SCHOOL OF DISTANCE EDUCATION
UNIVERSITY OF CALICUT
ADVANCED
CORPORATE ACCOUNTING
M.Com
II SEMESTER
SCHOOL OF DISTANCE EDUCATION
Calicut university P.O, Malappuram,
Kerala,India 673 635
2026
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 2
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
STUDY MATERIAL
M.Com
II SEMESTER
Prepared By:
T.H.JAHFARALI
Assistant Professor
P.G. Department of Commerce
Government College Malappuram
[email protected]
Layout & Settings: Computer Section, SDE
©
Reserved
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Advanced Corporate Accounting Page 3
CONTENTS
Lesson
No.
Topic
Page No.
MODULE 1
1
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
5 - 20
MODULE 2
2
ACCOUNTS OF HOLDING COMPANIES
21-61
MODULE 3
3
AMALGAMATION OF COMPANIES
62 -105
4
ACCOUNTING FOR INTERNAL
RECONSTRUCTION
5
LIQUIDATION OF COMPANIES
119-145
MODULE 4
6
VOYAGE ACCOUNTS
146 - 153
7
FARM ACCOUNTS
154 -163
MODULE 5
8
HUMAN RESOURCE ACCOUNTING
(HRA)
164 - 171
9
ACCOUNTING FOR PRICE LEVEL
CHANGES (INFLATION ACCOUNTING)
172-198
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SYLLABUS
MC2C7 – ADVANCED CORPORATE ACCOUNTING
80 Hours Marks: 80
Objectives:
1. To provide theoretical knowledge of International Financial Reporting
Standards.
2. To enable the students to gain ability to solve problems relating to Holding
Company Accounts, Liquidation of Companies and various other Accounts
Module 1: International Financial Reporting Standards (IFRS): Introduction –
Meaning – Scope – An Overview of the International Financial Reporting Standards –
IFRS 1 to 13 – Role of IASB – Arguments for Global Convergence – Required
disclosure as per IFRS – Achievements of IASB and Obstacles in Convergence –
Difference between IFRS and Indian Accounting Standards – US GAAP.
15 Hours
Module 2: Accounting for Group companies – Holding Companies – Definition –
Accounts Consolidation – Preparation of Consolidated Balance Sheet – Minority
Interest – Pre-acquisition or Capital Profits – Cost of Control or Goodwill – Inter-
company Balance – Unrealised Inter-company profits – Revaluation of assets and
liabilities – Bonus Shares – Treatment of Dividend.
20 Hours
Module 3: Accounting for Corporate Restructuring - Internal –External – Merger and
acquisition – Accounting for liquidation of companies – Preparation of Statement of
Affairs – Deficiency/Surplus Account - Liquidator’s Final Statement of Account –
Receiver’s Statement of Accounts
25 Hours
Module 4: Voyage Accounts – Meaning of important terms – Voyage in Progress –
Farm Accounts – Characteristics – Advantages and Disadvantages – Final Accounts of
Farms
10 Hours
Module 5: Human Resources Accounting – Objectives – Methods of valuation -
Advantages and Disadvantages.
Accounting foe Price Level Changes – CPP – CCA and Hybrid.
10 Hours
(Theory and Problems may be in the ratio of 30% and 70% respectively)
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MODULE – 1
INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
LESSON 1
INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
International Accounting Standards Board is an independent, privately – funded
accounting standard setter based in London. Contributors include major accounting
firms, private financial institutions, industrial companies throughout the world, central
and development banks, and other international and professional organisations.
In March 2001 the International Accounting Standards Committee (IASC)
Foundation was formed as a not for profit corporation incorporated in the USA. The
IASC Foundation is the parent entity of the IASB. In July 2010 it changed its name to
the International Financial Reporting Standards (IFRS) Foundation.
From April 2001the IASB assumed the accounting standard setting
responsibilities from the predecessor body, the International Accounting Standards
Committee (IASC). The 14 members of the IASB come from nine countries and have
a variety of backgrounds with a mix of auditors, preparers of financial statements,
users of financial statements and an academic.
The following are the formal objectives of the IASB:
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1. Develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards based on clearly articulated principles that
require high quality, transparent and comparable information in financial statements
and other financial reporting to help participants in the various capital markets of the
world and other users of the information to make economic decisions.
2. Promote the use and rigorous application of those standards.
3. Work actively with national standard-setters to bring about convergence of
national accounting standards and IFRSs to high quality solutions.
Under the IFRS Foundation Constitution, the IASB has complete responsibility
for all technical matters of the IFRS Foundation including: Full discretion in
developing and pursuing its technical agenda, subject to certain consultation
requirements with the Trustees and the public
a) The preparation and issuing of IFRSs (other than Interpretations) and exposure
drafts, following the due process stipulated in the Constitution
b) The approval and issuing of Interpretations developed by the IFRS
Interpretations Committee.
IFRS is a refined system of financial reporting which is going to benefit all the
stakeholders in the coming years, together with improved corporate governance and
increased free flow of capital across the globe.
International Financial Reporting Standards (IFRS) are a set of accounting
standards developed by the International Accounting Standards Board (IASB) that is
becoming the global standard for the preparation of public company financial
statements.
The IFRS Foundation is the legal entity under which the International
Accounting Standards Board (IASB) operates. The Foundation is governed by a board
of 22 trustees. IFRS Foundation is the new name of International Accounting
Standards Committee (IASC), approved in January 2010.
The IFRS Advisory Council is the formal advisory body to the IASB and the
Trustees of the IFRS Foundation. It consists of a wide range of representatives from
groups that are affected by and interested in the work of IASB. These include
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investors, financial analysts and other users of financial statements, as well as
preparers, academics, auditors, regulators, professional accounting bodies and standard
setters. Members of the Advisory Council are appointed by the Trustees.
The IFRS Interpretations Committee is the interpretive body of the IFRS
Foundation. Its mandate is to review on a timely basis widespread accounting issues
that have arisen within the context of current IFRSs. The work of IFRS Interpretations
Committee is aimed at reaching consensus on the appropriate accounting treatment
(IFRIC Interpretations) and providing authoritative guidance on those issues.
The following are the major importance of International Financial Reporting
Standards:
a) A business can present its financial statements on the same basis as its foreign
competitors, making comparisons easier.
b) Companies with subsidiaries in countries that require or permit IFRS may be
able to use one accounting language company-wide.
c) Companies may need to convert to IFRS if they are a subsidiary of a foreign
company that must use IFRS, or if they have a foreign investor that must use IFRS.
d) Capital market regulators must be aware of only one set of accounting standards
and the companies will experience efficiency in raising capital and reduced
information processing cost.
e) The companies will no longer required to prepare its financial statement under
different GAAP and make the task of listing shares in foreign exchange easier.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IFRS 1
IFRS 2
IFRS 3
IFRS 4
IFRS 5
IFRS 6
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IFRS 14
IFRS 15
First-time Adoption of International Financial Reporting
Standards.
Share-based Payment.
Business Combinations.
Insurance Contracts.
Non-current Assets Held for Sale and Discontinued Operations.
Exploration for and Evaluation of Mineral Resources.
Financial Instruments: Disclosures.
Operating Segments.
Financial Instruments.
Consolidated Financial Statements.
Joint Arrangements.
Disclosure of Interest in Other Entities.
Fair Value Measurement.
Regulatory Deferral Accounts.
Revenue from Contracts with Customers.
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The technical summary of important IFRSs is as under:
This IFRS was issued at 1 January 2013. The objective of this IFRS is to ensure
that an entity’s first IFRS financial statements, and its interim financial reports for part
of the period covered by those financial statements, contain high quality information
that: (a) is transparent for users and comparable over all periods presented; (b)
provides a suitable starting point for accounting in accordance with International
Financial Reporting Standards (IFRSs); and (c) can be generated at a cost that does not
exceed the benefits.
An entity shall prepare and present an opening IFRS statement of financial
position at the date of transition to IFRSs. This is the starting point for its accounting
in accordance with IFRSs. An entity shall use the same accounting policies in its
opening IFRS statement of financial position and throughout all periods presented in
its first IFRS financial statements. Those accounting policies shall comply with each
IFRS effective at the end of its first IFRS reporting period.
The IFRS requires disclosures that explain how the transition from previous
GAAP to IFRSs affected the entity’s reported financial position, financial performance
and cash flows.
IFRS 2 was issued at 1 January 2012. The objective of this IFRS is to specify
the financial reporting by an entity when it undertakes a share-based payment
transaction. The IFRS requires an entity to recognise share-based payment transactions
in its financial statements, including transactions with employees or other parties to be
settled in cash, other assets, or equity instruments of the entity. There are no
exceptions to the IFRS, other than for transactions to which other Standards apply.
This also applies to transfers of equity instruments of the entity’s parent, or
equity instruments of another entity in the same group as the entity, to parties that have
supplied goods or services to the entity.
The IFRS prescribes various disclosure requirements to enable users of financial
statements to understand: (a) the nature and extent of share-based payment
arrangements that existed during the period; (b) how the fair value of the goods or
services received, or the fair value of the equity instruments granted, during the period
was determined; and (c) the effect of share-based payment transactions on the entity’s
profit or loss for the period and on its financial position.
This states that all business combinations are accounted for using purchase
accounting, with limited exceptions. A business combination is to bringing together of
separate entities or business into one reporting entity. A business can be operated
managed for the purpose of providing return to investors or lower costs. An entity in
its development stage can meet the definition of a business. In some cases the legal
subsidiary is identified as the acquirer for accounting purposes (reverse
acquisition).The date of acquisition is the date on which effective control is transferred
to the acquirer. The cost of acquisition is the amount of cash equivalents paid, plus the
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fair value of other purchase considerations given, plus any cost directly attributable to
the acquisition.
The fair values of securities issued by the acquirer are determined at the date of
exchange. Costs directly attributable to the acquisition may be internal costs but
cannot be general administrative costs. There is no requirement for directly
attributable cost to be incremental.
IFRS 4 was issued at 1 January 2013. The objective of this IFRS is to specify
the financial reporting for insurance contracts by any entity that issues such contracts
(described in this IFRS as an insurer) until the Board completes the second phase of its
project on insurance contracts. In particular, this IFRS requires: (a) limited
improvements to accounting by insurers for insurance contracts. (b) Disclosure that
identifies and explains the amounts in an insurer’s financial statements arising from
insurance contracts and helps users of those financial statements understand the
amount, timing and uncertainty of future cash flows from insurance contracts.
An insurance contract is a contract under which one party (the insurer) accepts
significant insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the insured event)
adversely affects the policyholder. The IFRS applies to all insurance contracts
(including reinsurance contracts) that an entity issues and to reinsurance contracts that
it holds, except for specified contracts covered by other IFRSs.
The IFRS permits an insurer to change its accounting policies for insurance
contracts only if, as a result, its financial statements present information that is more
relevant and no less reliable, or more reliable and no less relevant. In particular, an
insurer cannot introduce any of the following practices, although it may continue using
accounting policies that involve them: (a) measuring insurance liabilities on an
undiscounted basis. (b) Measuring contractual rights to future investment management
fees at an amount that exceeds their fair value as implied by a comparison with current
fees charged by other market participants for similar services. (c) Using non-uniform
accounting policies for the insurance liabilities of subsidiaries.
The IFRS requires disclosure to help users understand: (a) the amounts in the
insurer’s financial statements that arise from insurance contracts. (b) The nature and
extent of risks arising from insurance contracts.
This IFRS was issued at 1 January 2013. The objective of this IFRS is to specify
the accounting for assets held for sale, and the presentation and disclosure of
discontinued operations. In particular, the IFRS requires: (a) assets that meet the
criteria to be classified as held for sale to be measured at the lower of carrying amount
and fair value less costs to sell, and depreciation on such assets to cease; (b) an asset
classified as held for sale and the assets and liabilities included within a disposal group
classified as held for sale to be presented separately in the statement of financial
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position; and (c) the results of discontinued operations to be presented separately in the
statement of comprehensive income.
The IFRS: (a) adopts the classification ‘held for sale’. (b) Introduces the concept
of a disposal group, being a group of assets to be disposed of, by sale or otherwise,
together as a group in a single transaction, and liabilities directly associated with those
assets that will be transferred in the transaction. (c) Classifies an operation as
discontinued at the date the operation meets the criteria to be classified as held for sale
or when the entity has disposed of the operation.
An entity shall classify a non-current asset (or disposal group) as held for sale if
its carrying amount will be recovered principally through a sale transaction rather than
through continuing use.
A discontinued operation is a component of an entity that either has been
disposed of, or is classified as held for sale, and (a) represents a separate major line of
business or geographical area of operations, (b) is part of a single co-ordinated plan to
dispose of a separate major line of business or geographical area of operations or (c) is
a subsidiary acquired exclusively with a view to resale.
IFRS 6 was issued at 1 January 2012. The objective of this IFRS is to specify
the financial reporting for the exploration for and evaluation of mineral resources.
Exploration and evaluation expenditures are expenditures incurred by an entity in
connection with the exploration for and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting a mineral resource are
demonstrable. Exploration for and evaluation of mineral resources is the search for
mineral resources, including minerals, oil, natural gas and similar non-regenerative
resources after the entity has obtained legal rights to explore in a specific area, as well
as the determination of the technical feasibility and commercial viability of extracting
the mineral resource. Exploration and evaluation assets are exploration and evaluation
expenditures recognised as assets in accordance with the entity’s accounting policy.
An entity shall determine an accounting policy for allocating exploration and
evaluation assets to cash- generating units or groups of cash-generating units for the
purpose of assessing such assets for impairment. Each cash-generating unit or group
of units to which an exploration and evaluation asset is allocated shall not be larger
than an operating segment determined in accordance with IFRS 8 Operating Segments.
An entity shall disclose information that identifies and explains the amounts
recognised in its financial statements arising from the exploration for and evaluation of
mineral resources.
This IFRS was issued at 1 January 2012. The objective of this IFRS is to require
entities to provide disclosures in their financial statements that enable users to
evaluate: (a) the significance of financial instruments for the entity’s financial
position and performance; and (b) the nature and extent of risks arising from financial
instruments to which the entity is exposed during the period and at the end of the
reporting period, and how the entity manages those risks. The qualitative disclosures
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describe management’s objectives, policies and processes for managing those risks.
The quantitative disclosures provide information about the extent to which the entity is
exposed to risk, based on information provided internally to the entity’s key
management personnel. Together, these disclosures provide an overview of the
entity’s use of financial instruments and the exposures to risks they create.
The IFRS applies to all entities, including entities that have few financial
instruments (e.g. a manufacturer whose only financial instruments are accounts
receivable and accounts payable) and those that have many financial instruments (e.g.
a financial institution most of whose assets and liabilities are financial instruments).
When this IFRS requires disclosures by class of financial instrument, an entity
shall group financial instruments into classes that are appropriate to the nature of the
information disclosed and that take into account the characteristics of those financial
instruments. An entity shall provide sufficient information to permit reconciliation to
the line items presented in the statement of financial position.
IFRS 8 was issued at 1 January 2013. An entity shall disclose information to
enable users of its financial statements to evaluate the nature and financial effects of
the business activities in which it engages and the economic environments in which it
operates.
This IFRS shall apply to: (a) the separate or individual financial statements of
an entity: (i) whose debt or equity instruments are traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market, including local and
regional markets), or (ii) that files, or is in the process of filing, its financial statements
with a securities commission or other regulatory organisation for the purpose of
issuing any class of instruments in a public market; and (b) the consolidated financial
statements of a group with a parent: (i) whose debt or equity instruments are traded in
a public market (a domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets), or (ii) that files, or is in the process of filing, the
consolidated financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a public market.
The IFRS requires an entity to report a measure of operating segment profit or
loss and of segment assets. It also requires an entity to report a measure of segment
liabilities and particular income and expense items if such measures are regularly
provided to the chief operating decision maker. It requires reconciliations of total
reportable segment revenues, total profit or loss, total assets, liabilities and other
amounts disclosed for reportable segments to corresponding amounts in the entity’s
financial statements.
IFRS 9 was issued in July 2014.IFRS 9 is built on a logical, single classi
fi
cation
and measurement approach for
fi
nancial assets that re
fl
ects the business model in
which they are managed and their cash
fl
ow characteristics.
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Built upon this is a forward-looking expected credit loss model that will result
in more timely recognition of loan losses and is a single model that is applicable to all
financial instruments subject to impairment accounting. In addition, IFRS 9 addresses
the so-called ‘own credit’ issue, whereby banks and others book gains through pro
fi
t
or loss as a result of the value of their own debt falling due to a decrease in credit
worthiness when they have elected to measure that debt at fair value. The Standard
also includes an improved hedge accounting model to better link the economics of risk
management with its accounting treatment.
IFRS 10 was issued at 1 January 2013.The objective of this IFRS is to establish
principles for the presentation and preparation of consolidated financial statements
when an entity controls one or more other entities. To meet the objective, this IFRS:
(a) requires an entity (the parent) that controls one or more other entities (subsidiaries)
to present consolidated financial statements; (b) defines the principle of control, and
establishes control as the basis for consolidation; (c) sets out how to apply the
principle of control to identify whether an investor controls an investee and therefore
must consolidate the investee; and (d) sets out the accounting requirements for the
preparation of consolidated financial statements.
Consolidated financial statements are the financial statements of a group in
which the assets, liabilities, equity, income, expenses and cash flows of the parent and
its subsidiaries are presented as those of a single economic entity. The IFRS requires
an entity that is a parent to present consolidated financial statements. The IFRS
defines the principle of control and establishes control as the basis for determining
which entities are consolidated in the consolidated financial statements.
When preparing consolidated financial statements, an entity must use uniform
accounting policies for reporting like transactions and other events in similar
circumstances. Intragroup balances and transactions must be eliminated. Non-
controlling interests in subsidiaries must be presented in the consolidated statement of
financial position within equity, separately from the equity of the owners of the parent.
IFRS 11 was issued in May 2011. It establishes principles for the financial
reporting by parties to a joint arrangement. IFRS 11 improves the accounting for joint
arrangements by introducing a principle- based approach that requires a party to a joint
arrangement to recognise its rights and obligations arising from the arrangement. Such
a principle-based approach will provide users with greater clarity about an entity’s
involvement in its joint arrangements by increasing the verifiability, comparability and
understandability of the reporting of these arrangements.
The disclosure requirements allow users to gain a better understanding of the
nature, extent and financial effects of the activities that an entity carries out through
joint arrangements. The disclosure requirements for joint arrangements have been
placed in IFRS 12 Disclosure of Interests in Other Entities.
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IFRS 12 applies to entities those have an interest in subsidiaries, joint
arrangements, associates and unconsolidated structured entities.
IFRS 12 does not apply to: (a) Post-employment benefit plans or other long-
term employee benefit plans to which IAS 19 Employee Benefits applies , (b) Separate
financial statements, where IAS 27 Separate Financial Statements applies , (c) An
interest held by an entity that participates in, but does not have joint control or
significant influence over, a joint arrangement , and (d) Interests accounted for in
accordance with IFRS 9 Financial Instruments, except for interests in an associate or
joint venture measured at fair value as required by IAS 28 Investments in Associates
and Joint Ventures.
IFRS 13 was issued at 1 January 2013. This IFRS (a) defines fair value; (b) sets
out in a single IFRS a framework for measuring fair value; and (c) requires disclosures
about fair value measurements.
The IFRS applies to IFRSs that require or permit fair value measurements or
disclosures about fair value measurements (and measurements, such as fair value less
costs to sell, based on fair value or disclosures about those measurements), except in
specified circumstances.
A fair value measurement assumes that a financial or non-financial liability or
an entity’s own equity instrument (e.g. equity interests issued as consideration in a
business combination) is transferred to a market participant at the measurement date.
The transfer of a liability or an entity’s own equity instrument assumes the
following: (a) A liability would remain outstanding and the market participant
transferee would be required to fulfil the obligation. The liability would not be settled
with the counterparty or otherwise extinguished on the measurement date. (b) An
entity’s own equity instrument would remain outstanding and the market participant
transferee would take on the rights and responsibilities associated with the instrument.
The instrument would not be cancelled or otherwise extinguished on the measurement
date.
An entity shall disclose information that helps users of its financial statements
assess both of the following: (a) for assets and liabilities that are measured at fair
value on a recurring or non-recurring basis in the statement of financial position after
initial recognition, the valuation techniques and inputs used to develop those
measurements. (b) for recurring fair value measurements using significant
unobservable inputs (Level 3), the effect of the measurements on profit or loss or other
comprehensive income for the period.
a) IFRSs are not intended to be applied to immaterial items and they are not
retrospective.
b) Within each individual country local regulations govern, to a greater or lesser
degree, the issue of financial statements.
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c) IFRSs concentrate on essentials and are designed not to be too complex;
otherwise they would be impossible to apply on a worldwide basis.
d) IFRSs do not override local regulations on financial statements.
a) The world's economies are becoming more integrated and having one
accounting system will make life a little less complicated for both the companies and
the investors.
b) As multinational businesses continue to grow and expand, a thorough
knowledge of IFRS is now essential for internationally active, growing businesses.
c) There seems to be worldwide consensus surrounding the need for one global set
of high-quality accounting standards and that IFRS is currently best positioned to fulfil
that need.
d) In today's global economy the consistency of one reporting standard will make
it more efficient for investors to research and compare financial statements globally
and more effectively.
e) IFRS adoption leads to higher market liquidity, more investment flows through
foreign mutual funds, and more favourable terms in private debt contracting, greater
analyst coverage, and lower stock return synchronicity.
a) Even if the IFRS is implemented, there would still be differences in financial
reporting, and financial statements would not be “identical” because of the differences
in national laws, economic conditions, and objectives.
b) The environmental factors such as culture, language, and legal system affect
how IFRS is applied.
c) The differing backgrounds of the people in numerous countries applying IFRS
means that interpretative differences will arise because of different historical practices.
d) If some countries interpret the IFRS differently than other countries, the
financial statements between those countries would not be comparable.
e) The audit fees of public accounting firms increase after the transition to IFRS.
f) The costs of application by companies, such as changing the internal systems to
make it compatible with the new reporting standards, training costs and etc., are
increased.
g) It will take a substantial amount of time to convert to IFRS completely,
depending on the size of the company.
A complete set of financial statements, includes the following components, is
required under IFRS:
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a) A Statement of Financial Position as at the end of the reporting period.
b) A Statement of Profit or Loss and Other Comprehensive Income for the
reporting period.
c) A Statement of Changes in Equity (SOCE) for the reporting period.
d) A Cash Flow Statement or Statement of Cash Flows for the reporting period.
e) Notes comprising a summary of significant accounting policies and other
explanatory information.
f) A Statement of financial position at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it reclassifies
items in its financial statements.
The IASB and the US Financial Accounting Standards Board (FASB) have been
working together since 2002 to achieve convergence of IFRSs and US Generally
Accepted Accounting Principles (GAAP). A common set of high quality global
standards remains a priority of both the IASB and the FASB.
In September 2002 the IASB and the FASB agreed to work together, in
consultation with other national and regional bodies, to remove the differences
between international standards and US GAAP. This decision was embodied in a
Memorandum of Understanding (MoU) between the boards known as the Norwalk
Agreement. The boards’ commitment was further strengthened in 2006 when the
IASB and FASB set specific milestones to be reached by 2008.
In the light of progress achieved by the boards and other factors, the US
Securities and Exchange Commission (SEC) removed in 2007 the requirement for
non-US companies registered in the US to reconcile their financial reports with US
GAAP if their accounts complied with IFRSs as issued by a proposed road map on
adoption of IFRSs for domestic US companies.
In 2008 the two boards issued an update to the MoU, which identified a series
of priorities and milestones, emphasising the goal of joint projects to produce
common, principle based standards.
The Group of 20 Leaders (G20) called for standard setters to re-double their
efforts to complete convergence in global accounting standards. Following this
request, in November 2009the IASB and FASB published a progress report describing
and intensification of their work programme, including the hosting of monthly joint
board meetings and to provide quarterly updates on their progress on convergence
projects.
In April 2012 the IASB and FASB published a joint progress report in which
they describe the progress made on financial instruments, including a joint expected
loss impairment (‘provisioning’) approach and a more converged approach to
classification and measurement.
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In February 2013 the IASB and FASB published a high level update on the
status and timeline of the remaining convergence projects. The report includes an
update on the impairment phase of the joint project on financial instruments.
The listed companies of European Union State including UK, France and
Germany, have adopted IFRS since 2005. The process of converging towards IFRS is
still going on in India.
IFRS convergence, in recent years, had gained momentum in this world. As the
capital markets become increasingly global in nature, more and more investors see the
need for a common set of accounting standards.
India being one of the global players, migration to IFRS will enable Indian
entities to have access to international capital markets without having to go through
the cumbersome conversion and filing process. It will lower the cost of raising funds,
reduce accountants’’ fees and enable faster access to all major capital markets.
Furthermore it will facilitate companies to set targets and milestones based on a global
business environment rather than an inward perspective.
Furthermore, convergence to IFRS, by various group entities, will enable
management to bring all components of the group into a single financial reporting
platform. This will eliminate the need for multiple reports and significant adjustment
for preparing consolidated financial statements or filing financial statements in
different stock exchanges.
The following are the reasons for adoption of IFRS inspite of Indian GAAP:
1. Improve transparency in accounting system.
2. Globally accepted.
3. New opportunity.
4. Allows exercise of professional judgement.
5. IFRS are increasingly being recognised as Global Reporting Standards for
financial statements.
6. Indian GAAP is becoming rare because it has some limitations in comparison
with IFRS.
7. As global capital markets become increasingly integrated, many countries are
adopting IFRs.
8. More than 100 countries already permit the use of IFRS in their countries.
The following are the benefits to India by the implementation of IFRS:
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1. It would benefit the economy by increasing the growth of international business.
2. It would encourage foreign investment which results in foreign capital inflows
into the country.
3. It would reduce the cost of compliance.
4. IFRS would open many opportunities for the professionals to serve the
international clients.
There are certain challenges in implementation of IFRS in India. They include:
1. Increase in cost initially due to dual reporting requirement, which entity might
have to meet till the full convergence is achieved.
2. Current accounting framework in India is deeply affected by laws and
regulations. It is required to make amendments in various laws and regulations.
3. All stakeholders, employees, auditors, regulators, tax authorities etc. would
need to aware about IFRS. They need to be trained.
4. Organisations would incur additional costs for modifying their current
accounting procedures for meeting the new disclosures and reporting requirements.
The following are the important similarities and differences between IFRS, US
GAAP and Indian GAAP:
Sl.
No.
Subject
IFRS
US GAAP
Indian GAAP
1.
Historical
Cost
Generally uses
historical cost, but
intangible assets,
property, plant and
equipment (PPE) and
investment property
may be revalued to
fair value.
No revaluation
except for
certain types of
financial
instruments.
Uses historical
cost, but
property, plant
and equipment
(PPE) may be
revalued to fair
value.
2.
First-time
adoption of
accounting
frameworks
Full retrospective
application of all
IFRSs effective at
the reporting date for
an entity’s first IFRS
financial statements,
with some optional
exemptions and
limited mandatory
exceptions.
First-time
adoption of US
GAAP requires
retrospective
application.
Similar to US
GAAP.
3.
Components
Two years’
Similar to IFRS,
Single-entity
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 18
of Financial
Statements
consolidated balance
sheets, income
statements, cash
flow statements,
changes in equity
and accounting
policies and notes.
except three
years required
for SEC
registrants
(public
companies) for
all statements
except balance
sheet
parent company
(standalone) two
years’ balance
sheets, income
statements, cash
flow statements
and accounting
policies and
notes.
4.
Balance Sheet
Does not prescribe a
particular format. A
liquidity presentation
of assets and
liabilities used
instead of a current
or non-current
presentation, only
when a liquidity
presentation
provides more
relevant and reliable
information.
Entities may
present either a
classified or non-
classified
balance sheet.
Items on the face
of balance sheet
are generally
presented in
decreasing order
of liquidity.
Accounting
standards do not
prescribe a
particular format;
certain items
must be
presented on the
face of the
balance sheet.
5.
Income
Statement
Does not prescribe a
standard format,
although expenditure
is presented in one of
two formats
(function or nature).
Present as either
a single step or
multiple step
format.
Expenditures are
presented by
function.
Does not
prescribe a
standard format;
but certain
income and
expenditure
items are
disclosed in
accordance with
accounting
standards and the
Companies Act.
6.
Cash Flow
Statements –
Format and
Method
Standard headings,
but limited guidance
on contents. Direct
or indirect method is
used.
Similar headings
to IFRS, but
more specific
guidance for
items included in
each category.
Direct or indirect
method is used.
Similar to IFRS.
However,
indirect method
is required for
listed companies
and direct
method or
insurance
companies.
7.
Cash Flow
Cash includes cash
Similar to IFRS,
Similar to US
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 19
Statements –
Definition of
Cash and cash
equivalents
equivalents with
maturities of three
months or less from
the date of
acquisition and may
include bank
overdrafts.
except that bank
overdrafts are
excluded.
GAAP.
8.
Revenue
Recognition
Based on several
criteria, which
require the
recognition of
revenue when risks
and rewards and
control have been
transferred and the
revenue can be
measured reliably.
Similar to IFRS
in principle,
based on four
key criteria.
Extensive
detailed
guidance exists
for specific types
of transactions.
Similar to IFRS
conceptually,
although several
differences in
detail.
9.
Depreciation
Associated on
systematic basis to
each accounting
period over the
useful life of the
asset.
Similar to IFRS.
Similar to IFRS,
except where the
useful life is
shorter as
envisaged under
the Companies
Act or the
relevant statute,
the depreciation
is computed by
applying a higher
rate.
10.
Property ,
Plant and
Equipment
(PPE)
Historical cost or
revalued amounts are
used. Regular
valuations of entire
classes of assets are
required when
revaluation option is
chosen.
Historical cost is
used;
revaluations are
not permitted.
Historical cost is
used.
Revaluations are
permitted.
However, no
requirement on
frequency of
revaluation.
11.
Inventories
Carried at lower of
cost and net
realisable value.
FIFO or weighted
average method is
used to determine
cost. LIFO is
Similar to IFRS;
However, use of
LIFO is
permitted.
Similar to IFRS.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 20
prohibited.
12.
Contingencies
Disclose
unrecognised
possible losses and
probable gains.
Similar to IFRS.
Similar to IFRS,
except that
contingent gains
are neither
recognised nor
disclosed.
A. Short Answer Type questions
1. What do you mean by IFRS?
2. Write a note on IFRS Advisory Council.
3. What do you understand by IFRS Interpretations Committee?
4. Write a note on IFRS Foundation.
5. List any four IFRSs.
B. Essay Type Questions
1. Discuss the objectives and roles of IASB.
2. Write a note on scope, merits and demerits of IFRS.
3. Briefly explain any five IFRSs.
4. How can you distinguish the IFRS and US GAAP?
5. Give a note on IFRS in India.
6. Write an essay on convergence between IFRSs and US GAAP.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 21
MODULE – 2
ACCOUNTING FOR GROUP
COMPANIES
(ACCOUNTS OF HOLDING
COMPANIES)
LESSON 2
ACCOUNTS OF HOLDING COMPANIES
A holding company is the company that holds either the whole of the share
capital or a majority of the shares in one or more companies so as to have a controlling
interest in such companies. Such other companies are known as subsidiary companies.
Unlike in amalgamation or absorption, the subsidiary companies retain their identities
because they do businesses in their own names.
A Holding company together with its Subsidiaries can be called as the Group of
companies.
The following are the advantages for a company to operate as a group:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 22
1. Decentralisation of financial risk: If one entity fails, it does not affect the other
companies in the group. The other companies can continue even if one or two
companies in the group fail.
2. Lawful obligation: In some cases, the formation of a subsidiary company is a
legal requirement.
3. Diversification possible at lower cost: One company acquires controlling
interest of another company. It helps the company to diversify its business activities at
least cost.
4.
Subsidiary Company– Sec 2(87) of the Companies Act 2013 defines a company. As
per this section,a company shall be deemed to be a subsidiary company of another if
and only if:
(a) that other company controls the composition of its board of directors ; or
(b) when the first mentioned company is another company, holds more than half in
nominal value of its equity share capital; or
(c) the company is a subsidiary of any company which is that other company’s
subsidiary.
A Subsidiary company may be either Wholly Owned Subsidiary or Partly
Owned Subsidiary.
The following documents in respect of a subsidiary or subsidiaries should be
attached with the balance sheet of a holding company:
(a) A copy of Balance Sheet of Subsidiary.
(b) A copy of its Statement of Profit and Loss.
(c) A copy of Report of its Board of Directors.
(d) A copy of Report of its Auditors.
(e) A Statement of Holding Company’s interest in Subsidiary.
According to section 129(3) of the Companies Act 2013, a holding company
shall prepare a consolidated financial statement of the company and of all the
subsidiaries in the same form and manner as that of its own, which shall also be laid
before the annual general meeting of the company along with the laying of its financial
statements.
In addition to the legal balance sheet as prescribed in Schedule III, the holding
company may also publish a Consolidated Balance Sheet in which the assets and
liabilities of all the subsidiaries are shown along with its own assets and liabilities as
the Balance Sheet of a head office incorporates the assets and liabilities of its
branches. By way of Consolidated Balance Sheet, the investments of the holding
company in the subsidiary company are replaced by net assets.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 23
When some of the shares of the subsidiary company are held by outsiders (other
than the holding company), their interest in the subsidiary company is called as
Minority Interest in subsidiary company. The minority interest is shown on the
liabilities side of the Balance Sheet of the holding company under the head ‘Share
Capital’. The minority interest can be calculated as follows:
Paid up value of shares held by outsiders xxx
Add: Proportionate share of capital/ revenue profit and/or reserves xxx
xxx
Less: Proportionate share of capital/ revenue losses xxx
Value of Minority Interest xxx
If the preference shares are held by outsiders, paid up value of such shares
together with dividend thereon(if there is profit)is added to the value of minority
interest.
