Page 1
1 Module -1
1
AS 14 - AMALGAMATION, ABSORPTION
& EXTERNAL RECONSTRUCTION - I
Unit Structure :
1.0 Objectives
1.1 Introduction
1.2 Accounting S tandard 14 Issued By Institute of Chartered Accounts
of India
1.3 Types o f Amalgamation
1.4 Distinction Between Amalga mation in the Nature of Merger a nd
Purchase
1.5 Purchase Consideration
1.6 Accounting Procedure in the Books o f Transferor Company
1.7 Accounting Procedure in the Books o f Transferee Company
1.8 Exercise
1.0 OBJECTIVES
After reading this unit, learner w ill be able:
• To acquaint the knowledge of Amalgamation, Absorption, and
External Reconstruction
• To understand the different methods of Amalgamation
• To compute the Purchase Consideration amount
• To be aware of the various methods of determining Purchase
Consideration.
• To apply practically the procedures of the Amalgamation Accounting
for a company.
1.1 INTRODUCTION
1. Amalgamation:
A merger of two or more companies into a single entity is known as an
amalgamation. The assets and liabilities of the merging companies become
part of the merged company in an amalgamation. In exchange for their munotes.in
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Financial Accounting
and Auditing
2 shares in the merging companies, the shareholders of the merging
companies receive shares in the merged company.
Example: Suppose Company A and Company B merge to form C ompany
C. Company A and Company B shareholders receive shares in Company
C in proportion to their respective shareholdings in the merging companies
or as determined by the terms of amalgamation.
2. Absorption:
Absorption is a type of amalgamation in which one company absorbs
another, and the absorbed company goes out of business. In exchange for
their shares in the absorbed company, the absorbed company's
shareholders receive shares in the absorbing company.
For instance, if Company A absorbs Company B, Co mpany B ceases to
exist. Company B shareholders receive shares in Company A in
proportion to their shareholding in Company B or as determined by the
terms of absorption.
3. External Reconstruction:
When a company has been making losses for several years an d is facing a
financial crisis, it can sell its business to another newly
incorporated company. In reality, the new company is formed to take over
the old company's assets and liabilities. This is known as external
reconstruction. In simple words, external reconstruction refers to the sale
of an existing company's business to a new company formed for the
purpose. External reconstruction involves the liquidation of one company
and the formation of a new one. The liquidated company is known as
"Vendor Company ," while the new company is known as "Purchasing
Company." Vendor company shareholders become purchasing company
shareholders.
1.2 ACCOUNTING STANDARD 14 ISSUED BY
INSTITUTE OF CHARTERED ACCOUNTS OF
INDIA
1. Scope : Accounting Standard 14 (AS -14) is a stan dard issued by the
Institute of Chartered Accountants of India that provides guidance on
amalgamation accounting. The standard applies to all companies involved
in amalgamations, whether listed or unlisted, and it requires the accrual
basis of accounting t o be used in the preparation of financial statements.
2. Amalgamation : According to AS -14, an amalgamation is a
combination of two or more companies to form a new company, pursuant
to the provisions of the Companies Act, 1956 or any other applicable
statu te. It involves the acquisition of one company by another, and after
the amalgamation, the acquired company is dissolved and ceases to exist.
3. Transferor Company : The transferor company is the company that
transfers its assets, liabilities, and reserves to another company, known as munotes.in
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - I
3 the transferee company, in an amalgamation. The transferor company is
also known as the vendor company.
4. Transferee Company : The transferee company is the company into
which the transferor company is amalgamated, or the com pany that
acquires the assets, liabilities, and reserves of the transferor company in an
amalgamation. The transferee company is also known as the purchasing
company.
AS-14 also provides guidance on the accounting treatment of
amalgamations, such as accoun ting methods, disclosures, and financial
statements for each type of amalgamation. It establishes the principles for
determining the accounting policies, disclosures, and financial statements
for amalgamations, and it requires the consolidated financial st atements of
the merging companies to provide a true and fair view of the merged
entity's financial position, performance, and cash flows.
1.3 TYPES OF AMALGAMATION
AS-14, "Accounting for Amalgamations", recognizes two types of
amalgamation:
1. Amalgamatio n in the nature of merger :
Amalgamation in the nature of merger is a type of amalgamation that
satisfies all the following conditions:
a. All assets and liabilities of the transferor company become assets and
liabilities of the transferee company.
b. Sharehol ders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already
held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
c. The consideration for the amalgamation is discharged only by the issue
of equity shares in the transferee company, except that cash may be
paid in respect of any fractional shar es.
d. The business of the transferor company is intended to be carried on, in
whole or in part, by the transferee company.
e. No adjustment is intended to be made to the book value of the assets
and liabilities of the transferor company when they are incorpor ated in
the financial statements of the transferee company, except to ensure
uniformity of accounting policies.
If an amalgamation satisfies all the above conditions, it is considered to be
an amalgamation in the nature of merger and is accounted for using the
pooling of interests method. munotes.in
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4 2. Amalgamation in the nature of purchase :
If Amalgamationdoes not satisfy any one of the above five conditions then
it willbe regarded as Amalgamation in the nature of purchase AS-14
requires different accounting treatme nts for these two types of
amalgamations. In the case of an amalgamation in the nature of merger,
the pooling of interests method is used to account for the amalgamation,
while in the case of an amalgamation in the nature of purchase, the
purchase method i s used.
1.4 DISTINCTION BETWEEN AMALGAMATION IN
THE NATURE OF MERGER AND PURCHASE
Merger Purchase
1. Shareholders of the transferor
company who own 90% of the face
value of the transferee company
become shareholders of the transferee
company. 1. Transfero r company
shareholders may not become
transferee company shareholders.
2. There is a genuine polling of the
amalgamating companies' assets and
liabilities. 2. There is no genuine polling of
the amalgamation companies'
assets and liabilities.
3. Shareholders' interests are also pooled. 3. There may be no pooling of shareholder interests.
4.The values of assets and liabilities, as
well as reserves, represent the same
values of the merging companies. 4. The assets and liabilities of the
merging companies ma y have
different values.
Amalgamation in the nature of merger is not covered in the Mumbai
University T.Y.B.Com syllabus, so it will not be covered in this book.
1.5 PURCHASE CONSIDERATION
Purchase consideration is the amount paid by the transferee compa ny
(purchaser) to the transferor company (vendor) in exchange for acquiring
the assets and liabilities of the transferor company in an amalgamation.
AS-14 provides the following techniques for calculating the purchase
consideration:
1. Net Assets Method: In t his method, the purchase consideration is
calculated as the excess of the fair value of the net assets acquired over
the consideration paid to the transferor company. The net assets are
calculated as the difference between the fair value of the assets
acqu ired and the fair value of the liabilities assumed.
For example, if the fair value of the assets acquired from the transferor
company is Rs. 20,000 and the fair value of the liabilities assumed is Rs.
12,000, the net assets would be Rs. 8,000. If the tran sferee company pays
Rs. 10,000 to the transferor company, the net assets method would result
in a purchase consideration of Rs. 2,000. munotes.in
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - I
5 Particulars Amount
(`) Amount
(`)
Revised Values of Assets taken over at
agreed values(excluding fictitious assets)
Goodwill XX Land & Buildings XX Plant & Machinery XX Furniture & Fittings XX Motor vehicles XX Investments XX Inventories XX Trade Receivable XX Bills Receivable XX Cash & Cash Equivalent XX Bank XX Total XX
Less: Revised Values of L iabilities taken
over at agreed value
Trade Payables XX Bills payables XX Bank overdraft XX Debentures XX Total (XX)
Purchase consideration XX
2. Net Payment Method: The purchase consideration in this method is
equal to the net payment made by the transferee company to the
transferor company. The net payment is calculated as the difference
between the total amount of cash or cash equivalents or any securities
acquired from the transferor company and the total amount of
payments made to the tran sferor company.
For example, if the transferee company say Nandini Ltd. buys assets and
liabilities worth Rs. 75,000 from the transferor company say Ragini Ltd.
and pays Rs. 40,000 in form of equity shares in transferee company, pays
Rs. 30,000 in form of Preference shares in transferee company, Rs. 20,000
in form of Debentures in transferee company,Rs. 10,000 in form of cash,
the net payment method results in a Rs. 25,000 purchase consideration.
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Financial Accounting
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6 Statement Showing Calculation of Purchase Consideration
Particulars Amount Amount Equity Shares in Nandini Ltd. 40,000 Preference Shares in Nandini Ltd. 30,000 Debentures in Nandini Ltd. 20,000 Cash 10,000 Total 1,00,000 Less: Net Assets Taken Over (75,000) Purchase Consideration 25,000
3. Lumpsum Method: The transferee may provide the amount of
purchase consideration directly, eliminating the need to calculate the
purchase consideration.
For example, Soma Ltd. agrees to buy out Manappa Ltd. business
for ` 95,00,000. So the PC is ` 95,00,000.
4. Exchange of shares Method / Intrinsic value Method: The intrinsic
value of the shares of both companies is calculated using this method,
and the transferor company then issues the shares to the transferee
company based on these values.
1.6 ACCOUNTING PRO CEDURE IN THE BOOKS OF
TRANSFEROR COMPANY
If Ledger Accounts are to opened:
1. Realisation A/c
2. 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
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - I
7 If Journal Entries are to be passed
Sr.
No. Particulars Dr.
Rs Cr.
Rs.
1 Recording Purchase of Business
Business Purchase A/c Dr. XX
To Liquidator of transferor company XX
(The entry should b e passed at purchase consideration
amount.)
2 Recording of assets and liabilities taken over
Sundry assets A/c Dr. XX
( With Agreed values)
Goodwill A/c (if any) Dr. XX
To Sundry Liabilities A/c XX
To Business Purchase A/c XX
To Capital Reserve A/c XX
3 Recording Discharge of purchase consideration
Liquidator of transferor company A/c Dr. XX
Discount on issue of shares A/c Dr. XX
To Equity Share Capital A/c. XX
To Preference Share Capital A/c. XX
To Securities Premium A/c. XX
4 Discharge of Liabilities of Transferor Company
Debentures of Transferor Company A/c Dr. XX
Discount on issue of Debentures A/c Dr. XX
To new Debentures A/c. XX
To Securities Premium A/c. XX
5 Recording of payment of liquidation expenses
Capital Reserve/ Goodwill A/c. Dr. XX
To Cash/Bank A/c. XX
6 Recording of Expenses incurred by the transferee
company for its own formation.
Preliminary Expenses A/c. Dr. XX
To Cas h / Bank A/c XX munotes.in
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8
7 Recording of Statutory Reserve of transferor company
Amalgamation adjustment A/c Dr. XX
To Statutory Reserve A/c. XX
8 Adjusting of mutual indebtedness of transferor &
transferee company
Sundry Creditors A/c. Dr . XX
To Sundry Debtors A/c. XX
1.7 ACCOUNTING PROCEDURE IN THE BOOKS OF
TRANSFEREE COMPANY
Sr.
No. Particulars Dr.
Rs Cr.
Rs.
1 Recording Purchase of Business
Business Purchase A/c Dr. XX
To Liquidator of transferor company XX
(The entry should be passed at purchase
consideration amount.)
2 Recording of assets and liabilities taken
over
Sundry assets A/c Dr. XX
( With Agreed values)
Goodwill A/c (if any) Dr. XX
To Sundry Liabilities A/c XX
To Busi ness Purchase A/c XX
To Capital Reserve A/c XX
3 Recording Discharge of purchase
consideration
Liquidator of transferor company A/c Dr. XX
Discount on issue of shares A/c Dr. XX
To Equity Share Capital A/c. XX
To Preference Sh are Capital A/c. XX
To Securities Premium A/c. XX munotes.in
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - I
9
4 Discharge of Liabilities of Transferor
Company
Debentures of Transferor Company A/c
Dr. XX
Discount on issue of Debentures A/c Dr. XX
To new Debentures A/c. XX
To Securitie s Premium A/c. XX
5 Recording of payment of liquidation
expenses
Capital Reserve/ Goodwill A/c. Dr. XX
To Cash/Bank A/c. XX
6 Recording of Expenses incurred by the
transferee company for its own
formation.
Preliminary Expenses A/c. Dr. XX
To Cash / Bank A/c XX
7 Recording of Statutory Reserve of
transferor company
Amalgamation adjustment A/c Dr. XX
To Statutory Reserve A/c. XX
8 Adjusting of mutual indebtedness of
transferor & transferee company
Sundry Creditors A/c. Dr. XX
To Sundry Debtors A/c. XX
1.8 EXERCISE
1. What is purchase consideration? What are different methods of
Amalgamation?
2. Conditions for amalgamation in the nature of purchase.
3. Explain the Term:
a. Amalgamation;
b. Absorption;
c. External Re construction
munotes.in
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Financial Accounting
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10 Illustration:1
Following is Balance Sheet of Toofan Ltd as on 31st March 2023
Liabilities Rs Assets Rs
Share Capital Goodwill 1,00,000 10,000 Equity share of
Rs 100 10,00,000 Machinery 2,50,000 2,000 8% Preferenc e
Shares of Rs.100 each
fully paid 4,00,000 Land &
Building 5,00,000 Securities Premium 2,00,000 Furniture 1,00,000 Revenue Reserves 1,00,000 Trade
Receivables 4,50,000 Trade Payables 3,00,000 Inventory 4,00,000 Cash and
Bank 2,00,000 20,00,000 20,00,000
Toofan Ltd received the following offers from Hanuman Ltd.:
1. HanumanLtd. agrees to pay 25,00,000 cash.
2. Hanuman Ltd. agrees to take over on the following terms:
a) Equity shareholders to given 20 Equity shares fully paid of
Rs.15each in Hanuman Ltd.for every 2 Equity shares of Toofan
Ltd.
b) 8% Preference shareholders of ToofanLtd. to be issued 1 0%
Preferance shares of Rs.100 each fully paid on 1:1 basis.
c) Sundry Creditors to be settled in cash.
3. Toofan Ltd. Received another offer Aashna Ltd.offers to take over
business of Toofan Ltd.on the following terms:
a) Assets to be revalued as follows:
Goodwill 1,50,000
Land &Building 9,00,000
Trade Receivables 4,00,000
Inventories 3,50,000
Furniture 80,000 munotes.in
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Reconstruction - I
11 a. Sundry creditors to be taken over subject to 5% discount.
b. 7% Preference shareholders to be issued 10% Preference shares of Rs.
100 each of same amount. Balance of purchase consideration to be
discharged by issue of Equity shares of Rs.10 eachatpar.
c. Prabhu Ltd. agreed to take over Mihir Ltd. on the basis of intrinsic
value of Equity share of Toofan., revaluing Goodwill at Rs.2,00,000.
The entire purcha se price to be paid by issue of 2,0009% Preference
shares of Rs.100 each atpar and balance in Equity shares of Rs.10 each
to beconsidered worth Rs. 12.50.each.
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12 Module 1
2
AS 14 - AMALGAMATION, ABSORPTION
& EXTERNAL RECONSTRUCTION - II
Illustration 1. (Payment Method)
Given below are the extracts from the Balance Sheets of Y Ltd. as at 31st
March, 2019.
Particulars Rs. (in Lakhs)
Equity Share Capit al of Rs. 10 each 10.00
8% Pref. Share Capital of Rs. 100 each 2.00
Reserves and Surplus 3.00
12% Debentures of Rs. 100 each 1.00
Current Liabilities 2.20
Non-Current Assets 12.80
Current Assets 5.40
X Ltd. absorbs Y Ltd. as on that date on the fol lowing terms:
1. 12% D ebentures of Y Ltd. are to be discharged by X Ltd. by issuing
such number of its 15% Debentures of Rs. 100 each so as to maintain
the same amount of interest.
2. The issue of such an amount of fully paid 9% Preference Shares in X
Ltd. at 1 25% as is sufficien t to discharge 8% Preference Shares in Y
Ltd. at a premium of 20%.
3. The Equity Shareholders of Y Ltd. will receive the requisite number of
Equity Shares of X Ltd. The Equity Shares of X Ltd. are to be of a
nominal value of Rs. 10 each c redited as Rs. 8 pa id up and valued at
Rs. 15 per share.
4. The transferee company shall pay the cost of absorption which
amounts to Rs. 100000.
Show the calculation and discharge of Purchase Consideration.
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
13 Solution.
Calculation and Discharge of Purchase Consideration
Part iculars Rs.
1920, 9% Preference Shares [(200000 + 20%)/125)
X Rs. 125] 240000
100000 Equity Shares [100000 X 15] 1500000
Total Purchase Consideration 1740000
Note. According to AS -14, the amount paid by purchasing company to
dischar ge the debenture ho lders and the liquidation expenses of Vendor
Company are not considered as part of purchase consideration.
Illustration 2.
Calculate the amount of purchase consideration payable by Mini Limited
to Maxi Limited. The Summary Balance Sheet of Maxi Limited as on
March 31, 2012 is as follows:
Liabilities Amount Assets Amount
Equity Share Capital
(Shares of Rs. 10) 150000 Goodwill 30000 8% Pref. Share Capital
(Shares of Rs. 10) 60000 Land 35000 Capital Reserve 8000 Building 40000 General r eserve 14000 Machin ery 100000 Profit and Loss A/c 3000 Investment 25000 7.5% Debentures (Rs.
100 each) 30000 Stock 24000 Sundry Creditors 12000 Debtors 15000 Outstanding Expenses 8000 Cash & Bank 13000 Share Issue
Expenses 3000 Total 285000 Total 285000
Mini Limite d decided to take over Maxi Limited by issuing 6 Equity
Shares of Rs. 10 each fully paid and Rs. 6.50 in cash for every 5 Equity
Shares held in Maxi Ltd. The Preference Shareholders are to be paid at
premium of 15% by issue of 10% Prefer ence Shares in Mini Ltd.
Debenture holders of Maxi Ltd. will be paid 9.5% Debentures of Mini Ltd.
for equal value. Realisation expenses of Rs. 7500 are to be borne and paid
by Mini Ltd to Maxi Ltd.
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Financial Accounting
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14 Solution.
Calculation of Purchase Consideration (Net Pa yment Method)
Payme nt to Old
No. Exchange
Ratio New
No. Issue
Price Amount Equity
Shareholders
Equity Shares
Cash 15000 15000 5:6 5:1 18000 3000 10.00 6.50 180000 19500 Preference
Shareholders
10% preference
Shares
Rs. 60000 +
15% Premium 69000 Total Purchase
Consideration 268500
Note: Payment to debenture holders and payment for realization expenses
will not be considered for calculation of Purchase consideration (As per
AS 14)
Illustration 3. (Net Asset Method)
Homer Ltd. and Illiad Ltd . Propose to amalga mate.
Goodwill may be taken at Rs. 96000 for Homer Ltd. and Rs. 38000 for
Illiad Ltd. The Stock of Homer Ltd. and Illiad Ltd. to be taken at Rs.
204000 and Rs. 142000 respectively. You are required to find out the
purchase consideration receivable by both the companies on the basis of
the Net Assets Method. Their financial position as on December 31, 2012
were:
Liabilities Homer Illiad Assets Homer Illiad
Share
Capital:
Equity
Shares of
Rs. 10 each
500000
200000 Fixed Assets
(at cost l ess
depreciation)
400000
100000
Reserves
and Surplus:
General
Reserve
P & L A/c
200000
100000
20000
30000
Investment
100000
Current
Liabilities:
Creditors
100000
50000 Current
Assets:
Stock
Debtors
Cash & Bank
200000
170000
30000
130000
60000
10000
Total 90000 0 300000 Total 900000 300000 munotes.in
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
15 Solution:
Purchase Consideration
Particulars Homer (Rs) Illiad (Rs)
Assets Goodwill (as given) 96000 38000 Fixed Assets 400000 100000 Investment 100000 - Stock (Agreed Value) 204000 142000 Debtors 170000 60000 Cash & Bank 30000 10000 Total 1000000 350000 Less. Creditors 100000 50000 Net Assets / Purchase Consideration 900000 300000
Illustration 4
The balance sheet of Shivam Ltd as on 31st December 2020 was below.
Liabilities Amount Assets Amoun t
Equity share cap ital
of Rs. 10 each 150000 Goodwill 20000
11.5% Preference
share capital of Rs.
100 each 50000 Building 49000
Securities Premium 10000 Plant 115000
General reserve 10000 Furniture 5000
Profit & Loss A/c 5000 Investment 10000
Workmen
Compensation Fund 5000 Stock 20000
Bills Payable 6000 Debtors 15000
Creditors 8000 Bills Receivable 5000
Provident Fund 6000 Cash at Bank 10000
Preliminary
Expenses 1000
Total 250000 Total 250000
Small Limited want s to take over the business on the following terms and
valuation:
Goodwill: Rs. 30000 Building: Rs. 60000
Plant: Rs. 100000 Furniture: Rs. 4000
Investment at book value. munotes.in
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Financial Accounting
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16 Stock at Rs. 15000, Debtors at 10% provision, Bills receivable at par, cash
is no t taken over.
The purchase consideration is to be satisfied to the extent of Rs. 40000 by
payment in cash, and balance is payable in equity shares of Rs. 10 each.
Solution
Calculation of Purchase Consideration
Particulars Amt Amt
Assets taken over
Goodwill 30000
Building 60000
Plant 100000
Furniture 4000
Investment 10000
Stock 15000
Debtors 15000
Less. R.D.D -1500 13500
Bills Receivable 5000
Total (A) 237500
Liabilities Taken Over
Workmen Compensation Fund 5000
Bills payabl e 6000
Creditors 8000
Provident fund 6000
Total (B) 25000
Purchase Consideration (A – B) 212500
Discharge of Purchase Consideration.
In Cash Rs. 40000
In equity shares of Rs. 10 each Rs. 172500
Total Rs. 212500
Amalgamati on
Illustration 5.
A Ltd. and B Ltd. carry on similar business decided to amalgamate and for
this purpose a new company AB Ltd. was formed to take over assets and
liabilities of both the companies. It is agreed that fully paid shares of Rs.
100 each shall be issued by the Ne w Co. to the value of Net Assets of each
of the old companies.
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
17 Summary Balance Sheet of A Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
Shares of Rs. 50
each 50000 Goodwill 5000
General reserve 20000 Land and Building 17000
Profit and Los s A/c 3000 Plant and
Machinery 24000
Sundry Creditors 4000 Stock 10000
Bills Payable 4000 Debtors 12000
Furniture & Fittings 5000
Cash at Bank 8000
Total 81000 Total 81000
Summary Balance Sheet of B Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
800 Shares of Rs. 50
each 40000 Goodwill 2000
Bank Overdraft 8000 Land and Building 10000
Sundry Creditors 8000 Plant and
machinery 16000
Stock 7500
Furniture and
Fittings 7500
Debtors 7000
Cash 300
Profit and Loss A/c 5700
Total 56000 Total 56000
The following is the accepted scheme of valuation of business of the two
companies:
A Ltd:
(a) to provide for reserve for bad debts at the rate of 5% on Debtors
(b) to write off Rs. 400 from stock; and
(c) to write off 33 1/3% from plant and machinery
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Financial Accounting
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18 B Ltd:
(a) to eliminate its goodwill and profit & loss a/c balance
(b) to write off bad debts Rs. 1000 and to provide reserve of 5% on the
balance of debtors;
(c) to write off Rs. 1400 from the value of stock.
You are required to pass the journal entries in the books of A Ltd. & B
Ltd. giving effects to the above transactions. Also pass the journal entries
in the books of AB Ltd.
Solution
Statement of Purchase Consideration (Net Asset Method)
Particulars A Ltd. B Ltd. AB Ltd.
Assets:
Goodwill 5000 - 5000
Land and Building 17000 10000 27000
Plant and Machinery 16000 14400 30400
Furniture and Fittings 5000 7500 12500
Stock 9600 6100 15700
Debtors 12000 6000 18000
Cash 8000 300 8300
Total (A) 72600 4430 0 116900
Less. External Liabilities
Reserve for Bad Debts 600 300 900
Creditors 4000 8000 12000
Bills Payable 4000 - 4000
Bank Overdraft - 8000 8000
Total (B) 8600 16300 24900
Purchase Consideration (A –
B) 64000 28000 92000
Fully paid shares of Rs. 100
each AB Limited 64000 28000 92000
Note: Assets for which valuation is not given are taken at book value. Eg.
Land & Building, Furniture etc.
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AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
19 Journal of A Limited
Sr.
No Particulars Dr (Rs) Cr (Rs)
1 Assets Tfd.
Realisation A/c Dr
To Goodwill
To Land and Building
To Plant and Machinery
To Stock
To Debtors
To Furniture & Fixtures
To Cash
(being the assets transferred to
close the assets a/cs on
amalgamation)
81000
5000
17000
24000
10000
12000
5000
8000
2 Liabilities Tfd. Sundry Creditors A/c Dr Bills Payable A/c Dr
To Realisatio n A/c
(Being transfer of current
liabilities on Amalgamation)
4000
4000
8000
3 Purchase Consideration Due AB Limited A/c Dr
To Realisation A/c
(Being the purchase
consideration d ue for take -over
of assets and liabilities)
64000
64000
4 Loss on Realisation Equity Shareholders A/c Dr
To Realisation A/c
(Being the loss on realization
transferred)
9000
9000
5 Capital Tfd.
Equity Share Capital A/c Dr
To Equity Shareholders A/c
(Being the transfer on
amalgamation to close capital
a/c)
50000
50000 munotes.in
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Financial Accounting
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20 6 Reserves Tfd. General Reserve A/c Dr
Profit and Loss A/c Dr
To Equity Shareholders A/c
(Being transfer of reserves etc.
on amalgamation)
20000
3000
23000
7 PC Received
Equity Shares in AB Limited
A/c Dr
To AB Limited
(Being the purchase
conside ration received fro m AB
Ltd vide agreement)
64000
64000
8 Payment to Equity
Shareholders Equity Shareholders A/c Dr
To Equity Shares in AB
Limited
(Being the payment of purchase
consideration to Equity
Shareh olders vide agreeme nt of
amalgamation)
64000
64000
Journal of B Limited
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Assets Tfd. Realisation A/c Dr
To Goodwill
To Land and Building
To Plant a nd
Machinery
To Stock
To Debtors
To Furniture &
Fixtures
To Cash
(being the assets transferred to
close the assets a/cs on
amalgamation)
50300
2000
10000
16000
7500
7000
7500
300 munotes.in
Page 21
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
21
2 Liabilities Tfd.
Sundry Creditors A/c Dr Bank Overdraft A/c Dr
To Realisation A/c
(Being transfer of current
liabilities on Amalgamation)
8000
8000
16000
3 Purchase C onsideration Due
AB Limited A/c Dr
To Realisation A/c
(Being the purchase
consideration due for take -over
of assets and liabilities)
28000
28000
4 Loss on Realisation
Equity Shareholders A/c Dr
To Realisation A/c
(Being the loss on realization
transferred)
6300
6300
5 Capital Tfd. Equity Share Capital A/c Dr
To Equity Shareholders A/c
(Being the transfer on
amalgamation to close capital
a/c)
40000
40000
6 Reserves Tfd. Equity Shareholders A/c Dr
To Profit and Loss A/c
(Being transfer of reserves etc.
on amalgamation)
5700
5700
7 PC Received
Equity Shares in AB Limited
A/c Dr
To AB Limited
(Being the purchase
consideration received from
AB Ltd vide agreement)
28000
28000 munotes.in
Page 22
Financial Accounting
and Auditing
22
8 Payment to Equity
Shareholders Equity Shareholders A/c Dr
To Equity Shares in AB
Limite d
(Being the paymen t of
purchase consideration to
Equity Shareholders vide
agreement of amalgamation)
28000
28000
Journal of AB Limited
Sr.
No Particulars Dr (Rs) Cr (Rs)
1 Takeover of A Limited (Purchase
Consideration)
Goodwill A/c
Dr
Land and Building A/c
Dr
Plant and Machinery A/c
Dr
Furniture Fittings A/c
Dr
Stock A/c
Dr
Debtors A/c
Dr
Cash A/c
Dr
To Creditors
To Bills Payable
To Reserve for Bad Debts
To Liquidator of A Ltd.
(Being the assets and liabilities taken
over at agreed val ue)
5000
17000
16000
5000
9600
12000
8000
4000
4000
600
64000
2 Liquidator of A Ltd. A/c
Dr
To Equity Share Capital
(Being payment of purchase
consideration) 64000
64000 munotes.in
Page 23
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
23
3 Takeover of B Limited (Purchase
Method)
Land and Buil ding A/c
Dr
Plant and Machinery A/c
Dr
Furniture Fittings A/c
Dr
Stock A/c
Dr
Debtors A/c
Dr
Cash A/c
Dr
To Creditors
To Bank Overdraft
To Reserve for Bad Debts
To Liquidator of B Ltd.
(Being the assets and liabilities taken
over at agreed value)
10000
14400
7500
6100
6000
300
8000
8000
300
28000
4 Liquidator of B Ltd. A/c
Dr
To Equity Share Capital
(Being payment of purchase
consideration) 28000
28000
Illustration 6)
Following is the summary Ba lance Sheets of X L td. and Y Ltd.
Balance Sheets as on 31st March, 2017
Liabilities X Ltd. Y Ltd Assets X Ltd. Y Ltd.
Equity
Share
Capital of
Rs. 10
each 7500000 4500000 Building 2500000 1550000 Export
Profit
reserves 300000 300000 Machinery 3250000 1700000 Profit &
Loss A/c 700000 600000 Stock 2550000 1800000 General
Reserves 200000 450000 Debtors 900000 1000000 munotes.in
Page 24
Financial Accounting
and Auditing
24 12%
Debenture
s of Rs.
100 each
500000
300000 Bank 700000 550000
Sundry
Creditors 700000 550000 Share
Issue
Expenses - 100000
Total 9900 000 6700000 Total 9900000 6700000
Z Ltd. was formed to acquire all assets and liabilities of X Ltd. and Y Ltd.
on the following terms:
1. Z Ltd. to have an authorized share capital of Rs. 5 crores divided into
500000 equity shares of Rs. 100 each.
2. The busi ness of both compan ies were taken over for a total price of Rs.
1.2 crores to be discharges by Z Ltd. by issue of equity shares of Rs.
100 each at a premium of 20%.
3. The shareholders of X Ltd. and Y Ltd. to get shares in Z Ltd. in the
ratio of net assets values of their res pective shares.
4. The Debentures of both the companies to be converted into equivalent
number of 14% Debentures of Rs. 100 each in Z Ltd. at a discount of
10%.
