 Profit and Loss A/c 18000 Investment 30000 12% Debentures 60000 Stock 40000 Sundry Creditors 37000 Debtors 50000 Provision for Tax 30000 Bills Receivable –
Trade 8000 Bank 20000 Total 328000 Total 328000
Terms of Acquisition
1. Aqua Engineers Ltd. issued 25000 equity shares of Rs. 10 each at Rs.
12 per share.

2. Aqua E ngineers Ltd. paid Rs. 4 in cash for each shares of Beeta Ltd.

3. Aqua Engineers Ltd. discharged 12% Debentures of Beeta Ltd. at 10%
Premium by issu e of its 15% Debentures at a discount of 12%.

4. Aqua Engineers Ltd. paid absorption expenses Rs. 3000

5. Aqua En gineers Ltd. revalued Land & Building at Rs. 100000, Plant at
10% below book value, Stock at Rs. 35000 and debtors subject to 5%
provision for dou btful debts.

6. Beeta Ltd. sold one -fifth of the shares received from Aqua Engineers
Ltd at Rs. 13 per share.

7. Aqua Engineers Ltd issued 10000 equity shares of Rs. 10 each at Rs.
12 each to the public. The issue was fully subscribed and paid for.

8. Export P rofit Reserve is to be maintained for next three years.

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Page 66

Financial Accounting
66 You are required to:
1. Compute Purchase Consideration

2. Prepare Realization Account, Aqua Engineers Ltd. Account, Equity
Shareholders Account, Equity Shares in Aqua Engineers Account and
Bank Account in the books of Beeta Ltd.

3. Prepare Balance Sheet of Aqua Engineers Ltd. after acquisition under
purchase method .
Solution.
Aqua Engineers Ltd.
Statement of Purchase Consideration (Net Payment Method)
Particulars Amount (Rs)
Equity Shares (25000 X 12) 300000
Cash (15000 X 4) 60000
Total 360000

In the books of Beeta Ltd.
Dr. Realization Account Cr.
Particulars Amount Particulars Amount
To Goodwill 20000 By 12% Debentures 60000 To Land &
Building 80000 By Sundry
Creditors 37000 To Plant 80000 By Provision for
Tax 30000 To Investment 30000 By Aqua Engineers
Ltd. A/c (PC) 360000 To Stock 40000 By Equ ity Shares in
Aqua Engineers
A/c (Profit on sale
of shares) 5000 To Debtors 50000
To Bills
Receivable 8000
To Equity
Shareholders A/c
(Prof it on
Realization) 164000
Total 492000 Total 492000 munotes.in

Page 67

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
67 Dr. Equity Shareholders Account Cr.
Particular s Amount Particulars Amount
To Equity Shares in
Aqua Engineers A/c 240000 By Equity Share
Capital 150000 To Cash/Bank A/c 125000 By General Reserve 25000 By Export Profit
Reserve 8000 By Profit & Loss A/c 18000 By Realization A/c
(Profit) 164000 Total 365000 Total 365000
Aqua Engineers Ltd. A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Realization A/c 360000 By Equity Shares
in Aqua
Engineers A/c 300000 By Cash/Bank 60000 Total 360000 Total 360000
Equity Shar es in Aqua Engineers Ltd. A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Aqua Engineers
Ltd. A/c 300000 By Bank A/c (25000
X 1/5 X 13) 65000 To Realization A/c
(Profit) 5000 By Equity
Shareholders A/c
(Bal) 240000 Total 305000 Total 305000
Cash/Bank Account
Dr Cr.
Particulars Amount Part iculars Amount
To Balance b/d 20000 By Realization 20000 To Aqua Engineers
Ltd. A/c 60000 By Equity
Shareholders A/c 125000 To Equity Shares in
Aqua ltd. 65000 Total 145000 Total 145000 munotes.in

Page 68

Financial Accounting
68 Aqua Engineers Limited
Balance Sheet as on 31st March 2017
No. Particulars Note
No. Amount
(Rs)
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capital 1 350000 b. Reserves and Surplus 2 70000 2. Non-Current Liabilities Long Term Borrowings 3 75000 3. Current Liabilities a. Trade Payables 37000 B Short Term provision (Provision
for Tax) 30000 Total 562000 II Assets 1. Non-Current Assets a. Property, Plant & Equipment Tangible Asse ts 4 172000 Intangible Assets (Goodwill) 183500 b. Non-Current Investment 30000 C Other Non -Current Assets 5 9000 2. Current Assets a. Inventories 35000 b. Trade Receivables 6 55500 c. Cash & Cash Equivalent (Bank) 77000 Total 562000
Notes to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Issued and Ful ly paid up shares:
35000 Equity Shares of Rs. 100 each 350000 2. Reserves and Surplus a. Export Profit Reserve 8000 b. Security premium reserve 70000 c. Amalgamation Adjustment Reserve (8000) Total 70000 munotes.in

Page 69

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
69 3. Long Term Borrowings 15% Debentures of Rs. 100 each (66000/88%) 75000 4. Tangible Assets Land & Building 100000 Plant 72000 Total 172000 5. Other Non -Current Assets Discount on issue of Debentures
(Assumed, amortizable after 12 months) 9000 Total 9000 6. Trade Receivables a. Debtors (50000 – 2500) 47500 b. Bills Receivable – Trade 8000 Total 55500 Working Notes:
Statement of Net Assets Taken Over
Particulars Amount Amount
Asset s
Land and Building (Given) 100000 Plant (80000 X 90%) 72000 Investment (Book Value) 30000 Stock (Given) 35000 Debtors (Book Value) 50000 Bills Receivable (Book Value) 8000 Bank (book Value) 20000 315000
Less. Liabilities
12% Debentu res (60000 X 110%) 66000 Sundry Creditors (Book Value) 37000 Provision for Tax ( Book Value) 30000 Provision for Doubtful Debts (50000 X
5%) 2500 135500 Net Assets Taken Over 179500 Less. Purchase Consideration 360000 Goodwill 180500
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Page 70

Financial Accounting
70 Dr. Cash/Bank Account Cr.
Particulars Amount Particulars Amount
To Beeta Ltd. T/o 20000 By Goodwil l (Abs.
Exp) 3000 To Shares issued
(10000 X 12) 120000 By Beeta Ltd. (P.C) 60000 By Balance c/d 77000 Total 140000 Total 140000
Note.
1. Alternatively, Di scount on issue of debentures may be adjusted against
Security Premium.

2. Amalgamation Adjustment Reserve is treated as a separate line item
under “Reserve” vide the amendments in AS 14 by the MCA.
Illustration 8.
A Ltd. and B Ltd. carry on similar busine ss decided to amalgamate and for
this purpose a new company AB Ltd. was formed to take over assets and
liabilities of both the companies. It is agreed that fully paid shares of Rs.
100 each shall be issued by the New Co. to the value of Net Assets of each
of the old companies.
Summary Balance Sheet of A Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
Shares of Rs. 50
each 50000 Goodwill 5000 General reserve 20000 Land and Building 17000 Profit and Loss A/c 3000 Plant and
Machinery 24000 Sundry Creditors 4000 Stock 10000 Bills Payable 4000 Debtors 12000 Furniture & Fittings 5000 Cash at Bank 8000 Total 81000 Total 81000


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Page 71

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
71 Summary Balance Sheet of B Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
800 Shares of Rs. 50
each 40000 Goodwill 2000 Bank Overdraft 8000 Land and Building 10000 Sundry Creditors 8000 Plant and
machinery 16000 Stock 7500 Furniture and
Fittings 7500 Debtors 7000 Cash 300 Profit and Loss A/c 5700 Total 56000 Total 56000
The followi ng is the accepted scheme of valuation of the business of the
two companies:
A Ltd:
(a) to provide for reserve for bad debts at the rate of 5% on Debtors
(b) to write off Rs. 400 from stock; and
(c) to write off 33 1/3% from plant and machinery
B Ltd:
(a) to eliminate its goodwill and profit and loss a/c balance
(b) to write off bad debts Rs. 1000 and to provide a reserve of 5% on the
balance of debtors;
(C) to write off Rs. 1400 from the value of stock.
You are required to prepare the Ledger Accounts in the bo oks of A Ltd. &
B Ltd. and also prepare opening balance sheet of AB Ltd.
Solution.
Statemen t of Purchase Consideration (Net Asset Method)
Particulars A Ltd. B Ltd. AB Ltd. Assets:
Goodwill 5000 - 5000 Land and Building 17000 10000 27000 Plant and Machinery 16000 14400 30400 Furniture and Fittings 5000 7500 12500 Stock 9600 6100 15700 munotes.in

Page 72

Financial Accounting
72 Debtors 12000 6000 18000 Cash 8000 300 8300 Total (A) 72600 44300 116900 Less. External Liabilities Reserve for Bad Debts 600 300 900 Creditors 4000 8000 12000 Bills Payable 4000 - 4000 Bank Overdraft - 8000 8000 Total (B) 8600 16300 24900 Purchase Consideration (A – B) 64000 28000 92000 Fully paid shares of Rs. 100 each
AB Limited 64000 28000 92000
Note: Assets for which valuation is n ot given are taken at book value. Eg.
Land & Building, Furniture etc.
Ledger of A Limited
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sundry Assets
(transfer) 81000 By Creditors 4000 By Bills Payable 4000 By AB Limi ted (PC
Due) 64000 By Equity
Shareholders (Loss
on realization) 9000 Total 81000 Total 81000
Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(Loss) 9000 By Equity Share
Capital A/c 50000 To Equity S hares in AB
Ltd. (PC received) 64000 By General
Reserve Account 20000 By Profit and
Loss A/c 3000 Total 73000 Total 73000
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Page 73

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
73 Dr. AB Limited Account Cr.
Particulars Amount Particulars Amount
To Realisati on A/c
(PC Due) 64000 By Equity Shares in
AB Ltd. (P. C
Received) 64000 Total 64000 Total 64000
Ledger of B Limited
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sundry Assets
(transfer) 50300 By Creditors 8000 By Bank O/D 8000 By AB Limited (PC
Due) 28000 By Equity
Shareholders (Loss on
realization) 6300 Total 50300 Total 50300
Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount To R ealisation A/c
(Loss) 6300 By Equity Share
Capital A/c 40000 To P & L A/c (Dr. Bal) 5700 To Equ ity Shares in AB
Ltd. (PC received) 28000 Total 40000 Total 40000
Dr. AB Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(PC Due) 28000 By Equity Shares i n
AB Ltd. (P. C
Received) 28000 Total 28000 Total 28000
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Page 74

Financial Accounting
74 AB Limited
Balance Sheet as on 31st March 2012
No. Particulars Note No. Amount (Rs)
I Equity and Liabilities
1. Shareholders’ Fund
Share Capital 1 92000 2. Current Liabilities a. Trade Payables 2 16000 b. Short Term Borrowings (Bank O/D) 8000 Total 116000 II Assets 1. Non-Current Assets Property, Plant & Equipment Tang ible Assets 3 69900 Intangible Assets (Goodwill) 5000 2. Current Assets a. Inventories 1570 0 b. Trade Receivables (18000 – 900) 17100 c. Cash & Cash Equivalent (Cash in
hand) 8300 Total 116000
Notes to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Issued and Fully paid up shares:
920 Equity Shares of R s. 100 each 92000 2. Trade Payables a. Creditors 12000 b. Bills Payable 4000 Total 16000 3. Tangible Assets Land & Building 27000 Plant& Machiner y 30400 Furniture & Fittings 12500 Total 69900
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Page 75

As 14 - Amalgamation,
Absorption & External
Reconstruction - I
75 Absorption
Illustration 9.
Premier Ltd. agreed to acquire the business of Modern Auto Ltd. as on 31st
March 2012. The Summary Balance Sheet of Modern Auto Ltd. as on that
date was as under:
Liabilities Amount Assets Amount
Share Capital
6000 Equity Shares
of Rs. 10 each fully
paid up 60000
Goodwill
Building 10000 30000 General Reserve 17000 Machinery 34000 Profit & Loss A/c 11000 Stock 16800 6% Debentures 10000 Book Debts 3600 Sundry Creditors 2000 UTI Bank Account 5600 Total 100000 Total 100000
The considerations payable by Premier Ltd. was agreed at as follows:
a. Cash payment equal to Rs. 2.50 per share in Modern Auto Ltd.
b. Issue of 9000 Equity Shares of Rs. 10 each of Premier Ltd. having an
agreed value of Rs. 15 per share.
c. Issue of such an amount of fully paid 8% Debentures of Premier Ltd.
at Rs. 96 each as is sufficient to discharge 6% Debentures of Modern
Auto Ltd. at 20% premium.
While computing purchase consideration, Premier Ltd. val ued building
and machinery at Rs. 60000 each, stock at Rs. 14200 and Book Debts
subject to 5% provi sion for discount. The cost of liquidation of Modern
Auto Ltd. was Rs. 500
Prepare:
1. Necessary ledger Accounts in the books of Modern Auto Ltd.
2. Journalise the transactions in the books of Premier Ltd.
Solution.
In the Books of Modern Auto Ltd.
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount To Assets tfd.
Goodwill 10000 By Sundry
Creditors tfd. 2000 Building 30000 By Debentures
tfd. 10000 Machinery 34000 By Premier
Ltd. A/c 150000 munotes.in

Page 76

Financial Accounting
76 Stock 16800 Debtors 3600 Bank 5600 100000 To Cash ( Expenses) 500 To Equity Shareholders A/c
(Profit on Realisation) 61500 Total 162000 Total 162000
Dr. Cash Account Cr.
Particulars Amount Particulars Amount
To Premier
Ltd. 15000 By Realisation A/c
(Expense s) 500 By Equity
Shareholders A/c 14500 Total 15000 Total 15000
Dr. Equity Shareholde rs Account Cr.
Particulars Amount Particulars Amount
To Cash (15000 –
500) 14500 By Equity Share
Capital 60000 To Equity Shares in
premier Ltd. 135000 By General reserves 17000 By P & L A/c 11000 By Realisation A/c 61500 Total 149500 Total 149500
Dr. Premier Ltd. Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c 150000 By Cash 15000 By Equi ty Shares in
Premier Ltd. 135000 Total 150000 Total 150000



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As 14 - Amalgamation,
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Reconstruction - I
77 In the Books of Premier Ltd.
Journal
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Building A/c Dr
Machinery A/c Dr
Stock A/c Dr
Book Debts A/c Dr
UTI Bank A/c Dr
Goodwill A/c (Bal. fig) Dr
To Provision for
Discount on Debtors A/c
To Creditors A/c
To Debentures in
Modern Auto Ltd. A/c
To liquidators of Modern
Auto Ltd. A/c
(Assets and Liabilities taken over at
agreed values, difference between
P.C and net assets value tfd. To
goodwill) 60000 60000 14200 3600 5600 20780 180 2000 12000 150000 2 Liquidators of Modern Auto Ltd. Dr.
To Cash
To Equity Shares Capital A/c
To Securities Premium A/c
(Purchase Consideration paid) 150000 15000 90000 45000 3 Debentures in Modern Ltd. A/c Dr
Discount on issue of Debentures
A/c Dr
To 8% Debentures A/c
(Being Debentures taken over-
discharged ) 12000 500 12500
Working Notes:
1. Purchase Consideration (Payment Basis)
Payment to No. Rate Amount
Equity Shareholders
Cash 6000 2.50 15000 Shares 9000 15.00 135000 Total 150000 munotes.in

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Financial Accounting
78 2. No. of Debentures to be issued – Rs. 12000 / Rs. 96 = 125
3. Discount on issue of Debentures may be adjusted against Premium
received on issue of shares.
Illustration 10.
A Ltd. absorbed B Ltd. w.e.f 31st March 2017 when their Summary
Balance Sheets were as under:
Liabilities A Ltd. B Ltd Assets A Ltd. B Ltd.
Equity
Shares of
Rs. 10 each
fully paid 1000000 400000 Land and
Building 440000 28000 0 11%
Preference
Share of Rs.
100 each
fully paid 400000 400000 Plant and
Machinery 840000 520000 Revaluation
Rese rves 40000 - Stock 580000 320000 General
Reserves 300000 100000 Sundry
Debtors 240000 280000 Export
profit
reserves 80000 40000 Bills
Rece ivable
s – Trade 260000 180000 Other
Statutory
reserves 100000 20000 Bank 40000 20000 15%
Debentures 160000 - 10%
Debentures 240000 Sundry
Creditors 320000 400000 Total 2400000 1600000 Total 2400000 1600000
Terms of Absorption:
a. A Ltd. will issue Eight Equity Shares for every Five Equity Shares in
B Ltd. of Rs. 10 each at Rs. 11 per share.

b. 11% Preferenc e shareholders of B Ltd. will be issued equal number of
preference shares in A Ltd. of Rs. 100 each at Rs. 105 per share.

c. A Ltd. agreed to take over the debentures of B Ltd. at book value.
Subsequently after absorption, 10% debentures holders of B Ltd. a re munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
79 discharged by A Ltd. issuing such number of its 15% Debentures of
Rs. 100 each so as to maintain the same amount of interest.

d. All the a ssets and liabilities of B Ltd were taken over at book value
except the following which were revalued as follows
Land and building Rs. 300000
Plant and Machinery Rs. 500000
Stock Rs. 300000
Sundry Debtors Rs. 260000
Bills Receivable Rs. 160000
Sundry Creditors Rs. 380000

e. Cost of absorption amounting to Rs. 10000 was paid by A Ltd.