If the holding company purchases the shares of the subsidiary company at a
price more than their paid up value, the excess is cost of control or goodwill, if there is
no reserve or profit or loss balance in the subsidiary company on date of acquisition of
shares of the subsidiary company.
If the shares are purchased at a price which is less than the paid up value of the
shares, the difference is taken as capital reserve or profit.
The goodwill or cost of control is shown on the assets sideand the capital
reserve or profit is shown on the liabilities sidein the Consolidated Balance Sheet.
Illustration 1: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10
each
Profit and Loss
Account
General Reserve
Current Liabilities
400000
80000
40000
40000
200000
20000
16000
4000
Sundry Assets
Investments:
20000 shares in S
Ltd.
260000
300000
240000
560000
240000
560000
240000
H Ltd. acquired the shares of S Ltd. on 31
st
December 2014. Prepare the
Consolidated Balance Sheet.
Solution:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 24
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Current Liabilities
H Ltd. 40000
S Ltd. 4000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
H Ltd. 260000
S Ltd. 240000
Intangible Assets – Goodwill
Current Assets
Total
1
2
400000
120000
44000
564000
500000
64000
Nil
564000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
40000 Equity shares of Rs. 10 each
Reserves and Surplus
General Reserve
P & L A/c
400000
40000
80000
120000
Working Note:
Calculation of Goodwill or Cost of Control:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd.
Profit and Loss Account
General Reserve
Goodwill or Cost of Control
Rs.
200000
20000
16000
Rs.
300000
236000
64000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 25
Illustration 2: The liabilities and assets of the holding company A Ltd. and its
subsidiary B Ltd. as on 31
st
December 2014 are as follows:
Liabilities
A Ltd.
Rs.
B Ltd.
Rs.
Assets
A Ltd.
Rs.
B Ltd.
Rs.
Share Capital:
Shares of Re. 1
each
Profit and Loss
Account
General Reserve
Current Liabilities
72000
18000
12000
63000
36000
12000
6000
18000
Sundry Assets
Investments:
36000 shares in B
Ltd.
120000
45000
72000
165000
72000
165000
72000
A Ltd. acquired the shares in B Ltd. on 31
st
December 2014. Prepare the
Consolidated Balance Sheet.
Solution:
Consolidated Balance Sheet of A Ltd. and its Subsidiary B Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Current Liabilities
A Ltd. 63000
B Ltd. 18000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
A Ltd. 120000
B Ltd. 72000
Intangible Assets
Current Assets
Total
1
2
72000
39000
81000
192000
192000
Nil
Nil
192000
Notes to Accounts
Note No.
Particulars
Amount
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 26
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
72000 Equity shares of Re. 1 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c
72000
9000
18000
12000
39000
Working Note:
Calculation of Capital Reserve:
Cost of Shares in B Ltd.
Less: Face value of shares in B Ltd.
Profit and Loss Account
General Reserve
Capital Reserve
Rs.
36000
12000
6000
Rs.
45000
54000
9000
Illustration 3: The following are the liabilities and assets of the holding company P
Ltd. and its subsidiary Q Ltd. as on 31
st
December 2014. P Ltd. acquired 12000 shares
in Q Ltd on 31
st
December 2014. Prepare the Consolidated Balance Sheet.
Liabilities
P Ltd.
Rs.
Q Ltd.
Rs.
Assets
P Ltd.
Rs.
Q Ltd.
Rs.
Share Capital:
Shares of Re. 1
each
Sundry Liabilities
36000
24000
15000
9000
Sundry Assets
Investments:
12000 shares in Q
Ltd.
48000
12000
24000
60000
24000
60000
24000
Solution:
Share of holdings by P Ltd.in Q Ltd. = 12000 shares out of 15000 shares = 80%
Share of holdings by Outsiders in Q Ltd. = 3000 shares out of 15000 shares = 20%
Consolidated Balance Sheet of P Ltd. and its Subsidiary Q Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
P Ltd. 24000
1
36000
Nil
3000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 27
Q Ltd. 9000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
P Ltd. 48000
Q Ltd. 24000
Intangible Assets
Current Assets
Total
33000
72000
72000
Nil
Nil
72000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
Share Capital
Issued and Subscribed
36000 Equity shares of Re. 1 each
36000
Working Note:
Calculation of Minority Interest = 3000 shares of Re. 1 each
= Rs. 3000
Any profit or reserve standing in the Balance Sheet of subsidiary company on
the date of purchase of shares by holding company is called pre-acquisition profit or
capital profit. The outsiders’ share of such capital profit is added to the minority
interest and the balance (to holding company) are shown as Capital Reserve or
adjusted in Cost of Control or Goodwill and shown in the Consolidated Balance Sheet.
Any losses, share of loss of outsiders is deducted from the minority interest and
the share of loss to the holding company is added to the Cost of Control or Goodwill
or deducted from the Capital Reserve, and shown in the Consolidated Balance Sheet.
Profits of the subsidiary company made after the date of purchase of shares in
the subsidiary company by the holding company are called as post-acquisition profits
or revenue profits. The share of revenue profit of the holding company is added to the
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 28
profit of the holding company. The share of profit due to the outsiders in the
subsidiary company is added to the minority interest and shown in the Consolidated
Balance Sheet.
• The date of purchase of shares in the subsidiary company by the holding
company is the basis for determination of profit, whether it is Capital Profit or
Revenue Profit.
Illustration 4: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10
each
Profit and Loss
Account
Current Liabilities
800000
80000
80000
400000
40000
40000
Sundry Assets
Investments:
32000 shares in S
Ltd.
@ Rs. 10 each
640000
320000
480000
960000
480000
960000
480000
H Ltd. acquired the shares in S Ltd. on 31
st
December 2014. Prepare the
Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 32000 shares out of 40000 shares = 80%
Share of holdings by Outsiders in S Ltd. = 8000 shares out of 40000 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
H Ltd. 80000
S Ltd. 40000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
H Ltd. 640000
S Ltd. 480000
1
2
800000
112000
88000
120000
1120000
1120000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 29
Intangible Assets
Current Assets
Total
Nil
Nil
1120000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
80000 Equity shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
P & L A/c
800000
32000
80000
112000
Working Notes:
Calculation of Capital Profit:
Profit and Loss Account balance in S Ltd. = Rs. 40000
Share of capital profit due to H Ltd. = 40000x80% = Rs. 32000
Share of capital profit due to Outsiders in S Ltd. = 40000x20% = Rs. 8000
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd.
Capital Profit
Capital Reserve
Rs.
320000
32000
Rs.
320000
352000
32000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (8000 x10)
Add: Share of capital profit due to Outsiders in S Ltd.
Minority Interest
Rs.
80000
8000
88000
Illustration 5: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Equity Shares of
Rs.10
120000
50000
Fixed Assets
Current Assets
Cash and Bank
100000
115000
70000
60000
20000
10000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 30
Each
8% Preference
Shares
of Rs. 10 each
Profit and Loss
Account
Sundry Creditors
40000
25000
100000
10000
10000
20000
285000
90000
285000
90000
H Ltd. acquired 90% of the equity shares of S Ltd. at Rs. 15 per share on 1
st
January 2015. Prepare the Consolidated Balance Sheet as on 1
st
January 2015.
Solution:
Share of holdings by H Ltd.in S Ltd. = 90%
Share of holdings by Outsiders in S Ltd. = 10%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 1
st
January 2015
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities – Sundry Creditors
H Ltd. 100000
S Ltd. 20000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Fixed Assets
H Ltd. 100000
S Ltd. 60000
Intangible Assets - Goodwill
Current Assets
Cash & Bank
H Ltd. (70000 – 67500) 2500
S Ltd. 10000
Other Current Assets
H Ltd. 115000
1
2
160000
25000
16000
120000
321000
160000
13500
12500
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 31
S Ltd. 20000
Total
135000
321000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
12000 Equity shares of Rs. 10 each
4000, 8% Preference Shares
of Rs. 10 each
Reserves and Surplus
Profit and Loss Account
120000
40000
160000
25000
Working Notes:
Calculation of Capital Profit:
Profit and Loss Account balance in S Ltd. = Rs. 10000
Share of capital profit due to H Ltd. = 10000x90% = Rs. 9000
Share of capital profit due to Outsiders in S Ltd. = 10000x10% = Rs. 1000
Calculation of Goodwill:
Cost of Shares in S Ltd. (5000x90%x15)
Less: Face value of shares in S Ltd.
Capital Profit
Goodwill
Rs.
45000
9000
Rs.
67500
54000
13500
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd.
(5000x10%x10)
Add: Share of capital profit due to Outsiders in S Ltd.
8% Preference Share Capital in S Ltd
Minority Interest
Rs.
1000
10000
Rs.
5000
11000
16000
Illustration 6: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10
1200000
600000
Sundry Assets
Investments:
720000
756000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 32
each
Profit and Loss
Account
General Reserve
Current Liabilities
120000
120000
60000
48000
60000
48000
48000 shares in S
Ltd.
780000
1500000
756000
1500000
756000
H Ltd. acquired shares in S Ltd. on 1
st
January 2014. On that date the Profit and
Loss Account had a credit balance of Rs. 12000 and in Reserve Rs. 36000. Prepare the
Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 48000 shares out of 60000 shares = 80%
Share of holdings by Outsiders in S Ltd. = 12000 shares out of 60000 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
H Ltd. 60000
S Ltd. 48000
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
H Ltd. 720000
S Ltd. 756000
Intangible Assets - Goodwill
Current Assets
Total
1
2
1200000
288000
141600
108000
1737600
1476000
261600
Nil
1737600
Notes to Accounts
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 33
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
120000 Equity shares of Rs. 10 each
Reserves and Surplus
Profit and Loss Account:
H Ltd. 120000
S Ltd. 28800
General Reserve:
H Ltd. 120000
S Ltd. 19200
1200000
148800
139200
288000
Working Notes:
Calculation of Capital Profit in S Ltd.:
Profit and Loss Account balance on 01/01/2014
General Reserve
Capital Profit
Rs.
12000
36000
48000
Share of capital profit due to H Ltd. = 48000x80% = Rs. 38400
Share of capital profit due to Outsiders in S Ltd. = 48000x20% = Rs. 9600
Calculation of Revenue Profit:
(a) Profit and Loss Account (48000-32000) = Rs. 36000
H Ltd. = 36000x80% = Rs. 28800
Outsiders in S Ltd. = 36000x20% = Rs. 7200
(b) General Reserve (60000-36000) = 24000
H Ltd. = 24000x80% = Rs. 19200
Outsiders in S Ltd. = 24000x20% = Rs. 4800
Calculation of Goodwill:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd.
Capital Profit
Goodwill
Rs.
480000
38400
Rs.
780000
518400
261600
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd.
Add: Share of capital profit due to Outsiders in S Ltd.
Share of revenue profit due to Outsiders in S Ltd
(7200+4800)
Minority Interest
Rs.
9600
12000
Rs.
120000
21600
141600
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 34
Illustration 7: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Re. 1
each
Profit and Loss
Account
General Reserve
Current Liabilities
30000
12000
15000
9000
15000
5400
-----
9600
Sundry Assets
Investments:
15000 shares in S
Ltd.
48000
18000
30000
66000
30000
66000
30000
H Ltd. acquired the shares in S Ltd. on 30
th
June 2014. On 1
st
January 2014 the
Balance Sheet of S Ltd. showed a loss of Rs. 9000, which was written off out of profit
earned during the year 2014. Profits are assumed to accrue evenly throughout the year.
Prepare the Consolidated Balance Sheet.
Solution:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Current Liabilities
H Ltd. 9000
S Ltd. 9600
Total
B. Assets
Non-current Assets
Fixed Assets
Tangible Assets – Sundry Assets
H Ltd. 48000
S Ltd. 30000
Intangible Assets - Goodwill
Current Assets
1
2
30000
34200
18600
82800
78000
4800
Nil
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 35
Total
82800
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
30000 Equity shares of Re. 1 each
Reserves and Surplus
Profit and Loss Account:
H Ltd. 12000
S Ltd. 7200
General Reserve
30000
19200
15000
34200
Working Notes:
Calculation of Revenue Profit in S Ltd.:
Profit and Loss Account balance on 31
st
Dec 2014
Add: Loss written off during the year 2014
Total Profit in 2014
Rs.
5400
9000
14400
Profit before 30
th
June 2014 (Capital Profit) = 14400x1/2 = Rs. 7200
Profit after 30
th
June 2014 (Revenue Profit) = 14400x1/2 = Rs. 7200
Calculation of Capital Profit:
Profit upto 30
th
June 2014
Less: Capital Loss on 1
st
Jan 2014
Net (Capital) Loss
Rs.
7200
9000
1800
Calculation of Goodwill:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd.
Add: Capital Loss
Goodwill
Rs.
18000
15000
3000
1800
4800
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 36
While preparing Consolidated Balance Sheet, the inter-company transactions between
the holding company and the subsidiary company should be eliminated. Such
transactions may be as follows:
1. Debtors and Creditors - Goods sold on credit by the holding company to the
subsidiary company or vice versa will appear as debtors in the balance sheet of the
company selling goods and creditors in the balance sheet of the company purchasing
goods.
2. Bills of Exchange - Bills drawn by one company and accepted by the other
company are eliminated while preparing Consolidated Balance Sheet but bills
discounted and endorsed will continue to appear as liability because the company,
which has accepted such bills, will have to make the payment to an outsider (i.e. bank)
on the due date.
3. Loans and Advances - Loans advanced by the holding company to the
subsidiary company or vice versa appears as an asset in the balance sheet of the
company which gives such loans and as a liability in the balance sheet of the company
that takes these loans.
4. Debentures - Debentures issued by one company and held by the other
company.
Illustration 8: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
March 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10 each
General Reserve
Profit and Loss
500000
75000
125000
25000
Land and Building
Plant and Machinery
lessdepreciation
Furniture
150000
500000
22500
…….
…….
25000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 37
H Ltd. acquired 7500 shares in S Ltd. on 1
st
October 2013. Bills Receivables
held by S Ltd. are all accepted by H Ltd. A sum of Rs. 15000 owning by H Ltd. in
respect of goods supplied by S Ltd. Prepare the Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 7500 shares out of 12500 shares = 60%
Share of holdings by Outsiders in S Ltd. = 5000 shares out of 12500 shares = 40%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
March 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
a. Trade Payables
b. Bank Overdraft
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible - Goodwill
Current Assets
Stock:
H Ltd. 100000
S Ltd. 187500
Sundry Debtors:
H Ltd. 25000
1
2
3
4
500000
318750
105000
147500
50000
1121250
697500
23750
287500
Account
(01/04/2013)
Profit and Loss
Account
(31/03/2014)
Sundry Creditors
Bills Payables
Bank Overdraft
100000
125000
75000
37500
50000
50000
62500
75000
……
……
Investments:
7500 shares in S Ltd.
Stock
Sundry Debtors
Bills Receivables
Bank Balance
Cash in Hand
162500
100000
25000
……
…….
2500
…….
18750
0
70000
25000
26250
3750
962500
337500
962500
33750
0
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 38
S Ltd. 70000
95000
Less: Inter-company debt 15000
Bills Receivables (25000 – 25000)
Cash and Cash Equivalents
Total
5
80000
Nil
32500
1121250
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
5.
Share Capital
Issued and Subscribed
50000 Shares of Rs. 10 each
Reserves and Surplus
General Reserve
P & L A/c
Trade Payables
Sundry Creditors:
H Ltd. 75000
S Ltd. 75000
150000
Less: Inter-company debt 15000
Bills Payables:
H Ltd. 37500
Less: Inter-company acceptance 25000
Fixed Assets – Tangible
Land & Building
Plant & Machinery less depreciation
Furniture:
H Ltd. 22500
S Ltd. 25000
Cash and Cash Equivalents
Cash in Hand
H Ltd. 2500
S Ltd. 3750
Bank Balance
500000
75000
243750
318750
135000
12500
147500
150000
500000
47500
697500
6250
26250
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 39
32500
Working Notes:
Calculation of Revenue Profit in S Ltd.:
Profit and Loss Account (01/04/2013 to 31/03/2014)
Less: Capital Profit (upto 30/09/2013)
Revenue Profit
Rs.
62500
31250
31250
Share of revenue profit due to H Ltd. = 31250x60% = Rs. 18750
Share of revenue profit due to Outsiders in S Ltd. = 31250x40% = Rs. 12500
Calculation of Capital Profit in S Ltd.:
Profit and Loss Account on 01/04/2013
Add: ½ of 62500 (01/04/2013 to 30/09/2013)
General Reserve
Capital Profit
Rs.
50000
31250
25000
106250
Share of capital profit due to H Ltd. = 106250x60% = Rs. 63750
Share of capital profit due to Outsiders in S Ltd. = 106250x40% = Rs. 42500
Calculation of Goodwill:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (7500x10)
Capital Profit
Goodwill
Rs.
75000
63750
Rs.
162500
138750
23750
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (5000x10)
Add: Share of capital profit due to Outsiders in S Ltd.
Share of revenue profit due to Outsiders in S Ltd
Minority Interest
Rs.
42500
12500
Rs.
50000
55000
105000
Calculation of P & L A/c balance in Consolidated Balance Sheet:
Profit and Loss Account balance (100000+125000)
Add: Revenue Profit of H Ltd. in S Ltd.
P & L A/c Balance
Rs.
225000
18750
243750
If the goods sold at a profit by the subsidiary company to the holding company
or by the holding company to the subsidiary company remain unsold at the end of the
financial year, the profit charged by the company on unsold goods remains unrealised.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 40
In such a case, it is not proper to credit the Profit and Loss Account with such
unrealised profit. Hence, a stock reserve is created and profit is reduced by the
unrealised profit. While preparing Consolidated Balance Sheet, stock reserve will be
deducted from stock.
Illustration 9: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10
each
Profit and Loss
Account
General Reserve
Sundry Creditors
250000
75000
100000
25000
75000
43750
31250
17500
Buildings
Plant and
Machinery
Furniture
Investments:
5000 shares in S
Ltd.
Sundry Debtors
Stock
Cash
112500
87500
20000
65000
75000
80000
10000
30000
40000
7500
42500
40000
7500
450000
167500
450000
167500
Prepare the Consolidated Balance Sheet as on 31
st
December 2014, by
considering the following information:
(a) H Ltd. acquired the shares in S Ltd. on 1
st
January 2014 when balance of their
Profit and Loss Account and General Reserve were Rs. 18750 and Rs. 20000
respectively.
(b) Stock of Rs. 40000 held by S Ltd. includes Rs. 15000 of goods purchased from
H Ltd, who has charged a profit @ 25% on cost.
Solution:
Share of holdings by H Ltd.in S Ltd. = 5000 shares out of 7500 shares = 2/3
Share of holdings by Outsiders in S Ltd. = 2500 shares out of 7500 shares = 1/3
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
1
2
250000
207000
50000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 41
H Ltd. 25000
S Ltd. 17500
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
Stock:
H Ltd. 80000
S Ltd. 40000
120000
Less: Unrealised Profit(Stock Reserve) 3000
Sundry Debtors:
H Ltd. 75000
S Ltd. 42500
Cash and Cash Equivalents – Cash in Hand
H Ltd. 10000
S Ltd. 7500
Total
3
42500
549500
297500
Nil
117000
117500
17500
549500
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
25000 Shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c
Fixed Assets – Tangible
Buildings:
H Ltd. 112500
S Ltd. 30000
Plant & Machinery:
H Ltd. 87500
250000
10833
107500
88667
207000
142500
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 42
S Ltd. 40000
Furniture:
H Ltd. 20000
S Ltd. 7500
127500
27500
297500
Working Notes:
Calculation of Revenue Profit in S Ltd.:
(a) Profit and Loss Account (43750-18750) = Rs. 25000
H Ltd. = 25000x2/3 = Rs. 16667
Outsiders in S Ltd. = 25000x1/3 = Rs. 8333
(b) General Reserve (31250-20000) = 11250
H Ltd. = 11250x2/3 = Rs. 7500
Outsiders in S Ltd. = 11250x1/3 = Rs. 3750
Calculation of Capital Profit in S Ltd.:
Profit and Loss Account on 1
st
January 2014
General Reserve
Capital Profit
Rs.
18750
20000
38750
Share of capital profit due to H Ltd. = 38750x2/3 = Rs. 25833
Share of capital profit due to Outsiders in S Ltd. = 38750x1/3 = Rs. 12917
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (5000x10)
Capital Profit
Capital Reserve
Rs.
50000
25833
Rs.
65000
75833
10833
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (2500x10)
Add: Share of capital profit due to Outsiders in S Ltd.
Share of revenue profit due to Outsiders in S Ltd
(8333+3750)
Minority Interest
Rs.
12917
12083
Rs.
25000
25000
50000
Calculation of P & L A/c balance in Consolidated Balance Sheet:
Profit and Loss Account balance of H Ltd.
Rs.
75000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 43
Add: P & L A/c balance of H Ltd. in S Ltd.
Less: Unrealised Profit (15000 x 25/125)
P & L A/c Balance
16667
91667
3000
88667
Calculation of General Reserve balance in Consolidated Balance Sheet:
General Reserve balance of H Ltd.
Add: General Reserve balance of H Ltd. in S Ltd.
General Reserve Balance
Rs.
100000
7500
107500
Sometimes, the bonus shares are issued by the subsidiary companies. It
enhances the number of shares held by the holding company. Its treatment depends
upon the sources (Capital Profit or Revenue Profit) from which bonus shares are
issued out.
a) Bonus shares issued out of Capital Profit or Pre-acquisition Profit – No effect
in the accounting treatment in the books of accounts.
b) Bonus shares issued out of Current Profit or Post-acquisition Profit – The
holding company’s share in the current profit of the subsidiary company should be
calculated after making proper adjustments for bonus issue. Ultimately, it reduces the
amount of holding company’s share in the post-acquisition profit. It will affect the cost
of goodwill.
Illustration 10: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
120000 Shares of
Rs.
5 each
16000 Shares of
Rs. 10
each
Capital Reserve
General Reserve
Profit and Loss
Account
Bills Payables (Incl.
Rs.
2000 to H Ltd.)
600000
……
……
40000
100000
……
70000
……
160000
68000
20000
20000
7000
35000
Fixed Assets
Investments:
12000 shares in S
Ltd.
Stock
Bills Receivables
(Incl.
2000 from S Ltd.)
Bank
506000
200000
60000
4000
40000
256000
……
20000
……
34000
810000
310000
810000
310000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 44
Sundry Creditors
H Ltd. acquired 12000 shares of Rs. 10 each from S Ltd. on 31
st
December
2014. S Ltd. utilised a part of its Capital Reserve to make bonus issue of one share for
every four shares held. Prepare the Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 12000 shares out of 16000 shares = 75%
Share of holdings by Outsiders in S Ltd. = 4000 shares out of 16000 shares = 25%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
H Ltd. 70000
S Ltd. 35000
Bills Payables (7000 – 2000)
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
Stock:
H Ltd. 60000
S Ltd. 20000
Bills Receivables (4000 – 2000)
Cash and Cash Equivalents – Bank
H Ltd. 40000
S Ltd. 34000
Total
1
2
3
600000
141000
67000
105000
5000
918000
762000
Nil
80000
2000
74000
918000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 45
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
12000 Shares of Rs. 5 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c
Fixed Assets – Tangible
H Ltd. 506000
S Ltd. 256000
600000
1000
40000
100000
141000
762000
Working Notes:
Revenue Profit in S Ltd. = Nil
Calculation of Capital Profit in S Ltd.:
Profit and Loss Account
General Reserve
Capital Reserve
Capital Profit
Rs.
20000
20000
68000
108000
Share of capital profit due to H Ltd. = 108000x75% = Rs. 81000
Share of capital profit due to Outsiders in S Ltd. = 108000x25% = Rs. 27000
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (12000x10)
Capital Profit
Capital Reserve
Rs.
120000
81000
Rs.
200000
201000
1000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (4000x10)
Add: Share of capital profit due to Outsiders in S Ltd.
Minority Interest
Rs.
40000
27000
67000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 46
Illustration 11: The liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs.10
each
General Reserve
Profit and Loss
Account
Sundry Creditors
300000
75000
37500
37500
75000
30000
22500
7500
Fixed Assets
Investments:
6000 shares in S
Ltd.
Current Assets
262500
75000
112500
75000
60000
450000
135000
450000
135000
On the date of acquisition of shares in S Ltd. by H Ltd., S Ltd. had a General
Reserve balance of Rs. 30000. S Ltd. capitalised Rs. 15000 out of profit earned after
acquisition of its shares by H Ltd. by making a bonus issue of one share for every five
shares held. Prepare the Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 6000 shares out of 7500 shares = 80%
Share of holdings by Outsiders in S Ltd. = 1500 shares out of 7500 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
H Ltd. 37500
S Ltd. 7500
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
1
2
3
300000
139500
25500
45000
510000
337500
Nil
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 47
H Ltd. 112500
S Ltd. 60000
Total
172500
510000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
30000 Shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c (37500 + 6000)
Fixed Assets – Tangible
H Ltd. 262500
S Ltd. 75000
300000
21000
75000
43500
139500
337500
Working Notes:
Calculation of Revenue Profit in S Ltd.:
Profit and Loss Account balance for the year2014
Less: Bonus Shares
Revenue Profit
Rs.
22500
15000
7500
Share of revenue profit due to H Ltd. = 7500x80% = Rs. 6000
Share of revenue profit due to Outsiders in S Ltd. = 7500x20% = Rs. 1500
Calculation of Capital Profit in S Ltd.:
General Reserve = 30000
Share of capital profit due to H Ltd. = 30000x80% = Rs. 24000
Share of capital profit due to Outsiders in S Ltd. = 30000x20% = Rs. 6000
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (6000x10)
Capital Profit
Face value of Bonus Shares (15000x80%)
Rs.
60000
24000
12000
Rs.
75000
96000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 48
Capital Reserve
21000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (1500x10)
Add: Share of revenue profit due to Outsiders in S Ltd.
Share of capital profit due to Outsiders in S Ltd.
Bonus Shares (15000x20%)
Minority Interest
1500
6000
3000
Rs.
15000
10500
25500
Sometimes, the fixed assets of subsidiary companies are revalued at the time of
acquisition of shares. There may be revaluation profit (capital profit) or revaluation
loss (capital loss). The share of holding company in revaluation profit is added to the
capital reserve or deducted from the goodwill. The revaluation profit due to outsiders
in subsidiary company is added to the minority interest. The share of revaluation loss
to holding company is added to goodwill or deducted from capital reserve. The share
of revaluation loss to outsiders in subsidiary company is deducted from minority
interest. Depreciation is also adjusted while calculating the revenue profit in subsidiary
company.
Illustration 12: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Re. 1
each
General Reserve
Profit and Loss
Account
(Current Year)
300000
120000
90000
240000
60000
30000
Investments:
192000 shares in S
Ltd.
Other Assets
210000
300000
330000
510000
330000
510000
330000
On 1
st
January 2014 H Ltd. acquired the shares in S Ltd., when the plant and
machinery were revalued to Rs. 240000 from Rs. 180000 and furniture of S Ltd. was
revalued to Rs. 45000 from Rs. 60000. Depreciation for plant and machinery and
furniture are 10% and 5% respectively. The balance sheet of S Ltd. showed these
assets on revalued basis. Prepare the Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 192000 shares out of 240000 shares = 80%
Share of holdings by Outsiders in S Ltd. = 48000 shares out of 240000 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
Amount
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 49
No.
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
Other Assets
Total
1
2
3
300000
295800
73950
Nil
669750
258750
Nil
411000
669750
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
300000Shares of Re. 1 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c (90000+19800)
Fixed Assets – Tangible
Plant and Machinery of S Ltd. 216000
Furniture of S Ltd. 42750
300000
66000
120000
109800
295800
258750
Working Notes:
Calculation of Profit on Revaluation:
Plant and Machinery (240000-180000)
Rs.
60000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 50
Less: Loss on Furniture (60000-45000)
Total Profit on Revaluation
15000
45000
Calculation of Revenue Profit in S Ltd.:
Share of revenue profit due to H Ltd. = 24750x80% = Rs. 19800
Share of revenue profit due to Outsiders in S Ltd. = 24750x20% = Rs. 4950
Calculation of Capital Profit in S Ltd.:
General Reserve
Revaluation Profit
Capital Profit
Rs.
60000
45000
105000
Share of capital profit due to H Ltd. = 105000x80% = Rs. 84000
Share of capital profit due to Outsiders in S Ltd. = 105000x20% = Rs. 21000
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd.
Capital Profit
Capital Reserve
Rs.
192000
84000
Rs.
210000
276000
66000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd.
Add: Share of revenue profit due to Outsiders in S Ltd.
Share of capital profit due to Outsiders in S Ltd.
Minority Interest
21000
4950
Rs.
48000
25950
73950
Plant and Machinery of S Ltd.:
Rs.
Profit and Loss Account balance for the year
Less: Additional Depreciation on Plant & Machinery (60000x10%)
Add: Excess Depreciation on Furniture (15000x5%)
Revenue Profit
Rs.
30000
6000
24000
750
24750
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 51
Plant and Machinery
Less: Depreciation @ 10%
Plant and Machinery of S Ltd.
240000
24000
216000
Furniture of S Ltd.:
Furniture
Less: Depreciation @ 5%
Furniture of S Ltd.
Rs.
45000
2250
42750
Other Assets in Consolidated Balance Sheet:
Total Other Assets as per Balance Sheet
Less: Plant and Machinery (180000 – Depn. 18000)
Furniture (60000 – Depn. 3000)
Other Assets
162000
57000
Rs.
330000
219000
73950
Sometimes, the holding company takes the investment in debentures of the
subsidiary company. It shows under the head ‘Investments’ in the Balance Sheet of the
holding company. If there is any difference between the costs and paid up value of
debentures, adjusted against the cost of control or goodwill. If there is any debenture
interest, it will also be adjusted.
a) Preference Shares held by the Holding Company – The accounting treatment
is the same as in the case of holdings of equity shares. Dividend accrued after the
acquisition is taken as revenue profit.
b) Preference Shares held by the Outsiders in the Subsidiary Company – The
share holdings by the outsiders are included in the minority interest by the amount of
paid up value of shares held (including arrears of dividend accrued to the date of
consolidation). If the balance sheet of the subsidiary company shows debit balance of
profit and loss account, preference shareholders are not required to bear the
proportionate loss and the whole loss should be borne by the equity shareholders.
Illustration 13: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
12500 Equity
Shares of
Rs. 100 each
12500 Equity
1250000
125000
Fixed Assets
Investments:
10000 Equity
Shares
in S Ltd.
1000000
125000
312500
150000
81250
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 52
Shares of
Rs. 10 each
6250, 8%
Preference
Shares of Rs. 10
each
General Reserve
Sundry Creditors
Dividend due on
Preference Shares
125000
62500
62500
25000
12500
6250
Current Assets
1437500
231250
1437500
231250
S Ltd. had Rs. 18750 in general reserve as on the date of acquisition on 1
st
January 2014. No dividend has been declared by S Ltd. in 2014. Prepare the
Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 10000 shares out of 12500 shares = 80%
Share of holdings by Outsiders in S Ltd. = 2500 shares out of 12500 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
H Ltd. 62500
S Ltd. 12500
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible - Goodwill
Current Assets
H Ltd. 312500
1
2
3
1250000
130000
98750
75000
1553750
1150000
10000
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Advanced Corporate Accounting Page 53
S Ltd. 81250
Total
393750
1553750
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
12500Equity Shares of Rs. 100 each
Reserves and Surplus
General Reserve (125000+5000)
Fixed Assets – Tangible
H Ltd. 1000000
S Ltd. 150000
1250000
130000
1150000
Working Notes:
Revenue Profit in S Ltd.:
General Reserve = 25000-18750
= Rs. 6250
Share of revenue profit due to H Ltd. = 6250x80% = Rs. 5000
Share of revenue profit due to Outsiders in S Ltd. = 6250x20% = Rs. 1250
Capital Profit in S Ltd.:
General Reserve = 18750
Share of capital profit due to H Ltd. = 18750x80% = Rs. 15000
Share of capital profit due to Outsiders in S Ltd. = 18750x20% = Rs. 3750
Calculation of Goodwill:
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (10000x10)
Capital Profit
Goodwill
Rs.
100000
15000
Rs.
125000
115000
10000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd. (2500x10)
Add: 8% Preference Shares
Share of revenue profit due to Outsiders in S Ltd.
Share of capital profit due to Outsiders in S Ltd.
Dividend to Preference Shares
Minority Interest
62500
1250
3750
6250
Rs.
25000
73750
98750
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Advanced Corporate Accounting Page 54
Illustration 14: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
60000 Equity
Shares of
Rs. 10 each
7500 Equity Shares
of
Rs. 10 each
7500, 8%
Preference
Shares of Rs. 10
each
General Reserve
(on 01/01/2014)
Profit and Loss
Account
Sundry Creditors
Bank Overdraft
600000
75000
30000
30000
15000
75000
75000
45000
15000
30000
Fixed Assets
Investments:
Shares in S Ltd.
Sundry Debtors
Bank
375000
150000
135000
90000
210000
15000
15000
750000
240000
750000
240000
On 1
st
January 2014 H Ltd. acquired 80% of both the equity shares and
preference shares at a total cost of Rs. 150000. S Ltd. had a profit of Rs. 7500 in profit
and loss account on 1
st
January 2014. Dividend for the year 2014 is still to be paid.
