A Complete Amalgamation, Worked
Chapter Fifteen
Syllabus topic 4, 5, 6 and 7, the whole of Module I
Pages 43 to 45 of 168
The question
A and B are partners in A & Co sharing profits equally. C and D are partners in C & Co, also sharing equally. Their balance sheets as at 31 March 2027 are:
A & Co
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 40,000 | Building | 1,00,000 |
| General reserve | 20,000 | Stock | 60,000 |
| Capital: A | 1,00,000 | Debtors | 40,000 |
| Capital: B | 60,000 | Cash | 20,000 |
| Total | 2,20,000 | Total | 2,20,000 |
C & Co
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 30,000 | Building | 70,000 |
| General reserve | 10,000 | Stock | 50,000 |
| Capital: C | 80,000 | Debtors | 30,000 |
| Capital: D | 40,000 | Cash | 10,000 |
| Total | 1,60,000 | Total | 1,60,000 |
On 1 April 2027 the two firms amalgamate into ABCD & Co, which takes over all the assets and liabilities of both. The assets are taken at: building A & Co Rs 1,20,000 and C & Co Rs 85,000; stock Rs 55,000 and Rs 45,000; debtors Rs 38,000 and Rs 28,000; cash at book value. Creditors are taken over at book value. The purchase consideration is agreed at Rs 2,10,000 for A & Co and Rs 1,50,000 for C & Co, to be credited to the partners as capital in the new firm. The four partners will share profits equally.
Prepare the realisation accounts and partners' capital accounts in the books of both old firms, the opening entries in the books of ABCD & Co, and its balance sheet.
Step one: the goodwill
Compute the net assets taken over from each firm, then compare with the consideration.
| A & Co, Rs | C & Co, Rs | |
|---|---|---|
| Building, at agreed value | 1,20,000 | 85,000 |
| Stock, at agreed value | 55,000 | 45,000 |
| Debtors, at agreed value | 38,000 | 28,000 |
| Cash | 20,000 | 10,000 |
| Assets taken over | 2,33,000 | 1,68,000 |
| A & Co, Rs | C & Co, Rs | |
|---|---|---|
| Assets taken over | 2,33,000 | 1,68,000 |
| Less: creditors taken over | 40,000 | 30,000 |
| Net assets | 1,93,000 | 1,38,000 |
| A & Co, Rs | C & Co, Rs | |
|---|---|---|
| Purchase consideration | 2,10,000 | 1,50,000 |
| Less: net assets taken over | 1,93,000 | 1,38,000 |
| Goodwill | 17,000 | 12,000 |
Firm by firm, as it must be, and added to Rs 29,000 only for presentation.
Step two: the realisation accounts
In the books of A & Co
| Dr | Rs | Cr | Rs |
|---|---|---|---|
| To Building | 1,00,000 | By Creditors | 40,000 |
| To Stock | 60,000 | By ABCD & Co | 2,10,000 |
| To Debtors | 40,000 | ||
| To Cash | 20,000 | ||
| To Profit to A's capital | 15,000 | ||
| To Profit to B's capital | 15,000 | ||
| Total | 2,50,000 | Total | 2,50,000 |
In the books of C & Co
| Dr | Rs | Cr | Rs |
|---|---|---|---|
| To Building | 70,000 | By Creditors | 30,000 |
| To Stock | 50,000 | By ABCD & Co | 1,50,000 |
| To Debtors | 30,000 | ||
| To Cash | 10,000 | ||
| To Profit to C's capital | 10,000 | ||
| To Profit to D's capital | 10,000 | ||
| Total | 1,80,000 | Total | 1,80,000 |
Assets at BOOK value on the debit side. The agreed values were used in step one and belong to the new firm's books, not here.
A Complete Amalgamation, Worked
Step three: the partners' capital accounts
In the books of A & Co
| Particulars | A, Rs | B, Rs |
|---|---|---|
| By balance brought down | 1,00,000 | 60,000 |
| By General reserve, old ratio | 10,000 | 10,000 |
| By Realisation, profit in the old ratio | 15,000 | 15,000 |
| Total | 1,25,000 | 85,000 |
Each account is closed by a debit "To Capital in ABCD & Co" of the same amount.