f. Creditors of B Ltd. i nclude Rs. 10000 payable to A Ltd.
g.
h. It was decided by directors of A Ltd. to set off goodwill and capital
reserve mutually.
You are re quired to:
1. Compute Purchase Consideration of B Ltd.
2. Pass Journal entries in the books of A Ltd.
3. Prepare Balance Sheet af ter absorption of A Ltd.
Solution.
Statement of Purchase Consideration
No Particulars Amount
1 11% Preference Shareholders
4000 Prefer ence Shares of Rs. 100
each at Rs. 105 each
(4000 X Rs. 105) 420000 2 Equity Shareholders
64000 Equity Shares of Rs. 1 0 each
at Rs. 11 each
(40000 X 8/5) X Rs. 11 704000 3 Purchase Consideration 1124000
Journal of A Ltd.
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Business Purchase A/c Dr
To Liquidator of B Ltd.
(Being Business purchased) 1124000 1124000 munotes.in

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Financial Accounting
80
2 Land & Building A/c Dr
Plant & machinery A/c Dr
Stock A/c Dr
Debtors A/c Dr
Bills Receivable A/c Dr
Bank A/c Dr
Goodwill (Bal. fig) Dr
To 10% Debentures of B Ltd
To Sundry Creditors
To Business Purchase A/c
(Being Assets and Liabilities
Taken Over) 300000 500000 300000 2600 00 160000 20000 204000 240000 380000 1124000 3 Liquidator of B Ltd. A/c Dr
To 11% Pref. Shares
Capita l A/c
To Equity Share Capital
A/c
To Security Premium A/c
(20000 + 64000)
(Being PC disch arged) 1124000 400000 640000 84000 4 10% Debentures of B Ltd. A/c Dr
To 15% Debentures
(240000 X 10/15)
To Capital Reserve
(Being 15% Debentures
exchanged for 10%
Debentures) 240000 160000 80000 5 Amalgamation Adjustment
Reserve A/c Dr
To Export Profit Reserve
To Other Statutory Reserve
(Being Export Profits and
Statutory reserve adjusted) 60000 40000 20000 6 Goodwill A/c Dr
To Bank A/c
(Being payment of cost of
absorption) 10000 10000 7 Sundry Creditors A/c Dr
To Sundry Debtors A/c
(Being settlement of amount
payable by B Ltd. to A Ltd) 10000 10000 8 Capital Rese rve A/c Dr
To Goodwill A/c
(Being Goodwill and Ca pital
Reserve set off mutually) 80000 80000

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
81 A Ltd.
Balance Sheet as at 31st March 2017 (After Amalgamation)
No. Particulars Note No. Amount (Rs)
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capital 1 2440000 b. Reserves and Surpl us 2 604000 2. Non-Current Liabilities Long Term Borrowings (15%
Debentures) 320000 3 Current Liabilities Trade Payables (320000 + 380000
– 10000) 690000 Total 40540 00 II Assets 1. Non-Current Assets Property, Plant & Equipment Tangible Assets 3 2080000 Intangible Assets (Goodwill –
204000 + 10000 – 80000) 134000 2. Current Assets a. Inventories (580000 + 300000) 880000 b. Trade Receivables 4 910000 c. Cash & Cash Equivalent 5 50000 Total 4054000
Notes to Accounts
No Particulars Amount
1. Share Capital
a. Equity Share Capital
Issued and Fully paid up shares:
164000 Equity Shares of Rs. 10 each 1640000 b. Preference Share Capital Issued and Fully paid up shares:
8000, 11% Preference Shares of Rs. 100 eac h 800000 Total 2440000 munotes.in

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Financial Accounting
82
2. Reserves and Surplus
a. Security Premium 84000 b. Revaluation Reserve 40000 c. Export Profit Reserve (80000 + 40000) 120000 d. Statutory Reserve (100000 + 20000) 120000 e. General Reserve 300000 f. Amalgamation Adjustm ent Reserve (60000) Total 604000 3. Tangible Assets Land & Building (440000 + 300000) 740000 Plant & Machinery (840000 + 500000) 1340000 Total 2080000 4 Trade Receivable a. Debtors (240000 + 260000 – 10000) 490000 b. Bills Receivable (260000 + 160000) 420000 Total 910000 5 Cash and Cash Equivalent Balance with Bank (60000 – 10000) 50000
Illustration 11)
B Co. Ltd had the following Summary Balance Sheet as on 31st March
2012:
B Co. Ltd
Liabilities B Ltd Assets B Ltd.
Share Capital Fixed Assets 8300000 50000 Shares of Rs.
100 each 5000000 Current
Assets 6900000 Capital Reserve 1000000 Investments 1700000 General Reserve 3600000 Goodwill 200000 Unsecured Loan s 2200000 Sundry Creditors 4200000 Provision for Taxation 1100000 Total 17100000 Total 17100000

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
83 B Co. Ltd is absorbed by Beesons Limited as on 31st March 2012 on
which date the summary balance sheet of Beesons Limited is as follows:
Beesons Li mited
Liabilities B Ltd Assets B Ltd.
Share Capital Fixed Assets 16000000 800000 Shares of Rs.
10 each 8000000 Current Assets 16800000 General Reserve 10000000 Secured Loans 4000000 Sundry Creditors 4600000 Provision for
Taxation 5200000 Provision for
Dividend 1000000 Total 32800000 Total 32800000
For the purp ose of the absorption the goodwill of B Co. Ltd is considered
valueless. There are also arrears of depreciation in B Co. Ltd amounting to
Rs. 400000. The shareholders in B Co. Ltd are allotted, in full satisfaction
of their claims, shares in Beesons Limite d in the same proportion as the
respective intrinsic values of the shares of the two Companies bear to one
another.
Show necessary ledger accounts of B Co. Ltd and prepare the ope ning
balance sheet of Beeson Limited after absorption.
Solution.
Calculatio n of Purchase Consideration (Net Assets Method)
Particulars B Co. Ltd Beeson Ltd. Intrinsic value of shares
Fixed Assets 8300000 16000000 Less. Arrears of Depreciation 400000 - Net Fixed Assets 7900000 16000000 Current Assets 6900000 16800000 Inves tment 1700000 - (A) 16500000 32800000 Less. Liabilities Secured Loans - 400000 Unsecured Loans 2200000 - munotes.in

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Financial Accounting
84 Sundry Creditors 4200000 4600000 Provision for Taxation 1100000 5200000 Provision for Dividend - 1000000 (B) 7500000 14800000 Intrinsic Value (A – B)
(Value of Net Assets) 9000000 18000000 Total No of Shares 50000 800000 Value per Share (Rs)
(Net Assets / No. of Shares) 180 22.50
Exchange Ratio:
Thus, sharehold ers of B Ltd. should get shares in Beesons Ltd. worth Rs.
9000000. The value per share of Beesons Ltd is Rs. 22.50. So, the number
of shares to be issued to the shareholders of B Ltd. = 9000000 / 22.50 =
400000.
In the Books of B Co. Ltd.
Dr. Realisat ion Account Cr.
Particulars Amount Particulars Amount
To Sundry
Assets (Transfer) 17100000 By Sundry
Liabilities (Transfer) 7500000 By Beesons Limited
(PC Due) 9000000 By Equity
Shareholders (Loss
on Realisation) 600000 Total 17100000 Total 17100000
Dr. Equity Shareholders’ Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(Loss Transferred) 600000 By Equity
Share
Capital
(Transfer) 5000000
To Shares in
Beesons Ltd (PC
Received) 9000000 By Reserves
(Transfer) 4600 000

Total 9600000 Total 9600000 munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
85 Dr. Beesons Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(PC Due) 9000000 By Shares in
Beesons Ltd. (PC
received) 9000000

Total 9600000 Total 9600000

Beesons Limited
Balance Sheet as at 31st March 2012
Sr. No Particulars Note No Amount
I Equity and Liabilities 1. Shareholders’ Fund a. Share Capital 1 1200000 B Reserves and Surplus 2 1500000 2. Non-Current Liabilities Long Term Borrowings 3 6200000 3. Current Liabilities a. Trade Payables 8800000 b. Short Term Provisions 4 73000 00 Total 49300000 II Assets 1. Non Current Assets a. Property, Plant and
Equipment 23900000 b. Non-current Investments 1700000 2. Current Assets 23700000 Total 49300000
Notes to accounts Amount (Rs)
Share Capital
Equity Share Capital
Issued, Subscribed and fully paid:
1200000 equity shares of Rs. 10 each
(Of the above 400000 shares issued on
amalgamation without consideration in cash) 12000000 Reserves a nd Surplus munotes.in

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Financial Accounting
86 Security Premium 5000000 General reserves 10000000 Total 1500 0000 Long term borrowings Secured loans 4000000 Unsecured Loans 2200000 Total 6200000 Short Term Provisions Provision for Tax 6300000 Proposed Dividends 1000000 Total 7300000
Illustration 12.
Tom Ltd. agreed to acquire business of Jerry Ltd. as on 31.03.2013. The
summarised Balance Sheet of Jerry Ltd. as on 31.03.2013 was as follows:
Liabilities Amount Assets Amount 12000 equity
shares of Rs. 10
each fully paid 120000 Goodwill 20000 General Reserve 34000 Building 60000 Profit and Loss
A/c 22000 Machinery 68000 6% Debentures 20000 Closing stock 33600 Creditors 4000 Debtors 7200 ICICI Bank
Account 11200 Total 200000 Total 200000
The consideration payable was as follows:
a. Cash payment equal to Rs. 2.50 per share in Jerry Ltd.
b. Issue of 18 000 Equity shares of Rs. 10 each of Tom Ltd having an
agreed value of Rs. 15 per share.
c. Issue of such an amount of fully paid 9% Debentures of Tom Ltd. at
Rs. 96 each as is suffic ient to discharge 6% Debentures of Jerry at
20% premium.
d. While calculating the consideration the assets were revalued as
follows:
Building and Machinery at Rs. 120000 each, Stock at Rs. 28400
and Debtors subject to 5% provision for discount.
e. Liquidation expenses agreed to be paid by Jerry Ltd. was Rs. 1000 munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
87 Prepare:
1. Statement of Purchase Consideration
2. Necessary ledger accounts to close the books of Jerry Ltd.
3. Opening Journal entries in the books of Tom Ltd.
Solution
Statement of Purchase Consideration (P ayment Method)
Payments to No. Rate Amount
(Rs)
Equity Shareholders
Cash 12000 2.50 30000 Shares 18000 15.00 270000 Total 300000
Ledger Accounts to close Books of Jerry Ltd.
Dr. Realisation Account Cr.
Particulars Amount Particulars Amou nt
To Sundry
Assets: By Sundry
Liabilities:
Goodwill 20000 Creditors 4000 Building 60000 Debentures 20000 Machinery 68000 Stock 33600 By Tom Ltd. A/c
(P.C) 300000 Debtors 7200 Bank 11200 To Cash
(Expenses) 1000 To Profit
transferred to
Equity
Shareholders
A/c (Bal. fig) 123000 Total 324000 Total 324000

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Financial Accounting
88 Dr. Cash Account Cr.
Particulars Amount Particulars Amount
To Tom Ltd. 30000 By Realisation A/c
(Expenses) 1000 By Equity
Shareholders A/c 29000 Total 30000 Total 30000

Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount
To Cash 29000 By Equity Share
Capital 120000 To Equity Shares in
Tom Ltd. 270000 By General Reserve 34000 By Profit and Loss
A/c 22000 By Realisation A/c
(Profit) 123000 Total 299000 Total 299000
Dr. Tom Ltd. Account Cr.
Particulars Amount Particulars Amount
To Realisation
A/c (P.C) 300000 By Cash 30000 By Equity
Shares in Tom
Ltd. 270000 Total 300000 Total 300000




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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
89 Opening Journa l Entries in the Books of Tom Ltd.
No Particulars Dr (Rs) Cr (Rs)
1 Busine ss Purchase A/c Dr
To Liquidation of Jerry
Ltd. A/c 300000 300000 2 Building A/c Dr
Machinery A/c Dr
Stock A/c Dr
Debtors (Gross) Dr
Bank A/c Dr
Goodwill A/c (Bal. fig) Dr.
To Provision for discount
on debtors
To Creditors
To Debentu res (Old)
To Business Purchase
(Being assets and liabilities taken
over at agreed values, difference
transferred to Goodwill A/c) 120000 120000 28400 7200 11200 41560 360 4000 24000 300000 3 Liquidation of Jerry Ltd. A/c Dr
To Cash A/c
To Equity Share Capital A/c
To Security Premi um A/c
(Being P.C Settled) 300000 30000 180000 90000 4 Debentures (Old) A/c Dr
Discount on issue of debentures
A/c Dr
To 9% Debentures A/c
(Being d ebentures taken over
discharged) 24000 1000 25000





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Financial Accounting
90 External Recons tructions
Illustration 13.
The following is the Summary Balance Sheet of Vikrant Ltd:
Liabilities Amount Assets Amount Issued and paid up Intangible Assets 50000
Equity Share c apital 500000 Fixed Assets 420000
Statutory Reserve (to be
maintained for 3 more years) 10000 Current assets 110000
Debentures 100000 Profit and Loss A/c 80000
Creditors 50000
Total 660000 Total 660000

Virat Ltd. agreed to absorb Vikrant Ltd. on th e following terms:
1. Virat Ltd. agreed to take over all the assets and liabili ties
2. The assets of Vikrant Ltd. are to be considered to be worth Rs. 500000
3. The purchase price is to be paid one -quarter in cash and the balance in
shares which are issued at the m arket price.
4. Liquidation expenses amounted to Rs. 300 agreed to be paid by
Vikrant Ltd.
5. Market value of shares of Rs. 10 each of Virat Ltd. is Rs. 12 per share.
6. Debentures of Vikrant Ltd. were paid.
7. The amalgamation is in the nature of purchase.
You a re required to show:
a. Purchase consideration
b. Ledger accounts in the books of Vikrant Ltd.
c. Opening entries in the books of Virat Ltd.
Solution:
Purchase Consideration (PC)
Particulars Rs Rs
Market value of assets taken over: 500000 Less. Liabilities take n over Creditors 50000 Debentures 100000 150000 350000 Purchase con sideration is to be discharged In Cash ¼ X Rs. 350000 87500 In Shares ¾ X Rs. 350000 262500 350000 munotes.in

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
91 Working notes:
Nos of shares to be issued to the vendors co. has been calculated as under:
Amount to be paid in shares : ¾ of Rs. 350000 = 262500
Agreed value of 1 share Rs. 12
No of shares = 262500 / 12 21875 shares
In the books of Vikrant Ltd.
Dr. Realisation A ccount Cr.
Particulars Amount Particulars Amount
To Intangible
Assets 50000 By Debentures 100000 To Fixed Assets 420000 By Creditors 50000 To Current Assets 110000 By Virat Ltd. (PC) 350000 To Bank
(Expenses) 300 By Equity Shareholders
(Loss on realization) 80300 Total 580300 Total 58030 0
Dr. Equity Shareholders Account Cr.
Particulars Amoun t Particulars Amount
To Realisation A/c 80300 By Equity Share
Capital 500000 To Profit and Loss
A/c 80000 By Statutory
Reserve 10000 To Bank 87200 To Shares in Virat
Ltd. 262500 Total 510000 Total 510000
Dr. Virat Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation
A/c 350000 By Bank
Account 87500 By Shares in
Virat Ltd. 262500 Total 350000 Total 350000
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Financial Accounting
92 Dr. Bank Ac count Cr.
Particulars Amount Particulars Amount
To Virat Ltd. 87500 By Realisation
A/c 300 By Equity
Shareholders 87200 Total 87500 Total 87500
Dr. Equity S hares on Virat Ltd. Account Cr.
Particulars Amount Particulars Amount
To Virat Ltd. 262500 By Equity
Shareholders 262500

Total 262500 Total 262500

In the books of Virat Limited
No Particulars Dr (Rs) Cr. (Rs)
1 Business Purchase A/c Dr.
To Liquidators of Vikrant Ltd. A/c 350000 350000 2 Fixed Assets A/c Dr
Current Assets A/c Dr
To Trade Creditors A/c
To Debentures in Vikrant A/c
To Capital Reserve A/c
To Business Purchase A/c 420000 110000 50000 100000 30000 350000 3 Liquidation of Vikrant Ltd A/c Dr
To Equity Share Capital A/c
To Securities Premium A/c
To Bank A/c 350000 218750 43750 87500

4
Amalgamation Adjust Reserve A/c Dr
To Statutory Reserve 10000 10000 5 Debentures in Vikrant A/c Dr
To Bank A/c 100000 100000

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As 14 - Amalgamation,
Absorption & External
Reconstruction - I
93 3.8 EXERCISE
1. What is purchase consideration? What are different methods of
Amalgamation?
2. Conditions for amalgamation in the nature of purchase.
3. Explain the Term:
a. Amalgamation;
b. Absorption;
c. External Reconstruction
Illustration:1
Following is Bala nce Sheet of Toofan Ltd as on 31st March 2023
Liabilities Rs Assets Rs
Share Capital Goodwill 1,00,000 10,000 Equity share of
Rs 100 10,00,000 Machinery 2,50,000 2,000 8% Preference
Shares of Rs.100 each
fully paid 4,00,000 Land &
Building 5,00,000 Securities Premium 2,00, 000 Furniture 1,00,000 Revenue Reserves 1,00,000 Trade
Receivables 4,50,000 Trade Payables 3,00,000 Inventory 4,00,000 Cash and
Bank 2,00,000 20,00,000 20,00,000
Toofan Ltd received the following offers from Hanuman Ltd.:
1. HanumanLtd. agrees to pay 25,00,000 cash.
2. Hanuman Ltd. agrees to take over on the following terms:
a) Equity shareholders to given 20 Equity shares fully paid of
Rs.15each in Hanuman Ltd.for every 2 Equity shares of Toofan
Ltd.
b) 8% Preference shareholders of ToofanLtd. to be issued 1 0%
Preferance shares of Rs.100 each fully paid on 1:1 basis.
c) Sundry Creditors to be settled in cash. munotes.in

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Financial Accounting
94 3. Toofan Ltd. Received another offer Aashna Ltd.offers to take over
business of Toofan Ltd.on the following terms:
a) Assets to be revalued as follows:
Goodwill 1,50,000
Land &Building 9,00,000
Trade Receivables 4,00,000
Inventories 3,50,000
Furniture 80,000
a. Sundry creditors to be taken over subject to 5% discount.

b. 7% Preference shareholders to be issued 10% Preference shares of Rs.
100 each of same amount. Balance of purchase consideration to be
discharged by issue of Equity shares of Rs.10 eachatpar.

c. Prabhu Ltd. agreed to take over Mihir Ltd. on the basis of intrinsic
value of Equity share of Toofan., revaluing Goodwill at Rs.2,00,000.
The entire purcha se price to be paid by issue of 2,0009% Preference
shares of Rs.100 each atpar and balance in Equity shares of Rs.10 each
to beconsidered worth Rs. 12.50.each.




