holding co. questions

7/30/2019 holding co. questions

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Valuation of goodwill

Methods of Valuation of Goodwill

Since goodwill is an intangible asset it is very difficult toaccurately calculate its value. Various methods have been

advocated for the valuation of goodwill of a partnership firm.

Goodwill calculated by one method may differ from the

goodwill calculated by another method. Hence, the method

by which goodwill is to be calculated, may be specificallydecided between the existing partners and the incoming

partner.

The important methods of valuation of goodwill are as follows:

1. Average Profits Method

2. Supper Profits Method

3. Capitalisation Method


2/77

The profit for the last five years of a firm were as follows

year 2002 Rs. 4,00,000; year 2003 Rs. 3,98,000; year 2004 Rs.

4,50,000; year 2005 Rs. 4,45,000 and year 2006 Rs. 5,00,000.

Calculate goodwill of the firm on the basis of 4 years purchaseof 5 years average profits.

Solution

Year Profit

(Rs.)

2002 4,00,000

2003 3,98,000

2004 4,50,000

2005 4,45,000

2006 5,00,000

Total 21,93,000


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Average Profit = Total Profit of Last 5 Years

No. of years

= Rs. 21,93,000

5

= Rs. 4,38,600

Goodwill = Average Profits No. of years purchased

= Rs. 4,38,600 4 = Rs. 17,54,400


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The Profits of firm for the last five years were as follows:

Year Profit

(Rs.)

200203 20,000

200304 24,000

200405 30,000

200506 25,000200607 18,000

Calculate the value of goodwill on the basis of three years

purchase of weighted average profits based on weights

1,2,3,4 and 5 respectively to the profits for2002,2003,2004,2005 and 2006.


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Solution

Year Ended 31st March Profit Weight Product

(Rs.)

200203 20,000 1 20,000

200304 24,000 2 48,000

200405 30,000 3 90,000

200506 25,000 4 1,00,000200607 18,000 5 90,000

15 3,48,000

Weighted Average Profit = Rs. 3,48,000 / 15

= Rs. 23,200

Goodwill = Rs. 23,200 3 = Rs. 69,600


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Calculate goodwill of a firm on the basis of three year purchase

of the weighted average profits of the last four years. The

profit of the last four years were: 2003 Rs. 20,200; 2004 Rs.

24,800; 2005 Rs. 20,000 and 2006 Rs. 30,000.The weights assigned to each year are : 2003 1; 2004 2; 2005

3 and 2006 4.

You are supplied the following information:

1. On September 1, 2005 a major plant repair was undertaken forRs. 6,000, which was charged to revenue. The said sum is to

be capitalised for goodwill calculation subject to adjustment of

depreciation of 10% p.a. on reducing balance method.

2. The Closing Stock for the year 2004 was overvalued by Rs.2,400.

3. To cover management cost an annual charge of Rs. 4,800

should be made for purpose of goodwill valuation.


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Calculation of Adjusted Profit 2003 2004 2005 2006

Rs. Rs. Rs. Rs.

Given Profits Less 20,200 24,800 20,000 30,000

Management Cost 4,800 4,800 4,800 4,800

Add: Capital Expenditure 15,400 20,000 15,200 25,200

Charged to Revenue - - 6,000 -

15,400 20,000 21,200 25,200Less: Unprovided Depreciation - - 200 580

15,400 20,000 21,000 24,620

Less; over valuation of Closing Stock - 2,400 - -

15,400 17,600 21,000 24,620

Add: over value of opening stock - - 2,400 -

Adjusted Profits 15,400 17,600 23,400 24,620


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Calculation of weighted average profits:

(Rs.)

Year Profit Weight Product

2003 15,400 1 15,4002004 17,600 2 35,200

2005 23,400 3 70,200

2006 24,620 4 98,480

Total 10 2,19,280Weight Average Profit = Rs. 2,19,280/ 10 = Rs. 21,928

Goodwill = Rs. 21,928 3 = Rs. 65,784

Notes to Solution

(i) Depreciation of 2005 = 10% of Rs. 6000 for 4 months= Rs. 6000 *10/100 * 4/12 = Rs. 200

(ii) Depreciation of 2006 = 10% of Rs. 6000 Rs. 200 for one year

= Rs. 5800 * 10/100 = Rs. 580

(iii) Closing Stock of 2004 will become opening stock for the year 2005


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In previous study the term capital employed is defined as

simple equation as:

Total assets out side liabilities

But in practice, in large size of companies the following twodifferent type of approaches are adopted to compute the

value of capital employed:

1. Assets side approach

2. Liabilities side approach


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Assets side approach

Value of capital employed, under this approach, is calculate as follows:

Assets at market value ***

(excluding goodwill, all deferred expenditure)Less:

Liabilities to outsiders ***

Capital employed ------

Less:

50% of profit during the year ***

Average capital employed ------


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Liabilities side approach

Share capital ****

Add:

Profit , reserve, workman compensation reserve,

Gain on revaluation of assets and liabilities ****

Less:

Goodwill, loss on revaluation of assets and liabilitiesLosses, preliminary expenses, investment, ****

Capital employed ------

Less:

50% of profit during the year ****Average capital employed ------


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You are required to calculate a) capital employed and b) average

capital employed from the following balance sheet:

Liabilities Amount Assets Amount

12% preference share capital

Equity share capital

Reserve ( including profit of the

current year Rs. 50,000)

Workman compensation fund

Depreciation fund:Land and building 30,000

Plant 30,000

Debenture

Creditor

1,00,000

3,00,000

90,000

60,000

60,000

90,000

80,000

Goodwill

Land and building

Plant

Current assets

Investment

Investment for replacement ofplant

Preliminary expenses

30,000

90,000

1,50,000

4,00,000

70,000

30,000

10,000

7,80,000 7,80,000


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Total of assets other than goodwill and preliminary expenses

7,80,000 30,000 10,000 = 7,40,000

Less: Debenture 90,000

Creditors 80,000

Depreciation 60,000 2,30,000

5,10,000Less: 50% of profit 25,000

Average capital employed 4,85,000


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Share capital

Equity 1,00,000

Preference share capital 3,00,000 4,00,000Add: reserve (90,000-50,000) 40,000

Profit 50,000

Workman compensation 60,000 1,50,000

5,50,000

Less: goodwill 30,000

Preliminary exp. 10,000 40,000

Capital employed 5,10,000

Less: 50% profit of c.y. 25,000

Average capital employed 4,85,000


15/77

You are required to calculate a) capital employed and b) average

capital employed from the following balance sheet:


Equity share of Rs. 10 each fully

paid up

Reserve

Profit and loss a/c

15% Debenture

Workman compensation fundCreditor

Workman profit sharing reserve

10,00,000

3,00,000

2,00,000

2,00,000

30,00060,000

50,000

Goodwill

Land and building 3,00,000

Less: Dep. 30,000

Plant 6,00,000

Less: Dep. 1,00,000

Furniture 70,000Less: Dep. 20,000

Trade investment

(cost 2,00,000)

Stock

Debtors 4,00,000

Less: provision 50,000Cash at bank

Preliminary expenses

1,00,000

2,70,000

5,00,000

50,000

1,75,000

2,80,000

3,50,000

90,000

25,000

18,40,000 18,40,00

0


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Building are now worth Rs. 5,00,000 and plant and machinery is worth Rs.4,75,000.

You are required to compute the value of capital employed.Assets side approach

Total assets 18,40,000Goodwill (100000)

Less: P. Exp. (25,000)

Less: building book value (2,70,000)

Add: building market value 5,00,000Less: plant book value (5,00,000)

Add: plant market value 4,75,000

Required new total assets 19,20,000

Less: 15% debenture 2,00,000Creditors 60,000

Workmen profit sharing reserve 50,000 3,10,000



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Share capital 10,00,000

Add: G/R 3,00,000

Profit and loss a/c 2,00,000

Workmen compensation 30,000

Increase in the value of building 2,30,000

17,60,000Less: Goodwill (1,00,000)

Investment loss (25,000)

Decrease in the value of assets (25,000)



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the following balance sheet of Raj Com. Ltd. as on 31st march 2010:

You are ask to value the goodwill of Raj Ltd. on the basis of 5 year

purchase for which following information is supplied:Adequate provision have been made in the accounts for income tax

and depreciation.

The rate of income tax may be taken at 50%.


Equity share of Rs. 10 each fully

paid upReserve

Profit and loss a/c

Creditor

Provision for taxation

5,00,000

30,000

50,000

1,00,000

70,000

Goodwill

Land and buildingPlant

Stock

Debtors 1,00,000

Less: provision 5,000

Cash at bank

50,000

2,50,0002,00,000

1,50,000

95,000

5,000

7,50,000 7,50,000


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The average rate of dividend by the company for the past 5 year

was 15%.

The return on the company invested is 12%.