5. All the tangible assets of both the companies are taken over by Z Ltd.
at bo ok values except th e following:
Assets X Ltd. Y Ltd
Building 2800000 1820000
Machinery 3150000 1600000
6. Sundry Creditors of X Ltd. and Y Ltd. are taken over at Rs. 650000
and Rs. 500000 respectively.
7. Statutory reserves are to be maintained for 3 years more.
You are req uired to : -
1. Compute purchase consideration of X Ltd. and Y Ltd.
2. Pass Journal Entries in the books of Z Ltd.
3. Prepare balance sheet after amalgamation. Apply purchase method.
munotes.in
Page 25
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
25 Solution.
Purchase Consideration and Settlement
Particulars X Ltd Y Ltd Z Ltd (B S)
Assets Taken Over
Building 2800000 1820000 4620000
Machinery 3150000 1600000 4750000
Stock 2550000 1800000 4350000
Debtors 900000 1000000 1900000
Bank 700000 550000 1250000
(A) 10100000 6770000 16870000
Liabilities Taken
Over
Debentures 450000 270000 720000
Creditors 650000 500000 1150000
(B) 1100000 770000 1870000
Net Assets (A – B) 9000000 6000000 15000000
Purchase
Consideration (in
ratio of 9:6)
X Ltd. : 120000 X
9 / 15
Y Ltd. : 120000 X
6 / 15
7200000
4800000
12000000
No of Sha res (@
Rs. 120 each)
X Ltd. : 7200000 /
120
Y Ltd. : 4800000 /
120
60000
40000
100000
Journal of Z Ltd.
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Business Purchase A/c Dr.
To Liquidator of
X Ltd
To Liquidator of
Y Ltd. 12000000
7200000
4800000 munotes.in
Page 26
Financial Accounting
and Auditing
26 (Being the purchase of
business as per
agreement)
2 Building A/c Dr Machinery A/c Dr
Stock A/c Dr Debtors A/c Dr Bank A/c Dr
To 12%
Debentures of X Ltd A/c
To Sundry
Creditors A/c
To Busines s
purchase A/c
To Capital
reserve A/c
(Being the assets and
liabilities of X Ltd. taken
over recorded) 2800000
3150000
2550000
900000
700000
450000
650000
7200000
1800000
3 Liquidator of X Ltd. A/c Dr
To Equity
Share Capital A/c
To Securities
Premium A/c
(Being the purchase
consideration of X Ltd.
discharged) 7200000
6000000
1200000
4 12% Debentures of X
Ltd. A/c
Dr
Discount on is sue of
debentures A /c
Dr
To 14%
Debentures A/c
(Being the issue of 12%
Debentures to 14%
Debenture holders of X
Ltd. ) 450000
50000
500000 munotes.in
Page 27
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
27
5 Building A/c Dr
Machinery A/c Dr Stock A/c Dr Debtors A/c Dr Bank A/c Dr
To 12%
Debentures of Y Ltd A/c
To Sundry
Creditors A/c
To Business
purchase A/c
To Capital
reserve A/c
(Being the assets and
liabilities of Y Ltd. taken
over recorded) 1820000
1600000
1800000
1000000
550000
270000
500000
4800000
1200000
6 Liquidator of Y Ltd. A/c Dr
To Equity
Share Capital A/c
To Securities
Premium A/c
(Being the purchase
consideration of Y Ltd.
discharged) 4800000
4000000
800000
7 12% Debentures of Y
Ltd. A/c
Dr
Discount on issue of
debentures A/c
Dr
To 14%
Debentures A/c
(Being the issue of 12%
Debentures to 14%
Debenture holders of Y
Ltd. ) 270000
30000
300000 munotes.in
Page 28
Financial Accounting
and Auditing
28
8 Amalgamation
Adjustment Reserve A/c Dr
To Export Profit
Reserve A/c (X)
To Export Profit
Reserve A/c (Y)
(Being the identity of
Statutory Reserves
retained) 600000
300000
300000
Balance Sheet of Z Ltd. as at 31.03.2017 (After Amal gamation)
No. Parti culars Note
No. Amount
(Rs)
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capital 1 10000000 b. Reserves and Surplus 2 5000000
2. Non-Current Liabilities
Long Term Borrowings (14%
Debentures) 800000
3. Current Li abilities
Trade Payables 1150000
Total 16950000 II Assets
1. Non-Current Assets
a. Property, Plant & Equipment
Tangible Assets 3 9370000
b. Other Non -Current Assets 4 80000
2. Current Assets
a. Inventories 4350000
b. Trade Receiva bles 1900000
c. Cash & Cash Equivalent (Bank) 1250000
Total 16950000
munotes.in
Page 29
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
29 Notes to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Authorised Shares : 500000 Equity Shares
of Rs. 100 each 50000000
Issued and Fully paid up shares:
100000 Equi ty Shares of Rs. 100 each
10000000
2. Reserves and Surplus
a. Capital Reserve (on Amalgamation) 3000000
b. Export Profit Reserve 600000
c. Security premium 2000000
d. Amalgamation Adjustment Reserve (600000)
Total 5000000
3. Tangible Assets
Building 4620000
Machinery 4750000
Total 9370000
4. Other Non -Current Assets
Discount on issue of Debentures
(Assumed, amortizable after 12 months) 80000
Total 80000
Note:
1. Amalgamation Adjustment Reserve is treated as a separat e line item
under “ Reserves” vide the amendment in AS 14 by the MCA
2. Alternatively, Discount on issue of debentures may be written off
against Security premium.
Illustration 7
Aqua Engineers Ltd, a newly formed company acquired business of Beeta
Ltd. as on 31.03.2017. The su mmary Balance Sheet of Beeta Ltd. as on
that date was as under:
Liabilities Amount Assets Amount
Equity Shares of Rs.
10 each fully paid 150000 Goodwill 20000
General Reserve 25000 Land and Building 80000
Export Profit reserve 8000 Plant 80000
Profit and Loss A/c 18000 Investment 30000 munotes.in
Page 30
Financial Accounting
and Auditing
30 12% Debentures 60000 Stock 40000
Sundry Creditors 37000 Debtors 50000
Provision for Tax 30000 Bills Receivable –
Trade 8000
Bank 20000
Total 328000 Total 328000
Terms of Acquisition
1. Aqua Engin eers Ltd. issued 25 000 equity shares of Rs. 10 each at Rs.
12 per share.
2. Aqua Engineers Ltd. paid Rs. 4 in cash for each shares of Beeta Ltd.
3. Aqua Engineers Ltd. discharged 12% Debentures of Beeta Ltd. at 10%
Premium by issue of its 15% Debentures at a dis count of 12%.
4. Aqua Engineers Ltd. paid absorption expenses Rs. 3000
5. Aqua Engineers Ltd. revalued Land & Building at Rs. 100000, Plant at
10% below book value, Stock at Rs. 35000 and debtors subject to 5%
provision for doubtful debts.
6. Beeta Ltd. sold one -fifth of the shares received from Aqua Engineers
Ltd at Rs. 13 per share.
7. Aqua Engineers Ltd issued 10000 equity shares of Rs. 10 each at Rs.
12 each to the public. The issue was fully subscribed and paid for.
8. Export Profit Reserve is to be maintained for next three years.
You are required to:
1. Compute Purchase Consideration
2. Prepare Realization Account, Aqua Engineers Ltd. Account, Equity
Shareholders Account, Equity Shares in Aqua Engineers Account and
Bank Account in the books of Beeta Ltd.
3. Prepare Balan ce Sheet of Aqua En gineers Ltd. after acquisition under
purchase method.
Solution.
Aqua Engineers Ltd.
Statement of Purchase Consideration (Net Payment Method)
Particulars Amount (Rs)
Equity Shares (25000 X 12) 300000
Cash (15000 X 4) 60000
Total 360000
munotes.in
Page 31
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
31 In the books of Beeta Ltd.
Dr. Realization Account
Cr.
Particulars Amount Particulars Amount
To Goodwill 20000 By 12% Debentures 60000
To Land &
Building 80000 By Sundry
Creditors 37000
To Plant 80000 By Provision for
Tax 30000
To Investmen t 30000 By Aqua Eng ineers
Ltd. A/c (PC) 360000
To Stock 40000 By Equity Shares in
Aqua Engineers
A/c (Profit on sale
of shares) 5000
To Debtors 50000
To Bills
Receivable 8000
To Equity
Shareholders A/c
(Profit on
Realization) 164000
Total 492000 Total 492000
Dr. Equity Sh areholders Account Cr.
Particulars Amount Particulars Amount
To Equity
Shares in
Aqua
Engineers
A/c 240000 By Equity
Share Capital 150000
To
Cash/Bank
A/c 125000 By General
Reserve 25000
By Export
Profit
Reserve 8000
By Profit &
Loss A/c 18000 munotes.in
Page 32
Financial Accounting
and Auditing
32
By
Realization
A/c (Profit) 164000
Total 365000 Total 365000
Dr. Aqua Engineers Ltd. A/c
Cr.
Particulars Amount Particulars Amount
To Realization
A/c 360000 By Equity
Shares in Aqua
Engineers A/c 300000
By Cash/Bank 60000
Total 360000 Total 360000
Dr. Equity Shar es in Aqua Engineers Ltd. A/c
Cr.
Particulars Amount Particulars Amount
To Aqua Engineers
ltd. A/c 300000 By Bank A/c (25000
X 1/5 X 13) 65000
To Realization A/c
(Profit) 5000 By Equity
Shareholders A/c
(Bal) 240000
Total 305000 Total 305000
Dr. Cash/Bank Account
Cr.
Particulars Amount Particulars Amount
To Balance b/d 20000 By Realization 20000
To Aqua
Engineers Ltd.
A/c 60000 By Equity
Shareholders
A/c 125000
To Equity Shares
in Aqua ltd. 65000
Total 145000 Total 145000
munotes.in
Page 33
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
33 Aqua Engineers Limited
Balance Sheet as on 31st March 2017
No. Particulars Note
No. Amount
(Rs)
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capital 1 350000
b. Reserves and Surplus 2 70000
2. Non-Current Liabilities
Long Term Borrowings 3 75000
3. Current Liabilities
a. Trade Payables 37000
B Short Term provision (Provision
for Tax) 30000
Total 562000
II Assets
1. Non-Current Assets
a. Property, Pla nt & Equipment
Tangible Assets 4 172000
Intangible Assets (Goodwill) 183500
b. Non Current Investment 30000
C Other Non -Current Assets 5 9000
2. Current Assets
a. Inventories 35000
b. Trade Receivables 6 55500
c. Cash & Cash Equivalent (Ba nk) 77000
Total 562000
Notes to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Issued and Fully paid up shares:
35000 Equity Shares of Rs. 100 each 350000
2. Reserves and Surplus
a. Export Profit Reserve 8000
b. Secu rity premium reserv e 70000
c. Amalgamation Adjustment Reserve (8000) munotes.in
Page 34
Financial Accounting
and Auditing
34 Total 70000
3. Long Term Borrowings
15% Debentures of Rs. 100 each (66000/88%) 75000
4. Tangible Assets
Land & Building 100000
Plant 72000
Total 172000
5. Other Non -Curren t Assets
Discoun t on issue of Debentures
(Assumed, amortizable after 12 months) 9000
Total 9000
6. Trade Receivables
a. Debtors (50000 – 2500) 47500
b. Bills Receivable – Trade 8000
Total 55500
Working Notes:
Statement of Net Assets Taken Over
Particulars Amount Amount
Assets
Land and Building (Given) 100000
Plant (80000 X 90%) 72000
Investment (Book Value) 30000
Stock (Given) 35000
Debtors (Book Value) 50000
Bills Receivable (Book Value) 8000
Bank (book Value) 20000 315000
Less. Liabilities
12% Debentures (60000 X 110%) 66000
Sundry Creditors (Book Value) 37000
Provision for Tax (book Value) 30000
Provision for Doubtful Debts (50000 X
5%) 2500 135500
Net Assets Taken Over 179500
Less. Purchase Consideration 3600 00
Goodwill 18050 0
munotes.in
Page 35
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
35 Dr. Cash/Bank Account Cr.
Particulars Amount Particulars Amount
To Beeta Ltd. T/o 20000 By Goodwill (Abs.
Exp) 3000
To Shares issued
(10000 X 12) 120000 By Beeta Ltd. (P.C) 60000
By Balance c/d 77000
Total 140000 Total 140000
Note.
1. Alternatively, Discount on issue of debentures may be adjusted against
Security Premium.
2. Amalgamation Adjustment Reserve is treated as a separate line item
under “Reserve” vide the amendments in AS 14 by the MCA.
Illustration 8.
A Ltd. and B Ltd. carry o n similar business decided to amalgamate and for
this purpose a new company AB Ltd. was formed to take over assets and
liabilities of both the companies. It is agreed that fully paid shares of Rs.
100 each shall be issued by the New Co. to the value of Net Assets of each
of the old companies.
Summary Balance Sheet of A Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
Shares of Rs. 50
each 50000 Goodwill 5000
General reserve 20000 Land and Building 17000
Profit and Loss A/c 3000 Plant and
Mach inery 24000
Sundry Creditors 4000 Stock 10000
Bills Payable 4000 Debtors 12000
Furniture & Fittings 5000
Cash at Bank 8000
Total 81000 Total 81000
Summary Balance Sheet of B Ltd. as at 31st March 2012
Liabilities Amount Assets Amount
800 Shares of Rs. 50
each 40000 Goodwill 2000
Bank Overdraft 8000 Land and Building 10000 munotes.in
Page 36
Financial Accounting
and Auditing
36 Sundry Creditors 8000 Plant and
machinery 16000
Stock 7500
Furniture and
Fittings 7500
Debtors 7000
Cash 300
Profit and Loss A/c 5700
Total 56000 Total 56000
The following is the accepted scheme of valuation of business of the two
companies:
A Ltd:
(a) to provide for reserve for bad debts at the rate of 5% on Debtors
(b) to write off Rs. 400 from stock; and
(c) to write off 33 1/3% from p lant and machinery
B Ltd:
(a) to eliminate its goodwill and profit & loss a/c balance
(b) to write off bad debts Rs. 1000 and to provide reserve of 5% on the
balance of debtors;
(C) to write off Rs. 1400 from the value of stock.
You are required to prepa re the Ledger Accou nts in the books of A Ltd. &
B Ltd. and also prepare opening balance sheet of AB Ltd.
Solution.
Statement of Purchase Consideration (Net Asset Method)
Particulars A Ltd. B Ltd. AB Ltd.
Assets:
Goodwill 5000 - 5000
Land and Buildi ng 17000 10000 2700 0
Plant and Machinery 16000 14400 30400
Furniture and Fittings 5000 7500 12500
Stock 9600 6100 15700
Debtors 12000 6000 18000
Cash 8000 300 8300
Total (A) 72600 44300 116900 munotes.in
Page 37
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
37
Less. External Liabilities
Reserve for Bad Debt s 600 300 900
Cred itors 4000 8000 12000
Bills Payable 4000 - 4000
Bank Overdraft - 8000 8000
Total (B) 8600 16300 24900
Purchase Consideration (A –
B) 64000 28000 92000
Fully paid shares of Rs. 100
each AB Limited 64000 28000 92000
Note: Asset s for which valuati on is not given are taken at book value. Eg.
Land & Building, Furniture etc.
Ledger of A Limited
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sundry Assets
(transfer) 81000 By Creditors 4000
By Bills Payable 4000
By AB Limited (PC
Due) 64000
By Equity
Shareholders (Loss
on realization) 9000
Total 81000 Total 81000
Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount
To Realisation
A/c (Loss) 9000 By Equity S hare
Capital A/c 50000
To Equity
Shares in AB
Ltd. (PC
received) 64000 By General
Reserve Account 20000
By Profit and
Loss A/c 3000
Total 73000 Total 73000 munotes.in
Page 38
Financial Accounting
and Auditing
38 Dr. AB Limited Account Cr.
Particulars Amount Particulars Amount
To Realisatio n A/c
(PC Due) 6400 0 By Equity Shares in
AB Ltd. (P. C
Received) 64000
Total 64000 Total 64000
Ledger of B Limited
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sundry Assets
(transfer) 50300 By Creditors 8000
By Bank O/D 8000
By AB Limited (PC
Due) 28000
By Equity
Shareholders (Loss
on realization) 6300
Total 50300 Total 50300
Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(Loss) 6300 By Equity Share
Capital A/c 40000
To P & L A/c (Dr.
Bal) 5700
To Equity Shares in
AB Ltd. (PC
received) 28000
Total 40000 Total 40000
Dr. AB Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(PC Due) 28000 By Equit y Shares in
AB Ltd. (P. C
Received) 28000
Total 28000 Total 28000
munotes.in
Page 39
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
39 AB Limited
Balance Sheet as on 31st March 2012
No. Particulars Note No. Amount (Rs)
I Equity and Liabilities
1. Shareholders’ Fund
Share Capital 1 92000
2. Current Liabiliti es
a. Trade Paya bles 2 16000
b. Short Term Borrowings (Bank O/D) 8000
Total 116000
II Assets
1. Non-Current Assets
Property, Plant & Equipment
Tangible Assets 3 69900
Intangible Assets (Goodwill) 5000
2. Current Assets
a. Invento ries 15700
b. Trade Receivables (18000 – 900) 17100
c. Cash & Cash Equivalent (Cash in
hand) 8300
Total 116000
Notes to Accounts
No Particulars Amount
1. Share Capital
Equity Share Capital
Issued and Fully paid up shares:
920 Equity Sh ares of Rs. 100 eac h 92000
2. Trade Payables
a. Creditors 12000
b. Bills Payable 4000
Total 16000
3. Tangible Assets
Land & Building 27000
Plant& Machinery 30400
Furniture & Fittings 12500
Total 69900 munotes.in
Page 40
Financial Accounting
and Auditing
40 Absorption
Illustration 9.
Premier Lt d. agreed to acquir e the business of Modern Auto Ltd. as on 31st
March 2012. The Summary Balance Sheet of Modern Auto Ltd. as on that
date was as under:
Liabilities Amount Assets Amount
Share Capital
6000 Equity Shares
of Rs. 10 each fully
paid up
60000
Goodwill
Building
10000
30000
General Reserve 17000 Machinery 34000
Profit & Loss A/c 11000 Stock 16800
6% Debentures 10000 Book Debts 3600
Sundry Creditors 2000 UTI Bank Account 5600
Total 100000 Total 100000
The considerations payable by Pr emier Ltd. was agre ed at as follows:
a. Cash payment equal to Rs. 2.50 per share in Modern Auto Ltd.
b. Issue of 9000 Equity Shares of Rs. 10 each of Premier Ltd. having an
agreed value of Rs. 15 per share.
c. Issue of such an amount of fully paid 8% Debentures o f Premier Ltd.
at Rs. 96 each as is sufficient to discharge 6% Debentures of Modern
Auto Ltd. at 20% premium.
While computing purchase consideration, Premier Ltd. valued building
and machinery at Rs. 60000 each, stock at Rs. 14200 and Book Debts
subject t o 5% provision for discount. The cost of liquidation of Modern
Auto Ltd. was Rs. 500
Prepare:
1. Necessary ledger Accounts in the books of Modern Auto Ltd.
2. Journalise the transactions in the books of Premier Ltd.
Solution.
In the Books of Modern Auto Ltd.
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount To Assets tfd.
Goodwill
10000 By Sundry
Creditors tfd. 2000 munotes.in
Page 41
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
41 Building
30000 By
Debentures
tfd. 10000
Machinery
34000 By P remier
Ltd. A/c 150000
Stock
16800
Debtors 3600
Bank 5600 100000
To Cash (Expenses) 500
To Equity Shareholders
A/c
(Profit on Realisation) 61500
Total 162000 Total 162000
Dr. Cash Account Cr.
Particulars Amount Particulars Amount
To Premier
Ltd. 15000 By Realisation A/c
(Expenses) 500
By Equity
Shareholders A/c 14500
Total 15000 Total 15000
Dr. Equity Shareholders Account Cr.
Partic ulars Amount Partic ulars Amount
To Cash (15000 –
500) 14500 By Equity Share
Capital 60000
To Equity Shares in
premier Ltd. 135000 By General reserves 17000
By P & L A/c 11000
By Realisation A/c 61500
Total 149500 Total 149500
munotes.in
Page 42
Financial Accounting
and Auditing
42 Dr. Premi er Ltd. Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c 150000 By Cash 15000
By Equity Shares in
Premier Ltd. 135000
Total 150000 Total 150000
In the Books of Premier Ltd.
Journal
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Building A/c Dr Machinery A/c Dr Stock A/c Dr Book Debts A/c Dr
UTI Bank A/c Dr Goodwill A/c (Bal. fig) Dr
To Provision for
Discount on Debtors A/c
To Creditors A/c
To Debentures in
Modern Auto Ltd. A/c
To liquid ators of Modern
Auto Ltd. A/c
(Assets and Liabilities taken over at
agreed values, difference between
P.C and net assets value tfd. To
goodwill) 60000
60000
14200
3600
5600
20780
180
2000
12000
150000
2 Liquidators of Modern Auto Ltd. Dr.
To Cash
To Equity Shares Capital
A/c
To Securities Premium
A/c
(Purchase Consideration paid) 150000
15000
90000
45000 munotes.in
Page 43
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
43 3 Debentures in Modern Ltd. A/c Dr
Discount on issue of De bentures
A/c Dr
To 8% Debentures A/c
(Being Debentures taken over
discharged) 12000
500
12500
Working Notes:
1. Purchase Consideration (Payment Basis)
Payment to No. Rate Amount
Equity Shareholders
Cash 6000 2.50 1500 0
Shares 9000 15.00 135000
Total 150000
2. No. of Debentures to be issued – Rs. 12000 / Rs. 96 = 125
3. Discount on issue of Debentures may be adjusted against Premium
received on issue of shares.
Illustration 10.
A Ltd. absorbed B Ltd. w.e.f 31st March 2017 when their Sum mary
Balance Sheets were as under:
Liabilities A Ltd. B Ltd Assets A Ltd. B Ltd.
Equity Shares
of Rs. 10 each
fully paid 1000000 400000 Land and
Building 440000 280000
11%
Preference
Share of Rs.
100 each fully
paid 400000 400000 Plant and
Machinery 8400 00 520000
Revaluation
Reserves 40000 - Stock 580000 320000
General
Reserves 300000 100000 Sundry
Debtors 240000 280000
Export profit
reserves 80000 40000 Bills
Receivable
s – Trade 260000 180000
Other
Statutory
reserves 100000 20000 Bank 40000 20000 munotes.in
Page 44
Financial Accounting
and Auditing
44 15%
Debentures 160000 -
10%
Debentures 240000
Sundry
Creditors 320000 400000
Total 2400000 160000
0 Total 240000
0 160000
0
Terms of Absorption:
a. A Ltd. will issue Eight Equity Shares for every Five Equity Shares in
B Ltd. of R s. 10 each at Rs. 1 1 per share.
b. 11% Preference shareholders of B Ltd. will be issued equal number of
preference shares in A Ltd. of Rs. 100 each at Rs. 105 per share.
c. A Ltd. agreed to take over the debentures of B Ltd. at book value.
Subsequently after absorption, 10% de bentures holders of B Ltd. are
discharged by A Ltd. issuing such number of its 15% Debentures of
Rs. 100 each so as to maintain the same amount of interest.
d. All the assets and liabilities of B Ltd were taken over at book value
except t he following which were revalued as follows
Land and building Rs. 300000
Plant and Machinery Rs. 500000
Stock Rs. 300000
Sundry Debtors Rs. 260000
Bills Receivable Rs. 160000
Sundry Creditors Rs. 380000
e. Cost of absorption amounting to Rs. 1 0000 was paid by A Ltd.
f. Creditors of B Ltd. include Rs. 10000 payable to A Ltd.
g.
h. It was decided by directors of A Ltd. to set off goodwill and capital
reserve mutually.
You are required to:
1. Compute Purchase Consideration of B Ltd.
2. Pass Journal entries in the books of A L td.
3. Prepare Balance Sheet after absorption of A Ltd.
munotes.in
Page 45
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
45 Solution.
Statement of Purchase Consideration
No Particulars Amount
1 11% Preference Shareholders
4000 Preference Shares of Rs. 100
each at Rs. 105 each
(4000 X Rs. 105)
420000
2 Equity Shareholders
64000 Equity Shares of Rs. 10 each
at Rs. 11 each
(40000 X 8/5) X Rs. 11
704000
3 Purchase Consideration 1124000
Journal of A Ltd.
Sr. No Particulars Dr (Rs) Cr (Rs)
1 Business Purchase A/c Dr
To Liquidator of B
Ltd.
(Being Business purchased) 1124000
1124000 2 Land & Building A/c Dr Plant & machinery A/c Dr Stock A/c Dr
Debtors A/c Dr Bills Receivable A/c Dr Bank A/c Dr Goodwill (Bal. fig) Dr
To 10% Deb entures
of B Ltd
To Sundry
Creditors
To Business
Purchase A/c
(Being Assets and Liabilities
Taken Over) 300000
500000
300000
260000
160000
20000
204000
240000
380000
1124000 munotes.in
Page 46
Financial Accounting
and Auditing
46 3 Liquidator of B Ltd. A/c Dr
To 11% Pref.
Shares Capital A/c
To Equity Share
Capital A/c
To Security
Premium A/c (20000 + 64000)
(Being PC discharged) 1124000
400000
640000
84000
4 10% Debentures of B Ltd. A/c Dr
To 15%
Debentures (240000 X 10/15)
To Capital Reserve
(Being 15% Debentures
exchanged for 10%
Debentures) 240000
160000
80000
5 Amalgamation Adjustment
Reserve A/c Dr
To Export Profit
Reserve
To Other
Statutory Reserve
(Being Export Profits and
Statutory reserve adjusted) 60000
40000
20000
6 Goodwill A/c Dr
To Bank A/c
(Being payment o f cost of
absorptio n) 10000
10000
7 Sundry Creditors A/c Dr
To Sundry Debtors
A/c
(Being settlement of amount
payable by B Ltd. to A Ltd) 10000
10000
8 Capital Reserve A/c Dr
To Goodwill A/c
(Being Goodwill and Capital
Reserve set off mutually) 80000
80000
munotes.in
Page 47
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
47 A Ltd.
Balance Sheet as at 31st March 2017 (After Amalgamation)
No. Particulars Note No. Amount (Rs)
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capita l 1 2440000
b. Reserves and Surplus 2 604000
2. Non-Current Liabilities
Long Term Borrowings (15%
Debentures) 320000
3 Current Liabilities
Trade Payables (320000 + 380000
– 10000) 690000
Total 4054000
II Assets
1. Non-Current Assets
Property, Plant & Equipment
Tangible Assets 3 2080000
Intangible Assets (Goodwill –
204000 + 10000 – 80000) 134000
2. Current Assets
a. Inventories (580000 + 300000) 880000
b. Trade Receivables 4 910000
c. Cash & Cash Equ ivalent 5 50000
Total 4054000
Notes to Accounts
No Particulars Amount
1. Share Capital
a. Equity Share Capital
Issued and Fully paid up shares:
164000 Equity Shares of Rs. 10 each 1640000
b. Preference Share Capital
Issued and Fully paid u p shares:
8000, 11 % Preference Shares of Rs. 100 each 800000
Total 2440000
2. Reserves and Surplus
a. Security Premium 84000 munotes.in
Page 48
Financial Accounting
and Auditing
48 b. Revaluation Reserve 40000
c. Export Profit Reserve (80000 + 40000) 120000
d. Statutory Reserve (100000 + 20000) 120000
e. General Reserve 300000
f. Amalgamation Adjustment Reserve (60000)
Total 604000
3. Tangible Assets
Land & Building (440000 + 300000) 740000
Plant & Machinery (840000 + 500000) 1340000
Total 2080000
4 Trade Receivable
a. Debtors (240000 + 2 60000 – 10000) 4900 00
b. Bills Receivable (260000 + 160000) 420000
Total 910000
5 Cash and Cash Equivalent
Balance with Bank (60000 – 10000) 50000
Illustration 11)
B Co. Ltd had the following Summary Balance Sheet as on 31st March
2012:
B Co. Ltd
Liabilities B Ltd Assets B Ltd.
Share Capital Fixed Assets 8300000
50000 Shares of Rs.
100 each 5000000 Current
Assets 6900000
Capital Reserve 1000000 Investments 1700000
General Reserve 3600000 Goodwill 200000
Unsecured Loans 2200000
Sundry Credi tors 4200000
Provision for Taxation 1100000
Total 17100000 Total 17100000
B Co. Ltd is absorbed by Beesons Limited as on 31st March 2012 on
which date the summary balance sheet of Beesons Limited is as follows:
munotes.in
Page 49
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
49 Beesons Limited
Liabilities B Ltd Assets B Ltd.
Share C apital Fixed Assets 16000000 800000 Shares of Rs.
10 each 8000000 Current Assets 16800000 General Reserve 10000000
Secured Loans 4000000
Sundry Creditors 4600000
Provision for
Taxation 5200000
Provision for
Dividend 100000 0
Total 32800000 Total 32800000
For the purpose of the absorption the goodwill of B Co. Ltd is considered
valueless. There are also arrears of depreciation in B Co. Ltd amounting to
Rs. 400000. The shareholders in B Co. Ltd are allotted, in full satis faction
of their cl aims, shares in Beesons Limited in the same proportion as the
respective intrinsic values of the shares of the two Companies bear to one
another.
Show necessary ledger accounts of B Co. Ltd and prepare the opening
balance sheet of Beeso n Limited after abs orption.
Solution.
Calculation of Purchase Consideration (Net Assets Method)
Particulars B Co. Ltd Beeson Ltd. Intrinsic value of shares
Fixed Assets 8300000 16000000
Less. Arrears of Depreciation 400000 -
Net Fixed Assets 7900000 16000000
Current Assets 6900000 16800000
Investment 1700000 -
(A) 16500000 32800000
Less. Liabilities
Secured Loans - 400000
Unsecured Loans 2200000 -
Sundry Creditors 4200000 4600000
Provision for Taxation 1100000 5200000 munotes.in
Page 50
Financial Accounting
and Auditing
50 Provision for Div idend - 1000000
(B) 7500000 14800000
Intrinsic Value (A – B)
(Value of Net Assets) 9000000 18000000
Total No of Shares 50000 800000
Value per Share (Rs)
(Net Assets / No. of Shares) 180 22.50
Exchange Ratio:
Thus, shareholders of B Ltd. should get sh ares in Beesons Ltd . worth Rs.