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Page 95

95 4
INTERNAL RECONSTRUCTION
Unit Structure :
4.0 Objectives
4.1 Introduction
4.2 Types of Construction
4.3 Alteration of Shares capital
4.4 Legal Aspects
4.5 Capital Reduction
4.6 Accounting Entries
4.7 Solved Problems
4.0 OBJECTIVES
After studying the unit the students will be able to:
 Understand the various types of reconstruction.
 Know the alternation of share capital.
 Explain the procedure of reconstruction.
 Understand the Accounting entries for reconstruction.
 Solve the practical problems on the unit.
4.1 INTRODUCTION
The term reconstruction refers to reorganising a company's financial
structure and reducing the claims of both classes of shareholders and
creditors against the company. It is also known as reorganisation, and it
allows the existing company to continue. Sick companies (loss -making
companies) can be taken over by profit -making companies; however, if
huge losses exist and assets are overvalued or undervalued, the company
may reduce share capital for reconstruction. External or internal
reconstr uction is possible.
4.2 TYPES OF RECONTRUCTION
The Company can be reconstructed internally or externally.
It means two types of reconstruction is possible: munotes.in

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Financial Accounting
96 4.2.1 External Reconstruction:
In the case of external reconstruction, a new company is formed to t ake
over the operations of an existing loss -making company that is in a bad
financial situation. The vendor company is liquidated, and the new
company takes over its operations.
4.2.2 Internal Reconstruction:
In the case of internal reconstruction, the com pany's capital structure is
reorganised in order to breathe new life into the company. It includes the
modification, reduction, and reorganisation of the company's share capital.
4.3 ALTERATION OF SHARE CAPITAL
A limited company if authorized by its Arti cles of Association can alter
the capital clause of its Memorandum of Association. As per Sec. 61 of
the Companies Act 2013 a company can alter its share capital. The
alteration of share capital may be in following different ways: -
a] Increase in share ca pital by the issue of new shares. b]
Consolidation of shares:
Consolidation refers to conversion of shares of the smaller
denomination into shares of larger denomination e.g: 1000 equity shares
of Rs . 10 each can be consolidated into 100 shares of Rs. 100 each.
c] Subdivision of shares:
Sub division refers to conversion of shares of the larger denomination into
shares of small denomination e.g: 1000 equity shares of Rs. 100 each can
be subdivided into 10000 shares of Rs. 10 each.
d] Conversion of shares into stock:
A corporation's shares can be converted into stock. Stocks can be
purchased in fractions, but shares cannot. Conversion of shares into stock
requires Central Government approval.
e] Surrender of shares:
In the case of a share surrender, shareholders may b e required to surrender
a portion of their shareholdings. Such a surrender may be made prior to
immediate cancellation or for distribution to some of the company's
creditors in satisfaction of their claim.
f] Cancellation of Unissued shares:
There is no need for an accounting entry to be made when a company
cancels its unissued shares. The amount of unissued shares now cancelled
will be deducted from the company's authorised share capital.
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Internal Reconstruction
97 4.4 LEGAL ASPECTS
Internal reconstruction plans should be based on c areful research and
proper asset and liability valuation. It entails a compromise or
arrangement reached between the company and its members or creditors.
However, the following factors should be carefully considered when
developing an internal reconstruct ion strategy:
a] Changes in share capital in any form should be considered in
accordance with the provisions of the M/A & A/A, and if necessary, the
company should amend the provisions in the M/A & A/A.
b] Within 30 days of passing a resolution, the company must notify the
Register of Companies.
c] In some cases, SEBI sanction is required.
d] A Board Resolution is required to make the change.
4.5 CAPITAL REDUCTION (Section 66)
Reducing capital is necessary for internal reconstruction in order to cancel
any paid -up sh are capital that is lost during business operations and is not
equal to the true value of the assets.
The following are some ways that a company can reduce its share capital:
a] writing off capital loss
a] Refunding Surplus paid -up capital.
b] Lowering the membe rs' liability for uncalled capital.
Only after each of the following conditions has been met by the company
can it reduce its share capital.
Such a reduction must be permitted by the business' A/A.
The business adopts a special resolution to lower its shar e capital.
The corporation gets the court's approval.Only when it is approved by the
court and registered with the Registrar of Companies will a capital
reduction take effect. The company's name may, at its option, have the
words "And Reduced" appended for the time period specified.
4.6 ACCOUNTING ENTRIES
1] When the face value of share is changed:
Share capital A/c (old) Dr.
(With paid up value of old shares) To Share Capital A/c (new)
(With paid up value of new shares)
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Financial Accounting
98 2] When any sacrifice is made by the creditors:
Creditors A/c (with sacrifice) Dr.
To Capital Reduction A/c
3] When there is reduction in share capital (face value of share is not
changed)
Share Capital A/c Dr.
To Capital Reduction A/c
(With the amount of reduction).
4] When the value of any asset is appreciated:
Asset A/c (increase in value) Dr.
To Capital Reduction A/c
5] When any sacrifice is made by the Debenture Holders
Debentures A/c (increase in value) Dr.
To Capital Reduction A/c
6] When shares are consolid ated:
Share Capital A/c (say Rs. 10) Dr.
To Share Capital A/c (say Rs. 100)
7] When Shares are subdivided:
Share Capital A/c (say Rs. 100) Dr.
To Share Capital A/c (say Rs. 10)
8] When capital reduction is utilised for writing off fictitious assets,
losses and excess value of other assets:
Capital Reduction A/c Dr.
To P/L A/c (Dr.bal)
To Goodwill A/c
To Preliminary Expenses A/c
To Discount on Shares/Debentures A/c To Other Assets A/c
To Capital Reserve A/c (if any balance is left)

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Internal Reconstruction
99 9] When shares are converted into stock:
Share Capital A/c Dr.
To Share Stock A/c
10] When shares are surrendered:
Share Capital A/c Dr.
To Share Surrendered A/c
11] When surrendered shares are converted into preference shares:
Share Surrendered A/c Dr.
To Preference Share Capital A/c
12] When conting ent liability/unrecorded liability is paid for:
Capital Reduction A/c Dr.
To Bank A/c
(Note: No entry is required for amount foregone against such liability.)
13] When recorded liability is paid for:
Liability A/c Dr.
To Bank A/c
(Note: Any profit or loss shou ld be transferred to Capital Reduction A/c)
14] When recorded assets are disposed off:
Bank A/c Dr.
To Assets A/c
(Note: Any profit or loss on sale should be transferred to Capital Reduction
A/c)
15] When Reconstruction expenses are paid
Capital Reduction A/c Dr.
To Bank A/c
16] When an unrecorded asset is sold off:
Bank A/c Dr.
To Capital Reduction A/c

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Financial Accounting
100 17] When finance is raised by issue of shares
Bank A/c Dr.
To Share Capital A/c
18] When arrears of preference dividend are cancelled : No Entry (As it
is contigent liability)
19] When new debentures are exchanged for old debentures :
Old Debentures A/c Dr.
To New Debentures A/c
20] When arrears of preference dividend are settled by issue of deposit
certificates cash/shares:
Capital Reduction A/c Dr.
To Deposit Certificates/Cash/Share Certificate A/c
21] When the rate of preference dividend is changed:
Preference Share Capital (old) A/c Dr.
To Preference Share Capital A/c (new)
22] When surrendered shares are issued to creditors:
(a) Share Surrendered A/c Dr.
To Share Capital A/c
(b) Creditors A/c Dr.
To Capital Reduction A/c
Note: Profit or Loss on scheme to be transferred to capital Reduction A/c.
23] When provision for taxation, Capital Reserve, Securities Premium
is utilized:
Provision for Taxation A/c Dr.
Capita l Reserve A/c Dr.
Securities Premium A/c Dr.
To Capital Reduction A/c
Capital Reduction Account
It is a nominal account prepared to debit all the losses and fictitious
assets , credit all the incomes , surrendered amount by shareholders
and appreciation of assets. Balance if any is transferred to capital
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Internal Reconstruction
101 Capital Reduction A/c
Particulars Rs. Particulars Rs.
To P & L A/c (Loss written off)
To Goodwill A/c (Written off)
To Preliminary expenses A/c
(Written off)
To Discount on
Shares/Debentures (Writ ten off)
To Assets A/c (Decrease in
value)
To Bank A/c (payment ofunrecorded liability) To Bank A/c (payment ofReconstruction Expenses)
To Bank A/c (Refund ofDirectors Fees)
To Capital Reserve (Balancing
figure) XX
XX
XX

XX

XX

XX

XX

XX

XX By Sh are Ca pital A/c
(Amount of reduction) By Debentures A/c (Amount of Reduction)
By Creditors A/c (Amount
of Sacrifice)
By Assets A/c (Increase invalue)
By Bank A/c (sale ofunrecorded assets) XX

XX

XX

XX

XX
XXX XXX
4.7 SOLVED PROBLEMS
Illustrat ion– 1
Follow ing is the Balance sheet of M/s. Life Care Ltd. as on 31st
March, 2015.
Balance Sheet as on 31st March, 2015.
Liabilities Rs. Assets Rs.
50,000 – 8% Goodwill 1,00,000 Cumulative Preference Shares of Rs.10/ - each.
40,000 – Equity Shares
of Rs.10/ - each.
5,00,000 4,00,000 Freehold Property Leasehold Property
Plant & Machinery
Furniture 1,50,000 2,40,000 3,00,000 1,00,000 Stock 50,000 Security Premium 8,000 Debtors 1,00,000 9% Debentures 1,00,000 Preliminary Exp. 9,000 Accrued Debenture Profit & Loss A/c 2,07,000 Interest 6,000 Sundry Creditors 1,00,000 Bank Overdraft 1,42,000 12,56,000 12,56,000 munotes.in

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Financial Accounting
102 Note –
1) Preference dividend was in arrears for 2 years.
2) There was a contingent liability of Rs.50,000/ - for workmen
compensation.
Following sche me of reconstruction was approved & implemented.
a) The Preference shares were reduced to Rs.7/ - per share fully paid
& Equity Shares to Rs.4/ - per share fully paid.
b) One new Equity share of Rs.10/ - each was issued of every Rs.50/ -
gross prefere nce dividend in arrears.
c) After reduction, both classes of shares were consolidated into Rs.10/ -
shares.
d) The balance of Securities Premium was utilized.
e) Plant & Machinery was written of down to Rs.2,00,000/ -.
f) Furniture was sold at Rs.85,000/ -
g) Preliminary ex penses debit balance in Profit & Loss A/c, debt of
Rs.15,000/ - & obsolete stock Rs.18,000/ - were to be written off.
h) Contingent liability for which no provision has been made was settled
at Rs.25,000/ -. However, the amount of Rs.11,000/ - was recovered
from insurance comp any.
i) Debenture holders agreed to Forgo principal amount by Rs.60,000/ - &
accrued debenture interest in full.
Pass journal entries and capital reduction account.
Solution :
Journal of Life Care Ltd.
Dat
e Particulars Debit
(Rs.) Credit
(Rs.)
1. 8% Preferen ce Share Cap. A/c .................. Dr. (50,000X10)
To 8% Preference Share Capital A/c
(50,000X7)
To Capital Reduction A/c (50,000X3)
(Being reduction in 8% Preference Capital.) 5,00,000 3,50,000 1,50,000 munotes.in

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Internal Reconstruction
103 2. 8% Preference Share Capital A/c .............. Dr. (40,000X8)
To 8% P reference Share Capital A/c
(32,000X10)
(Being consolidation of 8% Preference
Shares.) 3,20,000 3,20,000 3. Equity Share Capital A/c Dr.
(40,000X10)
To Equity Share Capital A/c (40,000X4)
To Capital Reduction A/c (40,000X6)
(Being reduction in Equity Share Capital) 4,00,000 1,60,000 2,40,000 4. Equity Share Capital A/c ........................... Dr. (40,000X3)
To Equity Share Capital A/c (12,000X10)
(Being consolidation of Equity Shares.) 1,20,000 1,20,000 5. Capital Reduction A/c Dr.
To Equity Share Capital A/c
(8%X5,00,00 0X 3 X10)
(Being arrears of Preference dividend paid
by issue of Equity shares.) 24,000 24,000 6. Security Premium A/c Dr.
To Capital Reduction A/c (Being Security Premium used.) 8,000 8,000 7. Bank A/c Dr. Capital Reduction A/c ............................... Dr. To Furniture A/c
(Being sale of Furniture at a loss of
Rs.25,000/ -) 85,000 15,000 1,00,000 8. Capital Reduction A/c ............................... Dr. To Bank A/c
(Being payment of contingent liability.) 25,000 25,000 munotes.in

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Financial Accounting
104 9. Bank A/c ................................ ................... Dr. To Capital Reduction A/c
(Being recovery of claim from insurance
company.) 11,000 11,000 10. 9% Debentures A/c ................................ .... Dr. Accrued Debenture interest A/c ............... Dr. To Capital Reduction A/c 60,000 6,000 66,000 11. Capital Reduction A/c ............................... Dr. To Plant & Machinery A/c (3,00,000 – 2,00,000)
To Preliminary Expenses A /c
To Profit & Loss A/c
To Sundry Debtors A/c
To Stock A/c
To Capital Reserve A/c
(Being losses & Assets written off.) 3,91,000 1,00,000 9,000 2,07,000 25,000 18,000 52,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Part iculars Amt.
To Equity Share Cap. A/c 24,000 By 8% Pref. Share Cap.
A/c
By Equity Share Capital
A/c
By Se curity Premium By 9% Debentures
By Accrued interest on
debentures
By Bank (Insurance) (Preference Dividend) 1,50,000 To Furniture 15,000 To Plant & Machinery A/c 1,00,000 2,40,000 To Preliminary Expenses 9,000 8,000 To Profit & Loss A/c 2,07,00 0 60,000 To Sundry Debtors A/c 25,000 To Stock 18,000 6,000 To Bank 25,000 11,000 (Contingent liability) To Capital Reserve 52,000 4,55,000 4,75,000


