Chapter1

Amalgamation of Firms
Introduction
instant
Generally, business concerns adopt different strategies to achieve
important strategies
growth in size and reap the consequential benefits. One of the carrying on similar
is amalgamation of firms. Accordingly, twO or more firms will own and run
businesses may join together and merge into a new firm which
their existing businesses. The old firms will lose their identity.
Meaning of Amalgamation of firms
new business firm,
When two or more business firms are merged to form a
is known
resulting in closure of theold firms and continuation of the new firm, it
partnership
as amalgamation of fims. In other words, when two or moreisexisting
formed to take over
firms amalgamate and in their place, a new partnership fim
their businesses, the process is called amalgamation of firms.
firms" and
The firms which are combined together are called "amalgamating
old firms are
the resulting newfirm is called "amalgamated firm". In short,
amalgamating firms and the new fim is the amalgamated firm.
Objectives or benefits of Amalgamation
The strategy of amalgamation of partnership firms is mainly adopted to achieve
certain objectives and to reap certain benefits such as
(a) avoidance of unhealthy competition,
(b) Internal and external economies of large scale business,
(c) enlarged marketing network,
(d) efficiency of management personnel,
(e) technology,
() tax benefits,
(g) gaining monopoly or dominant position in the market
(h) reducing unnecessary expenses on advertising
) achieving mass production at minimum cost,
() better utilisation of factors of production, and
(k) getting more capital for expansion of the business.
 13
Amalgamation of Firms
Forms of Amalgamation of Firms
place in any one of the
Theamalgamation offirms may take
(a) Merging oftwo or more sole
traders to form a new partnership fol owing way (a) When the values of assets are increased:
Assets Alc Dr

(b) Anexisting partnership fimtaking over an

existing sole i
trading firm. To Revaluation Alc

(c) Merging of two or more existing partnership firms, formine

partnership fim.
Concem (b) When the values of assets are
Revaluation Alc Dr
reduced:

To Assets Alc
(d) An existing partnership firm absorbing or taking over another
partnership firm.
Problems or Issues connected with Amalgamation of firms
existing (c) When the values of
liabilities are increased:
Revaluation Alc Dr
To Liabilities A/c
Whenamalgamation of partnership firms takes place, partrners of thee
firms become partners of the new fim. The following are the usual
arising while existing partnership firms are merged into anew firm:
combiproblems
ning (d) When the values of
liabilities are reduced:
Liabilities Alc Dr
0 The assets and liabilities (partially or fully) of the existing firms To Revaluation A/c
taken over by the new fim either at book values or at revised values may he
Unrecorded Assets :
(D Some of the assets and liabilities of the (e) For recording
Concerned Asset A/c Dr
existing firms may not be taken (with realisable value of
the asset)
over by the new firm. Revaluation A/c
(ü) The amount paid towards goodwill to the unrecordedliabilities :
may be more or less than the value of existing frms by the new firm () Forrecording (with agreed value of
the
in the balance sheets.
goodwill, any, already appearing
if Revaluation Alc Dr
liability)
liability Alc
(iv) The new partnerS may be required to To Concerned
having fixed amount of capital, as percontribute capital to the new firm,
agreed ratio. (g) For profit on
Revaluation:
Dr
Accounting Treatment in the Books of 1ito oud Revaluation Alc
In case of amalgamation of Amalgamating Firms To partners' capital A/cs.
or some of the assets and partnership firms, the old firms transfer their entire Loss:
liabilities either at book values or at (h) For Revaluation
Partners capital A/cs Dr
new firm. If the new firm does not
take certain assets or
revised values to
such assets or liabilities will have to liabilities of old firms, Revaluation A/c accumulated
By doing so, the books of the be transferred to partners' capital accounts. os b o a To and losses: All reserves, accounts
old Accumulated profits partners'capital
generally needed to close the books offirms are closed. The
old firms: following steps are (i) Transfer oflossesshouldbetransferredtothe Journalentries are:
() Revaluation of Assets profitsand ratio. The required
and old profit sharing
e intheir
over by the new firm shouldLiabilities:
be revalued by
All assets and liabilities
taken AccumulatedProfits:
Account".Revaluation is necessary to preparing "Revaluation (a) For General ReserveA/c Dr
in the value of each reveal any appreciation or Dr
the effect of such asset orin liability taken over by the new fim decine
A/c
Profit & Loss Dr
change values is so that accumulated profitsAlc
new firm need not be transferred to the partners. The
loss on revaluation willaffected by the change in values. The
Any other CapitalA/cs
To partners'
have to be to the capital profit or
partners in their profit sharing
of assets and ratio.transferred
The Journal entries accounts ol
for Revaluation (b) For
Accumulated Losses:
Partners' capitalA/cs Dr
liabilities are as
follows LossA/c
To profit&
14
of
(i) Disposalwhich
Assets and Liabilities not taken
bythe new fim
are nottaken overinthe "ratio of
over :
be
AcCou
shouldThe assets Amalgamationof Firms
To Partners' capital A/cs
(Gain on discharge,
15

