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IPCC ACCOUNTS SHORT NOTES ON AMALGAMATION, INTERNAL RECONSTRUCTION, ISSUE OF BONUS SHARES, NOT FOR PROFIT ORGANISATION, INVESTMENT, PRE-POST INCORPORATION PROFIT, PARTNERSHIP , INSURANCE CLAIM, CASH FLOW STATEMENT #pdf
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"CA-IPCC REVISIONARY - A Series of one day revision classes" MAY 2016 Exam ACCOUNTING – PAPER 1 14.04.2016 By- CA Anand V Kaku (+91-9762717777) www.facebook.com/anandvkaku WESTERN INDIA CA STUDENTS’ ASSOCIATION, NAGPUR BRANCH W I C A S A CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 1 AMALGAMATION Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions: (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. (iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. (iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. If any one or more of the above conditions are not satisfied in an amalgamation, such amalgamation is called amalgamation in the nature of purchase Purchase Consideration AS 14 defines the term purchase consideration as the “aggregate of the 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”. In simple words, it is the price payable by the transferee company to the transferor company for taking over the business of the transferor company. It is notable that purchase consideration does not include the sum which the transferee company will directly pay to the creditors of the transferor company. COMPUTATION OF PURCHASE CONSIDERATION i) Lump Sum Method: The amount to be paid by the transferee company as consideration may be stated in the problem as a lump sum. In such a case, no calculation is required. (ii) Net Assets Method: The amount of consideration or the amount of net assets is ascertained under this method in the following manner: Assets taken over (at their revalued figures, if any, otherwise at their book figures). Less: Liabilities taken over (at their agreed values, if any, otherwise at their book figures). While determining the amount of consideration under this method care should be taken of the following: 1. The term “Assets” will always include cash in hand and cash at bank, unless otherwise stated but shall not include any fictitious asset like preliminary expenses, underwriting commission, discount on issue of shares or debentures, profit and loss account (debit balance), etc. 2. If any particular asset is not taken over by the transferee company, the same should not be included while computing purchase consideration. CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 2 3. If there is any goodwill or pre-paid expenses, the same should be included in the assets taken over unless otherwise stated. 4. The term “Liabilities” will mean all liabilities to third parties (the company being the first party and shareholders being the second party). 5. The term “Trade Liabilities” will mean trade creditors and bills payable and shall not include other liabilities to third parties, such as, bank overdraft, debentures, outstanding expenses, taxation liability, etc. 6. The term “Liabilities” shall not include any past accumulated profits or reserves, such as general reserve, reserve fund, sinking fund, dividend equalisation fund, capital reserve, securities premium account, capital redemption reserve account, profit and loss account etc. These are payable to the shareholders and not to the third parties. 7. If any fund or portion of any fund denotes liability to third parties, the same must be included in liabilities, such as, staff provident fund, workmen’s’ savings bank account, workmen’s profit sharing fund, workmen’s’ compensation fund (up to the amount of claim, if any), etc. 8. If any liability is not taken over by the transferee company, the same should not be included. 9. The term “business” will always mean both the assets and the liabilities of the company. (iii) Net Payment Method: The amount of consideration under this method is ascertained by adding up the total value of shares and other securities issued and the payments made in the form of cash and other assets by the transferee company to the transferor company in discharge of consideration. So the consideration constitutes the total payment in whatever form either in shares, debentures, or in cash to the liquidator of the transferor company for payment to the shareholders of the transferor company. Significantly, the total payments made by the transferee company to discharge the claims of preference shareholders and/or equity shareholders of the transferor company may be construed as consideration. In fact they can be satisfied by issuing preference shares/equity shares or debentures, at par, premium or discount and partly by cash. Now the question arises, suppose the transferee company has agreed to discharge the debentures of the transferor company by issuing its own debentures whether it is possible to include the debentures issued to the debenture holders as part of consideration. In this case, according to AS-14, any payments made by the transferee company to other than the shareholders of the transferor company cannot be treated as part of consideration. Moreover, consideration implies the value agreed upon for the net assets taken over by the transferee company, hence payments made to discharge the liabilities of the transferor company may be excluded from