Prepare the Consolidated Balance Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 80%
Share of holdings by Outsiders in S Ltd. = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
H Ltd. 30000
1
2
600000
123000
42000
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Advanced Corporate Accounting Page 55
S Ltd. 30000
Bank Overdraft
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
Sundry Debtors:
H Ltd. 135000
S Ltd. 15000
Cash and Cash Equivalents – Bank:
H Ltd. 90000
S Ltd. 15000
Total
3
60000
15000
840000
585000
Nil
150000
105000
840000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
60000Equity Shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c
Fixed Assets – Tangible
H Ltd. 375000
S Ltd. 210000
600000
12000
75000
36000
123000
585000
Working Notes:
Calculation of Revenue Profit in S Ltd.:
Profit and Loss Account (15000-7500)
Less: Preference Share Dividend (75000x8%)
Revenue Profit
Rs.
7500
6000
1500
Share of revenue profit due to H Ltd. = 1500x80% = Rs. 1200
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 56
Share of revenue profit due to Outsiders in S Ltd. = 1500x20% = Rs. 300
Calculation of Capital Profit in S Ltd.:
General Reserve
P & L Account
Capital Profit
Rs.
45000
7500
52500
Share of capital profit due to H Ltd. = 52500x80% = Rs. 42000
Share of capital profit due to Outsiders in S Ltd. = 52500x20% = Rs. 10500
Calculation of Capital Reserve:
Cost of Shares in S Ltd.
Less: Face value of equity shares in S Ltd. (75000x80%)
Face value of preference shares in S Ltd. (75000x80%)
Capital Profit
Capital Reserve
Rs.
60000
60000
42000
Rs.
150000
162000
12000
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd.:
Equity Shares (75000x20%)
Preference Shares (75000x20%)
Add: Share of revenue profit due to Outsiders in S Ltd.
Share of capital profit due to Outsiders in S Ltd.
Dividend for Preference Shares (6000x20%)
Minority Interest
15000
15000
Rs.
30000
12000
300
10500
1200
42000
The dividend declared by the subsidiary can be taken in the financial statements
as follows:
a) Dividend paid out of Pre-acquisition Profit – Holding company’s share of
dividend is to be deducted or added from goodwill or to capital reserve. No adjustment
is required in minority interest. The same amount is to be deducted from the profit and
loss account in the consolidated balance sheet which appears in liabilities side.
b) Dividend paid out of Post-acquisition Profit – If the dividend is declared by the
subsidiary company from current profit and received by the holding company, and
then it should be credited to the profit and loss account of the holding company.
Illustration 15: The following are the liabilities and assets of the holding company H
Ltd. and its subsidiary S Ltd. as on 31
st
December 2014:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 57
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
24000 Equity
Shares of
Rs. 10 each
20000 Equity
Shares of
Rs. 10 each
General Reserve
(on 01/01/2014)
Profit and Loss
Account:
Balance on
01/01/2014
Balance for 2014
Sundry Creditors
240000
48000
16000
120000
40000
200000
40000
32000
80000
32000
Fixed Assets
Investments:
16000 Equity
Shares
in S Ltd.
Current Assets
240000
208000
16000
320000
64000
464000
384000
464000
384000
H Ltd. acquired 16000 shares of Rs. 10 each on 30
th
June 2014 for Rs. 208000
in S Ltd. H Ltd. received 10% dividend for the year 2013 and it was credited to the
profit and loss account of the holding company. Prepare the Consolidated Balance
Sheet.
Solution:
Share of holdings by H Ltd.in S Ltd. = 16000 shares out of 20000 shares = 80%
Share of holdings by Outsiders in S Ltd. = 4000 shares out of 20000 shares = 20%
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31
st
December 2014
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Minority Interest
Current Liabilities
Sundry Creditors:
H Ltd. 40000
S Ltd. 32000
Total
B. Assets
1
2
240000
257600
70400
72000
640000
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Advanced Corporate Accounting Page 58
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible
Current Assets
H Ltd. 16000
S Ltd. 64000
Total
3
560000
Nil
80000
640000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
24000Equity Shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
General Reserve
P & L A/c
Fixed Assets – Tangible
H Ltd. 240000
S Ltd. 320000
240000
57600
48000
152000
257600
560000
Working Notes:
Revenue Profit in S Ltd.:
Profit and Loss Account (80000-40000) = 40000
Share of revenue profit due to H Ltd. = 40000x80% = Rs. 32000
Share of revenue profit due to Outsiders in S Ltd. = 40000x20% = Rs. 8000
Calculation of Capital Profit in S Ltd.:
General Reserve on 01/01/2014
P & L Account balance on 01/01/2014
P & L Account for 2014
Capital Profit
Rs.
40000
32000
40000
112000
Share of capital profit due to H Ltd. = 112000x80% = Rs. 89600
Share of capital profit due to Outsiders in S Ltd. = 112000x20% = Rs. 22400
Calculation of Capital Reserve:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 59
Cost of Shares in S Ltd.
Less: Face value of shares in S Ltd. (16000x10)
Capital Profit
Dividend (16000x10x10%)
Capital Reserve
Rs.
160000
89600
16000
Rs.
208000
265600
57600
Calculation of Minority Interest:
Paid up value of Shares held by outsiders in S Ltd.:
Add: Share of revenue profit due to Outsiders in S Ltd.
Share of capital profit due to Outsiders in S Ltd.
Minority Interest
8000
22400
Rs.
40000
30400
70400
Calculation of Profit and Loss Account Balance in Consolidated Balance Sheet:
P & L Account of H Ltd. on 01/01/2014
P & L Account for 2014
Revenue Profit
Less: Dividend (16000x10x10%)
Profit and Loss Account Balance in Consolidated Balance Sheet
Rs.
16000
120000
32000
168000
16000
152000
A. Short Answer Type questions
6. Define a holding company.
7. Define a subsidiary company.
8. What is a Consolidated Balance Sheet?
9. What do you mean by Minority Interest?
10. What do you mean by Pre-Acquisition Profits?
11. What is meant by Post-Acquisition Profit?
B. Short Essay Type Questions
1. How would you ascertain the amount of minority interest?
2. Explain the treatment of debentures of the subsidiary company in consolidated
balance sheet.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 60
C. Essay Type Questions
1. Briefly explain the procedures to be followed in consolidation of accounts.
2. Write notes on the following terms:
a) Cost of Control
b) Minority Interest
c) Pre-Acquisition Profits
d) Post-Acquisition Profit
D. Practical Problems
1. The following are the liabilities and assets of the holding company H Ltd. and
its subsidiary S Ltd. as on 31
st
December 2014:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Equity Shares of
Rs.10
Each
8% Preference
Shares
of Rs. 10 each
Profit and Loss
Account
Sundry Creditors
24000
8000
5000
20000
10000
2000
2000
4000
Fixed Assets
Current Assets
Cash and Bank
20000
23000
14000
12000
4000
2000
57000
18000
57000
18000
H Ltd. acquired 90% of the equity shares of S Ltd. at Rs. 15 per share on
1
st
January 2015. Prepare the Consolidated Balance Sheet as on 1
st
January 2015.
(Answer: Goodwill – Rs. 2700; Minority Interest – Rs. 3200; Consolidated Balance
Sheet Total – Rs. 64200).
2. The liabilities and assets of the holding company H Ltd. and its subsidiary S
Ltd. as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
Shares of Rs. 10
each
Profit and Loss
Account
General Reserve
Current Liabilities
200000
20000
20000
10000
100000
8000
10000
8000
Sundry Assets
Investments:
8000 shares in S
Ltd.
120000
130000
126000
250000
126000
250000
126000
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Advanced Corporate Accounting Page 61
H Ltd. acquired shares in S Ltd. on 1
st
January 2014. On that date the Profit and
Loss Account had a credit balance of Rs. 2000 and in Reserve Rs. 6000. Prepare the
Consolidated Balance Sheet.
(Answer: Capital Profit – Rs. 8000; Revenue Profit – Rs. 10000; Goodwill – Rs.
43600; Minority Interest – Rs. 23600; Consolidated Balance Sheet Total – Rs.
289600).
3. The liabilities and assets of the holding company H Ltd. and its subsidiary S Ltd.
as on 31
st
December 2014 are as follows:
Liabilities
H Ltd.
Rs.
S Ltd.
Rs.
Assets
H Ltd.
Rs.
S Ltd.
Rs.
Share Capital:
30000 Shares of
Rs.
5 each
4000 Shares of Rs.
10
each
Capital Reserve
General Reserve
Profit and Loss
Account
Bills Payables (Incl.
Rs.
500 to H Ltd.)
Sundry Creditors
150000
……
……
10000
25000
……
17500
……
40000
17000
5000
5000
1750
8750
Fixed Assets
Investments:
3000 shares in S
Ltd.
Stock
Bills Receivables
(Incl.
500 from S Ltd.)
Bank
126500
50000
15000
1000
10000
64000
……
5000
……
8500
202500
77500
202500
77500
H Ltd. acquired 3000 shares of Rs. 10 each from S Ltd. on 31
st
December 2014.
S Ltd. utilised a part of its Capital Reserve to make bonus issue of one share for every
four shares held. Prepare the Consolidated Balance Sheet.
(Answer: Capital Profit – Rs. 17000; Revenue Profit – Nil; Capital Reserve – Rs. 250;
Minority Interest – Rs. 16750; Consolidated Balance Sheet Total – Rs. 229500).
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Advanced Corporate Accounting Page 62
MODULE – 3
ACCOUNTING FOR CORPORATE
RESTRUCTURING
AMALGAMATION
INTERNAL RECONSTRUCTION
LIQUIDATION OF COMPANIES
LESSON 3
AMALGAMATION OF COMPANIES
There are many forms of business combinations to obtain the economies of
large scale production or to avoid the cut throat competition. They are amalgamation,
absorption, external reconstruction etc.
The term amalgamation is used when two or more existing companies go into
liquidation and a new company is formed to take over the business of liquidated
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 63
companies. The term absorption is used when an existing company takes over the
business of one or more existing companies which go into liquidation. In external
reconstruction, one existing company goes into liquidation and a new company is
formed to take over the former company.
a. Amalgamation – means an amalgamation pursuant to the provisions of the
Companies Act 1956 or any other statute which may be applicable to companies.
b. Transferor Company – means the company which is amalgamated into another
company.
c. Transferee Company – means the company to which a 6ransferor company is
amalgamated.
d. Reserve – means the portion of earnings, receipts or other surpluses of an
enterprise (whether capital or revenue) appropriated by the management for a general
or a specific purpose other than provision for depreciation or diminution in the value
of assets or for a known liability
As per AS-14 there are two types of amalgamation (1) Amalgamation in the
nature of merger and (2) Amalgamation in the nature of purchase.
An amalgamation should be considered to be an amalgamation in the nature of
merge when all the following conditions are satisfied:
a. All the assets and liabilities of the Transferor Company or companies before
amalgamation should become the assets and liabilities of the transferee company.
b. Shareholders holding not less than 90% of the face value of the equity shares of
the
Transferor Company (excluding the proportion held by the transferee company)
should become the shareholders of the transferee company.
c. The consideration payable to the above mentioned shareholders should be
discharged by the transferee company by the issue of the equity shares and cash can be
payable in respect of fractional shares.
d. The business of the Transferor Company/ companies is intended to be carried
on by the transferee company.
e. No adjustment is intended to be made to the book values of the assets and
liabilities of the Transferor Company/ companies when they are incorporated in the
financial statements of the transferee company except to ensure uniformity of
accounting policies.
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An amalgamation should be considered to be an amalgamation in the nature of
purchase, when any one or more of the conditions specified for amalgamation in the
nature of merger is not satisfied.
Merger
Purchase
1. There is a genuine pooling of assets and
liabilities of the transferor companies as well
as the share holders’ interest. As such the
shareholders of all the transferor companies
continue to have substantial or proportionate
share in the equity or management of
Transferee Company.
1. One company acquires another. As a
consequence, the shareholders of the
transferor company normally do not
continue to have a proportionate share in
the equity management of the transferee
company.
2. Assets, liabilities and reserves of the
transferor company are recorded by the
transferee company at their book values.
2. Assets, liabilities and reserves of the
transferor company are recorded by the
transferee company either at book value or
at values revised on the basis of their fair
values.
3. The balance of P&L A/c of the transferor
company aggregated with the balance of the
P&L A/c of the transferee company.
3. The balance of P&L A/c of the
transferor company is not included in the
books of the transferee company.
4. All reserves whether capital or revenue 0of
Transferor Company are merged into the
reserves of Transferee Company.
4. Only statutory reserves of Transferor
Company are taken in the books of
Transferee Company in order to preserve
their identity.
5. It is always intended to continue the
business of transferor company.
5. It may not be intended to continue the
business of Transferor Company.
6. All the assets of Transferor Company
become the assets of the transferee company.
6. All the assets of transferor company may
or may not become the assets of the
transferee company.
7. Purchase consideration is usually valued at
the par value of the shares issued.
7. Purchase consideration is usually valued
at the market price of the shares issued.
Purchase consideration is the amount which is paid by the transferee company
for the purchase the business of Transferor Company. As per AS-14, consideration for
amalgamation means the aggregate of shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company. Purchase consideration does not include any
payment to outsiders including debenture holders. The purchase consideration may be
calculated in the following ways:
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Advanced Corporate Accounting Page 65
1. Lump Sum Method: When the transferee company agrees to pay a fixed sum to
the transferor company, it is called lump sum payment of purchase consideration. For
example, X Ltd purchases the business of Y Ltd for a consideration of 1000000.
2. Net Worth (Net Assets) Method: Under this method, the net worth of the assets
taken over by the transferee company is taken as purchase consideration.
Here, Purchase consideration = Assets taken over at agreed values – Liabilities
taken over at agreed values.
The following points are noted while calculating purchase consideration under
his method:
a. Cash balance is usually included in assets. But if it is not taken over, it will not
be included.
b. Fictitious assets should never be added.
c. Accumulated profits and reserves should not be considered.
d. The term ‘liabilities’ include all liabilities to third parties. But ‘trade liabilities’
include only trade creditors and bills payable.
e. The term ‘businesses’ will always mean both the assets and liabilities.
Illustration 1: The following are the liabilities and assetsof Amrita Ltd
Liabilities
Rs.
Assets
Rs.
Share capital
Debentures
Sundry creditors
General reserve
Profit & Loss A/c
60000
10000
6000
4000
20000
Goodwill
Land & building
Plant & Machinery
Stock
Debtors
Cash
Preliminary expenses
28000
16000
28000
16000
8000
2000
2000
100000
100000
Bangalore Ltd takes over the business of Amrita Ltd. the value agreed for
various assets are: Goodwill Rs.22000, Land & Building Rs.25000, Plant and
Machinery Rs.24000, Stock Rs.13000 and Debtors Rs.8000. Bangalore Ltd does not
take over cash but agrees to assume the liability of sundry creditors at Rs.5000.
Calculate the purchase consideration.
Solution:
Calculation of purchase consideration
Value of assets taken over:
Goodwill 22000
Land & Building 25000
Plant and Machinery 24000
Stock 13000
Debtors 8000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 66
92000
Less: Liabilities taken over:
Sundry creditors 5000
Debentures 10000 15000
Purchase consideration 77000
3. Net Payment method: Under this method, purchase consideration is the
aggregate of all payments in the form of cash, shares, securities etc. to the shareholders
of the transferor company by the transferee company. The following points are
considered while calculating purchase consideration under this method:
a. The assets and liabilities taken over by the transferee company are not
considered.
b. Purchase consideration includes the payments to shareholders only.
c. Any payments made by the transferee company to some other party on behalf of
the transferor company are to be ignored.
Illustration 2: The liabilities and assets of Jay Ltd as on 31 March 2015 is as follows:
Liabilities
Rs.
Assets
Rs.
Share capital
General reserve
Profit & Loss A/c
Debentures
Sundry creditors
200000
35000
20000
50000
25000
Goodwill
Land & building
Plant & Machinery
Stock
Debtors
Cash
40000
90000
75000
52000
58000
15000
330000
330000
Jay Ltd decides to amalgamate into a new company New Ltd which will take
over the assets and liabilities of Jay Ltd in the term that holders of each share of Rs.10
in the company would receive one share of Rs.10 each, Rs.5 paid up and Rs.4 in cash.
The liquidation expense of Rs.5000 is met by New Ltd. calculate purchase
consideration.
Solution:
Calculation of purchase consideration
Holder of each share of Rs.10 each will get one share of Rs. 10 each Rs.5 paid up =
100000
Holder of each equity share will get Rs.4in cash (2000x4) =
80000
Purchase consideration =
180000
(Note: Liquidation expense is not included in purchase consideration)
d. Share exchange or Intrinsic value Method: Under this method purchase
consideration is calculated on the basis of intrinsic value of shares. The intrinsic value
of a share is calculated by dividing g the net assets available le for equity shareholders
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 67
by the number of equity shares. This value determines the ratio of exchange of the
shares between the transferee and transferor companies.
a. Calculation of purchase consideration.
b. Ascertainment of discharge of purchase consideration.
c. Closing the books of transferor companies.
d. Passing opening entries in the books of purchasing or Transferee Company.
1. For transferring assets to Realisation A/c:
Realisation A/c Dr
To Assets A/c (individually at book value)
(Note :( a). Fictitious assets should not be transferred to Realisation A/c (b). If cash in
hand and bank are not taken over by transferee company should not be transferred to
Realisation A/c. But it can be taken as opening balance of cash or bank A/c and (c).
Other assets, even if they are not taken over, should be transferred to Realisation A/c)
2. For transferring liabilities(outside liabilities only) to Realisation A/c:
Liabilities A/c Dr (individually at book value)
To Realisation A/c
(Note :( a). If any liability is not taken over by transferee company should not be
transferred to Realisation A/c, (b). Items in the nature of provisions are to be
transferred to Realisation A/c and (c). Any fund which denotes both liability and
reserve, the portion of liability should be transferred to Realisation A/c).
3. For purchase consideration due from transferee company:
Transferee Company A/c Dr
To Realisation A/c
4. On receiving or discharging purchase consideration:
Equity shares in Transferee company A/c Dr
Preference shares in Transferee company A/c Dr
Debentures in Transferee company A/c Dr
Cash/ Bank A/c Dr
To Transferee company A/c
5. For sale of assets not taken over by transferee company:
Cash/ Bank A/c Dr (Sale proceeds)
To Realisation A/c
6. For discharging liabilities not taken over by transferee company:
Liability A/c Dr
Realisation A/c Dr (if excess amount paid)
To Cash/ Bank A/c
To Realisation A/c (If less payment is made)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 68
7. For liquidation (realisation) expenses:
a. If liquidation expenses are met by transferor company.
Realisation A/c Dr
To Cash/ Bank A/c
b. If liquidation expenses are met by transferee company.
No entry is required.
8. For closing preference share capital:
Preference share capital A/c Dr
Realisation A/c Dr (if excess amount paid)
To Preference shareholders A/c
To Realisation A/c (if less amount paid)
9. For paying off Preference shareholders:
Preference shareholders A/c Dr
To Preference shares in Transferee company A/c
To Cash/ Bank A/c (if any)
To Debentures A/c (if any)
10. For transferring equity share capital, reserves etc.
Equity share capital A/c Dr
General reserve A/c Dr
P&L A/c Dr
Dividend equalization reserve A/c Dr
Security premium A/c Dr
To equity shareholders A/c
11. For transferring fictitious assets:
Equity shareholders A/c Dr
To P&L A/c
To preliminary expenses
To Discount/ expense on issue of shares/ debentures
12. For closing Realisation A/c:
a. For loss on realisation (if debit > credit).
Equity shareholders A/c Dr
To Realisation A/c
b. For profit on realisation (if credit > debit).
Realisation A/c Dr
To Equity shareholders A/c
13. For payment to equity shareholders:
Equity shareholders A/c Dr
To Equity shares in Transferee company A/c
To Cash/ Bank A/c (if any)
After payment to equity shareholders, all the accounts in the books of
Transferor Company will be closed.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 69
1. For purchase consideration due and assets and liabilities taken over:
Assets A/c Dr (At revised, otherwise at book
value)
Goodwill A/c Dr (if credit > debit)
To Liabilities A/c (At revised, otherwise at book value)
To Liquidator of transferor company (purchase consideration)
To Capital reserve (if debit > credit)
2. For payment of purchase consideration:
Liquidator of transferor company A/c Dr
To Share capital A/c
To Debenture A/c
To Bank A/c
(Note: if shares are issued at premium, security premium A/c is credited with
premium. If shares are issued at discount, discount on issue of shares A/c is debited
with discount).
3. For payment of liquidation expenses by transferee company:
Goodwill/ Capital reserve/ P&L A/c Dr
To Cash/ Bank A/c
4. For payment of formation expenses:
Preliminary expenses A/c Dr
To Cash/ Bank A/c
5. If there are both Goodwill and Capital reserve A/c, Goodwill may be set off
against Capital reserve:
Capital Reserve A/c Dr
To Goodwill A/c
6. If any liability (including debenture) is discharged by transferee company:
Liability A/c Dr (Amount payable)
To Share capital/ Debenture/ Bank A/c
7. To record Statutory Reserves of transferor company:
Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
(Note: Amalgamation adjustment A/c is shown on the assets side of the company’s
Balance Sheet).
Illustration 3: X Ltd acquired the business of Y Ltd on 31 March 2015 for a purchase
consideration of Rs. 55000 to be paid by fully paid equity shares of Rs.10 each. The
liabilities and assets of both the companies on the date of acquisition were as follows:
Liabilities
X Ltd
Rs.
Y Ltd
Rs.
Assets
X Ltd
Rs.
Y
Ltd
Rs.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 70
Equity shares of Rs.10 each
10 % Preference shares of
Rs.10 each
General Reserve
Development Allowance
Reserve
P&L A/c
Work men Compensation
Fund
10% Debentures
Fixed Deposit(unsecured)
Sundry creditors
Bills Payable
Provision for tax
55000
……
17000
……
7000
3000
20000
7500
5000
3000
4000
3250
0
6000
1100
0
4000
5000
1500
1000
0
5000
5500
……
3000
Land & Building
Plant & Machinery
Furniture
Investment
Inventories
Sundry Debtors
Cash & Bank
Advance Tax
21500
40000
7500
12500
25000
8500
3000
3500
1350
0
2500
0
5000
8000
2250
0
5000
1500
3000
12150
0
8350
0
12150
0
8350
0
Debenture holders of Y Ltd will be issued equity shares in X Ltd. Journalise the
transactions in the books of X Ltd sand the Balance sheet after amalgamation
assuming that the amalgamation is in the nature of purchase. Also give journal entries
in the books of the transferor company to close the books.
Solution:
In the books of Y Ltd (Transferor company)
Closing entries
Realisation A/c Dr
To Land & Building A/c
To Plant & Machinery A/c
To Furniture A/c
To Investment A/c
To Inventories A/c
To Sundry Debtors A/c
To Cash & Bank A/c
To Advance Tax A/c
(transfer of various assets to Realisation A/c)
Rs.
83500
10000
5000
5500
3000
Rs.
13500
25000
5000
8000
22500
5000
1500
3000
23500
10% Debentures A/c Dr
Fixed Deposit A/c Dr
Sundry creditors A/c Dr
Provision for tax A/c Dr
To Realisation A/c
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 71
(transfer of various liabilities to Realisation
A/c)
55000
55000
6000
6000
32500
11000
4000
5000
1500
5000
49000
55000
55000
6000
6000
54000
5000
49000
X Ltd A/c Dr
To Realisation A/c
(purchase consideration due from X Ltd)
Equity Shares in X Ltd A/c Dr
To X Ltd A/c
(purchase consideration received)
10% Preference share capital A/c Dr
To Preference shareholders A/c
(amount payable to Preference shareholders
Preference shareholders A/c Dr
To Equity Shares in X Ltd A/c
(distribution of equity shares received from X
Ltd)
Equity share capital A/c Dr
General reserve A/c Dr
Development Allowance reserve A/c Dr
P&L A/c Dr
Workmen compensation Fund A/c Dr
To equity shareholders A/c
(transfer of equity shareholders’ funds)
Equity shareholders A/c Dr
To Realisation A/c
(transfer of loss on realisation)
Equity shareholders A/c Dr
To Equity shares in X Ltd A/c
(distribution of equity shares received from X
Ltd)
Realisation A/c
To Land & Building A/c
To Plant & Machinery A/c
To Furniture A/c
To Investment A/c
To Inventories A/c
To Sundry Debtors A/c
To Cash & Bank A/c
To Advance Tax A/c
Rs.
13500
25000
5000
8000
22500
5000
1500
3000
By 10% Debentures A/c
By Fixed Deposit A/c
By Sundry creditors A/c
By Provision for tax A/c
By X Ltd (PC)A/c
By Equity shareholders A/c
(Realisation loss)-Bal.
figure
Rs.
10000
5000
5500
3000
55000
5000
83500
83500
X Ltd A/c
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 72
To Realisation A/c
Rs.
55000
By Equity shares in X Ltd.
A/c
Rs.
55000
55000
55000
Preference shareholders A/c
To Equity shares in X Ltd A/c
Rs.
6000
By 10%Preference share
capital A/c
Rs.
6000
6000
6000
Equity shareholders A/c
To Realisation A/c (loss)
To Equity shares in X Ltd. A/c
Rs.
5000
49000
By Equity share capital A/c
By General reserve A/c
By Development Allowance
reserve
By P&L A/c
By Workmen compensation
Fund A/c
Rs.
32500
11000
4000
5000
1500
54000
54000
Opening Entries in the books of X Ltd (Transferee Company)
Land & Building A/c
Dr
Plant & Machinery A/c Dr
Furniture A/c Dr
Investment A/c Dr
Inventories A/c Dr
Sundry Debtors A/c Dr
Cash & Bank A/c
Dr
Advance Tax A/c
Dr
To 10% Debentures A/c
To Fixed Deposit A/c
To Sundry creditors A/c
To Provision for tax A/c
To Liquidators of Y Ltd A/c
To Capital Reserve (Bal. figure)
(purchase consideration due and assets and
liabilities taken over)
Rs.
13500
25000
5000
8000
22500
5000
1500
3000
55000
Rs.
10000
5000
5500
3000
55000
5000
55000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 73
Liquidators of Y Ltd A/c Dr
To Equity Share capital A/c
(payment of purchase consideration in equity
shares)
10000
5500
10000
4000
1500
10% Debentures A/c Dr
To Equity Share capital A/c
(discharge of debentures by issuing equity
shares)
Amalgamation Adjustment A/c Dr
To Development Allowance reserve A/c
To Workmen compensation Fund A/c
(statutory reserves incorporated)
Balance Sheet of X Ltd (after amalgamation) as on 1 April 2015
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
a. Long term borrowings
b. Fixed Deposit
Current Liabilities
a. Trade Payables
b. Provisions for Tax
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Inventories
Trade Receivables
Cash and Cash Equivalents: Cash and Bank
Advance Tax
Total
1
2
3
4
5
6
7
120000
37500
20000
12500
13500
7000
210500
112500
20500
5500
47500
13500
4500
6500
210500
Notes to Accounts
Note No.
Particulars
Amount
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 74
(Rs.)
1.
2.
3.
4.
5.
6.
7.
Share Capital
Issued and Subscribed
12000 Equity shares of Rs. 10 each
Reserves and Surplus
Capital Reserve
General Reserve
Development Allowance Reserve
Workmen compensation Fund
P & L A/c
Long Term Borrowings
10% Debentures
Fixed Deposits
Trade Payables
Sundry Creditors
Bills Payables
Fixed Assets – Tangible
Land & Building
Plant & Machinery
Furniture
Other Non-current Assets
Amalgamation Adjustment Account
120000
5000
17000
4000
4500
7000
37500
20000
12500
10500
3000
13500
35000
65000
12500
112500
5500
a) For purchase consideration due and assets and liabilities taken over:
Assets A/c Dr (Individually at book
value)
To Liabilities A/c (Individually at book value)
To Reserves of Transferor Company A/c
To P & L A/c
To Liquidator of transferor company A/c (purchase consideration)
(Note: The difference between debit and credit is adjusted in the reserves of Transferee
Company)
b) For payment of purchase consideration:
Liquidator of transferor company A/c Dr
To Share capital A/c
To Debenture A/c
To Bank A/c
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 75
(Note: if shares are issued at premium, security premium A/c is credited with
premium. If shares are issued at discount, discount on issue of shares A/c is debited
with discount).
c) Payment of liquidation expense by transferee company:
General Reserve/ P & L A/c Dr
To Cash/ Bank A/c
d) For the payment of formation expenses:
Preliminary expenses A/c Dr
To Cash/ Bank A/c
Illustration 4: The following is the summarized statement of liabilities and assets of
Moon Ltd as on 31 March 2015.
Share Capital
40000 equity shares of Rs.10
Each
Reserves & Surplus
Capital Reserve A/c
P & L A/c
Secured Loan
10% Debentures
Current liabilities &
Provisions
Sundry creditors
Rs.
400000
180000
60000
200000
20000
Fixed Assets
Land & Building
Plant & Machinery
Furniture
Investments
Current Assets
Stock
Sundry Debtors
Bank
Cash
Rs.
200000
100000
80000
-------
40000
60000
300000
80000
860000
860000
On 1 April 2015 Sun Ltd took over the business of Moon Ltd as per the
following terms:
a. Debentures are to be discharged at a premium of 5% in Sun Ltd.
b. Creditors are to be paid off by Sun Ltd.
c. Sun Ltd will issue 5 equity shares of Rs.10 each at a market value of Rs.11 for
every 4 equity shares of Moon Ltd.
d. Cost of liquidation Rs.10000 is to be paid by Sun Ltd.
Close the books of Moon Ltd and pass opening entries in the books of Sun Ltd
assuming that the amalgamation s in the nature of merger.
Solution:
Purchase consideration (in Equity shares) = 40000x5/4x11 = Rs.550000
In the books of Moon Ltd.
Realisation A/c
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 76
To Land & Building A/c
To Plant & Machinery A/c
To Furniture A/c
To Stock A/c
To Sundry Debtors A/c
To Bank A/c
To Cash A/c
Rs.
200000
100000
80000
40000
60000
300000
80000
By 10% Debentures A/c
By Sundry creditors A/c
By Sun Ltd (PC)
By Equity shareholders A/c
(realisation loss)-Bal.
figure
Rs.
200000
20000
550000
90000
860000
860000
Sun Ltd A/c
To Realisation A/c
Rs.
550000
By Equity shares in Sun
Ltd.
Rs.
550000
550000
550000
Equity Shares in Sun Ltd A/c
To Sun Ltd A/c
Rs.
550000
By Equity shareholders A/c
Rs.
550000
550000
550000
Equity shareholders A/c
To Realisation A/c (loss)
To Equity shares in Sun Ltd.
Rs.
90000
550000
By Equity share capital
A/c
By Capital Reserve A/c
By P&L A/c
Rs.
400000
180000
60000
640000
640000
Entries In the books of Sun Ltd
Land & Building A/c
Dr
Plant & Machinery A/c
Dr
Furniture A/c
Dr
Stock A/c
Dr
Sundry Debtors A/c
Dr
Bank A/c
Dr
Cash A/c Dr
Rs.
200000
100000
80000
40000
60000
300000
80000
Rs.
200000
20000
30000
60000
550000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 77
To 10% Debentures A/c
To Sundry creditors A/c
To Capital Reserve A/c (Bal.
Fig)
To P & L A/c
To Liquidators of Moon Ltd A/c
(purchase consideration due and assets
and liabilities taken over)
550000
200000
10000
10000
10000
500000
50000
210000
10000
10000
Liquidators of Moon Ltd A/c
Dr
To Equity Share capital A/c
To Security Premium A/c
(payment of purchase consideration in
50000 equity shares of Rs.10 at Rs.11)
10% Debentures A/c Dr
Premium on Redemption of Debentures
A/c Dr
To Bank A/c
(discharge of debentures at 5% premium)
Capital Reserve A/c Dr
To Premium on Redemption of
Debentures A/c
(Premium on Redemption of Debentures
adjusted )
Capital Reserve A/c
Dr
To Bank A/c
(liquidation expenses paid)
Working Note:
Calculation of Reserve:
Purchase consideration 550000
Less: Share capital of Moon Ltd 400000
Difference to be adjusted 150000
Capital Reserve in Moon Ltd 180000
Less: Difference adjusted 150000
Balance of Capital Reserve 30000
Illustration 5: A Ltd acquired the business of B Ltd on 31 March 2015 for a purchase
consideration of Rs.2,50,00,000 to be paid by fully paid equity shares of Rs.10 each.
The liabilities and assets of two companies on the date of acquisition were as follows:
Liabilities
A Ltd
(Rs.)
B Ltd
(Rs.)
Assets
A Ltd
(Rs.)
B Ltd
(Rs.)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 78
Equity shares of Rs.10
each fully paid
General Reserve
Development Rebate
Reserve
P&L A/c
Workmen Compensation
Fund
Current Liabilities
2500000
0
1200000
0
1000000
1000000
1500000
4500000
1500000
0
1800000
3700000
5300000
2400000
9500000
Land & Building
Plant & Machinery
Furniture
Stock
Sundry Debtors
Bank
1200000
0
2000000
0
1000000
5500000
4500000
2000000
8000000
1800000
0
2000000
4000000
4000000
1700000
4500000
0
3770000
0
4500000
0
3770000
0
Pass the necessary journal entries in the books of A Ltd when amalgamation is
in the nature of (i) merger and (ii) purchase. Also prepare the Balance sheet of A Ltd
after amalgamation assuming that Development Rebate Reserve and Workmen
Compensation Fund of B Ltd are required to be continued in the books of A Ltd.