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Internal Reconstruction
105 Illustration – 2
Following is the Balance Sheet of Satya Ltd. as on 31st March, 2015 .
Balance Sheet as on 31st March 2015
Liabilities Amt. Assets Amt.
Share Capital Goodwill 3,00,000 1,50,000 Equity Shares Land & Building 2,40,000 of Rs.10/ - each fully paid 7,50,000 Equipment 2,10,000 Sundry Debtors 2,00,970 5,000 6% Preference Shares of Rs.100/ - each
fully paid 5,00,000 Stock
Investment
Cash at Bank 3,32,440 44,000 21,000 8% Debentures 3,00,000 Profit & Loss A/c 7,51,590 Bank Overdraft 1,70,000 Sundry Creditors 3,80,000 (including Rs.22,000 int. on Bank Overdraft) 21,00,000 21,00,000
The preference dividend is in arrears for Five years.
Following scheme of reconstruction was approved by the court.
1) Equity Shares be reduced to Rs.1.5/ - each of then to be consolidated
into shares of Rs.10/ - each.
2) 6% Preference shares be reduced to Rs.50/ - each & then to be
subdivided into shares of Rs.10/ - each.
3) Interest accrued but not due on 8% debentures. For half year ended
31st March 2015 has not been provided in the above Balance Sheet.
The debenture holders have agreed to received 30% of this interest in
cash immediately & provision for the balance be made in the books of
account.
4) Rs.20,000/ - be paid to Preference shareholder s in lieu of arrears of
Preference dividend.
5) The debenture holders have also agreed to accept equal number of
9% debentures of Rs.60/ - each in exchange of 8% debentures of
Rs.100/ - each.
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Financial Accounting
106 6) Bank has agreed to take over 50% stock in full satisfaction of its
claim including interest. The remaining stock be revalued at
Rs.80,000/ -.
7) Investment be sold for Rs.39,000/ -.
8) Tangible Fixed assets be appreciated by 15% & provision be made
for doubtful debts of Rs.18,000/ -.
Give journal entries for the above scheme of reconstruction. Prepare
Capital Reduction Account in the books of Satya Ltd. & Balance sheet of
the company after reconstruction.
Solution :
Journal of Satya Ltd.
Date Particulars Debit
(Rs.) Credit
(Rs.)
1. Equity Shares Capital A/c (5)
Dr.
To Equity Share Capital A/c (1.50) To
Capital Reduction A/c (3.5)
(Being 1,50,000 Equity Shares of Rs.5/ -
each reduc ed to Rs.1.50 each.) 7,50,000 2,25,000 5,25,000 2. Equity Share Capital A/c (1.50)
Dr.
To Equity Share Capital (10)
(Being 1,50,000 Equity shares of Rs.1.5 0
consolidated into shares of Rs.10/ - each.) 2,25,000 2,25,000 3. 6% Preference Share Capital A/c (100) .. Dr.
To 6% Preference Share Capital A/c (50)
To Capital Reduction A/c
(Being 6% Preference shares of Rs.100/ -
each reduced to shares of Rs.50/ - each.) 5,00,000 2,50,000 2,50,000 4. 6% Preference Share Capital A/c
Dr.
To 6% Preference Shares Capi tal A/c
(Being 6% Preference shares of Rs.50/ - each subdivided into shares of Rs.10/ - each.) 2,50,000 2,50,000 munotes.in

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Internal Reconstruction
107 5. Capital Reduction A/c
Dr.
To Bank A/c
To Interest on Debentures A/c
(Being payment of accrued interest on debentures to the extent of 30% & provided for the balance.) 12,000 3,600 8,400 6. Capital Reduction A/c
Dr.
To Bank A/c
(Being paid to preference share holders in
lieu of arrears of divide nd.) 20,000 20,000 7. 8% Preferences A/c (100)
Dr.
To 9% Debentures A/c (60)
To Capital Reduction A/c
(Being exchanged 8% debentures by 9%
debentures.) 3,00,000 1,80,000 1,20,000 8. Bank Overdraft A/c
Dr.
Sundry Creditors A/c
Dr.
(Interest on Bank Over draft) To Stock A/c
To Capital Reduction A/c
(Being taken over 50% of the Stock by the
bank in satisfaction of bank overdraft.) 1,70,000 22,000 1,66,220 25,780 9. Capital Reduction A/c
Dr.
To Stock A/c
(Being reduction in Stock.) 86,220 86,220 10. Bank A/c
Dr.
Capital Reduction A/c
Dr.
To Investment A/c
(Being sale of investment at a loss.) 39,000 5,000 44,000 munotes.in

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Financial Accounting
108 11. Capital Reduction A/c
Dr.
To Profit & Loss A/c
To Provision for doubtful debts A/c To Capital Reserve A/c
(Being written off profit & loss account debit balance, provided for reduction redemption reserve & transferred the remaining amo unt to Capital Reserve Account.) 8,65,040 7,51,590 18,000 95,470 12. Land & Building A/c
Dr.
Equipment A/c
Dr.
To Capital Reduction A/c
(Being appreciation in Land & Building & Equipment.) 36,000 31,500 67,500
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Bank A/c 3,600 By Equity Sh are Capital
A/c
By 6% Preference Share
Capital A/c
By 8% Debentures A/c
By Bank Overdraft &
Credito rs A/c By Land & Building A/c By Equipments A/c 5,25,000 2,50,000 1,20,000 25,780 36,000 31,500 To Int. on debentures 8,400 To Bank A/c 20,000 To Stock A/c 86,220 To Investment A/c 5,000 To Profit & Loss A/c 7,51,590 To Provision for
doubtful debts. 18,000 To Capital Reserve 95,470 9,88,280 9,88,280
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Internal Reconstruction
109 Satya Ltd. ( And Reduced) Balance Sheet as on 1st April 2015
Particulars Notes Rs. Rs. I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 4,75,000 b. Reserves & Surplus 2 95,470 5,70,470 2. Non-Current Liabilities Long Term Borrowings 1,80,000 3. Current Liabilities a. Trade Payables 3,58,000 b. Other Current Liabilities 3 8,400 Total 11,16,870 II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets 4 5,17,500 ii. Intangible Assets 3,00,000 (Goodwill) 2. Current Assets
a. Inventories
b. Trade Receivables
c. Cash & Cash Equivalents
5 80,000 1,82,970 36,400 2,99,370 Total 11,16,870




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Financial Accounting
110 Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital

Issued, Paid Up Share Capital
Equity Share Capital
Equity Shares of Rs. 10/ - each Preference Share Capital
6% Pref. Share of Rs. 10/ - each 22,500 25,000 2,25,000 2,50,000 4,75,000
Note – 2 Reserves & Surplus Rs. Rs.

Capital Reserve
(transf. from Capital Reduction A/c)
95,470

Note – 3 Other Curr ent Liabilities Rs. Rs.

Interest payable on Debentures
8,400

Note – 4 Tangible Assets Rs. Rs.
Land & Building 2,76,000 Equipments 2,41,500 5,17,500
Note – 5 Trade Receivables Rs. Rs.
S. Debtors 2,00,970 Less: Prov.for doubtful debts. 18,000 1,82,970




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Internal Reconstruction
111 Illustration – 3
Following is the Balance sheet of Damyanti Ltd. as on 31st March, 2015 .
Liabilities Amt. Assets Amt.
16,000 12% Preference Goodwill 90,000 Shares of Rs.10/ - each
fully paid up 1,60,000 Patents
Land & Building 50,000 1,50,00 0
14000 10%
Preference shares of
Rs.10/ -, Rs.5/ - per Plant & Machinery
Furniture
Investment 3,00,000 35,000 85,000 share paid up 70,000 Sundry Debtors 3,00,000 Bills Receivables 1,20,000 18,000 Equity Share of Bank 30,000 Rs.10/ - each fully paid
up 1,80,000 Profit & Loss A/c 71,500 12% Debenture of
Rs.100/ - each 1,70,000
11% Debentures of
Rs.100/ - each 2,80,000
Interest due on debenture 21,500
Sundry Creditors 3,50,000
12,31,500 12,31,500
The following scheme of reconstruct ion was submitted & approved by the
court.
1) 12% Preference Shares of the Rs.10/ - each fully paid were reduced to
13% Preference Shares of Rs.10/ - each, Rs.6/ - per share paid up.
2) 10% Preference share of Rs.10/ - each, Rs.5/ - per share paid up were
reduced to 13% Preference shares of Rs.10/ - each, Rs.4/ - per share
paid up.
3) Equity Shares of Rs.10/ - each ful ly paid were reduced to the
denomination of Rs.7/ - each fully paid.
4) 11% Debenture holders agreed to accept 44,800 Equity Shares of
Rs.5/ - each in full settlem ent of their claims.
5) Debentures holders agreed to Forgo the interest due on debentures. munotes.in

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Financial Accounting
112 6) Sundry Creditors agreed to Forgo 20% of their claims.
7) The company recovered as damages as sum of Rs.60,000/ - which was
not recorded in the books.
8) Cost of reconstruction was paid Rs.3,000/ -.
9) Assets are to be revalued as under : Land & Buildings Rs.2,05,000/ -,
Plant & Machinery Rs.2,50,000/ -, Furniture Rs.10,000/ -, Investment
Rs.1,05,000/ -, Sundry Debtors Rs.2,77,000/ -.
10) All intangible assets & accumulated losses are to be written off.
You are required to –
i) Pass journal entries in the books of Damyanti Ltd.
ii) Prepare Capi tal Reduction Account & Balance Sheet after
reconstruction.
Solution:
Journal of Damyanti Ltd.
Date Particulars Debit
(Rs.) Credit
(Rs.)
1. 12% Preference Share Capital A/c ............ Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c
(Being reduction in 12% Preference
Capital.) 1,60,000 96,000 64,000 2. 10% Preference Share Capital A/c ............ Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c
(Being reduction in 13% Preference
Capital.) 70,000 56,000 14,000 3. Equity Share Capital A/c .......................... Dr. To Equity Share Capital A/c To Capital Reduction A/c
(Being reduction in Equity Share Capital.) 1,80,000 1,26,000 54,000 4. 11% Debenture A/c ................................ .. Dr.
To Equity Sh are Capital A/c To Capital Reduction A/c
(Being reduction in debentures.) 2,80,000 2,24,000 56,00 0 5. Interest due on Debenture A/c .................. Dr. To Capital Reduction A/c
(Being interest dues on debentures
cancelled.) 21,500 21,500 munotes.in

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Internal Reconstruction
113 6. Creditors A/c ................................ ............ Dr.
To Capita l Reduction A/c (Being Creditors dues reduced.) 70,000 70,000 7. Bank A/c ................................ ................... Dr. To Capital Reducti on A/c (Being damages
recovered.) 60,000 60,000 8. Capital Reduction A/c ............................... Dr. To Bank A/c
(Being costs of reconstruction paid.) 3,000 3,000 9. Land & Build ing A/c ............................... Dr. Investment A/c ................................ .......... Dr. To Capital Reduction A/c (Being increase in valuations.) 55,000 20,000 75,000 10. Capital Reduction A/c ............................... Dr. To Plant & Machinery A/c To Furniture A/c
To Sundry Debtors A/c 5,01,500 50,000 25,000 23,000 To Goodwill A/c 90,000 To Patents A/c 50,000 To Profit & Loss A/c 71,500 To Capital Reserve A/c 102000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Bank A/c 3,000 By 12% Preference Share Capital A/c
By 10% Preference Share Capital A/c
By Equity Share Capital
A/c
By 11% Debenture A/c
By Interest due on
debentures
By Sundry Creditors By Bank A/c By Land & Building
To Plant & Machinery 50,000 64,000 To Furniture A/c 25,000 To Sundry Debtors A/c 23,000 14,000 To Goodwill A/c 90,000 To Patents A/c 50,000 54,000 To Profit & Loss A/c 71,500 56,000 To Capital Reserve A/c 10,2000 21,500 munotes.in

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Financial Accounting
114 A/c By Investment A/c 70,000 60,000 55,000 20,000 4,14,500 4,14,500
Balance Sheet of Damyanti Ltd. (And Reduced) as on 1st April, 2015
Particulars Notes Rs. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 5,02,000 b. Reserves & Surplus 2 1,02,000 6,04,000 2. Non-Current Liabilities Long Term Borrowings
3 1,70,000 3. Current Liabilities a. Trade Payables 2,80,000 Total 10,54,000 II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets
b. Non -current Investments
3. Current Assets
a. Trade Receivables
b. Cash & Cash Equivalents


4

5 3,97,000 87,000 4,65,0 00 1,05,000 4,84,000 Total 10,54,000



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Internal Reconstruction
115 Notes to Accounts
Note – 1 Share Capital Number Rs.
Authoris ed Share Capital
Issued, Paid Up Share Capital
18,000
44,800
16,000
14,000Equity Share Capital
Equity Shares of Rs. 7/- each
Equity Sh ares of Rs. 5/ - each Preference Share Capital 1,26,000
2,24,000
13 % Pref. Share of Rs. 10/ - each Rs.6/ - paid up
13 % Pref. Share of Rs. 10/ - each Rs.4/ - paid up 96,000
56,000 5,02,000


Note – 2 Reserves & Surplus Rs. Rs.

Capital Reserve
(transf. from Capital Reduction A/c)
1,02,000

Note – 3 Long Term Borrowings Rs. Rs.

12% Debentures of Rs.100/ - each
1,70,000

Note – 4 Tangible Assets Rs. Rs.
Land & Building 2,05,000 Plant & Machinery 2,50,000 Furniture 10,000 4,65,000
Note – 5 Non -current Investments Rs. Rs.

Balance: 85,000 Add: Increase in valuations 20,000 1,05,000 munotes.in

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Financial Accounting
116 Liab ilities Rs. Assets Rs.
Sources of Funds
2,00,000 Equity Shares
of Rs.20/ - each Rs.10/ -
paid up

10% Preference Shares Capital
10,000 Shares of Rs.100/ - each, Rs.50/ -
paid up

Secured Loan
9% Deb. 7,00,000 (+) O/s int. 1,00,000
20,00,000 5,00,000 8,00,000 2,10,000 Application of Sources Fixed assets 15,50,000
Goodwill
50,000 Investment at cost (Market value
1,00,000)
Current Assets & Loans & Advances
Current Assets
Stock 3,00,000 Debtors 5,00,000
B.R. 8,00,000
16,00,000
Less : Liab.
S. Creditors 2,00,000

Profit & Loss A/c 16,00,000 1,10,000
Loan from
ICICI Ltd.
(+) O/s Int.
1,80,000 30,000 14,00,000 4,00,000 35,10,000 35,10, 000
Illustration – 4
M/s. Katrina Ltd. whose Balance Sheet as at 31st March 2015 is as given
below.
Preference dividend is in arrears for 1 year. Following scheme of
reconstruction is approved & agreed upon
1) Preference Shareholders to give up their 50% of claims, dividend to be
paid in full
2) Debenture holders agree to give up their claims to receive interest in
consideration of their rate of interest being enhanced to 12%
henceforth.
3) ICICI Ltd. agree to give up 80% of their interest outstanding in
considerat ion of their claim being paid off at once.
4) Sundry Creditors would like to grant a discount 20% if they were to be
paid off immediately.
5) Balance of Profit & Loss A/c, Goodwill & 50% of the total sundry
debtors to by written off.
6) Fixed Assets to be written down by Rs.50,000/ -.
7) Investment to be reflected at their market value. munotes.in

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Internal Reconstruction
117 8) Cost of reconstructi on is Rs.50,000/ -.
9) To the extent required Equity Shareholders suffers on reduction of
their rights.
10) The Equity shareholder bring in necessary as against their partly paid
shares to leave working capital at Rs.30,000/ -.
Pass necessary journal entries in the books of the company assuming that
scheme has been put through fully & prepare the Balance Sheet after
reconstruction. Ignore narration.
Solution:
In the boo ks of Ms. Katrina Ltd.
Date Particulars Debit (Rs.) Credit
(Rs.)
Dec.
31 Preference Share Capita l A/c ................ Dr.
To Preference Shareholders A/c To Capital Reduction A/c 5,00,000
2,50,000
1. 2,50,000
2. Capital Reduction A/c ........................... Dr. To Preference Shareholders A/c 50,000
50,000
3. 9% Debenture A/c ................................ . Dr. Interest o/s on debenture A/c ................. Dr. To 12% Debentures A/c To Capital Reduction A/c 7,00,000
1,00,000
7,00,000
1,00,000
4. ICICI Loan A/c ................................ ..... Dr.
Outstanding interest A/c ....................... Dr.
To Bank A/c
To Capital Reduction A/c 1,80,0 00
30,000
1,86,000
24,000
5. Capital Reduction A/c ........................... Dr. To Profit & Loss A/c To Goodwill A/c
To Investment A/c To Debtors A/c
To Fixed Assets A/c 7,65,000 4,00,000
50,000
10,000
2,50,000
50,000
To Bank (Expenses) A/c 5,000
6. Creditors A/c................................ .......... Dr. To Bank A/c
To Capital Reduction A/c 2,00,000
1,60,000
40,000
7. Preference Shareholders A/c ................. Dr. To Bank A/c 3,00,000
3,00,000munotes.in

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Financial Accounting
118 8. Equity Share Capital A/c ....................... Dr. To Capital Reduction A/c 4,01,000
4,01,000
9. Bank A/c ................................ ............... Dr.
To Equity Share Capital A/c 6,81, 000
6,81,000

Working Note:
Bank Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital By Creditors A/c By
Expenses A/c
By Loan Interest A/c By
Preference Share
Capital A/c
By Closing Balance 1,60,000 A/c (Bal Figure) 6,81,000 5,000 1,86,000 3,00,000 30,000 6,81,000 6,81,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Preference Dividend By Preference Shareholders A/c
By Debenture Interest
A/c
By Interest A/c By Creditors A/c By Equity Share
Capital A/c
A/c 50,000 2,50,000 To Sundries A/c 7,65,000
1,00,000 24,000 40,000 4,01,000 8,15,000 8,15,000


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Internal Reconstruction
119 Balance Sheet as on 1st April, 2015
Particulars Notes Rs. Rs.
I. Equity and Liabilities
1. Shareholders’ Funds
Share Capital
2. Non-Current Liabilities

1

22,80,000 Long Term Borrowings 12% Debentures 7,00, 000 Total 29,80,000 II. Assets 1. Non current Assets a. Tangible Assets 15,00,000 b. Non Current Investments 1,00,000 2. Current Assets Inventories
Trade Receivables
Cash & Cash equivalents 2 3,00,000 10,50,000 30,000 13,80,000 Total 29,80,000

Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital Issued, Paid Up Share Capital Equity Share Capital 200000 Equity Shares of Rs. 20, Rs.11.4 paid up 200000 22,80,000 22,80,000
Note – 2 Trade Receivables Rs. Rs.
Debtors Bills Receivables 2,50,000 8,00,000 10,50,000 10,50,000

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Financial Accounting
120 Illustration 5
The Balance Sheet of Three Idiots Ltd. as at 31st March 2015 was as under
Liabilities Rs. Assets Rs.
10,000 Equity Shares of Goodwill 1,00,000 Rs.50/ - each fully paid 5,00,000 Other Assets 8,00,000 10%, 50,000 Profit & Loss A/c 3,00,000 Debentures of Rs.10/ - each 5,00,000 Interest on debenture 20,000 Sundry Creditors 1,80,000 12,00,000 12,00,000 For the purpose of reconstruction of the company, necessary resolutions
are passed on the following lines.
1) The Equity Shares are to be sub divided into Share of Re.1/ - each &
each shareholder shall re-surrender 80% of his holding.
2) Out of the surrendered share s, 1,00,000 shares will be converted to 8%
Preference Shares of Rs.10/ - each.
3) Debentures holders will reduced their claims by Rs.2,20,000/ - & in
consideration they are to get the entire Preference Shares Capital
converted from Shares Surrendered.
4) Creditors claims are to be reduced to the extent of Rs.80,000/ - & in
consideration they are to received Equity Shares of Re.1/ - each,
amounting to Rs.50,000/ - from the Shares surrendered.
5) Goodwill & profit & loss A/c (Dr.) are to be written off fully.
6) The remaining surrendered shares shall be cancelled.
You are required to give the journal entries for the above & prepare
Balance sheet of the company after reconstruction .
Journal entries in the books of Three Idiots Ltd.
Date Particulars Debit (Rs.) Credit (Rs.) 1. Equity Share Capital A/c (50) ................ Dr.
To Equity Share Capital A/c (1)
(Being 10,000 Equity Shares of Rs.50/ - each sub-dividend into shares of Re.1/ - each.) 5,00,000 5,00,000 munotes.in

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Internal Reconstruction
121 2. Equity Share Capital A/c........................ Dr.
To Share Surrendered A/c
(Being surrender of 80% of shares.) 4,00,000 4,00,000 3. Shares Surrendered A/c ........................... Dr. 1,00,000 To 8% Preference Share Capital A/c
(Being converted Rs.1,00,000/ - shares surrend ered into 80% Preference Shares
Capital.) 1,00,000 4. 10% Debentures A/c .............................. Dr.
Interest Debenture A/c ............................ Dr.
To Capital Reduction A/c
(Being reduction in the claim of debenture
holders.) 2,00,000 20,000 2,20,000 5. Share Surrendered A/c ........................... Dr.
To Equity Share Capital A/c
(Being issued to Creditors out of surrendered Shares.) 50,000 50,000 6. Creditors A/c ................................ ......... Dr.
To Capital Reduction A/c
(Being reduced the claim of creditors.) 80,000 80,000 7. Capital Reduction A/c ............................ Dr.
To Goodwill A/c
To Profit & Loss A/c
(Being written off Goodwill & Profit & Loss Account debit balance.) 4,00,000 1,00,000 3,00,000 8. Shares Surrendered A/c ........................... Dr.
To Capital Reduction A/c
(Being cancelled remaining
Surrendered Shares.) 2,50,000 2,50,000 9. Capital Reduction A/c ............................ Dr.
To Capital Reserve A/c
(Being the balance on Capital Reduction
transferred to Capital Reserve.) 1,50,000 1,50,000
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Financial Accounting
122 Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Goodwill A/c 1,00,000 By 10% Debentures A/c
By Interest A/c
By Share Surrender ed
A/c
By Creditors A/c 2,00,000 To Profit & Loss A/c 3,00,000 20,000 To Capital Reserve A/c 1,50,00 0 2,50,000 80,000 5,50,000 5,50,000
Three Idiots Ltd. (And reduced) Balance sheet as on 1st April , 2015
Particulars Notes Rs. Rs.
I. Equity and Liabilities
1. Shareholders’ Funds
a. Share Capital
b. Reserves and Surplus
2. Non-Current Liabilities Long Term Borrowings 10% Debentures
3. Current Liabilities
Trade Payables

1 2,50,000 2 1,50,000 4,00,000 3,00,000 1,00,000 Total 8,00,000 II. Asset s
1. Non current Assets
Tangible Assets 8,00,000 Total 8,00,000

Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital - -
Issued, Paid Up Share Capital Equity Share Capital
Equity Shares of Re. 1 each Preference Shares of Rs.
10 each 150000 10000 1,50,000
1,00,000
2,50,000munotes.in

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Internal Reconstruction
123 Note – 2 Reserves & Surplus Rs. Rs.

Capi tal Reserve:
(transf. from Capital Reduction A/c)

1,50,000

Illustration 6
Following is the balance sheet of Veer Ltd. as on 31st March 2015.
Liabili ties Rs. Assets Rs.
10,000 8% Cumulative Goodwill
Patents
Land & Building
Pant & Machinery Investme nt (at cost)
Stock

Debtors :
Considered Goods
3,00,000
Considered Doubtful
70,00 0
Cash
Preliminary Expenses
Profit & Loss A/c 90,000
Preference Shares of
Rs.100/ - each
8,000 Equity Shares of
Rs.100/ - each
9% Debentures of
Rs.100/ - each 10,00,000 8,00,000 7,00,000 30,000 10,00,000 4,80,000 50,000 4,80,000 3,70,000 (Secured on Land / Building) Interest payable to debenture holders 20,000 5,000 Loan from Directors 2,00,000 95,000 7,00,000 Creditors
UTI Bank Overdraft 3,00,000 2,80,00 0 33,00,000 33,00,000
Contingent Liabilities:
1) Claims for damages pending in the court totaling Rs.1,00,000/ -
2) Arrears of Preference dividend Rs.300 000/-.
The board of directors agreed to present the realistic picture of the state of
affairs of t he company’s position & the following scheme of
reconstruction was duly approved.
1) The Preference shares were to be reduced to an equal number of fully
paid Pr eference Shares of Rs.50/ - each. Equity Share to an equal
number of fully paid Equity Shares of Rs.30/- each.
2) All intangible assets, including patents to be written off. munotes.in

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Financial Accounting
124 3) Stock to be revalued at Rs.4,00,000/ - & debtors considered doubtful to
be written off.
4) Preference Shareholders agreed to waive half of the arrears of
dividends & to receive Equity Shares in lieu of the balance.
5) Debenture holder agreed to take over part of the security of the book
value of Rs.2,00,000/ - for Rs.2,00,000/ - in satisfaction of part of their
claim & to provide further cash of Rs.1,00,000/ - after deducting
arrears of interest due to them on floating charge of the rest of the
assets.
6) The contingent liability for claims for damage pending in the court of
law materialized to the full extent. However, the company could
recover Rs.80,000/ - from those who were responsible for such
damages & settled the rest by issuing Equity Shares.
7) The Directors agreed to convert the loan into Equity Shares. You are
required to prepare –
i) Capital Reductio n Account
ii) The Balance sheet after reconstruction
Solution:
In the books of Veer Ltd.
Capital Reduc tion Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Goodwill A/c 90,000 By Preference Share
Capital A/c
By Equity Share
Capital A/c
To Patent s 30,000 5,00,000 To Preliminary Expenses A/c 95,000 5,60,000 To Profit & Loss A/c 7,00,000 By Ca sh A/c (claim
recovery)
By Land & Building A/c
(3,00,000 - 2,00,000) To Stock 80,000 80,000 (4,80,000 - 4,00,000) 1,00,000 To Debtors 70,000 To Preference Dividend A/c 1,50,000 To Cash A/c (damages) 80,000 To Damages A/c 20,000 To Capital Reserve A/c 60,000 12,40,000 12,40,000 munotes.in

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Internal Reconstruction
125 Working Note:
1) Equity Shares @ Rs.30/ - each
Nos. Amount
Original (at Reduced Value) 8,000 2,40,000 Issued against arrears of Preference Dividend 500 15,000 Issued against claim for Damages 666.67 20,000 Loan from Directors converted 6,666.67 2,00,000 Closing Balance 15,833 4,75,000
2) Cash Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Balance b/d To Damages Claim A/c To Debenture holders A/c 5,000 80,000 1,00,000 By Debenture interest
A/c
By Recovery A/c By Balance c/d 20,000 80,000 85,000 1,85,000 1,85,000
3) It is assumed that the debenture holder brought in gross Rs.1,00,000/ -
without deductin g Rs.20,000/ - for arrears of interest.
4) 9% debenture holders
Amount
Balance 7,00,000 Less : Land / Building taken over 3,00,000
Add : Further Cash brought in 4,00,000 1,00,000 Closing Balance 5,00,000


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Financial Accounting
126 Veer Ltd. (And reduced)
Balance Sheet as on 1st April 2015
Particulars Notes Rs. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 9,75,000 b. Reserves & Surplus 2 60,000 10,35,000 2. Non-Current Liabilities Long Term Borrowings 5,00,000 (Secured 9% Debentures) 3. Current Liabilities a. Trade Payables b. Short -Term Liabilities (UTI Bank Overdraft) 3,00,000 2,80,000 5,80,000 Total 21,15,00 0
II. ASSETS
1. Non current Assets a. Fixed Assets - i. Tangible Assets
b. Non Current Inves tment 3 12,80,000 50,000 2. Current Assets a. Inventories
b. Trade Receivables
c. Cash & Cash Equivalents
4 4,00,000 3,00,000 85,000 7,85,000 Total 21,15,000
Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital

Issued, Paid Up Share Capital
Equity Share Capital
Equity Shares of Rs. 30/ - each Preference Share Capital
8 % Pref. Share of Rs. 50/- each 15,833 10,000 4,75,000 5,00,000 9,75,000 munotes.in

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Internal Reconstruction
127 Note – 2 Reserves & Surplus Rs. Rs.
Capital Reserve: Balance
(transf. from Capital Reduction A/c) 60,000

Note – 3 Tangible Assets Rs. Rs.
Land & Building 10,00,000 Less: Given to Debenture holders 2,00,000 8,00,000 4,80,000 Plant & Machinery 12,80,000
Note – 4 Trade Receivables Rs. Rs.

Balance
(Unsecured, Considered Good)
3,00,000

Illustration 7
Monaco Ltd. had adverse trading for past few years resulting in
accumulated losses & over valued assets. It’s Balance Sheet as on 31st
March 2015 is as follows.
Liabilities Rs. Asset s Rs.
Share Capital Goodwill 60,000 (in shares of Rs.10/ - Freehold Property 70,000 each) Leasehold Property 1,50,000 50,000 Equity Share
Capita l
40,000 Preference
Share Capital
Securities Premium
12% Debenture 5,00,000 4,00,000 30,000 1,20,000 Plant
Investment
Stock
Debtors
Profit & Loss A/c 1,40,000 80,000 1,00,000 5,00,000 2,00,000 Accrued Interest 10,000 Creditors 1,10,000 Overdraft 1,30,000 13,00,000 13,00,000
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Financial Accounting
128 Note : Preference dividend is unpaid for past three years.
The shar eholders & the court approved the following scheme of
reconstruction.
1) The paid – up value of preference shares and Equity shares was to be
reduced by 50% & 85% respectively. The face value will remain
unchanged.
2) The Preference dividend for one years is to be paid by allotment of
Equity shares credited Rs.2/ - per share. The remaining amount to be
cancelled.
3) The debenture holders took over Freehold property w hich was
mortgaged in their favour. This property realized Rs.1,40,000/ -. The
balance amount after adjusting principal & interest was handed over to
the company.
4) The investments are sold for Rs.1,00,000/ -.
5) Obsolete Stock worth Rs.25,000/ - & irrecoverable d ebt worth
Rs.15,000/ - are to be written off along with goodwill & profit & loss
A/c.
6) There was a claim against company not provided to the extent of
Rs.1,00,000/ -. This was settled for Rs.83,000/ -.
7) A call @ Rs.3/ - per share on revised Equity & Preference shares was
made. This was paid by all shareholders.
8) The authorized capital was suitably revised from Rs.8,00,000/ - to
Rs.12,00,000/ - which was equally divided between Equity & 8%
Preference shares.
9) Remaining bank balance to be utilized to pay bank overdraft .
You are required to show journal entries & balance sheet after
implementation of the scheme.
Solutio n:
Journal in the books of Monaco Ltd.
Sr. No. Particulars Debit
(Rs.) Credit
(Rs.)
1. 8% Preference Share Capital A/c
……Dr.
To Capital Reduction A/c
(Being reduced Preference share by 50%.) 2,00,000 2,00,000 munotes.in

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Internal Reconstruction
129 2. Equity Share Capital A/c Dr.
To Capital Reduction A/c
(Being 50,000 Equity shares of Rs.10/ - each reduced by 75%.) 4,25,000 4,25,000 3. Capital Reduction A/c Dr.
To Equity Share Capital A/c
(Being 10,667 Equity shares of Rs.3/ - each allotted to satisfy the arrears of preference dividend for 1 year.) 32,000 32,000 4. 12% Debenture A/c Dr.
Accrued Interest on Debenture A/c Dr.
Bank A/c Dr.
To Freehold Property A/c
To Capital Reduction A/c
(Being Freehold property of Rs.70,000/ - taken by debenture holders, remaining amount paid by the debenture holders.) 1,20,000 10,000 10,000 70,000 70,000 5. Bank A/c Dr.
To Investment A/c
To Capital Reduction A/c
(Being sold out investments at a profit of Rs.20,000/ -.) 1,00,000 80,000 20,000 6. Capital Reduction A/c Dr.
To Stock A/c To Debtors A/c To
Goodwill A/c
To Profit & Loss A/c
(Being written off Stock, Debtors, Goodwill & Profit and Loss debit balance as agreed upon.) 3,00,000 25,000 15,000 60,000 2,00,000 7. Capital Reduction A/c Dr.
To Bank A/c
(Being settled the claim.) 83,000 83,000 8. Preference Share Call A/c Dr.
To 8% Preference Share Capital
A/c
(Being made a call on 40,000 Preference Share @ Rs.3/ - each.) 1,20,000 1,20,000 9. Equity Share Call A/c Dr.
To Equity Share Capital A/c
(Being made a call on 66,000 Equity shares @ Rs.3/ - each.) 1,98,000 1,98,000 munotes.in

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Financial Accounting
130 10. Bank A/c Dr.
To Preference Share Call A/c To Equity Share Call A/c
(Being collected call money.) 3,18,000 1,20,000 1,98,0 00 11. Bank overdraft A/c Dr.
To Bank A/c
(Being cleared Bank overdraft.) 1,30,000 1,30,000 12. Capit al Reduction A/c Dr.
To Capital Reserve A/c
( Being Capital Reserve account
closed) 3,00,000 3,00,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital
A/c
To Stock A/c 32,000 25,000 By Preference Capital
A/c
By Equity Share Capital A/c 2,00,0 00 4,25,000 To Debtors A/ c
To Goodwill A/c
To Profit & Loss A/c
To Bank A/c
To Capital Reserve A/c 15,000 60,000 2,00,000 83,000 3,00,000 By 12% Debenture A/c
By Bank A/c 70,000 20,000 7,15,000 7,15,000
Bank Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Freehold Property A/c 10,000 By Capital Reduction
A/c 83,000 To Investment A/c 80,000 By Bank overdraft A/c 1,30,000 To Capital Reduction
A/c 20,000 By Balance c/d 2,15,000 To Preference Share Capital A/c 1,20,000 To Equity Share Capital
A/c 1,98,0 00 4,28,000 4,28,000 munotes.in

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Internal Reconstruction
131 Monaco Ltd. (And reduced) Balance Sheet as on 1st April, 2015
Particulars Notes Rs. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital
b. Reserves & Surplus

1
2 6,25,000 3,30,000 9,55,000 2. Current Liabilities
a. Trade Payables 1,10,000 Total 10,65,000 II. ASSETS
1. Non current Assets
a. Fixed Assets - i. Tangible Assets 3 2,90,000 2. Current Assets
a. Inventories
b. Trade Receivables 4
5 75,000 4,85,000 c. Cash & Cash Equivalents 2,15,0 00 7,75,000 Total 10,65,000
Note – 1 Share Capital Number Rs.
Authorised Share Capital
Equity Share of Rs.10/ - each
8% Preference share of Rs.10/ - each 60,000 60,000 6,00,000 6,00,000 1,20,000 12,00,000 Issued, Paid Up Share Capital
Equity Share Capital Equity Shares of Rs. 10/ - each Rs.5/ - paid up 61,000 3,05,000 Preference Share Capital
8 % Pref. Share of Rs. 10/- each 32,000 3,20,000 6,25,000

