Corporate Accounting कंपनी लेखांकन

Quick summary

A company raises its owned capital by issuing shares to the public. This topic covers the kinds of shares, the steps of issue (application, allotment, calls), issue at par and at premium, over-subscription with pro-rata allotment, and calls in arrears and in advance. The rules come from the Companies Act, 2013 and the accounting is done in the journal of the company.

Key points

• Share – one unit of the share capital of a company (Sec 2(84), Companies Act 2013).
• Two kinds: equity shares (voting rights, dividend after preference) and preference shares (preference for fixed dividend and return of capital on winding up).
• Kinds of capital: authorised → issued → subscribed → called-up → paid-up.
• Money is collected in stages: application, allotment, first call, second and final call.
• Shares may be issued at par (face value) or at premium (above face value). Issue at discount is not allowed under Sec 53, except sweat equity shares.
• Securities premium (प्रतिभूती अधिमूल्य) goes to a separate account. Under Sec 52 it can be used only for: issuing fully paid bonus shares, writing off preliminary expenses, writing off expenses/commission/discount on issue of shares or debentures, premium on redemption of preference shares or debentures, and buy-back of own shares.
• Minimum subscription: as per SEBI rules, a public issue must receive at least 90% of the issue size, otherwise application money is refunded.
• Over-subscription: when applications are more than shares offered, the company may reject some and allot the rest pro-rata; excess money is adjusted towards allotment (and calls, if the Articles allow) and the balance is refunded.
• Calls in arrears – call money due but not paid. Calls in advance – money received before it is called.
• Under Table F, interest on calls in arrears is charged at up to 10% p.a. and interest on calls in advance is paid at up to 12% p.a. (unless the Articles say otherwise).

Important terms

• Face value – the value printed on the share certificate, e.g. ₹10.
• Allotment – acceptance of the application by the board; the applicant becomes a shareholder.
• Call – a demand by the company for an unpaid part of the share price.
• Pro-rata allotment – allotment in proportion to the shares applied for.
• Private placement – issue to a selected group of persons, not the public.

Formats and formulas

Worked problem: X Ltd issued 10,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹4 on allotment (including premium) and ₹5 on first and final call. All money was received.

Check: share capital = 30,000 + 20,000 + 50,000 = ₹1,00,000 (10,000 × ₹10); securities premium = ₹20,000 (10,000 × ₹2).

• Excess application money = (shares applied − shares allotted) × application money per share.
• Amount due on allotment from shareholders = allotment due − excess application money adjusted.

5 important questions

Q1. What is securities premium? State any two uses.

It is the amount received over the face value of a share. Under Sec 52 it can be used to issue fully paid bonus shares and to write off preliminary expenses (also discount on issue of debentures, premium on redemption, buy-back).

Q2. Distinguish between calls in arrears and calls in advance.

Calls in arrears is money called but not yet paid by a shareholder; it is shown as a deduction from called-up capital. Calls in advance is money paid before it is called; it is a liability shown separately and may earn interest up to 12% p.a. under Table F.

Q3. Explain the procedure for issue of shares by a public company.

Outline: (1) issue of prospectus, (2) receipt of applications through banks/ASBA, (3) minimum subscription of 90%, (4) allotment by the board and basis of allotment approved with the stock exchange, (5) refund of excess money, (6) making calls, (7) listing on a stock exchange, (8) issue of share certificates or credit in demat account.

Q4. In the problem above, 15,000 shares were applied for and 10,000 allotted pro-rata. Show the effect of excess application money.

Application money received = 15,000 × ₹3 = ₹45,000. Needed = 10,000 × ₹3 = ₹30,000. Excess = ₹15,000, adjusted to allotment. Allotment due ₹40,000 − ₹15,000 = ₹25,000 received in cash. Entry: Equity Share Application A/c Dr ₹15,000, To Equity Share Allotment A/c ₹15,000.

Q5. Explain the kinds of share capital shown in the Balance Sheet.

Authorised (maximum in MoA), issued (offered to the public), subscribed (taken up by the public), called-up (demanded so far), paid-up (actually received). Shown under "Shareholders' funds – Share capital" with details in the notes to accounts as per Schedule III.

