11 February 2014
Selling Companies (SC) have, say 12% Debentures. In the scheme of amalgamation, Purchasing company (PC), issues to it's own 16% Debentures, to the SC's Debenture Holders, such that their interest income is maintained as previous.
What will the treatment be in the books of the purchasing company and the selling companies?
Does the treatment differ according to the nature of amalgamation(merger/purchase)?
14 July 2024
The treatment of debentures in the books of the purchasing company (PC) and the selling companies (SC) in an amalgamation (whether merger or purchase) would generally follow accounting principles and the terms agreed upon in the scheme of amalgamation. Let's break down the treatment based on the scenario described:
### Scenario Description: - **Selling Company (SC)**: Holds 12% Debentures. - **Purchasing Company (PC)**: Issues its own 16% Debentures to SC's Debenture Holders, ensuring their interest income remains the same as before.
### Treatment in the Books:
#### 1. **Purchasing Company (PC)**: - **Recognition of New Debentures**: PC would recognize the new 16% Debentures issued to SC's Debenture Holders as a liability on its balance sheet. - **Amortization of Premium or Discount**: If the 16% Debentures are issued at a premium or discount compared to their face value, PC would amortize this premium or discount over the term of the debentures. - **Interest Expense**: PC would recognize interest expense at the rate of 16% on the debentures issued, reflecting the cost of borrowing the funds. - **Treatment of SC's Debentures**: If SC's 12% Debentures are assumed or replaced by the new 16% Debentures, PC might need to recognize any gain or loss on extinguishment of debt if there is a difference between the carrying amount of SC's debentures and the consideration paid or received.
#### 2. **Selling Company (SC)**: - **Receipt of New Debentures**: SC would receive the new 16% Debentures issued by PC. - **Recognition of New Investment**: SC would record the new 16% Debentures as an investment or financial asset on its balance sheet. - **Interest Income**: SC would continue to recognize interest income at the rate of 12% on the new 16% Debentures received from PC. This is achieved through adjusting entries, where the difference between the coupon rate and the market rate is booked as discount or premium
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