Solution :


Total assets 7,50,000

Less: goodwill (50,000)

Required new total assets 7,00,000

Less: liabilities

Creditors (1,00,000)

Provision for taxation (70,000)Capital employed 5,30,000

Goodwill = super profit * No. of purchase year

Super profit = average profit or current profit Normal profit


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Calculation of current profit

Provision for taxation is Rs. 70,000

That is at 50% of the profit

Total profit 100% will be Rs. 1,40,000Current Profit after providing tax (1,40,000 70,000) = 70,000

Calculation of Normal profit

Normal profit = capital employed * rate of return

= 5,30,000 * 12/100= 63,600

Calculation of super profit

Super profit = average profit or current profit Normal profit

= 70,000 63,600= 6,400

Value of goodwill = super profit * No. of purchase year

= 6,400 * 5 = 32,000


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the following balance sheet of sudarshan. Ltd. as on 31st march2010:

the company started business in 2005 with paid up capital Rs. 20,00,000. profitearned before taxation have been as follows:

2006 = 6,00,000, 2007= 7,00,000, 2008 = 8,00,000, 2009 = 5,00,000, 2010 = 9,00,000

Income tax rate 50%. Dividend have been distributed from the profit of first 3 year @10% and 15% next 2 year of the paid up capital.


Equity share of Rs. 10 each fullypaid up

Bank overdraft

Profit and loss a/c

Creditor

Provision for taxation

20,00,000

3,00,000

5,00,000

7,00,000

3,75,000

GoodwillLand and building

Plant

Stock

Debtors

2,00,0009,00,000

8,00,000

12,00,000

7,75,000

38,75,000 38,75,000


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Find the goodwill by capitalization method

Total assets

(38,75,000 2,00,000)= 36,75,000

Less: Total liabilities3,00,000 + 7,10,000 + 3,75,000 = 13,85,000

Net assets = 22,90,000

Calculation of average profit

6+7+8+5+9=35,00,000 / 5 = 7,00,000Less: provision for tax @ 50% = 3,50,000

Average profit = 3,50,000

Average dividend = 10%+10%+10%+15%+15% / 5

Fair rate of return = 12%Capitalized value of business

100 x 3,50,000 / 12 = 29,16,666.6

Goodwill = Capitalized value of business Net Assets

Goodwill = 29,16,666.6 - 22,90,000 =6,26,666.67


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Future Maintainable Profits

We all know that goodwill is abstract asset.

It represents the Future Maintainable Profits of a business. As

is clear from the name itself, Future Maintainable Profits arethe profits that are expected to be earned by the business in

the coming future. For calculating the Future Maintainable

Profits of a concern, we should have a look into the profits

earned by that concern in the few previous years say 2,3,4 or5 years. Its always better to take a short and recent time

period for calculation of Future Maintainable Profits or

Adjusted Average Past Profits.


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The following factors should be considered

For the FMP

Interest on debenture and depreciation on fixed assets

should be included.

Provision for liabilities should be made

Preference dividend must be deducted

Result of any development that will arise in future should

be taken into account

The following items should not taken into account

1. Transfer to general reserve

2. Redemption of liabilities

3. Dividend equalization fund

4. Non trading assets

5. Any income derived from Non trading assets


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Exp. For the year ended 31st march 2010 a

company reported a profit of 14,000 after

paying income tax @ 30%. It was found thatthe year income included Rs. 1,000 for a claim

lodged in 2007-08 for which no entry has been

passed then. The plan to launch a new

product and the following are the estimate in

respect of this.

Sales 12,000

Expenditure on raw material 5,000

Wages and fixed expenses 6,500

You are asked to find FMP


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Solution

Profit before tax

14,000 * 100 / 70 = 20,000

Less: income of 2007-08 = 1,000

Normal profit 19,000

Add: expected profit of new product

Sales 12,000

Less: expenses (5,000 +6,500) 11,500 500

Expected profit before tax =(19,000+500) = 19,500

Less: income tax @ 30% = 5850

FMP 13650


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Valuation of share

Following are the condition in which valuation

of share has become utmost important Amalgamation of companies

Reconstruction

Conversion

Assessment of tax

To meet shareholders demand


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Methods of valuation of shares

Net asset method

Following are the most important steps in this method

Step 1. Total Assets (at market value)

Step 2. less: Total liabilities ( including Debenture and preference share)

Step 3. Result = Net Assets

Step 4. Value of share = Net Assets / Number of equity share

Following are the factors should be considers

Goodwill:

It should be valued at current cost

Inventory:

Raw material, stock and WIP should be valued at cost

Finished goods should be valued at market valueFictitious Assets:

Should be eliminated

Nontrading assets:

at market price


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Debtors:

After provision for bad and doubtful debts

Other assets:

If market value of assets are not given, should be value at book value

Share capital:

If both share capital are given, preference share capital should be

deducted

Intrinsic value of share (I.V.S.) : net assets / no. of equity share

Example

Valuation of fully paid shareValuation of partly paid share

Valuation of fully paid shares


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Valuation of fully paid shares

Q1. the following is balance sheet of A ltd. Company as on 31/3/10

Liabilities

3000, 10% P.S. of Rs. 100 each 30000050000 E.S. of Rs. 10 each 500000

B/P 60000

Creditor 120000 1000000

Assets

Sundry Assets as Book value 1000000

Other information's

The market value of 70% of the assets is estimated to be 20%

more then the book value and that of the remain 30% at 10%

less than the book value. There are unrecorded liabilities of Rs.

10,000.

Find the value of one equity share


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Solution

Total assets is Rs. 1000000 out of which 70% is appreciate by 20%

= 840000

And rest of 30% is depreciated by 10% = 270000

Total assets at market value 1110000

Less : current liabilities

B/P 80000Creditors 120000

Unrecorded liabilities 10000

210000

900000

Less: preference share capital 300000

Net assets available for E.S.H. 600000

I.V.S. = 600000 / 50000 = Rs. 12


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Q.2 the following is balance sheet of A ltd. Company as on 31/3/10

Liabilities Assets

5000 E.S. of Rs. 100 each 500000 goodwill 120000

P&L a/c 50000 investment 480000

GR 150000 stock 500000

10% Debenture 450000 Debtors 300000

Workman S.B. a/c 200000 cash at bank 100000

Creditor 150000 -------------- ---------

1500000 1500000The profit for the past 5 years were:

25000,35000,60000,50000,80000

The market value of investment was Rs. 400000

Goodwill is to be valued as 3 years purchase of average annual profitfor the last 5 years. Find the intrinsic value of share.


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Solution

Step 1 calculate goodwill

Goodwill at new value = 150000

Investment at new value = 400000

Other assets 900000

Total assets 1450000

Less liabilities :Debenture 450000

Creditors 150000

Works S.B. a/c 200000

Total liabilities 800000

Net assets available for E.S.H. 650000

I.V.S. = 650000 / 5000 = 130

/ /


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Q.3 the following is balance sheet of A ltd. Company as on 31/12/09

Liabilities Assets

150000 E.S. of Rs. 10 each 1500000 Building 500000

P&L a/c 200000 P&M 300000

Div. Eq. fund 150000 stock 1000000

B.O.D.* 50000 Debtors 450000

Provision for tax* 100000 ------------- ---------

Creditor * 250000 -------------- ---------

2250000 2250000The profit for the past 5 years were:

05-200000,06-225000,07-250000,08-275000,09-300000

On 31st Dec 09 the value of building were valued at Rs. 625000 and

P&M at 375000. in view of the business, it is considered that 10% isreasonable on capital. goodwill is calculate on the basis of 3 year

super profit method.


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Solution:

Step 1- (total assets liabilities) = net assets 2050000

Step2 average capital employed = (net assets half of current

year profit)= (2050000 150000) = 1900000

Step 3 calculate Goodwill

Average profit = 250000

Normal profit = 190000Super profit = A.P N.P.

Goodwill = S.P. X 3

= 180000

Step 4 Net assets + Goodwill= 2050000+180000 = 2230000

Step 5 Calculate IVS

= 2230000/ 150000 = 14.86

Q 4 31st h 2010 th b l h t f A ltd f ll


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Q.4 on 31st march 2010, the balance sheet of A ltd. was as followsLiabilities Assets1000, 10% P.S. 100000 Goodwill 5000050000 E.S. 500000 land & Building 200000

GR 100000 Machinery 250000CR 20000 furniture 20000P&L 80000 investment (F.V. 60000)750006% Debenture * 160000 stock 400000Creditors* 100000 Debtors 80000

Pro. For tax* 40000 cash 250001100000 1100000

The assets are revalued as- land & Building 280000, machinery 220000Furniture 30000. the normal return in capital is 10%, the basicValuation of goodwill is 4 year purchase of super profits. 50% of

investment in building is treated as non-trading assets because a sumof Rs. 12000 is collected as rent from building. You are required tocalculate the value of each equity share assuming that average annualprofit after tax at 50% is Rs. 132500


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Solution :

Step 1- calculate capital employed

Total assets total liabilities

Step 2 calculate normal profitCapital employed * rate/100

Step 3 calculate average trading profit

Average annual profit - non trading income ( rent 50%, interest

on investment at F.V. less tax 50%)