Exam tip

Always split allotment money into capital and premium. Write narrations, and show a short check of total share capital at the end of a numerical answer.

Quick summary

When a shareholder fails to pay an allotment or call money, the company can cancel (forfeit) his shares as allowed by its Articles. The amount already paid by him is not returned; it is kept in a Share Forfeiture account. Forfeited shares can later be re-issued, even below face value, and the gain left over is a capital profit transferred to Capital Reserve.

Key points

• Forfeiture (जप्ती) means cancelling shares for non-payment of calls; the member loses his shares and the money paid on them.
• It must be done strictly as per the Articles (Table F): a notice of at least 14 days is given, then a board resolution forfeits the shares.
• On forfeiture: debit Share Capital with the called-up amount, credit the unpaid calls, and credit Share Forfeiture with the amount paid.
• If shares were issued at premium and the premium is not yet received, debit Securities Premium too. If the premium was already received, it is not cancelled.
• Share Forfeiture A/c is shown under "Share capital" in the notes to accounts (added to paid-up capital) until re-issue.
• Re-issue: forfeited shares may be re-issued at par, at premium or at a discount.
• Maximum discount on re-issue = amount forfeited on those shares. The discount is debited to Share Forfeiture A/c.
• After re-issue, the balance in Share Forfeiture on the re-issued shares is a capital profit → transferred to Capital Reserve.
• If only part of the forfeited shares are re-issued, transfer only the proportionate profit on the re-issued shares.
• With pro-rata allotment, find the amount actually paid by the defaulter after adjusting his excess application money.

Important terms

• Called-up value – amount per share demanded up to the date of forfeiture.
• Share Forfeiture A/c – holds the money paid by defaulters on forfeited shares.
• Capital Reserve – reserve created from capital profits; not available for dividend.
• Re-issue – sale of forfeited shares to new holders.

Formats and formulas

• Forfeiture entry: Share Capital A/c Dr (shares × called-up value) → To Share Forfeiture A/c (amount paid) → To Calls in Arrears / Allotment / Call A/c (amount unpaid).
• Discount on re-issue ≤ forfeited amount per share.
• Capital Reserve = forfeited amount on re-issued shares − discount on re-issue.

Worked problem: Ram held 100 equity shares of ₹10 each (₹3 application, ₹3 allotment, ₹4 final call). He did not pay the final call. His shares were forfeited and later re-issued to Shyam at ₹8 per share fully paid.

Check: discount ₹2 per share is less than ₹6 forfeited, so the re-issue is valid. Capital Reserve = ₹400.

5 important questions

Q1. What is meant by forfeiture of shares?

It is the cancellation of shares by the company when a shareholder fails to pay an allotment or call money after due notice. The amount already paid is kept by the company and he ceases to be a member.

Q2. Why is the balance of Share Forfeiture transferred to Capital Reserve?

Because the profit arises from a capital transaction (forfeited money not refunded), not from trading. A capital profit is not distributable as dividend, so it is kept in Capital Reserve.

Q3. Shares of ₹10 issued at ₹2 premium; Hari (200 shares) paid ₹3 on application but did not pay allotment ₹5 (including premium) and call ₹4. Pass the forfeiture entry.

Called-up at forfeiture = ₹10 per share (all calls made). Entry: Share Capital Dr 2,000 (200 × 10); Securities Premium Dr 400 (200 × 2, not received); To Share Forfeiture 600 (200 × 3); To Share Allotment 1,000 (200 × 5); To Share First and Final Call 800 (200 × 4). Dr 2,400 = Cr 2,400.

Q4. Of Hari's 200 shares, 150 were re-issued at ₹7 fully paid. Pass entries.

Bank Dr 1,050 (150 × 7); Share Forfeiture Dr 450 (150 × 3); To Share Capital 1,500. Forfeited amount on 150 shares = 150 × 3 = ₹450, all used as discount, so Capital Reserve = 0. The forfeiture balance of ₹150 on the remaining 50 shares stays in Share Forfeiture A/c.

Q5. Explain the legal procedure and accounting treatment of forfeiture and re-issue.

