Module 4

CORPORATE ACCOUNTING II
MODULE IV
AMALGAMATION, ABSORPTION AND EXTERNAL
RECONSTRUCTION
2 MARK QUESTIONS
1. What do you mean by Amalgamation?
When two or more companies go into liquidation and a new company is

formed to take over the business of the liquidating companies, it is called
amalgamation. Hence, two or more liquidation and one formation take place
in the case of amalgamation.
2. What do you mean by absorption?
Absorption is the process of taking over of an existing company by another

existing company. The company which takes over the business is called
absorbing company and the company, the business of which is taken over is
called absorbed company.
3. What is purchase consideration?
Purchase consideration is the amount payable by the purchasing company to

the shareholders of the vendor company as the price of the business or assets
taken over. It is the aggregate of the shares and other securities issued and
payment in cash by the buying company to the shareholders of the vendor
company.
4. What is net worth?
Net worth is total of agreed value of assets including goodwill taken over
minus the value of liabilities taken over (assumed) by the purchasing
company.
5. What is net worth method of purchase consideration?

Under this method purchase consideration calculated by finding out the net -
worth of the business. Net asset or net worth is total of agreed value of assets
including goodwill taken over minus the value of liabilities taken over
(assumed) by the purchasing company.
6. What is net payment method?
It is a method of calculating purchase consideration. Under this method,

according to As 14 the purchase consideration is calculated by adding the
various payments made by the purchasing company in the form of cash,
shares, debentures etc. to the shareholders of the vendor company.
7. What is external reconstruction?
External reconstruction is the liquidation of an existing company and the

formation of a new company for the purpose of taking over the business of
the liquidating company. External reconstruction is resorted by a company
which has suffered huge loss or which has acute financial crisis or the
business of which has become illegal or has lost its reputation.
5 MARK QUESTIONS
1. Differentiate amalgamation and external reconstruction.
Points Amalgamation External Reconstruction

Companies In amalgamation at least two In external reconstruction only one
Liquidated companies go into liquidation. company goes into liquidation.
Combination Amalgamation is a case of External reconstruction is not a
combination of companies. case of reconstruction.
Objective Amalgamation is undertaken to To continue business when it
eliminate competition. becomes illegal.
Size of Size of the business increases with Size of the Balance Sheet usually
Business amalgamation. gents reduced.
2. Differentiate Absorption and external reconstruction
Points Amalgamation External Reconstruction
Formation of a In absorption, no new company is In external reconstruction, a new
new company formed. company is formed.
Number of In absorption the purchasing In external reconstruction, the
companies company takes over the business business of only one company is
taken over of one or more existing companies acquired.
Combination Absorption is a case of business There is no combination in external
combination. reconstruction.
Objective To get benefits of large scale To give a new life to an existing
operation. company.
Circumstances Absorption is undertaken as a To continue business when it
measure to face stiff competition. becomes illegal.
3. Explain the different methods of calculating purchase consideration.
Purchase consideration is the amount payable by the purchasing company to

the shareholders of the vendor company as the price of the business or assets
taken over. It is the aggregate of the shares and other securities issued and
payment in cash by the buying company to the shareholders of the vendor
company. The following are the different methods for calculating purchase
consideration:
(i) Lump Sum Method
It is a method of presentation of purchase consideration in which the

purchase price is given in total.
(ii) Net Asset Method
Under this method purchase consideration calculated by finding out the net -
worth of the business. Net asset or net worth is total of agreed value of assets
including goodwill taken over minus the value of liabilities taken over
(assumed) by the purchasing company.
(iii) Net Payment Method
It is a method of calculating purchase consideration. Under this method,

according to As 14 the purchase consideration is calculated by adding the
various payments made by the purchasing company in the form of cash,
shares, debentures etc. to the shareholders of the vendor company.
(iv) On the basis of Intrinsic value of shares
Under this method, purchase consideration is calculated on the basis of the

intrinsic value of shares of the vendor company as well as the purchasing
company.
Intrinsic Value = Total market value of assets – Liabilities
Number of shares of the company
4. What are the conditions for amalgamation in the nature of merger?
When two or more companies go into liquidation and a new company is

formed to take over the business of the liquidating companies, it is called
amalgamation. Hence, two or more liquidation and one formation take place
in the case of amalgamation. An amalgamation should be considered to be
an amalgamation in the nature of merger when all the following conditions
are satisfied:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets are liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company become the equity shareholders of
the transferee company by the virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agrees 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 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 in accounting policies.

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CORPORATE ACCOUNTING II

When two or more companies go into liquidation and a new company is

2. What do you mean by absorption?

Absorption is the process of taking over of an existing company by another

3. What is purchase consideration?

Purchase consideration is the amount payable by the purchasing company to

4. What is net worth?

5. What is net worth method of purchase consideration?

6. What is net payment method?

It is a method of calculating purchase consideration. Under this method,

7. What is external reconstruction?

External reconstruction is the liquidation of an existing company and the

Points Amalgamation External Reconstruction

Purchase consideration is the amount payable by the purchasing company to

(i) Lump Sum Method

It is a method of presentation of purchase consideration in which the

(ii) Net Asset Method

It is a method of calculating purchase consideration. Under this method,

(iv) On the basis of Intrinsic value of shares

Under this method, purchase consideration is calculated on the basis of the

Intrinsic Value = Total market value of assets – Liabilities

Number of shares of the company

4. What are the conditions for amalgamation in the nature of merger?

When two or more companies go into liquidation and a new company is

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