consideration. Therefore payments made to the debentureholders should not be considered as part of consideration and they should treated separately and discharged as per the terms of agreement. The same principles may apply to the cost of amalgamation paid by the transferee company since such payment will not form part of purchase consideration and hence ignored. A separate entry will be made by the transferee company in this regard. It may be noted that in this study material, by consideration, under net payment method we shall mean the total payments made by the transferee company to the shareholders of the transferor company for the value of net assets taken over which would have been available to the shareholders of the transferor company had there been no merger. Therefore, any payments made to debentureholders or to discharge the liabilities of the transferor company CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 3 by the transferee company are excluded from the calculation of consideration. The practical problems in this study material are also worked out accordingly. While determining the amount of consideration under this method, care should be taken of the following: 1. The value of assets and liabilities taken over by the transferee company are not to be considered in calculating the consideration. 2. The payments made by the transferee company for shareholders, whether in cash or in shares or in debentures must to be taken into account. 3. Where the liabilities are taken over by the transferee company and subsequently discharged such amount should not be added to consideration. 4. When liabilities are taken over by the transferee company they are neither deducted nor added to the amount arrived at as consideration. 5. Any payments made by the transferee company to some other party on behalf of the transferor company are to be ignored. 6. If the liquidation expenses of the transferor company are paid by the transferee company, the same should not be taken as a part of the consideration. (iv) Shares Exchange Method: In this method, the consideration is ascertained on the basis of the ratio in which the shares of the transferee company are to be exchanged for the shares of the transferor company. This exchange ratio is generally determined on the basis of the value of each company’s shares. Methods of Accounting for Amalgamations Pooling of Interest Method Under pooling of interests method, the assets, liabilities and reserves of the Transferor Company will be taken over by Transferee Company at existing carrying amounts unless any adjustment is required due to different accounting policies followed by these companies. As a result the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves. Purchase Method Assets and Liabilities : the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. Reserves: No reserves, other than statutory reserves, of the transferor company should be incorporated in the financial statements of transferee company. Statutory reserves of the transferor company should be incorporated in the balance sheet of transferee company by way of the following journal entry. Amalgamation Adjustment A/c Dr. To Statutory Reserves When the above statutory reserves will no longer be required to be maintained by transferee company, such reserves will be eliminated by reversing the above entry Inter Company-owing - Should the purchasing company owe an amount to the vendor company or vice versa, the amount will be included in the book debts of one company and trade payables of the other. This should be adjusted by the entry: CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 4 Trade payables Dr. To Trade receivables The entry should be made after the usual acquisition entries have been passed. At the time of preparing the Realisation Account and passing the business purchase entries, no attention need be paid to the fact that the two companies involved owed money mutually. Adjustment of the value of stock - Inter-company owings arise usually from purchase and sale of goods; it is likely, therefore, that at the time, of the sale of business, the debtor company also has goods in stock which it purchased from the creditor company - the cost of the debtor company will include the profit made by the creditor company. After the takeover of the business it is essential that such a profit is eliminated. The entry for this will be made by the purchasing company. If it is the vendor company which has such goods in stock, at the time of passing the acquisition entries, the value of the stock should be reduced to its cost to the company which is acquiring the business; automatically goodwill or capital reserve, as the case may be, will be adjusted. But if the original sale was made by the vendor company and the stock is with the company acquiring the business, the latter company will have to debit Goodwill (or Capital Reserve) and credit stock with the amount of the profit included in the stock. ACCOUNTING ENTRIES IN THE BOOKS OF TRANSFEREE COMPANY A. In case the Amalgamation is in the nature of Merger: (Pooling of Interest Method) On amalgamation of the business Business Purchase Account Dr To Liquidator of Transferor Company (with the amount of consideration) When assets, liabilities and reserves are taken over from the transferor company and incorporated in the books Sundry