Outline: Articles must permit; final notice of 14 days; board resolution; entries on forfeiture (capital, premium if unpaid, forfeiture, unpaid calls); disclosure in Balance Sheet; re-issue by board, discount limit; transfer of balance to Capital Reserve; partial re-issue rule.

Exam tip

Work per share first (called-up, paid, unpaid, discount) and then multiply by the number of shares. Mistakes in this topic usually come from forgetting unpaid premium.

Quick summary

A debenture is a written acknowledgement of a loan taken by a company. Debenture holders are creditors who get fixed interest and are repaid on a fixed date. This topic covers the types of debentures, the six common terms of issue, interest, and the methods and legal rules for redemption, including the Debenture Redemption Reserve (DRR).

Key points

• Debenture (कर्जरोखा) – an instrument showing a debt of the company (Sec 2(30), Companies Act 2013). Holders have no voting rights.
• Types: secured/unsecured, redeemable/irredeemable, convertible/non-convertible, registered/bearer, first/second.
• Issue may be at par, at premium or at discount; redemption may be at par or at premium. This gives six combinations.
• Loss on issue of debentures (discount + premium payable on redemption) is written off from Securities Premium and then from Statement of Profit and Loss, over the life of the debentures.
• Debentures as collateral security – issued as extra security for a loan; recorded by a note or by "Debentures Suspense A/c".
• Interest is a charge on profit, payable even in a loss year. TDS is deducted by the company before payment.
• Methods of redemption: lump sum on maturity, instalments by draw of lots, purchase in the open market (own debentures), and conversion into shares.
• DRR (Rule 18(7), Companies (Share Capital and Debentures) Rules 2014, as amended in 2019): listed companies, NBFCs and HFCs need not create DRR; other unlisted companies create DRR of 10% of outstanding debentures. Before 30 April each year, 15% of the debentures maturing during the year ending next 31 March is to be deposited or invested (Debenture Redemption Investment). Check the current rules — older textbooks show 25%.
• DRR is created out of profits available for dividend; after full redemption it is transferred to General Reserve.

Important terms

• Coupon rate – rate of interest written on the debenture.
• Premium on redemption – extra amount paid at redemption; a liability until paid.
• Ex-interest / cum-interest – market price without / including accrued interest (used in own-debenture purchase).
• Sinking fund – fund built by yearly investments to repay debentures (older method).

Formats and formulas

• Interest per year = face value × rate.
• Loss on issue = discount on issue + premium on redemption.
• DRR (unlisted, non-NBFC) = 10% × value of outstanding debentures.

Worked problem: Z Ltd issued 1,000, 12% debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10% after 5 years.

Note: the application and allotment entries are combined here for short. Yearly interest = 1,00,000 × 12% = ₹12,000. Loss of ₹15,000 is written off ₹3,000 each year for 5 years (equal amounts, as the debentures are redeemed together).

On redemption (after 5 years):

5 important questions

Q1. Distinguish between a share and a debenture (any four points).

Share = ownership, debenture = loan. Shareholders get dividend (only from profit), debenture holders get fixed interest (even in loss). Shareholders have voting rights, debenture holders do not. On winding up debentures are repaid before shares. Debentures can be issued at discount; shares cannot (Sec 53).

Q2. What is Debenture Redemption Reserve?

A reserve created out of profits available for dividend to make sure funds are kept aside for repaying debentures. Under the 2019 rules unlisted companies (other than NBFC/HFC) keep 10% of outstanding debentures; listed companies are exempt.

Q3. Explain the methods of redemption of debentures.

Outline: (1) lump-sum payment on maturity, (2) annual instalments by draw of lots, (3) purchase of own debentures in the open market – cancellation, profit on cancellation to Capital Reserve, (4) conversion into equity/preference shares, (5) use of DRR and investments; journal entries for each.

Q4. A company buys back its own 500 debentures of ₹100 for cancellation at ₹96 (ex-interest). Pass the cancellation entry.

Debentures A/c Dr ₹50,000; To Bank A/c ₹48,000; To Profit on Cancellation of Debentures A/c ₹2,000. Then transfer the profit of ₹2,000 to Capital Reserve.

Q5. Pass entries for the six cases of issue and redemption of debentures.