9000000. The value per share of Beesons Ltd is Rs. 22.50. So, the number
of shares to be issued to the shareholders of B Ltd. = 9000000 / 22.50 =
400000.
In the Books of B Co. Ltd.
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sundry
Assets (Transfer) 17100000 By Sundry
Liabilities (Transfer) 7500000
By Beesons Limited
(PC Due) 9000000
By Equity
Shareholders (Loss
on Realisation) 600000
Total 17100000 Total 17100000
Dr. Equity Shareholders’ Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(Loss Transferred) 600000 By Equity
Share
Capital
(Transfer) 5000000
To Shares in
Beesons Ltd (PC
Received) 9000000 By Reserves
(Transfer) 4600000
Total 9600000 Total 9600000
munotes.in
Page 51
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
51 Dr. Beesons Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c
(PC Due) 9000000 By Shares in
Beesons Ltd. (PC
received) 9000000
Total 9600000 Total 9600000
Beesons Limited
Balance Sheet as a t 31st March 2012
Sr. No Particulars Note No Amount
I Equity and Liabilities
1. Shareholders’ Fund
a. Share Capital 1 1200000
B Reserves and Surplus 2 1500000
2. Non-Current Liabilities
Long Term Borrowings 3 6200000
3. Current Liabilities
a. Trade Payables 8800000
b. Short Term Provisions 4 7300000
Total 49300000
II Assets
1. Non Current Assets
a. Property, Plant and
Equipment 23900000
b. Non-current Investments 1700000
2. Current Assets 23700000
Total 49300000
Notes to accounts Amount (Rs)
Share Capital
Equity Share Capital
Issued, Subscribed and fully paid:
1200000 equity shares of Rs. 10 each
(Of the above 400000 shares issued on
amalgamation without consideration in cash) 12000000
Reserves and Surplus munotes.in
Page 52
Financial Accounting
and Auditing
52 Security Premium 5000 000
General reserves 10000000
Total 15000000
Long term borrowings
Secured loans 4000000
Unsecured Loans 2200000
Total 6200000
Short Term Provisions
Provision for Tax 6300000
Proposed Dividends 1000000
Total 7300000
Illustra tion 12.
Tom Ltd. a greed to acquire business of Jerry Ltd. as on 31.03.2013. The
summarised Balance Sheet of Jerry Ltd. as on 31.03.2013 was as follows:
Liabilities Amount Assets Amount 12000 equity
shares of Rs. 10
each fully paid 120000 Goodwill 20000
General Reserve 34000 Building 60000
Profit and Loss
A/c 22000 Machinery 68000
6% Debentures 20000 Closing stock 33600
Creditors 4000 Debtors 7200
ICICI Bank
Account 11200
Total 200000 Total 200000
The consideration payable was as follows:
a. Cash pa yment equal to Rs. 2.50 per share in Jerry Ltd.
b. Issue of 18000 Equity shares of Rs. 10 each of Tom Ltd having an
agreed value of Rs. 15 per share.
c. Issue of such an amount of fully paid 9% Debentures of Tom Ltd. at
Rs. 96 each as is sufficient to discharg e 6% Debentures of Jerry at
20% premium.
d. While calculating the consideration the assets were revalued as
follows:
Building and Machinery at Rs. 120000 each, Stock at Rs. 28400
and Debtors subject to 5% provision for discount.
e. Liquidation expenses agreed to be paid by Jerry Ltd. was Rs. 1000 munotes.in
Page 53
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
53 Prepare:
1. Statement of Purchase Consideration
2. Necessary ledger accounts to close the books of Jerry Ltd.
3. Opening Journal entries in the books of Tom Ltd.
Solution
Statement of Purchase Consideration (Payment Metho d)
Payments to No. Rate Amount
(Rs)
Equity Shareholders
Cash 12000 2.50 30000
Shares 18000 15.00 270000
Total 300000
Ledger Accounts to close Books of Jerry Ltd.
Dr. Realisation Account Cr.
Particulars Amount Particulars Amount
To Sun dry
Assets: By Sun dry
Liabilities:
Goodwill 20000 Creditors 4000
Building 60000 Debentures 20000
Machinery 68000
Stock 33600 By Tom Ltd. A/c
(P.C) 300000
Debtors 7200
Bank 11200
To Cash
(Expenses) 1000
To Profit
transferred to
Equity
Shareholders
A/c (Bal. fig) 123000
Total 324000 Total 324000
munotes.in
Page 54
Financial Accounting
and Auditing
54 Dr. Cash Account Cr.
Particulars Amount Particulars Amount
To Tom Ltd. 30000 By Realisation A/c
(Expenses) 1000
By Equity
Shareholders A/c 29000
Total 30000 Total 30000
Dr. Equity Sh areholders Account Cr.
Particulars Amount Particulars Amount
To Cash 29000 By Equity Share
Capital 120000
To Equity Shares in
Tom Ltd. 270000 By General Reserve 34000
By Profit and Loss
A/c 22000
By Realisation A/c
(Profit) 123000
Total 299000 Total 299000
Dr. Tom Ltd. Account Cr.
Particulars Amount Particulars Amount
To Realisation
A/c (P.C) 300000 By Cash 30000
By Equity
Shares in Tom
Ltd. 270000
Total 300000 Total 300000
Opening Journal Entries in the Books of To m Ltd.
No Particulars Dr (Rs) Cr (Rs)
1 Business Purchase A/c Dr
To Liquidation of Jerry
Ltd. A/c 300000
300000 munotes.in
Page 55
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
55 2 Building A/c
Dr
Machinery A/c
Dr
Stock A/ c
Dr
Debtors (Gross)
Dr
Bank A/c
Dr
Goodwill A/c (Bal. fig)
Dr.
To Provision for discount
on debtors
To Creditors
To Debentures (Old)
To Business Purchase
(Being assets and liabilities taken
over at agreed values, difference
transferred to Goodwill A/c) 120000
120000
28400
7200
11200
41560
360
4000
24000
300000
3 Liquidation of Jerry Ltd. A/c Dr
To Cash A/c
To Equity Share Capital
A/c
To Security Premium A/c
(Being P.C Settled) 300000
30000
180000
90000
4 Debentures (Old) A/c Dr
Discount on issue o f debentures
A/c Dr
To 9% Debentures A/c
(Being debentures taken over
discharged) 24000
1000
25000
External Reconstructions
Illustration 13.
The following is the Summary Balance Sheet of Vikrant Ltd:
Liabilities Amou nt Assets Amount
Issued and paid up Intangible Assets 50000
Equity Share capital 500000 Fixed Assets 420000
Statutory Reserve (to
be maintained for 3
more years) 10000 Current assets 110000 munotes.in
Page 56
Financial Accounting
and Auditing
56 Debentures 100000 Profit and Loss A/c 80000
Creditors 50000
Total 660000 Total 660000
Virat Ltd. agreed to absorb Vikrant Ltd. on the following terms:
1. Virat Ltd. agreed to take over all the assets and liabilities
2. The assets of Vikrant Ltd. are to be considered to be worth Rs. 500000
3. The purchase price is to b e paid one -quarter in cash and the balance in
shares which are issued at the market price.
4. Liquidation expenses amounted to Rs. 300 agreed to be paid by
Vikrant Ltd.
5. Market value of shares of Rs. 10 each of Virat Ltd. is Rs. 12 per share.
6. Debentures of Vikrant Ltd. were p aid.
7. The amalgamation is in the nature of purchase.
You are required to show:
a. Purchase consideration
b. Ledger accounts in the books of Vikrant Ltd.
c. Opening entries in the books of Virat Ltd.
Solution:
Purchase Consideration (PC)
Particu lars Rs Rs
Market value of assets taken
over: 500000
Less. Liabilities taken over
Creditors 50000
Debentures 100000 150000
350000
Purchase consideration is to be
discharged
In Cash ¼ X Rs. 350000 87500
In Shares ¾ X Rs. 350000 262500
350000
Working not es:
Nos of shares to be issued to the vendors co. has been calculated as under:
Amount to be paid in shares : ¾ of Rs. 350000 = 262500
Agreed value of 1 share Rs. 12
No of shares = 262500 / 12 21875 shares munotes.in
Page 57
AS 14 - Amalgamation,
Absorption & External
Reconstruction - II
57 In the books of Vikr ant Ltd.
Dr. Realisation A ccount Cr.
Particulars Amount Particulars Amount
To Intangible
Assets 50000 By Debentures 100000
To Fixed Assets 420000 By Creditors 50000
To Current Assets 110000 By Virat Ltd.
(PC) 350000
To Bank
(Expenses) 300 By E quity
Shareholders
(Loss on
realization) 80300
Total 580300 Total 580300
Dr. Equity Shareholders Account Cr.
Particulars Amount Particulars Amount
To Realisation A/c 80300 By Equity Share
Capital 500000
To Profit and Loss
A/c 80000 By Sta tutory
Reserve 1000 0
To Bank 87200
To Shares in Virat
Ltd. 262500
Total 510000 Total 510000
Dr. Virat Limited Account Cr.
Particulars Amount Particulars Amount
To Realisation
A/c 350000 By Bank
Account 87500
By Shares in
Virat L td. 262500
Total 350000 Total 350000
Dr. Bank Account Cr.
Particulars Amount Particulars Amount
To Virat Ltd. 87500 By Realisation
A/c 300
By Equity 87200 munotes.in
Page 58
Financial Accounting
and Auditing
58 Shareholders
Total 87500 Total 87500
Dr. Equity S hares on V irat Ltd. Account Cr.
Particulars Amount Particulars Amount
To Virat Ltd. 262500 By Equity
Shareholders 262500
Total 262500 Total 262500
In the books of Virat Limited
No Particulars Dr (Rs) Cr. (Rs)
1 Business Purchase A/c Dr.
To Liquidators of Vikrant Ltd.
A/c 350000
350000
2 Fixed Assets A/c Dr Current Assets A/c Dr
To Trade Creditors A/c
To Debentures in Vikrant A/c
To Capital Reserve A/c
To Business Purchas e A/c 420000
110000
50000
100000
30000
350000
3 Liquidation of Vikrant Ltd A/c Dr
To Equity Share Capital A/c
To Securities Premium A/c
To Bank A/c 350000
218750
43750
87500
4 Amalgamation Adjustment
Reserve A/c
Dr
To St atutory Reserve 10000
10000
5 Debentures in Vikrant A/c Dr
To Bank A/c 100000
100000
munotes.in
Page 59
59 3
ACCOUNTING OF TRANSACTIONS OF
FOREIGN CURRENCY
Unit Structure:
3.0 Objective
3.1 Introduction
3.2 Need for Conversion/ Translation
3.3 Accounting Standard
3.4 Definition of Terms (AS -11)
3.5 Translation of the Transactions
3.6 Translation of Balances at Year End
3.7 Exercises
3.8 Multi ple Choice Questions
3.9 Practical Problems
3.0 OBJECTIVES
After studying this unit, the student will be able to:
Understand Foreign Currency Transactions
Describe the need for conversion
Know how to recognize exchange differences
Explain the accounting of foreign currency transactions
3.1 INTRODUCTION
When a transaction takes place between two or more concerns which are
situated in the same region or country, their respective accounts are
finalized in the same currency.
However, when one of these concern s are located in another country, it
becomes difficult to record transactions in different currencies. Each of the
concerns then has to enter the transaction in this own/ domestic currency
in its books. Thus, a need to convert the currency arises by using currency
exchange rates.
For example, Arun & Co., Mumbai buys goods from Preston & Co. of
USA. The invoice for the same by Preston & Co. may be in US $ while
accounting by Arun & Co. will be in Indian Currency . The $ will have
to be converted into by appropriate exchange rate, in such a case. munotes.in
Page 60
Financial Accounting
and Auditing
60 From the point of view of Arun & Co.:
“ ” is the Reporting Currency
“ $ “ is a Foreign Currency
From the point of view of Preston & Co.:
“ $ “ is the Reporting Currency
“ “ is the Foreign Currency
The rate of e xchange between $ and is the exchange rate
3.2 NEED FOR CONVERSION / TRANSLATION
It is the process of converting the accounting data from one currency to
another. This may be required when an Indian concern may either be
selling or buying goods from a foreign concern.
The currency of settlement, until paid, amounts to a receivable or payable
which will require conversion to Indian currency at the date of initial
transaction and again on the date of finalization of accounts for the Indian
entity.
The fo llowing diagram depicts such a transaction:
In such a case,one of the concerns must accept the responsibility or
receive its payment in foreign currency. The party that agrees this incurs
an exchange gain or loss, depending on t he direction and amount of
exchange rate fluctuation between date of billing and date of payment.
For example, if a domestic importer has purchased goods from abroad and
is billed in a foreign currency, the invoice may be translated to domestic
currency a t current exchange rate as on the billing date. To settle the debt,
the domestic importer must acquire foreign currency for the purpose of
payment, between the billing date and the payment date. In case the Indian
Exporter Indian
Importer Foreign
buyer
Indian Export Foreign
seller
Indian Export INRINRFCFCExchange Exchange munotes.in
Page 61
Accounting of
Transactions of Foreign Currency
61 exchange rate fluctuated in that period, the subs equent acquisition of
foreign currency results in a gain or loss which falls on the domestic
importer. Had the billing been accounted for in domestic currency, the
exchange risk would have been with the foreign exporter. A similar case
can be drawn for a d omestic exporter and a foreign importer.
3.3 ACCOUNTING STANDARD
In order to maintain uniformity of accounting policies, principles and
treatments, ‘Accounting Standards’ are prescribed, which are to be
followed.
The Institute of Chartered Accountants o f India which is the sole authority
to issue the Accounting Standards has issued Accounting Standard 11
(AS-11) to cover the subject of foreign exchange transactions for
Standardization of Accounting treatments.
The said Standard has been revised and is m andatory. It is to be applied
w.e.f. 1st April 2004. But as far as the accounting for transactions in
foreign currencies entered into by the reporting enterprise itself before the
date this standard comes into effect, AS 11 (1994) i.e. (the old Standard)
will continue to be applicable.
Old AS 11 states that:
Exchange differences arising on transactions of foreign currency should be
recognized as income or an expense in the period in which they arise.
Exchange difference arising on repayment of liabilities i ncurred for the
purpose of acquisition of fixed assets, should be adjusted in the carrying
amount of the respective fixed assets.
Revised AS 11 states that:
Exchange difference arising on the settlement of monetary items should be
recognized as income or a n expense in the period in which they arise.
When the transaction is settled i.e. completed in the same accounting
period (ending 31st March) as that in which it arose, the entire exchange
difference arises in that period. However, when the transaction is settled in
the next accounting period, the exchange difference is spread over two
different accounting years and will have to be split into those two years on
time basis.
3.4 DEFINITIONS OF TERMS
Closing rate is the exchange rate at the balance sheet da te
Average rate is the mean of the exchange rates in force during a period
Exchange rate is the ratio of exchange of currencies of two countries munotes.in
Page 62
Financial Accounting
and Auditing
62 Foreign currency is the currency other than the reporting currency of an
enterprise
Reporting currency is the c urrency used in presenting financial statements
3.5 TRANSLATION OF THE TRANSACTIONS
INITIAL RECOGNITION
In case the imports are on immediate payment basis, the concerned Indian
company will purchase US $ from an Indian bank and make such payment
in dollars to the concerned foreign company in USA. The dollar will be
purchased at the prevailing rate. Translation is done into rupees at that
time. This is known as initial recognition.
RECOGNITION IN STAGES
In case the import of goods is on credit basis, the tra nslation will be done
at different stages as below:
1. On the date of purchase the import will be recorded.
2. If the payment is outstanding, creditors will be recorded as on the
Balance Sheet date.
3. On the date of settlement, the payment in US $ will be recorded .
ACCOUNTING PROBLEMS
As the exchange rate may be different at each stage, it gives rise to the
following accounting problems:
1. At what rate translation should be done on each date i.e. (a) on the date
of purchase, (b) on the date of payment, (c) on the dat e of Balance
Sheet
2. In instances the exchange rates are different, how profit or loss arising
due to such difference should be recorded in the books of accounts
3.6 TRANSLATION OF BALANCES AT YEAR END
The following balances in foreign currency need to be translated in rupees.
A. Monetary Items
Cash in Hand, Bank balances, Debtors, Creditors and Loans
B. Non-monetary Items
Fixed Assets, Long -term Investments, Inventory and Current
Investments
Rate of Translation
1. Monetary Items are translated at Closing rate or at realizable vale
(when closing rate is unrealistic)
2. Non-monetary Items are translated at historical cost or at fair value.
munotes.in
Page 63
Accounting of
Transactions of Foreign Currency
63 Treatment of Exchange difference
Exchange difference arises due to the following:
a) A transaction being reported at a rate different f rom the rate at which it
was initially recorded
b) A monetary or non -monetary item being settled at a rate different from
the rate at which it was initially recorded
c) A transaction being settled at a rate different from the one taken for the
reporting in the f inancial statement.
3.7 EXERCISES
Illustration 1
Goods purchased on 0 3.03.2021 of US $ 20,000 45 per
US $
Exchange rate on 3 3.03.2021 44 per US $
Date of actual payment 07.07.2021 43 per US $
Ascertain the loss/gain for financial year 2020 -21 and 2021 -22 also give
their treatment as per AS 11
Solution
1. At the date of Transaction: As p er AS11 all foreign currency
transactions should be recorded at the exchange rate on the date of
transactions.
Accordingly, goods purchased on 0 3.03.2021 and corresponding
creditors would be recorded at 9,00,000 (i.e. $ 20,000 x 45). At
the balance s heet date all monetary transactions should be reported at
the closing rate
2. At Reporting date: As per AS11 creditor of US $ 20,000 on
33.03.2021 should be reported at 8,80,000 (i.e. $ 20,000 x 44) and
exchange profit of 20,000 (i.e. 9,00,000 – 8,80,00 0) should be
credited to profit and loss account in the year 2020 -23.
3. Settlement date: As per AS11, exchange difference on settlement of
the account should be transferred to profit and loss account. Therefore,
20,000 (8,80,000 – 8,60,000) should be cred ited to Profit and Loss
account for the year 2021 -22.
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Financial Accounting
and Auditing
64 Illustration 2
On 31st March 2021, the following ledger balances have been extracted
from the books of Washington branch office:
Ledger accounts $
Building
Stock as on 0 3.04.2020
Cash and Bank ba lances
Purchases
Sales
Commission receipts
Debtors
Creditors 360
52
114
192
220
56
92
130
You are required to convert above Ledger balances into Indian Rupees
using the following rates of exchange:
Rate per US$
Opening Rate
Closing Rate
Average Rate
For Fixed Assets 46
50
48
42
Solution
Conversion of Ledger Balances (in Dollars) into Rupees
Particulars $ Rate Per $ Amount in
Rupees
Building
Stock as on 0 3.04.2020
Cash and Bank
balances
Purchases
Sales 360
52
114
192
220
56 42
46
50
48
48
48 15,120
2,392
5,700
9,216
10,560
2,688 munotes.in
Page 65
Accounting of
Transactions of Foreign Currency
65 Commission receipts
Debtors
Creditors 92
130 50
50 4,600
6,500
Illustration 3
M/s Moon International, an Indian Exporter, sells goods to a foreign
purchaser Roy & Co. inv oicing at $ 24,000 on 31st December 2020. The
exchange rate at the time of invoice was 45.50. After 95 days, M/s Moon
International received remittance of $ 23,500. The rate of exchange at the
time of remittance was 47. The local bank deducted their charges of
750 while crediting the amount in the account of M/s Moon International.
Reco rd the above transactions in the books of M/s Moon International
Solution
Journal of M/s Moon International
Date Particulars Dr. Cr.
31 Dec 2020 Roy & Co. a/c ($ 24,000 @ 45.50)
To Sales a/c
(Being goods exported) 10,92,000
10,92,000
15 April 2021 Bank a/c ($ 23,500 @ 47) - 750
Bank charges a/c
To Roy & Co. a/c ($ 23,500
@ 45.50)
To exchange difference
($ 23,500 @ 3.50)
(Being $ 23,500 received from Roy &
Co. Exchange rate difference be ing
US $ 1 = 3.50 transferred to FEF
a/c. Bank charges of 750 being
debited) 11,03,750
750
10,69,250
35,250
31 March 2021 Exchange difference a/c
To Profit & Loss a/c
(Profit on exchange difference for the
year ended 31 March 2021
transferred) 35,250
35,250
munotes.in
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Financial Accounting
and Auditing
66 Illustration 4
Smita Ltd of Mumbai sold goods worth $ 20,00,000 to Barak Ltd of
America on 31st January 2020. Amounts were received from Barak Ltd as
follows:
Date $
03.02.2020 8,00,000
03.03.2020 2,00,000
30.03.2020 10,00,000
Accounts were closed on 31st March every year. Exchange rate of $ 3.
33.03.2020 61
03.02.2020 60
03.03.2020 62
30.03.2 020 58
Pass journal entries in the books of Smita Ltd for the year ended 31 March
2020.
Solution
Journal of Smita Ltd
Date Particulars Dr. Cr.
31 January
2020 Barak Ltd ($20,00,000 x 61)
To Sales
(Being goods worth
$20,00,000 exported
to Barak Ltd.
Exchange rate being
$1 = 61) 12,20,00,000 12,20,00,000
01 February
2020 Bank a/c ($ 8,00,000
@ 60)
Foreign exchange
fluctuations a/c ($ 8,00,000 @1)
To B arak Ltd
a/c
(Being $ 8,00,000
received from Barak
Ltd. Exchange rate
difference being $ 1 =
1 transferred to 4,80,00,000
8,00,000
4,88,00,000 munotes.in
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Accounting of
Transactions of Foreign Currency
67 FEF a/c)
01 March
2020 Bank a/c ($ 2,00,000
@ 62)
To Barak Ltd ($
2,00,000 @ 61)
To Foreign
exchange fluctuation
a/c ($ 2,00,000 @
1)
(Being $ 2,00,000
received from Barak
Ltd. E xchange rate
difference being $ 1 =
1 transferred to FEF
a/c) 1,24,00,000
1,22,00,000
2,00,000
30 March
2020 Bank a/c ($ 10,00,000
@ 58)
Foreign exchange
fluctuation a/c
To Barak Ltd
(Being $ 10,00,000
received from Barak
Ltd. exchange rate
diff being $1= 3
transferred to FEF
a/c) 5,80,00,000
30,00,000
6,10,00,000
31 March
2020 Profit & Loss a/c
To Foreign
exchange fluctuation
a/c
(Being balance in
foreign exchange
fluctuation a/c
transferred to Profit
& Loss a/c) 36,00,000
36,00,000
Illustra tion 5
Journalise the following transactions in the books of M/s Rumani& Co. for
the year ended 31st March 2019:
Date Transactions
30/11/2018
27/12/2018
13/01/2019
27/01/2019 Export of goods worth US $ 1,20,000 to M/s Jackson
Ltd
Import of goods worth US $ 80,000 from M/s Max Ltd
Received US $ 50,000 from M/s Jackson Ltd munotes.in
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Financial Accounting
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68 19/02/2019
31/03/2019 Paid to M/s Max Ltd US $ 40,000
Received from M/s Jackson Ltd US $ 50,000
Paid US $ 40,000 to M/s Max Ltd
Exchange rate per US $ was as follows:
Date Exchange rate p er US $ ( )
30/11/2018
27/12/2018
13/01/2019
27/01/2019
19/02/2019
31/03/2019 47.00
48.00
50.00
49.00
45.00
49.00
Solution
Journal of M/s Rumani and Co.
Date Particulars Dr. Cr.
30/11/2018 Jackson Ltd (1,20,000 x
47)
To Sales a/c
(Being goods e xported) 56,40,000
56,40,000
27/12/2018 Purchases a/c (80,000 x
48)
To Max Ltd a/c
(Being goods
purchased) 38,40,000
38,40,000
13/01/2019 Bank a/c (50,000 x 50)
To Jackson Ltd a/c
(50,000 x 47)
To Foreign exchange
fluctuation a/c
(50,000 x 3)
(Being amount received
from Jackson Ltd) 25,00,000
23,50,000
1,50,000
27/01/2019 Max Ltd a/c (40,000 x
48)
Foreign exchange
fluctuation a/c (40,000 x 1)
To Bank a/c (40,000 x
49)
(Being paid to Max Ltd
on a/c) 19,20,000
40,000
19,60,000 munotes.in
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Accounting of
Transactions of Foreign Currency
69
19/02/2019 Bank a/c (50,000 x 45)
Foreign exchange
fluctuation a/c (50,000 x 2)
To Jackson Ltd a/c
(50,000 x 47)
(Being received from
Jackson Ltd) 22,50,000
1,00,000
23,50,000
31/03/2019 Max Ltd a/c (40,000 x
48)
Foreign exchange
fluctuation a/c (40,000 x 1)
To Bank a/ c (40,000 x
49)
(Being paid to Max Ltd) 19,20,000
40,000
19,60,000
31/03/2019 Jackson Ltd a/c
To Foreign exchange
fluctuation a/c
(20,000 x 2)
(Being transfer of
balance on foreign
exchange fluctuation
a/c) 40,000
40,000
31/03/2019 Foreign exchange
fluctuation a/c
To Profit & Loss a/c (1,50,000 + 40,000 -
40,000 - 1,00,000 -
40,000)
(Being profit transferred
to profit & loss a/c) 10,000
10,000
Illustration 6
Pass necessary journal entries in the books of N Ltd of Nasik.
A machine was imported on 20th January 2020 from Jackie Chan of China
for
US $ 4,00,000
The payment for the same was made as follows:
US $ 3,00,000 on 27th February 2020
US $ 1,00,000 on 15th March 2020 munotes.in
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Financial Accounting
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70 The Exchange rate for $ 1 was as follows:
On 20th January 2020 47.00
On 27th February 2020 46.50
On 15th March 2020 48.00
The company follows financial year as accounting year.
Solution
Journal of N Ltd
Date Particulars Dr. Cr.
20 January 2020 Machinery a/c
To Jackie Chan a/c
(Being purchase of
machinery $ 4,00,000 @ 47) 1,88,00,000
1,88,00,000
20 February
2020 Jackie Chan a/c
To Bank a/c
To Exchange
difference a/c
(Being amount paid $
3,00,000 @ 46.5 and
foreign exchange loss
adjusted $ 3,00,000) (46.5 -
47) 1,41,00,000
1,39,50,000
1,50,000
15 March 2020 Jackie Chan a/c
Exchange difference a/c
To Bank a/c
(Being payment made $
1,00,000 @ 48 and foreign
exchange loss $ 1,00,000)
(48-47) 47,00,000
1,00,000
48,00,000
31 March 2020 Exchange difference a/c
To Profit & Loss a/c
(Being transfer of the
balance on exchange
difference account to profit
& loss account) 50,000
50,000
Illustration 7
Godrej Industries Ltd. exported refrigerators and received the amounts as
under:
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Accounting of
Transactions of Foreign Currency
71 Sales Transactions:
1) On 5th January 2021 to C of Canada amount US $ 20,000 at exchange
rate
41 per US $
2) On 7th January 2021 to W of Germany amount US $ 40,000 at
exchange rate
41 per US $
Receipt Transactions
1) On 5th February 2021 from C of Canada amount US $ 12,000 at
exchange rate 42 per US $
2) On 10th February 2021 from W of Germany amount US $ 12,000 at
exchange rate 43 per US $
3) On 15th April 2021 from W of Germany amount US $ 28,000 at
exchange rate
42 per US $
4) On 31st May 2021 from C of Canada amount US $ 8,000 at exchange
rate
44 per US $
Exchange rate on 31 March 2021 44 per US $
You are required to:
1) Pass necessary Journal entries to record above transactions
Solution
Journal of A Ltd
Date Particulars Dr. Cr.
5 January 2021 C of Canada (20,000 x 41)
To Sales a/c
(Being export to C of Canada) 8,20,000
8,20,000
7 January 2021 W of Germany (40,000 x 41)
To Sales a/c
(Being export to W of Germany) 16,40,000
16,40,000
5 February
2021 Bank a/c (12,000 x 42)
To Foreign exchange fluctuation
a/c (12,000 x 1)
To C of Canada (12,000 x 41)
(Being received from C of
Canada) 5,04,000
12,000
4,92,000
10 February
2021 Bank a/c (12,000 x 43)
To Foreign exchange fluctuation
a/c
(12,000 x 2) 5,16,000
24,000
4,92,000 munotes.in
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Financial Accounting
and Auditing
72 To W of Germany (12,000 x 41)
(Being received from W of
Germany)
31 March 2021 C of Canada (20,000 – 12,000) x
(44 – 41)
To Foreign exchange fluctuation
a/c
(Being exchange difference
transferred to FEF a/c) 24,000
24,000
31 March 2021 W of Germany (40,000 –
12,000) x (44 – 41)
To Foreign exchange fluctuation
a/c
(Being exchange difference
transfe rred to FEF a/c) 84,000
84,000
31 March 2021 Foreign exchange fluctuation a/c
To Profit & Loss a/c
(Being the balance of FEF a/c
transferred to profit & loss a/c) 1,44,000
1,44,000
Illustration 8
Krishna Ltd imported goods from Skylark Ltd. of USA wo rth US $
6,00,000 on 31st October 2020 when the exchange rate was 65 per US $.
The amount was paid in instalments as follows:
Date Amount of Installment – US $ Exchange Rate per US $
( )
15/11/2020
15/03/2021
20/04/2021
10/01/2022 2,00,000
1,00,000
1,00,000
2,00,000 64
66
63
61
Krishna Ltd. closes its books on 31st March every year. On 31st March
2021, the exchange rate was 61 per US $.
You are required to pass the Journal Entries in the books of Krishna Ltd.
for the years ended 31st March 2021 and 3 1st March 2022.
Also prepare Foreign Exchange Fluctuation Account in the books of
Krishna Ltd. for the relevant years
munotes.in
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Accounting of
Transactions of Foreign Currency
73 Solution
Journal of Krishna Ltd
Date Particulars Dr. Cr.