Step 4 calculate super profit

Average profit normal profit

Step 5 calculate Goodwill

Super profit * no. of year purchase

Step 6- calculate Net assetsTotal assets total liabilities preference share capital

Step 7- calculate IVS

Net assets/ no. of Equity share

S l i


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Solution :

Step 1- calculate capital employed

Total assets total liabilities

TA=(280000+220000+30000+400000+80000+25000-50% of 280000)

TL=(160000+100000+40000)

Step 2 calculate normal profit

Capital employed * rate/100

Step 3 calculate average trading profit

Average annual profit - non trading income ( rent 50%, interest oninvestment at F.V. less tax 50%)

Step 4 calculate super profit

Average profit normal profit

Step 5 calculate GoodwillSuper profit * no. of year purchase

Step 6- calculate Net assets

Total assets total liabilities preference share capital

Step 7- calculate IVS

Net assets/ no. of Equity share

Valuation of partly paid shares


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Valuation of partly paid shares

Following are the extract of balance sheet of A ltd. on 31st march 2010

5000, 10% P.S. of Rs. 100 each 500000

10000, E.S. of Rs. 10 each, Rs. 5 paid up 5000010000, E.S. of Rs. 10 each, Rs. 2.5 paid up 25000

10000, E.S. of Rs. 10 each, Fully paid up 100000

Reserve and Surpluses 200000

P&L a/c 1250001000000

On revaluation of assets it was found that they had appreciated by Rs.

100000 over the value in the aggregate. The article of association of the

company state that in case of liquidation, the preference share holder

would have a further claim of the surplus assets, if any. You are required

to ascertain the value of share assuming that liquidation of the

company has to take place on 31st

march 2010.

S l ti


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Solution

Step 1- calculate Net assets

Ps + Eq + R&S + P&L+ appreciation on revaluation

Step 2- less equity share capital and preference share capital

Step 3- less surplus to preference share holder (10% of surplus)

Result is surplus assets available to equity share holder

Step 4- calculation of total amount available for EQ.S.H.

(Equity share capital + surplus assets available to equity share holder)

Step 5- calculation of value of Rs. 1 of paid-up capital= total amount available for EQ.S.H / paid-up capital

Step 6- calculate value of each Rs. 5 paid up share

Rs. 5 * value of Rs. 1 of paid-up capital

Step 7- calculate value of each Rs. 2.5 paid up shareRs. 2.5 * value of Rs. 1 of paid-up capital

Step 8- calculate value of each Rs. 10 paid up share

Rs. 10 * value of Rs. 1 of paid-up capital

T t t f f h


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Treatment of preference share

The following is the balance sheet of A ltd. On 31st march 2008.

Liabilities Assets

2000, 10% P.S. 200000 sundry Assets 1000000

50000 E.S. 500000 discount on Deb. 5000

GR 25000 Pre. Exp. 15000

Debenture RR 50000 P&L a/c 80000

5% debenture* 100000 --------- ------

Depreciation fund* 25000 --------- -------Creditors* 200000 --------- -------

1100000 1100000

The debenture interest are for one year is outstanding and dividend

on P.S. is arrear for 2 years. In following cases find the value of EQ.S.and P.S.Preference share are preferential as to capital and arrears are payable

Preference share are preferential as to capital but arrears are not payable

Preference share do not priority of capital but arrears are payable

Neither Preference share enjoy priority of capital nor the payment of arrears


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Solution

Step 1- calculation of Net Assets

Total Assets Total liabilities including outstanding interest

Case :Preference share are preferential as to capital and arrears are payable

Step 1- calculation of assets available for Eq. share holders

Net assets preference share capital arrears of 2 years

Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.In this case value of preference share is Rs. 100

Case :Preference share are preferential as to capital but arrears are not payable

Step 1- calculation of assets available for Eq. share holders

Net assets preference share capital

Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.

In this case value of preference share is Rs. 100

case: Preference share do not priority of capital but arrears are


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case: Preference share do not priority of capital but arrears arePayable

Step 1- calculation of assets available for Equity and Preference share

holders

Net assetsarrears of 2 yearsStep 2- IVS = assets available for Eq. share / No. of Eq. S. + P.S. holders

case: Neither Preference share enjoy priority of capital nor the

payment of arrearsStep 1 = Net Assets/ No. of Eq. S. + P.S. holders

Fair value of share - on the basis of minority holding and majority


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y g j y

holding

Minority holding is based on expected rate of return

F.V. of M.H. = IVS + Yield value (based on expected rate of return)2

Majority holding is based on Average rate of return

F.V. of M.H. = IVS + Yield value (based on Average rate of return)

2

Q. Determine the value of 200 share held by Mr. Ram of A Ltd. to be


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y

transferred to Mr. Ramesh on the basis of minority and majority

basis. The balance sheet of A Ltd. Is as follows on 31st march 2010.