Outline: par/par, discount/par, premium/par, par/premium, discount/premium, premium/premium. In each, debit Bank with cash received; debit Loss on Issue for discount plus redemption premium; credit Securities Premium for issue premium; credit Premium on Redemption for redemption premium; credit Debentures with face value.

Exam tip

Always show the premium payable on redemption at the time of issue (prudence). Mention that DRR rules changed in 2019 when you write theory answers.

Quick summary

Preference shares issued by a company must be redeemable; Sec 55 of the Companies Act, 2013 does not allow irredeemable preference shares. Redemption means paying back the preference shareholders. The law protects creditors: redemption can be made only out of divisible profits or out of the proceeds of a fresh issue, and capital used from profits must be kept in a Capital Redemption Reserve.

Key points

• Preference shares must be redeemed within 20 years of issue (up to 30 years for infrastructure projects, with yearly redemption of at least 10% from the 21st year).
• Only fully paid preference shares can be redeemed. Partly paid shares are first made fully paid by a call.
• Sources of redemption: (a) profits available for dividend (P&L surplus, General Reserve), (b) proceeds of a fresh issue of shares made for the purpose.
• When redeemed out of profits, an amount equal to the nominal value of shares redeemed out of profits is transferred to Capital Redemption Reserve (CRR) (भांडवल विमोचन राखीव निधी).
• CRR can be used only to issue fully paid bonus shares.
• Premium on redemption is provided out of Securities Premium account or out of profits (for companies not following Ind AS).
• Proceeds of debentures or loans cannot be counted as fresh issue for redemption.
• Capital reserve, revaluation reserve and securities premium are not available for transfer to CRR.
• After redemption, the share capital + CRR keeps the capital base the same, so creditors are protected.

Important terms

• Divisible profits – profits that could be paid as dividend.
• Fresh issue – new shares issued specially to raise money for redemption.
• Capital Redemption Reserve – a capital reserve created from profits on redemption.
• Bonus shares – fully paid shares issued free to existing shareholders.

Formats and formulas

• Amount to transfer to CRR = nominal value of shares redeemed − proceeds of fresh issue (face value part).
• Minimum fresh issue (at par) = nominal value to be redeemed − divisible profits to be used.
• Number of new shares = fresh issue amount ÷ issue price per share.

Worked problem: A Ltd decides to redeem 5,000, 10% preference shares of ₹100 each at a premium of 10%. It issues 20,000 equity shares of ₹10 each at par. It has General Reserve ₹4,00,000 and Securities Premium ₹60,000.

Journal entries:

Check: General Reserve left = 4,00,000 − 3,00,000 = ₹1,00,000; Securities Premium left = 60,000 − 50,000 = ₹10,000.

5 important questions

Q1. What is Capital Redemption Reserve? How can it be used?

It is a reserve created when preference shares are redeemed out of profits, equal to the nominal value so redeemed. It can be used only for issuing fully paid bonus shares.

Q2. Can preference shares be redeemed out of the proceeds of debentures?

No. Sec 55 allows only profits available for dividend or the proceeds of a fresh issue of shares. Debentures are borrowed money, not share capital.

Q3. State the provisions of Sec 55 of the Companies Act 2013 about redemption of preference shares.

Outline: no irredeemable preference shares; maximum 20 years (30 for infrastructure); fully paid only; sources – profits or fresh issue; CRR rule; premium from securities premium or profits; CRR use only for bonus; scheme under Sec 55(3) if company cannot redeem.

Q4. A company must redeem preference shares of ₹6,00,000 and has divisible profits of ₹4,50,000 but wants to keep ₹1,00,000 of profits. Find the minimum fresh issue at par.

Profits to be used = 4,50,000 − 1,00,000 = ₹3,50,000. Minimum fresh issue = 6,00,000 − 3,50,000 = ₹2,50,000. CRR = ₹3,50,000.

Q5. Explain the accounting steps for redemption of preference shares.

Outline: make partly paid shares fully paid; fresh issue entry; amount due on redemption with premium; premium written off; transfer to CRR; sale of investments if needed; payment entry; bonus issue from CRR if asked; prepare the Balance Sheet after redemption.

Exam tip

Before writing entries, prepare a small working table: nominal value, fresh issue, CRR, premium and cash needed. Examiners give marks for this working.

