Pooling of Interests, Worked
Chapter Twenty-Eight
Syllabus topic 2, "Accounting for amalgamation - Pooling of interest method and purchase method"
Pages 68 to 69 of 85
In one line
Bring everything across at book value, bring the reserves with it, and put the difference on the capital into reserves.
The facts
Beta Ltd.'s Balance Sheet, as before.
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| 40,000 Equity shares of Rs 10 each, fully paid | 4,00,000 | Land and buildings | 2,00,000 |
| General Reserve | 60,000 | Plant and machinery | 1,80,000 |
| Profit and Loss A/c | 40,000 | Stock | 1,20,000 |
| 10% Debentures | 1,00,000 | Sundry debtors | 1,00,000 |
| Sundry creditors | 80,000 | Cash at bank | 80,000 |
| Total | 6,80,000 | Total | 6,80,000 |
Alpha Ltd. agreed to take over the whole of Beta's assets and liabilities and to continue its business. All of Beta's equity shareholders agreed to become equity shareholders of Alpha, receiving four equity shares of Rs 10 each in Alpha for every five shares held in Beta, the consideration being discharged wholly in equity shares. The assets and liabilities were to be recorded at their existing carrying amounts, the accounting policies of the two companies already being uniform.
Step 1. Classify
| Condition | Satisfied? |
|---|---|
| (i) All assets and liabilities pass | Yes |
| (ii) Holders of not less than 90 per cent of the face value of equity become shareholders of Alpha | Yes, all of them |
| (iii) Consideration discharged wholly in equity shares | Yes |
| (iv) Business intended to be carried on | Yes |
| (v) No adjustment to book values | Yes |
All five. This is an amalgamation in the nature of merger, and paragraph 31 requires the pooling of interests method.
Step 2. Purchase consideration
| Working note | Computation | Rs |
|---|---|---|
| WN 1. Shares to be issued | 40,000 Beta shares at 4 for every 5 = 32,000 Alpha shares | |
| WN 2. Consideration | 32,000 shares of Rs 10 each, at par | 3,20,000 |
Step 3. The paragraph 35 adjustment
This is the step that has no counterpart in the purchase method.
| Working note | Computation | Rs |
|---|---|---|
| WN 3. Share capital of the transferor | 40,000 shares of Rs 10 | 4,00,000 |
| WN 4. Share capital issued by the transferee | from WN 2 | (3,20,000) |
| Total, being the difference adjusted in reserves | 80,000 |
Alpha has issued Rs 80,000 less capital than Beta had. Under paragraph 35 that difference is adjusted in reserves, and because the capital issued is the smaller figure, reserves are increased by Rs 80,000.
Had Alpha issued more capital than Beta's, reserves would have been reduced by the excess.
Step 4. Entries in Alpha's books
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| 1. Business Purchase A/c ... Dr | 3,20,000 | |
| To Liquidator of Beta Ltd. A/c | 3,20,000 | |
| (Being the purchase consideration payable on the amalgamation, WN 2) | ||
| 2. Land and Buildings A/c ... Dr | 2,00,000 | |
| Plant and Machinery A/c ... Dr | 1,80,000 | |
| Stock A/c ... Dr | 1,20,000 | |
| Sundry Debtors A/c ... Dr | 1,00,000 | |
| Cash at Bank A/c ... Dr | 80,000 | |
| To 10% Debentures A/c | 1,00,000 | |
| To Sundry Creditors A/c | 80,000 | |
| To General Reserve A/c | 1,40,000 | |
| To Profit and Loss A/c | 40,000 | |
| To Business Purchase A/c | 3,20,000 | |
| (Being assets, liabilities and reserves of Beta Ltd. incorporated at existing carrying amounts under the pooling of interests method, the difference on capital of Rs 80,000 being adjusted in General Reserve, WN 3 and WN 4) | ||
| 3. Liquidator of Beta Ltd. A/c ... Dr | 3,20,000 | |
| To Equity Share Capital A/c | 3,20,000 | |
| (Being the consideration discharged by the issue of 32,000 equity shares of Rs 10 each) | ||
| Total | 13,20,000 | 13,20,000 |
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