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Financial Accounting
132 Note – 2 Reserves & Surplus Rs. Rs.
Security Premium: Balance 30,000 Capital Rese rve:
(trans f. from Capital Reduction A/c) 3,00,000 3,30,000
Note – 3 Tangible Assets Rs. Rs.
Leasehold Property 1,50,000 Plant & Machinery 1,40,000 2,90,000
Note – 4 Inventories Rs. Rs.
Balance 1,00,000 Less : written off -25,000 75,000
Note – 5 Trade Receivables Rs. Rs.
Balance 5,00,000 Less : written off -15,000 4,85,000
Illustration 9
The paid – up Capital of Fast traler Ltd. amounted to Rs.12,00,000/ -
consisting of 6,000 – 5% Cumula tive Shares of Rs.100/ - each and 60,000
Equity Shares of Rs.10/ - each. The Preference dividend was in arrears for
Rs.80,000/ - (Contingent Liability)
The company incurred heavy losses continuously. Therefore, the
Directors recommended to the shareholders the following scheme of
reconstruction to provide a sum sufficient for the following purpose :
1) To write down the book value of Patents by Rs.2,00,000/ -, Plant &
Machinery by Rs.24,000/ - and Tools & Equipments by Rs.8,000/ -.
2) To write off the debit balance of Profit & Loss Account of
Rs.2,96,000/ -. munotes.in

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Internal Reconstruction
133 3) Any balance made available by the reduction of capital is to be utilized
to write off “Experiment & research expenses”
4) The scheme duly approved & authorized provided the following.
i) For every 15, 5% Prefere nce Shares, 8 – 4% Cumulative Preference
Shares of Rs.100/ - each & 40 Equity shares of Rs.2/ - each are to be
issued.
ii) For every Rs.20/ - of Cumulative Preference Divided; 2 Equity shares
of Rs.3/ - each are to be issued.
iii) For every 10 old Equity shares, 2 new Equity shares of Rs.2/ - each are
to be issued.
You are required to:
Pass journal entries in the books of the company to record the above
transactions. Prepare Capital Reduction Account.
Solution:
Journal of Fast Traler Ltd.
3. Equity Share Capital A/c Dr.
To Equity Share Capital A/c
To Capital Reduction A/c
(Being issued 12,000 Equity share of Rs.2/ -
each to the existing Equity shareholders.) 6,00,000 24,000 5,76,000 Date Particulars Debit
(Rs.) Credit
(Rs.)
1. 5% Preference Share Capital A/c ………Dr.
To 4% Cumulative Preference Share Capital A/c
To Equity Share Capital A/c
To Capital Reduction A/c
(Being issued 3200, 4% Preference shares of
Rs.100/ - each & 24,000 Equity Shares of 5% Preference shares Capital. 6,00,000 3,20,000 48,000 2,32,000 2. Capital Reduction A/c ................................ .. Dr. To Equity Share Capital A/c
(Being issued 6,000 Equity shares of Rs.3/ -
each in settlement of arrears of Preference
dividend.) 18,000 18,000 munotes.in

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Financial Accounting
134 4. Capital Reduction A/c ................................ .. Dr. To Patents A/c
To Plant & Machinery A/c
To Tools & Eq uipment A/c
To Profit & Loss A/c
To Experiment & Research Expenses A/c
(Being written off Patents, Plant & Machinery, Tools & Equipments , Profit & Loss A/c, Debit balance & Experiment & Research Expenses as agreed upon.) 7,96,000 2,00,000 24,000 8,000 2,96,000 2,68,000

Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital
A/c 18,000 By 5% Preference Share
Capital A/c 2,32,000 To Patents A/c 2,00,000 By Equity Sha re Capital
A/c 5,76,000 To Plant & Machinery
A/c 24,000
To Tools & Equipment
A/c 8,000
To Profit & Loss A/c 2,96,000
To Experiment &
Research Expenses A/c 2,62,000
8,08,000 8,08,000



4.8 EXERCISES
4.8.1 OBJECTIVES QUESTIONS
 Filling the blanks.
1) Capital Reduction is implemented as per section _____ of Companies
Act.
2) The scheme of Capital reduction is to be approved by . munotes.in

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Internal Reconstruction
135 3) Fictitious assets are to be transferred to .
4) Balance in Capita l Reduction should be transferred to .
5) The payment for contingent liability should be debited to .
6) And reduced words are to be shown as in Balance sheet as per
required.
7) XYZ Ltd. has on 31st March, 2015 1,00,000 Equity shares at Rs.10/ -
each. It was de cided to reduced share to Rs.6/ - each. The reduction is
.
8) The Preference shareholders agree to Forgo arrears of Preference
dividend Rs.1,00,000/ -. The amount transferred to Capital Reduction
Account is .
9) Debtors costing of Rs.56,000/ - given to Bank for bank loan of
Rs30,000/ -. The Capital reduction is debited by Rs. .
10) Provision for taxation is Rs.1,62,000/ -. The tax liability of the
company is settled at Rs.1,40,000/ - & it is paid immediately. Amount
credited to Capital Reduction is .
11) The capital reduction means reduction in ________ value of shares.
12) The sub division of shares does not result in ____ of capital.
13) The shareholders can surrender shares for _____or ________ .
14) _________ resolution is to be passed by shareholders for approval of
scheme or reconstruction.
15) The Fictitious debit balances are to be transferred to Account.
16) The full balan ce of Capital is to be debited, if value is
reduced.
17) Shareholders not approving scheme is called shareholders.
18) The expenses for forming & implementing scheme should be
debited to .
19) The scheme of internal reconstruction can be utilized to provide ___
for the company.
(Ans –(Ans – 1) 100, 2) High court, 3) Capital reduction, 4) Capital
Reserve, 5) Capital Reduction, 6) Company law, 7) 4,00,000, 8) Nil,
9) 26.000 10) 22,000 11) Paid -up Value, 12) Reduction, 13) Re-issue,
cancellation, 14) Special, 15) Capital Reduction, 16) Face,
17) dissenting, 18) Capital Reduction, 19) Funds.

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Financial Accounting
136  Match the following.
1)
Group “A” Group “B”
1) Capital Reductio n
2) Fictitious Balance
3) Capital Reduction Scheme
4) Consolidation of Share
5) Subdivision of Share a) Profit& loss Ac (Dr.bal)
b) Section 100
c) No reduction of Capital
d) Internal Reconstruction
e) No Change in Capital
(Ans : 1 – b, 2 – a, 3 – d, 4 – e, 5 – c.)
2)
Group “A” Group “B”
1) Surrender of share
2) Cancellation of surrendered
shares
3) Surplus on revaluation of
assets
4) Loss on revaluation of assets
5) Credit balance in Capital
Reduction a) Credit – Capital reduction
b) Unchanged Capital
c) Transfer to Capital Reserve
d) Transfer to Capital Reduction
e) Debit Capital Reduction
(Ans : 1 – b, 2 – a, 3 – c, 4 – e, 5 – d.)
3)
Group “A” Group “B”
1) Balance sheet after
reduction
2) Statutory Reserve
3) Expenses of Scheme
4) Reduction in paid up
value of shares
5) Reduction in face value of
debenture a) Not transf erable to Capital Reduction
b) Transfer difference to Capital
Reserve
c) Cancel present capital, raise new capital & difference to reduction
d) Indicate, & reduced
E) Debit capital reduction account

(Ans – 1 – d, 2 – a, 3 – e, 4 – b, 5 – c.)
 True or False.
1) Capita l Reduction & Internal reconstruction is synonym. – True
2) Consolidation of shares result in profit for a company. – False
3) Sub – division of shares result in gain for a company. – False
4) Provision for unrecorded liability indicates loss to a company. – True munotes.in

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Internal Reconstruction
137 5) Accounting for Internal & External reconstruction is in identical
manner. – False
6) Authorised Share Capital is to be reduced to the extent of Capital
Reduction. – False
7) Cancellation of contingent liability is treated as profit to the company.
– False
8) Re – classification of surrendered shares should not be accounted.
– True
9) The requirements of schedule VI is to be complied while preparing
account after internal reconstruction. – True
10) Internal reconstruction scheme cannot be prepared to cover capital
reconstruc tion. – False
4.8.2 PROBLEMS FOR PRACTICE
1) Following is the balance sheet of Vinayak Ltd. as on 31st March, 2015.
Liabilities Rs. Assets Rs.
60,000 10% cumulative Preference Share of
Rs.10/ - each fully paid up 6,00,000 Goodwill 2,00,000 1,50,000 Equity share of Rs.10/ - each, fully paid up 15,00,000 Land & Building 19,50,000 Loans 2,22,000 Trade Debtors 2,88,000 Creditors 7,50,000 Bank Balance 1,26,000 Plant & Machinery 70,000 Stock 4,00,000 Profit & Loss A/c 38,000 30,72,000 30,72,00 0
Note: Preference dividend was in arrears Rs.1,20,000/ -. The Board of
Directors of the company decided upon the following scheme of
reconstruction, which was approved by all concerned.
1) Paid up value of Equity shares shall be reduced to Rs.5/ - per share,
face value being Rs.10/ -.
2) Preference shares are to be converted into 13% debentures of Rs.100/ -
each with regard to their 20% of dues (including arrears of Preference munotes.in

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Financial Accounting
138 dividend) & for the balance (including dividend arrears) preference ,
shares of Rs.10/ - each (Rs .5/- paid up shall be issued.)
3) All Equity shareholders agreed to pay the balance amount, making
shares full paid up.
4) The Plant & Machinery was revalue at Rs.1,00,000/ -.
5) The value of Stock was reduced by Rs.50,000/ -.
6) Land & Building shall be written down to Rs.16,50,000/ -.
7) Creditors agreed to Forgo their claims by 50%.
8) Loans was fully settled for Rs.2,00,000/ -.
9) Goodwill, debit balance of profit & loss Account shall be written off.
10) Cost of reconstruction of Rs.2,000/ - was paid. Above resolution was
carried out

You are required to:
i) Pass journal entries in the books of the company.
ii) Prepare Capital Reduction Account
iii) Prepare Balance sheet after reconstruction
(Ans : Capital Reserve – Rs.2,000/ -, Tally – 30,43,000/ -)

2) The ledger balance of ZEE TV Ltd. include Building Rs.6,10,000/ -,
Furniture Rs.2,00,000/ -, Computer Rs.3,00,000/ -, Debtors Rs.3,00,000/ -,
Preliminary Expenses Rs.20,000/ -, Cash at Bank Rs.80,000/ -, Bills
Receivable Rs.2,50,000/ -, Stock Rs.40,000/ -, 8% Preference Share Capital
– 2,000 shares Rs.100/ - each, Equity Share Capital – 80,000 shares of
Rs.10/ - each, ‘A’ 10% Debentures Rs.4,00,000/ -, ‘B’ 12% Debenture
Rs.5,00,000/ -, Outstanding Interest for one year on Debentures
Rs.1,00,000/ -.
Creditors Rs.4,00,000/ -, Bills Payable Rs.50,000/ -, Outstan ding Audit
Fees Rs.50,000/ -, Profit & Loss Account
The company has incurred heavy losses. The following scheme of
reconstruction is agreed upon.
1) 8% Preference shares are to be reduced by Rs.20/ - per share, Equity
shares be reduced by Rs.5/ - per share.
2) To settle th e claim of holders of ‘A’ 10% Debenture by issue of new
11% Debenture of Rs.2,00,000/ -, ‘A’ Debenture holders agree to
forgo their interest.
3) To settle the claim of holders of ‘B’ 12% Debenture by issue of new
13% Debenture of Rs.5,00,000/ - outstand ing Debe nture interest on
‘B’ 12% Debenture holders be paid.
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139 4) To write off Fictitious assets & debit balance of Profit & Loss
Account.
5) Director refund Rs.60,000/ - fees previously received by them.
6) Computer was to be written down by Rs.20,000/ -.
You are requ ired to show :
a) Journal entries to record the above transactions in books of ZEE Ltd.
b) Balance sheet before reconstruction
c) Balance sheet after reconstruction.
Assume that all the formalities are duly complied.
(Ans : Balance sheet before reconstruction Tally – Rs.25 ,00,000/ -,
Balance sheet after reconstruction Tally – Rs.17,60,000/ -, Capital
Reduction – Rs.7,40,000/ -.)



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140 5
LIQUIDATION OF COMPANIES
Unit Structure :
5.0 Objective
5.1 Concept and Meaning
5.2 Modes of Winding Up
5.3 Statement of Affairs
5.4 Deficiency Account
5.5 Special Considerations in Liquidations
5.6 Liquidation Cost
5.7 Liquidators’ Final Statement of Ac counts
5.8 Illustrations
5.9 Exercise
5.0 OBJECTIVES

After studying this chapter, you should be able to understand:
 The concept and meaning of liquidation and winding up of companies

 The purpose and contents of statement of affairs inluding Deficiency
Account

 Special considerations in liquidation for settlement of dues

 The purpose and contents of liquidators’ final statement

 Accounting treatment of settlement of liabilities, partly paid up shares
in liquidators’ final statement

5.1 CONCEPT AND MEAN ING

Winding up refers to the process of realising assets of the company and
use the proceeds to pay of its debts. After such external debt is paid off,
the remainder cash is utilised for repayment of its members’ contribution.
The winding up involves invo lvement of third party administrator for
financial settelement of its creditors and members. Such administrators are
called liquidators who are appointed for controlling the process of
realisation of assets, payment of debts and distribution of surplus as per
legal rights of members. The process of winding up is governed by section
2 (94A) of Companies Act, 2013 and liquidation process under Insolvency
and Bankruptcy Code 2016. munotes.in

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141 Dissolution of company refers to appoint where it looses its identity as
corpor ate entity in general sense. In legal point of view, on dissolution,
company’s name shall be strike off from register of companies. In simple
words, dissolution of company is death of company as being artificial
judiciary person, it can’t have end of its l ife otherwise.

Many a times, winding up and liquidation are used as synonyms but there
is thin line of difference between the 2. Winding up means putting an end
to business operations and liquidation indicates selling of its assets and
payment of obliga tions. Similarly, winding up and dissolution also have
there own interpretations which requires thorough understanding. The
major areas of differences are as follows:

 Winding up is just one of the methods of dissolution and dissolution is
end result of wi nding up

 In winding up the legal status continues whereas in dissolution it
comes to an end.

 Winding up is administered by liquidator whereas dissolution happens
only through Registrar’s order.

5.2 MODES OF WINDING UP

A) Compulsory Winding Up
a) If due to inability to pay debts then governed by insolvency and
Bankruptcy Code
b) On grounds other than inability to pay debts then governed by
Companies Act, 2013

B) Voluntary Winding Up
a) Upto 31st March, 2017 – Companies Act, 2013
b) From 1st April, 2017 – Insolvenc y and Bankruptcy Code

Note – To be in line with the syllabus, we will be covering only winding
up under the Companies Act, 2013.

C) Winding Up by Tribunal
a) Company Resolution
b) Against National Interests
c) Fraud
d) Default in Filing FS / AR
e) Just and Equitable

5.3 STATEMENT OF AFFAIRS

A statement of affairs is one of the most important documents which is
required to be submitte along with the company’s petition before the
tribunal as per section 272 (5 ) of Companies Act, 2013. In c ase, petition is
initiative by any e ntity other than company under section 274 (1), the munotes.in

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Financial Accounting
142 statement of affsirs is required to be presented. In both the situations, the
statement of affairs is required in prescribed form and prescribed manner.

The broad contents that are required to for m the statement of affairs are as
follows:

1) The details of assets having no specific charge with expected realisable
value.

2) The details of assets having specific charge along with expected
realisable value. In case of deficit, it should be treated as unse cured
liability and surplus should be made available for disposal.

3) The details of assets mentioned in 1 and surplus arising from 2.

4) The details of preferential creditors, debentures with floating charge,
unsecured creditors.

5) Details of total paid up c apital indicating each class of shares

The statement of affairs should be accompanied by 8 mandatory lists
prescribed in section 274 of Companies Act, 2013:

1) List A – Full particulars of every description of property not
specifically pledged and included in any other list are to be set forth in
this list

2) List B – Assets specifically pledged and creditors fully or partly
secured.

3) List C – Preferential creditors for rates, taxes, salaries, wages and
otherwise.