Quick summary

Every company must prepare its financial statements – Balance Sheet, Statement of Profit and Loss, Cash Flow Statement, notes and statement of changes in equity – in the form given in Schedule III of the Companies Act, 2013 (Sec 129). This topic explains the vertical formats, the main heads and sub-heads, and how common items and adjustments are shown.

Key points

• Sec 129: financial statements must give a true and fair view, follow notified Accounting Standards (AS or Ind AS) and use the Schedule III form.
• Schedule III has Division I (companies following AS), Division II (Ind AS companies) and Division III (Ind AS NBFCs). B.Com syllabi mostly use Division I.
• The Balance Sheet is in vertical form with two parts: Equity and Liabilities and Assets; previous year figures are given beside the current year.
• Current vs non-current: an item due/realisable within 12 months (or the operating cycle) is current; otherwise non-current.
• Details are given in Notes to Accounts; the face of the statements shows only main heads with a "Note No." column.
• Reserves and surplus include capital reserve, securities premium, general reserve and the surplus (balance) in Statement of Profit and Loss; a debit balance of P&L is shown as a negative figure under this head.
• Proposed dividend is not provided as a liability; it is disclosed in the notes (AS-4 revised).
• Depreciation is charged as per Schedule II (useful-life based).
• Calls in arrears are deducted from called-up capital in the note on share capital.
• Rounding off depends on turnover (e.g. to the nearest hundred, thousand, lakh or crore).

Important terms

• Shareholders' funds (भागधारकांचा निधी) – share capital + reserves and surplus.
• Long-term borrowings – debentures, term loans repayable after 12 months.
• Trade payables – amounts owed to suppliers for goods and services.
• Property, Plant and Equipment (PPE) – tangible fixed assets such as land, buildings and machinery.
• Cash and cash equivalents – cash, bank balances and very short-term deposits.

Formats and formulas

Worked example – Balance Sheet of P Ltd as at 31 March (Division I):

Statement of Profit and Loss (short form):

Finance cost check: 10% × 2,00,000 debentures = ₹20,000.

5 important questions

Q1. What are the main heads of the Balance Sheet under Schedule III?

Equity and Liabilities: shareholders' funds, share application money pending allotment, non-current liabilities, current liabilities. Assets: non-current assets and current assets.

Q2. Where will you show (a) securities premium, (b) debentures due after 3 years, (c) bills payable, (d) goodwill?

(a) Reserves and surplus; (b) long-term borrowings; (c) trade payables under current liabilities; (d) intangible assets under non-current assets.

Q3. Explain the provisions of Sec 129 and Schedule III.

Outline: true and fair view, accounting standards, form in Schedule III, consolidated statements for companies with subsidiaries, penalty for non-compliance, the three divisions, general instructions (current/non-current, notes, rounding, previous year figures).

Q4. Prepare the Balance Sheet from a given trial balance with adjustments.

Steps: classify each ledger balance into heads; adjust depreciation, outstanding and prepaid items, provision for tax, transfer to reserve; prepare the Statement of Profit and Loss first; carry the surplus to reserves and surplus; prepare notes; total both sides (as in the example).

Q5. Explain the treatment of dividend, provision for tax and transfer to reserves in company final accounts.

Proposed dividend – disclosed in notes, not a liability until approved at the AGM. Provision for tax – debited to Statement of P&L, shown under short-term provisions. Transfer to reserves – reduces surplus and increases general reserve inside "Reserves and surplus".

Exam tip

Learn the order of heads by heart and always draw the "Note No." column. Prepare notes for share capital and reserves even if the question does not ask; examiners give marks for them.

Quick summary

Goodwill is the value of a firm's reputation, which helps it earn more profit than a normal firm in the same business. It is an intangible asset. Goodwill has to be valued when a business is sold, at amalgamation, when shares are valued, or when partners change. This topic covers the meaning, factors and the main methods of valuing goodwill.