31/10/2020 Purchase a/c (6,00,000 x 65)
To Skylark Ltd a/c
(Being goods imported from
SkyLark Ltd. exchange rate being
1$ = 64) 3,90,00,000
3,90,00,000 15/11/2020 Skylark Ltd a/c (2,00,000 x 65)
To Foreign exchange fluctuation
a/c (2,00,000 x 1)
To Bank a/c (2,00,000 x 64)
(Being $ 2,00,000 paid, exchange
rate be ing 1$ = 64) 1,30,00,000
2,00,000
1,28,00,000 15/03/2021 Skylark Ltd a/c (1,00,000 x 65)
Foreign exchange fluctuation a/c
(1,00,000 x 1)
To Bank a/c (1,00,000 x 66)
(Being $ 1,00,000 paid, exchange
rate being
1$ = 66) 65,00,000
1,00,000
66,00,000
31/03/2021 Skylark Ltd a/c
To Foreign Exchange Fluctuation
a/c
(Being creditor’s balance
adjusted - $ 3,00,000 x 4, as on
31/03/2021) 12,00,000
12,00,000
31/03/2021 Foreign Exchange Fluctuation a/c
(2,00,000 + 12,00,000 – 1,00,000)
To Profit & Loss a/c
(Being balance in FEF a/c
transferred to P&L a/c) 13,00,000
13,00,000 munotes.in
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Financial Accounting
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74
20/04/2021 Skylark Ltd a/c (1,00,000 x 6 1)
Foreign exchange fluctuation a/c
(1,00,000 x 2)
To Bank a/c (1,00,000 x 63)
(Being $ 1,00,000 paid, exchange
rate being $ 1 = 63) 61,00,000
2,00,000
63,00,000
10/01/2022 Skylark Ltd a/c (2,00,000 x 61)
To Bank a/c
(Being amount paid, exchange
rate being $1 = 61) 1,22,00,000
1,22,00,000 31/03/2022 Profit & Loss a/c
To Foreign exchange fluctuation
a/c
(Being balance in FEF a/c
transferred to P&L a/c) 2,00,000
2,00,000
Dr. Foreign Exchange Fluctuation a/c
Cr.
Date Particulars Date Particulars
15/03/2022
31/03/2021
20/04/2021 To Bank a/c
To P&L a/c
(Bal. fig)
To Bank a/c 1,00,000
13,00,000
14,00,000
2,00,000
15/11/2020
31/03/2021
31/03/2022 By Skylark
Ltd. a/c
By Skylark
Ltd. a/c
By P&L a/c
(Bal. fig) 2,00,000
12,00,000
14,00,00 0
2,00,000
munotes.in
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Accounting of
Transactions of Foreign Currency
75 3.8 MULTIPLE CHOICE QUESTIONS
1. Average rate
(a) is the exchange rate at the balance sheet date
(b) is the mean of the exchange rates in force during a period
(c) is the ratio for exchange of two currencies
(d) is the rate at which an asset cou ld be exchanged between
knowledgeable, willing parties inan arm’s length transaction
2. Currency other than the reporting currency of an enterprise
(a) Non -Reporting currency
(b) U.S. Dollars
(c) Foreign Currency
(d) Indian Rupees
3. Money held and assets and liabilities to be received or paid in
fixed or determinable amounts of money
(a) Current items
(b) Non -monetary items
(c) Monetary items
(d) Forward Exchange Contract
4. Currency used in presenting the financial statements
(a) Reporting currency
(b) Non -Foreign Currency
(c) Official Currency
(d) Indian Rupees
5. A change from Rs. 60 = 1 dollar to Rs. 62 = 1 dollar indicates that
Rs. has ______
(a) Appreciated
(b) Depreciated
(c) Falling short in supply
(d) Increasing in demand
6. Cash and bank balances are translated at _____ on year end
(a) Average rate
(b) Opening rate
(c) Exchange rate
(d) Closing rate
7. The currency translation is governed by _____
(a) AS 2
(b) AS 7
(c) AS 11
(d) AS 9
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Financial Accounting
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76 8. ______ occurs when there is a change in the exchange rate
between the transaction date and the date of settlement of any
mon etary items arising from a foreign currency transaction
(a) Exchange difference
(b) Initial recognition
(c) Outstanding payment
(d) Closing difference
3.9 PRACTICAL PROBLEMS
Unsolved 1
On 1st January 2020, John Ltd. imported goods worth $ 1,70,000 from
Synergy Ltd. USA. The payments were made as under:
Date Amount ($) Exchange rate / dollar
10/01/2020
15/02/2020
15/03/2020
15/04/2020 32,000
36,000
58,000
44,000 61
62
63
59
Exchange rate on 01/01/2020 was $1 = 60.
Books are closed on 31st March every year. The exc hange rate on
31/03/2020 was $1 = 63.
Pass necessary journal entries in the books of John Ltd. To record the
above transactions and also prepare foreign exchange fluctuation account
in the books of John Ltd. for the year ended 31/03/2020 and 31/03/202 3.
Unsolved 2
Exported goods to Pashchim Ltd. as on 1st March 2021 for $ 2,00,000
when the exchange rate was 1 US $ = 62. The amount was received in
three instalments as under:
Date Instalment (US $) Exchange rate
05/03/2021
18/03/2021
30/03/2021 80,000
70,000
50,000 61
63
60
Pass the journal entries for the above transactions in the books of Purab
Ltd. for the year ended 31st March 202 3.
Unsolved 3
Journalise the following transactions in the books of M/s. Dhavan and Co.
for the year ended 31 March 20 23. munotes.in
Page 77
Accounting of
Transactions of Foreign Currency
77 Date Transactions
30/11/2020
27/12/2020
19/02/2021
22/03/2021 Export of goods worth US $ 1,20,000 to M/s
Jackson Ltd
Import of goods worth US $ 40,000 from M/s
Mcmilan& Co.
Received from M/s Jackson Ltd. US $ 50,000
Paid US $ 20,000 to M/s Mcmilan& C o.
Exchange rate per US $ was as under:
Date Exchange rate per US $ ( )
30/11/2020
27/12/2020
19/02/2021
22/03/2021
31/03/2021 47.00
48.00
45.00
46.00
49.00
Unsolved 4
Aparna Ltd. imported goods from Zen Ltd. of USA worth US $ 20,00,000
on 1st November 2019 when the exchange rate was 63 per US $. The
amount was paid to Zen Ltd. in five equal installments on the following
dates:
Date Exchange rate per US $ ( )
01/12/2019
15/01/2020
10/02/2020
30/04/2020
20/06/2020 62
64
61
66
65
Aparna Ltd. closes the books on 31st March every year. On 31st March
2020 the exchange rat e was 63 per US $.
You are required to pass Journal entries in the books of Aparna Ltd. for
the year ended 31st March 2020 and 31st March 202 3.
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Financial Accounting
and Auditing
78 Unsolved 5
Marvel Ltd. imported goods from Larson Ltd. of Germany worth US $
4,00,000 on 30th November 2021 when the exchange rate was 69 per US
$. The payment was made as follows:
Date Amount Exchange rate per US $
12th November 2021
17th December 2021
25th January 2022 2,00,000
1,00,000
1,00,000 68
70
67
Marvel Ltd. closes its books on 31st March every year. On 31st March
2022, the exchange rate was 68 per US $.
You are required to pass Journal entries in the books of Marvel Ltd. for
the year ended 31st March 2022.
munotes.in
Page 79
79 4
LIQUIDATION OF COMPANIES
Unit Structure :
4.0 Objective
4.1 Concept and Meaning
4.2 Modes of Winding Up
4.3 Statement of Affairs
4.4 Deficiency Account
4.5 Special Considerations in Liquidations
4.6 Liquidation Cost
4.7 Liquidators’ Final Statement of A ccounts
4.8 Illustrations
4.9 Exercise
4.0 OBJECTIVES
After studying this chapter, you should be able to understand:
The concept and meaning of liquidation and winding up of companies
The purpose and contents of statement of affairs inluding Deficiency
Account
Special considerations in liquidation for settlement of dues
The purpose and contents of liquidators’ final statement
Accounting treatment of settlement of liabilities, partly paid up shares
in liquidators’ final statement
4.1 CONCEPT AND MEA NING
Winding up refers to the process of realising assets of the company and
use the proceeds to pay of its debts. After such external debt is paid off,
the remainder cash is utilised for repayment of its members’ contribution.
The winding up involves inv olvement of third party administrator for
financial settelement of its creditors and members. Such administrators are
called liquidators who are appointed for controlling the process of
realisation of assets, payment of debts and distribution of surplus as per
legal rights of members. The process of winding up is governed by section
2 (94A) of Companies Act, 2013 and liquidation process under Insolvency
and Bankruptcy Code 2016. munotes.in
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Financial Accounting
and Auditing
80 Dissolution of company refers to appoint where it looses its identity as
corpo rate entity in general sense. In legal point of view, on dissolution,
company’s name shall be strike off from register of companies. In simple
words, dissolution of company is death of company as being artificial
judiciary person, it can’t have end of its life otherwise.
Many a times, winding up and liquidation are used as synonyms but there
is thin line of difference between the 2. Winding up means putting an end
to business operations and liquidation indicates selling of its assets and
payment of oblig ations. Similarly, winding up and dissolution also have
there own interpretations which requires thorough understanding. The
major areas of differences are as follows:
Winding up is just one of the methods of dissolution and dissolution is
end result of w inding up
In winding up the legal status continues whereas in dissolution it
comes to an end.
Winding up is administered by liquidator whereas dissolution happens
only through Registrar’s order.
4.2 MODES OF WINDING UP (Pg No. 188)
A) Compulsory Winding Up
a) If due to inability to pay debts then governed by insolvency and
Bankruptcy Code
b) On grounds other than inability to pay debts then governed by
Companies Act, 2013
B) Voluntary Winding Up
a) Upto 31st March, 2017 – Companies Act, 2013
b) From 1st April, 2017 – Insolvency and Bankruptcy Code
Note – To be in line with the syllabus, we will be covering only winding
up under the Companies Act, 2013.
C) Winding Up by Tribunal
a) Company Resolution
b) Against National Interests
c) Fraud
d) Default in Filing FS / AR
e) Just an d Equitable
4.3 STATEMENT OF AFFAIRS
Statement of affairs is one of the most important documents which is
required to be submitted alongwith company’s petition before the tribunal
as per section 272 (5) of Companies Act, 2013. In case, petition is
initia tive by any entity other than company under section 274 (1), the munotes.in
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Liquidation of Companies
81 statement of affsirs is required to be presented. In both the situations, the
statement of affairs is required in prescribed form and prescribed manner.
The broad contents that are required to form the statement of affairs are as
follows:
1) The details of assets having no specific charge with expected realisable
value.
2) The details of assets having specific charge along with expected
realisable value. In case of deficit, it should be treated as unsecured
liability and surplus should be made available for disposal.
3) The details of assets mentioned in 1 and surplus arising from 2.
4) The details of preferential creditors, debentures with floating charge,
unsecured creditors.
5) Details of total pa id up capital indicating each class of shares
The statement of affairs should be accompanied by 8 mandatory lists
prescribed in section 274 of Companies Act, 2013:
1) List A – Full particulars of every description of property not
specifically pledged and in cluded in any other list are to be set forth in
this list
2) List B – Assets specifically pledged and creditors fully or partly
secured.
3) List C – Preferential creditors for rates, taxes, salaries, wages and
otherwise.
4) List D – List of Debenture holders se cured by a floating charge
5) List E – Unsecured creditors
6) List F – List of Preference shareholders
7) List G – List of Equity shareholders
8) List H – Deficiency or surplus account
Sr. no. Name of the List Contents
1 List A Assets not specifically pledg ed
(i.e. Assets not having fixed
charge)
2 List B Assets specifically pledged (i.e.
Assets having fixed charge)
3 List C Preferential Creditors
4 List D Debenture holders secured by a
floating charge munotes.in
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Financial Accounting
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82 5 List E Unsecured Creditors
6 List F Preference Sh areholders
7 List G Equity Shareholders
8 List H Reasons for the Surplus /
deficiency as shown by the
Statement of Affairs
STATEMENT OF AFFAIRS
` Particulars `
Assets not Specifically Pledged (as per List A)
Asse ts Specifically Pledged (as per List B)
( a ) ( b ) ( c ) ( d )
Estimated Due to Deficiency Surplus
Realisable Secured Ranking
as carried
to
Value Creditors Unsecured Last
Column Column
Estimated Surplus from Assets Specially Pledged
Estimated total assets available for preferential creditors,
debenture holders
secured by floating charges and unsecured creditors
Summa ry of Gross Assets:
Gross realizable value of assets specifically pledged
Other Assets
Gross Assets
Liabilities
Secured Creditors(as per List B) to the extent to which
claims are estimated
to be covered by assets specifically pledged
Preferential Creditors (as per List C)
Estimated balance of assets available for debenture holders
secured by a
floating charge and unsecured creditors munotes.in
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Liquidation of Companies
83
Debenture h olders Secured by Floating Charge (as per
List D)
Estimated surplus as regard debenture holders
Unsecured Creditors (as per List E)
Estimated surplus as regards creditors(being diff bet gross
assets & liabilities)
Issued and Paid up Capital (as per List G)
Estimated Surplus/Deficiency as regards member (as per
List H)
4.4 DEFICIENCY ACCOUNT
The deficiency account needs to be prepared in case if proceeds fro m
realization of assets are not sufficient to pay off creditors and members’
contribution. The administrator or liquidator provides specific date of
beginning on which the deficiency account is prepared. On such a given
date there could be surplus or defic it. The format of deficiency account is
prescribed in 2 parts –
A) Deficiency and items increasing deficiency further
B) Items reducing deficiency
The format of deficiency or surplus account is as follows:
Rs. Particulars Rs. Rs.
Items Contributin g to Deficiency or
Reducing Surplus :
1. Excess (if any) of capital and
liabilities over (assets as ___ 20__) (as
shown by Balance Sheet) (copy annexed)
2. Net dividends and bonuses declared
during the period from ___20__ to the date
of statement.
3. Net trading losses (after charging
items shown in note below) for the same
period.
4. Losses other than trading losses
written off or for which provision has been
made in the books during the same period
(give particulars or annex schedule) munotes.in
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84 5. Estimated lo sses now written off or
for which provision has been made for
purposes of preparing the statement (give
particulars or annex schedule)
______ ______ 6. Other items contributing to
Deficiency or reducing surplus
___________________________________
____
XXX Items Reducing Deficiency (or
Contributing to Surplus):
7. Excess (if any) of assets over capital
and liabilities on the __20__ as shown on
the Balance Sheet (copy annexed)
8. Net trading profit (after charging
items shown in note below) for the perio d
from the __20__ to the date of statement
9. Profit and income other than trading
profit during the same period (give
particulars or annex schedule).
_____
10. Other items reducing Deficiency or
Contributing to Surplus
Deficiency / Surplus as shown i n
Statement of Affairs
____
XXX
5.5 SPECIAL CONSIDERATIONS IN LIQUIDATION
A) Overerriding preferential payments
In the process of winding up of company, as per provisions of section 326,
following debts should be settled as matter of priority over other debts:
1) Workmen’s due
2) Realisation of secured assets having charge against secured creditors,
(any deficit or amount equal to woekmen’s portion in the security,
whichever is less.) The following payment needs to be made to
security creditors in the g iven order as follows:
a) All remuneration including outstanding remuneration to employees
b) Acrued holiday remuneration
Note - In case, if above payments are due for 2 years prior to closure of
company then they should be paid before all liabilities within 30 days
from realisation of assets which do not have specific charge against other
secured liabilities
The obligations payable under provision of section 326 (1) shall be settled
to the extent of 100 % as priority over secured creditors and once such munotes.in
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Liquidation of Companies
85 payment is made, then secured creditors need to be paid off. In case, if the
value of assets realised is not sufficient, then the liability shall be treated
in proportion for its repayment.
For the purpose of interpretations of sections 326 and 327 workmen
should be treated as any employee under section 2(s) of Industrial Dispute
Act, 1947. Workmen’s dues includes remuneration including outstanding
remuneration to employees, Acrued holiday remuneration, compensation
and all dues under retirement benefits / f unds maintained by the company.
B) Preferential Creditors
In the process of winding up of company, preferential creditors needs to
be paid as priority over other debts under section 327 of The Companies
Act. While such payments are made it should be subject to the provisions
of section 326. The examples of preferential creditors are as follows:
1) Statutory tax liabilities: All kinds of taxes, cess and duties payable by
company towards central government, state government or local
authorities should be treated as statutory tax liability. Such payments
which have become due should be paid within 12 months.
2) Employee remuneration: All types of remuneration including salaries,
wages, commission etc. which are payable for time period not
exceeding 4 months should b e paid within 12 months immediately
before the due date. The provision is subject to fulfillment of certain
conditions.
3) Leave Salary: The amount accrued as holiday remuneration falling due
to the employee or other person at the time of retirement or
termi nation of employment shall be treated as leave salary and is
required to be paid as priority.
4) Retirement Benefits / Funds: All amounts payable under provident
fund, pension fund, gratuity fund and any other fund created by
company for welfare of employee s shall be covered under the heading.
5) Contributions under ESI Act: The total amount due for 12 months,
prior to winding up of a company, under ESI Act or any other relevant
Act shall be treated as preferential liability. The said amount is payable
only w hen the winding up is compulsory and not voluntary.
6) Compensation
7) Investigation expenses under section 213 and 216 if payable by
company
In case, if there is any advance payment made to the employee or any
other person in respect to remuneration or oth erwise, the employee or
other person shall reserve a right in respect of that money at the time of munotes.in
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86 winding up. In case of sick leave, remuneration that falls due on medical
grounds should be treated as regular remuneration.
Note – section 326 amd 327 shall not be applicable if liquidation is under
Insolvency and Bankruptcy Code 2016.
C) Members liability as Contributories
According to S. 2 (26) of the Companies Act, 2013, the term
“contributory” means, a person liable to contribute towards the assets of a
company in the event of its being wound up. A person holding fully paid
shares in a company shall be considered as a contributory but shall have
no liabilities of a contributory under the Act whilst retaining rights of such
a contributory.
In the event of winding up, the tribunal should make clear differenciation
between contributories having their own rights and those contributories
which are representatives of others. The tribunal can process the
settlements of list of contributories by making calls or ad justing their
rights. There are 2 separate lists prepared as far as contributories are
concerned:
a) List A: It shows the details of the members who appear in the register
of members on the date of winding up. These members shall have
limited liability to th e extent of unpaid amount of share capital.
b) List B: It shows the details of all such members who ceased to be
members within 12 months from the date of beginning of winding up
of a company. Such members are treated as past members. The past
members are l iabe to make contributions unless shares were
transmitted, the contractual liability arised after ceasing to be a
member or current members fail to pay all the dues.
Companies should first make contribution cal l to the members listed in list
A. If they f ail to pool the required amount then B listed contributors
should be called for payment. Also the contributions can be demanded
from list B members only when the realisable value of assets falls short of
the liabilities and when existing shareholders fail to pay the amount due to
the liquidator.
Liquidation Cost
The process of liquidation involves realization of assets and settlement of
liabilities which results into many incidental expenses such as
transportation, negotiation charges, administrative and logistics expenses
etc. In the process of winding up, such expenses and liquidator’s
remuneration gets top priority over other claims on company. The
liquidation cost is paid after settlement of overriding preferential creditors
and also has implications o f secured creditors. The payment of liquidation
cost is made in specific order which is as follows:
Liquidation cost
Legal Expenses
Liquidator’s Remuneration
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87 The above order is used for voluntary liquidation whereas in case of
compulsory winding up the order is prescribed by company law tribunal.
The remuneration of liquidator may be payable as percentage of assets
realized or it may be payable in terms of cash distributed to external
stakeholders and members. In a situation of deficiency, remuneration may
be calculated as n / 100 + n where n indicates percentage of commission.
4.6 LIQUIDATORS’ FINAL STATEMENT OF
ACCOUNTS
When company goes for winding up by operation of law, the liquidator
has to maintain proper books in prescribed manner including entries or
minutes of the resolutions passed at the time of meetings held during the
process of liquidation. Any creditor or contributory reserves the rights to
demand for inspection of records subject to approval from the tribnal. One
of the important st atements which shows summarised record of all receipts
and payments is known as liquidator’s statement of account. In case, when
winding up process is complete, the said statement is called liquidator’s
final statement of account.
Following are important items which are included on receipt side of
liquidator’s final statement of account:
A) Net realised amount from assets sold in prescribed order
B) Surplus arising from assets realised which are pledged against the
specific liabilities under the heading of “su rplus from securities”. (In
case if there is deficit then such excess amount of liability should be
treated as unsecured liability and is to be paid off in the manner
presribed.)
C) Final call on partly paid up shares in case the available amount is not
sufficient to pay off creditors’ claim and / or claim of preference
shareholders. Such calls should be made first from equity shareholders
to the extent necessary and then from preference shareholders.
D) Amounts received from calls made to contributories from list A and B
Following are important items which are included on payment side of
liquidator’s final statement of account:
A) Legal charges (lawyers’ fees, expenses related to court proceedings
etc.)
B) Liquidator’s remuneration
C) Liquidator’s expenses
D) Claims o f debenture holders including interest due upto the date of
actual repayment subject to solvency of the company
E) Preferential creditors (to be paid before claim of debenture holders if
there is general charge of assets)
F) Unsecured creditors
G) Preference shar eholders (including arrears in dividend)
H) Equity shareholders munotes.in
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88 In case of repeyment to shareholders there may be 2 situations where
shares are fully paid up or partly paid up. In case if shares are partly paid
up then first call should be made to equity sh areholders being owners so as
to settle the claims of creditors and preference shareholders. Such amount
should be called only if available cash is not sufficient. Only if it is
required then preference shareholders would be called upon. Calls on
partly pa id up shares is required to be made under the following situation:
Steps to determine call amount
1) Calculate total loss for equity shareholders
Total loss = total equity share capital – cash available for payments to
unsecured liabilities and preference s hare capital
2) Determine loss per share
Loss per share = total loss / number of equity shares
3) Determine call amount
4) Call amount = loss per share – paid up amount
Note – In case, if loss per share is less than paid up amount then
balance amount per shar e is refunded.
Liquidators Final Statement of Account
1. Name of the Company :
2. Nature of Proceeding :
3. Date of Commencement of the Winding up :
4. Name and address of the liquidator
Receipts ` (Estimated
Value) `
(Realised
Value) Payments ` `
To Cash/Bank By Liquidation
Expenses
To Realisation
of Assets By
Liquidator's
remuneration
1)
2) By Statutory
Liabilities
1) Govt dues.
To Surplus fro m
Secured 2)
Liabilities
By Secured
Liabilities
To proceeds of
call 1) Secured
Bank Loan
2) Debentures
By Preferential
Liabilities munotes.in
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89 1) Preference
Dividend
2) Interest
Payment s
By Unsecured
Liabilities
By Preference
Share Capital
4.7 ILLUSTRATIONS
1. A liquidator is entiled to receive remuneration @ 2% of the assets
realized 3 % of Preference Creditors and 3% of the amount distributed
among the unsecured creditors.
Assets realised Rs. 25,00,000 against which payment was made as
follows:
Liquidation Expenses Rs. 25,000
Preferential Creditors Rs. 75,000
Secured Credit ors Rs. 10,00,000
Calculate remuneration payable to the liquidator. (CS)
Solution :
Analysis : 3% of amount distributed means 3/103 * Amount payable
before remuneration.
Remuneration payable to Liquidator
Sr. No. Particulars Rs.
1. 2% of assets r ealised
(2% of 25,00,000) 50,000
2. 3% of Preferential Creditors
(3% of 75,000) 2.250
3. 3% of Distribution to Unsecured
Creditors (Working Note 1) 39,255
Total Remuneration 91,505
Note – Remuneration amount paid to unsecured creditors
munotes.in
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90 Particulars Rs. Rs.
Amount Realised
Less: Paid to secured creditors
Liquidation expenses
Preferential Creditors
Remuneration on collevction
of assets
Remuneration o n payment to
preference creditors
10,00,000
25,000
75,000
50,000
2,250 25,00,000
11,52,250
Payable to Unsecured Creditors
before remuneration
13,47,750
Working Note
a) Remuneration = 3 / 103 * 13,47,750
= 39,255
b) Remuneration = 2% of assets realised
2% of 25,00,000
2. A liquidator i s entitled to receive remuneration at 2.5% on the
Assets realised, 1.5 % on the amount distributed to Preferential Creditors
and 3% on the payment made to Unsecured Creditors. The assets were
realised for Rs. 15,00,000 against which payment was made as fol lows:
Liquidation Expenses Rs. 25,000
Secured Creditors Rs. 6,00,000
Preferential Creditors Rs. 75,000
The amount due to Unsecured Creditors was Rs. 9,00,000. Calculate the
Total Remuneration payable to Liquidator.
Solution:
A) 2.5% of ass ets realised = 15,00,000 * 2.5 %
= Rs. 37,500
B) 1.5 % of preferential creditors = 75,000 * 1.5%
= Rs. 1,125
C) 3% of payments to Unsecured Creditors = (15,00,000 – 25,000 –
37,500 – 1,125 – 6,00,000 – 75,000) * (3 / 103) = Rs. 22,176
Total Remuneration = A + B + C
= Rs. 60,801
munotes.in
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91 3. M/s. ABC Ltd. Has gone into liquidation on 25th June, 2019. Certain
creditors could not receive payments out of realisation of assets and
contributions from “A” list contributories. Following are the details of
certain transfers which took place in the year ended 31st March, 2019.
Shareholders No. of
Shares
Transferred Date of
Ceasing to
be a
member Creditors
Remaining
unpaid on the
date of
transfer
P 4,000 10-5-2018 9,000
Q 3,000 22-7-2018 12,000
R 2,400 15-9-2018 13,500
S 1,600 14-12-2018 14,000
T 1,000 9-3-2019 14,200
All the shares are of Rs. 10 each, Rs. 8 per share paid up. Show the
amount to be realised from the persons listed above. Ignore remuneration
to liquidator and other expenses. (CA IPCC November 2 011)
Solution :
Statement of Liabilities of “B” List Contributories
Share
holders No. of shares
transferred Maximum
liability
Upto Rs. 2
Per Share
(Rs.) Division of Liability as on Total
22 July
(Rs.) 15 Sept. (Rs.) 14 Dec.
(Rs.) 9 Mar.
(Rs.)
Q 3,000 6,000 4,500 - - - 4,500
R 2,400 4,800 3,600 720 - - 4,320
S 1,600 3,200 2,400 480 308 - 3,188
T 1,000 2,000 1,500 300 192 8 2,000
Total 8,000 16,000 12,000 1,500 500 8 14,008
Notes:
A. P transferred shares before one year preceding the date of liq uidation.
Hence, he cannot be held liable for any liability on liquidation.
B. Liability of T is restricted to maximum Rs. 2,000. Hence, amount
payable by T on 9th March is Rs. 8 only.
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92 C. Q will not be responsible for further debts incurred after 10th May
(from the date when he ceases to be a member). R & S will not be
liable for the debts incurred after the date of their transfer to shares.
Note :
Computation of Ratio for Discharge of Liabilities
Date Cumulative
Liability (Rs.) Increase in
Liability
(Rs.) Ratio of No.
of Shares
Held by Q, R,
S & T
22July 12,000 - 30:24:16:10
15 September 13,500 1,500 24:16:10
14 December 14,000 500 16:10
9 March 14,200 200 Only T
4. Sri. “Ram” is appointed Liquidator of “C” Ltd., in Voluntary
Liquidation. On 1st July. Fol lowing balances are extracted from the books
on that date:
Equity & Liabilities Rs. Assets Rs.
Share Capital:
12,000 Shares of Rs. 9
each
1,08,000 Machinery 60,000
Reserve for Bad Debts 19,000 Leasehold
Properties 40,000
Debentures (Machinery) 55,000 Stock – in – trade 7,500
Bank Overdraft (Secured) 25,000 Book debts 75,000
Creditors (including
Preferential creditors) 30,000 Investments 12,000
Call in Arrears 1000
Cash in hand 1,500
Profit and Losss
A/C 40,000
Total 2,37,000 2,37,000 munotes.in
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93 Prepare a Statement of Affairs to be submitted to the meeting of Creditors.
Following assets are valued as under by that date:
Machinery Rs. 90,000 Investments Rs. 9,000
Leasehold Properties Rs.1,09,000 Stock Rs. 3,000
Bad Debts are Rs. 2,000 a nd the Doubtful Debts are Rs. 5,000 which are
estimated to realise Rs. 3,000. Preferential Creditors are Rs. 1,500.
Telephone Rent outstanding Rs. 120. Liquidation expenses amounted to
Rs 500 and Remuneration is Rs 750.
Solution:
Receipts Rs. Payment s Rs.
To Assets
realised By Liquidation
Expenses 500
Cash 1,500 By Liquidator’s
Remuneration 750
Fixed Assets
(leasehold
Property) 1,09,000 By Preferential
creditors 1,500
Book Debts 71,000 By Bank Overdraft 25,000
Investments 9,000 Trade Creditors 28,620
Stock 3,000 By Equity
Shareholders 1,72,130
Surplus from
security 35,000
2,28,500 2,28,500
Note – Sine debentures were secured againast specific asset and asset
realised more amount, the excess net amount is shown as surplus in a
statement. In case, asset does not fetch required amount, the difference
would have been unsecured liability.
The following is the balance sheet of XY Ltd. Which is in the hands of the
liquidator.
munotes.in
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94 Balance Sheet as at 31.3.2018
Liabilities Rs. Assets Rs.
Share Cap ital :
1,000, 6% Preference Shares of
Rs. 100 each, fully paid 1,00,000 Fixed
Assets 2,00,000 2,000 Equity shares of Rs. 100
each 2,00,000 Stock 1,20,000 2,000 Equity shares of Rs. 100
each, Rs. 75 paid 1,50,000 Book
Debts 2,40,000 Loan from Bank ( on security of
stock) 1,00,000 Cash 40,000
Trade Creditors 3,50,000 Profit
and
Loss
Account
3,00,000 9,00,000 9,00,000
The assets realised the following amounts (after all costs of realisation and
liquidator’s commission amounting to Rs. 5,000 paid out of cash in hand
Rs. 40,000as per Balance Sheet):
Fixed Assets Rs. 1,68,000
Stock Rs. 1,10,000
Book Debts Rs.2,30,000
Calls on partly paid shares were made but the amount due on 200 shares
was found to be irrecoverable.
Prepare the Liquidator’s Final Statement of Account.
( November 2018 University of Mumbai, TYBAF)
Solution:
Analysis: A call should be made on 1,800 shares shares as holders of 200
shares did not pay.
XY Co. Ltd.
Liquidators Final Statement of Account
For the year ended 31st March 2018
Receipts Rs. Payments Rs.
To Assets realised By Liquidator’s
Remuneration 5,000
Cash 40,000 By Trade
Creditors 3,50,000
Fixed Assets 1,68,000 By Preference
Shareholders 1,00,000 munotes.in
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Liquidation of Companies
95 Book Debts 2,30,000 By Equity Share
Holders (Rs. 10
per share on
2,000 shares) 20,000
Surplus from
security 10,000
To Proceeds of
call on
1,800Equity
shares @ Rs. 15
per share
27,000
4,75,000 4,75,000
Working Note
1. Amount Required:
Particulars Rs.