4) List D – List of Debenture holders secured b y a fl oating charge

5) List E – Unsecured creditors

6) List F – List of Preference shareholders

7) List G – List of Equity shareholders

8) List H – Deficiency or surplus account

Sr. no. Name of the List Contents
1 List A Assets not specifically pledged
(i.e. Ass ets no t having fixed
charge)
2 List B Assets specifically pledged (i.e.
Assets having fixed charge)
3 List C Preferential Creditors
4 List D Debenture holders secured by a
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143 5 List E Unsecured Creditors
6 List F Preference Shareholders
7 List G Equity Shareholders
8 List H Reasons for the Surplus /
deficiency as shown by the
Statement of Affairs

STATEMENT OF AFFAIRS
` Particulars `

Assets not Specifically Pledged (as per List A)

Assets Specifica lly Pl edged (as per List B)

( a ) ( b ) ( c ) ( d )
Estimated Due to Deficiency Surplus
Realisable Secured Ranking
as carried
to
Value Creditors Unsecured Last
Column Column




Estimated Surplus from Assets Specially Pledged
Estimated total assets available for preferential creditors,
debenture holders
secured by floating charges and unsecured creditors

Summary of Gross Assets:
Gross realizable value of assets specifically pledged
Other Assets
Gross Assets


Liabilities

Secured Creditors(as per List B) to the extent to which
claims are esti mated
to be covered by assets specifically pledged

Preferential Creditors (as per List C)

Estimated balance of assets available for debenture holders
secured by a
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144
Debe nture holders Secured by Floating Charge (as per
List D)

Estimated surplus as regard debenture holders

Unsecured Creditors (as per List E)

Estimated surplus as regards creditors(being diff bet gross
assets & liabilities )

Issued and Paid up Capital (as per List G)

Estimated Surplus/Deficiency as regards member (as per
List H)


5.4 DEFICIENCY ACCOUNT

The deficiency account needs to be prepared in case if proceeds from
realization of assets are not sufficient to pay off creditors and members’
contribution. The administrator or liquidator provides specific date of
beginning on which the deficiency account is prepared. On such a given
date there could be surplus or deficit. Th e format of deficiency account is
prescribed in 2 parts –
A) Deficiency and items increasing deficiency further
B) Items reducing deficiency

The format of deficiency or surplus account is as follows:

Rs. Particulars Rs. Rs.
Items Contributing to Deficien cy or
Reducing Surplus :
1. Excess (if any) of capital and
liabilities over (assets as ___ 20__) (as
shown by Balance Sheet) (copy annexed)
2. Net dividends and bonuses declared
during the period from ___20__ to the date
of statement.
3. Net trading los ses (after charging
items shown in note below) for the same
period.
4. Losses other than trading losses
written off or for which provision has been
made in the books during the same period
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Liquidation o f Companies
145 5. Estimated losses now writ ten off or
for which provision has been made for
purposes of preparing the statement (give
particulars or annex schedule)

______ ______ 6. Other items contributing to
Deficiency or reducing surplus
___________________________________


____
XXX Items Reducing Deficiency (or
Contributing to Surplus):
7. Excess (if any) of assets over capital
and liabilities on the __20__ as shown on
the Balance Sheet (copy annexed)
8. Net trading profit (after charging
items shown in note below) for the period
from the __ 20__ to the date of statement
9. Profit and income other than trading
profit during the same period (give
particulars or annex schedule).


_____
10. Other items reducing Deficiency or
Contributing to Surplus
Deficiency / Surplus as shown in
Statement o f Affairs

____
XXX
5.5 SPECIAL CONSIDERATIONS IN LIQUIDATION

A) Overerriding preferential payments
In the process of winding up of company, as per provisions of section 326,
following debts should be settled as matter of priority over other debts:

1) Workmen’s due
2) Realisation of secured assets having charge against secured creditors,
(any deficit or amount equal to woekmen’s portion in the security,
whichever is less.) The following payment needs to be made to
security creditors in the given order as fol lows:

a) All remuneration including outstanding remuneration to employees
b) Acrued holiday remuneration

Note - In case, if above payments are due for 2 years prior to closure of
company then they should be paid before all liabilities within 30 days
from rea lisation of assets which do not have specific charge against other
secured liabilities

The obligations payable under provision of section 326 (1) shall be settled
to the extent of 100 % as priority over secured creditors and once such munotes.in

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Financial Accounting
146 payment is made, the n secured creditors need to be paid off. In case, if the
value of assets realised is not sufficient, then the liability shall be treated
in proportion for its repayment.

For the purpose of interpretations of sections 326 and 327 workmen
should be treated as any employee under section 2(s) of Industrial Dispute
Act, 1947. Workmen’s dues includes remuneration including outstanding
remuneration to employees, Acrued holiday remuneration, compensation
and all dues under retirement benefits / funds maintained b y the company.

B) Preferential Creditors
In the process of winding up of company, preferential creditors needs to
be paid as priority over other debts under section 327 of The Companies
Act. While such payments are made it should be subject to the provision s
of section 326. The examples of preferential creditors are as follows:

1) Statutory tax liabilities: All kinds of taxes, cess and duties payable by
company towards central government, state government or local
authorities should be treated as statutory tax liability. Such payments
which have become due should be paid within 12 months.

2) Employee remuneration: All types of remuneration including salaries,
wages, commission etc. which are payable for time period not
exceeding 4 months should be paid within 12 months immediately
before the due date. The provision is subject to fulfillment of certain
conditions.

3) Leave Salary: The amount accrued as holiday remuneration falling due
to the employee or other person at the time of retirement or
termination of employm ent shall be treated as leave salary and is
required to be paid as priority.

4) Retirement Benefits / Funds: All amounts payable under provident
fund, pension fund, gratuity fund and any other fund created by
company for welfare of employees shall be covere d under the heading.

5) Contributions under ESI Act: The total amount due for 12 months,
prior to winding up of a company, under ESI Act or any other relevant
Act shall be treated as preferential liability. The said amount is payable
only when the winding u p is compulsory and not voluntary.

6) Compensation

7) Investigation expenses under section 213 and 216 if payable by
company

In case, if there is any advance payment made to the employee or any
other person in respect to remuneration or otherwise, the emplo yee or
other person shall reserve a right in respect of that money at the time of munotes.in

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147 winding up. In case of sick leave, remuneration that falls due on medical
grounds should be treated as regular remuneration.
Note – section 326 amd 327 shall not be applicabl e if liquidation is under
Insolvency and Bankruptcy Code 2016.

C) Members liability as Contributories
According to S. 2 (26) of the Companies Act, 2013, the term
“contributory” means, a person liable to contribute towards the assets of a
company in the even t of its being wound up. A person holding fully paid
shares in a company shall be considered as a contributory but shall have
no liabilities of a contributory under the Act whilst retaining rights of such
a contributory.

In the event of winding up, the t ribunal should make clear differenciation
between contributories having their own rights and those contributories
which are representatives of others. The tribunal can process the
settlements of list of contributories by making calls or adjusting their
rights. There are 2 separate lists prepared as far as contributories are
concerned:

a) List A: It shows the details of the members who appear in the register
of members on the date of winding up. These members shall have
limited liability to the extent of unpai d amount of share capital.

b) List B: It shows the details of all such members who ceased to be
members within 12 months from the date of beginning of winding up
of a company. Such members are treated as past members. The past
members are liabe to make cont ributions unless shares were
transmitted, the contractual liability arised after ceasing to be a
member or current members fail to pay all the dues.

Companies should first make contribution cal l to the members listed in list
A. If they fail to pool the r equired amount then B listed contributors
should be called for payment. Also the contributions can be demanded
from list B members only when the realisable value of assets falls short of
the liabilities and when existing shareholders fail to pay the amount due to
the liquidator.

Liquidation Cost
The process of liquidation involves realization of assets and settlement of
liabilities which results into many incidental expenses such as
transportation, negotiation charges, administrative and logistics expense s
etc. In the process of winding up, such expenses and liquidator’s
remuneration gets top priority over other claims on company. The
liquidation cost is paid after settlement of overriding preferential creditors
and also has implications of secured credito rs. The payment of liquidation
cost is made in specific order which is as follows:

 Liquidation cost
 Legal Expenses
 Liquidator’s Remuneration
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Financial Accounting
148 The above order is used for voluntary liquidation whereas in case of
compulsory winding up the order is prescrib ed by company law tribunal.

The remuneration of liquidator may be payable as percentage of assets
realized or it may be payable in terms of cash distributed to external
stakeholders and members. In a situation of deficiency, remuneration may
be calculate d as n / 100 + n where n indicates percentage of commission.

5.6 LIQUIDATORS’ FINAL STATEMENT OF
ACCOUNTS

When company goes for winding up by operation of law, the liquidator
has to maintain proper books in prescribed manner including entries or
minut es of the resolutions passed at the time of meetings held during the
process of liquidation. Any creditor or contributory reserves the rights to
demand for inspection of records subject to approval from the tribnal. One
of the important statements which sh ows summarised record of all receipts
and payments is known as liquidator’s statement of account. In case, when
winding up process is complete, the said statement is called liquidator’s
final statement of account.

Following are important items which are included on receipt side of
liquidator’s final statement of account:
A) Net realised amount from assets sold in prescribed order
B) Surplus arising from assets realised which are pledged against the
specific liabilities under the heading of “surplus from securi ties”. (In
case if there is deficit then such excess amount of liability should be
treated as unsecured liability and is to be paid off in the manner
presribed.)
C) Final call on partly paid up shares in case the available amount is not
sufficient to pay of f creditors’ claim and / or claim of preference
shareholders. Such calls should be made first from equity shareholders
to the extent necessary and then from preference shareholders.
D) Amounts received from calls made to contributories from list A and B

Following are important items which are included on payment side of
liquidator’s final statement of account:
A) Legal charges (lawyers’ fees, expenses related to court proceedings
etc.)
B) Liquidator’s remuneration
C) Liquidator’s expenses
D) Claims of debenture holde rs including interest due upto the date of
actual repayment subject to solvency of the company
E) Preferential creditors (to be paid before claim of debenture holders if
there is general charge of assets)
F) Unsecured creditors
G) Preference shareholders (includi ng arrears in dividend)
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149 In case of repeyment to shareholders there may be 2 situations where
shares are fully paid up or partly paid up. In case if shares are partly paid
up then first call should be made to equity shareholders being o wners so as
to settle the claims of creditors and preference shareholders. Such amount
should be called only if available cash is not sufficient. Only if it is
required then preference shareholders would be called upon. Calls on
partly paid up shares is re quired to be made under the following situation:

Steps to determine call amount
1) Calculate total loss for equity shareholders
Total loss = total equity share capital – cash available for payments to
unsecured liabilities and preference share capital
2) Deter mine loss per share
Loss per share = total loss / number of equity shares
3) Determine call amount
4) Call amount = loss per share – paid up amount
Note – In case, if loss per share is less than paid up amount then
balance amount per share is refunded.
Liquidators Final Statement of Account
1. Name of the Company :
2. Nature of Proceeding :
3. Date of Commencement of the Winding up :
4. Name and address of the liquidator

Receipts ` (Estimated
Value) `
(Realised
Value) Payments ` `
To Cash/Bank By Liquidation
Expenses

To Realisation
of Assets By
Liquidator's
remuneration
1)
2) By Statutory
Liabilities
1) Govt dues.
To Surplus from
Secured 2)
Liabilities
By Secured
Liabilities
To proc eeds of
call 1) Secured
Bank Loan
2) Debentures

By Preferential
Liabilities munotes.in

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Financial Accounting
150 1) Preference
Dividend
2) Interest
Payments

By Unsecured
Liabilities

By Preference
Share Capital

5.7 ILLUSTRATIONS

1. A liquidator is entiled to receive remuneration @ 2% of the assets
realized 3% of Preference Creditors and 3% of the amount distributed
among the unsecured creditors.

Assets realised Rs. 25,00,000 a gainst which payment was made as
follows:
Liquidation Expenses Rs. 25,000
Preferential Creditors Rs. 75,000
Secured Creditors Rs. 10,00,000
Calculate remuneration payable to the liquidator. (CS)

Solution :
Analysis : 3% of amount distribut ed means 3/103 * Amount payable
before remuneration.
Remuneration payable to Liquidator
Sr. No. Particulars Rs.
1. 2% of assets realised
(2% of 25,00,000) 50,000 2. 3% of Preferential Creditors
(3% of 75,000) 2,250 3. 3% of Distribution to Unsecured
Creditors (Working Note 1) 39,255 Total Remuneration 91,505
Note – Remuneration amount paid to unsecured creditors







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151 Particulars Rs. Rs.
Amount Realised
Less: Paid to secured creditors
Liquidation expenses
Preferential Credit ors
Remuneration on collection of
assets
Remuneration o n payment to
preference creditors 10,00,000 25,000 75,000 50,000 2,250 25,00,000 11,52,250 Payable to Unsecured Creditors
before remuneration 13,47,750
Working Note
a) Remuneration = 3 / 103 * 13,47,750
= 39,255

b) Remuneration = 2% of assets realised
2% of 25,00,000

2. A liquidator is entitled to receive remuneration at 2.5% on the
Assets realised, 1.5 % on the amount distributed to Preferential Cred itors
and 3% on the payment made to Unsecured Creditors. The assets were
realised for Rs. 15,00,000 against which payment was made as follows:
Liquidation Expenses Rs. 25,000
Secured Creditors Rs. 6,00,000
Preferential Creditors Rs. 75,000

The amount due to Unsecured Creditors was Rs. 9,00,000. Calculate the
Total Remuneration payable to Liquidator.

Solution:
A) 2.5% of assets realised = 15,00,000 * 2.5 %
= Rs. 37,500

B) 1.5 % of preferential creditors = 75,000 * 1.5%
= Rs. 1,125

C) 3% of pa yments to Unsecured Creditors = (15,00,000 – 25,000 –
37,500 – 1,125 – 6,00,000 – 75,000) * (3 / 103) = Rs. 22,176

Total Remuneration = A + B + C
= Rs. 60,801


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Financial Accounting
152 3. M/s. ABC Ltd. Has gone into liquidation on 25th June, 2019. Certain
creditors co uld not receive payments out of realisation of assets and
contributions from “A” list contributories. Following are the details of
certain transfers which took place in the year ended 31st March, 2019.

Shareholders No. of
Shares
Transferred Date of
Ceasi ng to
be a
member Creditors
Remaining
unpaid on the
date of
transfer
P 4,000 10-5-2018 9,000
Q 3,000 22-7-2018 12,000
R 2,400 15-9-2018 13,500
S 1,600 14-12-2018 14,000
T 1,000 9-3-2019 14,200

All the shares are of Rs. 10 each, Rs. 8 per share paid up. Show the
amount to be realised from the persons listed above. Ignore remuneration
to liquidator and other expenses. (CA IPCC November 2011)

Solution :
Statement of Liabilities of “B” List Contributories
Share
holders No. of shares
transferred Maximu m
liability
Upto Rs. 2
Per Share
(Rs.) Division of Liability as on Total
22 July
(Rs.) 15 Sept. (Rs.) 14 Dec.
(Rs.) 9 Mar.
(Rs.)
Q 3,000 6,000 4,500 - - - 4,500
R 2,400 4,800 3,600 720 - - 4,320
S 1,600 3,200 2,400 480 308 - 3,188
T 1,000 2,000 1,500 300 192 8 2,000
Total 8,000 16,000 12,000 1,500 500 8 14,008

Notes:
A. P transferred shares before one year preceding the date of liquidation.
Hence, he cannot be held liable for any liability on liquidation.

B. Liability of T is restricted to maximum Rs. 2,000. Hence, amount
payable by T on 9th March is Rs. 8 only.
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153 C. Q will not be responsible for further debts incurred after 10th May
(from the date when he ceases to be a member). R & S will not be
liable for the debts incurred after the date of their tr ansfer to shares.

Note :
Computation of Ratio for Discharge of Liabilities

Date Cumulative
Liability (Rs.) Increase in
Liability
(Rs.) Ratio of No.
of Shares
Held by Q, R,
S & T
22July 12,000 - 30:24:16:10
15 September 13,500 1,500 24:16:10
14 Decemb er 14,000 500 16:10
9 March 14,200 200 Only T

4. Sri. “Ram” is appointed Liquidator of “C” Ltd., in Voluntary
Liquidation. On 1st July. Following balances are extracted from the books
on that date:

Equity & Liabilities Rs. Assets Rs.
Share Capital:
12,000 Shares of Rs. 9
each
1,08,000 Machinery 60,000 Reserve for Bad Debts 19,000 Leasehold
Properties 40,000 Debentures (Machinery) 55,000 Stock –in–trade 7,500 Bank Overdraft (Secured) 25,000 Book debts 75,000 Creditors (including
Preferential cr editors) 30,000 Investments 12,000 Call in Arrears 1000 Cash in hand 1,500 Profit and Losss
A/C 40,000 Total 2,37,000 2,37,000 munotes.in

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Financial Accounting
154 Prepare a Statement of Affairs to be submitted to the meeting of Creditors.
Following assets are valued as under by that date:

Machinery Rs. 90,000 Investments Rs. 9,000
Leasehold Properties Rs.1,09,000 Stock Rs. 3,000

Bad Debts are Rs. 2,000 and the Doubtful Debts are Rs. 5,000 which are
estimated to realise Rs. 3,000. Preferential Creditors are Rs. 1,500.
Telephone Rent outstanding Rs. 120. Liquidation expenses amounted to
Rs 500 and Remuneration is Rs 750.

Solution:

Receipts Rs. Payments Rs.
To Assets
realized By Liquidation
Expenses 500 Cash 1,500 By Liquidator’s
Remuneration 750 Fixed Assets
(leasehol d
Property) 1,09,000 By Preferential
creditors 1,500 Book Debts 71,000 By Bank Overdraft 25,000 Investments 9,000 Trade Creditors 28,620 Stock 3,000 By Equity
Shareholders 1,72,130 Surplus from
security 35,000 2,28,500 2,28,500
Note – Sine deben tures were secured againast specific asset and asset
realised more amount, the excess net amount is shown as surplus in a
statement. In case, asset does not fetch required amount, the difference
would have been unsecured liability.

The following is the b alance sheet of XY Ltd. Which is in the hands of the
liquidator.





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Liquidation o f Companies
155 Balance Sheet as at 31.3.2018
Liabilities Rs. Assets Rs.
Share Capital :
1,000, 6% Preference Shares
of Rs. 100 each, fully paid 1,00,000 Fixed Assets 2,00,000 2,000 Equity shares of Rs.
100 each 2,00,000 Stock 1,20,000 2,000 Equity shares of Rs.
100 each, Rs. 75 paid 1,50,000 Book Debts 2,40,000 Loan from Bank (on security
of stock) 1,00,000 Cash 40,000 Trade Creditors 3,50,000 Profit and
Loss Account 3,00,000 9,00,000 9,00,000
The assets realised the following amounts (after all costs of realisation and
liquidator’s commission amounting to Rs. 5,000 paid out of cash in hand
Rs. 40,000as per Balance Sheet):

Fixed Assets Rs. 1,68,000
Stock Rs. 1,10,000
Book De bts Rs.2,30,000

Calls on partly paid shares were made but the amount due on 200 shares
was found to be irrecoverable.