Key points

• Goodwill (ख्याती) – "the present value of a firm's anticipated excess earnings" (Spicer and Pegler); the benefit and advantage of the good name, reputation and connection of a business (Lord Eldon).
• Factors affecting goodwill: location, quality of products, efficient management, monopoly or patents, long-standing customers, nature of business, risk, trend of profits, capital required.
• Purchased goodwill (paid for when buying a business) is recorded in books; self-generated (inherent) goodwill is not recorded (AS-26 / Ind AS 38).
• Average profit method – goodwill = average maintainable profit × number of years' purchase. Weighted average is used if profits show a trend.
• Super profit method – goodwill = super profit × number of years' purchase.
• Capitalisation method – (a) capitalise average profit and deduct net assets, or (b) capitalise super profit directly.
• Annuity method – goodwill = super profit × present value of annuity of ₹1 for the given years at the normal rate.
• Methods of valuation:
• Future maintainable profit – past average profit adjusted for abnormal items, changes in management salary, expected changes and tax.
• Capital employed = total assets (excluding goodwill and fictitious assets, at revalued figures) − outside liabilities. Average capital employed = opening + closing ÷ 2, or closing − ½ of the year's profit.
• Normal rate of return – rate earned by similar firms in the industry.

Important terms

• Super profit – profit earned above the normal profit.
• Years' purchase – number of years for which super/average profit is expected to continue.
• Normal profit – capital employed × normal rate of return ÷ 100.
• Fictitious assets – debit balances with no real value, e.g. preliminary expenses.

Formats and formulas

• Average profit = total profits of given years ÷ number of years.
• Normal profit = capital employed × normal rate ÷ 100.
• Super profit = average (maintainable) profit − normal profit.
• Goodwill (capitalisation of super profit) = super profit × 100 ÷ normal rate.
• Goodwill (capitalisation of average profit) = (average profit × 100 ÷ normal rate) − capital employed.

Worked problem: Profits of the last 4 years: ₹40,000, ₹50,000, ₹60,000 and ₹70,000. Capital employed ₹4,00,000. Normal rate of return 10%.

Both capitalisation methods give the same answer, which is a good check.

5 important questions

Q1. What is goodwill? Why is it called an intangible asset?

Goodwill is the value of the reputation of a business that enables it to earn more than normal profit. It cannot be seen or touched, but it has value and can be bought or sold, so it is an intangible asset.

Q2. What is super profit?

Super profit is the excess of the average maintainable profit over the normal profit expected on the capital employed. Example: average profit ₹55,000, normal profit ₹40,000 → super profit ₹15,000.

Q3. Explain the factors affecting the value of goodwill.

Outline: nature of business, location, efficiency of management, market situation (monopoly), special advantages (licences, patents, contracts), quality and brand, trend of profits, capital required, risk, customer relations.

Q4. Profits for 3 years are ₹30,000, ₹36,000 and ₹42,000; weights 1, 2, 3. Find goodwill at 2 years' purchase of weighted average profit.

Weighted profit = 30,000 × 1 + 36,000 × 2 + 42,000 × 3 = 30,000 + 72,000 + 1,26,000 = ₹2,28,000. Weighted average = 2,28,000 ÷ 6 = ₹38,000. Goodwill = 38,000 × 2 = ₹76,000.

Q5. Explain the methods of valuation of goodwill with formulas.

Outline the four methods, their formulas, when each is suitable, and a short example; mention adjustments for future maintainable profit and capital employed.

Exam tip

Before calculating, adjust past profits for abnormal gains or losses and show the "future maintainable profit" in a separate working. Most students lose marks by skipping this step.

Quick summary

Shares need to be valued when they are not listed, when shares are gifted or transferred, at amalgamation, for taxation, for loans against shares, or when shares are bought in large blocks. This topic covers the need for valuation, the factors affecting the value of a share, and the three main methods: net assets (intrinsic value) method, yield method and fair value method.