Preference Share Capital 1,00,000
Equity Share Capital 2,00,000
Equity Share Capital partly paid (1,50,000 –
15,000) 1,35,000
4,35,000
Less: Available Cash (40,000 + 1,68,000 +
2,30,000 + 10,000 – 5,000 – 3,50,000) 93,000
Total Deficiency 3,42,000
Loss per share = 3,42,000 / 3,800 = Rs. 90
Therefore a call of Rs. 15 (90 – 75) per share will be made on 1,800 shares
and a return of Rs. 10 (100 – 90) will be made on the holders of 2,000
shares.
5. U Ltd. Went into voluntary liquidation on 31st March. The following
balances are ext racted from its books on that date:
Equity and Liabilities Rs. Assets Rs.
Capital : 48,000 Equity
Shares of Rs. 10 each,
paid up Rs 5
2,40,000 Machinery 75,000 munotes.in
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96
The following assets are valued as under:
Machinery Rs. 80,000 Stock Rs. 6, 000
Leasehold
Properties Rs. 2,10,000 Debtors Rs. 1,00,000
Investments Rs. 10,000
The bank overdraft is secured by deposit of Title Deeds of Leasehold
Properties. There were Preferential Creditors Rs. 5,000 which were not
included in Creditors Rs . 60,000.
Prepare a Statement Affairs to be submitted to the meeting of Members /
Creditors.
Solution:
Receipts Rs. Payments Rs.
To Cash 50,000 By Preferential
Creditors 5,000 To assets realised: By Debentures 1,60,000 Machinery 80,000 By Creditors 60,000 Investments 10,000 By Equity
Shareholders 1,91,000 Stock 6,000 Debtors 1,00,000 To surplus from
assets 1,70,000 4,16,000 4,16,000 Debentures (secured by a
Floating Charge)
1,60,000 Leasehold
Properties 1,25,000
Bank O verdraft 40,000 Stock 5,000
Creditors 60,000 Debtors 1,30,000
Investments 15,000
Cash in hand 50,000
- Profit and Loss
Account 1,00,000
Total 5,00,000 5,00,000
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97 6. The following is the Balance sheet of Suman Ltd. Which is in the
hand of liquidator.
Balance sheet as on 31 -12-2019
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 1,00,000
500, 6% Preference
shares of Rs 100 each,
fully paid 50,000 Stock 60,000
1000 Equity Shares of
Rs 100 each fully paid 1,00,000 Book debts 1,20,000
3000 Equity Shares of
Rs 50 each, Rs 25 paid 75,000 Cash 20,000
Loan from Bank (on
security of stock) 50,000 Profit And Loss 1,50,000
Trade Creditors 1,75,000
4,50,000 4,50,000
The Assets realized the following amounts (after all costs of rea lization
and liquidators remuneration amounting Rs 3000 paid out of cash in hand
Rs 20,000 as per Balance sheet):
Fixed Assets 84,000
Stock 55,000
Book Debts 1,15,000
Prepare the liquidators final stat ement of Account. (TYBAF, October
2019, Mumbai University)
Solution:
Analysis: Make a call 3000 shares @25 Rs each
Suman Ltd
Liquidators Final Statement of Accounts .
Particulars Rs. Particulars Rs.
To Assets By Liquidators 3,000
Cash
20,000 By Creditors 1,75,000 Fixed Assets 84,000 By return to 6%
Preference
Shareholders 50,000 Book Debts 1,15,000 2,19,000 By Equity Shareholders munotes.in
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98 To Surplus from
Security 5,000 Rs 100 paid 28,400
To Proceeds of call
(3000 x 25) 75,000 Rs 50 paid 42,600 71,000
-
2,99,000 2,99,000
4.8 EXERCISES
1. B Ltd. is to be liquidated. Their summarised Balance Sheet as at 3 0th
September, 2020 appears as under:
Liabilities Rs. Assets Rs.
2,50,000 Equity
shares of Rs. 10
each 25,00,000 Land and buildings
5,00,000
Secured Debentures
(on land and
building) 5,00,000 Other fixed assets
20,00,000 Unsecured loans 20,00,000 Current assets 45,00,000 Trade creditors 40,00,000 Profit and Loss A/c 20,00,000 90,00,000 90,00,000
Contin gent liabilities are Rs.
For bills discounted 1,50,000
For excise duty demands 2,50,000
On investigation, it is found that the c ontingent liabilities are certain to
devolve and that the assets are likely to be realised as follows: Land and
buildings 110%
Other fixed assets 90%
Current assets Rs 40,00,000
Taking the above into account prepare the s tatement of affairs.
2. A liquidator is entitled to receive remuneration @ 3% of the assets
realised and 5% of the amount distributed among the unsecured creditors.
The assets realised Rs. 35,00,000 against which payment was made as
follows:
- Liquidation expen ses Rs. 25,000
- Preferential creditors Rs. 1,75,000
- Secured creditors Rs. 7,50,000 munotes.in
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99 Calculate the remuneration payable to the liquidator
3 .The capital of Data Company Limited was as follows:
a. 8000 equity shares of Rs. 100 each fully paid up
b. 6000 equity share s of Rs. 100 each, Rs. 80 per share paid up
c. 2000 preference shares of Rs. 100 each fully paid (these shares have
preference as to capital)
d. 2000 deferred shares of R. 100 each Rs. 80 per share paid up (these
shares, under the articles are to be paid after s atisfying the claims of
equity shareholders)
The various creditors amounted in all to Rs. 2,00,000 including the
liquidator’s remuneration of Rs. 5,000. The liquidator made a call of the
remaining Rs. 20 on the deferred shares which were paid in full. He a lso
realised all the assets amounting to Rs. 3,82,000.
A call of R. 15 per hare was made on the equity shares which were partly
paid up. This was paid in full with the exception of that on 200 shares.
Prepare the Liquidator’s Account showing the return of money to the
shareholders.
3. The balance sheet of Badshah Ltd as on 31st December 2019 was as
follows:
Liabilities Rs. Assets Rs.
Share Capital: Land and
Building 61,000 8000 Preference shares
of Rs. 9 each 72,000 Other fixed
assets 3,00,000 12,000 equit y shares of
Rs. 1each 12,000 Stock 3,25,000 Bank loan 4,00,000 Debtors 1,00,000 Debentures 1,00,000 Profit and Loss
A/c 58,000 Interest outstanding on
debentures 10,000 Creditors 2,50,000 844000 844000
The company went into liquidation on that date. Prepare Liquidator’s
Statement of Account after taking into account the following:
a. Liquidation expenses and liquidator’s remuneration amounted to Rs.
3,000 and Rs. 10,000, respectively.
b. Bank loan was secured by pledge of stock
c. Debentures and interes t thereon are secured by a floating charge on all
the assets
d. Fixed assets were realised at book value and current assets at 75% of
book values. munotes.in
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100 4. Balance sheet of Naru Ltd as on 31 December 2020 is as follows
Liabilities Rs. Assets Rs.
Paid up Capital: Fixed Assets:
2000, 6% Preference
shares of Rs. 100 each 2,00,000 Land and
building 4,00,000 4,000 equity shares of Rs.
100 each fully paid up 4,00,000 Plant and
machinery 4,40,000 6,000 equity shares of Rs.
100 Rs. 50 paid up 3,00,000 Current
assets: Secured Loans: Stock 2,00,000 6% bonds (on floating
charge on all assets) 2,00,000 Debtors 2,00,000 Others bank loan (on
mortgage of land and
building) 2,00,000 Cash at bank 60,000 Current Liabilities: Miscellaneous
expenditure: Sundry creditors 1,80,000 Profit and
Loss A/c 2,00,000 Income tax 20,000
15,00,000 15,00,000
The company went into liquidation on 1 January 2021.
The preference dividends were in arrears for three years. The arrears are
payable on liquidation
The assets were realise d as follows:
- Land and Building – 125%
- Plant and machinery - 85%
- Stock at book value
- Debtors - 80%
The expenses of liquidation amounted to Rs. 5,000.
The liquidator is entitled to a commission at 3% on all assets realised and
5% on amount distributed to uns ecured creditors.
All payments are made on 30 June 2021.
Prepare Liquidator’s Statement of Accounts.
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Liquidation of Companies
101 5. The summarised balance sheet of Berti Ltd as on 31.3.2017, being the
date of voluntary winding up is as under:
Liabilities Rs. Assets Rs.
Share Capital :
100000, 12% Cumulative
Preference shares of Rs. 10
each fully paid up 10,00,000 Land and
building 5,00,000 50,000 equity shares of Rs.
10 each Rs. 6 per share
called up and paid up 3,00,000 Plant and
machinery 8,00,000 50,000 equity shares of Rs.
10 Rs. 5 per share called up
and paid up 2,50,000 Stock 2,00,000 15% Debentures 7,50,000 Debtors 15,00,000 Preferential creditors 2,00,000 Profit and Loss
A/c 5,00,000 Bank overdraft 3,00,000 Trade creditors 7,00,000 35,00,000 35,00,000
The pre ference dividends were in arrears for two years.
The assets were realised as follows:
- Land and Building @ 150%
- Plant and machinery @ 95%
- Stock @ 75%
- Debtors Rs. 12,25,000
The expenses of liquidation amounted to Rs. 54,000.
The remuneration of the liquid ator is 1.25% of the realisation. Income tax
payable on liquidation is Rs. 80,500. Assuming that the final payments are
made on 31.3.2018 prepare the Liquidator’s Final Statement of Account.
6. Rupay Ltd went into voluntary liquidation on 31st December 2014
when their balance sheet read as follows:
Liabilities Rs. Assets Rs.
7500, 10% Cumulative
Preference shares of Rs. 100
each fully paid up 7,500,000 Land and
building 3,75,000 3750 equity shares of Rs.
100 each Rs. 60 paid 2,81,250 Plant and
machinery 9,37,500 11250 equity shares of Rs.
100 each Rs. 60 paid 6,75,000 Patents 1,50,000 munotes.in
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102 15% Debentures secured by
a floating charge 3,75,000 Stock 2,01,250 Interest outstanding on
debentures 56,250 Sundry debtors 4,12,500 Creditors 4,78,125 Cash at bank 1,12, 500 P & L A/c 4,26,875 26,15,625 26,15,625
The dividends on preference shares were in arrears for two years and the
creditors included preferential creditors of Rs. 19,000. The assets realised
were as under:
- Land and Building Rs. 7,00,000
- Plant and machinery Rs. 9,00,000
- Stock Rs. 2,50,000
- Debtors Rs. 4,00,000
- Patents Rs. 1,25,000
The expenses of liquidation amounted to Rs. 20,250. The liquidator is
entitled to a commission of 2.5% on all assets realised except cash.
Assuming that final payments i ncluding those on debentures were made
on 30th June, 2015, prepare the Liquidator’s Final Statement of Account.
7. The following is the Balance sheet of Lily Ltd as at 31st March, 2019
Liabilities Rs. Assets Rs.
4000, 10% Preference
shares of Rs. 100 each
fully paid up 4,00,000 Land and building 8,00,000 4,000 equity shares of Rs.
100 each Rs. 75 per share
paid up 3,00,000 Plant and
machinery 7,60,000 12,000 equity shares of
Rs. 100each Rs. 60 per
share and paid up 7,20,000 Stock at cost 2,20,000 10% Debe ntures (having a
floating charge on all
assets) 4,00,000 Sundry debtors 4,40,000 Interest outstanding on
debentures (also secured
as above) 20,000 Cash at bank 1,20,000 Creditors 9,80,000 P & L A/c 4,80,000 28,20,000 28,20,000 munotes.in
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Liquidation of Companies
103 On the date, the compa ny went into voluntary liquidation. The dividends
on preference shares were in arrears for the last two years. Sundry
creditors include a loan of Rs. 1,80,000 on mortgage of Land and
Buildings. The assets realised were as under:
Land and Building Rs. 6,80, 000
Plant and Machinery Rs. 7,20,000
Stock Rs. 2,40,000
Sundry Creditors Rs. 3,20,000
Interest accrued on loan on mortgage of buildings up to the date of
payment amounted to Rs. 20,000. The expenses of Liquidation amounted
to Rs. 5,000. The Liquidator is entitled to remuneration of 2% on all the
assets realised (except cash at bank) and 3% on the amount distributed
among equity shareholders. Preferential creditors included in sundry
creditor’s amount to Rs. 50,000. All payments were made on 30th June,
2019 .
Prepare the Liquidator’s Final statement of Account.
8. In liquidation of Unfortunate Ltd which commenced on 1 April,
2017 certain creditors could not receive payments out of the realisation of
the assets and out of contribution from ‘A’ list contributor ies. The
following are the details of certain transfers which took place after 1 April,
2017:
Shareholders No. of
shares
transferred Date of ceasing to
be member Creditors
remaining
unpaid and
outstanding on
the date of
ceasing to be
member (Rs.)
A 1,000 1st May, 2017 3,000 B 1,500 1st July,2017 4,500 C 300 1st November, 2017 6,000 D 200 1st February, 2017 8,500
All the shares were of Rs. 10each, Rs. 5 paid up. Ignoring expenses,
remuneration to liquidator, etc Show the amount to be realised from the
various persons listed above.
9. In a winding up which commenced on 15th September, 2020 certain
creditors could not receive payments out of the realisation of the assets
and out of contribution from ‘A’ list contributories. The following are the
details of certain transfers which took place prior to liquidation and the
amount of creditors remaining unpaid: munotes.in
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Financial Accounting
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104 Shareholders No. of
shares
transferred Date of
ceasing to be
member Creditors remaining
unpaid and
outstanding on the
date of ceasing to be
member (Rs.)
L 2,000 31.8.2020 6,000 M 1,800 20.9.2020 22,000 N 1,200 15.11.2020 27,400 O 1,000 22.2.2021 38,600 P 500 10.3.2021 42,000
All the shares were of Rs. 10each, on which Rs. 4 per share had been
called and paid up. Ignoring expenses, remuneration to liq uidator, etc
show the amount to be realised from the various persons listed above.
munotes.in
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105 5
UNDERWRITING OF SHARES &
DEBENTURES
Unit Structure
5.1 Introduction
5.2 Underwriting
5.3 Underwriting Commission
5.4 Provision of Companies Act with respect to Payment of underwriting
commission
5.5 Underwriters, Sub -underwriters & Brokers
5.6 Type s of underwriting
5.7 Marked, Unmarked & Firm -underwriting applications
5.8 Accounting treatment for underwriting of shares & debentures
5.9 Liability of the underwriters in respect of underwriting contract
5.10 Illustration
5.1 INTRODUCTION
In case of Public Ltd. companies, a minimum subscription must be
received in order to name that issue as a successful one. When a company
goes in for an initial public offer (IPO), it may face certain uncertainty
about whether its offer of shares or other securities will be subscribed in
full or not. If the public issue does not get fully subscribed, the project for
which the funds are being raised cannot be implemented. As per law, it is
required that if the company is not able to collect 90% of the offer amount,
then it needs to compulsorily return the money to those who have
subscribed to the shares.Companies in order to ensure minimum
subscription take the help of the procedure called underwriting. If the
whole or a certain portion of the shares or debentures of t he company is
not applied for by the public, the underwriters themselves apply or
persuade others to apply for those shares or debentures. The underwriters,
as risk -takers, are entitled to get commission at prescribed rates.
Depending upon the risk assessm ent of the issue, the underwriters decide
on their amount of commission.
5.2 UNDERWRITING
Underwriting means guaranteeing to subscribe to an agreed number of
shares or debentures for a certain consideration. The public companies munotes.in
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Financial Accounting
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106 enter into underwriting ar rangements when it goes for IPO. The person or
institution who underwrites the issue is called “underwriters and the
commission so paid is known as “Underwriting Commission .
5.3 UNDERWRITING COMMISSION
A commission is given to the underwriters for underwriting work, this
commission is known as Underwriting Commission. This commission is
found out on the issue price of the shares and debentures underwritten.
Commission to the underwriters is paid on the whole of issue underwritten
irrespective of the fact that whole of the issue has been subscribed by the
public or not. Underwriting commission can be paid only w hen it is
authorised by the Articles of Association
5.4 PROVISION OF COMPANIES ACT WITH RESPECT
TO PAYMENT OF UNDERWRITING COMMISSION
Section 40 (6) of the Companies Act 2013, provides that a company may
pay commission to any person in connection with the subscription or
procurement of subscription to its securities, whether absolute or
conditional, subject to the following conditions which are prescribed under
Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) the payment of such commissio n shall be authorized in the company’s
articles of association;
(b) the commission may be paid out of proceeds of the issue or the profit
of the company or both;
(c) the rate of commission paid or agreed to be paid shall not exceed, in
case of shares, five percent (5%) of the price at which the shares are issued
or a rate authorised by the articles, whichever is less, and in case of
debentures, shall not exceed two and a half per cent (2.5 %) of the price at
which the debentures are issued, or as specified in the company’s articles,
whichever is less;
(d) the prospectus of the company shall disclose –
the name of the underwriters; – the rate and amount of the
commission payable to the underwriter; and
the number of securities which is to be underwritten or subscribed
by the underwriter absolutely or conditionally.
(e) there shall not be paid commission to any underwriter on securities
which are not offered to the public for subscription;
(f) a copy of the contract for the payment of commission is delivered t o
the Registrar at the time of delivery of the prospectus for registration.
Thus, the Underwriting commission is limited to 5% of issue price in case
of shares and 2.5% in case of debentures. The rates of commission given munotes.in
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Underwriting of Shares &
Debentures
107 above are maximum rates. The compa ny is free to negotiate lower rates
with underwriters.
In short:
Underwriting commission may be paid in cash or in fully paid -up
shares or debentures or a combination of all these.
Companies Act, 2013 provides that payment of commission should be
authoriz ed by Articles of Association and the maximum commission
payable will be as under:
In case of shares 5% of the issue price of the share
In case of
debentures 2.5% of the issue price of
debenture
5.5 UNDERWRITERS, SUB -UNDERWRITERS &
BROKERS
Underwriters : The person or institutions underwriting a public issue of
shares and debentures are called underwriters. The underwriters may be
individuals, partnership firms, joint stock companies, banks and financial
institutions. Ex: ICICI, SFC’s, LIC etc. A person can only act as an
underwriter if he/she a certificate granted by SEBI.
Sub-underwriters: An underwriter may appoint several underwriters to
work under him/her. Such underwriters are termed as sub -underwriters
They have no contract with the company. They ge t their remuneration
from the underwriters who are responsible to them.
Brokers: Brokers only help in getting the shares or debentures sold and do
not offer any guarantee to take the unsubscribed shares. Consideration
paid to the brokers is known as broker age.
5.6 TYPES OF UNDERWRITING
An underwriting agreement may be of any one of the following types:
(a) Complete Underwriting : If the whole of the issue of shares or
debentures of a company is underwritten, it is said to be complete
underwriting. It may be wr itten by:
I. One firm/institution (or)
II. More than one person/institution
If the full issue is underwritten by one underwriter, then his
liability will be equal to the number of shares or debentures
underwritten minus shares applied for. munotes.in
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108 Ex: If S Ltd. makes a p ublic issue of 40,000 equity shares of 10
each at a premium of 490 per share and the entire issue of 40,000
equity shares is underwritten by A, B & C in the ratio of 2:2:1.
(b) Partial Underwriting: If a part of the issue of shares or debenture
of a company is underwritten, it is said to be partial underwriting.
Such an underwriting may be done by one underwriter or by a
number of underwriters. In case of partial underwriting, the
company is treated as ‘underwriter’ for the remaining part of the
issue.
Ex: If S Ltd. makes a public issue of 40,000 equity shares of 10
each at a premium of 490 per share and the 20,000 equity shares
are underwritten by A, B & C in the ratio of 2:2:1, it is called
partial underwriting.
(c) Firm Underwriting: It is a firm commitment by an underwriter to
take up a specified number of shares or debentures of the company
irrespective of the number of shares or debentures subscribed by
the public. In firm underwriting, the underwriters are committed to
take up the agreed number of shares or debentures in addition to
unsubscribed shares or debentures, if any. Even if the issue is over -
subscribed, the underwriters are liable to take up the agreed
number of shares of debentures.
Suppose a company has issued 4,00,000 shares of Rs.10 each out
of which underwriting is 30,000 shares. Public subscribed for all
4,00,000 shares. As 30,000 shares are reserved for underwriters,
only 4,00,000 – 30,000 i.e., 3,70,000 shares will be issued to pubic
and application money of remaining 30,000 shares will be returned
to the public.
Normally, an underwriter cannot set off his firm underwriting
liability, but if the contract provides setting off firm underwriting
out of underwriting liability, it may be done.
5.7 MARKED, UNMARKED & FIRM -UNDERWRITING
APPLICATION S
Marked Application: When shares and debentures of the company are
issued to the public, whatever shares and debentures are issued by the
underwriters to the public, they place a seal of their name and address on
the application form; and when the form bea ring seal of the underwriters is
received by the company, it becomes clear to the company as how many
forms are due to the efforts of a particular underwriter. Such applications
bear the stamp of the underwriter and the credit for these applications are
given to the individual underwriter. This is necessary in the case of such
companies whose shares are underwritten by a number of underwriters.
Unmarked Application: The ‘unmarked’ applications are those
applications which bear no stamp of an underwriter. T hese applications munotes.in
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Underwriting of Shares &
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109 are received by the company directly from the public. When there is more
than one underwriter, the unmarked applications are divided amongst
Underwriters in the ratio of their gross liability.
Firm Underwriting applications:
1. When credit for firm underwriting given to individual
underwriter: Firm underwriting shall be deducted from the gross
liability first and the calculation shall be done without considering the
firm underwriting and after determining the liability on account of
underwri ting, firm underwriting is added.
2. When the credit for firm underwriting not given to individual
underwriter: If the credit for the firm underwriting is not to be given
to individual underwriter, those shall be treated as unmarked
applications.
Types of
Application Treatment
Marked Application Always credited to the individual underwriter
Unmarked Always distributed among all the underwriters
Firm Underwriting The applications for the firm shares are either
credited to individual underwriter or credited to
all depending upon the conditions of underwriting
agreement
Note: The distinction between marked and unmarked applications
becomes immaterial when the whole issue is subscribed by only one
underwriter. When the issue is fully subscribed, the distincti on between
marked and unmarked applications becomes immaterial.
5.8 ACCOUNTING TREATMENT FOR
UNDERWRITING OF SHARES & DEBENTURES
Date Particulars Amount
1 When shares & debentures are
allotted to underwriters in
respect to their liability Underwriters A/ c Dr..
To Share Capital A/c (or)
ToDebenturesA/c
To Securities Premium A/c With the value of the
shares & debentures
taken up by the
underwriters
2 When commission becomes
payable to the underwriters Underwriting Commission A/c Dr..
To Underwriters A/c With the amount of
commission due on
the total issue price of
shares underwritten munotes.in
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Financial Accounting
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110 3 When the net amount due from
the underwriters on the shares or
debentures taken up by them is
received
Bank A/c Dr..
To Underwriters A/c With the net amount
due
4 When the net amount due to the
underwriters for commission on
the shares or debentures
underwritten
Underwriters A/c Dr.. To Bank A/c With the net amount
due
5.9 LIABILITY OF THE UNDERWRITERS IN RESPECT
OF UNDERW RITING CONTRACT
Statement showing Net and Total liability of underwriters:
No Particulars Basis A B
A Gross Liability Ratio of shares under
written XXX XXX
B Less: Marked
Application (excluding
firm under writing) Actual XXX XXX
C Balance (A – B) XXX XXX
D Less: Unmarked
applications allotted in
the ratio of gross
liability Ratio of gross liability XXX XXX
E Balance (C – D) XXX XXX
F Less: Firm
Underwriting Actual or Ratio of
Gross Liability XXX XXX
G Net liability as per
agreement (if no
balance is negative) (E – F) XXX XXX
H Add: Firm
Underwriting XXX XXX
I Total Liability XXX XXX
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111 Statement showing the Net Amount Due From/To of Underwriters
No Particulars A B
A Total Liability (including firm underwriting) (No
of shares) xxx xxx
B Amount due on total liability xxx xxx
C Less: amount already paid on Firms Applications xxx xxx
D Amount due on net liability xxx xxx
E Less: Underwriting Commission xxx xxx
F Net amount due to underwriters (if DNet amount from underwriters (if D> E) xxx xxx
Practical Problems
Q.1. Alpha Ltd. was incorporated on 1st April 2022 and issued a
prospectus inviting applications for 500,000 equity shares at Rs. 10 each
per share. The whole issue was fully underwritten by four individuals, as
shown in the following:
W: 200,000 shares
X: 150,000 shares
Y: 100,000 shares
Z: 50,000 shares
Applications were received for 450,000 shares, of which the marked
applications were as follows:
W: 220,000 shares
X: 90,000 shares
Y: 110,000 shares
Z: 10,000 shares
Requir ed: Calculate the liabilities of individual underwriters. (Full
Underwriting)
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112 Solution:
Details W X Y Z Total
No of shares
underwritten 2,00,000 1,50,000 1,00,000 50,000 5,00,000
Less: Marked
Application (2,20,000) (90,000) (1,10,000) (10,000) (4,30, 000)
Balance (20,000) 60,000 (10,000) 40,000 70,000
Less: Unmarked
Applications (8,000) (6,000) (4,000) (2,000) (20,000)
Balance (28,000) 54,000 (14,000) 38,000 50,000
Surplus of W &
Y distributed to
X & Z in ratio of
15:5 +28,000 (31,500) +14,000 (10,500) NIL
Net Liability NIL 22,500 NIL 27,500 50,000
Num ber of unmarked applications =Total shares applied for – Marked
Applications
= 4,50,000 – 4,30,000
= 20,000 shares
Q.2. Beta Ltd. issued 100,000 shares valued at Rs. 100 per share. The
shares were underwritten as follows:
X: 30,000 shares
Y: 50,000 shares
The public applied for 70,000 shares.
Required: Determine the liability of X, Y, and the company (Partial
Underwriting)
Solution:
X Y Company Total
Gross Liability 30,000 50,000 20,00 0 1,00,000
Less: Application received in
the ratio of 30:50:20 21,000 35,000 14,000 70,000
Net Liability 9,000 15,000 6,000 30,000
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113 Q.3. Deni Limited issued 10,000 shares valued at Rs. 100 each. The entire
issue was underwritten as follows:
A: 50%
B: 30%
C: 20%
In addition, there was firm underwriting as follows:
A: 1,000 shares
B: 750 shares
C: 500 shares
The total subscription, including firm underwriting, was 8,000 shares. The
subscription included the following marked applications:
A: 1,500 shares
B: 2,000 shares
C: 750 shares
Required: Calculate the liability of the underwriters. (Firm Underwriting)
Solution:
A B C Total
Gross
Liability 5,000 3,000 2,000 10,000
Less: Marked
Application (1,500) (2,000) (750) (4,250)
Balance 4,500 1,000 1,250 5,750
Less:
Unmarked
Application
(5:3:2) (1,875) (1,125) (750) (3,750)
Balance 2,625 (125) 500 2,000
Surplus of B
to be
distributed
between A &
C in ratio 5:2 (89) +125 (36) -
Balance 1,536 - 464 2,000
Add: Firm
underwriting 1,000 750 500 2,250
Net Li ability 2,536 750 964 4,250
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114 Q.4. Sardar Limited issued to public 1,50,000 equity shares of Rs. 100
each at par. Rs. 60 per share was payable along with application and the
balance on allotment. This issue was underwritten equally by Ali, Bali and
Charlie for a commission of 2.5 per cent. Applications for 1,40,000 shares
were received as per details:
Underwriter Firm
Application Marked
Application Total
Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked
Applications 7,000
Total 1,40,000
It was agreed to credit the unmarked applications equally to Ali and
Charlie. Sardar Limited accordingly made the allotment and received the
amounts due from the public. The underwriters settled their accounts.
Prepare a statemen t showing the liability of the underwriters.
Solution: Statement showing underwriters liabilities
Name of the
Underwriters Ali Bali Charlie Total
Gross Liability 50,000 50,000 50,000 1,50,000
Less: Marked
Applications (40,000) (46,000) (34,000) (1,20,000 )
Less: Unmarked
to be distributed
between Ali &
Charlie (1:1) (3,500) - (3,500) (7,000)
Less: Firm
Underwriting (5,000) (5,000) (3,000) (13,000)
Balance 1,500 (1,000) 9,500 10,000
Surplus of Bali
distributed
between Ali &
Charlie in ratio
(1:1) (500) +1,000 (500) -
Balance 1,000 - 9,000 10,000
Add: Firm
Underwriting 5,000 5,000 3,000 13,000 munotes.in
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115
Net Liability
(no. of shares) 6,000 5,000 12,000 23,000
Amount due @
Rs. 60 per share 3,60,000 3,00,000 7,20,000 13,80,000
Less: Amount
paid on firm
applicati on (3,00,000) (3,00,000) (1,80,000) (7,80,000)
Less:
Underwriting
Commission @
2.5% on issue
price (1,25,000) (1,25,000) (1,25,000) (3,75,000)
Net Liability (in
Rs.) (65,000) (1,25,000) 4,15,000 2,25,000
Q.5. K Ltd. issued for subscription 25,000 sha res at a premium of Rs. 10
each The issue was underwritten as follows:
A: 15,000 shares; B: 7,500 shares & C: 2,500 shares.
Firm application is as follows:
A: 2,500 shares; B: 1,000 shares & C: 500 shares.
Out of the total issue, 22,500 shares includi ng firm underwriting were
subscribed. Marked form details:
A: 8,000 shares; B: 5,000 shares & C: 2,500 shares.
Required:
If the firm underwriting shares are treated as unmarked application,
then what is the net liability of each underwriter?
If the fir m underwriting shares are treated as marked application, then
what is the net liability of each underwriter?
