Pooling and Purchase Compared, on One Set of Figures
Chapter Eight
Syllabus topic 3, "Accounting for amalgamation – Pooling of interest method and purchase method"
Pages 23 to 24 of 168
The question
A & Co (A and B, sharing equally) and C & Co (C and D, sharing equally) amalgamate into ABCD & Co. Their balance sheets 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 |
All assets and liabilities pass to the new firm.
Show the balance sheet of ABCD & Co (i) if the amalgamation is in the nature of merger, and (ii) if it is in the nature of purchase, the assets in that case being 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; and the purchase consideration being agreed at Rs 2,10,000 for A & Co and Rs 1,50,000 for C & Co.
Part one: the merger, by pooling of interest
Nothing is revalued, so the two balance sheets are added.
| Assets | A & Co, Rs | C & Co, Rs | New firm, Rs |
|---|---|---|---|
| Building | 1,00,000 | 70,000 | 1,70,000 |
| Stock | 60,000 | 50,000 | 1,10,000 |
| Debtors | 40,000 | 30,000 | 70,000 |
| Cash | 20,000 | 10,000 | 30,000 |
| Total | 2,20,000 | 1,60,000 | 3,80,000 |
Balance sheet of ABCD & Co, merger
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 70,000 | Building | 1,70,000 |
| General reserve | 30,000 | Stock | 1,10,000 |
| Capital: A | 1,00,000 | Debtors | 70,000 |
| Capital: B | 60,000 | Cash | 30,000 |
| Capital: C | 80,000 | ||
| Capital: D | 40,000 | ||
| Total | 3,80,000 | Total | 3,80,000 |
Three things to notice, and each is worth naming in an answer.
The general reserves of both firms survive, at Rs 20,000 plus Rs 10,000, and appear as Rs 30,000 in the new firm.
Each partner's capital is exactly what it was. Nothing was bought, so nothing was settled.
There is no goodwill, and the statement balanced without one.
Part two: the purchase, by the purchase method
Step one: the net assets taken over from each firm.
| A & Co, Rs | C & Co, Rs | |
|---|---|---|
| Building | 1,20,000 | 85,000 |
| Stock | 55,000 | 45,000 |
| Debtors | 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 |
Step two: the goodwill, computed separately for each firm.
| 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 |
Total goodwill Rs 29,000. Computed firm by firm, as the previous chapter required, and only then added for presentation.
Step three: the balance sheet.
Pooling and Purchase Compared, on One Set of Figures
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 70,000 | Goodwill | 29,000 |
| Capital: A and B, being the consideration for A & Co | 2,10,000 | Building | 2,05,000 |
| Capital: C and D, being the consideration for C & Co | 1,50,000 | Stock | 1,00,000 |
| Debtors | 66,000 | ||
| Cash | 30,000 | ||
| Total | 4,30,000 | Total | 4,30,000 |
Three things to notice here too.
The general reserves have gone. They were part of what the partners were paid for, and the consideration includes them.
The capitals are no longer the old capitals. They are the consideration, split between the partners of each old firm in their old ratio.
Goodwill appears, at Rs 29,000.
The reconciliation
The two totals differ by Rs 50,000, and every rupee of it can be accounted for.
| Rs | |
|---|---|
| Revaluation surplus, A & Co: building up 20,000, stock down 5,000, debtors down 2,000 | 13,000 |
| Revaluation surplus, C & Co: building up 15,000, stock down 5,000, debtors down 2,000 | 8,000 |
| Goodwill, A & Co | 17,000 |
| Goodwill, C & Co | 12,000 |
| Total difference | 50,000 |
| Rs | |
|---|---|
| Balance sheet total under purchase | 4,30,000 |
| Less: balance sheet total under merger | 3,80,000 |
| Difference | 50,000 |
Run that reconciliation whenever a question asks for both. It proves the two answers against each other, and it is the difference between an answer that produced two statements and one that understood them.
The comparison, drawn out
| Merger, pooling | Purchase | |
|---|---|---|
| Assets recorded at | Book value | Agreed value |
| Old firms' reserves | Survive, Rs 30,000 | Gone |
| Partners' capitals | Unchanged | The consideration |
| Goodwill | None | Rs 29,000 |
| Balance sheet total | Rs 3,80,000 | Rs 4,30,000 |
| Depreciation in later years | Lower | Higher, on a building of Rs 2,05,000 rather than Rs 1,70,000 |
The last row is the one to close an answer on. The choice of method is not a presentational preference; it changes the depreciation charge, and therefore the reported profit, for as long as the assets are held.
In short
- Merger: add the two balance sheets. Reserves survive, capitals unchanged, no goodwill, total Rs 3,80,000.
- Purchase: assets at agreed values, reserves gone, capitals replaced by the consideration, goodwill Rs 29,000, total Rs 4,30,000.
- Goodwill is computed firm by firm, Rs 17,000 and Rs 12,000, and added only for presentation.
- The difference of Rs 50,000 reconciles exactly as revaluation surplus of Rs 21,000 plus goodwill of Rs 29,000.
- The method chosen changes depreciation, and therefore profit, for years.
Answer in one sentence
Compare the two methods on the same amalgamation. Under the pooling of interest method nothing is revalued, so the two balance sheets are simply added, the general reserves of Rs 20,000 and Rs 10,000 survive as Rs 30,000, each partner's capital stands unchanged, no goodwill arises and the total is Rs 3,80,000; under the purchase method the assets enter at their agreed values, the reserves disappear because the partners have been paid for them in the consideration, the capitals are replaced by that consideration of Rs 2,10,000 and Rs 1,50,000, goodwill of Rs 17,000 and Rs 12,000 is computed separately for each firm and shown as Rs 29,000, and the total is Rs 4,30,000; and the difference of Rs 50,000 reconciles exactly as the revaluation surplus of Rs 21,000 plus the goodwill of Rs 29,000, with the consequence that the higher asset values will carry a higher depreciation charge, and so a lower reported profit, for as long as the assets are held.
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.