Liabilities Assets

80000 Eq. share 800000 Goodwill 40000GR 260000 Building 300000

P&L a/c 160000 Machinery 360000

Creditors 80000 Debtors 400000

---------- -------- Stock 160000---------- -------- Cash at Bank 20000

---------- -------- Pre. Exp. 20000

1300000 1300000

Debtors are estimated to be 10% below book value. Dividend was

paid for the last three years at the rate of 14%,18% and 16%respectively. Normal Expected rate is 10%. P&L a/c shows the net

profit after tax and transfer in general reserve

Solution


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Valuation of share of under net assets method

Step 1 calculate net assets available to Equity share holders

Total assets total liabilitiesStep 2 IVS = net assets available to Equity share holders / No. of Eq.S

Step 3- calculate intrinsic value of 200 shares

Valuation of share under yield method

Step 1 calculate expected rate of return= profit after tax and GR * 100

Share capital

Step 2 calculate yield value of shares

Expected rate of return *paid up value of equity shareNormal rate of return

Step 3- yield value of 200 shares

200 * yield value of shares

Determination of yield value of minority holding and majority holding


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y y g j y g

Step 1- calculate Average rate of actual dividend

14%+18%+16% / 3 = 16%

Step 2- calculate value of one shareAverage rate of actual dividend*paid up value of equity share

Normal rate of return

Step 3- yield value of 200 shares

200*16 =3200

Step 4 fair value of minority holding

F.V. of M.H. = IVS + Yield value (based on expected rate of return)

2

Step 5- fair value of majority holding

F.V. of M.H. = IVS + Yield value (based on Average rate of return)

2

Valuation of share by yield basis or market value


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Yield denotes the income that the investors get for their investment

In this method yield may represent

1. The entire earning2. The dividend paid by company

Following are the steps of share valuation by yield method

1. Future maintainable profit are ascertained

2. The normal rate of return is computed3. Calculation of capitalization factor is to be ascertained

By (100 / normal rate of return)

4. Calculate the capitalized value of future maintainable profit

By ( step 1 X step 2)

5. Calculate the yield value of share

By ( step 4 / Number of equity share)

Q. From the following information calculate the value of an equity


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share

1. The paid capital of the company consist of 2000, 12% preference

share of Rs. 100 each and 50,000 equity share of Rs.10 each .

2. The average annual profit of the company after providing for

depreciation and taxation amounted to Rs. 64,000

3. The normal rate of return is 10%

Solution


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Step 1 calculate FMP

Net profit after depreciation 64000

Less preference share dividend 24000

Amount available for equity shareholder (FMP) 40000

Step 2 normal rate of return is giver 10%

Step 3 capitalization factor

100/10=10Step 4 capitalized value of maintainable profit

40000 x 10 = 400000

Step 5 yield value

400000 / 50000 = 8

Dividend basis of yield value


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Step 1 calculate value of Expected rate

profit available X 100

Total paid-up equity share

Step 2 calculate value of shareExpected rate x paid-up value of equity share

Normal rate

Earning per share basisEPS = earning available to equity share holder / number of equity share

Average EPS = paid up value / normal rate of return

Value of per share = (EPS / Average EPS) X paid up value of equity share


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AMALGAMATION OF LIMITED COMPANIES


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AMALGAMATION OF LIMITED COMPANIES

Amalgamation means coming together of two or more

limited companies for betterment of the business. It

includes dissolution of one or more limited

companies and formation of one new company.

There can be three situations as below:

Amalgamation-

when one or more than one existing limited

companies come together and form a new limited

company to take over their business.

Absorption-

when one existing limited company takes over the

business of another existing limited company

External reconstruction


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External reconstruction

when one limited company is newly formed to takeover the business of another existing limited

company which is a loss making company.The I.C.A.I has issued Accounting Standard 14

governing the procedure and accounting ofAmalgamation of companies.

Scope:

Accounting Standard 14 [ Accounting forAmalgamation], prescribed by the Institute ofChartered Accounts of India, deals with accounting

for amalgamations. The meaning and types ofamalgamation, according to AS 14 are explainedbelow.

Amalgamation:


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Amalgamation:

Amalgamation means an amalgamation pursuant tothe provision of the Companies Act, 1956 or any

other statute which may be applicable to theCompanies, Amalgamation involves acquisition ofone company by another. After Amalgamation, theacquired company is dissolved and ceases to exist.