liabilities
to thecapital
accounts of
assets and liabilities
partners
takenover bythe
capitals"
partners is done in tthrDaeinvsistoeNn distributed in profit
sharing ratio).
toreturn or
addition ofcapital. raio valued, should be raised
of Goodwill: Goodwill, if to the partners capital
capitals because it
amounts
entries for transfer of assets
and liabilities not taken The jou
Over are as (iv) Raisingor Creation
existing firms and credited
in the books of sharing ratio.
(a) For assets not taken over: accounts in their old profit
is as follows:
Partners' capital A/cs Dr
The required journal entry
(In agreed ratio or Goodwill A/c Dr
To concerned Asset A/e capital ratio)
I
ToPartners' capital A/cs (In profit sharing ratio)
have to
Balance sheet, the same willgoodwill
(b) For Liabilities not taken over:
appears in the
Concerned Liability A/e Dr (In agreed ratio or capital ratio) In case goodwill
already
or decrease in value of
compared with revised value. Any increase accounts of all partners in their
To Partners' capital Alcs be transferred to the capital
Sometimes the assets not taken over by the new firm may be sold out in the should be straightaway
profit sharing ratio. The Journal entriesare :
open market. In such asituation, the following entries are warranted: ofgoodwill :
(a) For sale of assets not taken over, at par value: (a) For increased value Dr
GoodwillA/c (For increased value)
Bank A/c D
To partners' capital Alcs
To concerned Asset Alc goodwill:
(b) For sale of asset, not taken over, at a price (b)For Decreased value of Dr
higher than book value: e Partners' capital Alcs (For decreased value)
Bank A/c D (sale value) To Goodwill A/c
new firm account
To concerned Asset A/c
Assets and liabilities taken over : Thevalue of assets and
(Book value) of
() Transfer debited with the difference between the
To partners' capital A/cs should be over should be
(Gain on sale, distributed in profit the new firm. The assets taken
liabilities taken over by required entry is:
(c) For sale of asset, not sharing ratio) liabilities taken over should be debited. The
taken over, at a price lesser than credited and
Bank A/c book value: Liabilities (taken over) A/c
Dr
D
Partners' capital A/cs D (sale value) Dr
New Firm A/c (Bal. fig)
(Loss on sale, distributed in profit A/c.
To Assets (taken over) the purpose of the
To Concerned Asset sharing ratio) and liabilities are taken at revised values for
Alc Note: Assets
TheSimilarly.
the
journal entriesliabilities, not taken over by the(Book
new
value) above entry.
Accounts : The capital accounts
of partners
are: firm, can be paid off capital
partners' and crediting
(a) For directly (v) Closing ofamount due) should be closed by debiting them
dischange liabilities not taken over at
of (i.e. final
required entries are:
book value : the new firm. The
Concerned
To Bank Liability
Alc A/c Dr
(a) Fortransfer of debit balance in
capital a/cs:
(b) For D
value : discharge of liabilities not taken over New Firm's Alc
Alcs.
at a
value less than the book To Partners' Capital
balance in capital a/cs
Concerned
To BankLiability Alc Dr
(b) For transfer of credit
Partners' capital A/cs Dr
Alc
(Discharge value) (Book value) To New Firm's A/c
16 are
Financial Accou
amalgamating businesses
When one or all the Sole Tra, Amalgamation of Firms
Dr
1.7