Solution:
When amalgamation is in the nature of merger:
Entries in the books of A Ltd.
2015
Mar
31
Land & Building A/c Dr
Plant & Machinery A/c Dr
Furniture A/c Dr
Stock A/c Dr
Sundry Debtors A/c
Dr
Bank A/c Dr
General Reserve A/c (Bal. Fig)
Dr
To Development Rebate Reserve A/c
To Workmen Compensation Fund A/c
To Current liabilities A/c
To Liquidators of B Ltd A/c
(purchase consideration due and assets and
liabilities taken over)
8000000
18000000
2000000
4000000
4000000
1700000
2900000
25000000
3700000
2400000
9500000
25000000
25000000
Liquidators of B Ltd A/c Dr
To Equity Share capital A/c
(payment of purchase consideration in
equity shares)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 79
Balance Sheet of A Ltd as on 1 April 2015 (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Stock
Sundry Debtors
Bank
Total
1
2
3
50000000
18700000
Nil
14000000
82700000
61000000
Nil
Nil
9500000
8500000
3700000
82700000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
Share Capital
Issued and Subscribed
5000000 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
General Reserve
Development Rebate Reserve
Workmen compensation Fund
P & L A/c
Fixed Assets – Tangible
Land & Building
Plant & Machinery
Furniture
50000000
9100000
4700000
3900000
1000000
18700000
20000000
38000000
3000000
61000000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 80
When amalgamation is in the nature of purchase:
Entries in the books of A Ltd.
2015
Mar
31
Land & Building A/c
Dr
Plant & Machinery A/c
Dr
Furniture A/c
Dr
Stock A/c Dr
Sundry Debtors A/c
Dr
Bank A/c Dr
To Current liabilities A/c
To Liquidators of B Ltd A/c
To Capital Reserve A/c (Bal. Fig)
(purchase consideration due and assets and
liabilities taken over)
Rs.
8000000
18000000
2000000
4000000
4000000
1700000
25000000
6100000
Rs.
9500000
25000000
3200000
25000000
3700000
2400000
Liquidators of B Ltd A/c Dr
To Equity Share capital A/c
(payment of purchase consideration in
equity shares)
Amalgamation Adjustment A/c Dr
To Development Rebate Reserve A/c
To Workmen compensation Fund A/c
(statutory reserves incorporated)
Balance Sheet of A Ltd as on 1 April 2015 (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Total
B. Assets
Non-current Assets
Fixed Assets
1
2
50000000
24800000
Nil
14000000
88800000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 81
a. Tangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Stock
Sundry Debtors
Bank
Total
3
4
61000000
Nil
6100000
9500000
8500000
3700000
88800000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
Share Capital
Issued and Subscribed
5000000 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
Capital Reserve
General Reserve
Development Rebate Reserve
Workmen compensation Fund
P & L A/c
Fixed Assets – Tangible
Land & Building
Plant & Machinery
Furniture
Other Non-current Assets
Amalgamation Adjustment Account
50000000
3200000
12000000
4700000
3900000
1000000
24800000
20000000
38000000
3000000
61000000
6100000
Illustration 6: A Ltd agrees to sell their undertaking to B Ltd on the following terms. B
Ltd will pay them Rs.600000 in cash and allot them two fully paid share of Rs.6 each
(market value Rs. 7.50 per share) in exchange of every three shares in their own
company. The liabilities and assets of A Ltd on the date of amalgamation stood as
follows:
Share Capital
120000 equity shares of Rs.6
Each, fully paid up
Reserves & Surplus
General Reserve
P & L A/c
Creditors
Rs.
720000
360000
34168
132500
Fixed Assets
Land & Building
Plant & Machinery
Current Assets
Stock
Sundry Debtors
Bank
Rs.
450000
218700
273450
229500
74280
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 82
Cash
738
1246668
1246668
A ltd will pay their liquidation expenses themselves which amounted to
Rs.9000. close the books of A Ltd and give opening entries in the books of B Ltd
assuming that the amalgamation is in the nature of purchase.
Solution:
Calculation of purchase consideration
In cash 600000
In equity shares (120000x2/3x7.50) 600000
Purchase Consideration 1200000
Closing entries in the books of A Ltd
Realisation A/c Dr
To Land & Building A/c
To Plant & Machinery A/c
To Stock A/c
To Sundry Debtors A/c
To Bank A/c
To Cash A/c
(transfer of various assets to Realisation A/c)
Rs.
1246668
132500
1200000
600000
600000
720000
360000
34168
9000
Rs.
450000
218700
273450
229500
74280
738
132500
1200000
1200000
1114168
Sundry creditors A/c Dr
To Realisation A/c
(transfer of sundry creditors to Realisation
A/c)
B Ltd A/c Dr
To Realisation A/c
(purchase consideration due from B Ltd)
Cash A/c Dr
Equity Shares in B Ltd A/c Dr
To B Ltd A/c
(purchase consideration received)
Equity share capital A/c Dr
General reserve A/c Dr
P&L A/c Dr
To equity shareholders A/c
(transfer of equity shareholders’ funds)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 83
Realisation A/c Dr
To Cash A/c
(liquidation expenses paid)
76832
1191000
9000
76832
600000
591000
Realisation A/c Dr
To Equity shareholders A/c
(transfer of profit on realisation)
Equity shareholders A/c Dr
To Equity shares in B Ltd A/c
To Cash A/c
(distribution of equity shares and cash
received)
Opening entries in the books of B Ltd
Land & Building A/c
Dr
Plant & Machinery A/c Dr
Stock A/c
Dr
Sundry Debtors A/c Dr
Bank A/c
Dr
Cash A/c
Dr
Goodwill A/c (Bal. Fig)
Dr
To Sundry Creditors A/c
To Liquidators of A Ltd A/c
(purchase consideration due and assets and
liabilities taken over)
Rs.
450000
218700
273450
229500
74280
738
85832
1200000
Rs.
132500
1200000
480000
120000
600000
Liquidators of A Ltd A/c Dr
To Equity Share capital A/c
To Security premium A/c
To Cash A/c
(payment of purchase consideration)
Generally amalgamation or absorption takes place between companies having
mutual transactions. One company may purchase goods on credit from the other.
Sometimes, one company accepts the bills of exchange drawn by the other.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 84
At the time of amalgamation or absorption, inter-company debts must be
eliminated because after amalgamation or absorption both companies become one
entity and nothing will be payable or receivables between them. The adjusting entry in
the books of transferee company for the elimination is:
Sundry Creditors A/c Dr
To Sundry Debtors A/c
Note: No adjusting entry is required in the books of transferor company.
There may be mutual acceptance of bills of exchange between the companies.
For such mutual acceptance the following adjusting entry is passed in the books of
transferee company:
Bills Payables A/c Dr
To Bills Receivables A/c
Note: No adjusting entry is required in the books of transferor company.
Illustration 7: Super Star Ltd. is formed to take over Super Ltd. and Star Ltd. for Rs.
390000 and Rs. 260000 respectively. The purchase consideration is payable in fully
paid equity shares of Rs. 10 each.
The liabilities and assets of the two companies are as follows:
Liabilities
Super
Ltd (Rs.)
Star Ltd
(Rs.)
Assets
Super
Ltd (Rs.)
Star Ltd
(Rs.)
Equity Share Capital
General Reserve
Sundry Creditors
Bills Payable
312000
97500
78000
32500
234000
13000
26000
19500
Land and Building
Stock
Sundry Debtors
Bills Receivable
Cash at Bank
104000
143000
159900
70850
42250
65000
96200
83200
24180
23920
520000
292500
520000
292500
Note: Bills discounted by Super Ltd. not yet matured Rs. 7150.
Additional Information:
a) Sundry debtors of Star Ltd. include Rs. 24700 due from Super Ltd.
b) Bills payables of Super Ltd. include Rs. 16250 acceptances in favour of Star
Ltd. But bills receivable of Star Ltd. include Rs. 9100 accepted by Super Ltd.
Close the books of Super Ltd. and Star Ltd. and pass the acquisition entries in
the books of Super Star Ltd. Also prepare the balance sheet of Super Star Ltd.
(Amalgamation in the nature of purchase).
Solution:
Closing entries in the books of Super Ltd.
Realisation A/c Dr
To Land & Building A/c
To Stock A/c
To Sundry Debtors A/c
Rs.
520000
Rs.
104000
143000
159900
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 85
To Bills Receivable A/c
To Cast at Bank A/c
(transfer of various assets to Realisation A/c)
78000
32500
390000
390000
312000
97500
19500
390000
70850
42250
110500
390000
390000
409500
19500
390000
Sundry creditors A/c Dr
Bills Payable A/c Dr
To Realisation A/c
(transfer of sundry creditors to Realisation
A/c)
Super Star Ltd. A/c Dr
To Realisation A/c
(Purchase consideration due from Super Star
Ltd.)
Equity Shares in Super Star Ltd. A/c Dr
To Super Star Ltd. A/c
(purchase consideration received)
Equity share capital A/c Dr
General reserve A/c Dr
To Equity shareholders A/c
(transfer of equity shareholders’ funds)
Equity shareholders A/c Dr
To Realisation A/c
(transfer of loss on Realisation)
Equity shareholders A/c Dr
To Equity shares in Super Star Ltd.
A/c
(distribution of equity shares received)
Closing entries in the books of Star Ltd.
Realisation A/c Dr
To Land & Building A/c
To Stock A/c
To Sundry Debtors A/c
To Bills Receivable A/c
To Cast at Bank A/c
(transfer of various assets to Realisation A/c)
Rs.
292500
26000
19500
260000
260000
Rs.
65000
96200
83200
24180
23920
45500
260000
Sundry creditors A/c Dr
Bills Payable A/c Dr
To Realisation A/c
(transfer of sundry creditors to Realisation
A/c)
Super Star Ltd. A/c Dr
To Realisation A/c
(Purchase consideration due from Super Star
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 86
Ltd.)
234000
13000
13000
260000
260000
247000
13000
260000
Equity Shares in Super Star Ltd. A/c Dr
To Super Star Ltd. A/c
(purchase consideration received)
Equity share capital A/c Dr
General reserve A/c Dr
To Equity shareholders A/c
(transfer of equity shareholders’ funds)
Realisation A/c Dr
To Equity shareholders A/c
(transfer of profit on Realisation)
Equity shareholders A/c Dr
To Equity shares in Super Star Ltd.
A/c
(distribution of equity shares received)
Opening entries in the books of Super Star Ltd.
Land & Building A/c
Dr
Stock A/c
Dr
Sundry Debtors A/c Dr
Bills Receivable A/c Dr
Cash at Bank A/c
Dr
To Sundry Creditors A/c
To Bills Payable A/c
To Liquidators of Super Ltd. A/c
To Capital Reserve (Bal. Fig.)
(purchase consideration due and assets and
liabilities taken over)
Rs.
104000
143000
159900
70850
42250
390000
65000
96200
83200
Rs.
78000
32500
390000
19500
390000
Liquidators of Super Ltd. A/c Dr
To Equity Share capital A/c
(payment of purchase consideration)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 87
Land & Building A/c
Dr
Stock A/c
Dr
Sundry Debtors A/c Dr
Bills Receivable A/c Dr
Cash at Bank A/c
Dr
Goodwill A/c (Bal. Fig.)
Dr
To Sundry Creditors A/c
To Bills Payable A/c
To Liquidators of Star Ltd. A/c
(purchase consideration due and assets and
liabilities taken over)
24180
23920
13000
260000
24700
9100
13000
26000
19500
260000
260000
24700
9100
13000
Liquidators of Star Ltd. A/c Dr
To Equity Share capital A/c
(payment of purchase consideration)
Sundry Creditors A/c Dr
To Sundry Debtors A/c
(mutual debt set-off)
Bills Payable A/c Dr
To Bills Receivable A/c
(mutual acceptance set-off)
Capital Reserve A/c Dr
To Goodwill A/c
(goodwill set-off against capital reserve)
Balance Sheet of Super Star Ltd. (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Trade Payables
Total
B. Assets
Non-current Assets
Fixed Assets
1
2
3
650000
6500
Nil
122200
778700
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 88
a. Tangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Stock (143000+96200)
Sundry Debtors (159900+83200-24700)
Bills Receivable (70850+24180-9100)
Cash at Bank (42250+23920)
Total
4
169000
Nil
Nil
239200
218400
85930
66170
778700
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
Share Capital
Issued and Subscribed
65000 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
Capital Reserve (19500-13000)
Trade Payables
Sundry Creditors (78000+26000-24700)
Bills Payables (32500+19500-9100)
Fixed Assets – Tangible
Land & Building (104000+65000)
650000
6500
79300
42900
122200
169000
The stock of transferor company or transferee company may represent goods
sold by transferee company or transferor company at a profit. The profit included in
the unsold goods (stock) is called unrealized profit. But, no adjustment is required in
the books of transferor company. In the books of transferee company, the following
adjusting entry is passed:
Goodwill or Capital Reserve A/c Dr
To Stock A/c (with unrealized profit)
Illustration 8: X Ltd. agrees to absorb Y Ltd. in the nature of purchase on 31
st
December 2014 on which date their liabilities and assets are as under:
Liabilities
X Ltd
(Rs.)
Y Ltd
(Rs.)
Assets
X Ltd
(Rs.)
Y Ltd
(Rs.)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 89
Equity Share Capital
of
Rs. 10 each
Profit & Loss Account
Sundry Creditors
Bills Payable
280000
84000
105000
21000
140000
56000
49000
7000
Fixed Assets
Stock
Sundry Debtors
Bills Receivable
Bank
140000
130200
126000
65800
28000
98000
42000
70000
30800
11200
490000
252000
490000
252000
The purchase consideration is Rs. 224000 payable in equity shares of Rs. 10
each. The bills payables of X Ltd. include Rs. 11200 due to Y Ltd. and sundry debtors
of X Ltd. include Rs. 21000 due from Y Ltd. The stock of X Ltd. includes Rs. 15400
worth of goods purchased from Y Ltd. on which Y Ltd. made a profit of 10% on cost
and the stock of Y Ltd. includes Rs. 28000 worth of goods purchased from X Ltd. on
which X Ltd. made a profit of 10% on sale price.
Pass journal entries in the books of both the companies and prepare the balance
sheet of X Ltd. after absorption.
Solution:
Closing entries in the books of Y Ltd.
Realisation A/c Dr
To Fixed Assets A/c
To Stock A/c
To Sundry Debtors A/c
To Bills Receivable A/c
To Bank A/c
(transfer of various assets to Realisation A/c)
Rs.
252000
49000
7000
224000
224000
140000
56000
28000
224000
Rs.
98000
42000
70000
30800
11200
56000
224000
224000
196000
28000
Sundry creditors A/c Dr
Bills Payable A/c Dr
To Realisation A/c
(transfer of sundry creditors to Realisation
A/c)
X Ltd. A/c Dr
To Realisation A/c
(Purchase consideration due from X Ltd.)
Equity Shares in X Ltd. A/c Dr
To X Ltd.
(purchase consideration received)
Equity share capital A/c Dr
P & L A/c Dr
To Equity shareholders A/c
(transfer of equity shareholders’ funds)
Realisation A/c Dr
To Equity shareholders A/c
(transfer of profit on Realisation)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 90
Equity shareholders A/c Dr
To Equity shares in X Ltd. A/c
(distribution of equity shares received)
224000
Opening entries in the books of X Ltd.
Fixed Assets A/c
Dr
Stock A/c
Dr
Sundry Debtors A/c Dr
Bills Receivable A/c Dr
Bank A/c
Dr
Goodwill A/c (Bal. Fig.)
Dr
To Sundry Creditors A/c
To Bills Payable A/c
To Liquidators of Y Ltd. A/c
(purchase consideration due and assets and
liabilities taken over)
Rs.
98000
42000
70000
30800
11200
28000
224000
21000
11200
1400
2800
Rs.
49000
7000
224000
224000
21000
11200
1400
2800
Liquidators of Y Ltd. A/c Dr
To Equity Share capital A/c
(payment of purchase consideration)
Sundry Creditors A/c Dr
To Sundry Debtors A/c
(mutual debt set-off)
Bills Payable A/c Dr
To Bills Receivable A/c
(mutual acceptance set-off)
Goodwill A/c Dr
To Stock A/c (15400x10/110)
(unrealized profit in stock purchased from Y
Ltd. eliminated)
Goodwill A/c Dr
To Stock A/c (28000x10/100)
(unrealized profit in stock sold to Y Ltd.
eliminated)
Balance Sheet of X Ltd. (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 91
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Trade Payables
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible
b. Intangible - Goodwill
Current Assets
Stock (130200+42000-4200)
Sundry Debtors (196000-21000)
Bills Receivable (96600-11200)
Bank (28000+11200)
Total
1
2
3
4
504000
84000
Nil
149800
737800
238000
32200
168000
175000
85400
39200
737800
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
Share Capital
Issued and Subscribed
50400 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
P & L A/c
Trade Payables
Sundry Creditors (154000-21000)
Bills Payables (28000-11200)
Fixed Assets – Tangible
(140000+98000)
504000
84000
133000
16800
149800
238000
There are three situations:
1. Shares held by transferee company in transferor company.
2. Shares held by transferor company in transferee company.
3. Shares held by both the companies in each other.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 92
The following steps are involved:
a) Calculate the purchase consideration as usual.
b) The discharge of purchase consideration by the transferee company must be
reduced in proportion to transferee company’s holding in the transferor company.
c) In the books of transferor company:
i. Show the entire purchase consideration as due.
ii. Record the actual discharge by transferee company (reduced by holdings of
transferee company).
iii. Transfer the balance in transferee company account to the equity shareholders
account by:
Equity Shareholders A/c Dr
To Transferee Company A/c
d) In the books of transferee company:
i. Transferee company’s holding in transferor company represents investments in the
books of transferee company.
ii. While discharging purchase consideration debit liquidator’s account and credit
investments account, with value of discharge for the number of shares of transferor
company, held by transferee company.
iii. Transfer any balance in investment account to goodwill account or capital reserve
as the case may be.
Illustration 9: Following are the liabilities and assets of A Ltd. and B Ltd. as on 31
st
March 2015.
Liabilities
A Ltd
(Rs. in
Lakhs)
B Ltd
(Rs. in
Lakhs)
Assets
A Ltd
(Rs. in
Lakhs)
B Ltd
(Rs. in
Lakhs)
40000 Equity Shares
of
Rs. 100 each
20000 Equity Shares
of
Rs. 50 each
General Reserve
Current Liabilities
Provision for Tax
Proposed Dividend
40
30
30
10
5
1
1
1
Goodwill
Fixed Assets
Investments
Current Assets
30
5
65
0.50
3.50
14.00
100
18
100
18
B Ltd. is to be amalgamated in the nature of purchase by A Ltd. on the
following terms:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 93
1. B Ltd. declares a dividend of 10% before absorption for the payment of which it
is to retain sufficient amount of cash.
2. The net worth of B Ltd. is valued at Rs. 14.50 lakhs.
3. The purchase consideration is satisfied by the issue of fully paid-up shares of
Rs. 100 each in A Ltd.
Following further information is also to be taken into consideration:
a) A Ltd. holds 5000 shares of B Ltd. at a cost of Rs. 3 lakh.
b) The stock of B Ltd. includes items valued at Rs. 1 lakh purchased from A Ltd.
(cost to A Ltd. Rs. 0.75 lakh).
c) The creditors of B Ltd. include Rs. 0.50 lakh due to A Ltd.
d) A Ltd. takes fixed assets of B Ltd. in its books at Rs. 4.50 lakh.
Show ledger accounts in the books of B Ltd. to give effect to the above and
make journal entries in the books of A Ltd. and also prepare the balance sheet of A
Ltd. after completion of absorption.
Solution:
In the books of B Ltd.
Proposed Dividend Account
To Current Assets A/c
Rs.
100000
By Balance b/d
Rs.
100000
100000
100000
Current Assets Account
To Balance b/d
Rs.
1400000
By Proposed Dividend A/c
By Realisation A/c
Rs.
100000
1300000
1400000
1400000
Realisation Account
To Goodwill
To Fixed Assets
To Current Assets
Rs.
50000
350000
1300000
By Current Liabilities
By Provision for Tax
By A Ltd. (Purchase Consideration)
By Equity Shareholders A/c (Loss)
Rs.
100000
100000
1450000
50000
1700000
1700000
A Ltd. Account
To Realisation A/c
Rs.
1450000
By Shares in A Ltd. (1450000x3/4)
By Equity Shareholders A/c – set-off
(1450000x1/4)
Rs.
1087500
362500
1450000
1450000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 94
Shares in A Ltd. Account
To A Ltd.
Rs.
1087500
By Equity Shareholders A/c
Rs.
1087500
1087500
1087500
Equity Shareholders Account
To Realisation A/c (loss)
To Shares in A Ltd.
To A Ltd. (set-off)
Rs.
50000
1087500
362500
By Equity Share Capital
By General Reserve
Rs.
1000000
500000
1500000
1500000
In the Books of A Ltd.
Journal Entries
Goodwill A/c
Dr
Fixed Assets A/c Dr
Current Assets A/c
Dr
To Current Liabilities A/c
To Provision for Tax A/c
To Liquidators of B Ltd. A/c
To Capital Reserve (Bal. Fig.)
(purchase consideration due and assets and
liabilities taken over)
Rs.
50000
450000
1300000
1450000
62500
25000
25000
Rs.
100000
100000
1450000
150000
1087500
362500
62500
25000
25000
Liquidators of B Ltd. A/c Dr
To Equity Share capital A/c
To Shares in B Ltd.
(payment of purchase consideration)
Shares in B Ltd. A/c
Dr
To Capital Reserve A/c (362500-
300000)
(profit on shares in B Ltd. transferred to
Capital Reserve)
Bank A/c Dr
To P & L A/c
(Dividend received from B Ltd.)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 95
Capital Reserve A/c Dr
To Stock A/c
(unrealized profit in stock purchased from B
Ltd. eliminated)
50000
50000
50000
50000
Creditors (Current Liabilities) A/c
Dr
To Debtors (Current Assets)
(cancellation of mutual –debt)
Capital Reserve A/c
Dr
To Goodwill A/c
(Goodwill set-off against capital reserve)
Balance Sheet of A Ltd.as on 31
st
March 2015 (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Current Liabilities (3000000+100000-50000) 3050000
Provision for Tax 100000
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible (3000000+450000)
b. Intangible
Investments (500000-362500+62500)
Current Assets
Current Assets (6500000+1300000+25000-25000-50000)
Total
1
2
5087500
3162500
Nil
3150000
11400000
3450000
Nil
200000
7750000
11400000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
Share Capital
Issued and Subscribed
50875 Equity shares of Rs. 100 each, fully paid
5087500
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 96
2.
Reserves and Surplus
Capital Reserve (150000+62500-25000-50000)
General Reserve
P & L A/c
137500
3000000
25000
3162500
The following steps are involved:
1. Calculate the purchase consideration, depending on the method applicable.
However,
a) If purchase consideration is calculated under ‘net assets method’, investment
held by transferor company in transferee company must not be considered as an asset.
b) If purchase consideration is calculated under ‘net payment method’, deduct the
number of shares of transferee company held by transferor company from total
number of shares to be discharged by the transferee company.
2. In the books of transferor company:
a) Shares held by transferor company in transferee company must not be
transferred to Realisation Account. It must be shown as the balance in the Shares in
Transferee Company Account (Investment Account).
b) The shares received from Transferee Company as a part of purchase
consideration must be debited to Shares in Transferee Company Account (Investment
Account).
c) Transfer the profit or loss on revaluation of investment to the Realisation
Account.
d) Transfer the balance in Shares in Transferee Company Account (Investment
Account) to the Shareholders Account.
3. In the books of transferee company – There will be no specific entry.
Illustration 10: Following are the liabilities and assets of Z Ltd. and A Ltd. as on 31
st
March 2015.
Liabilities
Z Ltd
Rs.
A Ltd
Rs.
Assets
Z Ltd
Rs.
A Ltd
Rs.
Equity Shares of
Rs. 10 each
Reserves and Surplus
7% Debentures of Rs.
100 each
Loan from Z Ltd.
Other Liabilities
200000
40000
100000
50000
400000
100000
30000
70000
Sundry Assets (no
goodwill)
Loan to A Ltd.
Investments –
5000
shares in A Ltd.
310000
30000
50000
600000
390000
600000
390000
600000
A Ltd. merges Z Ltd. in the nature of purchase on the following terms:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 97
a) A Ltd. will issue sufficient number of shares at Rs. 11 each and pay Re. 0.50
each per share held by members of Z Ltd.
b) 7% Debentures of Z Ltd. are taken over by A Ltd. along with other liabilities of
Z Ltd.
Show the ledger accounts in the books of Z Ltd. and pass journal entries in the
books of A Ltd. Also prepare the balance sheet of A Ltd. after amalgamation.
Solution:
Calculation of Purchase Consideration:
Total number of shares of A Ltd. to be issued to Z Ltd.
20000
Less: Shares of A Ltd. already held by Z Ltd.
5000
New shares of A Ltd. to be issued
15000
Total value of new shares (15000x11)
165000
Cash payment (20000x0.50)
10000
Purchase Consideration 175000
Ledger Accounts in the books of Z Ltd.
Realisation Account
To Sundry Assets
To Loan to A Ltd.
Rs.
310000
30000
By Other Liabilities
By 7% Debentures
By A Ltd. (Purchase Consideration)
By Shares in A Ltd.
By Equity Shareholders A/c (Loss)
Rs.
50000
100000
175000
5000
10000
340000
340000
A Ltd. Account
To Realisation A/c
Rs.
175000
By Shares in A Ltd. (15000xRs. 11)
By Cash
Rs.
165000
10000
175000
175000
Shares in A Ltd. Account
To Balance b/d
To A Ltd.
To Realisation (Profit)
Rs.
50000
165000
5000
By Equity Shareholders A/c
Rs.
220000
220000
220000
Cash Account
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 98
To A Ltd.
Rs.
10000
By Equity Shareholders A/c
Rs.
10000
10000
10000
Equity Shareholders Account
To Realisation A/c (loss)
To Shares in A Ltd.
To Cash A/c
Rs.
10000
220000
10000
By Equity Share Capital
By Reserves and Surplus
Rs.
200000
40000
240000
240000
In the Books of A Ltd.
Journal Entries
Sundry Assets A/c
Dr
Loan of A Ltd. A/c Dr
To Other Liabilities A/c
To 7% Debentures A/c
To Liquidators of Z Ltd. A/c
To Capital Reserve (Bal. Fig.)
(purchase consideration due and assets and
liabilities taken over)
Rs.
310000
30000
175000
30000
Rs.
50000
100000
175000
15000
150000
15000
10000
30000
Liquidators of Z Ltd. A/c Dr
To Equity Share capital A/c
(15000x10)
To Securities Premium A/c
(15000x1)
To Cash A/c
(payment of purchase consideration)
Loan from Z Ltd. A/c
Dr
To Loan of A Ltd. A/c
(Elimination of mutual - loan)
Balance Sheet of A Ltd.as on 31
st
March 2015 (after amalgamation)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
7% Debentures
1
2
550000
130000
100000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 99
Current Liabilities
Other Liabilities (50000+70000)
Total
B. Assets
Sundry Assets:
(600000+310000-10000 cash paid to Z Ltd.)
Total
120000
900000
900000
900000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
55000 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
Reserves – given
Capital Reserve
Securities Premium
550000
100000
15000
15000
130000
If purchase consideration is to be calculated under ‘net payment method’, the
purchase consideration is calculated as under:
a) Calculate the number of shares to be given to the outside shareholders in
transferor company.
b) Calculate the number of shares due to the transferee company as a shareholder
in the transferor company.
c) Obtain the total of (a) and (b).
d) Deduct the number of shares already held by the transferor company from the
total under (c).
e) To calculate purchase consideration, multiply the number of shares as under (d)
with the issue price.
Illustration 11: Following are the liabilities and assets of X Ltd. and Y Ltd. X Ltd. is
to absorb Y Ltd., in the nature of purchase, by issuing 5 shares of Rs. 10 each at a
premium of 10% for every 4 shares held in Y Ltd.
Liabilities
X Ltd
Rs.
Y Ltd
Rs.
Assets
X Ltd
Rs.
Y Ltd
Rs.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 100
Equity Shares of
Rs. 10 each
General Reserves
Creditors
100000
0
100000
200000
60000
0
80000
12000
0
Fixed Assets
Investments:
12000 shares in Y
Ltd.
10000 shares in X
Ltd.
Current Assets
80000
0
16000
0
34000
0
400000
120000
280000
130000
0
80000
0
13000
00
800000
Show the important ledger accounts in the books of Y Ltd and opening entries
in the books of X Ltd, assuming current assets of Y Ltd. are taken at Rs. 180000. Also
prepare the balance sheet of X Ltd. after absorption.
Solution:
Calculation of Purchase Consideration:
a) No. of shares held by outsiders (60000-12000) = 48000
No. of shares due to outsiders (48000x5/4) 60000
b) No. of shares due to X Ltd. (will not be issued)12000x5/4 15000
c) Total of (a) and (b) 75000
d) Less: Already held by Y Ltd. 10000
e) No. of shares constituting purchase consideration 65000
Purchase Consideration = 65000x Rs. 11 = Rs. 715000
Ledger Accounts in the books of Y Ltd.
Realisation Account
To Fixed Assets
To Current Assets’
To Shares in X Ltd.
(loss – 10000 shares @
Re.1)
To Equity Shareholders A/c
(Profit)
Rs.
400000
280000
10000
145000
By Sundry Creditors
By X Ltd. (Purchase
Consideration)
Rs.
120000
715000
835000
835000
X Ltd. Account
To Realisation A/c
Rs.
715000
By Shares in X Ltd. (50000xRs.
11)
By Equity Shareholders A/c
(15000xRs. 11) – set-off
Rs.
550000
165000
715000
715000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 101
Shares in X Ltd. Account
To Balance b/d
To X Ltd.
Rs.
120000
550000
By Realisation (Loss on
revaluation
10000xRe.1)
By Equity Shareholders A/c
Rs.
10000
660000
670000
670000
Equity Shareholders Account
To X Ltd. (set-off)
To Shares in X Ltd.
Rs.
165000
660000
By Equity Share Capital
By General Reserve
By Realisation A/c (Profit)
Rs.
600000
80000
145000
825000
825000
In the Books of X Ltd.
Journal Entries
Fixed Assets A/c
Dr
Current Assets A/c Dr
Goodwill A/c (Bal. Fig.)
Dr
To Sundry Creditors A/c
To Liquidators of Y Ltd. A/c
(purchase consideration due and assets and
liabilities taken over)
Rs.
400000
180000
255000
715000
5000
Rs.
120000
715000
500000
50000
165000
5000
Liquidators of Y Ltd. A/c Dr
To Equity Share capital A/c
(50000x10)
To Securities Premium A/c
(50000x1)
To Shares in Y Ltd
(payment of purchase consideration)
Shares in Y Ltd. A/c Dr
To Goodwill A/c (165000-160000)
(profit on revaluation of shares in Y Ltd.
credited to Goodwill A/c)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 102
Balance Sheet of X Ltd. (after absorption)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
Sundry Creditors(200000+120000)
Total
B. Assets
Non-current Assets
Fixed Assets
a. Tangible (800000+400000)
b. Intangible - Goodwill
Current Assets (340000+180000)
Total
1
2
1500000
150000
Nil
320000
1970000
1200000
250000
520000
1970000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
150000 Equity shares of Rs. 10 each, fully paid
Reserves and Surplus
General Reserve
Securities Premium
1500000
100000
50000
150000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 103
A. Short Answer Type questions
1. Define Amalgamation.
2. What do you mean by amalgamation in the nature of merger?
3. What is meant by amalgamation in the nature of purchase?
4. Define purchase consideration.
5. What do you mean by net worth method of purchase consideration?
B. Short Essay Type Questions
1. Distinguish between amalgamation in the nature of purchase and amalgamation
in the nature of merger.
2. What are the various methods for calculation of purchase consideration?
C. Practical Problems
1. X Ltd. agrees to absorb Y Ltd. in the nature of purchase on 31
st
March 2015 on
which date their liabilities and assets are as under:
Liabilities
X Ltd
(Rs.)
Y Ltd
(Rs.)
Assets
X Ltd
(Rs.)
Y Ltd
(Rs.)
Equity Share Capital
of
Rs. 10 each
Profit & Loss Account
Sundry Creditors
Bills Payable
20000
0
60000
75000
15000
10000
0
40000
35000
5000
Fixed Assets
Stock
Sundry Debtors
Bills Receivable
Bank
10000
0
93000
90000
47000
20000
70000
30000
50000
22000
8000
35000
0
18000
0
35000
0
18000
0
The purchase consideration is Rs. 160000 payable in equity shares of Rs. 10
each. The bills payables of X Ltd. include Rs. 8000 due to Y Ltd. and sundry debtors
of X Ltd. include Rs. 15000 due from Y Ltd. The stock of X Ltd. includes Rs. 11000
worth of goods purchased from Y Ltd. on which Y Ltd. made a profit of 10% on cost
and the stock of Y Ltd. includes Rs. 20000 worth of goods purchased from X Ltd. on
which X Ltd. made a profit of 10% on sale price.
Pass journal entries in the books of both the companies and prepare the balance sheet
of X Ltd. after absorption (Amalgamation in the nature of purchase).
(Answer: Profit on Realisation- Rs. 20000; Balance Sheet Total – Rs. 527000).