Transferor Company:Transferor Company means the Company which atransferor another Company ( vendor company).

Transferee Company:

Transferee Company means the Company into whicha transferor Company is amalgamated (purchasingcompany).

Types of Amalgamations


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Types of Amalgamations

There are two types of Amalgamations.

(a) Amalgamation in the nature of merger.

(b) Amalgamation in the nature of purchase.

Amalgamation in the nature of merger means


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Amalgamation in the nature of merger meanswhich satisfies all the following conditions:

i. All the assets and liabilities of the transferor company

are taken over by the transferee company.ii. Shareholders holding not less than 90% of the face

value of equity shares of the transferor companybecome equity shareholders of the transferee

company by virtue of the amalgamation.iii. The consideration for the amalgamation receivable

by those equity shareholders of the transferorcompany who agree to become equity shareholders

of the transferee company is discharged by thetransferee company wholly by the issue of equityshares in the transferee company, except that cashmay be paid in respect of any fractional shares.


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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.

Amalgamation in the nature of purchase

If Amalgamation does not satisfy any one of theabove five conditions then it will be regarded as

Amalgamation in the nature of purchase.

PURCHASE CONSIDERATION :


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PURCHASE CONSIDERATION :

MEANING

Purchase Consideration is the sale price of the

business agreed mutually between the two parties,the transferor company (selling company) and the

transferee company (purchasing company). The AS

14 defines the Purchase Consideration as the

aggregate of the shares and other securities issueand payment made in the form of cash or otherwise

by the transferee company to the SHAREHOLDERS

OF THE TRANSFEROR COMPANY.

METHODS OF PURCHASE CONSIDERATION:


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METHODS OF PURCHASE CONSIDERATION:a. Lump-sum method:

The problem may give the amount of purchase consideration directly and

hence there will not be any need to calculate the purchase consideration.

e.g. Alka techno Ltd. agrees to take over business of WLC Ltd for a sum of

Rs.10 lakhs.

b. Net Payment Method:

If the purchase consideration is not given Lum-sum then this method

should be adopted. Here the purchase consideration is arrived at byadding up cash paid and the agreed values of shares, securities issued by

the transferee company to share holders of transferor company in

discharge of the purchase consideration.

e.g. Engineers Ltd. takes over business of Ramesh Ltd. and agrees to pay the

purchase consideration as follows: issue of 10,000 equity shares of Rs.10each at Rs. 12 each and cash Rs. 50,000. Hence the purchase consideration

would be Rs 10,000 equity shares of Rs.10 each at Rs. 12 each 1,20,000

Cash 50,000 Purchase consideration 1,70,000


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Net Assets Method :

If the purchase consideration can not be calculated

by above two methods then this methods should beadopted. It is the aggregate of the assets taken over

at agreed values less liabilities taken over at agreed

values.

Assets taken over at agreed values,( excluding fictitiousassets) ******

Less : Liabilities taken over at agreed value ******

Purchase consideration ******


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Exchange of shares Method / Intrinsic value

Method :

Under this method the intrinsic value of the

shares of both the companies is calculated

and then the transferor company issue the

shares to the transferee company on the basis

of these values.

ACCOUNTING PROCEDURE IN THE BOOKS OF TRANSFEROR


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COMPANY:

Step 1. Open following Ledger Accounts

1. Realization A/c2. Equity Shareholders A/c

3. Preference Shareholders A/c

4. Cash/ Bank A/c

5. Liabilities not taken over A/c

6. Transferee company's A/c

7. Equity Shares in transferee company A/c

8. Preference Shares in transferee company A/c

Step2. Pass following journal entries


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Step2. Pass following journal entries

Transfer all assets to realization A/c Whether

taken over or not , at their book values.

Realization A/c Dr.

To Sundry assets A/c

Note:

1.Fictitious assets should not be transferred to realization A/c

2. Cash & bank balance should be transferred to realization A/c

only if it taken over by the transferee company

3. Debtors and R.D.D should be treated as separate A/c. Debtors

should be transferred at their gross value on debit side and

R.D.D should be transferred on the credit side of realization

A/c

4. This entry closes all Assets A/c

Transfer all liabilities which are taken over by the


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ytransferee company to realization A/c, credit side

Sundry liabilities A/c Dr.