Assets (Individually) Dr To Sundry Liabilities (Individually) To Profit and Loss A/c To Reserves To Business Purchase A/c See (Note 1 & 2) (with the book value) (with the book value) (with the book balance) (with the book balance) (with the consideration) When consideration is satisfied Liquidator of Transferor Company Dr. To Equity Share Capital To Preference Share Capital To Bank See (Note 3) (with the purchase consideration) (with the paid-up value of shares allotted) (with cash paid) On discharge of liability Debentures in Transferor Company Dr. (with the paid-up value of To Debentures debentures allotted) If the liquidation expenses of the transferor company are borne by the transferee company General Reserve A/c Dr. (with the amount of expenses) To Bank For the formation expenses of the transferee company Preliminary Expenses Account Dr. (with the amount of expenditure) To Bank Note: CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 5 1) Amalgamation in the nature of merger, all the assets, written off expenses, debit balance of Profit and Loss Account, outside liabilities and reserves of the transferor company have to be recorded in the books of the transferee company in the form and at the book values as they were appearing in the books of the transferor company on the date of amalgamation. However, if there is a conflict in the accounting policies of the transferee and transferor companies, changes in the book values may be made to ensure uniformity. 2) While passing the above journal entry, the difference between the amount of consideration payable by the transferee company to the transferor company and the amount of the share capital of the transferor company is adjusted in the general reserve or other reserves. 3) The shares may be allotted at premium or at discount, in which case share premium account and discount on issue of shares account should be stated. In the case of mergers the consideration receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. However, the transferee company may issue preference shares to the preference shareholders of the transferor company. Moreover, the transferee company may allot securities other than equity shares and give cash and other assets to satisfy the dissenting shareholders of the transferor company. B. In case the Amalgamation is in the nature of Purchase: On acquisition of the business from the transferor company Business Purchase A/c Dr. To Liquidator of Transferor Company (with the amount of consideration) When the assets and liabilities are taken over from transferor company Sundry Assets A/c Dr. To Sundry Liabilities A/c (Individually) To Business Purchase A/c (Individually excluding goodwill, with their revalued figures, if any, otherwise at their book figures) (with the figures at which they are taken over) (with the amount of consideration) When the consideration is satisfied Liquidator of Transferor Company Dr. To Preference Share Capital A/c To Equity Share Capital A/c To Debentures A/c To Bank (with the amount of consideration) (with the face value of shares allotted) (with the face value of debentures allotted) (with the amount paid) To record the statutory reserves of the transferor company in the books of the transferee company Amalgamation Adjustment A/c Dr To Statutory Reserve A/c (with the amount of statutory reserve) If the liquidation expenses of the transferor company are borne by the Goodwill Account Dr. To Bank (with the amount of expenditure) CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 6 transferee company With the formation expenses of the transferee company Preliminary Expenses A/c Dr. To Bank (with the amount of expenditure) If there are both goodwill and capital reserve, Goodwill may be written off against Capital Reserve Capital Reserve A/c Dr. To Goodwill A/c (with the amount written off) If any liability is discharged by the transferee company Respective Liability A/c Dr. To Share Capital A/c To Debentures A/c To Bank (with the amount payable) (as the case may be) ACCOUNTING ENTRIES IN THE BOOKS OF TRANSFEROR COMPANY It involves the closing of accounts in the books of the transferor company. The following procedures are followed: Open a Realisation Account and transfer all the assets except any fictitious assets like preliminary expenses, underwriting commission, discount on issue of shares or debentures, profit and loss account (Dr.) balance, etc., to it at their book value: Realisation A/c Dr. To Sundry Assets A/c (Individually) (with the total) (with their books value) Transfer the liabilities taken over by the transferee company Sundry Liabilities A/c Dr (individually) To Realisation A/c (with their book figure) (with the total) consideration becoming due Transferee Company Dr To Realisation A/c (with the amount of consideration) If any assets (other than fictitious assets) is not taken over by the transferee company, the same has to be realised by the transferor company itself: Bank Dr To Realisation A/c (with the realised value) On receiving the consideration from the transferee company: Shares in Transferee Company Dr Transferee Company Dr Bank Dr(as the case may be Debentures in according to the terms of discharge of the consideration ) CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 7 To Transferee Company If the liquidation expenses or realisation expenses are borne