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 104
2. The liabilities and assets of Sky Ltd. and Blue Ltd. as on 1
st
January 2015 were
as under:
Liabilities
Sky
Ltd
(Rs.)
Blue
Ltd
(Rs.)
Assets
Sky
Ltd
(Rs.)
Blue
Ltd
(Rs.)
Equity Shares of
Rs. 10 each, fully
paid
Profit & Loss Account
6% Debentures
Sundry Creditors
50000
0
50000
50000
50000
100000
0
80000
Land and Building
Plant and
Machinery
Goodwill
Patents
Stock
Sundry Debtors
Cash at Bank
Profit & Loss
Account
30000
0
20000
0
50000
20000
20000
60000
400000
300000
50000
10000
100000
120000
50000
50000
65000
0
108000
0
65000
0
108000
0
Sky Ltd. and Blue Ltd. decided to amalgamate under the name of Sky Blue Ltd.
which was floated for the purpose with an authorized capital of 20000 shares of Rs.
100 each.
Sky Blue Ltd. took over all assets except cash at bank, but considered goodwill
of Blue Ltd. as valuables. It also agreed to take over trade creditors. For the purpose, it
agreed to issue fully paid shares to the liquidators of the two companies.
Give journal entries and ledger accounts in the books of Sky Ltd. and Blue Ltd.
and opening entries in the books of Sky Blue Ltd. Also show the balance sheet of Sky
Blue Ltd. after the amalgamation (Amalgamation in the nature of purchase).
(Answer: Sky Ltd. – Purchase Consideration – Rs. 490000, Loss on Realisation- Rs.
50000; Blue Ltd. – Purchase Consideration – Rs. 900000, Profit/Loss on Realisation-
Nil; Sky Blue Ltd. - Balance Sheet Total –Rs. 1520000).
3. Following are the liabilities and assets of P Ltd. and Q Ltd. P Ltd. is to absorb Q
Ltd., in the nature of purchase, by issuing 5 shares of Rs. 10 each at a premium of 10%
for every 4 shares held in Q Ltd.
Liabilities
P Ltd
Rs.
Q Ltd
Rs.
Assets
P Ltd
Rs.
Q Ltd
Rs.
Equity Shares of
Rs. 10 each
General Reserves
Creditors
160000
0
160000
320000
960000
128000
192000
Fixed Assets
Investments:
19200 shares in
Q Ltd.
16000 shares in P
128000
0
256000
640000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 105
Ltd.
Current Assets
544000
192000
448000
208000
0
128000
0
208000
0
128000
0
Show the important ledger accounts in the books of Q Ltd and opening entries
in the books of P Ltd, assuming current assets of Q Ltd. are taken at Rs. 288000. Also
prepare the balance sheet of P Ltd. after absorption.
(Answer: Purchase Consideration – 1144000; Profit on Realisation- Rs. 232000;
Balance Sheet Total – Rs. 3152000).
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 106
LESSON 4
ACCOUNTING FOR INTERNAL RECONSTRUCTION
There are two types or reconstruction, namely external reconstruction and
internal reconstruction. In external reconstruction, a new company is formed to take
over the assets and liabilities of an existing company which goes into liquidation. But
in internal reconstruction, there will be neither liquidation of an existing company nor
formation of a new company.
Internal reconstruction means an internal rearrangement that gives a new look to
the capital structure, adjusts the rights of shareholders, debenture holders and creditors
along with some adjustments in the values of assets and writing off fictitious assets.
Internal reconstruction may be done due to the accumulate losses, shortage of working
capital, overvaluation of assets etc.
Internal reconstruction
External reconstruction
1. The company does not loss its identity
1. The company losses its identity
2. The overvalued assets are revalued at
their net worth and the losses written off.
2. The newly formed company takes over
the assets and liabilities of the liquidated
company at agreed values.
3. No new company is formed nor is any
existing company liquidated. It is the
internal matter of a single company.
3. A new company is formed in place of
the old company.
4. Debenture holders, creditors and bank
overdraft may continue.
4. These parties will have to be settled.
1. Alteration of share capital.
2. Reduction of share capital.
3. Variation of shareholders’ rights.
4. Scheme of compromise.
According to Sec. 94 of the Companies Act, a limited company can, if
authorized by its articles of association, alter the capital clause of its memorandum of
association in any of the following ways.
a. By increasing its share capital by issue of new shares.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 107
b. By consolidating existing shares of smaller amounts into shares of larger
amo9unts.
c. By subdividing the existing share into shares of smaller amounts.
d. By converting fully paid shares into stock 0or stock into fully paid shares.
1. For increasing its share capital
i. Bank A/c Dr
To Share Application & Allotment A/c
ii. Share Application & Allotment A/c Dr
To Share Capital A/c
2. For consolidation of shares:
Share Capital (old) A/c Dr
To Share Capital (New) A/c
3. For subdivision of shares:
Share Capital (old) A/c Dr
To Share Capital (New) A/c
4. For conversion of shares into stock:
Share Capital A/c Dr
To Stock A/c
5. For conversion of stock into shares:
Stock A/c Dr
To Share Capital A/c
Illustration 1: A Ltd having a share capital of Rs.500000 divided into 5000 shares of
Rs.100 each, resolves to subdivide the shares into 50000 shares of Rs.10 each. Pass the
journal entry.
Solution:
Share Capital (Rs.100) A/c Dr 500000
To Share Capital (Rs.10) A/c 500000
Illustration 2: X Ltd resolves to convert its 50000 equity shares of Rs.10 each fully
paid into Rs.500000 worth of equity stock. Journalise the transaction.
Solution:
Equity Share Capital A/c Dr 500000
To Equity Stock A/c
500000
Illustration 3: B Ltd having an equity share capital of Rs.100000 divided into 10000
shares of Rs.10 each resolves to consolidate the shares into 1000 shares of Rs.100
each. Pass the journal entry.
Solution:
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 108
Equity Share Capital (Rs.10) A/c Dr 100000
To Equity Share Capital (Rs.100) A/c
100000
Reduction of capital is unlawful except when sanctioned by the court because
conservation of capital is one of the main principles the Company Act. In order to
reduce the share capital, the company must be authorized by its articles of association,
a special resolution must be passed at general meeting, and confirmation of court etc.
is required. A company can reduce its share capital by any of the following ways:
a. By reducing the liability of the shareholders for uncalled capital.
b. By paying off the surplus capital.
c. By reducing paid up capital which is not represented by available assets.
a. For reducing the liability in respect of uncalled capital:
Share Capital (old) A/c Dr
To Share Capital (New) A/c
b. For paying off surplus capital:
i. Share Capital A/c Dr
To Shareholders A/c
ii. Shareholders A/c Dr
To Bank A/c
c. For reducing or cancelling paid up capital which is not represented by available
assets:
i. For reducing paid up capital by changing its face value:
Share Capital (old) A/c Dr
To Share Capital (New) A/c
To Capital Reduction A/c
ii. For reducing paid up capital without changing its face value:
Share Capital A/c Dr (amount of reduced capital)
To Capital Reduction A/c
Capital Reduction Account is a new account opened for transferring that part of
capital which is lost or not represented by the assets. It is a temporary account opened
for carrying out internal reconstruction. This account will be closed as soon as the
scheme is carried out. The balance in Capital Reduction A/c can be used to write off
fictitious assets, past losses and excess value of assets. The entry is as follows:
Capital Reduction A/c Dr
To P&L A/c (Debit balance)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 109
To Goodwill A/c
To Preliminary Expenses A/c
To discount on issue of shares/ debentures A/c
To Patents/ Trademarks A/c
To Plant & Machinery A/c
To other Assets A/c
To Capital Reserve A/c (Bal. Fig)
Illustration 4: The following are the liabilities and assets of Brahma Ltd as on 31
st
March 2015.
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
5000 Equity shares of Rs.100
each fully paid
7500 10% Preference shares of
Rs.100 each fully paid
Sundry creditors
500000
750000
50000
Plant & Machinery
Patents
Stock in trade
Sundry debtors
Profit & Loss A/c
173000
850000
55000
77000
145000
1300000
1300000
The company suffered losses and the following scheme was adopted:
a. Equity shares are to be reduced to an equal number of shares of Rs.25 each.
b. The preference shares to be reduced to an equal number of shares of Rs.50 each.
c. The amount available to be used to write off Rs.39240 of plant and machinery
and Rs.15000 of stock in trade.
d. Made a provision of Rs.15300 for doubtful debt.
e. The balance being used to write off patents.
Journalise the transactions and prepare the balance sheet after reconstruction.
Solution:
Journal
2015
Mar
31
Equity Share Capital (Rs.100) A/c Dr
To Equity Share Capital (Rs.25) A/c
To Capital Reduction A/c
(reduction of equity share capital to Rs.25 each )
Rs.
500000
750000
750000
Rs.
125000
375000
375000
375000
145000
39240
15000
15300
535460
10% Preference Share Capital (Rs.100) A/c Dr
To Preference Share Capital (Rs.50) A/c
To Capital Reduction A/c
(reduction of preference share capital to Rs.50)
Capital Reduction A/c Dr
To P&L A/c
To Plant & Machinery A/c
To Stock in trade A/c
To Provision for doubtful debts A/c
To Patents (Bal. Fig)
(utilization of capital reduction A/c)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 110
Balance Sheet of X Ltd (After reconstruction) as on 1
st
April 2015
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
a. Trade Payables
Total
B. Assets
Non-current Assets
a. Fixed Assets
i. Tangible
ii. Intangible - Patents (850000-535460)
b. Non-current Investment
c. Other non-current Assets
Current Assets
Stock in trade (55000-15000)
Sundry debtors (77000-15300)
Total
1
2
3
4
5
500000
Nil
Nil
50000
550000
133760
314540
Nil
Nil
40000
61700
550000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
5.
Share Capital
Issued and Subscribed
5000 Equity shares of Rs.25each fully paid
7500 10% Preference shares of Rs.50 each fully paid
Reserves and Surplus
Non-current Liabilities
Trade Payables
Sundry Creditors
Fixed Assets – Tangible
Plant & Machinery(173000-39240)
125000
375000
500000
Nil
Nil
50000
133760
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 111
Illustration 5: The following are the liabilities and assets of Jay Ram Ltd as on 31
st
March 2015
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
10000 Equity shares of Rs.10
each fully paid
1000 7% Preference shares of
Rs.100 each fully paid
Sundry creditors
100000
100000
50000
Goodwill
Other Fixed assets
Current assets
Profit and loss A/c
25000
104000
95000
26000
250000
250000
It was decided that equity shares of Rs.10 each be reduced to shares of Rs.7
each and 7% preference shares of Rs.100 each be reduced to 8% preference shares of
Rs.75 each. The number of shares in each case is to remain the same. It was decided
that the amount so available be used for writing of the debit balance in P&L A/c,
goodwill A/c and with the balance for writing down the fixed assts. Journalise the
transactions and prepare the balance sheet after reconstruction.
Solution:
Journal
2015
Mar
31
Equity Share Capital (Rs.10) A/c Dr
To Equity Share Capital (Rs.7) A/c
To Capital Reduction A/c
(reduction of equity share capital to Rs.7
each)
Rs.
100000
100000
55000
Rs.
70000
30000
75000
25000
26000
25000
4000
7% Preference Share Capital (Rs.100) A/c
Dr
To 8%Preference Share
Capital(Rs.75)A/c
To Capital Reduction A/c
(reduction of preference share capital to
Rs.75)
Capital Reduction A/c
Dr
To P&L A/c
To Goodwill A/c
To Fixed assets A/c
(utilization of capital reduction A/c)
Balance Sheet as on 1 April 2015 (After reconstruction)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 112
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
a. Trade Payables
Total
B. Assets
Non-current Assets
a. Fixed Assets
i. Tangible
ii. Intangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Total
1
2
3
4
5
145000
Nil
Nil
50000
195000
100000
Nil
Nil
Nil
95000
195000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
3.
4.
5.
Share Capital
Issued and Subscribed
10000 Equity shares of Rs.7each fully paid
1000 8% Preference shares of Rs.75 each fully paid
Reserves and Surplus
Non-current Liabilities
Trade Payables
Sundry Creditors
Fixed Assets – Tangible
Fixed assets (104000-4000)
70000
75000
145000
Nil
Nil
50000
100000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 113
Under this, the shareholders rights are altered by changing the rate of dividend
or changing the classes of shares. For example, it can be done by changing the
cumulative preference shares to non-cumulative preference shares or from 10%
preference shares into 7% preference shares etc.
Here a compromise or arrangement is made with creditors or debenture holders
while settling their liabilities. This scheme involves the following:
1. For sacrifice by debenture holders:
Debentures A/c Dr (with amount sacrificed)
To Capital Reduction A/c
2. For exchange of debentures for new debentures or shares:
Debentures A/c (old) Dr
To Debentures/ Share Capital A/c (New)
3. For sacrifice by creditors:
Creditors A/c Dr (with amount sacrificed)
To Capital Reduction A/c
4. For agreement to receive shares or debentures in settlement of claims of
creditors:
Creditors A/c Dr
To Share Capital/ debentures A/c
1. For appreciation of fixed assets:
Fixed assets A/c Dr (with amount of appreciation)
To Capital Reduction A/c
2. For expense incurred on reconstruction:
Capital Reduction A/c Dr
To Bank A/c
Illustration 6: The liabilities and assets of Gloomy Ltd as on 31 March 2015 was as
follows:
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
4000 Equity shares of Rs.100
each fully paid
2000 5% Preference shares of
Rs.100 each fully paid
6% Debentures
Bank overdraft
400000
200000
100000
35000
Goodwill
Freehold premises
Plant & Machinery
Stock in trade
Sundry debtors
Cash in hand
15000
200000
300000
50000
40000
5000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 114
Sundry creditors
100000
Profit & Loss A/c
225000
835000
835000
The company has got the following scheme of capital reduction approved by the
court:
a. Preference shares to be reduced to Rs.60 per share fully paid up and equity
shares to Rs.40 per share fully paid up.
b. The debenture holders to take over stock in trade and book debts in full
satisfaction of the amount due to them.
c. The value of freehold premises to be increased by 10%.
d. The value of plant and machinery to be depreciated by 33 1/3 %.
e. The goodwill account to be eliminated.
f. Expenses of reconstruction amounted to Rs.4000.
Journalise the transactions and prepare the balance sheet after reconstruction.
Solution:
Journal
2015
Mar
31
Equity Share Capital (Rs.100) A/c Dr
To Equity Share Capital (Rs.40) A/c
To Capital Reduction A/c
(reduction of equity share capital to Rs.40 each
)
Rs.
400000
200000
100000
20000
350000
Rs.
160000
240000
120000
80000
50000
40000
10000
20000
5% Preference Share Capital (Rs.100) A/c Dr
To 5%Preference Share Capital(Rs.60)A/c
To Capital Reduction A/c
(reduction of preference share capital to Rs.60)
6% Debentures A/c Dr
To Stock in trade A/c
To Sundry debtors A/c
To Capital Reduction A/c (Bal. Fig)
(stock and debtors taken over by debenture
holders)
Freehold premises A/c Dr
To Capital Reduction A/c
(Freehold premises appreciated by 10%)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 115
Capital Reduction A/c Dr
To P&L A/c
To Goodwill A/c
To Plant and machinery A/c
To Bank A/c (expenses)
To Capital Reserve A/c
(utilization of capital reduction A/c)
15000
225000
100000
4000
6000
Balance Sheet as on 1 April 2015 (After reconstruction)
Particulars
Note
No.
Amount
(Rs.)
A. Equity and Liabilities
Shareholders’ Fund
a. Share Capital
b. Reserves and Surplus
Non-current Liabilities
Current Liabilities
a. Trade Payables
Total
B. Assets
Non-current Assets
a. Fixed Assets
i. Tangible
ii. Intangible
b. Non-current Investment
c. Other non-current Assets
Current Assets
Cash in Hand (5000-4000)
Total
1
2
3
4
5
280000
6000
35000
100000
421000
420000
Nil
Nil
Nil
1000
421000
Notes to Accounts
Note No.
Particulars
Amount
(Rs.)
1.
2.
Share Capital
Issued and Subscribed
4000 Equity shares of Rs.40each fully paid
2000 5% Preference shares of Rs.60 each fully paid
Reserves and Surplus
Capital Reserve
160000
120000
280000
6000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 116
3.
4.
5.
Non-current Liabilities
Bank Overdraft
Trade Payables
Sundry Creditors
Fixed Assets – Tangible
Freehold Premises (200000+20000)
Plant & Machinery(300000-100000)
35000
100000
220000
200000
420000
Under reconstruction, the shareholders may be required to surrender a part of
their share holdings. Such surrendered shares may be reissued to other parties
(creditors, debenture holders etc.) in whole or in part satisfaction of their claims. The
entries required are as follows:
1. On surrender of shares:
Share capital A/c Dr
To Surrendered shares A/c
2. On reissue of surrendered shares:
Surrendered shares A/c Dr
To Share capital A/c
3. On cancellation of unissued surrendered shares:
Surrendered shares A/c Dr
To Capital Reduction A/c
Illustration 7: A company has equity share capital of Rs.1000000 consisting 10000
shares of RS.100 each. It is resolved
a. To subdivide the shares into shares of Rs.10 each
b. To ask their shareholders to surrender 50% of their shares
c. To issue 60% of the surrendered shares to 15% debenture holders of Rs.400000
in full settlement of their claims
d. To cancel the unissued surrendered shares.
Give entries in the books of the company.
Solution:
Journal
Equity Share Capital (Rs.100) A/c Dr
To Equity Share Capital (Rs.10) A/c
(subdivision of equity shares into Rs.10 each )
Rs.
1000000
500000
Rs.
1000000
500000
Equity Share capital A/c Dr
To Surrendered shares A/c
(50% of shares surrendered)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 117
Surrendered shares A/c Dr
15% Debentures A/c Dr
To Equity Share capital A/c
To Capital Reduction A/c
(issue of 60% surrendered shares to debenture
holders in full settlement of their claims)
300000
400000
200000
300000
400000
200000
Surrendered Shares A/c
Dr
To Capital Reduction A/c
(cancellation of unissued surrendered shares)
A. Short Answer Type questions
6. What do you mean by internal reconstruction?
7. What is Capital Reduction account?
8. What do you mean by surrender of shares?
B. Short Essay Type Questions
3. Distinguish between internal reconstruction and external reconstruction.
4. How will alter the share capital of a company?
C. Essay Type Questions
3. Write an essay on forms or methods of internal reconstruction.
D. Practical Problems
1. The following are the liabilities and assets of Jaya Ltd as on 31
st
March 2015
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
15000 Equity shares of Rs.10
each fully paid
1500 12% Preference shares
of Rs.100 each fully paid
Sundry creditors
150000
150000
100000
Land and Building
Machinery
Stock
Debtors
Cash at Bank
Profit and loss A/c
145000
35000
25000
40000
5000
150000
400000
400000
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It was decided that equity shares of Rs.10 each be reduced to shares of Rs.4
each and 12% preference shares of Rs.100 each be reduced to 12% preference shares
of Rs.40 each. The number of shares in each case is to remain the same. It was decided
that the amount so available be used for writing down stock by Rs. 10000, writing off
the debit balance in P&L A/c, reducing the machinery by Rs. 10000 and with the
balance for providing the provision for bad debts against sundry debtors.
Journalise the transactions and prepare the balance sheet after reconstruction.
(Answer: Total Capital Reduction – Rs. 180000; Balance Sheet Total – Rs. 220000).
2. The following are the liabilities and assets of Ghosh Ltd as on 31
st
December 2014
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Equity shares of Rs.10 each
10% Preference shares of
Rs.100 each fully paid
Reserve
11% Debentures of Rs. 100
each
Creditors
500000
200000
226750
100000
137250
Fixed Assets
Stock
Debtors
Cash
Profit and loss A/c
233500
406200
233750
12300
278250
1164000
1164000
The company after the approval of the court puts the following scheme of
reconstruction:
a) Each existing preference share is to be reduced to Rs. 35, of which Rs. 20 will
be represented by new 12% preference shares and Rs. 15 by new equity shares.
b) Each debenture of Rs. 100 is to be exchanged for Rs. 50 of new 13% debenture,
one new 12% preference shares of Rs. 25 ach and four new equity shares of Rs. 2.50
each.
c) Each existing equity share is to be reduced to Rs. 2.50.
The reduction of capital and reserves are utilized for writing off losses, 50%
stock and debtors and balance, if any, is used for writing-down fixed assets. Show the
necessary journal entries and draw the revised balance sheet.
(Answer: Hint – Reserve is transferred to Capital Reduction A/c; Total Capital
Reduction – Rs. 746750; Balance Sheet Total – Rs. 417250).
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LESSON 5
LIQUIDATION OF COMPANIES
A company comes into existence through a legal process and also a company
can comes to an end by law. Some legal formalities are required to close the affairs of
a company. Such legal procedures can be called as liquidation of companies.
Simply, liquidation or winding up is the legal procedure by which a company
comes to its end. Liquidation or winding up of a company can be defined as “the
process whereby its life is ended and its property is administered for the benefit of its
creditors and members”. An administrator, namely a Liquidator, is appointed and he
takes control of the company, collects its assets, pays its debts and finally distributes
any surplus among the members in accordance with their rights.
Unlike an insolvent individual or partnership firm, insolvency proceedings are
not applicable to a company.A solvent as well as insolvent company may be
liquidated.
According to section 271 of the Companies Act, 2013 a company can be
liquidated or wound up in the following ways:
a) By the Tribunal
b) Voluntary
Notwithstanding anything contained in any other Act, the provisions of this Act
with respect to winding up shall apply to the winding up of a company in any of the
modes specified under this section.
As per section 271 of the Companies Act 2013, in the following circumstances a
company may be wound up by the Tribunal:
(1) A company may, on a petition under section 272, be wound up by the Tribunal
(a) if the company is unable to pay its debts;
(b) if the company has, by special resolution, resolved that the company be wound
up by the Tribunal;
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(c) if the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order,
decency or morality;
(d) if the Tribunal has ordered the winding up of the company under Chapter XIX
(of the Companies Act, 2013 dealing with revival and rehabilitation of sick
companies);
(e) if on an application made by the Registrar or any other person authorised by the
Central Government by notification under this Act, the Tribunal is of the opinion that
the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose or the persons concerned in
the formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company we wound
up;
(f) if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial
years; or
(g) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound up.
Contributoryis a person liable to contribute to the assets of the company in the
event of winding up. A contributory’s liability is legal, not contractual. A contributory
can be either a present member or a past member.
1. Present Members (‘A’ List of Contributories)
A present member is that member whose name is included in the register of
members when the company is wound up. He is liable to contribute the amount
remaining unpaid on the shares held by him if the amount is needed to make the
payment to the legal claimant. In the case of company limited by guarantee, he is
liable for the payment of guaranteed amount at the time of winding up.
2. Past Members (‘B’ List of Contributories)
Past members are those members who ceased to be shareholders (except by
death) within one year of winding up of the company and can be called upon to pay, if
the present contributories are not able to pay the liabilities of the company. Section
285 of the Companies Act, 2013 provides that:
(a) A past member is not liable to contribute in respect of any liability of the
company contracted after he ceased to be a member of the company.
(b) A past member is not liable to contribute if he ceased to be a member of the
company for one year or upward before the commencement of the winding up.
(c) A past member is liable to contribute only if it appears to the Tribunal that
present members are unable to make the contributions required to be made by them in
pursuance of the Companies Act.
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(d) In the case of a company limited by shares, no contribution is required from any
member excluding the amount (if any) unpaid on the shares in respect of which he is
liable as such member.
(e) In the case of a company limited by guarantee, no contribution is required from
any member excluding the amount undertaken to be contributed by him in the event of
the company being wound up.
A liquidator is the person who is appointed for the purpose of liquidating the
company. The main job of a liquidator is to realise all assets of the liquidating
company, collects the amount due from the contributories and distribute the sale
proceeds of assets of the company among the right claimants. The company must
submit a Statement of Affairs to the liquidator within 21 days of the passing of the
winding up order.
In case of winding up of a company by the Tribunal, the Tribunal at the time of
passing of the order of winding up, shall appoint an Official Liquidator or a liquidator
from the panel maintained by the Central Government consisting of the names of the
Chartered Accountants, advocates, Company Secretaries, Cost Accountants and such
other professional as may be notified by the Central Government having atleast 10
years’ experience in company matters.
In case of voluntary winding up, the voluntary liquidator is appointed by
resolution in general body meeting of the members and or of the creditors.
The amounts realised from the assets not specifically pledged and the amounts
contributed by the contributories must be distributed in the following order of
preference:
1. Expenditure of winding up incl. liquidator’s remuneration.
2. Creditors (Debentures etc.) secured by a floating charge on the assets of the
company.
3. Preferential Creditors.
4. Unsecured Creditors.
5. Surplus, if any among contributories (Preference shareholders and equity
shareholders) according to their respective rights and interests
Preferential creditors are unsecured creditors, having priority of claims over
other unsecured creditors, not because of any security held by them but because of the
provisions in the Companies Act. They are:
a) All revenues, taxes, cesses and rates, payable to the Government or local
authority, due and payable by the company within 12 months before the date of
commencement of winding up.
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b) All wages or salaries (including commission) of any employee in respect of
services rendered to the company and due for a period not exceeding four months
within the said 12 months before the relevant date.
c) All sums due as compensation under Workmen Compensation Fund Act, from a
provident fund, pension fund, gratuity fund or any other employee welfare fund.
Where the court has made a winding up order or appointed the official
liquidator as provisional liquidator unless the court in its otherwise order, a statement
as to the affairs of the company shall be made out and submitted to the official
liquidator. This statement is known as a statement of affairs. This statement is to be
submitted to the liquidator within 21 days from the date of winding up order. It is
always open to inspection to the contributories or creditors of the company, on
payment of a prescribed fee.
Statement as to the affairs of …Ltd., on the… day of …..20…. being the date of
the winding up order appointing Provisional Liquidator or the date directed by the
Official Liquidator as the case may be showing assets of estimated realisable values
and liabilities expected to rank.
Assets not specifically pledged (as per list ‘A’)
Balance at Bank
Cash in Hand
Marketable Securities
Bills Receivables
Trade Debtors
Loans and Advances
Unpaid Calls
Stock in Trade
Work in Progress
-----------------------
-----------------------
Freehold Property, Land and Buildings
Leasehold Property
Plant and machinery
Furniture, Fittings, Utensils etc.
Investments other than marketable securities
Livestock
Other Property, viz.,
-----------------------
Estimated
Realisable
Value
(Rs.)
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-----------------------
Assets specifically pledged (as per list ‘B’)
Total
(a)
Estimated
realisable
values
(Rs.)
---------------
---------------
(b)
Due to
Secured
Creditors
(Rs.)
---------------
---------------
(c)
Deficiency
ranking as
unsecured
(Rs.)
---------------
---------------
(d)
Surplus carried
to last column
(Rs.)
---------------
---------------
Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors, debenture holders
secured by a floating charge, and unsecured creditors (carried forward)
SUMMARY OF GROSS ASSETS
Gross realisable value of assets specifically pledged Rs. ……..
Other Assets Rs. …….
Gross Assets Rs………
----------
----------
-----------
Gross
Liabilities
(Rs.)
----------
----------
Liabilities
(to be deducted from surplus or added to deficiency as the case
may be)
Secured creditors (as per list ‘B’) to the extent to which claims
are estimated to be covered by assets specifically pledged item
(a) or (b) whichever is less [insert in Gross Liabilities column
only]
Preferential creditors (as per list ‘C’)
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----------
----------
----------
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors.
Debenture holders secured by a floating charge (as per list ‘D’)
Estimated Surplus/ Deficiency as regards debenture holders
Unsecured creditors (as per list ‘E’)
Estimated unsecured balance of claims of creditors partly secured
on specific assets, brought from preceding page.
Trade Accounts ------
Bills Payables ------
Outstanding Expenses ------
Contingent liabilities (state nature) ------
Estimated Surplus/ Deficiency as regards creditors (being
difference between Gross Assets and Gross Liabilities)
Issued and Called-up Capital:
Preference Shares of …… each
Called-up (as per list ‘F’)
Equity Shares of …. Each
Called-up (as per list ‘G’)
Estimated Surplus/Deficiency as regards members (as per list
‘H’)
-----------
-----------
-----------
-----------
----------
-----------
-----------
-----------
-----------
-----------
As per the Companies Act, the following lists are to be attached to the
Statement of Affairs:
1. List ‘A’ – A complete list of assets not specifically pledged.
2. List ‘B’ – A list of assets which are specifically pledged in favour of fully
secured and partly secured creditors.
3. List ‘C’ – A list of preferential creditors.
4. List ‘D’ – A list of debenture holders and other creditors having a floating
charge on the assets of the company.
5. List ‘E’ – A list containing the names, addresses and occupations of unsecured
creditors and the amount due.
6. List ‘F’ – A list containing names and number and value of shares held by
various preference shareholders.
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7. List ‘G’- A list showing the names and holdings of equity shareholders.
8. List ‘H’ – A list showing the surplus or deficiency in the Statement of Affairs
that has been arrived at.
The following points are to be kept in mind while preparing the Statement of
Affairs:
1. Assets which are not specifically pledged are taken first. These assets are to be
taken at realisable values. Calls in arrears are also treated as assets not specifically
pledged. The uncalled capital is not shown as an asset.
2. If there is any surplus from assets specifically pledged that should be added with
the realisable value of assets not specifically pledged.
3. From the resulting figure deduct the amount of preferential creditors.
4. Then deduct the amount of creditors having floating charge (E.g. Debenture
holders). The balance will be surplus or efficiency as regards debenture holders.
5. From the balance amount obtained, deduct the amount of unsecured creditors.
The resultant figure will be either surplus or deficiency as regards unsecured creditors.
6. If the balance amount is surplus, the share capital is to be deducted out of that
amount or if it is deficiency, the share capital is to be added with the amount. The
resultant figure may be surplus or deficiency as regards members or contributories.
Illustration 1: The following information were extracted from the books of a limited
company on 31
st
March 2015 on that date a winding up order was made:
Rs.
Cash in hand 6000
Stock in trade (Estimated to produce Rs. 18000) 24000
Furniture and fittings(Estimated to produce Rs. 2520) 3600
Plant and machinery (Estimated to produce Rs. 18720) 18000
Freehold land and buildings (Estimated to produce Rs. 54000) 36000
Book debts (Estimated to produce Rs. 6240) 7440
Unsecured creditors 84000
Preferential creditors 2400
Creditors fully secured (Value of securities Rs. 13200) 10800
Creditors partly secured (Value of securities Rs. 7200) 12000
Bank overdraft secured by a second charge on all assets of company 9600
10% Debentures secured by floating charge (interest paid to date) 60000
Equity share capital – 7200 shares of Rs. 10 each 72000
11% Preference share capital – 7800 shares of Rs. 10 each 78000
Calls in arrears on equity shares (Estimated to produce Rs. 1200) 3000
Prepare a Statement of Affairs as regards creditors and contributories.
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Solution:
Statement of Affairs
as on 31
st
March 2015
Assets not specifically pledged (as per list ‘A’)
Cash in Hand
Sundry Debtors
Calls in arrears
Stock in Trade
Freehold Land and Buildings
Plant and machinery
Furniture and Fittings
Assets specifically pledged (as per list ‘B’)
Estimated
Realisable
Value (Rs.)
6000
6240
1200
18000
54000
18720
2520
106680
Security
Security
Total
(a)
Estimated
realisable
values
(Rs.)
13200
7200
(b)
Due to
Secured
Creditors
(Rs.)
10800
12000
(c)
Deficiency
ranking as
unsecured
(Rs.)
-------
4800
(d)
Surplus carried
to last column
(Rs.)
2400
-------
20400
22800
4800
2400
Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors, debenture holders
secured by a floating charge, and unsecured creditors (carried forward)
SUMMARY OF GROSS ASSETS
Gross realisable value of assets specifically pledged Rs. 20400
Other Assets Rs. 106680
Gross Assets Rs. 127080
2400
109080
Gross
Liabilities
(Rs.)
18000
Liabilities
(to be deducted from surplus or added to deficiency as the case
may be)
Secured creditors (as per list ‘B’) to the extent to which claims
are estimated to be covered by assets specifically pledged item
(a) or (b) whichever is less [insert in Gross Liabilities column
only]
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2400
69600
88800
178800
Preferential creditors (as per list ‘C’)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors.
Debenture holders secured by a floating charge (as per list ‘D’):
Debenture holders 60000
Bank Overdraft 9600
Estimated Surplus as regards debenture holders
Unsecured creditors (as per list ‘E’)
Unsecured Creditors 84000
Unsecured balance of partly secured 4800
Estimated Deficiency as regards creditors (being difference
between Gross Assets and Gross Liabilities)
Issued and Called-up Capital:
7800, 11% Preference Shares of Rs. 10 each
Called-up (as per list ‘F’)
7200 Equity Shares of 10 Each
Called-up (as per list ‘G’) 72000
Less: Calls in arrears 1800
Estimated Deficiency as regards members (as per list ‘H’)
2400
106680
69600
37080
88800
51720
78000
70200
199920
Illustration 2: Mr. Sharma is appointed as the liquidator of Sun Ltd. in voluntary
liquidation on 1
st
July 2015. The following are the balances extracted from the books
on that date:
Debit Balances
Rs.
Credit Balances
Rs.
Machinery
Leasehold Properties
Stock in trade
Book Debts
Investments
Calls in arrears
Cash in hand
Surplus A/c (Negative Bal.)