To Realization A/c Transfer Equity Share Capital and Reserves to Equity

share holders A/c

Equity share Capital A/c Dr. x

Securities Premium A/c Dr. x

Capital Reserve A/c Dr. x

C.R.R. A/c Dr. x

General Reserve A/c Dr. xProfit & Loss A/c Dr. x

To Equity Shareholders A/c x

Transfer Preference Share Capital to Preference ShareholdersA/


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A/c

Preference Share Capital A/c Dr. x

To Preference Shareholders A/c x

Record the sale of businessTransferee Company A/c Dr. x

To Realization A/c x

( with the amount of purchase Consideration)

Receive the amount of purchase considerationEquity shares in transferee company A/c Dr x

Preference shares in transferee company A/c Dr. x

Cash/ Bank A/c Dr. x

To Transferee Company A/c x

Dispose off assets not taken over by the transferee company


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Cash / Bank A/c Dr. X

To Realization A/c X

Discharge the liabilities not taken over by the Transfereecompany.

Liability A/c Dr. X

Realization A/c ( if loss) Dr. x

To Cash / Bank A/c xTo Realization A/c ( if Profit) x

Payment of realization Expenses

Realization A/c Dr. X

To Cash/ Bank A/c. X

Settle the claim of preference shareholders


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p

Preference shareholders A/c. Dr. X

Realization A/c. (if paid at premium) Dr. X

To preference Shares in transferee Co. A/c X

To Cash/ Bank A/c. X

To Realization A/c. ( if paid at discount) X

Balance the Realization A/c.

a. If Profit

Realization A/c Dr. XTo Equity shareholders A/c. X

b. If loss


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Equity shareholders A/c. Dr. X

To Realization A/c. X Close the Equity shareholders A/c.

Equity shareholders A/c. Dr. X

To Equity shares in transferee Co. A/c XTo Cash/ bank A/c X

ACCOUNTING PROCEDURE IN THE BOOKS OF


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TRANSFEREE COMPANY :

Following Journal Entries are passed in the books of

transferee company.

PURCHASE METHOD

1. Recording Purchase of Business

Business Purchase A/c Dr. xTo Liquidator of transferor company X

(The entry should be passed at purchase consideration

amount.)

2. Recording of assets and liabilities taken over


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Sundry assets A/c Dr. x ( With Agreed values)

Goodwill A/c (if any) Dr. x

To Sundry Liabilities A/c XTo Business Purchase A/c X

To Capital Reserve A/c X

3. Recording Discharge of purchase considerationLiquidator of transferor company A/c Dr. X

Discount on issue of shares A/c Dr. X

To Equity Share Capital A/c. X

To Preference Share Capital A/c. X

To Securities Premium A/c. X

4. Discharge of Liabilities of Transferor Company


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Debentures of Transferor Company A/c Dr. X

Discount on issue of Debentures A/c Dr. X

To new Debentures A/c. X

To Securities Premium A/c. X

5. Recording of payment of liquidation expenses

Capital Reserve/ Goodwill A/c. Dr. X

To Cash/Bank A/c. X

6. Recording of Expenses incurred by the transferee

company for its own formation.Preliminary Expenses A/c. Dr. X

To Cash / Bank A/c X

7. Recoding of Statutory Reserve of transferor


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g y

company

Amalgamation adjustment A/c Dr. X

To Statutory Reserve A/c. X

8. Adjusting of mutual indebtedness of transferor

& transferee companySundry Creditors A/c. Dr. X

To Sundry Debtors A/c. X

MERGER METHOD


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1. Recording Purchase of Business

Business Purchase A/c Dr.

To Liquidator of transferor company(The entry should be passed at purchase consideration amount.)

2. Recording of assets and liabilities taken over

Sundry assets A/c Dr.

General Reserve A/c (if any) Dr.

To All Reserves of transferor co.(except General reserve)

To Sundry Liabilities A/c

To Business Purchase A/c

To General Reserve A/c (Balancing figure)

3. Recording Discharge of purchase consideration


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Liquidator of transferor company A/c Dr.

Discount on issue of shares A/c Dr.

To Equity Share Capital A/c.To Preference Share Capital A/c.

To Securities Premium A/c.

4. Discharge of Liabilities of Transferor Company

Debentures of Transferor Company A/c Dr.

Discount on issue of Debentures A/c Dr.

To new Debentures A/c.

To Securities Premium A/c.

5. Recording of payment of liquidation expenses


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General Reserve/ A/c. Dr.

To Cash/Bank A/c.

6. Recording of Expenses incurred by the transferee company for

its own formation.

Preliminary Expenses A/c. Dr.

To Cash / Bank A/c

7. Adjusting of mutual indebtedness of transferor & transferee

company

Sundry Creditors A/c. Dr.

To Sundry Debtors A/c.

Documents

holding co. questions