Concerns: books ofthe, Sole Trader Assets (taken over) Alc

gare the steps toclosethe To liabilities (taken over) Alc
The following
Assetsand Liabilities To Capital Accounts of partners A/c
1. Revaluation of
given in () above
Same steps and entries as Note : It is advisable to pass separate entry for assets, liabilities, and capital
loss on revaluation is credited or accounts balance taken over from each old firm, though combined entry
except that the entire profit or
the Capital Account of the owner.
andlosses : AlI accumulated
debited can be written.
to show good will
(ü) Writing off of Goodwill : If the new firm decides notshould
2. Transferofaccumulated profits
scapitalprofiActscooru
accounts be debited
losses should be credited or debited fully to the proprietor's in the balance sheet, partners' capital
goodwillaccount
over: according to the agreed (new) profit sharing ratio and
3. Disposal of assets and liabilities not taken should be credited to write it off. The entry is :
Any liabilities not taken over may be paid offin cash or
transferred to the
credit of capital Account, as per instruction in the problem.
Partners' capital A/cs D

(In new profit sharing ratio)

Any assets not taken over may be realised in cash or
transferred
capital Alc of the owner as per instruction, in the problem. Iff to the
To goodwill A/c
capital accounts of the partners
there is no
istruction, transferring assets and liabilities not taken Over to the (ii) Adjustment of capitals, if any : The the requirements of the new fim.
of
will have to be adjusted in the light additional capital or they may be
Account of owner is appropriate. capital Partners may be asked to bring cash as
4 Creanion ofgooall: Goodwill may be newly raised or Sometimes the balance in
existing value ma
be increzsed or decre2sed as per instruction. The full amount allowed to withdraw part of existing capital. to their current accounts.
transferred
of the capital accounts may have to be
increzse or decrezse goes to the capital account of the sole trader.
5. Trarser of Asset and Liabiliies taken
resulting The entries for re adjustment of capital are as under :
required amount
over : All liabilities taken ovae
shouidbe debited at agreed values and assets taken over (a) If capital balance is in excess of
Partner's capital A/c Dr
a agreed values. The should be credited
difference is debited or credited to the new fimm. (as To cash/ current A/c
shown n Vabove)
required limit :
6 Cosing (b) If capital balance is less than the
fcaptalAcoourt :
fira'saccount credined to closeOwners capital Account is debited and new Cash'current A/c Dr
the capital Account. If
debi balzDce, new fn's
account is debited and capitalcapital account has To partner's capital a'c the above
Accourtig Account credited Balance sheet : After having followed
New Firm) Treztment the Books of the
in (i) Preparation ofNew balance sheet will be prepared in the new fim
Amalgamated Firm (i.e., the mentioned steps, the
if any on the assets side
and
In e bonis cf new fm incorporating allthe assets, goodwill liabilities side. If necessary
ai han tes a opening
e rom he old entries are made for liabilities and capitals of partners
on the
beome aencf enew fm The
e firms. The partners
recording the assets
of the old firms wil cash or bank account has to
be prepared to ascertain
cash balance.

f caprais wt rz new
Ae ayrg DI be couribted by thefm mav have some fixed amount
new
Ales easets, the new fm's partners in the given rato.
ast mae n te boiks of new fimbalance sheet wil be
are presented in the prepa
Recordingm of Assets nd liabilities folloWI3
zS
te creted tares oe re to be taken over: In the books off the
2d debited liabilities taken over are to
ettei wta te 2pt2lNSyral entry is:
diffe, The
f the
partners are to be credited or
 Financial 19
1.8 ILLUSTRATIONS
Amalyamation of Firms
proprietorslhips) Buildings Nc (7,500 x 20%)
Dr 1.500
(Amalgamationoftwosole 31.3.2002 31.3.2002 1,509
llustration1 'A'&'B'as on were as To Revaluation A/e
The Balance
Sheets of
Asswts
foollows: (Being value of buildings
incrcased by 20%)
250
Dr
Liabilties Rs. 31.3.2002 Capital A/c 250
Rs. To Revaluatíon Alc
Rs. R
7,500 (Bcing loss on revaluation
15,000 20,000 Machinery
Cupitals 9 transferred) 10,000
Furniture Dr
Creditors 10,000 5,000 Creditors Alc 5,000
10,000 31.3.2002 Dr
Bank loan 5.000 Stock Bank loan Alc
Dr 14,750
2,500| Debtors 5,000 M/s A&B A/c (Bal. fig)
Bills payable
Buildings 7,500 10,000 To Machinery Alc
(7,500- 750)
6,750
9,000
(10,0001000)
30,000| 27,500 30,000 To Stock Ac 5.000
21,509% To Debtors A/c
9,000
(7,500 + 1,500)
To Buildings Alc
& liabilities
They decided to amalgamate their businesses. The following revaluationy (Being various assets
and
were agreed: transferred to the new firm
as due
(a) Machinery to be reduced by l0% balancing figure considered
(b) Furniture of 'B' to be appreciated by 5% from the new firm) Dr 14,750
Capital Alc 14.750
(c) Stock to be depreciated by 10% 31.3.2002
To M/s A&B
A/c
(d) Buildings to be appreciated by 20% to the new
Pass the journal entries in the books of (Being transfer of capital
'A and 'B' and alsO prepare the
amalgamated balance sheet. firm)