49500
66000
1650
99000
9900
8250
1650
57750
Capital:
26400 Equity shares of Rs.5
each
Reserves for bad debts
Debentures
Bank Overdraft
Liabilities for purchases
132000
16500
82500
29700
33000
293700
293700
Prepare a statement of affairs to be submitted in the meeting of the creditors.
The following assets are valued as under:
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Machinery Rs. 99000; leasehold properties Rs. 119900; investments Rs. 6600,
and stock in trade Rs. 3300.
Bad debts are Rs. 3300 and the doubtful debts are Rs. 6600 which are estimated
to realise Rs. 3300. The bank overdraft is secured by deposit of title deeds of leasehold
properties. Preferential creditors are Rs. 1650. Telephone rent outstanding Rs. 132.
Solution:
Statement of Affairs of Sun Ltd.
as on 1
st
July 2015
Assets not specifically pledged (as per list ‘A’)
Cash in Hand
Book Debts
Calls in arrears
Stock in Trade
Machinery
Investments
Assets specifically pledged (as per list ‘B’)
Estimated
Realisable
Value (Rs.)
1650
92400
8250
3300
99000
6600
211200
Leasehold
Properties
Total
(a)
Estimated
realisable
values
(Rs.)
119900
(b)
Due to
Secured
Creditors
(Rs.)
29700
(c)
Deficiency
ranking as
unsecured
(Rs.)
-------
(d)
Surplus carried
to last column
(Rs.)
90200
119900
29700
-------
90200
Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors, debenture holders
secured by a floating charge, and unsecured creditors (carried forward)
SUMMARY OF GROSS ASSETS
Gross realisable value of assets specifically pledged Rs. 119900
Other Assets Rs. 211200
Gross Assets Rs. 331100
90200
301400
Gross
Liabilities
(Rs.)
Liabilities
(to be deducted from surplus or added to deficiency as the case
may be)
Secured creditors (as per list ‘B’) to the extent to which claims
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29700
1650
82500
33132
146982
are estimated to be covered by assets specifically pledged item
(a) or (b) whichever is less [insert in Gross Liabilities column
only]
Preferential creditors (as per list ‘C’)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors.
Debenture holders secured by a floating charge (as per list ‘D’):
Estimated Surplus as regards debenture holders
Unsecured creditors (as per list ‘E’)
Liability for purchases 33000
Telephone rent outstanding 132
Estimated Surplus as regards creditors (being difference between
Gross Assets and Gross Liabilities)
Issued and Called-up Capital:
26400 Equity Shares of Rs. 5 Each
Called-up (as per list ‘G’)
Estimated Deficiency as regards members (as per list ‘H’)
1650
299750
82500
217250
33132
184118
132000
52118
The official liquidator will specify a date for period (not less than three years)
beginning with the date on which information is supplied for preparation to an
account, to explain the deficiency or surplus. On that date either assets could exceed
capital plus liabilities (or reserve) or there could be deficit or negative balance in
Surplus Account. Deficiency Account is divided into two parts as follows:
1. The first part starts with the deficit on the given date, and contains every item
that increases deficiency or reduce surplus such as losses, dividend etc.
2. The second part starts with the surplus on the given date and indicates all
profits.
If the total of the first exceeds that of the second, there could be a deficiency to
the extent of the difference and if the total of the second part exceeds that of the first,
there could be a surplus.
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Items contributing to Deficiency or Reducing Surplus:
1. Excess (if any) of Capital and Liabilities over Assets on the
….20.. as shown by Balance Sheet(copy annexed)
2. Net dividend and bonus declared during the period from……20..
to the date of statement.
3. Net trading losses (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 (give
particulars or annex schedule)
5. Estimated losses now written 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
Total
Items reducing Deficiency or Contributing to Surplus:
7. Excess (if any) of Assets over Capital and Liabilities on the
…20… as shown in the Balance Sheet (copy annexed)
8. Net trading profit (after charging items show in note below) for
the period from the ….20… to the date of statement.
9. Profits and income other than trading profits during the same
period (give particulars or annex schedule)
10. Other items reducing Deficiency or contributing to Surplus
Total
Deficiency or Surplus as shown by the Statement
Rs.
Note: as to Net Trading Profits and Losses:
1. Provision for depreciation, renewals or diminution in value of fixed assets.
2. Charges for Indian income tax and other Indian taxation on profits.
3. Interest on debentures and other fixed loans.
4. Payments to directors made by the company and required by law to be disclosed
in the accounts.
Exceptional or non-recurring expenditure Rs……….
Less: Exceptional non-recurring receipts Rs ………
Balance being other trading profits or losses Rs……….
Net trading profits or losses as shown in Deficiency or Surplus Account above.
Note: In case the company in liquidation has not maintained proper books of accounts
after a certain date, a trial balance should be prepared with the available information
by taking items at their book values. Any difference found in the trial balance is the
profit or loss made by the company during the period the company did not maintain
books of accounts.
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Illustration 3:A compulsory winding up order was made against Mayoori Ltd. on 31
st
January 2015. The following particulars are given:
Cash in hand Rs. 130
Debtors (estimated to produce Rs. 4680) Rs. 5200
Land and Building (estimated to produce Rs. 62400) Rs. 78000
Furniture Rs. 26000
Unsecured Creditors Rs. 26000
Debentures (Secured on Land and Building) Rs.
54600
Debentures (Secured on floating charge) Rs. 13000
Preferential Creditors Rs.
7800
Share Capital – 4160 shares of Rs. 100 each Rs.
416000
Estimated liability for bills discounted was Rs. 7800, estimated to rank at Rs.
7800. Other contingent liabilities were Rs. 15600, estimated to rank at Rs. 15600.
The company was formed on 1
st
January 2010 and has made losses of Rs.
408070. Prepare Statement of Affairs and Deficiency Account.
Solution:
Statement of Affairs of Mayoori Ltd.
as on 1
st
January 2015
Assets not specifically pledged (as per list ‘A’)
Cash in Hand
Debtors
Furniture
Assets specifically pledged (as per list ‘B’)
Estimated
Realisable
Value (Rs.)
130
4680
26000
30810
Land and
Building
Total
(a)
Estimated
realisable
values
(Rs.)
62400
(b)
Due to
Secured
Creditors
(Rs.)
54600
(c)
Deficiency
ranking as
unsecured
(Rs.)
-------
(d)
Surplus carried
to last column
(Rs.)
7800
62400
54600
-------
7800
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Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors, debenture holders
secured by a floating charge, and unsecured creditors (carried forward)
SUMMARY OF GROSS ASSETS
Gross realisable value of assets specifically pledged Rs. 62400
Other Assets Rs. 30810
Gross Assets Rs. 93210
7800
38610
7800
30810
13000
17810
49400
31590
416000
447590
Gross
Liabilities
(Rs.)
54600
7800
13000
49400
124800
Liabilities
(to be deducted from surplus or added to deficiency as the case
may be)
Secured creditors (as per list ‘B’) to the extent to which claims
are estimated to be covered by assets specifically pledged item
(a) or (b) whichever is less [insert in Gross Liabilities column
only]
Preferential creditors (as per list ‘C’)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors.
Debenture holders secured by a floating charge (as per list ‘D’):
Estimated Surplus as regards debenture holders
Unsecured creditors (as per list ‘E’)
Unsecured Creditors 26000
Liability for Bills Discounted 7800
Contingent Liabilities 15600
Estimated Deficiency as regards creditors (being difference
between Gross Assets and Gross Liabilities)
Issued and Called-up Capital:
4160 Equity Shares of Rs. 100 Each
Called-up (as per list ‘G’)
Estimated Deficiency as regards members (as per list ‘H’)
Deficiency Account (List H)
Rs.
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Items contributing to Deficiency:
Excess of capital and liabilities over assets
Estimated losses now written off for which provision has been made for the
purpose of preparing the statement:
Land and Building 15600
Debtors 520
Contingent liabilities (7800 + 15600) 23400
Items reducing Deficiency:
Deficiency as shown by the Statement of Affairs
408070
39520
447590
Nil
447590
The main job of liquidator is to collect the assets of the company and realise
them and distribute it among right claimants.He maintains a cash book for recording
the receipts and payments and submit an abstract of cash book to the court (incase
winding up by the Tribunal), and to the company (in case of voluntary winding up).
The liquidator also prepares an account of winding up. Such an account is called as
Liquidator’s Final Statement of Account.
All the receipts are shown on the debit side of this account. They include the
following:
a) Amount realised on sale of assets.
b) Amount received from delinquent directors and other officers of the company.
c) Contributions made by the contributories.
On the credit side of this account the following payments are shown in the given
order:
a) Payment of secured creditors and dues to workmen upto their claim or upto the
amount of securities held by secured creditors.
b) Cost of winding up (legal charges).
c) Liquidator’s remuneration.
d) Payment to creditors having a floating charge on the assets of the company.
e) Payment of preferential creditors.
f) Payment of unsecured creditors.
g) Amount paid to preference shareholders.
h) Amount paid to equity shareholders.
In the preparation of Liquidator’s Final Statement of Account, the principle of
double entry is not involved. It is only a statement although presented in the form of an
account.
Receipts
Amount
Payments
Amount
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 134
Rs.
Rs.
Assets:
Cash at Bank
Cash in Hand
Marketable Securities
Bills Receivables
Trade Debtors
Loans and Advances
Stock in Trade
Work in Progress
Freehold Property
Leasehold Property
Plant and Machinery
Furniture, Fittings, Utensils
etc.
Patents, Trade Marks etc.
Investments other than
Marketable Securities
Surplus from Securities
Unpaid calls at
commencement of
winding up
Amount received from calls
on
contributories made in the
winding up
Other Property
Legal Charges
Liquidator’s remuneration:
% on amount realised
% on amount distributed
Liquidation Expenses or
Cost of
Winding up
Debenture holders or other
creditors having a floating
charge on the assets of the
company
Preferential Creditors
Other Unsecured Creditors
Preference Shareholders
(Refund of Capital)
Equity Shareholders
(Refund of Capital)
A liquidator gets remuneration in the form of commission. It is paid as a
percentage of the assets realised as well as a certain percentage of the payments made
to unsecured creditors. The following points are relevant while calculating liquidator’s
remuneration:
1. Commission on assets given as securities to secured creditors – The
liquidator gets commission on the surplus from such assets left after making the
payment of secured creditors because he makes an effort of realising the surplus of
such assets from secured creditors. However, if he sells the assets himself, he gets
commission on the total proceeds of such assets.
2. Cash and Bank Balance – If the liquidator is to get a commission on cash and
bank balance unless otherwise stated.
3. Unsecured Creditors – If the liquidator is to get a commission on amount paid
to unsecured creditors, unsecured creditors will also include preferential creditors for
the purpose of calculation of remuneration unless otherwise stated.
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Advanced Corporate Accounting Page 135
If amount available is sufficient to make the full payment of unsecured
creditors, the commission can be calculated as follows:
=
%
100
If the amount available is not sufficient to make the full payment on secured
creditors, the commission can be calculated as follows:
=
%
100 + %
Illustration 4: A liquidator is entitled to receive remuneration @ 3% of the assets
realised and 2% on the amount distributed among the unsecured creditors. The assets
realised Rs. 8400000 against which payment was made as under:
Cost of liquidation Rs. 60000, Preferential Creditors Rs. 180000, Secured
Creditors Rs. 4800000 and Unsecured Creditors Rs. 3600000.
Calculate the liquidator’s remuneration.
Solution:
Calculation of Liquidator’s Remuneration
a. Liquidator’s commission on assets realised (8400000x3/100)
b. Liquidator’s commission on amount paid to preferential creditors
(180000x2/100)
c. Liquidator’s commission on amount distributed among unsecured
creditors (3104400x2/102)
Total Liquidator’s Remuneration
Rs.
252000
3600
60871
316471
Working Note:
Calculation of amount available to Unsecured Creditors
Total assets realised
Less: Cost of liquidation
Preferential creditors
Secured creditors
3% commission on assets realised
2% commission on amount paid to preferential creditors
Amount available to unsecured creditors
Rs.
60000
180000
4800000
252000
3600
Rs.
8400000
5295600
3104400
Illustration 5: Prepare the Liquidator’s Final Statement of Account of a limited
company went into voluntary liquidation, with the following liabilities:
Trade Creditors
Bank Overdraft
Capital:
14000 Preference shares of Rs. 100 each, Rs.7 called up
Rs.
Rs.
16800
28000
98000
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Advanced Corporate Accounting Page 136
14000 Equity shares of Rs. 10 each, Rs. 9 called up
Less: Calls in arrears
Cash received in anticipation of calls:
On preference shares
On equity shares
126000
2800
33600
5600
123200
39200
The assets realised Rs. 280000. Cost of liquidation amounted to Rs. 2800.
Liquidator’s remuneration Rs. 4200.
Solution:
Liquidator’s Final Statement of Account
Receipts
Amount
Rs.
Payments
Amount
Rs.
Assets Realised
Calls in Arrears
280000
2800
Cost of Liquidation
Liquidator’s Remuneration
Bank Overdraft
Trade Creditors
Calls in advance
Preference Shareholders
Equity Shareholders
@ Rs. 6.70 per share (Bal.
Fig)
2800
4200
28000
16800
39200
98000
93800
282800
282800
Illustration 6: The liabilities and assets of Kaloor Ltd as on 31
st
March 2015 are as
follows:
Liabilities
Amount
Rs.
Assets
Amount
Rs.
Share Capital:
Authorised and Subscribed:
6400, 6% Preference Shares
of
Rs. 100 each
3200 Equity shares of Rs.
100
each, Rs. 75 per share paid
up
9600 Equity Shares of Rs.
100
each, Rs. 60 per share paid
up
5% Debentures (having a
floating charge on all
assets)
Interest outstanding on
Debentures (also secured
640000
240000
576000
320000
16000
464000
Land and Buildings
Plant and Machinery
Patents
Stock at Cost
Sundry Debtors
Cash at Bank
320000
800000
512000
176000
352000
96000
2256000
2256000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 137
as
above)
Creditors
On that date, the company went into liquidation. The dividends on preference
shares were in arrear for two years. The arrears are payable on liquidation as per the
Articles of the company. Creditors include a loan of Rs. 160000 on mortgage on land
and building. The assets realised as under:
Land and building Rs. 384000, Plant and machinery Rs. 640000,Patents Rs.
96000, Stock Rs. 192000 and Sundry debtors Rs. 256000.
The cost of liquidation is amounted to Rs. 34880. The liquidator is entitled to a
commission of 3% on al assets realised (except cash at bank) and a commission of 2%
on amount distributed among unsecured creditors. Preferential creditors amounted to
Rs. 48000. All payments were made on 30
th
September 2015.
Prepare the Liquidator’s Final Statement of Account.
Solution:
Kaloor Ltd
Liquidator’s Final Statement of Account
Receipts
Amount
Rs.
Payments
Amount
Rs.
Assets Realised:
Cash at Bank
Sundry Debtors
Stock
Patents
Plant and
Machinery
Land and Building
96000
256000
192000
96000
640000
384000
1664000
Secured Creditors
Cost of
Liquidation
Liquidator’s
Remuneration:
On assets realised
except cash
(1568000x3%)
On payment to
preferential
creditors
(48000x2%)
On payment to
unsecured
creditors
(256000x2%)
5% Debentures
Add: Interest for 1
½
years upto 30
th
Sep
2015 @5%
Preferential
47040
960
5120
160000
34880
53120
344000
48000
256000
716800
320000
24000
640000
76800
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Advanced Corporate Accounting Page 138
Creditors
Unsecured
Creditors
Preference
Shareholders:
Capital
Arrears of
Dividend
Equity
Shareholders:
Rs. 15.25 per
share
on 3200 shares,
Rs.
75 paid up
Re. 0.25 per
share on
9600 shares, Rs.
60
paid up
48800
2400
51200
1664000
1664000
Working Notes:
Calculation of Unsecured Creditors:
Total Creditors given
Less: Mortgage Loan
Preferential Creditors
Unsecured Creditors
Rs.
160000
48000
Rs.
464000
208000
256000
Calculation of Payment of Capital to Equity Shareholders:
Total Equity share capital paid up (Rs. 240000+ Rs. 576000)
Less: Balance available after payment to preference shareholders
(1664000-160000-34880-53120-344000-48000-256000-716800)
Loss to be borne by equity shareholders
Rs.
816000
51200
764800
Loss per Equity Share = 764800/12800 = Rs. 59.75
Amount repayable to 3200 equity shareholders = (Rs. 75 – Rs. 59.75)
= Rs. 15.25 per share
Amount repayable to 9600 equity shareholders = (Rs. 60 – Rs. 59.75)
= Re. 0.25 per share
SCHOOL OF DISTANCE EDUCATION
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Illustration 7: Munna Ltd. went into voluntary liquidation. Prepare the liquidator’s
final statement of account, from the following details regarding liquidation:
Share Capital:
a) 3400, 8% Preference shares of Rs. 100 each, fully paid up.
b) Class A – 3400 Equity shares of Rs. 100 each, Rs. 75 paid up.
c) Class B – 2720 Equity shares of Rs. 100 each, Rs. 60 paid up.
d) Class C – 2380 Equity shares of Rs. 100 each, Rs. 50 paid up.
Assets including machinery realised Rs. 714000. Cost of liquidation amounted
to Rs. 25500.
Munna Ltd. has borrowed a loan of Rs. 85000 from Noor & Co. against the
mortgage f machinery (which realised Rs. 136850). In the books of the company
salaries of four clerks for four months at the rate of Rs. 510 per month and salaries of
four peons for three months at the rate of Rs. 255 per month are outstanding. In
addition to this, the company’s books show the creditors worth Rs. 148580.
Solution:
Munna Ltd.
Liquidator’s Final Statement of Account
Receipts
Amount
Rs.
Payments
Amount
Rs.
Assets Realised
Proceeds of call @ Re. 1 per
share on 2380 equity shares
of
class C
714000
2380
Secured Creditors (Loan)
Cost of Liquidation
Preferential Creditors
Unsecured Creditors
Preference Shareholders
Equity Shareholders:
Rs. 24 per share on 3400
equity
shares of class A
Rs. 9 per share on 2720
equity
shares of class B
85000
25500
11220
148580
340000
81600
24480
716380
716380
Working Notes:
Calculation of Preferential Creditors:
Salary for 4 clerks @ Rs. 510 per month (510x4x4)
Salary for 4 peons @ Rs. 255 per month (255x4x3)
Preferential Creditors
Rs.
8160
3060
11220
Calculation of amount returnable or receivable to equity shareholders:
Assets Realised
Less: Payments
Rs.
Rs.
714000
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Secured Creditors
Cost of Liquidation
Preferential Creditors
Unsecured Creditors
85000
25500
11220
148580
270300
Balance available for shareholders
Less: Capital to be returned to Preference Shareholders
Amount available for Equity Shareholders
Less: Equity Shares paid up
Class A – 3400 Equity shares @ Rs. 75 each
Class B – 2720 Equity shares @ Rs. 60 each
Class C – 2380 Equity shares @ Rs. 50 each
Loss to be borne by Equity Shareholders
255000
163200
119000
443700
340000
103700
537200
433500
Loss per equity share = Total Loss/ Total No. of equity shares
= 433500/8500
= Rs. 51 per share
Paid up amount per share
Less: Loss per share
Amount returnable or receivable to equity
shareholders
Class A
Shares
Rs.
Class B
Shares
Rs.
Class C
Shares
Rs.
75
51
60
51
50
51
24
9
-1
In case of liquidation of companies, the debentureholders may appoint an
independent person as receiver to take over the assets specifically or generally charged
in their favour. The receiver will realise such assets and after meeting his expenses,
remuneration and making payment to claimants entitled to get payment in priority to
the debentureholders, he will make payment to the debentureholders. The receiver will
hand over the surplus, if any, to the liquidator of the company so that the latter may
make the payment to the claimants who are to get the payment after the
debentureholders. Thus, if a receiver is appointed two statements of accounts namely
Receiver’s Statement of Account and Liquidator’s Final Statement of Account have to
be prepared.
Illustration 8: The liabilities and assets of Bharath Ltd. as on 30
th
September 2015 as
follows:
Liabilities
Amount
Rs.
Assets
Amount
Rs.
Share Capital:
Issued – 11% Preference
Shares of Rs. 10 each
180000
Land and Building
Sundry Current Assets
Expenses on issue of
285300
711000
3600
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Advanced Corporate Accounting Page 141
18000 Equity Shares of Rs.
10
each, fully paid up
9000 Equity Shares of Rs. 10
each, Rs. 7.50 paid up
13% Debentures
Mortgage Loan
Bank Overdraft
Trade Creditors
Income tax arrears
(Assessment
concluded in July 2015)
AY 2013-14
37800
AY 2014-15
9000
180000
67500
270000
144000
54000
57600
46800
Debentures
999900
999900
Mortgage loan was secured against land and building. Debentures were secured
by a floating charge on all the other assets. The company was unable to meet the
payments and therefore the debentureholders appointed a receiver and this was
followed by a resolution for member’s voluntary winding up. The receiver for the
debentureholders brought the land and building to auction and realised Rs. 270000. He
also took charge of sundry assets of the value of Rs. 432000 and realised Rs. 360000.
The liquidator realised Rs. 180000 on the sale of the balance of sundry current
assets. The bank overdraft was secured by a personal guarantee of two of the directors
of the company and on the bank raising a demand, the directors paid off the dues from
their personal resources.
Costs incurred by the receiver were Rs. 3600 and by the liquidator Rs. 5040.
The receiver was not entitled to any remuneration but the liquidator was to receive 3%
fee on the value of assets realised by him. Preference shareholders had not been paid
dividend for period after 30
th
September 2013 and interest for the last half year was
due to the debentureholders.
Prepare the Receiver’s Statement of Account and the Liquidator’s Final
Statement of Account.
Solution:
Bharath Ltd.
Receiver’s Statement of Account
Receipts
Amount
Rs.
Payments
Amount
Rs.
Sundry Assets Realised
Surplus realised from
mortgage:
Sale proceeds of land and
360000
Cost of Receiver
Payment to
Debentureholders:
Principal
3600
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 142
building
270000
Less: Applied to discharge
of mortgage loan
144000
126000
270000
Add: Interest for ½ year
@ 13% p.a
17550
Surplus handed over to
Liquidator
287550
194850
486000
486000
Bharath Ltd.
Liquidator’s Final Statement of Account
Receipts
Amount
Rs.
Payments
Amount
Rs.
Surplus received from the
Receiver
Sundry assets realised by
Liquidator
Amount realised from
Contributories:
From 9000 equity
shareholders @ Rs. 2.17 per
share.
194850
180000
Cost of Liquidation
Liquidator’s Remuneration
@
3% of assets realised
(180000x3%)
Payment to Preferential
creditors
(Income tax within 12
months)
Payment to Unsecured
Creditors:
Trade Creditors
57600
Payment of amount
due to directors for Bank
Overdraft
54000
Payment to Preference
Shareholders:
Principal
180000
Arrears of dividend
@ 11% p.a for 2 years
39600
Payment to Equity
Shareholders:
18000 Shares fully paid
@ Re. 0.33 per share
5040
5400
46800
111600
219600
374850
19530
388440
5940
394380
394380
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Working Notes:
Calculation of amount payable by partly paid shareholders:
Amount available before call from partly paid shareholders
Less: Amount payable to various claimants:
Cost of liquidation
Liquidator’s remuneration
Unsecured Creditors
Preference Shareholders
Deficiency
Add: Total amount receivable from partly paid shareholders
on the
basis of notional call of Rs. 2.50 per share on 9000 shares
Net Surplus after notional call
Rs.
5040
5400
111600
219600
Rs.
328050
341640
- 13590
22500
8910
Number of shares deemed fully paid = 18000 + 9000 = 27000 shares.
Refund on each fully paid shares = 8910/27000 = Re. 0.33 per share.
Call on partly paid shares = Rs. 2.50 - Re. 0.33 = Rs. 2.17 per share.
A. Short Answer Type questions
9. Define liquidation of a company.
10. State the modes of winding up of a company.
11. Who is a contributory?
12. Who is a present member?
13. Who is a liquidator?
14. Who is a receiver for debentureholders?
15. What do you mean by Deficiency or Surplus Account?
B. Short Essay Type Questions
5. Briefly explain the circumstances when a company may be wound up by the
Tribunal.
6. What are the types of contributories?
7. Write a note on preferential creditors.
8. How to prepare a statement of affairs?
9. How to calculate the liquidator’s remuneration?
10. Write a note on Liquidator’s Final Statement of Account
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C. Practical Problems
1. The following information were extracted from the books of a limited company on
31
st
March 2015 on that date a winding up order was made:
Rs.
Cash in hand 10000
Stock in trade (Estimated to produce Rs. 30000) 40000
Furniture and fittings(Estimated to produce Rs. 4200) 6000
Plant and machinery (Estimated to produce Rs. 31200) 30000
Freehold land and buildings (Estimated to produce Rs. 90000) 60000
Book debts (Estimated to produce Rs. 10400) 12400
Unsecured creditors 140000
Preferential creditors 4000
Creditors fully secured (Value of securities Rs. 22000) 18000
Creditors partly secured (Value of securities Rs. 12000) 20000
Bank overdraft secured by a second charge on all assets of company 16000
10% Debentures secured by floating charge (interest paid to date) 100000
Equity share capital – 12000 shares of Rs. 10 each 120000
11% Preference share capital – 13000 shares of Rs. 10 each
130000
Calls in arrears on equity shares (Estimated to produce Rs. 2000) 5000
Prepare a Statement of Affairs.
(Answer: Gross Assets – Rs. 211800; Estimated Deficiency as regards members – Rs.
317200).
2. The following information were extracted from the books of a limited company on
31
st
December 2014 on that date a winding up order was made:
Rs.
Equity share capital – 40000 shares of Rs. 10 each, Rs. 8 called up 320000
Preference share capital – 4000 shares of Rs. 100 each, fully paid 400000
Calls in arrears on equity shares (Estimated to produce Rs. 1200) 2000
15% Debentures secured by first floating charge on assets 400000
Bank overdraft secured by a second charge on all assets of company 200000
Investments (Estimated to produce Rs. 120000) 160000
Land and buildings (Estimated to produce Rs. 160000) 80000
Plant and machinery – secured to creditors
(Estimated to realise Rs. 160000) 240000
Rent and taxes 8000
Wages and salaries 6000
Bills payable 48000
Sundry Creditors 120000
Bills receivable (Estimated to realise Rs. 4000) 12000
Debtors (Estimated to realise 60%) 280000
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Bills discounted (Rs. 60000 likely to rank) 16000
Contingent liability likely to accrue 12000
Cash in hand 6400
Stock in trade (Estimated to produce Rs. 76000) 120000
Entry for accrued salary of Rs. 8000 and rent of Rs. 4000 has still to be made in
the books. Prepare a statement of affairs and deficiency account.
(Answer: Gross Assets – Rs. 695600; Estimated Deficiency as regards to members –
Rs. 965600).
3. The capital of Dinesh Ltd. was as under:
(a) 2000 equity shares of Rs. 100 each fully paid.
(b) 1500 equity shares of Rs. 100 each, Rs. 80 per share paid up.
(c) 500 preferences shares of Rs. 100 each, fully paid, and
(d) 500 deferred shares of Rs. 100 each, Rs. 80 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. 50000 including liquidator’s
remuneration of Rs. 1250. The liquidator has made a call on the remaining Rs. 20 on
the deferred shares which were paid in full. He also realised all assets amounting to
Rs. 95500. A call of Rs. 15 per share was made on the equity shares which were
partly paid up. This was paid in full with the exception of that on 50 shares.
Prepare the liquidator’s final statement of account, showing the return of money
to the shareholders.
(Answer: Payment to fully paid equity shareholders – Rs. 20000; Payment to partly
paid equity shareholders – Rs. 7250; Calls on deferred shares – Rs. 10000).
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MODULE – 4
• VOYAGE ACCOUNTS
• FARM ACCOUNTS
The method of accounting followed by shipping companies is known as Voyage
Accounting. Shipping companies prepare their accounts periodically and also prepare
the results of each voyage separately. Shipping companies carry goods from one place
to another. Some companies carry passengers also in addition to goods from one place
to another place.Each voyage covers both outward and return journey of vessel.
In order to ascertain the result of operating a ship’s voyage, Voyage
Account is prepared. The Voyage Account is a revenue account.Voyage Account is
similar to an ordinary P&L A/c.It is important to note that there is no difference in the
manner of preparing accounts period-wise and voyage-wise.
All expenses connected with the voyage, such as port charges, wages and
salaries of the crew, captain and other staff, transhipment, agency fees, provisions,
loading and unloading charges, bunker and harbour wages, freight and insurance,
insurance of the ship on a time policy according to duration of voyage, depreciation
arising as a result of the journey, address commission paid to brokers for freight for
the ship, commission to captain on net profit etc. are debited to concerned Voyage
Account.All incomes such as freight on cargo carried, passagemoney, primage etc. are
credited to this account.
Voyage Account is debited usually with the following expenses:
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1. Bunker Cost
This is the expenditure incurred on fuel oil, diesel, coal and fresh water used
during the voyage. Now-a-days oil and diesel are used in place of coal. The bin or
storing place of coal is referred to as bunker. Hence these are called as bunker costs.
2. Port Charges
Port is used by the shipping companies for loading and unloading of goods and
parking of ships, hence the charges paid for these purposes are known as port charges.
3. Depreciation
Depreciation of the ship for the period of voyage is calculated and charged to
the Voyage Account.
4. Insurance
Insurance premium of cargo must be entirely debited to the concerned Voyage
Account whereas the insurance charges of the ship are charged proportionately to each
voyage on the basis of time of voyage.
5. Address Commission and Brokerage
This is payable to the brokers and agents who help the shipping company in
procurement of cargo, i.e., freight or business. This is calculated at a certain per cent of
the freight earned including the primage or surcharge and debited to Voyage Account.
Address commission is payable to the Charterer whereas brokerage is payable to the
agent of the charterer.
6. Stevedoring Charges
The expenses which are incurred in loading of goods on the ships and unloading
of goods from the ships are known as stevedoring charges.
7. Port Charges
These are the charges paid to port authorities for allowing the ship to use the
port either for loading or unloading the cargo.
8. Stores
If any stock of stores is brought for use during the voyage, then on ship’s return
the stores in hand must be valued and brought into account. Stores consumed are to be
debited.
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8. Salaries and wages of the crew, captain and other staff.
9. Harbour charges
10. Manager’s commission, if any.
Voyage Account is credited usually with the following incomes:
1. Freight
The amount which is charged by the shipping companies for taking goods or
cargo from one place to another is called freight. It is an income.
2. Primage
It is additional freight just like surcharge on freight originally collected for the
captain of the ship. It is treated as income of the shipping company.
3. Passage Money
Fare collected from the passengers travelled in addition to the fare collected for
merchandise.
4. Closing Stocks of Coal, Fuel etc.
Excess of credit side of Voyage Account over its debit side is profit on the
voyage. Excess of debit side of Voyage Account over its credit side is loss on the
voyage. This profit or loss is transferred to General Profit and Loss Account of the
shipping company.
A part of voyage is incomplete at the end of accounting period is called voyage
in progress.Income and expenditure for such part of voyage are calculated on most
appropriate basis and carried forward to subsequent period to ascertain the correct
profit.
Illustration 1: Ocean Shipping Ltd gives the following details in connection with a
voyage, commenced from port W on 1
st
November 2014. The voyage was completed
on 31
st
December 2014 by the arrival of ship at port Z.
5000 tons and 1250 tons were loaded at port X for port Z and port Y
respectively. Another 750 tons were loaded at Y for Z. the freight charges were as
follows:
Port W to port Z – Rs. 100 per ton
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Advanced Corporate Accounting Page 149
Port W to port Y – Rs. 80 per ton
Port Y to port Z – Rs. 50 per ton
The freight is subject to 10% primage, address commission @ 5% and
brokerage @ 3%. The freight was insured @ ½ % and the hull was insured for the
voyage @ 1%. Depreciation is provided @ 5% per annum.
Cost of the ship is Rs. 30,00,000. The expenses at different ports were as under:
W (Rs.)
X (Rs.)
Y (Rs.)
Z (Rs.)
Port charges
Coal
Captain’s expenses
Harbour wages
12500
45000
3000
10000
2500
------
2000
------
7500
10000
1500
7500
7500
------
2250
6250
Stores purchased at the commencement amounted to Rs. 20000. Opening stock
of stores was Rs. 12500 and closing stock is estimated at Rs. 5000. Opening stock and
closing stock of coal were Rs. 3750 and Rs. 11250 respectively. Salaries and wages of
sailors etc. amounted to Rs. 30000 per month.
Prepare the voyage account for the period ended 31
st
December 2014.
Solution:
Voyage Account
for the period ended 31
st
December 2014
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To Address commission
(701250x5%)
To Brokerage
(701250x3%)
To Insurance on freight
(701250x1/2 %)
To Insurance on hull
(3000000x1%)
To Depreciation
(3000000x5%x2/12)
To Port Charges
(12500+2500+7500+7500)
To Coal consumed
[3750+(45000+10000)-11250)
To Captain’s expenses
(3000+2000+1500+2250)
To Harbour wages
(10000+7500+6250)
To Stores consumed
(12500+20000-5000)
To Salaries & wages
(30000x2)
To Net Profit
Rs.
35063
21038
3506
30000
25000
30000
47500
8750
23750
27500
60000
389143
By Freight:
W to Z
(5000x100)
W to Y(1250x80)
Y to Z (750x50)
By Primage
(637500x10%)
500000
100000
37500
Rs.
