Worked Solution
✓ VerifiedAmalgamation in the Nature of Merger — Pooling of Interests Method (AS 14)
Since the amalgamation is in the nature of a merger, the pooling of interests method under AS 14 (Accounting for Amalgamations) is applied. Under this method, all assets and liabilities of the transferor (Diamond Ltd.) are recorded at book values, all reserves (including statutory reserves like Foreign Project Reserve) are incorporated, and the difference between net assets taken over and purchase consideration is adjusted against General Reserve.
(i) Journal Entries in the Books of Robert Ltd.
Entry 1 — For Purchase Consideration Payable:
Business Purchase A/c Dr. 13,500
To Liquidator of Diamond Ltd. A/c 13,500
(Being purchase consideration for taking over Diamond Ltd., computed as 1,350 lakh equity shares × ₹10 each at par — see Working Note 1)
Entry 2 — For Assets and Liabilities Taken Over (at book values):
Plant and Machinery A/c Dr. 7,500.0
Furniture, Fixtures and Fittings A/c Dr. 2,550.0
Inventory A/c Dr. 6,061.5
Trade Receivables (Debtors) A/c Dr. 1,530.0
Bills Receivable A/c Dr. 120.0
Cash at Bank A/c Dr. 913.5
To Trade Payables A/c 694.5
To Provisions A/c 1,053.0
To 12% Debentures A/c 1,500.0
To Business Purchase A/c 13,500.0
To Foreign Project Reserve A/c 465.0
To General Reserve A/c 300.0
To Profit & Loss A/c 1,162.5
(Being all assets and liabilities of Diamond Ltd. incorporated at book values; reserves adjusted as per Working Note 2)
Entry 3 — For Settlement of Purchase Consideration:
Liquidator of Diamond Ltd. A/c Dr. 13,500
To Equity Share Capital A/c 13,500
(Being 1,350 lakh fully paid equity shares of ₹10 each allotted at par to shareholders of Diamond Ltd. in ratio 3:2)
Entry 4 — For Conversion of Debentures:
12% Debentures A/c Dr. 1,500
To 13% Debentures A/c 1,500
(Being 12% debentures of Diamond Ltd. converted into 13% debentures of Robert Ltd. of the same amount and denomination)
Entry 5 — For Cancellation of Mutual/Inter-Company Indebtedness:
Bills Payable A/c Dr. 120
To Bills Receivable A/c 120
(Being bills receivable held by Diamond Ltd. — all of which were Robert Ltd.'s own acceptances — cancelled against corresponding bills payable of Robert Ltd. on merger)
Entry 6 — For Amalgamation Expenses:
General Reserve A/c Dr. 1.5
To Cash at Bank A/c 1.5
(Being amalgamation expenses of ₹1.5 lakhs borne by Robert Ltd. and charged to General Reserve under AS 14 — pooling of interests)
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(ii) Balance Sheet of Robert Ltd. as at 1st April 2020 (Immediately after Merger)
(₹ in lakhs)
EQUITY AND LIABILITIES
I. Shareholders' Funds
Share Capital:
Original Robert Ltd. (22,500 ÷ 10 = 2,250 lakh shares × ₹10): 22,500
New shares issued to Diamond Ltd. shareholders: 13,500
Total Share Capital: 36,000
Reserves and Surplus:
Securities Premium (Robert Ltd.): 4,500.0
General Reserve: 14,250 + 300 − 1.5 = 14,548.5
Foreign Project Reserve (from Diamond Ltd.): 465.0
Profit & Loss Account: 4,305 + 1,162.5 = 5,467.5
Total Reserves and Surplus: 24,981.0
II. Non-Current Liabilities
13% Debentures (converted from Diamond's 12%): 1,500.0
III. Current Liabilities
Trade Payables: (1,800 + 694.5 − 120) = 2,374.5
Provisions: (2,745 + 1,053) = 3,798.0
Total Equity and Liabilities: 68,653.5
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ASSETS
I. Non-Current Assets (Fixed Assets)
Land and Buildings: 9,000.0
Plant and Machinery: (21,000 + 7,500) = 28,500.0
Furniture, Fixtures and Fittings: (3,456 + 2,550) = 6,006.0
II. Current Assets
Inventory: (11,793 + 6,061.5) = 17,854.5
Trade Receivables: (3,180 + 1,530 + 0) = 4,710.0
(Diamond's Bills Receivable of ₹120 cancelled against Robert's Bills Payable)
Cash at Bank: (1,671 + 913.5 − 1.5) = 2,583.0
Total Assets: 68,653.5
The balance sheet balances at ₹68,653.5 lakhs, confirming correctness of all entries.
Write it like this
1The skeleton
- Lead with the method identification — your very first line must say 'amalgamation in the nature of a merger → pooling of interests method under AS 14' because the examiner awards a concept mark before even reading your entries.
- Write Working Note 1 (Purchase Consideration) before Entry 1 — show 9,000 ÷ 10 × 3/2 × ₹10 = ₹13,500 lakhs separately so the examiner sees your reasoning; an unexplained ₹13,500 in Entry 1 gets zero benefit of doubt.
- In Entry 2, credit all reserves of Diamond Ltd. line-by-line — Foreign Project Reserve, General Reserve, P&L separately, then show the balancing figure going to/from General Reserve with a clear Working Note 2; this is where 6–8 marks live and a lump-sum credit kills them.
- Give Entry 5 (inter-company elimination) its own separate journal entry — Bills Payable Dr. / Bills Receivable Cr. with a narration explaining these were Robert's own acceptances; if you club this inside Entry 2, the examiner cannot give the dedicated mark.
- Show amalgamation expenses hitting General Reserve, not P&L — write it explicitly in the narration of Entry 6; one wrong account name loses the mark even if the amount is right.
- In the balance sheet, footnote the trade receivables line — state '₹120 cancelled being inter-company bills' so the examiner doesn't think you dropped a number; reconciliation transparency is what separates 16/20 from 20/20.
2Examiner-rewarded phrases
3Common trap
Heads up — the single biggest mark-killer is crediting the reserve difference (net assets minus PC) to Capital Reserve instead of General Reserve; Capital Reserve is the purchase method, pooling always hits General Reserve, and mixing them up loses you 3–4 marks instantly even if every other number is perfect. Also watch out for leaving Diamond's Foreign Project Reserve out of Entry 2 — students skip it thinking 'it's not a statutory reserve so it doesn't transfer,' but under pooling ALL reserves transfer.