In the books of C & Co
| Particulars | C, Rs | D, Rs |
|---|---|---|
| By balance brought down | 80,000 | 40,000 |
| By General reserve, old ratio | 5,000 | 5,000 |
| By Realisation, profit in the old ratio | 10,000 | 10,000 |
| Total | 95,000 | 55,000 |
The check. A plus B is Rs 2,10,000, the consideration for A & Co; C plus D is Rs 1,50,000, the consideration for C & Co. Both agree, so the old firms' working is sound.
Step four: the opening entries in ABCD & Co
For A & Co
| Dr, Rs | Cr, Rs | |
|---|---|---|
| Building | 1,20,000 | |
| Stock | 55,000 | |
| Debtors | 38,000 | |
| Cash | 20,000 | |
| Goodwill | 17,000 | |
| To Creditors | 40,000 | |
| To A's Capital | 1,25,000 | |
| To B's Capital | 85,000 | |
| Total | 2,50,000 | 2,50,000 |
For C & Co
| Dr, Rs | Cr, Rs | |
|---|---|---|
| Building | 85,000 | |
| Stock | 45,000 | |
| Debtors | 28,000 | |
| Cash | 10,000 | |
| Goodwill | 12,000 | |
| To Creditors | 30,000 | |
| To C's Capital | 95,000 | |
| To D's Capital | 55,000 | |
| Total | 1,80,000 | 1,80,000 |
Both balance without a plug, because the goodwill was computed as exactly the difference.
Step five: the balance sheet
Balance Sheet of ABCD & Co as at 1 April 2027
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 70,000 | Goodwill | 29,000 |
| Capital: A | 1,25,000 | Building | 2,05,000 |
| Capital: B | 85,000 | Stock | 1,00,000 |
| Capital: C | 95,000 | Debtors | 66,000 |
| Capital: D | 55,000 | Cash | 30,000 |
| Total | 4,30,000 | Total | 4,30,000 |
The checks, run
| Check | Result |
|---|---|
| Both realisation accounts balance | Rs 2,50,000 and Rs 1,80,000 |
| Capitals reconcile to the considerations | Rs 2,10,000 and Rs 1,50,000 |
| Both opening entries balance without a plug | Rs 2,50,000 and Rs 1,80,000 |
| Balance sheet balances | Rs 4,30,000 |
| Every agreed value used | Building Rs 2,05,000, not Rs 1,70,000 |
If the question adds a goodwill write-off
One further step, and it comes last. Where the partners decide goodwill shall not appear, debit each capital account with one quarter of Rs 29,000, that is Rs 7,250, and credit Goodwill.
| Partner | Before, Rs | Less write-off, Rs | After, Rs |
|---|---|---|---|
| A | 1,25,000 | 7,250 | 1,17,750 |
| B | 85,000 | 7,250 | 77,750 |
| C | 95,000 | 7,250 | 87,750 |
| D | 55,000 | 7,250 | 47,750 |
| Total | 3,60,000 | 29,000 | 3,31,000 |
The balance sheet total then falls to Rs 4,01,000 on both sides.
In short
- Order: goodwill, realisation accounts, capital accounts, opening entries, balance sheet.
- Book values in realisation; agreed values in the new firm's books.
- Reserves and realisation profit in the OLD ratio; goodwill written off in the NEW one.
- Goodwill firm by firm: Rs 17,000 and Rs 12,000, presented as Rs 29,000.
- The proof: capitals of Rs 1,25,000 and Rs 85,000 add to the consideration of Rs 2,10,000; Rs 95,000 and Rs 55,000 add to Rs 1,50,000.
A Complete Amalgamation, Worked
Answer in one sentence
Work a complete amalgamation. Compute the goodwill firm by firm as the excess of each purchase consideration over the agreed value of the net assets taken over from that firm, Rs 17,000 and Rs 12,000 here; open a realisation account in each old firm debiting its assets at book value and crediting the liabilities taken over and the consideration due, so that the balancing figure is the profit on realisation, Rs 30,000 and Rs 20,000, shared in the old ratios; carry the reserves and that profit to the partners' capital accounts in the old ratios, whose closing balances of Rs 1,25,000 and Rs 85,000 and of Rs 95,000 and Rs 55,000 add back to the two considerations and so prove the working; pass an opening entry in the new firm for each old firm, debiting the assets at agreed values and the goodwill and crediting the liabilities and the partners; and draw the balance sheet, which totals Rs 4,30,000, falling to Rs 4,01,000 if the partners choose to write the goodwill off against their capitals in the new ratio.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.