Solution:
When firm underwriting shares are treated as unmarked application:
Particulars A B C Total
Gross Liability 15,000 7,500 2,500 25,000
Less: Marked
applications (5,500) (4,000) (2,000) (11,500)
Less:
Unmarked
Applications* (6,600) (3,300) (1,100) (11,000)
Balance 2,900 200 (600) 2,500 munotes.in
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Financial Accounting
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116 Surplus of C
(150:75) (400) (200) +600 -
Balance 2,500 - - 2,500
Add: Firm
Underwriting 2,500 1,000 500 4,000
Net Liability 5,000 1,000 500 6,500
*Calculation of net unmarked application:
Unmarked Applications 7,000
Add: Firm underwriting 4,000
11,000
When firm underwriting shares are treated as marked application:
Particulars A B C Total
Gross Liability 15,000 7,500 2,500 25,000
Less: Marked
applications
(including firm
underwriting) (8,000) (5,000) (2,500) (15,500)
Less:
Unmarked
Applications (4,200) (2,100) (700) (7,000)
Balance 2,800 400 (700) 2,500
Surplus of C
(150:75) (467) (233) +700 -
Balance 2,333 167 - 2,500
Add: Firm
Underwriting 2,500 1,000 500 4,000
Net Liability 4,833 1,167 500 6,500
Q.6. Sam Ltd invited applications from public for 1,00,000 equity shares
of Rs. 10 each at a premium of Rs. 5 per share. The entire issue was
underwritten by the underwriters A, B, C and D to the extent of 30%,
30%, 20% and 20% respectively with the provision of firm underwriting
of 3,000, 2000, 1,000 and 1,000 shares respectively. The underwriters
were entitled to the maximum commission permit ted by law. The
company received applications for 70,000 shares from public out of which
applications for 19,000, 10,000, 21,000and 8,000 shares were marked in
favour of A, B, C and D respectively. Calculate the liability of each of the
underwriters. Also ascertain the underwriting commission payable to the
different underwriters.
munotes.in
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Underwriting of Shares &
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117 Solution:
Statement showing the Liability of Underwriters
Details A B C D
Gross Liability 30,000 30,000 20,000 20,000
Less: Marked
Applications (19,000) (10,000) (21,000) (8,000)
Less:
Unmarked
Applications (5,700) (5,700) (3,800) (3,800)
Balance 5,300 14,300 (4,800) 8,200
Surplus of C
distributed
between A, B
& D in the
ratio 3:3:2 (1,800) (1,800) +4,800 (1,200)
Balance 3,500 12,500 Nil 7,000
Add: Firm
Underwriting 3,000 2,000 1,000 1,000
Total Liability 6,500 14,500 1,000 8,000
Underwriters Commission as per law:
A: 30,000 x 15 x 5% = 22,500
B: 30,000 x 15 x 5% = 22,500
C: 20,000 x 15 x 5% = 15,000
D: 20,000 x 15 x 5% = 15,000
Q.7. Rambo Ltd. came out with an issue of 45,00,000 equity shares of Rs.
10 each at a premium of Rs. 2 per share. The promoters took 20% of the
issue and the balance was offered to the public. The issue was equally
underwritten by A & Co; B & Co and C & Co.
Each underwriter took firm underwritin g of 1,00,000 shares each.
Subscriptions for 31,00,000 equity shares were received with marked
forms for the underwriters as given below:
A & Co. 7,25,000 shares
B & Co. 8,40,000 shares
C & Co. 13,10,000 shares
Total 28,75,000 shares
The underwriters are eligible for a commission of 5% on face value of
shares. The entire amount towardsshares subscription has to be paid along
with application.
You are required to:
(a) Compute the underwriter’s liability (number of shares);
(b) Compute the amounts payable o r due to underwriters; and munotes.in
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118 (c) Pass necessary journal entries in the books of Scorpio Ltd. relating to
underwriting
Solution:
Total no. of shares issued 45,00,000
Less: Shares taken over by
the promoter 9,00,000
Shares offered to general
public 36,00,000
Statement showing the liability of underwriters
Details A & Co B & Co C & Co
Gross Liability 12,00,000 12,00,000 12,00,000
Less: Marked
Application (7,25,000) (8,40,000) (13,10,000)
Less: Unmarked
Applications (75,000) (75,000) (75,000)
Balance 4,00,000 2,85,000 (1,85,000)
Less: Firm
Underwriting (1,00,000) (1,00,000) (1,00,000)
Balance 3,00,000 1,85,000 (2,85,000)
Surplus of C &
Co to be
allocated to A &
Co and B& Co in
ratio 1:1 (1,42,500) (1,42,500) +2,85,000
Balance 1,57,500 42,500 N
Add: F irm
Liability 1,00,000 1,00,000 1,00,000
Total Liability 2,57,500 1,42,500 1,00,000
Calculation of unmarked applications:
Total Subscriptions 31,00,000
Less: Marked applications (28,75,000)
Total Unmarked Applications 2,25,000
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119 Statement Showing t he Amount Due from (due to) Underwriters
Details A & Co B & Co C & Co
Number of shares
to be subscribed
(including firm
underwriting) 2,57,500 1,42,500 1,00,000
Amount payable
@ Rs. 12 each 30,90,000 17,10,000 12,00,000
Less: Amount
paid on firm
applica tion @ Rs.
12 each on
1,00,000 shares 12,00,000 12,00,000 12,00,000
Balance payable 18,90,000 5,10,000 Nil
Underwriting @
5% on 12,00,000
shares @ 10 each 6,00,000 6,00,000 6,00,000
Amount
received/(paid) 12,90,000 (90,000) (6,00,000)
Journal Entries
In the books of Scorpio Ltd.
Date Particulars Debit
(INR) Credit
(INR)
Bank A/c Dr..
To Share Application A/c 36,00,000 36,00,000 A & Co A/c Dr..
B & Co A/c Dr.
Share Application A/c
To Equity Share Capital A/c
To Securities Premium A/c 18,91,000 5,10,000 36,00,000 50,00,000 10,00,000 Underwriting Commission A/c
Dr..
To A & Co A/c
To B & Co A/c
To C & Co A/c 18,00,000 6,00,000 6,00,000 6,00,000 Bank A/c Dr..
To A & Co A/c 12,90,000 12,90,000 B & Co A/c Dr..
C & Co A/c Dr..
To Bank A/c 90,000 6,00,000 6,90,000 munotes.in
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120 Points to be noted: Unless it has been otherwise agreed, the underwriters’
liability is to be determined without taking intoconsideration the number
of shares taken up ’firm’ by him.In the examinatio n if nothing is
mentioned, the position should be cleared by way of a note.Students are
free to adopt any assumptions in such situation.
Q.8. A entered into an underwriting agreement with B Ltd. for 60% of the
issue of 15% Rs. 50,00,000 debentures with a f irmunderwriting of Rs.
5,00,000. Marked applications were for Rs. 35,00,000 debentures.
Calculate the liability of the underwriterand the commission payable to
him.
Solution: A’s liability is limited to 60% of Rs. 50,00,000 i.e., Rs.
30,00,000. Marked app lications were received for Rs. 35,00,000. The
issue isoversubscribed but there is a firm underwriting. Therefore, the
liability of the underwriter is limited to the extent of firm underwritingi.e.,
Rs.5,00,000.
Commission is payable @ 2.5% of issue price. Therefore, the amount of
commission will be = 2.5% of Rs. 30,00,000 = Rs. 75,000(assuming that
debentures were issued at par)
EXERCISE
Objective type:
1. Define Underwriting & Underwriting Commission
2. What are the provisions of Companies Act with respect to p ayment of
underwriting commission
3. Explain the difference between underwriters, sub -underwriters &
brokers.
4. What are the different types of underwriting?
5. Explain the following terms:
a. Marked Application
b. Unmarked Application
6. What is Firm Underwriting?
Multipl e Choice:
Select the best choice to complete each sentence or answer each question
below:
1. The payment of commission to underwriter(s) is to be authorised by
A: the board of directors
B: the articles of association
C: the memorandum of association
munotes.in
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121 2. A share broker or merchant banker can act as a underwriter provided he
holds a certificate granted by
A: Government of India
B: Company Law Board
C: SEBI
3. In respect of every underwritten issue, the merchant banker(s) shall
undertake a minimum obligation of
A. 5% of the total underwriting commitment or ~ 35 lacs
whichever is less
B. 10% of the total underwriting commitment or ~ 20 lacs
whichever is less
C. 5% of the total underwriting commitment or ~ 25 lacs
whichever is less.
4. As per the provision of t he Companies Act, 2013, in case of shares, the
commission paid or agreed tobe paid does not exceed
A 2%
B 2.5%
C 5%
5. As per the provision of the Companies Act, 2013, in case of debentures,
the commission paid or agreedto be paid does not exceed
A 2%
B 2.5%;
C 5%
Answers: 1 - B; 2 - C; 3 - C; 4 - C; D - B
Practice Questions
7. Cybertech Ltd. issued 1,00,000 shares for public subscription and these
were underwritten by A, B & C in the ratio of 25%, 30% & 45%
respectively. Applications were re ceived for 80,000 shares and of these
applications for 16,000 shares had the stamp of A, those for 20,000
shares had the stamp of B and those for 24,000 shares had the stamp of
C. The remaining applications did not bear any stamp. Calculate the net
liabili ty of underwriters in shares.
(Answer: A – 4,000 shares; B – 4,000 shares; C – 12,000 shares)
8. Sampada Ltd. was formed with a capital of 2,00,000 equity shares of
Rs.10 each. All shares were issued to public for subscription. Issue
was underwritten as foll ows: Ajay: 80,000 shares; Bijo: 60,000 shares munotes.in
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122 & Rajat: 60,000 shares. Marked application were received in favour of
Ajay for 32,000 shares, Bijo for 58,000 shares and Rajat for 42,000
shares. Applications for 30,000 shares was not marked. Calculate the
net liabilities of underwriters in shares.
(Answer: Ajay – 32,000 shares; Bijo – NIL; Rajat – 6,000 shares)
9. Aaadinath Co. Ltd was incorporated on 01.06.2022, issued a
prospectus inviting applications for 5 lakhs equity shares of Rs.10
each. The whole issu e was fully underwritten by A, B, C & D as
follows A -2,00,000. B – 1,50,000 C -1,00,000 & D50,000 shares.
Applications were received for 4,50,000 shares of which marked
applications were as follows: A -2,20,000: B – 1,10,000; C – 90,000;
D-10,000. You are re quired to find out the Net liability of each
underwriter and also calculate the commission received by each
underwriter as per Company’s Act of 2013.
(Answer: Net Liability A – Nil; B – 17,500; C – Nil; D – 32,500
Underwriters Commission A – 2,00,000*10*5% = Rs. 1,00,000
B – 1,50,000*10*5% = Rs. 75,000
C – 1,00,000*10*5% = Rs. 50,000
D – 50,000*10*5% = Rs. 25,000)
10. Meena Ltd has authorised company of Rs.50,00,000 divided into
1,00,000 equity shares of Rs.50 each. The Company issued for
subscription 50,00 0 shares at a premium of Rs.10 each. The entire
issue was underwritten as follows: A -30,000 (firm underwriting
5,000), B -15,000 (firm Underwriting 2,000), C -5,000(Firm
Underwriting 500). Out of the total issue 45,000 shares including firm
underwriting wee subscribed. The following were the marked
applications: A -16,000, B -10,000, C -4,000. Calculate the liability of
each underwriter.
(Answer: A – 9,667; B – 2,333 & C – 500)
11. A joint stock company resolved to issue 10 lakh equity shares of Rs.
10 each at a premium of Re 1 per share. One lakh ofthese shares was
taken up by the directors of the company, their relatives, associates
and friends, the entire amount beingreceived forthwith. The remaining
shares were offered to the public, the entire amount being as ked for
with applications.The issue was underwritten by X, Y and Z for a
commission @ 2% of the issue price, 65% of the issue was
underwrittenby X, while Y’s and Z’s shares were 25% and 10%
respectively. Their firm underwriting was as follows:X 30,000 shar es,
Y 20,000 shares and Z 10,000 shares. The underwriters were to submit
unmarked applications forshares underwritten firm with full
application money along with members of the general public.Marked
applications were as follows: X 1,19,500 shares; Y 57,500 shares and
Z 10,500 shares.Unmarked applications totalled 7,00,000
shares.Accounts with the underwriters were promptly settled.You are
required to: munotes.in
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123 (i) Prepare a statement calculating underwriter’s liability for shares other
than shares underwritten firm .
(ii) Pass journal entries for all the transactions including cash transactions.
(Answer: Liability of underwriters in shares: X – 4,000; Y – NIL;
Z – 8,500
Amount Due From (Due To) Underwriters
X – (Rs. 84,700); Y – (Rs.49,500); Z – Rs. 73,700
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124 6
ACCOUNTING FOR LIMITED LIABILITY
PARTNERSHIP
Unit Structure
6.0 Learning Objectives
6.1 Introduction
6.2 Meaning of a Limited Liability Partnership
6.3 Features of a Limited Liability Partnership
6.4 Benefits of a Limited Liability Partnership
6.5 Drawbacks of a Limited Liability Partnership
6.6 Comparison between LLP, Partnership firm and Limited Company
6.7 Formation of a Limited Liability Partnership
6.8 Statutory Compliance for a Limited Liability Partnership
6.9 Format of Accounts of a Limi ted Liability Partnership
6.10 Solved Illustrations
6.11 Exercise
6.0 LEARNING OBJECTIVES
To identify and understand the peculiarities and statutory compliances
of a Limited Liability Partnership
To apply the provisions of the Limited Liability Partnersh ip Act, 2008
in the preparation of financial statements
To plan and prepare financial statements for conversion of an existing
business structure into a Limited Liability Partnership
6.1 INTRODUCTION
Limited Liability Partnership or as generally used acr onym LLP is a fairly
recent business structure concept. A Limited Liability Partnership concept
emerged in global history during the 1980’s as a result of the aftermath of
large insolvency wave in firms causing the collapse of real estate and
energy prices in Texas, United States of America. Firms and partners were
subject to huge claims and potential bankruptcy, including those partners
who were not responsible for the failure or default of their own.
Consequently, the first limited liability partnership act was passed to munotes.in
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125 safeguard the innocent members of these partnerships firms from liability
occurring on account of actions of other partners. Thereafter other
counties in Europe, Asia and around the globe also enacted LLP laws
embracing the business struc ture. In India, various expert groups and
committees, including the Abid Hussain Committee 1997, The Naresh
Chandra Committee on Audit & Corporate Governance 2003 and Dr. J.J.
Irani Committee on Company Law in 2005 studied and offered
recommended for the need for a law enabling the setting up of LLPs in
India. After considering all these recommendations, the Ministry of
Company Affairs, Government of India enacted the Limited Liability
Partnership Act, 2008 which is presently in force.
6.2 MEANING OF A LIM ITED LIABILITY
PARTNERSHIP
A Limited Liability Partnership is a distinctive business structure
recognized globally today. It has been introduced in India via the Limited
Liability Partnership Act, 2008. As the name suggests, it is a combination
of few feat ures of a partnership firm and few features of a limited
company. It gives the advantages of limited liability of a company and the
flexibility of a partnership in the same organization. Members of a LLP
are called Partners.
6.3 FEATURES OF A LIMITED LIAB ILITY
PARTNERSHIP
Limited Liability: - According to Section 26 of the Act, every partner
is an agent of the LLP for the purpose of the business of the LLP.
However, he is not an agent of other partners. Further, the liability of
each partner has limitation s to his agreed contribution to the LLP. It
provides personal liability protection to its partners.
Name: - Distinct name as approved by the registrar with the suffix
LLP. No two LLPs can have the same name.
Distinct Legal entity: - Once registered under the LLP Act, the LLP is
a separate body corporate entity in the eyes of law. As per Section 3 of
the LLP Act, an LLP is a separate body corporate, formed and
incorporated under the Act. Its legal identity is different from that of its
partners.
Can sue a nd can be sued: - As the LLP is a distinct legal person, it
can be sued as well as it can sue others in its individual capacity. It can
enter into contracts and hold property in its name.
Mutual Agency: - The actions of one partner do not make the other
partners liable. Although all partners are agents of the LLP and the
actions of one partner do not bind the others.
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126 Compulsory registration: - LLP can be formed only by registration
under the s aid act.
Perpetual succession: - once registered LLP has a continuous life.
Partners may join and leave, but LLP continues.
LLP Agreement: - Is the charter document for the formation of a LLP.
It stipulated the mutual agreement between all partners and a lso
governs the rights and duties of all the partners. As an LLP agreement
is not mandatory and in the absence of LLP agreement, mutu al rights
and liabilities of partners shall be governed as per Schedule I to the
LLP Act.
Common Seal: - As per section 14(c) the LLP may have a common
seal. This is not mandatory though. If the LLP decides to have a
common seal, then it is required that the seal remains under the custody
of a responsible official and it can be affixed only in the presence of at
least two designated partners.
Number of Partners: - A LLP must have at least 2 partners at any
time. The maximum number of partners is unlimite d. The partner may
by individuals, firms, company’s, LLPs, or any other artificial persons
in and outside India. A partner may transfer his interest in the LLP as
per the provisions of the LLP agreement.
Designated partner: - A LLP shall have at least 2 d esignated partners
who are individuals of which at least one should be a resident in India.
Purpose: - LLP shall not be formed for charitable or nonprofit purpose.
LLP should carry on a lawful business with a motive to earning a
profit.
Records & reporti ng: - LLP shall maintain books of accounts as per
the provisions of the act and comply with all requirements of reporting
as per the other applicable statues from time to time. Audit is required
only if the partner’s contribution exceeds Rs 25 lakhs or the turnover
exceeds Rs. 40 lakhs.
6.4 BENEFITS OF A LIMITED LIABILITY
PARTNERSHIP
Ease in formation as compared to the red tape process of formation of a
company
Lesser cost of formation than a company
Unlimited numbers of partners – maximum number of partne rs in a
LLP are unlimited
Partner of the LLP is not responsible or liable for another partner’s
misconduct or negligence.
Separate legal status from its partners munotes.in
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127 Persons other than individuals may also be partners eg. Firm, company,
AOP etc.
Relatively les s legal and statutory compliances as compared to a
company
Perpetual succession of business
Limited liability of partners as stipulated in the agreement
Business structure accepted globally
Partners are not liable for the actions of other partners
Ease in dissolution and winding up
6.5 DRAWBACKS OF A LIMITED LIABILITY
PARTNERSHIP
LLP cannot raise funds in form of equity from public
Follow red tape process of the LLP Act.
In certain cases liability of the partner may extend to personal assets
also.
At leas t one designated partner has to be a resident of India.
6.6 COMPARISON BETWEEN LLP, PARTNERSHIP
FIRM AND LIMITED COMPANY
Aspects Partnership Firm Limited
Liability
Partnership Limited Company
Statute
applicable Indian
Partnership Act,
1932 Limited
Liability
Partnership Act,
2008 Indian Companies
Act, 1956 revised
2013
Charter
Document Partnership Deed LLP Agreement Article &
Memorandum of
Association
Minimum
number of
members Two Individual
Partners Two –
Designated
Partners of
which at least
one has to be an
Individual
resident of India 2 members for
Private Company &
7 members for
Public Company
Maximum
number of
members or
partners Twenty Unlimited Private company –
200
Public Company -
unlimited
Liability of
Owners Partners liability
is several a nd
unlimited Partners liability
is limited as per
the LLP
agreement Shareholders
liability is limited to
face value of shares munotes.in
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128 Residential
status of
owners Foreign nationals
cannot be
partners (except
in case of NRI &
PIO subject to
FEMA
regulations) Forei gn
nationals can be
partners (subject
to FEMA
regulations) Foreign nationals
can be directors.
Legal Status Not separate
entity from its
Partners Separate legal
entity from
partners Separate legal entity
from shareholders
Perpetual
Succession Not possibl e Possible Possible
Raise equity
from public Not possible Not possible Possible
Dividend
Distribution
Tax Not Applicable Not Applicable Applicable
Statutory
Compliance
level Low Moderate Very High
6.7 FORMATION OF A LIMITED LIABILITY
PARTNERSHIP
Any t wo or more persons (natural or artificial) may form a LLP in order to
conduct any business or profession with a motive to earn profit. With a
minimum of two members and maximum number of members being
unlimited, LLP can be registered. The pre -requisites fo r the same are as
below: -
At least two partners (Individual or body corporate): - Any two or more
persons (natural or artificial) may form a LLP in order to conduct any
business or profession with a motive to earn profit. With a minimum of
two members and m aximum number of members being unlimited, LLP
can be registered. In case of a body corporate a natural person shall be
appointed as a nominee for the purpose of the LLP. The partners may be
resident in India or abroad.
Minimum two designated partners who a re individuals and at least one
of them should be resident in India. Every Designated Partner shall obtain
a unique eight digit Designated Partner Identification Number (DPIN)
from the Central Government by filing Form 7. Each designated partner
shall give a consent to the registrar to act as the designated partner of the
LLP
Digital signature certificate: - As correspondence of the LLP is digitally
filed it requires a digital signature. At least one of the designated partners munotes.in
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129 of the LLP shall obtain a Digi tal Signature Certificate which shall be used
during the course for the purpose of the LLP.
Name of the LLP: - For formation of a LLP, the proposed partners are
required to select the proposed name for the LLP. The name of the LLP
should not be the same as any existing LLP or Limited company in India.
The name should not contain words or phrases prohibited under the
Emblems and Names (prevention of improper use) Act, 1950. As the
suffix in the name the words Limited Liability partnership or the acronym
LLP must be used. The application for approval of name shall be filed
with the Registrar of Companies in Form No 1 along with paying the
prescribed fees. The ROC shall approve the name if not found similar to
the name of an existing LLP or company.
LLP Agreeme nt: - . The mutual arrangement between the partners is
called the LLP agreement. It must specify the contribution of each partner
and the form in which it shall be paid. In case no formal agreement is
entered into amongst the partners, the rights and dutie s of the partners
shall be as per Schedule 1 of the LLP Act. Agreement once made may be
amended. Every such amendment must be notified to the ROC.
Registered office: - Is the official seat of business of the LLP. At the
time of incorporation proof the regi stered office of the LLP has to be
submitted to the ROC
Application for incorporation: - Form 2 Application form for
incorporation to be signed by all the partners. Form 3 agreement of LLP.
Form 4 & 9 Consent of appointment of designated partners. Form 6 w ith
proof of names and address of partners. All forms are filed along with
applicable fees.
Certificate of Incorporation: - Upon approval of the application for LLP
registration, the Certificate of Incorporation is issued in Form 16 by the
registrar. The L LP may commence its business operations thereafter.
6.8 STATUTORY COMPLAIANCE FOR A LIMITED
LIABILITY PARTNERSHIP
The Limited Liability Partnership Act, 2008 envisages multiple statutory
provisions for the formation, working, conversion and liquidation of a
LLP. Few of them as discussed below: -
6.8.1 Partners of a LLP: - Any person whether natural or artificial may
become a member of a LLP by being admitted as per the provisions of the
LLP agreement. In case of an artificial person, a natural person shall b e
appointed as a nominee for the purpose of LLP. The partner may by
individuals, firms, company, LLP, or any other artificial person in and
outside India. A partner may be a foreign national subject to the regulation
under FEMA. A LLP must have at least 2 partners at any time. The
maximum number of partners is unlimited. A partner may transfer his
interest in the LLP as per the provisions of the LLP agreement. The munotes.in
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130 relationship between the LLP and partners is that of principal and agent.
Thus, partners are agents of the firm but not the agents of other partners.
The liability of the partners is restricted to their contribution towards the
LLP as per the LLP agreement. However section 30 of the LLP Act
provides for unlimited liability of the partner in case a ny fraudulent
actions undertaken in order to defraud creditors or any other person
associated with the LLP. All the partners have a right to participate in the
management and functioning of the LLP, however they are not entitled for
any additional remuner ation for the same. Unless specified in the LLP
agreement as otherwise, the profit sharing ratio between the partners shall
be equal. Any change in name or address of the partner shall be notified to
the LLP within 15 days. Admission and retirement of part ners shall be as
per the terms and conditions of the LLP agreement.
6.8.2 Designated Partner: - A designated partner in a LLP is similar to
the managing director of a limited company. LLP shall have at least 2
designated partners who are individuals of whi ch at least one should be a
resident in India. Designated partners are solely responsible for the
compliance and execution of the LLP Act. They are liable for any fines
and penalties imposed on the LLP. The LLP is responsible for preparing
the statement of account and solvency, which requires the signature of a
designated partner. Every designated partner, on behalf of an LLP is
required to file annual returns with the registrar. Any changes in the LLP
must be reported to the designated partner, including c hanges in partners’
names, home addresses, and the signature of e -forms to be filed with the
registrar. A designated partner must cooperate with the investigating body
by submitting all essential books and papers pertaining to the LLP. The
LLP must file it s particulars with the registrar within 30 days of
individuals consenting to operate as Designated Partners, in accordance to
section 7(4). Each partner consenting to be a designated partner shall
obtain a Designated Partner Identification Number (DPIN) fr om the
central government, according to Section 7(6), and Section 266A -G of
the Companies Act, 1956, including the regulations of Mutatis Mutandis,
which apply to Designated Partner s. LLP shall file consent in e -form 4 to
the ROC within 30 days of appointment of designated partners. The LLP
Act states that a vacancy in the post of a designated partner must be filled
up within 30 days of its occurrence. If no designated partners are
nominated, or if there is only one designated partner at any time, each LLP
partner is considered a designated partner. If the LLP fails to identify
designated partners, the LLP as well as each of its partners shall be fined.
6.8.3 LLP Agreement: - LLP Agre ements is a written agreement between
the partners of the LLP which establish the rights and duties of the
partners toward each other as well toward the LLP . In the absence of the
LLP agreement all the rights and liabilities provided in Schedule I of the
LLP act shall apply to the partners and LLP. The broad contents of the
LLP agreement are as below: -
Name of the firm: - It contains the name of the limited liability
partnership firm. According to the Act, the name must always end with
the words LLP. munotes.in
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131 Date of agreement: - The agreement must be registered within 30 days
after incorporation.
Rights, Liabi lities and Partner’s contribution: - The profit sharing
ratio, the ratio of the capital contribution and drawings of each partner
and other provisions re garding the capital contribution if any shall be
defined clearly. The mechanism and process of transfer of such rights
in whole or partly to another shall also be clearly defined.
Compliances: - Provisions related to the recording, storage, and
maintenanc e of the books of accounts and other important documents
and compliances with statutes.
Admission and Retirement of partners: - The terms of disass ociation
as well. If any partners want to withdraw from the LLP, then the
procedure and process are listed out. Also, it contains the rights of the
exciting partners, rights of the continuing partners, the division of
firm assets etc. Also contains the provisions for the admission of a new
partner into the LLP. The agreement must also contain the procedural
information regarding the sale or transfer of partnership rights. If such
transfer of rights is prohibited, then it must be mentioned.
Indemnity clauses shall be included in the agreement
Manag ement and remuneration: - Every partner shall take part in the
management and business of LLP. No remuneration shall be paid to
any partner for managing the affairs of the LLP.
Disputes: - Shall be settled as per the provisions of the LLP agreement
or sh all be referred to under the Arbitration and Conciliation Act, 1996.
6.8.4 Accounts and audit: - Rule 24 of LLP, Rules 2009 provide for the
audit of accounts of every LLP. Audit is mandatory only if the
contribution exceeds Rs 25 lakhs or the turnover exce eds Rs. 40 lakhs in
any financial year. LLP may voluntarily get the accounts audited in case it
doesn’t meet the mandatory criterions. The designated partners are
responsible for appointment of auditors within 30 days of the end of the
financial year. The terms of appointment, remuneration and removal of
auditors shall be as per the LLP agreement.
6.8.5 Conversion of a firm into a LLP: - As per section 55 of the LLP
Act an existing partnership can be converted into LLP as per the
provisions inthe second sch edule. The firm shall apply to the ROC by
paying the prescribed fees in the prescribed format. The firm shall also
inform the registrar of firms about the conversion. The Registrar of firms
then removes the name of the firm from the record
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132 6.9 FORMAT OF ACCOUNTS OF A LIMITED
LIABILITY PARTNERSHIP
STATEMENT OF INCOME & EXPENDITURE OF (LLP)
FOR THE PERIOD 1st APRIL to 31st MARCH Particulars Rs. Rs. Rs. INCOME Turnover Other Income Increase/Decreasein Stock EXPENSES Purchases & Direct Expenses Personnel Expenses Administrative Expenses Selling Expenses Depreciation Interest Other Expenses Net Profit before Tax Less:-Provision for Tax Net Profit after Tax Transfer to partners Transfer to Reserves
STATEMENT OFASSETS & LIABILITIES OF (LLP)
ASON31st MARCH Particulars Rs. Rs. Rs. CONTRIBUTIONS & LIABILITIES CONTRIBUTIONS Partners fund Reserves LIABILITIES Secured loans Unsecured loans Short Term Borrowings Creditors & Trade Payables Other Liabilities Provisions ASSETS Fixed Assets Investments Loans &Advances Inventories Debtors & Trade Receivables Cash & Cash Equivalents Other Assets munotes.in
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133 6.10 SOLVED ILLUSTRATIONS
Question : -LLP Final Accounts
Mr. Andyand Mr. Ben were partners sharing profit & losses in the ratio 3:2
The following is the Trial Balance of AB (LLP) for year ended 31st March
2020. Particulars Debit Credit Stock on 01 -04-2019 75,000 Purchase 1,250 ,000 Sales Capital of Mr. Andy 300,000 Capital of Mr. Ben 200,000 Drawings of Mr. Andy 30,000 Drawings of Mr. Ben 20,000 Returns inwards 12,500 Returns outwards 15,200 Wages (Productive) 5,600 Wages (Unproductive) 3,500 Salaries 12,000 Rent, ratesand taxes 4,800 Discount Allowed 2,400 Discount Received 4,200 Machinery 360,000 Buildings 850,000 Cash 4,500 Bank Overdraft 4,100 Sundry Debtors 245,000 Sundry Creditors 206,800 2,875,300 2,875,300
Additional informa tion:-
1 Outstanding Unproductive wages were Rs. 4,000
2 Prepaid rent is Rs800
3 Closing stock on 31stMarch 2020 was Rs. 72,000
4 Depreciate Building by 5% and Machinery by10% You are required to
prepare for the year ended 31st March 2020
Statement of Income and E xpenditure & Balance sheet from the
given data
munotes.in
Page 134
Financial Accounting
and Auditing
134 STATEMENTOFASSETS & LIABILITIES
Of AB (LLP) ason 31st March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS & LIABILITIES
1
2
3
4
5
6
7
8
1,238,900
nil
nil
nil
4,100
210,800
nil
1,238,900
214,900 CONTRIBUTIONS
Partners fund Reserves LIABILITIES
Secured loans Unsecured loans
Short Term Borrowings Creditors &
Trade Payables Other Liabilities
Provisions
ASSETS 1,453,800
1,131,500 Fixed Assets 9
Investments 10 nil
Loan s & Advances 11 800
Inventories 12 72,000
Debtors &Trade Receivables 13 245,000
Cash & Cash Equivalents 14 4,500
Other Assets 15 nil
1,453,800
STATEMENT OF INCOME & EXPENDITURE
Of AB (LLP) for the period 1st April 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs.