637500
63750
701250
701250
Illustration 2: Maharaja Shipping Co. Ltd. of Mumbai acquired a new ship at a cost of
Rs. 7500000. The ship was ready for service on 1
st
January 2014. An insurance policy
was taken @ 2% per annum on the ship. Freight was insured at Rs. 20000 per annum.
During 3 months ended 31
st
March 2014, the ship was completed one round trip to
Kolkata and was half through the second trip (single way) to Kolkata.
The ship carried the following cargo:
To Kolkata - 18000 tons @ Rs.300 per ton
From Kolkata – 20000 tons @ Rs. 270 per ton
To Kolkata – 24000 tons @ Rs. 250 per ton
Commission @ 5% was paid to agents in addition to address commission @
1%. The other expenses were as follows:
Salaries and wages of crew Rs. 1600000
Fuel Rs. 800000
Sundry stores Rs. 160000
Port dues (Mumbai Rs. 140000, Kolkata Rs. 100000) Rs. 240000
Stevedoring @ Rs. 20 per ton Rs. 1240000
Share of overheads for the ship for the period Rs. 500000
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Provide depreciation for the period @ 5% per annum.
Prepare the consolidated voyage account for the period of three months ending
31
st
March 2014.
Solution:
Maharaja Shipping Co. Ltd
Voyage Account
for the period from 1
st
January 2014 to 31
st
March 2014
To Insurance on ship
(7500000x2%x3/12)
To Insurance on freight
(20000x3/12)
To Address commission
(16800000x1%)
To Agent’s commission
(16800000x5%)
To Salaries & wages
To Fuel
To Sundry Stores
To Port dues
To Stevedoring
To Overheads
To Depreciation
(7500000x5%x3/12)
To Provision for incomplete
Voyage (Freight)
To Net Profit
Rs.
37500
5000
168000
840000
1600000
800000
160000
240000
1240000
500000
93750
6000000
6641667
By Freight:
18000x300
20000x270
24000x250
By Voyage in
Progress
5400000
5400000
6000000
Rs.
16800000
1525917
18325917
18325917
Working Notes:
Calculation of voyage in progress
Insurance on ship (1/5)
Insurance on freight (1/5)
Address commission (6000000x1%)
Agent’s commission (6000000x5%)
Salaries & wages (1/5)
Fuel (1/5)
Sundry Stores (1/5)
Port dues (at Mumbai 140000x1/3)
Stevedoring (24000 tons @ Rs. 20)
Overheads (1/5)
Depreciation (1/5)
Rs.
7500
1000
60000
300000
320000
160000
32000
46667
480000
100000
18750
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1525917
The ship started from Mumbai to Kolkata and reached Mumbai in the first
round trip.
In second round trip it again started from Mumbai (voyage in progress).
When the ship started from Mumbai, it did only loading. On returning it did
unloading and loading. So the stevedoring charges are apportioned at a reasonable
basis (1/3) for incomplete voyage.
A. Short Answer Type questions
16. What do you mean by voyage account?
17. What is address commission?
18. What do you mean by stevedoring charges?
19. What is primage?
20. What do you mean by voyage in progress?
B. Short Essay Type Questions
11. Explain the expenditures and incomes relating to voyage accounts
C. Essay Type Questions
4. Write an essay on voyage accounts.
D. Practical Problems
1. S.S. Ganga sailed from Kolkata on 1
st
February 2015 and arrived at Chennai
Port on 31
st
March 2015 via Vishakhapatnam port on Voyage No. 302. The following
goods were loaded:
1000 M.T. and 200 M.T at Kolkata port for Chennai port and Vishakhapatnam
port respectively. Another 500 M.T were loaded at Vishakhapatnam for Chennai. The
freight charges were:
Kolkata port to Chennai port Rs. 600 per M.T
Kolkata port to Vishakhapatnam port Rs. 500 per M.T
Vishakhapatnam port to Chennai port Rs. 400 per M.T
The freight is subject to 10% primage, 5% address commission and 2.5%
brokerage. The freight was insured at ½ %. The hull was insured for the voyage at 1%.
Depreciation was provided at 3% p.a. The cost of the ship is Rs. 1 crore. The
following were the expenses incurred at different ports:
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Kolkata
Rs.
Vishakhapatnam
Rs.
Chennai
Rs.
Port charges
Coal
Captain’s contingencies
Harbour wages
36000
100000
7000
10000
20000
30000
2000
20000
20000
-----
10000
15000
Stores purchased for the voyage amounted to Rs. 50000. Opening stock of
stores was Rs. 40000 and closing stock was estimated at Rs. 30000. Stock of coal at
close was estimated at Rs. 30000 as against stock of Rs. 10000 at the beginning. The
ship will not come back to Kolkata port in the near future as part of the voyage
programme. Salaries and wages amounted to Rs. 80000 p.m.
Prepare this Voyage No. 302 account.
(Answer: Profit – Rs. 290800)
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LESSON 7
FARM ACCOUNTS
Farm accounting is intended to keep a record of farming activities. Farming
activities include agriculture, horticulture, animal husbandry, poultry farming,
pisciculture, dairy, sericulture, nurseries for plants, fruits & flowers etc.Farm
accounting is also called as Farm Book keeping.
The following are some of the definitions of farm accounting:
Farm accounting is defined as an application of the accounting principles to the
business of farming.
Farm accounting can be defined as “the art as well as the science of recording in
the books business transactions in regular and systematic manner so that their nature,
extend and financial affects can be readily ascertained at any time of the year”.
In India, Small farmers, mostly being illiterate, do not maintain accounts of
agricultural operations.Medium & big farmers keep accounts only for ascertaining
amounts receivable & payable.Farms in corporate sector maintain accounts, as they
have to keep accounts under the Companies Act.
In India, farm accounting is in its infant stage and not popular as it is in
advanced countries due to the following reasons:
1. Limited number of organised farms.
2. Mostly based on small scale operation of the household.
3. Low level of education of small & average farmers.
1. Notional Transactions – Some of the crops and products of the farm are consumed by
the family of the farm owner. Such consumption is treated as income of the farm and drawings
of the farm owner. The transactions between the farm and farm household are called notional
transactions.
2. A single bank account may be opened both for private & business purposes -
Being so, private transactions should be segregated from business transactions so that profit or
loss and financial position of farming activities may be ascertained.
3. Family provides labour for the farm – Valuation of such labour should be made and
added to the cost of production for ascertaining correct cost of production or profit.
4. Farming activities are subject to natural calamities – To meet the losses due to
draught, flood, diseases etc. insurance policies for various farming activities should be taken.
5. Valuation of farm inventory is a difficult task – Inventory valuation is very difficult
especially in case of standing crops, cattle, poultry etc.
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6. Exchange transactions- Output of one farming activity may become the input of
another farming activity. For example, a part of crop produced may be used in cattle rearing,
poultry farming etc. Such transactions are called as exchange transactions and should be
valued at the opportunity cost (market price).
1. True cost of each farming activity can be ascertained. So farm practices can be
improved to reduce the cost of production.
2. Profit on each line of farming activity can be ascertained. It helps to ensure better
managerial control.
3. It is helpful in maintenance of proper accounting records of farming activities.
4. Return on capital employed in farming activities can be ascertained.
1. It permits the farmer to find out the size of the income which is derived from the
farm.
2. To know the total value of the farm business and to know which part is actually
owned by the farmer and which by others.
3. Farm accounts provide the indispensable tool for farm management. In other
words, accounting is needed to obtain and to maintain the most profitable use of farm
resources.
4. To detect loss or theft of cash or stock.
5. To provide the necessary data for a correct income tax assessment.
6. To claim expenses for work done by others.
Farm accounting can be done on double entry system. All subsidiary books and
ledger can be maintained for recording farm transactions. As farming businesses are
mostly on cash basis, single entry system of accounting can also be followed. To
obtain cost and profit of each product detailed accounts should be kept for different
crops like rice, wheat, cotton jute etc. Each crop account is debited with opening stock
and expenses and credited with sale proceeds and closing stock. Common costs can be
apportioned suitably among different crops. The balance of crop account will be the
profit on that crop.
In case of livestock, separate accounts should be maintained for each type of
livestock. All the costs relating to livestock are debited and sale proceeds and other
incomes are credited to the livestock account. The resultant figure shall be profit or
loss.
Generally a Farm Account is prepared for all the farm items. A Crop Account is
prepared for all crops like wheat, rice, jute, cotton, vegetables etc. A DairyAccount can
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be maintained for all types of livestock, milk, butter, cream etc. All activities relating
to poultry farming can be recorded in a Poultry Account.
For proper ascertainment of profit & financial position, farmer should value
inventories and other assets. The basis of inventory valuation should be at cost or
market price whichever less is. It is very difficult to ascertain the cost of livestock and
standing crops. In such a case, as a general practice, the value of livestock is taken as
75% of market price and the crops are valued at 85% of market price.
The livestock may be fixed asset or current asset. It is a fixed asset when
livestock are kept for crop purposes. But, these are taken as current assets when
livestock are kept for trading purposes.
` Proper depreciation should be provided for farm machinery, equipment and
farm buildings in order to ascertain the correct profit or loss from farming activities.
As the farming business is family type the item of drawings should be carefully
recorded. Apart of cash drawings there may be consumption of crop, dairy or poultry
products. The following entry is passed to record the consumption of farm products by
farm proprietor:
Drawings A/c Dr
To Farm A/c
When farm products are consumed by labourers or paid in kind:
Wages A/c Dr
To Farm A/c
1. Cash Book for keeping a record of cash transactions.
2. Debtors & Creditors Register for keeping a record of credit transactions.
3. Stock Register for keeping a record of details of input goods and output goods,
sales, utilisation, wastage and balance of stock.
4. Fixed Assets Register for keeping a record of cost of fixed assets, depreciation
on fixed assets and balance of fixed assets.
5. Loan Register for keeping a record of borrowings from banks, friends, relatives
and other agencies along with interest paid and payables.
6. Register for Notional Transactions for making a record of transactions between
farm and farm household.
7. Cost Analysis Register for keeping a record of cost of each farming activity for
ascertaining profit of each farming activity.
A. Crops
Expenses:
1. Seeds
2. Fertilisers
3. Pesticides
4. Irrigation expenses
5. Wages
6. Running and maintenance cost of agricultural machinery and equipment
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7. Depreciation on fixed assets
8. Interest on borrowed capital
9. Rent on agricultural land
10. Notional rent, interest on owned capital or wages
11. Land revenue, cesses and other taxes
Incomes:
1. Sale of main products & by products
2. Value of farm products consumed by family members
3. Value of output transferred to other farming activity
4. Value of output exchanged for input
B. Poultry
Expenses:
1. Cost of chickens
2. Cost of feed
3. Cost of stocks like hay, packing boxes etc.
4. Maintenance cost of poultry sheds
5. Salaries & wages
Incomes:
1. Sale of eggs
2. Sale of chickens, broilers & hens
3. Sale of poultry excrements as manures
C. Dairies
Expenses:
1. Cattle feed & hay
2. Cost of cultivation of feed crop
3. Salaries & wages
4. Cost of insecticides
5. Cost of maintaining milk processing facilities
Incomes:
1. Sale of milk
2. Sale of milk products
3. Sale of calves
4. Sale of slaughtered cattle
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D. Fisheries
Expenses:
1. Cost of spawn like seeds
2. Cost of water
3. Cost of fish feed
4. Tank maintenance cost
5. Catching expenses
6. Salaries & wages
Incomes:
1. Sale of fish
The final accounts of farming activities can be prepared under both single entry
system and double entry system.
Under single entry system, opening statement of affairs showing assets and
liabilities at the beginning of the year and closing statement of affairs showing assets
and liabilities at the end of the year are prepared and thereby profit or loss for the year
is ascertained.
Under double entry system, a trial balance can be prepared which becomes the
basis for preparation of Farm Account or Trading and Profit and Loss Account and
Balance Sheet. Nominal accounts are closed by transferring them to Farm Account or
Trading and Profit and Loss Account and balances of personal and real accounts are
shown in Balance Sheet. Balance of Farm Account or Trading and Profit and Loss
Account being profit or loss is transferred to Capital Account or Farm Household
Capital Account.
Illustration 1: Prepare a Crop Account from the following information to ascertain the
profit made by the farm’s crop division.
Opening Stock (Rs.) Closing Stock (Rs.)
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Wheat 15000 12000
Seeds 3000 2100
Fertilisers 4500 2400
Purchases:
Seeds Rs. 1800
Fertilisers Rs. 2700
Wages:
Paid in cash Rs. 20400
Paid in kind (Wheat) Rs. 13800
Sale of Wheat Rs. 106200
Wheat consumed by proprietor Rs. 4800
Depreciation on farm machinery Rs. 6000
Solution:
Crop Account
To Opening Stock:
Wheat 15000
Seeds
3000
Fertilisers
4500
To Purchases:
Seeds
1800
Fertilisers 2700
To Wages:
Cash
20400
Kind(Contra)
13800
To Depreciation on
machinery
To Crop profit transferred to
P&L A/c
22500
4500
34200
6000
74100
By Sale (Wheat)
By Wages in kind (Contra)
By Drawings (Wheat
consumed)
By Closing Stock:
Wheat 12000
Seeds
2100
Fertilisers
2400
106200
13800
4800
16500
141300
141300
Illustration 2: From the following trial balance of a farmer, prepare Trading and Profit
and Loss Account for the year ended 31
st
December 2014 and Balance Sheet as on that
date.
Debit Balances
Rs.
Credit Balances
Rs.
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Opening Stock:
Livestock
Paddy
Cattle feed
Fertilisers
Purchases:
Livestock
Fertilisers
Seeds
Cattle feed
Crop expenses:
Labour
Other direct expenses
Livestock Expenses:
Medicines
Labour
Dairy expenses
General expenses
Tractor
Land
Cash in hand and at bank
244000
16000
11200
8800
46400
9600
4800
27200
28800
3200
4800
28800
6400
48000
144000
400000
68000
Sales:
Milk
Paddy
Livestock
Creditors
Capital
121600
210400
36000
47200
684800
1100000
1100000
Also consider the following adjustments:
a. Closing stock:
Livestock Rs. 240000
Paddy Rs. 12000
Cattle feed Rs. 7200
Fertilisers Rs. 4800
b. The proprietor has consumed the following items out of his farm output:
Milk Rs. 19200
Paddy Rs. 4800
c. Provide 10% depreciation on tractor.
Solution:
Farm Account (Trading and Profit and Loss Account)
for the year ended 31
st
December 2014
To Opening Stock:
Livestock
Paddy
Cattle feed
24400
0
16000
By Sales:
Milk
Paddy
Livestock
12160
0
21040
368000
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Fertilisers
To Purchases:
Livestock
Fertilisers
Seeds
Cattle feed
To Crop expenses:
Labour
Other direct exp.
To Livestock Exp:
Medicines
Labour
Dairy expenses
To Gross Profit c/d
11200
8800
46400
9600
4800
27200
28800
3200
4800
28800
6400
280000
88000
32000
40000
216000
By Products consumed
by proprietor:
Milk
Paddy
By Closing Stock:
Livestock
Paddy
Cattle feed
Fertilisers
0
36000
19200
4800
24000
0
12000
7200
4800
24000
264000
To General Expenses
To Depreciation on tractor
@10%
To Net Profit transferred to
Capital
656000
By Gross Profit b/d
656000
48000
14400
153600
216000
216000
216000
Balance Sheet
as on 31
st
December 2014
Liabilities
Rs.
Assets
Rs.
Creditors
Capital:
Opening Balance
Add: Net Profit
Less: Drawings
684800
153600
838400
24000
47200
814400
Cash in hand and bank
Closing Stock:
Livestock
Paddy
Cattle feed
Fertilisers
Tractor
Less: Depreciation
Land
240000
12000
7200
4800
144000
14400
68000
264000
129600
400000
861600
861600
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A. Short Answer Type questions
21. Define farm accounting.
22. What are the reasons for slow growth of farm accounting in India?
B. Short Essay Type Questions
12. Explain the objectives of farm accounting.
13. Write a note on importance of farm accounting.
14. Give the list of expenses and incomes of different farming activities.
15. What are the books of accounts maintained under farm accounting?
16. Briefly explain the characteristics of farm accounting.
C. Essay Type Questions
5. Briefly explain the procedures of recording transactions under farm accounting.
6. What is farm accounting? Explain its characteristics and importance.
D. Practical Problems
1.Prepare a Crop Account from the following information to ascertain the profit made
by the farm’s crop division.
Opening Stock (Rs.) Closing Stock (Rs.)
Wheat 5000 4000
Seeds 1000 700
Fertilisers 1500 800
Purchases:
Seeds Rs. 600
Fertilisers Rs. 900
Wages:
Paid in cash Rs. 6800
Paid in kind (Wheat) Rs. 4600
Sale of Wheat Rs. 35400
Wheat consumed by proprietor Rs. 1600
Depreciation on farm machinery Rs. 2000
(Answer: Crop Profit transferred to General P&L A/c – Rs. 24700; Balance Sheet Total – Rs.
137500).
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2.From the following trial balance of a farmer, prepare Trading and Profit and Loss
Account for the year ended 31
st
December 2014 and Balance Sheet as on that date.
Debit Balances
Opening Stock:
Livestock
Paddy
Cattle feed
Fertilisers
Purchases:
Livestock
Fertilisers
Seeds
Crop expenses:
Labour
Other direct expenses
Livestock Expenses
General expenses
Tractor
Land
Cash in hand and at bank
Rs.
30500
2000
1400
1100
5800
1200
4000
3600
400
5000
6000
18000
50000
8500
Credit Balances
Sales:
Milk
Paddy
Livestock
Creditors
Capital
Rs.
15200
26300
4500
5900
85600
137500
137500
Also consider the following adjustments:
a. Closing stock:
Livestock Rs. 30000
Paddy Rs. 1500
Cattle feed Rs. 900
Fertilisers Rs. 600
b. The proprietor has consumed the following items out of his farm output:
Milk Rs. 2400
Paddy Rs. 600
c. Provide 10% depreciation on tractor.
(Answer: Gross Profit – Rs. 27000; Net Profit transferred to Capital A/c – Rs. 19200;
Balance Sheet Total – Rs. 107700).
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MODULE –5
HUMAN RESOURCE ACCOUNTING
(HRA)
ACCOUNTING FOR PRICE LEVEL
CHANGES (INFLATION ACCOUNTING)
LESSON 8
HUMAN RESOURCE ACCOUNTING (HRA)
Human resource accounting is the process of identifying and reporting
investments made in the human resources of an organization that are presently
unaccounted for in the conventional accounting practices. It is an extension of standard
accounting principles. Measuring the value of human resources can assist
organizations in accurately documenting their assets.
The American Accounting Association's (AAA) has defined Human Resource
Accounting as "the process of identifying and measuring data about human resources
and communicating this information to interested parties".
Eric Flamholtz has defined Human Resource Accounting as "the measurement
and reporting of the cost and value of people in organizational resources"
Stephen Knauf defined Human Resource Accounting as "the measurement and
quantification of human organizational inputs such as recruiting, training, experience
and commitment."
Thus HRA not only involves measurement of all the costs or investments
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associated with the recruitment, placement, training and development of employees,
but also the quantification of the economic value of the people in an organization.
1. To furnish cost value information for making proper and effective management
decisions about acquiring, allocating, developing, and maintaining human resources in
order to achieve cost effective organizational objectives.
2. To monitor effectively the use of human resources by the management.
3. To have an analysis of the Human Asset, i.e. whether such assets are conserved,
depleted, or appreciated.
4. To aid in the development of management principles and proper decision
making for the future, by classifying financial consequences of various practices.
Research during the early stages of development of HRA was conducted at the
University of Michigan by a research team including the late organizational
psychologist Rensis Likert, R. Lee Brummet, William C. Pyle and Eric Flamholtz. The
group worked on a series of research projects designed to develop concepts and
methods of accounting for human resources. One outcome of this research was a paper
representing one of the earliest studies dealing with human resource measurement and
the one in which the term "Human Resource Accounting" was used for the first time.
They focused on HRA as a tool for increasing managerial effectiveness in the
acquisition, development, allocation, maintenance, and utilization of its human
resources. But the traces of a rudimentary HRA can be found in the Medieval
European practice of calculating the cost of keeping a prisoner versus the expected
future earnings from him.
In the recent decades concentration is switching from manufacturing
organization to service rendering organization, where human is the main resource. But
not only for the service organization but also human resource accounting is also
necessary for the manufacturing organization to measure their production personnel's
expertise. The necessities of the HRA can be as follows.
1. Measuring the expertise of the employees and management of the
organization.
2. Find out the true value of the assets and liabilities hold by the organization.
As the expertise of the employees is considered as assets and value to be
provided to the employees are considered as liabilities.
3. Applying a strong monitoring process on the human resources of the
organization.
4. It provides the management a sound basis for controlling the human resource.
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5. Provide a better basis of determining organizational goal and ways of
achieving
these goals.
6. Provide the investors of the organization, shareholders and debt holders,
accurate information for better decision making
7. Find out the true picture of the future prospects of the organization, as the
utilization of other resources are fully depending on the human resources.
8. Giving the stakeholders information about, how much value addition is done
by the
organization to country's human resource as part of the corporate social
responsibility.
There are different models in the valuation of human resources. They can be
discussed under the two heads as follows:
1. Historical Cost Model
2. Replacement Cost Model
3. Opportunity Cost Model
4. Standard Cost Model
1. Present Value of Future Earnings Model or Lev and Schwartz Model
2. Rewards Valuation Model or Flamholtz Model
3. Certainty Equivalent Net Benefit Model
4. Chakraborty Model
5. Dasgupta Model
This approach is also called an acquisition cost model. This approach was
developed by Brummet, Flamholtz and Pyle. But the first attempt towards employee
valuation was made by a footwear manufacturing company, R. G. Barry Corporation
of Columbus,Ohio with the help of Michigan University in 1967.
This method measures the organization’s investment in employees using the
five parameters: recruiting, acquisition, formal training and familiarization, informal
training and informal familiarization, and experience and development. This model
suggests that instead of charging the costs to profit and loss statement, it should be
capitalized in the balance sheet. The process of giving a status of asset to the
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expenditure item is called capitalization. In human resource accounting, it is necessary
to amortize the capitalized amount over a period of time. The unamortised cost is
shown as investments in the human assets. If an employee leaves the firm (i.e. human
assets expire) before the expected service life period, then the net value to that extent
is charged to the current revenue.
i. This model is very simple to understand and easy to work out.
ii. It meets the traditional accounting concept of matching cost with revenue.
iii. It provides a basis for evaluating a company’s return on its investments in
human resources.
i. The valuation method is based on the false assumption that the rupee is stable.
ii. This method measures only the costs to the organization, but ignores completely
any measure of the value of the employee to the organization.
iii. It takes only the cost of acquisition of employees and thus ignores the aggregate
value of their potential services.
iv. It is too tedious to gather the related information regarding the human values.
v. It is difficult to determine the number of years over which the capitalised
expenditure is to be amortised.
The historical cost model was highly criticised as it only considers the sunk
costs which are irrelevant for decision making. Thus a new model for HRA was
conceptualised which took into the account, the costs that would be incurred to replace
its existing human resources by an identical one. This model measures the cost of
replacing an employee. According to Rensis Likert, replacement cost includes
recruitment, selection, compensation, and training cost (including the income foregone
during the training period). The data derived from this method could be useful in
deciding whether to dismiss or replace the staff.
i. This model is more realistic as it considers the current value of human resources
in a company.
ii. It is more representative and logical.
i. This method may also lead to an upwardly biased estimate because an
inefficient firm may incur a greater cost to replace an employee
ii. There may be no similar replacement for a similar certain existing asset.
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This model was advocated by Hekiman and Jones in 1967. This model is also
called as Market Value Model. This model of measuring human resources is based on
the concept of opportunity cost (i.e. the value of an employee in its alternative best
use, as a basis of estimating the value of human resources). The opportunity cost value
may be established by competitive bidding within the firm, so that in effect, managers
bid for any scarce employee. A human asset therefore will have a value, only if it is a
scarce resource.
i. This model excludes the employees who are not scarce.
ii. Under this model, valuation on the basis of opportunity cost is restricted to
alternative use within the organisation.
This model was developed by David Watson. This model envisages
establishment of a standard cost per grade of employee updated every year.
Replacement costs can be used to develop standard costs of recruitment, selection,
training and developing individuals. Such standards can be used to compare result with
those planned. Variance should be analysed and would form a suitable basis for
control. But under this model, determination of standard cost for each grade of
employee is a difficult process.
In 1971, Lev and Schwartz proposed an economic valuation of employees,
based on the present value of future earnings, adjusted for the probability of
employees’ death, separation or retirement. This method helps in determining what an
employee’s future contribution is worth today.
According to this model, the value of human capital embodied in a person who
is ‘r’ years old, is the present value of his or her future earnings from employment and
can be calculated by using the following formula:
=
( )
(1 + )
Where, = expected value of a ‘r’ year old person’s human capital
t = the person’s retirement age
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I(t) = expected annual earnings of the person upto the retirement
R = discount rate.
i. This model ignores the possibility and probability that an individual may leave
an organisation for reasons other than death or retirement.
ii. This model also ignores the probability that people may make role changes
during their careers.
This model was developed by Flamholtz. He advocated that an individual’s
value to an organisation is determined by the services he is expected to render. This
model is an improvement to the Present Value of Future Earnings Model. The model is
based on the presumption that a person’s value to an organisation depends upon the
positions to be occupied by him in the organisation. The movement of people from one
organisational role to another is a stochastic process with rewards. As people move
and occupy different organisational roles, they render services (i.e. rewards) to the
organisation. However, the roles they will occupy in future will have to be determined
probabilistically for each individual.
This model suggests a five steps approach for assessing the value of an
individual to the organisation.
1. Forecasting the period a person will remain in the organisation, i.e. his expected
service life.
2. Identifying the service states, i.e. the roles that he might occupy, of course, the
time at which he will leave organisation.
3. Estimating the value derived by the organisation when a person occupies a
particular position for a specified time period.
4. Estimation of the probability of occupying ach possible mutually exclusive state
at specified future times.
5. Discounting the value at a predetermined rate to get the present value of human
resources.
1. It is difficult to estimate the probabilities of likely service states of each
employee.
2. Determining the monetary equivalent of service states is also very difficult and
costly affair.
3. Since the analysis is restricted to individuals, it ignores the value added element
of individuals working as groups.
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This model was suggested by Pekin Ogan in 1976. Under this model, the value
of human resources is determined by taking into consideration the certainty with
which the net benefits in future will accrue to the enterprise. The model involves the
following steps:
1. Net benefit from each employee.
2. Certainty factor at which the benefits will be available in future.
3. The certainty equivalent benefits will be calculated by multiplying the certainty
actor with the net benefits from all employees. This will be the value of human
resources of the enterprise.
This model was suggested by Prof. S.K. Chakraborty in 1976. He was the first
Indian to suggest a model on human resources of an enterprise. Under this model the
value of human resources can be calculated by dividing the employees into two groups
– Managerial and non-managerial, and then multiplying average tenure of group of
employees with their average salary. The value thus obtained is discounted at the
expected average after tax return on investment (ROI) over the average tenure period,
so that value of human asset does not fluctuate frequently.
Prof. N. Dasgupta suggested this model in 1978. According to this model the
total cost incurred by the individual upto that position in the organisation should be
taken as the value of a person which is further adjusted by his intelligence level. The
value thus calculated is revised time to time on the basis of age, performance,
experience and other capabilities.
The following are the important benefits of Human Resource Accounting.
1. Helpful in proper implementation of Return on Capital Employed
2. Improves managerial decision making by maintaining detailed records relating
to internal human resources.
3. It serves social purpose by identifying human resource as a valuable asset.
4. It helps to increases the productivity of human resources.
5. It is very essential where human element is the prime factor.
6. Helps in investment decisions.
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Although there are various advantages to an organisation by HRA it is not free
from the limitations. The following are the important limitations of HRA.
1. There are no clear cut and specific procedures or guidelines for finding costs
and value of human resources of an organization. The systems that are being adopted
have certain drawbacks.
2. The period of existence of human resources is uncertain and hence valuing them
under uncertainty in the future seems to be unrealistic.
3. The much needed empirical evidence is yet to be found to support the
hypothesis that HRA as a tool of management facilitates better and effective
management of human resources.
4. Since human resources are incapable of being owned, retained, and utilized,
unlike physical assets, this poses a problem to treat them as assets in the strict sense.
5. There is a constant fear of opposition from the trade unions as placing a value
on employees would make them claim rewards and compensations based on such
valuations.
6. In spite of all its significance and necessity, Tax Laws don’t recognize human
beings as assets.
7. There is no universally accepted method of the valuation of human resources.
A. Short Answer Type questions
23. Define Human Resource Accounting.
24. What are the objectives of HRA?
B. Short Essay Type Questions
17. Briefly explain the benefits of HRA.
18. What are the limitations of HRA?
19. Write a note on development of Human Resource Accounting.
20. Explain the need and importance of Human Resource Accounting.
C. Essay Type Questions
1. Write short notes on the following:
a) Historical Cost Model
b) Replacement Cost Model
c) Opportunity Cost Model
d) Standard Cost Model
2. Discuss the various methods of HRA with merits and demerits.
3. Explain the Lev and Schwartz Model and Flamholtz Model of Human Resource
Accounting.
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LESSON 9
ACCOUNTING FOR PRICE LEVEL CHANGES
(INFLATION ACCOUNTING)
Conventional or historical cost accounting assumes that money has stable value.
But in reality, value of money varies from time to time as a result of changes in the
general level of prices. Prices of goods and services change over the time. The change
in price as a result of various economic and social forces brings about a change in the
purchasing power of money. The historical cost accounting system does not consider
the impact of price level change on financial statements. Therefore, Accounting for
Price Level Changes has been emerged as a new accounting system. Accounting for
price level changes is also called as Inflation Accounting as changes in prices are
usually on upward side.
Historical cost accounts suffer from the following limitations:
1. Utility of accounting records seriously impaired
Financial statements prepared under historical cost accounting fail to reflect the effect
of such changes in purchasing power on the financial position and profitability of the
firm.
2. Unrealistic profits
Under historical cost accounting system, depreciation calculated on the basis of
historical cost of old assets is usually lower than that of those calculated at current
value or replacement value. This results in unrealistic and more profits.
3. Insufficient provision of depreciation
Under historical cost accounting system, depreciation is calculated on the
original cost of fixed assets with the result that only an amount equivalent to the
original cost of the fixed assets is available for its replacement when its life is over.
4. Values of fixed assets are unrealistic
In times of rising prices, historical cost accounting system does not give a true
and fair view the business enterprise as is required under the Companies Act as fixed
assets are shown at their historical cost and not at current values.
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5. Different basis
Under historical cost accounting system, fixed assets are shown at the historical
cost whereas operating expenses and incomes are taken at current prices. These
different bases will affect the reliability of accounting information.
6. Violation of Matching Principle
Historical cost accounting shows closing stock at cost price or market price
whichever is less. Sales are shown at current purchasing power of the rupee while
stocks are shown at cost or market price, whichever is less. Thus profit disclosed under
historical cost accounting does not represent increase in wealth of the business in
terms of current purchasing power because closing stocks are not shown at their
current value.
7. Difficulty in comparison of profitability of two plants
In case of price level changes, comparison of profitability of two plants set up at
different dates becomes difficult.
8. Misleading inter-period and inter-firm comparison
Accounting ratios are used for inter-period and inter-firm comparison. The
accounting ratios calculated based on historical costs will not give correct view.
Accounting for price level changes is a system of accounting which regularly
records all items in financial statements at their current values.
According to American Institute of Certified Public Accountants, “Inflation
accounting is a system of accounting which purports to record, as a built in
mechanism, all economic events in terms of current cost”.
1. Financial statements show real profit of the firm.
2. Sufficient funds are available for replacement of fixed assets as depreciation is
charged on current cost of fixed assets.
3. Balance sheet shows a true and fair view of the financial position of a firm
because assets are shown at their current values.
4. It is helpful for managerial decisions as the anticipated and actual profits are
expressed in rupees of the same purchasing power.
5. It helps in making better comparison of the profitability of the two plants set up
at different dates because current values are taken for comparison purposes.
6. Financial ratios calculated under inflation accounting would provide more
meaningful information.
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7. A rate of return on capital e employed adjusted to the current price index is
more useful in the valuation of business by its owners, creditors and management.
Disadvantages of Accounting for Price Level Changes
1. Charging depreciation on current values of fixed assets is not acceptable to
income tax authorities.
2. Too many calculations are involved for adjusting accounting to changing prices
and making financial statements complicated.
3. Charging depreciation is a process of depreciation of original cost of fixed asset
over its effective life, so charging anything in excess over the effective life of an asset
is against the concept of depreciation.
4. Adjusting accounts to changing prices is a never ending process because prices
go on changing every day.
5. Inflation accounting is not free from prejudice.
6. Distribution of dividend on the basis of profit shown under this system is not
desirable.
7. Lower depreciation will be charged in times of deflation. It will increase profit
which will lead to payment of excessive dividend.
There are four different approaches to price level accounting. They are as
follows:
1. Current Purchasing Power Accounting (CPPA).
2. Current Cost Accounting (CCA).
3. Specific and General Price Level Accounting (SGPLA).
4. Periodic Revaluation of fixed assets along with the adoption of LIFO method of
inventory.
This approach is also known as General Price Level Accounting. Under this
approach, the historic cost accounting data are adjusted on the basis of any established
and approved general price index at a given date. In India, Wholesale Price Index
(WPI) of the Reserve Bank of India (RBI) can be taken which shows the change in the
value of the rupee in the past years. This approach takes into account the changes in
the value of items as a result of the general price level, but it does not account for
changes in the value of individual items. The formula for the conversion of historic
cost to the general price level is as under:
=
The effect of the loss or profit on monetary assets or owing liabilities is also
ascertained. Monetary items are those whose amounts are fixed by contract or
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otherwise, regardless of changes in the general price level. Monetary items can be
debtors, creditors, bank balance, cash, redeemable preference share capital and loans.