Solution: [Bangalore, B.Com., OctNov. 2002) Revaluation A/c

Rs.
In the Books of A Particulars
Rs.
Particulars
Journal Entries By Buildings A/c
1.500
750 250
Date To Machinery A/c By Capital A/c
Particulars To Stock Alc
1,000
(Loss - Bal.fig)
LE Dr. Cr.
31.3.2002 Revaluation A/c Rs. Rs. 1.750

To Machinery Alc Dr 1,750 1.750

(7,500 x10%)
To Stock Alc 750

(Being value of (10,000 and x10%)

1,000
reduced by 10%)machinery stock
 Financial
1.10 CapitalA/e
Amalgamation ofFirms 4,500

Particulars To Stock A/c (5,000- 500) 10,.000

RS. To Debtors Ale
Particulars assets &
By Balance b/d (Being transfer of diferent
balancing
(loss)
250 liabilities to the new firm and
To Revaluation A/c 14,750 figure considered as net
amount due).
To MS A&B A/c Dr
18,775|
31.3.2002 Capital A/c 18,775
(Tr'
To M/s A&B A/c
the new
15,000 (Being transfer of capital to
1584 firm)

Revaluation A/e
In the Books of B
Journal Entries Rs
Particulars
Particulars Rs.
175
Date Particulars LE Dr. By Furniture A'c
900 1,225
Rs. Rs
To Machinery Alc By B's capital Ac
500
To Stock Ac (Loss - Bal. fig)
3L3.2002 Revaluation Alc Dr 1,400 1,400
To Machinery A/c 1,400
(9,000 x10%)
900
To Stock Ac (5,000 x 10%) Capital A/e
500
(Being value of machinery and
Rs
stock decreased by 10%) Particulars
Particulars Rs.
3132002 Furmiture Ac (3,500x 5%) 20,000
Dr 175 By Balance bd
To Revaluation A/c 1,225
(loss)
(Being value of furniture increased
175 To Revaluation Alc
Alc 18.775
by 590) To M's A&B 20,000
3132002 Capital Aic (Tr.) 20,000
To Revaluation Alc Dr 1.225

(Being loss on revaluation 1,225

3132002 transferred)
Creditors Alc
Bills Payable Alc Dr 5,000
M/s A&B Alc (Bal. Dr 2,500
fig)
To Dr 18,775

To
Machinery
Alc (9,000
900) 8,100
Furniture Alc (3,500+ 175) 3,675
1.12 Financial Accounti
Am
In the Books of M/s A& B(New Firm)
Balance Sheet of M/s A&B as on 31-3-2002 For

Liabilities Rs. Assetsiidee Rs.

Capital A/es: Buildingssi 9,000

A 14,750 Machinery (6,750+8,100) 14,850
B 18,775 Furniture 3,675
33.525 Stock (9,000+4,500) 13,500
Debtors (5,000+10,000) 15,000
Creditors (10,000+5,000) 15,000 In
Bank loan 5,000
Bills payable 2,500

56,025
56,025
02
lustration 2 of one
 6. The following arc the Balance Shects oftwo like businesSes owncd by
Logu respectively, who decided to amalgamate the businesses under the name ag Raju
Raju &Logu:

Liabilities Raju Logu Assets Raju

Rs. Rs. Rs. Logu
Rs.
Capital 60,000 36.000 Buildings 18,000
Reserve 9,000 Machinery 39,000 13.200
Creditors 18,000 27,000 Stock 24,000 18,000
Bills payable 14,580 Debtors 17,400 28,200
Bank overdraft 6,0000S Investments 9,000
Cash 180 3,600

1,07.580 63,000 1,07,580 63,000

It was mutually decided that the partnership should take over all the assets and
liabilities, subject to the following:
Raju's buildings, Investments and debtors are to be valued at Rs. 30,000. Rs. 6.000
and Rs. 16,530 respectively.
Logu's stock was to be valued at Rs. 21,000 whereas it was considered necessarv to
create a provision on debtors to the extent of Rs. 2,820. Logu's business also had Goodwil
of Rs. 1,000, which was not shown in the Balance Sheet.
The Capitals of Raju and Logu should be Rs. 72,000 and Rs. 48,000
the profits and losses are to be shared in the same proportion. respectively and
Prepare the partnership balance sheet after giving effect to the foregoing
by means ofjournal entries. transactions
[Ans: Raju : Revaluation Profit : Rs.
Capital Alc Balance : Rs. 77,130; Logu : 8,130;
Revaluation
(Excluding goodwill) Rs. 180. Capital Account Balance : Profit :
New firm : Balance Sheet Total : Rs. 1,90,710; :Rs. 37,180;
Balance : Raju : Rs. 5,130 (Cr); Logu Rs.
Rs. Current Alc
Hint : In the absence of instruction, the excess or deficit in capital accounts10,820
of (Dr)]
e carrYng
Amalgamation ofFirms 1.79
9. Shankar and Rajesh carried on business in
and losses in the ratio of2:1.
partnership as contractors sharing proiits
They agreed with Tagore who was carrying on the sametype of business
to amalgamate their business as on 31.8.04. independently,
Their Balance Sheets as on that date were as follows:
Mr.C Liabilities Shankar & Tagore Assets Shankar & Tagore
Rajesh Rajesh
Rs. Rs. Rs. Rs. Rs. Rs.
Creditors 27,000 12,000 Bank 12,000
Bank Overdraf 9,900 Debtors8,250
2256,0,3%0 Less :
Provision 2,250 6,000
27,4,000000 Capitals:
Shankar 63,000 Debtors ose 8,400|
83,000 Rajesh 24,000 1500
6,900
Tagore 21,000 Less:
Provision

Work-in 51,000 21,000

progress
Plant 21,000 15,000
Freehold 24,000
oduce
premises

nated |1,14,000 42,900 1,14,000| 42,900

9921 The terms on which they agreedto amalgamate were:

nce (i) They were to share profitsas under :
470; Shankar %; Rajesh : Tagore A
70;
(ii) Goodwill of Shankar and Rajesh was agreed at Rs. 36,000 and Tagore Rs.
185
18,000. (No goodwillaccount was to be raised).
85; (i) All assets of Shankar and Rajesh were taken over and liabilities to be discharged.
751 The value of theassets were :Freehold premises Rs. 33,000; Plant Rs. 18,750;
Work-in-progress Rs. 55,500; and Debtors Rs. 8,250.
firm was to
(iv) Tagore was to collect his own debts and pay his creditors. The new
take over hisplant for Rs. 15,000 and work-in-progress for Rs. 22,500 and to
pay off his bank overdraft.
contributed in profit
(V) The total capitalof the partners was tobe Rs. 1.20,000 to be entered in a
sharing ratio. The balance due to or by each partner was
current account.
 1.80 Financial Accounting
transactions and the opening
rrepare the partner's capital accounts recordino the above
Balance Sheet of the new firm.
13,500; Capital Ale
IAnS: Shankar & Rajesh : Revaluation profit : Rs.
Balance (Excluding goodwil): Shankar : Rs. 72,000; Rajesh : Rs. 28,500.
Balance
1agore : Revaluation profit: Rs. 1,500; Capital A/c
(Excluding goodwill) : Rs. 27,600
New Firm : Balance sheet total : Rs. 1,68,000;
Current Alc: Shankar : (Cr) Rs. 9,000; Rajesh : (Dr) Rs. 3,000;
Tagore : (Cr) Rs. 2,100]
Hint : Credit goodwillto the partners and Tagore in old ratio and debit all partners in the
firm in new ratio.