INCOME
16
2,132,500
2,133,700 Turnover
OtherIncome 17 4,200
Increase/Decrease in Stock 18 -3,000
EXPENSES
1,234,800
1,344,800 Purchases & Direct Expenses 19
Personnel Expenses 20 25,100
Administrat ive Expenses 21 4,000
Selling Expenses 22 nil
Depreciation 23 78,500
Interest 24 nil
Other Expenses 25
2,400
Net Profit before Tax
788,900
Less: -Provision for Tax - Net Profit after Tax 788,900 munotes.in
Page 135
Accounting for Limited
Liability Partnership
135 Transfer to partners (PSR 3:2)
473,340
788,900 Mr.Andy's Capital a/c
Mr. Ben's Capital a/c 315,560
Transfer to Reserves nil
Notes / Schedules to accounts
Sch.No. Particulars Rs. Rs. Rs.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 CONTRIBUTIONS &
LIABILITIES CONTRI BUTIONS
Partners fund
Capital Balance of Mr. Andy(+) Net
profit of the year
(-) Drawings
Capital Balance of Mr. Ben(+)
Netprofit of the year
(-) Drawings Reserves
LIABILITIES
Secured loans Unsecured loans
Short Term Borrowings Bank
Overdraft
Creditors & Trade Payables Sundry
Creditors Outstanding wages
Other Liabilities Provisions
ASSETS
Fixed Assets Machinery
(-) Depreciation @10%
Buildings
(-) Depreciation @5% Investments
Loans & Advances Prepaid
Rent Inventories
Closing stock
Debtors & Trade Receivables
Sundry Debtors
Cash & Cash Equivalents Cash
Other Assets
300,000
473,340
(30,000)
743,340
495,560
-
Nil
nil
4,100
210,800
nil
nil
1,238,900
214,900
1,131,500 nil
800
72,000
245,000
4,500
nil
200,000
315,5 60
(20,000)
206,800
4,000
360,000
36,000
324,000
807,500 850,000
42,500
munotes.in
Page 136
Financial Accounting
and Auditing
136 Notes / Schedules to accounts
Sch.No. Particulars Rs. Rs.
16
17
18
19
20
21
22
23
24
25 INCOME
Turnover Gross Sales
(-) Return Inwards Other
Income Discount Received
Increase/Decrease in Stock
Closing Stock
(-) Opening Stock
EXPENSES
Purchases & Direct
Expenses Gross Purchases
(-) Return Outwards
Personnel Expenses
Wages (Productive) (+)
Outstanding wages
Wages (Unproduct ive)
Salaries
Administrative Expenses
Rent, rates and taxes
(-) Prepaid Rent Selling
Expenses Depreciation
on machinery on building
Interest
Other Expenses Discount
Allowed
2,145,000
-12,500
2,132,500
4,200
-3,000
1,234,800
25,100
4,000
nil
78,500
2,400
72,000
-75,000
1,250,000
-15,200
5,600
4,000
9,600
3,500
12,000
4,800
-800
36,000
42,500
Question: -LLP Final Accounts
Mr. Jack and Mr. Ken were partners sharing profit & losses in the ratio:
3:2
The following is the Trial Balance of JK (LLP) foryear ended 31st March
2020. Particulars Debit Credit ReserveFund
2,000 Bills payable 1,200 Returns Outwards 2,100 Reserve for doubtful debts 1,600 Creditors 19,400 Sales 315,000 munotes.in
Page 137
Accounting for Limited
Liability Partnership
137 Machinery Office Rent 2,500 Discount 3,200 Bad debts 2,150 Wages and salaries 8,900 Investment in Debentures 6,000 Cash balance 2,400 Purchases 197,800 Bank overdraft 4,100 Capital of Mr. Jack 64,500 Capital of Mr. Ken 48,700 Opening Stock 42,500 Royalties 3,410 Loanfrom Mrs. Ken 4,500 Trademarks 12,500 Unpaid general expenses 3,210 Travelling expenses 2,150
Printing and stationery 3,500 Debtors 53,100 Drawings of Mr. Jack 22,500 Drawings of Mr. Ken 18,700 Bank Loan 5,000 471,310 471,310
Additional information: -
1 Jack to get a commission of 1% on Net sales
2 Revalue Machinery to Rs. 85,000
3 Unpaidexpenses wereRs. 2,000 forSalary
4 Rent is paid for two months in advance
5 New bad debtsare Rs. 1,200. Maintain RDD @5% on Debtors
6 Closing stock is valued at Rs. 38,500 whereas the cost price was Rs.
35,800
STATEMENTOFASSETS & LIABILITIES
Of JK( LLP) ason 31st March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS &
LIABILITIES
CONTRIBUTIONS
Partners fund Reserv es
LIABILITIES
Secured loans Unsecure d 1
2
3 59,921 2,000 151,952 5,000 munotes.in
Page 138
Financial Accounting
and Auditing
138 loans
Short Term Borrowings
Creditors & Trade Payables
Other Liabilities
Provisions
ASSETS
Fixed Assets Investments
Loans &Advances
Inventories
Debtors &Trade
Receivables Cash & Cash
Equivalents Other Assets 4
5
6
7
8
9
10
11
12
13
14
15 4,500 39,410 4,100 25,810 - - 191,362 97,500 6,000 357 35,800 49,305 2,400 - 191,362
STATEMENT OF INCOME & EXPENDITURE
Of JK (LLP) for the period 1stApril 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs.
INCOME
16 315,000
308,300 Turnover
Other Income 17 - Increase/Decrease in Stock 18 -6,700
EXPENSES 199,110
233,49 Purchases & Direct Expenses 19
Personnel Expenses 20 10,900 Administrative Expenses 21 5,643 Selling Expenses 22 8,700 Depreciation 23 5,000 Interest 24 - Other Expenses 25 4,145 Net Profit before Tax
44,881 74,802 Less: -Provisionfor Tax - Net Profitafter Tax 74,802 Transfer to partners (PSR 3:2)
74,802 Mr. Jack's Capital a/c
Mr. Ken's Capital a/c 29,921 Transfer to Reserves -
munotes.in
Page 139
Accounting for Limited
Liability Partnership
139 Note -Schedules to accounts
Sch.No. Particulars Rs. Rs. Rs.
1 CONTRIBUTIONS & LIABILITIES
64,500
90,031
151,952 CONTRIBUTIONS Partners fund Capital Balance of Mr. Jack
(+) Netprofit of the year 44,881 (+) 1% Commission on sales 3,150 (-) Drawings -22,500
Capital Balance of Mr. Ken
48,700
59,921 (+) Netprofit of the year 29,921 (-) Drawings -18,700 2 Reserves
1,200 2,000
LIABILITIES
5,000 3 Secured loans Bank Loan 4 Unsecured loans
4,500
Loan from Mrs. Ken 5 Short Term Borrowings
4,100
Bank overdraft 6 Creditors & Trade Payables
25,810
Bills payable Creditors 19,400
Unpaid general expenses 3,210 Outstanding Salary 2,000 7 Other Liabilities
90,000 - 8 Provisions - 39,410 ASSETS
85,000
97,500 9 Fixed Assets Machinery (-) Depreciation on Machinery -5,000
Trademarks
6,000 12,500
10 Investments
49,305
6,000 Investment in Debentures 11 Loans &Advances
53,100
357 Prepaid Rent 12 Inventories
35,800 Closing Stock 13 Debtors &Trade Receivables
49,305 Debtors (-) New Bad debts -1,200 (-) New RDD -2,595 14 Cash & Cash Equivalents
Cash balance OtherAssets
15 Other Assets 2400 2400
munotes.in
Page 140
Financial Accounting
and Auditing
140 Notes / Schedules to accounts
Sch.No. Particulars Rs. Rs.
INCOME
Turnover Sales
Other Income
Increase/Decrease in Stock
Closing Sock
Less Opening Stock
EXPENSES
Purchses & Direct Expenses
Purchases
(-) Return Outwards
Royalties
Personnel Expenses Wages
and salaries
(+) Outstanding Salary
Administrative Expenses
Office Rent
(-) Prepaid rent (2 mths)
Printing and stationery
Selling Expenses Discount
Old Bad debts
(+) New Bad debts
Travelling expenses
Depreciation
On Machinery Interest
Other Expenses New RDD
(-) Old RDD
Commpaid to Partner 35,800 -42,500 315,000 -6,700 199,110 10,900 5,643 8,700 5,000 4,145 16
17
18
19
20
21
22
23
24
25 197,800 -2,100 195,700 3,410 8,900 2,000 2,500 -357 2,143 3,500 3,200 2,150 1,200 3,350 2,150 2,595 -1,600 995 3,150
Question: -LLP FinalAccounts
Mr. G, Mr. H and Mr.I were partners sharing profit & losses in the ratio
2:2:1 the following is the Trial Balance of GHI (LLP) for year ended 31st
March 2020.
Particulars Debit Credit
Goodwill 22,000
Patents 15,000 Copyrights 8,000 Salary and Wages 24,500 munotes.in
Page 141
Accounting for Limited
Liability Partnership
141 Machinery 32,800
Vehicle 12,500 Cash in Hand 3,300 ICICI Bank Balance ( current A/C) 6,200 FD with ICICI bank 2,000 Freight 200 Freight inwards 1,040 Freight outwards 2,100 Purchases and Sales 87,240 Returns 1,250 2,100 Billls Payable / Receivable 3,920 2,390 Debtors / Creditors 23,820 12,470 Bad debts 200 Rent, rates and taxes 2,100 Mr.G's Capital 45,200 Mr.H's Capital 44,850 Mr.I's Capital 31,200 Travelling expenses 8,250 Opening Stock 11,200 Discount 810 Advertisement (for 2 years) 1,600 MutualFunds 8,000 277,220 277,220 -
Additional information: -
1 Closing stock on 31st March was valued at Rs. 16,500
2 Goods worth Rs. 12,000 were sold on 27th March for which no entry
was passed in the books of accounts
3 Depreciate Vehicles by15% and Machinery by10%
4 Unpaid expenses were Rs. 1,200 for Rent and Rs. 2,400 for Salary
5 Income from Mutual Funds was Rs. 2,000 reinvested, not recordedin
the b ooks of accounts
6 Advertisement contract was taken on 1st October 2019 You are required
to prepare for the year ended 31stMarch 2020
Statement of Income and Expenditure & Balance sheet from the given data
munotes.in
Page 142
Financial Accounting
and Auditing
142 STATEMENT OF ASSETS & LIABILITIES of GHI (LLP) as on 31st
March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS & LIABILITIES
1 149,225 149,225 CONTRIBUTIONS
Partners fund
Reserves 2 - LIABILITIES Secured loans 3 - Unsecured loans 4 - Short Term Borrowings 5 - Creditors &Trade Payables 6 14,860 Other Liabilities 7 - Provisions 8 - 14,860
ASSETS 164,085 85,145 Fixed Assets 9
Investments 10 12,000 Loans & Advanvces 11 1,200 Inventories 12 16,500 Debtors &Trade Receivables 13 39,740 Cash & Cash Equivalents 14 9,500 Other Assets 15 - 164,085
STATEMENT OF INCOME & EXPENDITURE of GHI (LLP) for the
period 1stApril 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs.
INCOME
16 148,950
157,060 Turnover
Other Income 17 2,810 Increase/Decrease in Stock 18 5,300 EXPENSES
Purchses & Direct Expenses 19 86,380
Personnel Expenses 20 24,500
Administrative Expenses 21 2,100
Selling Expenses 22 10,950
Depreciation 23 5,155
Interest 24 - Other Expenses 25 - 129,085 Net Profit before Tax 27,975 Less: -Provision for Tax - Net Profit after Tax 27,975 Transfer to partners (PSR 2:2:1) munotes.in
Page 143
Accounting for Limited
Liability Partnership
143 Mr.G's Capital a/c 11,190 27,975 Mr,H's Capital a/c 11,190 Mr.I's Capital a/c 5,595 Transfer to Reserves -
Notes / Schedules to acc ounts
Sch.No. Particulars Rs. Rs. Rs.
1 CONTRIBUTIONS & LIABILITIES
45,200
56,390
149,225 CONTRIBUTIONS Partners fund Capital Balance of Mr. G (+) Netprofit ofthe year 11,190 Capital Balance of Mr. H 44,850 11,190
56,040 (+) Netprofit ofthe year Capital Balance of Mr. I 31,200 5,595
36,795 (+) Netprofit of the year 2 Reserves
2,390 - LIABILITIES
-
- 3 Secured loans 4 Unsecured loans - - 5 Short Term Borrowings - - 6 Creditors &Trade Payables
14,860
14,860 Bills Payable / Receivable Creditors 12,470 7 Other Liabilities
32,800 - 8 Provisions - ASSETS
22,000
85,145 9 Fixed Assets Goodwill Patents 15,000 Copyrights 8,000 Machinery
29,520 (-) Depreciation @10% -3,280 Vehicle 12,500 -1,875
10,625 (-) Depreciation @15% 10 Investments
8,000 2,000
2,000
12,000 FD with ICICI bank Mutual Funds
10,000 (+) Income from Mutual Funds reinvested 11 Loans &Advances
23,820
3,920
1,200 Prepaid Advertising expenses 12 Inventories Closing Stock 13 Debtors &Trade Receivables Bills Receivable munotes.in
Page 144
Financial Accounting
and Auditing
144 Debtors (+) Unrecorded Sales 12,000 35,820 14
Cash & Cash Equivalen ts
3,300 Cash in Hand 15 Cash & Cash Equivalents 62003,300 9500
Notes / Schedules to accounts
Sch.No. Particulars Rs. Rs.
16
17
18
19
20
21
22
23
24
25 INCOME
Turnover
Sales Returns
(+) Un recorded
Sales Other Income Discount
Income from Mutual Funds
Increase/Decrease in Stock
Closing Stock
Opening Stock
EXPENSES
Purchses & Direct Expenses
Freight
Freight inwards Purchases
Returns
Personnel Expenses Salary
and Wages Administrative
Expenses Rent, ratesand
taxes Sellin g Expenses
Freight outwards Bad debts
Travelling expenses
Advertisement (for 2 years)
(-) Prepaid for 11/2 years
Depreciation On Machinery
On Vehicle Interest
Other Expenses 138,200 -1,250 12,000 148,950 2,810 5,300 86,380 24,500 2,100 10,950 5,155 - - 810 2,000 16,500 -11,200 200 1,040 87,240 -2,100 85,140 2,100 200 8,250 1,600 -1,200 400 3,280 1,875
Question: -LLP Final Accounts
Pnad Q were partners sharing profit & losses in the ratio 3:2 respectively
The following is the Trial Balance of PQ (LLP) foryear ended 31st March
2020. munotes.in
Page 145
Accounting for Limited
Liability Partnership
145 Particulars Debit Credit Goodwill 25,000 Plant and Machinery 124,000 Bills Receivable 1,300 Carriage 400 Miscellaneous expenses 8,600 Lighting and Power 5,600 Sundry Customers 45,600 Trade expenses 2,150 Commission on sales 3,120 10% Loan from Mr. Joshi (1st October 19) Vehicles 30,000 Salaries 6,000 Bonusto employees 1,500 Rent 4,500 Discount 2,100 3,200 Cash balance 18,200 Bank Overdraft 5,900 Units of Mutual Funds 4,600 GOIT-Bills 2,500 Capital of P 45,000 Capital of Q 30,000 Drawings of P 5,000 Drawings of Q 6,000 Inventories 12,500 Sundry Suppliers 42,700 Purchases 165,000 Sales 322,87
469,170 469,17-
Additional information: -
1 Closing stock was valued at cost Rs. 22,800 and market price Rs.
28,200
2 Lighting and Power included a deposit paid to Power board Rs. 500
3 Depreciate fixed assets by10%
4 Income from Mutual funds not received yet Rs. 600
5 Goods worth Rs. 4,200 purchsed on 31 -03-2020 were not recorded.
6 Bills receivable include a dishonoured bill of Rs. 200You are required
to prepare for the year ended 31st March 2020
munotes.in
Page 146
Financial Accounting
and Auditing
146 Statement of Income and Expenditure & Balance sheet from the given data
STATEMENT OF ASSETS & LIABILITIES Of PQ (LLP) ason 31st
March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS & LIABILITIES
CONTRIBUTIONS
Partners fund Reserves LIABILITIES
Secured loans Unsecured loans
Short Term Borrowings Creditors &
Trade Payables Other Liabilities
Provisions
ASSETS
Fixed Assets Investments
Loans & Advanvces Inventories
Debtors &Trade Receivables Cash & Cash
Equivalents Other Assets
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 191,150 - 191,150 - 15,750 5,900 46,900 - - 259,700 163,600 7,100 500 22,800 47,500 18,200 - 259,700
STATEMENT OF INCOME & EXPENDITURE of PQ (LLP) for the
period 1st April 2019 to 31st March 2020
Particulars Rs. Rs.
INCOME 322,870 341,470 Turnover
OtherIncome 8,300 Increase/Decrease in Stock 10,300 EXPENSES 174,700 214,320 Purchses & Direct Expenses
Personnel Expenses 7,500 Administrative Expenses 10,750 Selling Expenses 5,220 Depreciation 15,400 Interest 750 Other Expenses - Net Profit before Tax 127,150 Less: -Provision for Tax - Net Profit after Tax 127,150 munotes.in
Page 147
Accounting for Limited
Liability Partnership
147
Transfer to partners (PSR 3:2) 127,150 Mr.P's Capital a/c
Mr.Q's Capital a/c 50,860 Transfer to Reserves 0
Notes / Schedules to accounts
Sch. No. Particular Rs. Rs. Rs
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 CONTRIBUTIONS &
LIABILITIESCONTRIBUTIONS
Partners Fund
Capit al Balance of Mr.
P(+) Netprofit of the
year ( -) Drawings
Capital Balance of Mr.
Q(+) Netprofit of the
Year ( -) Drawings
ReservesLIA
BILITIES
Secured
Loans Unsecured
Loans Loan from Mr.
Joshi
(+) outstanding interest
6mths Short Term
Borrowing Bank Overdraft
Creditors & Trade
Payables Sundry Suppliers
(+) unrecorded
Purchases Other Liabilities
Provisions
ASSETS
Fixed Assets
Goodwill
Plant and Machinary
(-) Depreciation @10%
Vehicles
(-) Depreciation
@10% Investments
Units
Of Mutual Funds GOIT
Bill
Loans & Advances
Deposit paid to power
Board Inventories
Closing stock
Debtors & Trade
Receivables Bills Receivable
(-) bills
Dishonored Sundry Cu
Cash & Cash Equivelents
Cash
Other Assets
45,000
76,290
-5,000
30,000
50,860
-6,000
15,000
750
42,700
4,200
124,000
-12,400
30,000
-3,000
1,300
-200
45,600
200
18,200
-
116,290
74,860
-
-
15,750
5,900
46,900
-
-
25,000
11,600
27,000
4,600
2,500
1,100
45,800
600
191,150
68,550
163,60 0
7,100
500
22,800
47,500 munotes.in
Page 148
Financial Accounting
and Auditing
148 Notes / Schedules to accounts
Sch.No. Particulars Rs. Rs.
16
17
18
19
20
21
22
23
24
25 INCOME
Turnover
Sales
Other Income
Rent
Discount
O/S income
from Mutual funds Increase/
Decrease in Stock Closing
stock
(-)Inventories
EXPENSES
Purchses
& Direct Expenses Carriage
Lighting and Power
(-) Deposit to Power Board
Purchases
(+) unrecorded purchases
Personnel Expenses
Salaries
Bonus to
employees Administrative
Expenses Miscellaneous
expens esTrade expenses
Selling Expenses Commission
on
sales Discount Depreciation
On Plant & Machinery On
Vehicles
Interest
O/s Interest on Mr. Joshi Loan
Other Expenses 4,500 3,200 600 322,870 8,300 10,300 174,700 7,500 10,750 5,220 15,400 750 22,800 -12,500 400 5,600 -500 5,100 165,000 4,200 169,200 6,000 1,500 8,600 2,150 3,120 2,100
12,400 3,000
munotes.in
Page 149
Accounting for Limited
Liability Partnership
149 Question: -LLP Final Accounts
Land M were partners sharing profit & losses equally
The follow ing is the Trial Balance of LM (LLP) for year ended 31st March
2020.
Particulars Debit Credit
Drawings of Mr. L 3,500 15,000 Drawings of Mr. M 1,500 Capital of Mr. L Capital of Mr. M 15,000 Commission 1,000 Rent 1,000 Miscellaneous Income 2,000 Sales 170,500 Purchase Returns 3,200 Discount 300 Provident Fund 2,000 Interest on ProvidedndFundInvestments 200 Reserve for Doubtful Debts 500 Creditors 20,000 Stock 20,000 Purchases 130,000 Sales Return 700 Debtors 20,000 Wage s 6,000 Royalties on Sales 1,000 Furniture 5,000 Machinery 30,000 Advertisement for 4 years 4,000 Salaries 3,000 Provident Fund Investments 2,000 Contribution to Provident fund 500 Insurance 500 Cash 3,000 230,700 230,700 -
Additi onal information: -
1 Closing stock was valued at Rs. 25,000
2 Mr. L has taken goods worth Rs. 500 for personal use
3 Prepaid insurance amounted to Rs. 100
4 Depreciated Furniture by15% and Machinery by20%
5 Write of Rs. 400 as Bad debts
6 Maintain RDD @3% on Debtors munotes.in
Page 150
Financial Accounting
and Auditing
150 You are required to prepare for the year ended 31stMarch 2020
Statement of Income and Expenditure & Balance sheet from the given
data
STATEMENT OF ASSETS & LIABILITIES Of LM (LLP) ason 31st
March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS & LIABILITIES
1 58,162 58,162 CONTRIBUTIONS
Partners fund Reserves 2 - LIABILITIES - 22,200 Secured loans 3
Unsecured loans 4 - Short Term Borrowings 5 - Creditors & Trade Payables 6 20,000 Other Liabilities 7 2,200 Provisions 8 -
ASSETS 80,362 28,250 FixedAssets 9
Investments 10 2,000 Loans & Advanvces 11 3,100 Inventories 12 25,000 Debtors &Trade Receivables 13 19,012 Cash & Cash Equivalents 14 3,000 Other Assets 15 - 80,362
STATEMENT OF INCOME & EXPENDITURE of LM (LLP) for the
period 1st April 2019 to 31st March 2020 Particulars Sch.No. Rs. Rs. INCOME
16 169,800 179,600 Turnover
Other Income 17 4,800 Increase/Decrease in Stock 18 5,000
EXPENSES 126,800 Purchses &Direct Expenses 19
Personnel Expenses 20 9,500 Administrative Expenses 21 400 Selling Expenses 22 2,400 Depreciation 23 6,750 munotes.in
Page 151
Accounting for Limited
Liability Partnership
151 Interest 24 - 145,938 Other Expenses 25 88 Net Profit before Tax 16,831 33,662 Less: -Provision for Tax - Net Profit after Tax 33,662 33,662 Transfer to partners (PSR 1:1)
Mr.L's Capital a/c
Mr.M's Capital a/c 16,831 Transfer to Reserves -
Notes / Schedules to accounts Sch.No. Particulars Rs. Rs. Rs.
1 CONTRIBUTIONS &
LIABILITIES 15,000 27,831 58,162 CONTRIBUTIONS
Partners fund
Capital Balance of Mr. L
(+) Netprofit of the year 16,831 (-) Goodstaken for personal use -500 (-) Drawings -3,500 Capital Balance of Mr. M 15,000 30,331 (+) Netprofit of the year 16,831 (-) Drawings -1,500 2 Reserves 2000 - LIABILITIES - 22,200 3 Secured loans
4 Unsecured loans - 5 Short Term Borrowings - 6 Creditors &Trade Payables
20,000 Creditors
7 Other Liabilities
2,200 Provident Fund
Interest on 200 8 Provisions 5,000 - ASSETS 4,250 28,250 9 Fixed Assets
Furniture
(-) Depreciation -750 Machinery 30,000 -6,000 24,000 (-) Depreciation
10 Investments 2,000 100 2,000 Provident Fund Investments
11 Loans & Advanvces 3,100 Prepiad Insurance munotes.in
Page 152
Financial Accounting
and Auditing
152 Prepaid Advertisement 3,000 12 Inventories 20,000 25,000 Closing stock
13 Debtors &Trade Receivables 19,012 Debtors
(-) New Bad debts -400 (-) New RDD -588 14 Cash & Cash Equivalents 3,000 Cash
15 Other Assets -
Notes / Schedules to accounts
Particulars Rs. Rs.
16 INCOME 170,500 169,800 Turnover
Sales Return
Sales Return -700 17 Other Income 1,000 4,800 Commission
Rent 1,000 Miscellaneous Income 2,000 Discount 300 Goods taken by Mr. L 500 18 Increase/Decrease in Stock 25,000 -20,000 5,000 Closing stock
(-) Opening Stock
EXPENSES 130,000 -3,200 126,800 19 Purchses & Direct Expenses
Purchases
(-) Purchase Return
20 Personnel Expenses 6,000 9,500 Wages
Salaries 3,000 Contribution to Provident fund 500 21 Administrative Expenses 500 400 Insurance
(-) Prepai d -100 22 Selling Expenses 1,000 2,400 Royalties on Sales
Advertisement for 4 years (IMPLIED ADJ) 4,000 (-)Prepaid Advertisement -3,000
New Bad debts
1,000 400 munotes.in
Page 153
Accounting for Limited
Liability Partnership
153
23 Depreciation 750 6,000 6,750 OnFurniture OnMachinery 24 Interest 588 -500 - 25 OtherExpenses 88 New RDD
(-) Old RDD
Question: -LLP FinalAccounts
R and S were partners sharing profit & losses in the ratio 3:5
The following is the Trial Balance of RS (LLP) for year ended 31st March
2020.
Particulars Debit Credit
Profit on sale of Fixed Assets 165,450 4,250 Gross Sales 249,700 Purchases Opening stock 22,800 Sundry Supliers 48,710 Sundry Customers 61,350 Returnsto Suppliers 2,550 Returns from Customers 1,350 Loose Tools 1,400 Plant and Machinery 149,700 Productive Wages 6,500 Freight Outwards 1,200 Capital of R 65,000 Capital of S 140,000 Income from GOIsecurities 1,250 GOI securities 12,500
Patents 6,000
Prepaid Taxes 2,500
Unproductive Salary 4,570
Salesman Comm ission 2,100 Royalties 650 Printing and Stationery 3,210 Office Rent 2,000 Drawings of R 32,410 Drawings of S 44,700 Marketing expenses 1,340 Bills payable 540 Bank overdraft 2,130 Fixed Deposit with Bank 5,000 Loan from Bank 12,600 526,730 526,730 munotes.in
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Financial Accounting
and Auditing
154 Additional information: -
1 Write of 1/4th of the Patents
2 Wages include Rs. 2,500 paid for installation of Machnery
3 Depreciate Plant and Machinery@12 1/2 %
4 A sale made on 25 -03-2020 of Rs. 7,500 was not recorded
5 Goods distributed as freesam ples amounted to Rs. 6,240
6 Closing stock was valued at Rs. 39,450
You are required to prepare for the year ended 31st March 2020
Statement of Income and Expenditure & Balance sheet from the given data
STATEMENTOFASSETS & LIABILITIES of RS (LLP) ason 31st March
2020
Particulars Sch.N Rs. Rs.
CONTRIBUTIONS & LIABILITIES
1 203,395 203,395 CONTRIBUTIONS
Partners fund
Reserves 2 - LIABILITIES 12,600 63,980 Secured loans 3
Unsecured loans 4 - Short Term Borrowings 5 2,130 Creditors & Trade Payables 6 49,250 Other Liabilities 7 - Provisions 8 -
ASSETS 267,375 139,075 Fixed Assets 9
Investments 10 17,500 Loans & Advanvces 11 2,500 Inventories 12 39,450 Debtors &Trade Receivables 13 68,850 Cash & Cash Equivalents 14 - Other Assets 15 - 267,375
munotes.in
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Accounting for Limited
Liability Partnership
155 STATEMENT OF INCOME & EXPENDITURE
of RS (LLP) for the period 1st April 2019 to 31st March 2020 Particulars Sch.No. Rs. Rs. INCOME
16 255,850 278,000 Turnover
OtherIncome 17 5,500 Increase/Decrease in Stock 18 16,650
EXPENSES 157,310 Purchses & Direct Expenses 19
Personnel Expenses 20 8,570 Administrative Expenses 21 5,210 Selling Expenses 22 10,880 Depreciation 23 20,525 Interest 24 - Other Expenses 25 - Net Profit before Tax 28,314 75,505 Less:-Provision for Tax - NetProfit after Tax 75,505 75,505 Transfer to partners (PSR 3:5)
Mr. R's Capital a/c Mr.S's Capital a/c 47,191 Transfer to Reserves -
Notes / Schedules to accounts
Sch.No. Particu lars Rs. Rs. Rs.
1 CONTRIBUTIONS &
LIABILITIES 65,000 60,904 203,395 CONTRIBUTIONS
Partners fund
Capital Balance of Mr. R
(+) Netprofit of the year 28,314 (-) Drawings -32,410 Capital Balance of Mr. S 140,000 142,491 (+) Netprofit ofthe year 47,191 (-) Drawings -44,700 2 Reserves - LIABILITIES 12,600 3 Secured loans
Loanfrom Bank
4 Unsecured loans - 5 Short Term Borrowings 2,130 Bank overdraft munotes.in
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Financial Accounting
and Auditing
156
6 Creditors &Trade Payables 49,250
Sundry Suppliers
Bills payable 540 7 OtherLiabilities 6,000 - 8 Provisions - ASSETS 4,500 139,075 9 Fixed Assets
Patents
(-) Depreciation (1/4th) -1,500 Loose Tools 149,700 1,400 Plant and Machinery 133,175 (+) Wages paid forinstallation 2,500 (-) Depreciation @12.5% -19,025 10 Investments 12,500 5,000 61,350 17,500 GOI securities
Fixed Deposit with Bank
11 Loans & Advanvces 2,500 2,500 Prepaid Taxes
12 Inventories 39,450 Closing Stock
13 Debtors &Trade Receivables 68,850 Sundry Customers
(+) Unrecorded Sales 7,500 14 Cash & Cash Equivalents - 15 Other Assets -
Notes / Schedules to accounts
Particulars Rs. Rs.