Prepare the Liquidator’s Final Statement of Account.

( November 2018 University of Mumbai, TYBAF)












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Financial Accounting
156 Solution:

Analysis : A call should be made on 1,800 shares shares as holders of 200
shares did not pay.
XY Co. Ltd.

Liquidators Final Statement of Account

For the year ended 31st March 2018

Receipts Rs. Payments Rs.
To Assets realised By Liquidator’s
Remuneration 5,000 Cash 40,000 By Trade
Creditors 3,50,000 Fixed Assets 1,68,000 By Preference
Shareholders 1,00,000 Book Debts 2,30,000 By Equity Share
Holders (Rs. 10 per
share on 2,000
shares) 20,000 Surplus from
security 10,000 To Proceeds of
call on
1,800E quity
shares @ Rs. 15
per share 27,000 4,75,000 4,75,000
Working Note
1. Amount Required:

Particulars Rs.
Preference Share Capital 1,00,000 Equity Share Capital 2,00,000 Equity Share Capital partly paid (1,50,000 –
15,000) 1,35,000 4,35,000 Less: Available Cash (40,000 + 1,68,000 +
2,30,000 + 10,000 – 5,000 – 3,50,000) 93,000 Total Deficiency 3,42,000 munotes.in

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Liquidation o f Companies
157
Loss per share = 3,42,000 / 3,800 = Rs. 90
Therefore a call of Rs. 15 (90 – 75) per share will be made on 1,800 shares
and a return of Rs. 1 0 (100 – 90) will be made on the holders of 2,000
shares.

5. U Ltd. Went into voluntary liquidation on 31st March. The following
balances are extracted from its books on that date:

The following assets are valued as under:

Machinery Rs. 80,000 Stock Rs. 6,000 Leasehold
Properties Rs. 2,10,000 Debtors Rs. 1,00,000 Investments Rs. 10,000

The bank overdraft is secured by deposit of Title Deeds of Leasehold
Properties. There were Preferential Creditors Rs. 5,000 which were not
included in Creditors Rs. 60,000.

Prepare a Statement Affairs to be submitted to the meeting of Members /
Creditors.



Equity and Liabilities Rs. Assets Rs.
Capital : 48,000 Equity
Shares of Rs . 10 each,
paid up Rs 5 2,40,000 Machinery 75,000 Debentures (secured by a
Floating Charge) 1,60,000 Leasehold
Properties 1,25,000 Bank Overdraft 40,000 Stock 5,000 Creditors 60,000 Debtors 1,30,000 Investments 15,000 Cash in hand 50,000 - Profit and Loss
Account 1,00,000 Total 5,00,000 5,00,000 munotes.in

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Financial Accounting
158 Solution:

Rece ipts Rs. Payments Rs.
To Cash 50,000 By Preferential
Creditors 5,000 To assets realised: By Debentures 1,60,000 Machinery 80,000 By Creditors 60,000 Investments 10,000 By Equity
Shareholders 1,91,000 Stock 6,000 Debtors 1,00,000 To surplus from
assets 1,70,000 4,16,000 4,16,000

6. The following is the Balance sheet of Suman Ltd. Which is in the
hand of liquidator. Balance sheet as on 31 -12-2019
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 1,00,000 500, 6% Preference
shares o f Rs 100 each,
fully paid 50,000 Stock 60,000 1000 Equity Shares of
Rs 100 each fully paid 1,00,000 Book debts 1,20,000 3000 Equity Shares of
Rs 50 each, Rs 25 paid 75,000 Cash 20,000 Loan from Bank (on
security of stock) 50,000 Profit And Loss 1,50,000 Trade Creditors 1,75,000 4,50,000 4,50,000 The Assets realized the following amounts (after all costs of realization
and liquidators remuneration amounting Rs 3000 paid out of cash in hand
Rs 20,000 as per Balance sh eet):
Fixed Assets 84,000
Stock 55,000
Book Debts 1,15,000

Prepare the liquidators final statement of Account. (TYBAF, October
2019, Mumbai University)
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Liquidation o f Companies
159 Solution:
Analysis: Make a call 3000 shares @25 Rs each
Suman Ltd
Liquida tors Final Statement of Accounts .
Particulars Rs. Particulars Rs.
To Assets By Liquidators 3,000 Cash 20,000 By Creditors 1,75,000 Fixed Assets 84,000 By return to 6%
Preference
Shareholders 50,000 Book Debts 1,15,000 By Equity Shareholders To Surplus from
Security 5,000 Rs 100 paid 28,400 To Proceeds of call
(3000 x 25) 75,000 Rs 50 paid 42,600 - 2,99,000 2,99,000
5.8 EXERCISES

Multi ple Choice Questions
1) Voluntary winding up:
a) If period fixed for the company is expired.
b) If company passes a special resolution the company wound up
voluntarily.
c) Members voluntary winding up is applicable t o solvent companies only.
d) All of the above

2)Compulsory winding up:
a) If a company unable to pay its debt
b) If the number of members of company reduced below statutory limit.
c) If a company does commence its business within a year from its
incorpora tion.
d) All of the above.

3)The first item in order of payment to be made by liquidator is:
a) Secured creditors
b) Preferential creditors
c) Liquidation expenses
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Financial Accounting
160 4)Liquidator’s statement of receipts and payment is know as:
a) Cash flow statement
b) Cash book
c) Liq uidator’s final statement of account
d) Deficiency account

5) The liquidator final statement of account is prepared
a) Only in case of creditor voluntary winding up
b) Only in case of members voluntary winding up
c) Only in case of compulsory winding up
d) Whatever may be

6) When the liquidator company has adequate cash to pay off all
liabilities, the interest on liabilities will be paid
a) Up to date of commencement of insolvency
b) Up to date of actual payment
c) Up to date of payment to share holders
d) None of these

7) The Job of Realizing Assets and Paying Liabilities Is Performed by
A Person
a) Liquidator
b) Auditor
c) Registrar of the Company
d) None of the above

8) At the time of liquidation of company, t he liquidator has to file a
statement of r eceipt and payment is known as
a) Statement of affairs
b) Liquidator report
c) Liquidator final statement of account
d) None of the Above

9)The deficiency shown by deficiency account will be equal to the
deficienc y revealed by
a) Liquidator final statemen t of account
b) Liquidator report
c) Statement of affairs
d) None
10)Insolvent Companies Can Be Liquidated
a) Compulsory
b) Optional
c) Order
d) All the Above
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Liquidation o f Companies
161 11)A Liquidator can claim the
a) Remuneration
b) Asset s
c) Dividend
d) All the Above

PRACTICLE QUESTION
1. B Ltd. is to be liquidated. Their summarised Balance Sheet as at 30th
September, 2020 appears as under:

Liabilities Rs. Assets Rs.
2,50,000 Equity
shares of Rs. 10
each 25,00,000 Land and buildings
5,00,000 Secured Debentures
(on land and
building) 5,00,000 Other fixed assets
20,00,000 Unsecured loans 20,00,000 Current assets 45,00,000 Trade creditors 40,00,000 Profit and Loss A/c 20,00,000 90,00,000 90,00,000
Contin gent liabilities are Rs.
For bills discounted 1,50,000
For excise duty demands 2,50,000
On investigation, it is found that the contingent liabilities are certain to
devolve and that the assets are likely to be realised as follows: Land and
buildings 110%
Othe r fixed assets 90%
Current assets Rs 40,00,000
Taking the above into account prepare the statement of affairs.
2. A liquidator is entitled to receive remuneration @ 3% of the assets
realised and 5% of the amount distributed among th e unsecured creditors.
The assets realised Rs. 35,00,000 against which payment was made as
follows:
- Liquidation expenses Rs. 25,000
- Preferential creditors Rs. 1,75,000
- Secured creditors Rs. 7,50,000
Calculate the remuneration payable to the liquidator
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Financial Accounting
162 3 .The capital of Data Company Limited was as follows:
a. 8000 equity shares of Rs. 100 each fully paid up
b. 6000 equity shares of Rs. 100 each, Rs. 80 per share paid up
c. 2000 preference shares of Rs. 100 each fully paid (these shares have
preference as to capital)
d. 2000 deferred shares of R. 100 each Rs. 8 0 per share paid up (these
shares, under the articles are to be paid after satisfying the claims of
equity shareholders)
The various creditors amounted in all to Rs. 2,00,000 including the
liquidator’s remuneration of Rs. 5,000. The liquidator made a call of the
remaining Rs. 20 on the deferred shares which were paid in full. He also
realised all the assets amounting to Rs. 3,82,000.
A call of R. 15 per hare was made on the equity shares which were partly
paid up. Th is was paid in full with the exception of that on 200 shares.
Prepare the Liquidator’s Account showing the return of money to the
shareholders.
4.. The balance sheet of Badshah Ltd as on 31st December 2019 was as
follows:
Liabilities Rs. Assets Rs.
Share Capi tal: Land and
Building 61,000 8000 Preference shares
of Rs. 9 each 72,000 Other fixed
assets 3,00,000 12,000 equity shares of
Rs. 1each 12,000 Stock 3,25,000 Bank loan 4,00,000 Debtors 1,00,000 Debentures 1,00,000 Profit and Loss
A/c 58,000 Interest outstanding on
debentures 10,000 Creditors 2,50,000 8,44,000 8,44,000
The company went into liquidation on that date. Prepare Liquidator’s
Statement of Account after taking into account the following:

a. Liquidation expenses and liquidator’s remunerati on amounted to Rs.
3,000 and Rs. 10,000, respectively.
b. Bank loan was secured by pledge of stock

c. Debentures and interest thereon are secured by a floating charge on all
the assets
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Liquidation o f Companies
163 d. Fixed assets were realised at book value and current assets at 75% of
book values.

5. Balance sheet of Naru Ltd as on 31 December 2020 is as follows

Liabilities Rs. Assets Rs.
Paid up Capital: Fixed Assets:
2000, 6% Preference
shares of Rs. 100 each 2,00,000 Land and
building 4,00,000 4,000 equity shares of Rs.
100 each fully paid up 4,00,000 Plant and
machinery 4,40,000 6,000 equity shares of Rs.
100 Rs. 50 paid up 3,00,000 Current
assets: Secured Loans: Stock 2,00,000 6% bonds (on floating
charge on all assets) 2,00,000 Debtors 2,00,000 Others bank loan (on
mortgage of land and
building) 2,00,000 Cash at bank 60,000 Current Liabilities: Miscellaneous
expenditure: Sundry creditors 1,80,000 Profit and
Loss A/c 2,00,000 Income tax 20,000
15,00,000 15,00,000
The company went into liquidation on 1 January 2021.

The preference dividends were i n arrears for three years. The arrears are
payable on liquidation

The assets were realised as follows:
- Land and Building – 125%
- Plant and machinery - 85%
- Stock at book value
- Debtors - 80%
The expenses of liquidation amounted to Rs. 5,000.
The liquidator is entitled to a commission at 3% on all assets realised and
5% on amount distributed to unsecured creditors.
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Financial Accounting
164 All payments are made on 30 June 2021.
Prepare Liquidator’s Statement of Accounts.
6. The summarised balance sheet of Be rti Ltd as on 31.3.2017, bein g the
date of voluntary winding up is as under:

Liabilities Rs. Assets Rs.
Share Capital:
100000, 12% Cumulative
Preference shares of Rs. 10
each fully paid up 10,00,000 Land and
building 5,00,000 50,000 equity shares of Rs.
10 each Rs. 6 per share
called up and paid up 3,00,000 Plant and
machinery 8,00,000 50,000 equity shares of Rs.
10 Rs. 5 per share called up
and paid up 2,50,000 Stock 2,00,000 15% Debentures 7,50,000 Debtors 15,00,000 Preferential creditors 2,00,0 00 Profit and Loss
A/c 5,00,0 00 Bank overdraft 3,00,000 Trade creditors 7,00,000 35,00,000 35,00,000
The preference dividends were in arrears for two years.
The assets were realised as follows:
- Land and Building @ 150%
- Plant and machinery @ 95 %
- Stock @ 75%
- Debtors Rs. 12 ,25,000
The expenses of liquidation amounted to Rs. 54,000.
The remuneration of the liquidator is 1.25% of the realisation. Income tax
payable on liquidation is Rs. 80,500. Assuming that the final payments are
made on 31.3.2018 prepare the Liquidator’s Fin al Statement of Account.
7. Rupay Ltd went into voluntary liquidation on 31st December 2014
when their balance sheet read as follows:

Liabilities Rs. Assets Rs.
7500, 10% Cumulative
Preference shares of Rs. 100
each fully paid u p 7,50,000 Land and
building 3,75,000 3750 equity shares of Rs.
100 each Rs. 60 paid 2,81,250 Plant and
machinery 9,37,500 11250 equity shares of Rs.
100 each Rs. 60 paid 6,75,000 Patents 1,50,000 munotes.in

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Liquidation o f Companies
165
15% Debentures secured by
a floating charge 3,75,000 Stock 2,01,250 Interest outsta nding on
debentures 56,250 Sundry debtors 4,12,500 Creditors 4,78,125 Cash at bank 1,12,500 P & L A/c 4,26,875 26,15,625 26,15,625
The dividends on preference shares were in arrears for two years and the
creditors in cluded preferential creditors of Rs. 19,000. The assets realised
were as under:
- Land and Building Rs. 7,00,000
- Plant and machinery Rs. 9,00,000
- Stock Rs. 2,50,000
- Debtors Rs. 4,00,000
- Patents Rs. 1,25,000
The expenses of liquidation amounted to Rs. 20,25 0. The liquidator is
entitled to a commission of 2.5% on all assets realised except cash.
Assuming that final payments including those on debentures were made
on 30th June, 2015, prepare the Liquidator’s Final Statement of Account.
8. The following is the Balance sheet of Lily Ltd as a t 31st March, 2019

Liabilities Rs. Assets Rs.
4000, 10% Preference
shares of Rs. 100 each
fully paid up 4,00,000 Land and building 8,00,000 4,000 equity shares of Rs.
100 each Rs. 75 per share
paid up 3,00,000 Plant and
machinery 7,60,000 12,000 equity shares of
Rs. 100each Rs. 60 per
share and paid up 7,20,000 Stock at cost 2,20,000 10% Debentures (having a
floating charge on all
assets) 4,00,000 Sundry debtors 4,40,000 Interest outstanding on
debentures (also secured
as above) 20,000 Cash at bank 1,20,000 Creditors 9,80,000 P & L A/c 4,80,000 28,20,000 28,20,000 munotes.in

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Financial Accounting
166 On the date, the company went into voluntary liquidation. The dividends
on preference shares were in arrears for the last two years. Sundry
creditors inclu de a loan of Rs. 1,80,000 on m ortgage of Land and
Buildings. The assets realised were as under:
Land and Building Rs. 6,80,000
Plant and Machinery Rs. 7,20,000
Stock Rs. 2,40,000
Sundry Creditors Rs. 3,20,000

Interest accrued on loan on mortgage of buildi ngs up to the date of
payment amounted to Rs. 20,000. The expenses of Liquidation amounted
to Rs. 5,000. The Liquidator is entitled to remuneration of 2% on all the
assets realised (except cash at bank) and 3% on the amount distributed
among equity shareho lders. Preferential creditors included in sundry
creditor’s amount to Rs. 50,000. All payments were made on 30th June,
2019.

Prepare the Liquidator’s Final statement of Account.

9. In liquidation of Unfortunate Ltd which commenced on 1 April,
2017 certain creditors could not receive pa yments out of the realisation of
the assets and out of contribution from ‘A’ list contributories. The
following are the details of certain transfers which took place after 1 April,
2017:
Shareholders No. of
shares
transferred Date of ceasing to
be member Creditors
remaining
unpaid and
outstanding on
the date of
ceasing to be
member (Rs.)
A 1,000 1st May, 2017 3,000 B 1,500 1st July,2017 4,500 C 300 1st November, 2017 6,000 D 200 1st February, 2017 8,500
All the shares wer e of Rs. 10each, Rs. 5 paid up . Ignoring expenses,
remuneration to liquidator, etc Show the amount to be realised from the
various persons listed above.

10. In a winding up which commenced on 15th September, 2020 certain
creditors could not receive payments o ut of the realisation of the a ssets
and out of contribution from ‘A’ list contributories. The following are the
details of certain transfers which took place prior to liquidation and the
amount of creditors remaining unpaid:
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Liquidation o f Companies
167 Shareholders No. of
shares
transferred Date of
ceasing to be
member Creditors remaining
unpaid and
outstanding on the
date of ceasing to be
member (Rs.)
L 2,000 31.8.2020 6,000 M 1,800 20.9.2020 22,000 N 1,200 15.11.2020 27,400 O 1,000 22.2.2021 38,600 P 500 10.3.2021 42,000
All the shares were of Rs. 10each , on which Rs. 4 per share had been
called and paid up. Ignoring expenses, remuneration to liquidator, etc
show the amount to be realised from the various persons listed above.



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