Amalgamation (AS-14 Basics): Types, Methods (Pooling vs Purchase) and Purchase Consideration Questions

Q: Differentiate between amalgamation in the nature of merger and purchase (any three points).

Merger vs purchase: | Basis | **Merger** | **Purchase** | |---|---|---| | Conditions | satisfies AS-14 merger conditions | does not satisfy merger conditions | | Method | **pooling of interests** | **purchase method** | | Reserves | generally carried forward | generally not carried forward (except statutory) | Thus, merger is a “combination”, purchase is a “takeover”.

Q: Explain two methods of calculating purchase consideration.

Two common methods: 1) **Net payment method**: total of payments to shareholders (shares/cash/debentures). 2) **Net assets method**: agreed value of assets taken over minus agreed value of liabilities taken over. | Method | Base | |---|---| | Net payment | consideration paid | | Net assets | assets – liabilities |

Q: Compute net assets and state whether goodwill or capital reserve arises: Assets ₹10,00,000, Liabilities ₹3,00,000, PC ₹7,50,000.

Net assets = 10,00,000 – 3,00,000 = **₹7,00,000**. PC = ₹7,50,000 which is **greater** than net assets. So **Goodwill = ₹50,000**. | Item | Amount | |---|---:| | Net assets | 7,00,000 | | PC | 7,50,000 | | Goodwill | 50,000 |

Q: Write the journal entry for purchase consideration due (Business Purchase) in transferee books.

When purchase consideration becomes due: **Business Purchase A/c Dr** To **Liquidator of Transferor Co. A/c** (Being purchase consideration payable to shareholders through liquidator.)

Question 1

What is pooling of interests method?

Accepted Answer

Pooling of interests method is an accounting method for amalgamation in the nature of merger where assets, liabilities and reserves are combined at book values.

Question 2

Define amalgamation.

Accepted Answer

Amalgamation is a business combination in which two or more companies are combined into one company by merger or absorption.

Question 3

Who is a transferor company?

Accepted Answer

Transferor company is the company that is taken over (amalgamated) and transfers its business to the transferee company.

Question 4

Define purchase consideration.

Accepted Answer

Purchase consideration is the amount payable by the transferee company to the shareholders of the transferor company for taking over its business.

Question 5

When does goodwill arise in amalgamation?

Accepted Answer

Goodwill arises when purchase consideration is more than the net assets taken over (PC > net assets).

Question 6

When does capital reserve arise in amalgamation?

Accepted Answer

Capital reserve arises when purchase consideration is less than the net assets taken over (PC < net assets).

Question 7

Differentiate between amalgamation in the nature of merger and purchase (any three points).

Accepted Answer

Merger vs purchase:

| Basis | **Merger** | **Purchase** |
|---|---|---|
| Conditions | satisfies AS-14 merger conditions | does not satisfy merger conditions |
| Method | **pooling of interests** | **purchase method** |
| Reserves | generally carried forward | generally not carried forward (except statutory) |

Thus, merger is a “combination”, purchase is a “takeover”.

Question 8

Explain two methods of calculating purchase consideration.

Accepted Answer

Two common methods:

1) **Net payment method**: total of payments to shareholders (shares/cash/debentures).
2) **Net assets method**: agreed value of assets taken over minus agreed value of liabilities taken over.

| Method | Base |
|---|---|
| Net payment | consideration paid |
| Net assets | assets – liabilities |

Question 9

Compute net assets and state whether goodwill or capital reserve arises: Assets ₹10,00,000, Liabilities ₹3,00,000, PC ₹7,50,000.

Accepted Answer

Net assets = 10,00,000 – 3,00,000 = **₹7,00,000**.

PC = ₹7,50,000 which is **greater** than net assets.
So **Goodwill = ₹50,000**.

| Item | Amount |
|---|---:|
| Net assets | 7,00,000 |
| PC | 7,50,000 |
| Goodwill | 50,000 |

Question 10

Write the journal entry for purchase consideration due (Business Purchase) in transferee books.

