Practice Questions: Amalgamation under AS 14

Question 1, classification

R Ltd. is taken over by S Ltd. All the assets and liabilities of R pass to S. Holders of 96 per cent of the face value of R's equity shares become equity shareholders of S. The consideration is discharged by the issue of equity shares in S, except that Rs 40,000 is paid in cash to those shareholders who asked for it. S intends to carry on R's business. The assets are recorded at R's book values.

Is this an amalgamation in the nature of merger or of purchase? Give your reason.

Question 2, purchase consideration

P Ltd. agrees to take over Q Ltd. Q has 60,000 equity shares of Rs 10 each fully paid. P agrees:

• to issue 3 equity shares of Rs 10 each, at Rs 12, for every 4 shares held in Q;
• to pay Rs 1,50,000 in cash to Q's shareholders;
• to discharge Q's 12 per cent debentures of Rs 2,00,000 by issuing its own 11 per cent debentures; and
• to bear the liquidation expenses of Rs 12,000.

Compute the purchase consideration under AS 14.

Question 3, the purchase method worked

Q Ltd.'s Balance Sheet on the date of amalgamation was as follows.

P Ltd. takes over all the assets and liabilities on the terms in Question 2. The assets are to be taken at the following agreed values: Land Rs 3,60,000; Plant Rs 2,40,000; Stock Rs 1,50,000; Sundry debtors Rs 1,30,000; Cash at bank at book value. The amalgamation is in the nature of purchase.

Pass the journal entries in P Ltd.'s books.

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Answers

Question 1

An amalgamation in the nature of purchase.

Condition (iii) of paragraph 29 requires the consideration receivable by those equity shareholders who agree to become equity shareholders of the transferee to be discharged wholly by the issue of equity shares, cash being permitted only in respect of fractional shares. Rs 40,000 paid to shareholders who asked for it is not cash for fractions, so condition (iii) fails.

Four of the five conditions are satisfied and it makes no difference. Paragraph 30 provides that failing any one or more makes the amalgamation one in the nature of purchase, so it is accounted for by the purchase method under paragraph 32.

Naming the condition that fails is where the marks are. An answer that says only "purchase" earns a fraction of them.

Question 2