16
17
18
19
INCOME
Turnover
Gross Sales
(-) Returns from customers
(+) Unrecorded sales
Other Income
Profit on sale of Fixed Assets
Income from GOI securities
Increase/ Decrease in Stock
Closing Stock
Opening stock
EXPENSES
Purchase & Direct Expenses
Purchase
(-) Return to suppliers
(-) Goods distributed as free samples 249,700 -1,350 7,500 4,250 1,250 39,450 -22,800 165,450 -2,550 -6,240 255,850 5,500 16,650 munotes.in
Page 157
Accounting for Limited
Liability Partnership
157
20
21
22
23
24
25 Royalties
Personal Expenses
Productive Wages
(-) paid for Machinery
Unproductive Salary
Administrative Expenses
Printing and Stationery
Office Rent
Selling Expenses
Freight Outwards
Salesman Commission
Marketing Expenses
Goods Distributed as freesamples
Depreciation
On Patatents
On Plant & Machinery
Interest
Other Expenses 650 6,500 -2,500 4,000 4,570 3,210 2,000 1,200 2,100 1,340 6,240 1,500 19,025 157,310 8,570 5,210 10,880 20,525 - -
STEPS INSOLVINGAMALGAMATION / CONVERSION SUMS
1) CALCULATE PURCHASE CONSIDERATION IN BOOKS OF
NEWLY FORMED LLP Revised values of all assets taken over (-)
liabilities taken over
(a) Copynames of ALL assets from the Balance sheet
(b) Copynames of ALL liabilities (except capital and reserves) from the
Balance sheet
Read adjustment and take revised values of ASSETS and LIABILITIES
TAKENOVER
Items of assets and liabilities for which revised value isnot given AND is
TAKEN OVER = take Balance sheet value
ASSUME ALL ASSETS AND LIABILITIES ARETAKEN OVER
UNLESS SPECIFIED AS NOT TAKEN OVER
Capital adjustments asper the agreement between partners
2) PREPARE BALANCE SHEET OF NEWLY FORMED LLP
Post each and everyasset and liabilitiy taken over (total amount of both the
firms revised value) under their respective headings in the Balance sheet
3) CLOSE BOOKS OF OLD FIRMS
(a) Prepare Realisation a/c, Capital a/c and NEWLY FORMED LLPa/c
b) Tranfer ALL assets at BOOK VALUE from the Balance sheet of the
old firm to the DEBIT side of the Realisation a/c munotes.in
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Financial Accounting
and Auditing
158 c) Tranfer ALL liabiities (except capital and reserves) at BOOK VALUE
from the Balance sheet of the old firm to the CREDIT side of the
Realisation a/c
d) Transfer balance of Capital a/c, reserves and accumulated losses to
Partners Capital a/c
( e) Disposed of all assets and liabilities NOTTAKEN OVER by the
NEW LY FORMED LLP
(f) Pass entry for Purchase consideration
NEWLY FORMED LLPa/c Dr. To Realisation a/c
(g) Close all Accounts.
Profit/Loss on Realisation is transferred to Partners Capital a/c Balance of
Partners Capital a/c is transferred to NEWLY FORMED LLP a/c NEWLY
FORMED LLP a/c will tally auto matically
Question :-LLP-Amalgamation of Firms
Alpha and Beta carried on their respective business as sole traders. Their
Balance sheet ason 31stMarch 2020 was as under: -
Liabilities Alpha Beta Assets Alpha Beta
Capita l a/c 285,000 194,500 Plant &
Machinery 145,000 - Sundry Creditors 89,500 74,500 Furniture 65,000 86,700 Outstanding
Expenses 2,500 - Inventories 36,000 47,000 Bills Payable 7,500 3,600 Debtors 62,000 35,900 Cash & Bank
Balance 76,500 103,000 384,500 272,600 384,500 272,600
Both the firms mutually agreed to amalgamate and form a Limited
Liability
Partnership under the name AB (LLP) from 1st April 2020 on the following
terms: -
(a) The Capital of the LLP would be Rs. 3,00,000 which would be
contr ibuted in the ratio 2:1 bythem respectively.Adjustment to be made
in Cash in the booksofthe LLP
(b) The assets of both the firms would be revalued and taken over by the
LLPat the revalued amountsas follows: -
Assets of Alpha: -
1) Inventories to be writtendown by15%
2) Debtors worth Rs. 2,000 would be worthless and not taken over by LLP munotes.in
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Accounting for Limited
Liability Partnership
159 3) Furniture to be valued at Rs. 62,000
4) Plant & Machinery to be taken over at Market valueRs. 1,40,000 Assets
of Beta: -
1) Inventories to be written up by10%
2) Debtorsto be admitted at 85% of their value
3) Furniture to be valued at Rs. 85,000
( c) The LLP shall not assume any out standing expenses from Alpha or
Beta.
You are required to close books of Alpha & Beta and prepare the opening
Balance Sheet of AB (LLP) ason 1st April 2020.
IN THEBOO KS OFAB (LLP) CALCULATION OF PURCHASE
CONSIDEARTION Particulars ALPHA BETA TOTAL REVISED VALUE OF ASSETS
TAKEN OVER
Plant & Machinery Furniture Inventories Debtors Cash &Bank Balance
(-) REVISED VALUE OF
LIABILITIES TAKENOVER
Sundry Creditors Outstanding
Expenses Bills Payable
PURCHASE CONSIDEARTION 140,000 62,000 30,600 60,000 76,500 369,100 89,500 - 7,500 97,000 85,000 51,700 30,515 103,000 270,215 74,500 - 3,600 78,100 140,000 147,000 82,300 90,515 179,500 - - 164,000 - 11,100 272,100 192,115 -
CAPITALADJUSTMENT
Particulars ALPHA BETA TOTAL CAPITAL ADJUSTMENT
200,000
272,100
100,000
192,115
300,000
464,215 CAPITAL AS PER AGREEMENT
(-) PURCHASE CONSIDEARTION
CAPITAL ADJUSTMENT -72,100 -92,115 -164,215
munotes.in
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Financial Accounting
and Auditing
160 IN THE BOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OF ALPHA
Dr. REALISATION A/c Particulars Rs Particulars Rs
To Plant & Machinery a/c 145,000 By Creditorsa/c 89,500 To Furniture a/c 65,000 By Outstanding Exp. 2,500 To Inventories a/c 36,000 By Bills Payable a/c 7,500 To Debtors a/c 62,000 To Cash & Bank a/c 76,500 To Alpha Capital a/c (o/s By AB(LLP) a/c (PC) 272,100 expsnot taken over) 2500 By Losson Realisation 15400 - 387,000 387,000 Dr. ALPHA's CAPITALA/c Cr. Particulars Rs Particul ars Rs
To Losson Realisation a/c 15,400 By Balance b/d 285,000 By Realisation a/c
(O/s Exps) 2,500 To AB (LLP) a/c 272,100 287,500 287,500 Dr. AB (LLP) NEW FIRM A/c Cr.
Particulars Rs Particulars Rs
To Realisation a/c (PC) 272,100 By Ahpha's Capital
a/c 272,100 272,100 272,100
IN THEBOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OF BETA
Dr. REALISATION A/c Cr.
Particulars Rs Particulars Rs
To Plant & Machinery a/c - By Creditorsa/c 74,500 To Furniture a/c 86,700 By Outsta nding Exp. - To Inventories a/c 47,000 By Bills Payable a/c 3,600 To Debtors a/c 35,900 To Cash & Bank a/c 103,000 ByAB(LLP) a/c (PC) 192,115 ByLosson Realisation 2,385 272,600 272,600
munotes.in
Page 161
Accounting for Limited
Liability Partnership
161 Dr. BETA'sCAPITALA/c Cr.
Particulars Rs Particulars Rs
To Losson Realisation a/c
To AB(LLP) a/c
2,385 192,115 By Balance b/d 194,500 194,500 194,500 Dr. AB (LLP NEW FIRM A/c Cr.
Particulars Rs Particulars Rs
To Realisation a/c (PC) 192,115 ByBeta's Capital a/c 192,115 192,115 192,115
IN THEBO OKS OFAB(LLP) BALANCESHEETAS ON 31STMARCH
2020
Particulars Rs. Rs. Rs.
CONTRIBUTIONS & LIABILITIES 272,100 200,000 300,000 CONTRIBUTIONS
Partners fund
Capital Balance of Mr. Alpha
(-) refund of excess contribution -72,100 Capital Balance of Mr. Beta 192,115 -92,115 100,000 (-) refund of excess contribution
Reserves 164,000 Nil LIABILITIES nil
nil
nil 175,100 nil
nil 175,100 Secured loans
Unsecured loans
Short Term Borrowings
Creditors & Trade Payables
Creditors
Bills Payable 11,100 Other Liabilities 179,500 Provisions
ASSETS 140,000 475,100 287,000 Fixed Assets
Plant & Machinery
Furniture 147,000 Investments 15,285 nil
Loans & Advanvces 82,300 Inventories
Debtors & Trade Receivables 90,515 Cash & Cash Equivalents 15,285 Cash and Bank Balance
(-) Amount refunded to Alpha -72,100 (-) Amount taken away by Beta -92,115 Other Assets 475,100 - munotes.in
Page 162
Financial Accounting
and Auditing
162 Question :-LLP-Amalgamation ofFirms
Following is the Balance sheet of IX & Co. and JY & Co. as on 31st
March 2020. Liabilities IX & JY & Assets IX & JY & Co Capital of X 15,000 - Goodwill - 10,000
Capital of J - 3,000 Building 10,000 - Capital of Y - 2,000 Inventories 20,000 5,000 Creditors 22,000 28,000 Customers 10,000 10,000 Bank Loan 15,000 - Cash 3,000 3,000 Bank 4,000 5,000 Capital ofI 5,000 - 52,000 33,000 52,000 33,000
IX & Co. and JY & Co agreed to amagamate their business on the
following conditions to form a new firm called IJ (LLP). from 1st April
2020
(a) Mr. Iand Mr. X shared profits in the ratio 1 : 2
(b) Goodwill of IX & Co is valued at Rs. 15,000.
(c) Goodwill of JY & Co is valued at Rs. 20,000.
(d) No Goodwill a/c will remain the the books of IJ (LLP)
(e) Partners wills hare Profits and Losses equally in the new firm
(f) The total capital of IJ & Co. will be Rs. 50,000 and each partner will
contribute his proportionate capital (adjustment in cash in the books
of IJ (LLP) after amalgamation)
Prepare a Statement of Purchase Consideration
Prepare the books of IX & Co. and JY & Co. to show the amalgamation
Prepare the Balance sheet of IJ (LLP) after amalgamation
IN THE BOOKS OF THE OLD FIRM (AMALGAMATIN GFIRMS) IN
THE BOOKS OF M/s JY&Co
Dr. REALISATION A/c Particulars Rs Particulars Rs
To Goodwill a/c To
Building a/c To
Inventories a/c
To Trade Receivable
a/cTo Cash a/c
To Bank a/c
To Profit on Realisation
a/c 10,000 - 5,000 10,000 3,000 5,000 10,000 By Credito rs a/c By Bank
Loan a/c
To IJ (LLP) a/c (P.C.) 28,000 - 15,000 43,000 43,000 munotes.in
Page 163
Accounting for Limited
Liability Partnership
163 Dr. PARTNERS CAPITAL A/c Particulars J Y Particulars J Y
To IJ(LLP) a/c 8,000 7,000 By Balance b/d 3,000 2,000 5,000 By Profit on Realis
8,000 7,000 8,000 7,000 Dr. IJ(LLP) A/c Particulars Rs Particulars Rs
To Realisation a/c (PC) 15,000 ByJ'sCapital
a/cBy Y'sCapital a/c 8,000 7,000 15,000 15,000
IN THE BOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OFM/s IX&Co Dr. REALISATION A/c Particulars Rs Particulars Rs To Goodwill a/cTo
Buildinga/cTo
Inventories a/c
To Trade Receivable
a/cTo Cash a/c
To Bank a/c
To Profit on Realisation
a/c - 10,000 20,000 10,000 3,000 4,000 15,000 ByCreditorsa/c
ByBan k Loan a/c
To IJ(LLP) a/c (P.C.) 22,000 15,000 25,000 62,000 62,000 Dr. PARTNERS CAPITALA/c Cr. Particulars I X Particulars I X To Balance b/d
To IJ(LLP) a/c 5,000 - 25,000 By Balance b/d - 15,000 - 10,000 By Profit on Realis 5,000 5,000 25,000 5,000 25,000 Dr. IJ(LLP) A/c Cr. Particulars Rs Particulars Rs To Realisation
a/c (PC) 25,000 ByI's Capital a/c By X's
Capital a/c - 25,000 25,000 25,000
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Page 164
Financial Accounting
and Auditing
164 IN THE BOOKS OF THE NEW FIRM IJ (LLP) (AMALGAMATED
FIRM) CALCULATION OF PURCHASE CONSIDERATION
Particulars IX & Co JY & Co IJ(LLP)
Total
REVISED
VALUE OFASSETS
TAKEN 15,000 20,000 35000 OVER
Goodwill
Building 10,000 - 10000 Inventories 20,000 5,000 25000 Customers 10,000 10,000 20000 Cash 3,000 3,000 6000 Bank 4,000 5,000 9000 62,000 43,000 (-)REVISED VALUEOFLIABILITIES TAKEN OVER Creditors 22,000 28,000 50000 Bank Loan 15,000 15000 37,000 28,000 PURCHASECONSIDERAT25,000 15,000 40,000
IN THEBOOKS OFIJ(LLP)
Dr. PARTNERS CAPITALA/c
Particulars I X J Y Particulars I X J Y
To
Goodwi 8,750 8,750 8,750 8,750 By
Balance - 25,000 8,000 7,000
To Cash a/c 3,750 By Cash
a/c 21,250 13,250 14,250 To
Balance 12,500 12,500 12,500 12,500 21,250 25,000 21,250 21,250 21,250 25,000 21,250 21,250
Dr. CASH A/c Particulars Rs. Particulars Rs.
To Balance b/d 6,000 ByCapital a/c ofX 3,750
To Capital a/c ofI 21,250
To Capital a/c ofJ 13,250
To Capital a/c ofY 14,250 ByBalance c/f 51,000
54,750 54,750
munotes.in
Page 165
Accounting for Limited
Liability Partnership
165 IN THEBOOKS OFIJ(LLP) BALANCESHEETAS ONAS ON
1stAPRIL 2020
Question :-Amagamation of Partnership firms
Following is the Balance sheet ofMM & Co. and NN &Co. as on
31stMarch 2020.
Liabilities MM & Co NN & Co Assets MM & Co NN & Co
Capital of Mama 75,000 - Cash 3,000 2,000
Capital of Mami 50,000 - Bank 7,000 3,000
Capital of Nana - 60,000 Debtors 7,500 45,000
Capital of Nani - 55,000 Inventories 50,000 70,000
Creditors 15,000 25,000 Furnitue 5,000 5,000
General Reserve 40,000 - Machinery 60,000 - Loanfrom ICICI 20,000 - Goodwill 67,500 25,000
Loan from HDFC - 10,000
200,000 150,000 200,000 150,000
Particulars Rs. Rs. Rs.
CONTRIBUTIONS &
LIABILITIES CONTRIBUTIONS
Partners fund
Capital Bala nce of Mr.
ICapital Balance
ofMr. XCapital
Balance of Mr.
JCapital Balance
ofMr. YReserves
LIABILITIES
Secured
loansBank
LoanUnsecu
red loans
Short Term
Borrowings Creditors&T
rade Payables Creditors
OtherLiabilitiesProvisions
ASSETS
FixedAssets Building Investme nts
Loans
&AdvancesInve
ntories
Debtors &Trade
ReceivablesCash &CashEq
uivalentsCash Balance
Bank Balance OtherAssets
12,500
12,500
12,500
12,500
50,000
Nil
50,000
65,000
51,000
9,000
nil
15,000
nil
nil
50,000
nil
nil
60,000 115,000
10,000
nil
25,000
20,000
60,000 115,000 - munotes.in
Page 166
Financial Accounting
and Auditing
166 MM & Co. and NN & Co agreed to amagamate their business on the
following condition s to form a new firm called MN (LLP). from1stApril
2020
(a) All the assets and liabilities of both the firms to be taken over by the
LLP
(b) A provision of 5% to be made on Debtors of both the amagamating
firms
(c) Goodwill of both the firms to be valued at 3 years pu rchase of the
last 4 years average profits
(d) The new PSR in the amalgamated firm MN (LLP) isequal between
all the four partners
(e) Machinery of MM & Co. is worth Rs. 75,000
(f) The profit of the last four years of both the firms is as under: -
(g) Mama & Mamish are d profits and losses in the ratio 3 : 2 in MM &
Co.
(h) Nana &Nanish are d profits and losses equally in NN & Co.
Prepare a Statement of Purchase Consideration
Prepare the books of MM & Co. and NN & Co. to show the
amalgamation Prepare the Balance sheet of MN (LLP). after
amalgamation
IN THE BOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OF M/s NN & Co
Dr. REALISATION A/c Particulars Rs Particulars Rs
To Cash a/cTo Bank a/c
To Debtors a/c
To Inventories a/c To
Furniture a/c To
Machinery a/c To Goodwill
a/c
To Profit on Realisation
a/c 2,000 3,000 45,000 70,000 5,000 - 25,000 65,750 By Creditors a/c
By Loan from ICICI a/c
By Loan from HDFC a/c
By MN (LLP) a/c (PC) 25,000 - 10,000 180,750 215,750 215,750 Year ended 31st March MM & Co NN & Co
2020 40,000 30,000
2019 35,000 35,000
2018 45,000 25,000
2017 44,000 34,000
munotes.in
Page 167
Accounting for Limited
Liability Partnership
167 Dr. PARTNERS CAPITALA/c Cr.
Particulars Nana Nani Particulars Nana Nani
To MN (LLP)
a/c 92,875 87,875 By Balance b/d
By General Reserv 60,000 - 55,000 - 32,875 By Profit on Realis 32,875
92,875 87,875 92,875 87,875 Dr. MN (LLP) A/c Particulars Rs Particulars Rs
To Realisation a/c (PC) 180,750 By Nana's Capital a/c By
Nani's Capital a/c 92,875 87,875 180,750 180,750
IN THEBOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OFM/s MM &Co
Dr. REALISATION A/c Particulars Rs Particulars Rs
To Cash a/c To Bank a/c To
Debtors a/c
To Inventories a/c To
Furniture a/c To Machinery
a/c To Goodwill a/c
To Profit on Realisation a/c 3,000
7,000
7,500
50,000
5,000
60,000
67,500
70,125 By Creditors a/c
By Loan from ICICI a/c
By Loan from HDFC a/c
By MN (LLP) a/c (PC) 15,000
20,000
-
235,125
270,125 270,125
Dr. PARTNERS CAPITALA/c Particulars Mama Mami Particulars Mama Mami
To MN (LLP)
a/c
141,075
94,050 By Balance b/d 75,000 50,000
16,000
28,050 By General Reserv 24,000
By Profit on Realis 42,075
141,075 94,050 141,075 94,050
Dr. MN (LLP) A/c Particulars Rs Particulars Rs
To Realisation a/c (PC) 235,125 ByMama's Capital a/c By Mami's
Capital a/c 141,075
94,050
235,125 235,125
munotes.in
Page 168
Financial Accounting
and Auditing
168 IN THEBOOKS OF THE NEW FIRM (AMALGAMATED FIRM) MN
(LLP)CALCULATION OF PURCHASE CONSIDE RATION Particulars MM NN&Co Total MN REVISED VALUE OFASSETS
TAKEN OVER
Cash Bank Debtors
Inventories Furnitue Machinery
Goodwill
-
(-) REVISED VALUE OF
LIABILITIES Creditors
Loan from ICICI Loan from
HDFC 3,000 7,000 7,125 50,000 5,000 75,000 123,000 270,125 15,000 20,000 - 2,000 3,000 42,750 70,000 5,000 - 93,000 215,750 25,000 - 10,000 5,000 10,000 49,875 120,000 10,000 75,000 216,000 - 40,000 20,000 10,000 - - 35,000 35,000 PURCHASE CONSIDERATION 235,125 180,750 415,875
WorkingNote: -
CALCULATION OFGOODWILL
Profits oflast 4 years MM &Co NN& Co
2020 40,000 30,000 2019 35,000 35,000 2018 45,000 25,000 2017 44,000 34,000 Total Profit of 4 years 164,000 124,000 Average profit = Total / 4yrs 41,000 31,000 Goodwill = 3yrs X Average Profit 123,000 93,000
munotes.in
Page 169
Accounting for Limited
Liability Partnership
169
IN THE BOOKS F IJ (LLP) BALANCE SHEET AS ONAS ON
1stAPRIL 2020
Particulars Rs. Rs. Rs. CONTRIBUTIONS & LIABILITIES
141,075
415,875
415,875 CONTRIBUTIONS Partners fund Capital Balance ofMama Capital Balance ofMami 94,050 Capital Balance ofNana 92,875 Capital Balance ofNani 87,875 Reserves
20,000 Nil
LIABILITIES
nil
30,000 nil
nil
40,000 nil
nil
70,000 Secured loans LoanfromICICI LoanfromHDFC 10,000 Unsecured loans
5,000 Short Term Borrowings Creditors&Trade Payables Creditors OtherLiabilities Provisions
ASSETS
216,000 485,875
301,000 FixedAssets Goodwill Machinery 75,000 Furniture 10,000 Investments
15,000 nil Loans &Advances
120,000 Inventories Debtors &Trade Receivables 49,875 Cash&CashEquivalents
15,000 Cash Balance Bank Balance 10,000 OtherAssets 485,875 - munotes.in
Page 170
Financial Accounting
and Auditing
170 Question :-Amagamation ofPartn ershipfirms to form LLP
Following is the Balance sheet of GX & Co. and HY &Co. as on 31st
March 2020.
Liabilities GX &Co HY &Co Assets GX &Co HY &Co
Capital ofG 50,000
50,000 Goodwill 11,900 -
Capital ofX 30,000 Land &Building -70,000
Capital ofH Plant &Machinery 21,000 -
Capital ofY 28,000 LeasehldPremises 42,000 -
Creditors 16,800 25,200 Furniture and Fitting 8,000 8,400
Bills Payable 7,000 -Investments 14,000 11,400
Reserves 14,000 11,200 Debtors 12,500 6,400
Bank Loan 14,000 5,600 Cash &Bank Balanc 22,400 23,800
131,800 120,000 131,800 120,000
GX & Co. and HY & Co agreed to amagamate their business on the
following conditions to form a new firm called GH (LLP) from1st April
2020
(a) The value of Goodwill ofboth the firms would be Rs. 18,000 each.
(b) For M/s GX &Co. thenew firm took investments and debtorsat
book value, Leasehold Premises at an agreed value of Rs. 75,000 and
Plant and Machinery for Rs. 13,000. However the Furniture and
Fittings was not taken over.
(c) For M/s HY &Co. thenew firm took Furniture and debtorsat book
value, Land & Buildingat an agreed value of Rs.94,000 .
However the Investments was not taken over.
(d) The new firm GH (LLP) agreed to take cash after payment of loans
made by each firm.
(e) Creditors of the both the firms we re taken over at book value
Prepare a Statement of Purchase Consideration
Prepare the books of GX & Co. and HY & Co. to show the amalgamation
Prepare the Balance sheet of GH (LLP) after amalgamation
munotes.in
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Accounting for Limited
Liability Partnership
171 IN THE BOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OF M/s HY &Co
Dr. REALISATION A/c Particulars Rs Particulars Rs
To Goodwill a/c
To Land & Buildinga/c
To Plant & Machinery a/c
To Lease hold Premises a/c
To Furniture & Fittings a/c
To Investment a/c
To Debtors a/c
To Cash & Bank a/c
To Profit on Realisation
a/c - 70,000 - - 8,400 11,400 6,400 23,800 42,000 By Creditors a/c
By Bills Payable a/c By Bank
Loan a/c By Partners Capital
a/c (Investments)
By GH (LLP) a/c (PC) 25,200 - 5,600 11,400 119,800 162,000 162,000 Dr. PARTNERS CAPITA LA/c Particulars H Y Particulars H Y
To Relisation
a/c (I )
To GH (LLP)
a/c 5,700 70,900 5,700 48,900 By Balance b/d
By Reserves 50,000 5,600 28,000 5,600 21,000 By Profit on Realis
76,600 54,600 76,600 54,600 Dr. GH (LLP) A/c Particulars Rs Particulars Rs
To Realisation a/c (PC) 119,800 ByH's Capital a/c
By Y's Capital a/c 70,900 48,900 119,800 119,800
IN THE BOOKS OF THE OLD FIRM (AMALGAMATING FIRMS) IN
THE BOOKS OF M/s GX &Co
Dr. REALISATION A/c Particul ars Rs Particulars Rs
To Goodwill a/c
To Land & Building a/c
To Plant & Machinery a/c
To Leasehold Premises a/c
To Furniture & Fittings a/c
To Investment a/c
To Debtors a/c
To Cash & Bank a/c
To Profit on Realisation a/c 11,900 - 21,000 42,000 8,000 14,000 12,500 22,400 31,100 By Creditors a/c
By Bills Payable a/c
ByBank Loan a/c
By Partners Capital a/c
(Furniture & Fittings)
By GH (LLP) a/c (PC) 16,800 7,000 14,000 8,000 117,100 162,900 162,900 munotes.in
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172
Dr. PARTNERS CAPITALA/c Particulars G X Partic ulars G X
To Reliastion a/c ( 4,000 4,000 48,550 By Balance b/d By
Reserves 50,000 7,000 30,000 7,000 15,550
To GH (LLP) a/c
68,550 By Profit on Realis
72,550 52,550 72,550 52,550 Dr. GH (LLP)A/c Particulars Rs Particul ars Rs
To Realisation a/c (PC) 117,100 By G's Capital a/c
By X's Capital a/c 68,550 48,550 117,100 117,100
IN THEBOOKS OFTHENEW FIRM (AMALGAMATED
FIRM)CALCULATION OFPURCHASECONSIDERATION
Particulars GX & Co HY & Co Total
REVISED VALUE OF ASSETS
TAKE N OVER
Goodwill Land & Building Plant
& Machinery Leasehld Premises
Furniture and Fittings
Investments
Debtors Cash & Bank Balance 18,000 - 13,000 75,000 not taken 14,000 12,500 8,400 18,000 94,000 - - 8,400 not taken 6,400 18,200 36,000 94,000 13,000 75,000 8,400 14,000 18,900 26,600 140,900 145,000 (-) REVISED VALUE OF
LIABILITIES Creditors Bills Payable Bank
Loan 16,800 25,200 - 42,000 7,000 - 7,000 not taken not taken - - - 23,800 25,200 PURCHASE CONSID E RATION 117,100 119,800 236,900
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173 IN THE BOOKS OF GH (LLP) BALANCE SHEETAS ON AS ON 1st
APRIL 2020
Particulars Rs. Rs. Rs.
CONTRIBUTIONS &
LIABILITIES
CONTRIBUTIONS
Partners fund
Capital Balance of Mr G Capital
Balance of Mr X Capital Balance
of Mr H Capital Balance of Mr
Y Reserves
LIABILITIES
Secured loans Unsecured loans
Short Term Borrowings
Creditors & Trade Payables
Creditors
Bills Payable Other Liabilities
Provisions
ASSETS
Fixed Assets Goodwill
Land & Building Plant &
Machinery Leasehld Premi ses
Furniture and Fittings
Investments
Loans & AdvanvcesInventories
Debtors & Trade Receivables
Cash & Cash Equivalents Cash
& Bank Balance
Other Assets 68,550 48,550 70,900 48,900 236,900 Nil 236,900 49,000 42,000 7,000 nil nil nil 49,000 nil nil 36,000 285,900 226,400 94,000 13,000 75,000 8,400 14,000 nill nil 18,900 26,600 285,900 -
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174 6.11 EXERCISE
6.11.1 Answer in Brief
1. Conce pt of Limited Liability in a LLP
2. Position of Designated Partner in a LLP
3. LLP Agreement
4. Compliances for Accounts and Auditing of LLP
6. Provisions for conversion of Partnership firm into LLP
6.11.2 Multiple Choice questions
1. Limited Liability P artnership Act was enforced in India in the year
________
a. 2008
b. 1956
c. 2013
d. 1932
2. In a Limited Liability partnership ______partners have limited
liabilities
a. Designated Partner
b. Working Partners
c. Nominated Partner
d. All Partners
3. In an LLP, each partner is _ _____responsible or liable for
another partner's misconduct or negligence
a. Not responsible
b. Fully responsible
c. Jointly responsible
d. Partially responsible
4. The maximum number of partners in a LLP is ___________
a. 20
b. 100
c. 500
d. Unlimited munotes.in
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175 6. The charter document o f a LLP is called __________
a. Partnership deed
b. Article of association
c. Memorandum of association
d. LLP agreement
6. In the name of an entity registered as a Limited liability partnership,
the words _____ have to be used as a suffix.
a. & Co
b. Ltd.
c. LLP
d. Corp.
7. It is mandatory to get the books of accounts of an LLP audited if the
capital contribution exceed Rs. __________
a. Rs. 15,00,000
b. Rs. 25,00,000
c. Rs. 35,00,000
d. Rs. 45,00,000
8. Of the designated partners in a LLP at least ______ have to be
resident Indian
a. 4
b. 3
c. 2
d. 1
9. In an LLP’s final accounts, the Gross block of fixed assets stood at
Rs. 1,45,000 and depreciation and amortizations during the year
amounted to Rs. 8,000. What is the net block of fixed assets?
a. Rs. 1,37,000
b. Rs. 1,41,000
c. Rs. 1,45,000
d. Rs. 1,53,000 munotes.in
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176 10. In an LLP’s final accounts, the market value of Closing stock is Rs.
35,000 (cost price being Rs. 32,000) and the value of Opening stock
is Rs. 40,000. What is the increase or decrease in stock?
a. Rs. 5,000 increase
b. Rs. 8,000 decrease
c. Rs. 8,000 increase
d. Rs. 5,000 decrease
6.11.3. Answer in detail / Essay type questions
1. Enumerate the provisions for the formation of a LLP
2. How are a LLP different from Partnership firm and a Limited
Company?
3. What are the advantages and drawbacks of a business structure being a
LLP?
4. What is the relationship amongst partners of a LLP?
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