The value of these items is fixed as we are not going to get more from debtors or pay
more to the creditors regardless of general increase in the price level. Non-monetary
items include inventory, machinery, building, furniture etc.
Holders of monetary assets lose if there is increase in the general price index
because purchasing power of assets owned, is actually decreased. Debtors are not
going to pay more because of increase in the price level. Similarly, balance of cash in
hand is not going to increase because of inflation.
Thus, the amounts of monetary assets are fixed by contract or otherwise in
terms of rupees, regardless of changes in general price level. On the other hand,
decrease in the general price level is a gain because it increases the purchasing power
of monetary assets owned.
Under this approach, firms prepare financial statements on historical cost basis
in usual manner and also prepare supplementary statement showing the historical cost
items in terms of current value on the basis of index.
Illustration 1: A firm had Rs.200000 as cash at bank on 1
st
April 2014. The consumer
price index on that date was 200. During the year ended 31
st
March 2014 the receipts
and payments were as stated below:
Date
Receipts
Amount
Index
Date
Payments
Amount
Index
Jun 1
Jan 15
Sales
Sales
105000
345000
210
230
Sep 15
Nov
20
Dec 1
Cost
Cost
Cost
215000
150000
200000
215
240
225
Ascertain the profit or loss on account of price changes. The year end index was
240.
Solution:
Opening Balance
Receipts:
Jun 1
Jan 15
Total (A)
Payments:
Sep 15
Nov 20
Dec 1
Total (B)
Balance (A-B)
Historical
Adjusted
Factor
Price level
Adjusted
Amount
200000
105000
345000
240/200
240/210
240/230
240/215
240/240
240/225
240000
120000
360000
650000
720000
215000
150000
200000
240000
150000
213333
565000
603333
85000
116667
As the price level adjusted amount is Rs. 116667 and actual balance Rs. 85000,
there is a purchasing power loss of Rs. 31667.
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Illustration 2: A company had the following monetary items on January 1:
Debtors
Bills Receivables
Cash
Less: Bills Payables
Creditors
Net Monetary Assets
10000
25000
Rs.
41000
10000
20000
71000
35000
36000
The transactions affecting monetary items during the year were:
a. Sales of Rs. 140000 made evenly throughout the year.
b. Purchases of goods of Rs. 105000 made evenly during the year.
c. Operating expenses of Rs.35000 were incurred evenly throughout the year.
d. One machine was sold for Rs.18000 on July 1.
e. One machine was purchased for Rs.25000 on December 31.
The general price index was as follows:
On January 1 300
Average for the year 350
On July 1 360
On December 31 400
Compute the general purchasing power gain or loss for the year stated in terms
of the current year-end rupee.
Solution:
Statement of General Purchasing Power Gain or Loss
Monetary Assets on Jan 1:
Debtors
Bills Receivables
Cash
Increase in Monetary Assets:
Sales
Sale of Machinery
Total (A)
Decrease in Monetary Assets:
Purchases
Operating Expenses
Purchase of Machinery
Total (B)
Monetary Assets on Dec 31(A-
B)
Purchasing Power Loss
Historical
Amount
Adjusted
Factor
Price Level
Adjusted
Amount
Purchasing
Power
Gain or
Loss
41000
10000
20000
140000
18000
400/300
400/300
400/300
400/350
400/360
400/350
400/350
400/400
400/300
400/300
54667
13333
26666
160000
20000
229000
274666
105000
35000
25000
120000
40000
25000
165000
185000
64000
89666
(-) 25666
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Monetary Liabilities on Jan 1:
Bills Payables
Creditors
Monetary Liabilities on Dec 31
Purchasing Power Gain
Net Monetary Assets on Dec 31
Net Purchasing Power Loss or
Loss on Monetary Items
10000
25000
13333
33333
11666
35000
46666
29000
43000
(-) 14000
Illustration 3: From the information given below, ascertain the cost of sales and
closing inventory under Current Purchasing Power Accounting Method if the
organisation follows (i) FIFO method, and (ii) LIFO method.
Inventory on 31
st
March 2014
Purchases during 2014-15 (Average)
Inventory on 31
st
March 2015
Historical
Cost
General
Price
Index
40000
310000
50000
200
220
230
Solution:
Cost of Sales:
Opening Inventory
Add: Purchases
Less: Closing Inventory
Cost of Sales
40000
310000
350000
50000
300000
I. Under FIFO Method:
a. Cost of Sales:
Out of opening inventory
Out of purchases
b. Closing Inventory:
Out of purchases
II. Under LIFO Method:
a. Cost of Sales:
Out of purchases
b. Closing Inventory:
Out of opening inventory
Out of purchases
Historical
Amount
Adjusted
Factor
Price
Level
Adjusted
Amount
40000
260000
230/200
230/220
230/220
230/220
230/200
46000
271818
300000
317818
50000
52273
300000
313636
40000
46000
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Advanced Corporate Accounting Page 178
10000
230/220
10454
50000
56454
Illustration 4: The Balance Sheet of Arun & Co. as on 1
st
January 2014 and Profit and
Loss Statement for the year ending 31
st
December 2014 are given below:
Balance Sheet
as on 1
st
January 2014
Liabilities
Rs.
Assets
Rs.
Capital
13% Loan
Current Liabilities
500000
125000
62500
Plant and Machinery
Furniture
Inventory
Debtors
Cash
375000
50000
75000
62500
125000
687500
687500
Profit and Loss Statement
for the year ending 31
st
December 2014
Sales
Less: Cost of goods sold:
Opening inventory
Add: Purchases
Less: Closing inventory
Gross Profit
Less: Operating expenses
Interest on loan
Depreciation on machinery
Depreciation on furniture
Net Profit
75000
887500
Rs.
1250000
962500
87500
875000
188750
16250
56250
5000
375000
266250
108750
Debtors and current liabilities balances remained constant throughout the year.
Interest on loan was paid on 31
st
December 2014. The general price index was as
follows:
On 1
st
January 2014 300
Average for the year 320
On 31
st
December 2014 360
Prepare the financial statements for the year 2014 after adjusting for price level
changes under Current Purchasing Power Method.
Solution:
Statement of General Purchasing Power Gain or Loss
Monetary Assets on 1
st
January
Historical
Amount
Adjusted
Factor
Price Level
Adjusted
Amount
Purchasing
Power
Gain or
Loss
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Advanced Corporate Accounting Page 179
2014:
Debtors
Cash
Increase in Monetary Assets:
Sales
Total (A)
Decrease in Monetary Assets:
Purchases
Operating Expenses
Interest on Loan
Total (B)
Monetary Assets on 31
st
December 2014.(A-B)
Purchasing Power Loss
Monetary Liabilities on 1
st
January 2014:
Loan
Current Liabilities
Monetary Liabilities on 31
st
December 2014
Purchasing Power Gain
Net Monetary Assets on 31
st
December 2014
Net Purchasing Power Loss or
Loss on Monetary Items
62500
125000
1250000
360/300
360/300
360/320
360/320
360/320
360/360
360/300
360/300
75000
150000
1406250
1437500
1631250
887500
188750
16250
998438
212344
16250
1092500
1227032
345000
404218
125000
62500
150000
75000
(-) 59218
37500
187500
225000
157500
179218
(-) 21718
Profit and Loss Statement as per CPPA Method
for the year ending 31
st
December 2014
Particulars
Historical
Amount
Adjusted
Factor
Price Level
Adjusted
Amount
Sales
Opening Inventory
Purchases
Less: Closing Inventory
Cost of Goods Sold
Gross Profit (Sales-CGS)
Operating Expenses
Depreciation on Machinery
Depreciation on Furniture
1250000
360/320
360/300
360/320
360/320
360/320
360/300
360/300
1406250
75000
887500
90000
998438
962500
87500
1088438
98438
875000
990000
375000
416250
188750
56250
5000
212344
67500
6000
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Interest on Loan
Total Expenses
Net Profit (G/P-Expenses)
Less: Loss on Monetary Items
Retained Earnings
16250
360/360
16250
266250
302094
108750
114156
21718
92438
Balance Sheet
as on 31
st
December 2014
Liabilities
Rs.
Assets
Rs.
Capital (500000x360/300)
Retained Earnings
13% Loan
Current Liabilities
600000
92438
125000
62500
Plant and
Machinery
(375000x360/300)
Less: Depreciation
Furniture
(50000x360/300)
Less: Depreciation
Inventory
(87500x360/320)
Debtors
Cash
450000
67500
382500
54000
98438
62500
282500
60000
6000
879938
879938
Note: FIFO Method has been followed for the cost of goods sold and closing inventory
in the absence information.
Calculation of Cash Balance in Balance Sheet:
Opening Cash Balance
Add: Sales
125000
1250000
Less: Purchases
Operating Expenses
Interest on Loan
Closing Cash Balance
887500
188750
16250
1375000
1092500
282500
Illustration 5: Adjust the following Statement of Profit and Loss and Balance Sheet
under CPPA method to ascertain the changes in net profit and reserve.
Statement of Profit and Loss
for the year ending 31
st
December 2014 (Rs. in 000’s)
Sales
Less: Cost of goods sold:
Opening inventory
Add: Purchases
Less: Closing inventory
96
504
600
516
600
84
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Advanced Corporate Accounting Page 181
Gross Profit
Less: Administration expenses
Depreciation on buildings
Net Profit
30
6
84
36
48
Balance Sheet
as on 31
st
December 2014 (Rs. in
000’s)
Share Capital
Reserve
Land
Buildings
Less: Depreciation
Stock
Debtors
Cash
Less: Creditors
240
54
240
240
480
168
186
126
84
48
36
168
42
480
Following further information are also given:
1. Closing stock was acquired during last quarter of 2014 and opening stock
during the last quarter of 2013.
2. The land and buildings were acquired and the capital issued during 1998. The
buildings are depreciated straight line over 40 years.
3. Sales, purchases and administration expenses are assumed to occur evenly over
the year and hence at average prices.
4. The relevant retail price indices are:
a. 2006 average 60
b. 2013 last quarter average 108
c. 2014 last quarter average 116
d. 2014 average 114
e. 2013 December 31 110
f. 2014 December 31 118
Solution:
Adjusted Statement of Profit and Loss as per CPPA Method
for the year ending 31
st
December 2014(Rs. in 000’s)
Particulars
Historical
Amount
Adjusted
Factor
Price Level
Adjusted
Amount
Sales
Opening Stock
600
118/114
118/108
621.05
96
104.88
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Purchases
Less: Closing Stock
Cost of Goods Sold
Gross Profit (Sales-CGS)
Administration expenses
Depreciation on Buildings
Total Expenses
Net Profit (G/P-Expenses)
504
118/114
118/116
118/114
118/60
521.68
600
84
626.56
85.45
516
541.11
84
79.94
30
6
31.05
11.80
36
42.85
48
37.09
Balance Sheet
as on 31
st
December 2014 (Rs. in
000’s)
Historical
Amount
Adjusted
Factor
Price Level
Adjusted
Amount
Equity and Liabilities:
Share Capital
Reserves (Bal. Fig)
Creditors
Assets:
Land
Buildings less accumulated depreciation(9 years)
(240-54)
Stock
Debtors
Cash
240
240
42
118/60
118/60
118/60
118/116
472.00
351.65
42.00
522
865.65
168
186
84
48
36
330.40
365.80
85.45
48.00
36.00
522
865.65
Under CPPA method, the changes in the value money are considered. Under CCA
method historic values of items are not taken into account; rather current values of
individual items are taken as basis for preparation of final statements. Here, the assets
are valued at current cost. Current cost is the cost at which the assets can be replaced
as on a date. This cost is referred as replacement cost.
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1. Fixed assets are shown in Balance Sheet at their current values and not at their
depreciated original costs.
2. Stocks are shown in Balance Sheet at their value to business, the value
prevailing on the date of balance sheet.
3. Depreciation is calculated on current values of the relevant fixed assets to find
out profit for the year.
4. The difference between the current values andthe depreciated original costs of
fixed assets is transferred to Revaluation Reserve Account which is shown on the
liabilities side of Balance Sheet and which is not available for dividend distribution.
5. Cost of stock consumed during the year is taken at current value of the stock at
the date of consumption and not at purchase price of the stock consumed.
6. Monetary assets and liabilities are not adjusted because they are always
recorded at their value to the business. The values of these items do not change with
changes in price level.
7. Accounting profit under CCA is divided into three parts as follows:
a. Current Operating Profit = Sales proceeds of goods and services sold –
Replacement cost of goods or services sold.
b. Realised Holding Gain = Replacement cost of non-monetary asset sold
on date of sale – Historical Cost.
c. Unrealised Holding Gain = Replacement cost of non-monetary asset on
closing date – Historical Cost.
The following adjustments are to be made in calculation of the Current Operating
Profit under CCA method:
1. Current Cost Adjustments
a. Depreciation Adjustment
b. Cost of Sales Adjustment (COSA)
c. Monetary Working Capital Adjustment (MWCA)
2. Gearing Adjustment
Under this method, depreciation is debited to profit and loss account on the
basis Current Value or Replacement Cost of the fixed assets.The current depreciation
charge is obtained under this method by apportioning average net replacement cost
over expected remaining useful life of fixed asset at the beginning of the period.
Backlog Depreciation- If fixed assets are revalued every year, there will be short fall
of depreciation. Such depreciation is called backlog depreciation. The backlog
depreciation is debited to the Current Cost Reserve or adjusted against the Revaluation
Reserve on the fixed assets. The backlog depreciation can be calculated as follows:
= − −
( + ℎ ) ]
Illustration 6: A firm is using machinery with historical gross value of Rs. 60000 and
the accumulated depreciation of Rs. 24000 including Rs. 6000 depreciation for the
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current year. The gross replacement cost of the machine is Rs. 120000 and it is
estimated that its remaining useful life will not change. Calculate the backlog
depreciation.
Solution:
Value of machinery
Current depreciation
Previous accumulated depreciation
Total accumulated depreciation
Value as per balance sheet
Historical Cost
Accounting(Rs.)
Current Cost
Accounting(Rs.)
60000
6000
18000
24000
36000
120000
12000
36000
48000
72000
= −
− (
+ ℎ )
= 120000-72000-(18000+12000)
= Rs. 18000
Illustration 7: Calculate the amount of depreciation under CCA method for each of the
four years as well as the backlog depreciation for a machine from the following
information by assuming straight line method of depreciation:
Cost of Machine Rs. 60000
Estimated life 4 years
Residual value Nil
Inflation factor 10% per annum
Solution:
Calculation of Depreciation under CCA method
Year
Historical
Cost
Replacement
Cost
Depreciation @ 25% on
Additional
Depreciation
(CCA
Adjustment)
Historical
Cost
Replacement
Cost
1.
2.
3.
4.
60000
60000
60000
60000
66000
(60000x110/100)
72600
(66000x110/100)
79860
(72600x110/100)
87846
(79860x110/100)
15000
15000
15000
15000
16500
18150
19965
21962
1500
3150
4965
6962
60000
76577
16577
Calculation of Backlog Depreciation
End
Total Depreciation
Total
Additional
CCA
Backlog
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 185
of
Year
HC
RC
HC
RC
Additional
Depreciatio
n
(RC-HC)
Annual
Depreciation
Depreciati
on
Adjustmen
t
Depreciat
ion
1.
2.
3.
4.
60000
60000
60000
60000
6600
0
7260
0
7986
0
8784
6
15000
30000
45000
60000
16500
36300
(2
yrs)
59895
(3
yrs)
87848
(4
yrs)
1500
6300
14895
27848
1500
4800
(6300-1500)
8595
(14895-
6300)
12953
(27848-
14895)
1500
3150
4965
6962
Nil
1650
3630
5991
27848
16577
11271
Cost of Sales Adjustment refers to the difference between value to the
business and the historical cost of stock consumed in the period. COSA can be
calculated as follows
=
(
−
)
− ( − )
C = Historical cost of Closing Stock
O = Historical cost of Opening Stock
Ia = Average Index No. for the period
Ic = Index No. appropriate to closing stock
Io = Index No. appropriate to Opening stock
Illustration 8: Calculate the Cost of Sales Adjustment from the following information:
Opening stock on 1
st
January 2014 Rs. 30000
Closing stock on 31
st
December 2014 Rs. 40000
Index on 1
st
January 2014 116
Index on 31
st
December 2014 125
Average Index for the year 2014 118
Solution:
=
(
−
)
− ( − )
= (40000-30000)-118( − )
= Rs. 2802
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 186
Monetary Working Capital Adjustment (MWCA) is the difference between
trade debtors and creditors. MWCA shows the effect of changes in prices arising from
volume. MWCA can be calculated as follows:
MWCA=
(
−
)
− ( − )
C = Closing Monetary Working Capital
O = Opening Monetary Working Capital
Ia = Average Index No. for the period
Ic = Index No. appropriate to closing Monetary Working Capital
o = Index No. appropriate to opening Monetary Working Capital
Illustration 9: The balance sheet of Malabar & Co. disclosed the following
information:
Trade Debtors
Trade Creditors
Advance to Suppliers
Index No.
1
st
January 2014
31
st
December 2014
Rs. 100000
Rs. 75000
Rs. 30000
100
Rs. 130000
Rs. 80000
Rs. 40000
120
Average Index 110
Calculate the Monetary Working Capital Adjustment.
Solution:
Trade Debtors
Advance to Suppliers
Less: Trade Creditors
Net Monetary Working Capital
Opening
MWC
(Rs.)
Closing
MWC
(Rs.)
100000
30000
130000
40000
130000
75000
170000
80000
55000
90000
MWCA=
(
−
)
− ( − )
=
(
90000 − 55000
)
− 110( − )
= Rs. 13000
Gearing is the ratio of borrowed capital and shareholders’ funds. Fixed assets and
working capital are partly financed by borrowed capital and partly by shareholders’
funds. During inflationary period the replacement cost of assets exceeds the
borrowings that has financed by them. In the period of rising prices the shareholders
get more benefits because any increase in price will provide more benefit to
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 187
shareholders. The position would be reverse during deflation. Total of current cost
adjustments is abated by gearing adjustment.
After gearing adjustment current cost operating profit will be abated & this abated
profit will be attributable to shareholders which will reflect result of adjustment to
historical cost trading profit. Gearing adjustment and gearing adjustment ratio can be
calculated as follows:
Gearing Adjustment = x A
Gearing Adjustment Ratio = x 100
L = Average Net Borrowing
S = Average Shareholders’ Funds
A = Total of Current Cost Adjustments
It may be noted that in the calculation of net borrowing, cash or any monetary
asset which is not considered in the calculation of monetary working capital
adjustment must be deducted from the total borrowings.
Illustration10: Calculate the gearing adjustment from the following data under CCA
method:
Convertible Debentures
Bank Overdraft
Cash
Share Capital
Reserves
Opening (Rs.)
Closing
(Rs.)
2000
1200
200
3000
1000
2400
1600
600
4000
1600
Cost of Sales Adjustment Rs. 400
Monetary Working Capital Adjustment Rs. 300
Depreciation Adjustment Rs. 100
Total Current Cost Adjustments Rs. 800
Solution:
Calculation of Net Borrowings
Convertible Debentures
Bank Overdraft
Total Borrowings
Less: Cash
Net Borrowings
Opening (Rs.)
Closing
(Rs.)
2000
1200
2400
1600
3200
200
4000
600
3000
3400
Calculation of Shareholders’ Funds
Share Capital
Reserves
Shareholders’ Funds
Opening (Rs.)
Closing
(Rs.)
3000
1000
4000
1600
4000
5600
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 188
Average Net Borrowings (L) = = 3200
Average Shareholders’ Funds (S) = = 4800
Current Cost Adjustments (A) = 800
Gearing Adjustment = x A
= x 800 = Rs. 320
Illustration 11: Roy Ltd. gives the following information:
(Rs. in
000’s)
a. Net long term borrowings
Hire purchase creditors
Bank overdraft
Taxation
Cash
Net Borrowings
b. Share capital and reserves
Proposed dividend
Total Shareholders’ funds
01/01/2014
31/12/2014
14000
4000
5000
1500
(5000)
14000
2800
5600
1400
(8400)
19500
15400
37080
500
47056
600
37580
47656
Current Cost Adjustments:
Depreciation Adjustment Rs. 3500
Cost of Sales Adjustment Rs. 1620
Monetary Working Capital Adjustment Rs. 1120
Rs. 6240
Calculate Gearing Adjustment Ratio and Current Cost Adjustments after abating
Gearing Adjustment.
Solution:
Average Net Borrowings (L) = = 17450
Average Shareholders’ Funds (S) = = 42618
Gearing Adjustment Ratio = x 100
= x 100 = 29.05%
Current Cost Adjustments after abating Gearing Adjustment:
Current Cost Adjustments (given) Rs. 6240
Less: Gearing Adjustment (6240x29.05%) Rs. 1813
CC Adjustments after abating Gearing Adjustment Rs. 4427
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 189
Illustration 12: The following were the liabilities and assets of Super Ltd. as on 31
st
December 2013 and 31
st
December 2014:
Liabilities
31/12/13
(Rs.000’s)
31/12/14
(Rs.000’s)
Assets
31/12/13
(Rs.000’s)
31/12/14
(Rs.000’s)
Equity Shares
Reserves
10%
Debentures
Creditors
Proposed
Dividend
3000
1200
…..
200
300
3000
1400
400
300
300
Land &
Buildings
(Cost – Rs.
3200)
Equipment
(Cost – 2000)
Stock
Debtors
Bank
3040
1000
600
260
(200)
2960
800
800
560
280
4700
5400
4700
5400
Statement of Profit and Loss for the year ended 31
st
December 2014 was as follows:
(Rs. in
000’s)
Sales
Opening Stock
Purchases
Less: Closing Stock
Gross Profit
Less: Expenses (Including interest on debenture)
Depreciation on building
Depreciation on equipment
Net Profit
Less: Proposed Dividend
Balance carried forward
600
1220
2000
1020
1820
800
200
80
200
980
480
500
300
200
The relevant price indices are as follows:
a. 2012 (Average) – Date of building acquisition
105
b. 2009 (Average) – Date of equipment acquisition and issue of equity shares
80
c. 2014 (1
st
January) - Debentures issued
116
d. 2014 (Average)
118
e. 2014 (31
st
December)
125
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 190
Closing stock of 2014 was acquired during whole of 2014 and opening stock
during 2013. Show the current cost adjustments under CCA method for the year ended
31
st
December 2014, under the following heads:
a. Cost of Sales
b. Depreciation Adjustment
c. Monetary Working Capital Adjustment
d. Gearing Adjustment.
Solution:
a. Calculation of Cost of Sales (COSA):
=
(
−
)
− ( − )
= (800-600)-118( − )
= Rs. 54.86
b. Calculation of Depreciation Adjustment:
Depreciation under CCA:
Building (80x125/105)
Equipment (200x125/80)
Less: Depreciation under Historical Costing:
Building
Equipment
Depreciation Adjustment
80.00
200.00
95.24
312.50
407.74
280.00
127.74
c. Calculation of Monetary Working Capital Adjustment (MWCA):
Debtors
Less: Creditors
Monetary Working Capital
Opening
Balance
(31/12/13
)
Closing
Balance
(31/12/14)
260
200
560
300
60
260
MWCA=
(
−
)
− ( − )
=
(
260 − 60
)
− 118( − )
= Rs. 15.92
d. Calculation of Gearing Adjustment:
Net Borrowings:
Opening
Balance
(31/12/13
Closing
Balance
(31/12/14)
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 191
Debentures
Bank Overdraft
Less: Bank
Net Borrowings
)
0
200
400
-----
200
-----
400
280
200
120
Shareholders’ Funds:
Equity Shares
Reserves
Proposed Dividend
Shareholders’ Funds
Opening
Balance
(31/12/13
)
Closing
Balance
(31/12/14)
3000
1200
300
3000
1400
300
4500
4700
Average Net Borrowings (L) = = 160
Average Shareholders’ Funds (S) = = 4600
Gearing Adjustment Ratio = x 100
= x 100 = 3.36%
Current Cost Adjustments:
Cost of Sales Adjustment 54.86
Depreciation Adjustment 127.74
Monetary Working Capital Adjustment 15.92
Total Current Cost Adjustments 198.52
Gearing Adjustment = Total Current Cost Adjustments x Gearing Adjustment Ratio
Gearing Adjustment = 198.52 x 3.36%
= 6.67
Illustration 13: Following are the Balance Sheets and Profit and Loss Account of a
firm, prepared on the basis of historical cost accounting.
Balance Sheet
as on 1
st
April 2014
Capital
Profit and Loss Account
Sundry Liabilities
Rs.
480000
60000
180000
Plant and Machinery
Furniture
Stock
Debtors
Cash
Rs.
240000
60000
120000
96000
204000
720000
720000
Balance Sheet
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 192
as on 31
st
March 2015
Capital
Profit and Loss Account
Sundry Liabilities
Rs.
480000
174000
78000
Plant and
Machinery
Less: Depreciation
Furniture
Less: Depreciation
Stock
Debtors
Cash
240000
24000
Rs.
216000
54000
96000
144000
222000
60000
6000
732000
732000
Profit and Loss Account
for the year ended 31
st
March 2015
To Stock (on 01/04/2014)
To Purchases
To Depreciation
To Other Operating
Expenses
To Net Profit
Rs.
120000
912000
30000
120000
114000
By Sales
By Stock (on 31/03/2015)
Rs.
1200000
96000
1296000
1296000
Additional Information:
a. The replacement cost of the goods sold on the date of sales amounted to Rs.
960000.
b. The current replacement cost of the stock on 31
st
March 2015 is Rs. 102000.
c. On 31
st
March 2015, the replacement costs of the plant and machinery and
furniture were Rs. 264000 and Rs. 48000 respectively.
Prepare Profit and Loss Statement for the year ended 31
st
March 2015 and
Balance Sheet as on 31
st
March 2015 on the basis of Current Cost Accounting.
Solution:
Profit and Loss Statement
For the year ended 31
st
March 2015
Sales
Less: Cost of Goods Sold at Replacement Cost
Gross Profit
Less: Depreciation on Replacement Cost basis:
Plant and Machinery (264000x10%)
Furniture (48000x10%)
Other Operating Expenses
Operating Profit
Add: Realised Holding Gain
Realised Profit
Add: Unrealised Holding Gain
Rs.
26400
4800
120000
Rs.
1200000
960000
240000
151200
88800
24000
112800
18000
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 193
Net Profit
130800
Balance Sheet
as on 31
st
March 2015
Liabilities
Rs.
Assets
Rs.
Capital
Profit and Loss Account:
Balance on 01/04/2014
60000
Realised Profit
112800
Revaluation Reserve
(Unrealised holding gain)
Sundry Liabilities
480000
172800
18000
78000
Plant and
Machinery
Less: Depreciation
Furniture
Less: Depreciation
Stock
Debtors
Cash
264000
26400
290400
52800
102000
144000
222000
48000
4800
748800
748800
Working Notes:
a. Calculation of Realised Holding Gain:
Replacement Cost of Goods Sold
Less: Historical Cost of Goods Sold
Opening Stock
Add: Purchases
Less: Closing Stock
Realised Holding Gain
Rs.
120000
912000
Rs.
960000
936000
1032000
96000
24000
b. Calculation of Unrealised Holding Gain (Revaluation Reserve):
Replacement Cost on 31
st
March 2015:
Plant and Machinery
Furniture
Stock
Less: Historical Cost:
Plant and Machinery (on 1
st
April 2014)
Furniture (on 1
st
April 2014)
Stock (on 31
st
March 2015)
Unrealised Holding Gain
Rs.
264000
48000
102000
Rs.
414000
396000
240000
60000
96000
18000
1. Financial statements prepared under this method are more meaningful.
2. The statements reveal true operational efficiency and profit.
3. It prevents overstatement of profit.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 194
4. It helps to determine the correct replacement cost of assets as depreciation is
provided at current cost.
1. Due to technological changes it is difficult to determine the value of real assets
of the business.
2. There is an element of subjectivity in periodic valuation due to the non-
availability of reliable indices.
3. The operating profits of the firm do not reflect the real earnings of the firm.
4. The income tax authorities have not recognised this method.
This approach is the combination of the two approaches – Current Purchasing
Power Accounting and Current Cost Accounting. This method is also referred as
hybrid method. This approach takes into account both the changes in specific prices of
individual items and the influences of general price level changes. Under this
approach, values shown in the financial statements are based on current costs and are
measured in units of purchasing power. This method is not so popular.
The advocates of this method are of the view that periodic revaluation of fixed
assets along with the adoption of LIFO method (for getting the cost of goods sold and
value of closing stock) can considerably reduce the effect of increasing prices. The
purpose of periodic revaluation of fixed assets is to charge depreciation on current cost
of replacement and the aim of following LIFO method is to charge current cost of
goods consumed to Profit and Loss Account.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 195
A. Short Answer Type questions
25. Define Inflation Accounting.
26. List the methods of Inflation Accounting.
27. What do you mean by CPP Accounting?
28. What do you understand by Current Cost Accounting?
29. What do you mean by SGPLA?
B. Short Essay Type Questions
21. Briefly explain the benefits of Inflation Accounting.
22. What are the limitations of Historical Accounting?
23. Write a note on CPP Accounting.
24. Explain the Current Cost Accounting with its merits and demerits.
25. What are the characteristics of CCA method?
C. Essay Type Questions
1. Define Inflation Accounting. Briefly explain its merits and demerits.
2. Write an essay on Methods of Accounting for Price Level Changes.
3. Write short notes on:
a) Cost of Sales
b) Depreciation Adjustment
c) Monetary Working Capital Adjustment
d) Gearing Adjustment.
D. Practical Problems
1. Adjust the following Statement of Profit and Loss and Balance Sheet under
CPPA method to ascertain the changes in net profit and reserve.
Statement of Profit and Loss
for the year ending 31
st
December 2014 (Rs. in 000’s)
Sales
Less: Cost of goods sold:
Opening inventory
Add: Purchases
Less: Closing inventory
Gross Profit
Less: Administration expenses
Depreciation on buildings
Net Profit
80
420
500
430
500
70
25
5
70
30
40
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 196
Balance Sheet
as on 31
st
December 2014 (Rs. in
000’s)
Share Capital
Reserve
Land
Buildings
Less: Depreciation
Stock
Debtors
Cash
Less: Creditors
200
45
200
200
400
140
155
105
70
40
30
140
35
400
Following further information are also given:
(a) Closing stock was acquired during last quarter of 2014 and opening stock
during the last quarter of 2013.
(b) The land and buildings were acquired and the capital issued during 1998. The
buildings are depreciated straight line over 40 years.
(c) Sales, purchases and administration expenses are assumed to occur evenly over
the year and hence at average prices.
(d) The relevant retail price indices are:
2006 average 60
2013 last quarter average 108
2014 last quarter average 116
2014 average 114
2013 December 31 110
2014 December 31 118
(Answer: Net Profit – Rs. 30.89; Balance Sheet Total – Rs. 721.37).
2. Calculate the gearing adjustment from the following data under CCA method:
Convertible Debentures
Bank Overdraft
Cash
Share Capital
Reserves
Opening (Rs.)
Closing
(Rs.)
100
60
10
150
50
120
80
30
200
80
Cost of Sales Adjustment Rs. 20
Monetary Working Capital Adjustment Rs. 15
Depreciation Adjustment Rs. 5
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 197
Total Current Cost Adjustments Rs. 40
(Answer: Average Net Borrowings – Rs. 160; Average Shareholders’ Fund – Rs. 240;
Gearing Adjustment – Rs. 16).
3. Following are the Balance Sheets and Profit and Loss Account of a firm, prepared
on the basis of historical cost accounting.
Balance Sheet
as on 1
st
April 2014
Capital
Profit and Loss Account
Sundry Liabilities
Rs.
400000
50000
150000
Plant and Machinery
Furniture
Stock
Debtors
Cash
Rs.
200000
50000
100000
80000
170000
600000
600000
Balance Sheet
as on 31
st
March 2015
Capital
Profit and Loss Account
Sundry Liabilities
Rs.
400000
145000
65000
Plant and
Machinery
Less: Depreciation
Furniture
Less: Depreciation
Stock
Debtors
Cash
200000
20000
Rs.
180000
45000
80000
120000
185000
50000
5000
610000
610000
Profit and Loss Account
for the year ended 31
st
March 2015
To Stock (on 01/04/2014)
To Purchases
To Depreciation
To Other Operating
Expenses
To Net Profit
Rs.
100000
760000
25000
100000
95000
By Sales
By Stock (on 31/03/2015)
Rs.
1000000
80000
1080000
1080000
Additional Information:
a. The replacement cost of the goods sold on the date of sales amounted to Rs.
800000.
b. The current replacement cost of the stock on 31
st
March 2015 is Rs. 85000.
c. On 31
st
March 2015, the replacement costs of the plant and machinery and
furniture were Rs. 220000 and Rs. 40000 respectively.
SCHOOL OF DISTANCE EDUCATION
Advanced Corporate Accounting Page 198
Prepare Profit and Loss Statement for the year ended 31
st
March 2015 and
Balance Sheet as on 31
st
March 2015 on the basis of Current Cost Accounting.
(Answer: Realised Holding Gain – Rs. 20000; Unrealised Holding Gain – Rs. 15000;
Total Profit – Rs. 109000; Balance Sheet Total – Rs. 624000).