by the transferor company itself Realisation A/c Dr To Bank (with the amount of expenditure) If the liquidation expenses or realisation expenses are borne by the transferee company: In such a case, it is better not to pass any entry in the books of the transferor company. Alternatively, the following two entries may be passed, the effect of which will be practically nil: (i) Transferee Company Dr (with the amount of To Bank expenditure) (ii) Bank Dr (with the amount of To Transferee Company expenditure) Entry (i) is passed when the expenditure is incurred, and entry (ii) when it is reimbursed If any liability is not taken over by the transferee company, the same need not be transferred to the Realisation Account. On payment, the liability account should be debited and Bank Account is credited with the actual amount paid. But, if there is any profit or loss on redemption of the liability, the same must be shown in the Realisation Account. (a) In case of Profit: Respective Liability A/c Dr To Realisation A/c (b) In case of Loss: Realisation A/c Dr To Respective Liability A/c (with the profit, i.e difference between the amount due and the amount payable) (with the loss, i.e,difference between the amount payable and the amount due) Now pay off the outside liabilities, if any, not taken over by the transferee company: Respective Liability A/c Dr To Bank (with the amount paid) When the debentures are discharged: (not assumed or discharged by transferee company) (a) Debentures A/c Dr To Debentureholders A/c (b) Debentureholders A/c Dr To Bank (with the book value) (with the amount paid) Now, pay off the (a) Preference Share Capital A/c (with the book figures) CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 8 preference shareholders, if any Dr To Preference Shareholders A/c (b) Preference Shareholders A/c Dr To Preference Shares in Transferee Company To Equity Shares in Transferee Company (as the case may be) To Debentures in Transferee Company To Bank (with the amount payable) Now, close the Realisation Account and transfer the profit or loss on realisation to Equity Shareholders Account: (a) In case of profit: Realisation A/c Dr To Equity Shareholders A/c (b) In case of loss: Equity Shareholders A/c Dr To Realisation A/c (with the amount of profit) (with the amount of loss) Before the equity shareholders are paid off, transfer equity share capital and the past accumulated profits and reserves to Equity Shareholders Account: Equity Share Capital A/c Dr General Reserve A/c Dr Reserve Fund A/c Dr Capital Reserve A/c Dr Profit and Loss A/c Dr To Equity Shareholders A/c (with the paid up value) (with their figures as the case may be) (with the total) Similarly, transfer the past accumulated losses and fictitious assets, if any, to Equity Shareholders Account: Equity Shareholders A/c Dr To Profit and Loss A/c To Preliminary Expenses A/c To Underwriting Commission A/c To Discount on Issue of Shares A/c To Discount on Issue of Debentures A/c (with the total) (as the case may be) Now, pay off the equity shareholders: Equity Shareholders A/c Dr To Equity Shares in Transferee Co A/c To Preference Shares in Transferee Co A/c To Debentures in Transferee Co A/c To Bank (with the amount payable) (as the case may be) Notes: (i) If cash in hand and cash at bank are not taken over by the transferee company, do not transfer them to Realisation Account. But, if it is taken over, then it must be transferred to the Realisation Account. CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 9 (ii) The asset not taken over by the transferee company has also to be transferred to the Realisation Account. (iii) Goodwill and other intangible assets like trade marks, patent rights, etc. are also transferred to Realisation Account provided they have realisable value or they are taken over by the transferee company. Notes: 1. If preference shareholders or debentureholders are paid more or less than the amount due to them as per balance sheet, the difference be transferred Equity Shareholders Account through Realisation Account. 2. After the equity shareholders are paid off, all the accounts in the book of the transferor company will be closed and not a single account will show any balance. 3. The net amount payable to the equity shareholders, after adjustment of accumulated profits and reserves, fictitious assets and profit or loss on realisation, must be equal to the amount of shares and debentures in transferee company and cash received from the transferee company left after discharge of all liabilities and preference share capital. ---****--- “Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.” -Thomas Jefferson CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 10 INTERNAL RECONSTRUCTION Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares. The object of reconstruction is usually to reorganize capital or to compound with creditors or to effect economies. Such a process is called internal reconstruction which is carried out without liquidating the company and forming a new one. Accounting procedure (i) In case of internal reconstruction by reducing capital, a “capital reduction account” is to be opened, which is credited with the amount sacrificed by the shareholders, debenture holders and creditors. (ii) Then the amount of capital reduction is utilised for writing off fictitious assets, past losses