Accepted Answer

When purchase consideration becomes due:

**Business Purchase A/c Dr**  
  To **Liquidator of Transferor Co. A/c**

(Being purchase consideration payable to shareholders through liquidator.)

Question 11

State any three conditions/features of amalgamation in the nature of merger (AS-14 basics).

Accepted Answer

Any three merger conditions/features (AS-14 basics):

- Substantially all **assets and liabilities** of transferor are taken over.
- Shareholders of transferor become shareholders of transferee (continuity of **ownership**).
- Business of transferor is intended to be **continued** by transferee.
- Consideration is discharged mainly by issue of **equity shares**.

Flow (write): Continuity of business + continuity of ownership → **Merger**

Question 12

Differentiate between net payment method and net assets method of purchase consideration (PC).

Accepted Answer

Net payment vs net assets method:

| Basis | **Net payment method** | **Net assets method** |
|---|---|---|
| Base | total payment to **shareholders** | agreed assets – agreed liabilities |
| Includes | shares/cash/debentures issued as consideration | only net assets taken over |
| Focus | how PC is **settled** | value of business **acquired** |

Both arrive at PC, but from different angles.

Question 13

Explain purchase method and treatment of goodwill/capital reserve (exam-style).

Accepted Answer

### Purchase method (nature of purchase) Under purchase method, the transferee company records assets and liabilities taken over at **agreed values**. Transferor’s reserves are generally not carried forward (except statutory reserves, if required). ### Goodwill / Capital reserve Compute net assets: Net assets = agreed assets – agreed liabilities Then compare with **purchase consideration (PC)**: - If **PC > net assets** → **Goodwill** (debit) - If **PC < net assets** → **Capital reserve** (credit) | Comparison | Result | |---|---| | PC > net assets | **Goodwill** | | PC < net assets | **Capital reserve** | ### Conclusion Thus, purchase method treats the combination as an acquisition and recognises goodwill/capital reserve based on the PC vs net assets difference.

Question 14

Explain pooling of interests method and treatment of reserves (exam-style).

Accepted Answer

### Pooling of interests method (merger)
Pooling method is used for amalgamation in the nature of **merger**. The key idea is to combine balances as if the companies were always one.

### Key points
- Assets and liabilities are recorded at **existing book values** (generally).
- Reserves of transferor are **preserved** and appear in transferee books in the same form.
- Shareholders of transferor become shareholders of transferee (condition-based).

| Item | Treatment |
|---|---|
| Assets/liabilities | book values |
| Reserves | carried forward |

### Conclusion
Pooling method emphasises continuity of business and continuity of ownership, so reserves are maintained rather than revalued/treated as acquisition gains.

Question 15

Prepare an exam-style flow for amalgamation accounting from identification to entries (flowchart).

Accepted Answer

Amalgamation accounting can be written as a clear flow:

### Steps
1) Identify type: **Merger** or **Purchase** (AS-14 conditions).
2) Choose method: **Pooling** (merger) or **Purchase method**.
3) Compute **Purchase Consideration (PC)** (net payment / net assets).
4) Compute **Net assets** (assets – liabilities) at agreed values.
5) Determine **Goodwill/Capital reserve**.
6) Pass entries in transferee books (Business Purchase, assets/liabilities, discharge PC).

Flowchart (write/draw):
Type → Method → PC → Net assets → Goodwill/Capital reserve → Entries

### Conclusion
A stepwise approach prevents mistakes and ensures correct goodwill/capital reserve recognition.

Basis	Merger	Purchase
Conditions	satisfies AS-14 merger conditions	does not satisfy merger conditions
Method	pooling of interests	purchase method
Reserves	generally carried forward	generally not carried forward (except statutory)

Amalgamation (AS-14 Basics): Types, Methods (Pooling vs Purchase) and Purchase Consideration

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