Amalgamation Accounts

 

1.0 INTRODUCTION

Sometimes companies carrying on similar business combine with each other to obtain the economies of large scale production or to avoid the disastrous results of cut-throat, competition. This combination of two or more business may be done by amalgamation.

2.0 OBJECTIVES

At the end of this note, you should be able to:

• define Amalgamation

• explain Purchase Consideration

• calculate Purchase Consideration by using lump sum payment method

• calculate Purchase Consideration by using Net Worth Basis

• give some illustrations in order to explain the calculation of purchase consideration.

3.0 MAIN CONTENT

3.1 Amalgamation Accounts

3.2 Definition

When two or more companies or cooperative societies carrying on similar businesses go into liquidation and a new company is formed to take over their businesses, this is called AMALGAMATION. 

You should note that from the above statement, it is clear that there are two types of companies i.e. Purchasing Company and Liquidating Company or companies. The purchase price of the company that goes into liquidation may be paid fully or partly by issuing share or debenture to the purchasing company. The shareholders or members of liquidating company who do not like to purchase the share of the purchasing company have the right of requiring the liquidator to purchase their shares at a price to be determined by the agreement.

3.3 Purchase Consideration

Before accounting entries, the books of the purchasing company or liquidating company will be discussed, it is necessary to understand "Purchase Consideration".

Purchase consideration is the amount which is paid by the purchasing company for the purchase of the business of the liquidating company.

The calculation of purchase consideration is very important and may be calculated in the following ways:

3.3.1 A Lump Sum Payment

When the purchasing company agrees to pay a lump sum amount to the liquidating company, it is called a LUMP SUM PAYMENT of purchase consideration. For example, "ABC" Nigeria Ltd purchases the business "XYZ" and agrees to pay N1,500,000.00 in all. This is called a lump sum payment.

3.3.2 Net Worth Basis

According to this method, the purchase consideration is calculated by calculating the net worth of the assets taken over by the purchasing company. The net worth is arrived at by adding the agreed value of assets taken over by the purchasing company less value of liabilities to be assumed by the purchasing company. 

3.3.3 Accounting Entries

Illustration I

 

Suppose i) 'ABC' Coop. Society Ltd. takes over the business of `XYZ' Coop Society Ltd.

ii) The value agreed for various assets:

                                                      N

Goodwill	2,200
Land	2,500
Machinery	2,400
Stock	1,300
Debtors	800

iii) "ABC" Coop. Society Ltd does not take over cash but agrees to pay creditors which actually comes to $500.00.

You are required to calculate the purchase consideration of `XYZ' Coop. Society Ltd

.

Solution:

The calculation of purchase consideration of "XYZ" Cooperative Society Ltd will be as follows:

Value of Assets taken over by 'ABC' Coop. Society Ltd.

N

Debtors                       800

Stock                           1,300

Machinery                   2,400

Land                            2,500

Goodwill                     2,200

Total value of Assets taken over                                                         9,200

Less liabilities taken over                    500

Purchase Consideration                      8,700

While calculating purchase consideration

1.      Only agreed value of those assets are added which have been taken over by the purchasing company

2. Fictitious assets and expenses not written off as debit balance of profit and loss account, preliminary expenses, discount or commission on the issue of shares or debentures will not be taken over by the purchasing company and therefore not added. Goodwill is an intangible asset and its agreed value is added, if taken over by the purchasing company.

3. Only agreed value of those liabilities is deducted which are assumed by the purchasing company.

4. Undistributed profits like credit balances of profit and loss account, reserve fund, general reserve, sinking fund, share premium, capital reserve are not deducted.

4.0 CONCLUSION

Amalgamation can only take place between two companies carrying on similar business. Shareholders of liquidating company who do not like to purchase the share of the purchasing company have the right to do so. The amount paid by the purchasing company to liquidating company is known as "Purchase Consideration".

5.0 SUMMARY

In this note, we discussed the definitions of Amalgamation, purchase consideration. The amount paid by purchasing company for purchasing the business of a liquidating company is known as purchase consideration, and this can be calculated by using lump sum payment method or net worth basis method.

<<<Previous Note

View Course Content

Next Course>>>