and excess value of other assets. (iii) If there is any balance of capital reduction account left after writing off the above losses, then it is to be transferred to capital reserve account. (iv) The amount to be written off cannot exceed the amount credited to the capital reduction amount. But if any reserve appears on the liabilities side of the balance sheet, the same may be utilised in writing off the accumulated losses and assets. (v) Write off all fictitious assets (including Goodwill and Patents) and eliminate all overvaluation of assets by crediting the accounts concerned and debiting the Capital Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the books of the company may be used. If any balance is left in the Capital Reduction (or Reconstruction) Account it should be transferred to the Capital Reserve Account. (vi) If there is any contingent liability (like arrears of preference dividend etc.) and if the same is forgone for the claimant, then no entry will be passed. (vii) If any contingent liability or unrecorded liability (like reconstruction expenses) is to be paid, then it will be paid out of capital reduction a/c. (viii) In case there are any profits or gain occurs during the process of internal reconstruction then such profits or gains must be credited to capital reduction account. (ix) In case of surrender of shares, shareholders surrender part of their holdings to the company, which are utilised to repay debenture holders, preference shareholders and other creditors of the company. Balance of unused shares surrendered is to be cancelled by transferring to capital reduction account. Accounting Entries 1. Entry for share capital reduced without changing the face value of the shares Share Capital A/c Dr. To Capital Reduction/Reconstruction/ Reorganization Account A/c (with the amount of the reduction made) 2. Entry if face value of the shares is also changed on reduction of capital a new category of share capital is created Share Capital A/c (Old) Dr. To Share capital A/c (New) (with the amount treated as paid up) To Capital reduction A/c (with the difference amount) 3. Entry When debenture holder and creditors are also ready to reduce their claim against company Debenture A/c Dr. Creditors A/c Dr. To Capital reduction A/c CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 11 4. Entry in case of appreciation in the value of any asset Assets A/c Dr. To Capital reduction A/c 5. Entry if any contingent liability matures and is to be paid immediately the following entry is passed Capital reduction A/c Dr. To Liability payable A/c Liability Payable A/c Dr. To cash/ Bank/ share capital A/c 6. Entry for utilising the amount of capital reduction to write off accumulated losses. Capital Reduction A/c Dr. To Profit & Loss A/c To Preliminary Expenses A/c To Discount on Shares /Debentures A/c To Goodwill A/c To Trade Assets A/c To Patents/Copy rights To Assets A/c 7. For transferring any balance left in the capital reduction account to capital reserve account Capital reduction A/c Dr. To capital reserve A/c (with the balance left) 8. Variation of Shareholders Rights (Old)% Cum. Pref. Share Capital A/c Dr. To (New)% Cum. Pref. Share Capital A/c <102300190092008e0003009d00a10093008c008e0003009c008f000300a300a6008c008c008e00a300a30003009300a300030092008a00a1008d000300aa009c00a1009610110003008d008e008d0093008c008a00a40093009c009a000300a4009c000300 a40092008e00030094009c008b0003008a00a400030092008a>nd, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand.” - Vince Lombardi CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 12 ISSUE OF BONUS SHARES (1) A company may issue fully paid-up bonus shares to its members, in any manner out of – (i) its free reserves; (ii) the securities premium account; or (iii) the capital redemption reserve account. However, no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets. (2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under (1) above, unless – a) it is authorised by its articles; b) it has, on the recommendation of the Board, been authorised in the general meeting of the company; c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus; e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up; f) The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same. [Rule 14 of Companies (Share Capital and Debentures) Rules, 2014] (3) The bonus shares shall not be issued in lieu of dividend. Accounting Treatment : On capitalization of reserve for issue of shares Capital Redemption Reserve Account Dr. Securities Premium Account Dr. Capital Reserve Account Dr. General Reserve Account Dr. Profit & Loss Account Dr. To Bonus to Shareholders Account. (realised in cash only) On issue of Bonus share Bonus to Shareholders Account Dr. To Share Capital Account. If some shares are party paid- up, first the shares are to me made fully paid up converting partly paid shares into fully paid shares Profit & Loss Account Dr. General Reserve Account Dr. Capital Reserve Account Dr. To Bonus to Shareholders Account (realised in cash only) On making the final call due Share Final Call Account Dr. To Share Capital Account On adjustment of final call Bonus to Shareholders Account Dr. To Share Final Call Account CA ANAND V KAKU +91-9762717777 CA IPC- 1 DAY REVISIONARY MAY 2016 13 NOT FOR PROFIT ORGANISATION




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