How to treat inter firm profits on sale during amalgamations. e.g., Firm A sold goods costing Rs. 1,000 for Rs. 2,000 to firm B. Goods worth Rs. 1,000 are still lying in stock of B, while Rs. 1,000 is still due on above sale. Plz suggest entry in books of both firms.
According to me, no entry in the books of A & B.
In the amalgamating firm AB, foll. entries will be passed:
1. Goodwill A/c Dr. 500
To Stock A/c 500
(to cancel the profit element on goods lying unsold)
2. Creditors A/c Dr. 1000
To Debtors A/c 1000
(to cancel the inter firm debt)
Firm A sold goods to Firm B costing Rs 1000 at Rs 2000. Assuming, Firm B is purchasing the business of Firm A (amalgamation taking place as per AS 14)
So Firm A is Vendor Company & Firm B is purchasing company.
Close the books as usual in both the company. In other words, pass entries in both companies as you do normally.
Pass one extra entry in the books of purchasing company. This entry is passed to remove the profit margin which was included by Firm A while selling its stock at Rs 2000. It is done because now (after amalgamation) both will be one Company.
Entry in the books of Firm B (removal of unrealized profit):-
Goodwill A/c (in case of purchase) / P&l A/c (in case of merger) Dr.
To Stock A/c.
- FA
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