Key points

• Need for valuation: unlisted shares, amalgamation and absorption, conversion of preference into equity shares, gift and wealth/estate purposes, loan against shares, compensation on nationalisation, buy-back, and ESOPs.
• Factors: profits and dividend record, net worth, goodwill, future prospects, market conditions, management, demand and supply of shares, rate of return in the industry.
• Net assets method (intrinsic or break-up value): value of net assets available to equity shareholders ÷ number of equity shares. It is used for winding up, amalgamation and when profits are uncertain.
• Net assets = all assets at market/realisable value (including goodwill, excluding fictitious assets) − outside liabilities − preference share capital (and arrears of preference dividend, if any).
• Yield method (market value method): based on expected return. Value per share = (expected rate of return ÷ normal rate of return) × paid-up value per share.
• Expected rate of return = profit available for equity dividend ÷ paid-up equity capital × 100. Profit available = profit after tax − transfer to reserves − preference dividend.
• Fair value method = (intrinsic value + yield value) ÷ 2. It balances asset backing and earning power.
• If the preference shares are participating, their extra share of profit is deducted before the equity yield.
• Partly paid shares: value of fully paid share minus uncalled amount per share (under net assets, notional calls are added to net assets).

Important terms

• Intrinsic value – value of a share based on the net assets backing it.
• Normal rate of return – return that investors expect from similar companies.
• Earning capacity – ability of a company to earn profit on capital employed.
• Dividend yield – dividend per share ÷ market price × 100.

Formats and formulas

Worked problem: Q Ltd has 50,000 equity shares of ₹10 each fully paid and 2,000, 10% preference shares of ₹100 each. Net assets (after outside liabilities) at fair value = ₹8,00,000. Expected profit after tax = ₹1,00,000, of which ₹5,000 goes to reserves each year. Normal rate of return = 12%.

5 important questions

Q1. What is the intrinsic value of a share?

It is the value of a share found by dividing the net assets available to equity shareholders (assets at fair value less outside liabilities and preference capital) by the number of equity shares.

Q2. Why is the fair value method used?

Because the net assets method looks only at assets and the yield method only at earnings. Fair value takes the average of the two, so it reflects both the asset backing and the earning capacity.

Q3. Explain the circumstances in which valuation of shares becomes necessary.

Outline: unlisted shares, amalgamation/absorption, buy-back, gift and succession, loans, conversion of shares, nationalisation compensation, dissenting shareholders, acquisition of a controlling block.

Q4. Net assets ₹9,00,000; equity: 60,000 shares of ₹10, ₹7.50 paid. Find intrinsic value of a partly paid share.

Notional call = 60,000 × 2.50 = ₹1,50,000. Net assets after notional call = ₹10,50,000. Value of a fully paid share = 10,50,000 ÷ 60,000 = ₹17.50. Value of a partly paid share = 17.50 − 2.50 = ₹15.00.

Q5. Explain the yield method of valuation with an example.

Outline: meaning of yield; steps – find future maintainable profit, deduct tax, reserve and preference dividend; expected rate of return; compare with normal rate; formula; use the table above as an example; merits and limits.

Exam tip

Always write a clear "Net assets available to equity shareholders" working. In yield method, check whether the question wants rate of dividend or rate of earning – they give different answers.

Quick summary

Amalgamation means two or more companies joining together so that their businesses are carried on by one company. It may be done by forming a new company (amalgamation) or by an existing company taking over another (absorption). This topic covers the meaning and types under AS-14, methods of calculating purchase consideration, and the entries in the books of the transferor and transferee companies.

Key points

• Amalgamation (एकत्रीकरण) – AS-14 defines it as an amalgamation under the Companies Act or any other statute applicable to companies. Sec 230–232 of the Companies Act, 2013 deal with mergers; approval of the NCLT is needed (fast-track route under Sec 233 for small companies).
• Absorption – an existing company takes over one or more companies. External reconstruction – a new company is formed to take over an existing company in difficulty.
• Transferor company – the company that is taken over (it goes into liquidation). Transferee company – the company that takes over.
• Two types under AS-14: (1) in the nature of merger – all assets and liabilities taken, at least 90% of equity shareholders of the transferor become shareholders of the transferee, consideration only in equity shares (cash only for fractions), business continued, book values kept; (2) in the nature of purchase – any amalgamation that does not meet all these conditions.
• Methods of accounting: pooling of interests for merger (book values, reserves kept as they are) and purchase method for purchase (assets at fair value, only statutory reserves carried forward, through Amalgamation Adjustment Reserve).
• Purchase consideration – what the transferee pays to the shareholders of the transferor, in shares, debentures or cash. It does not include payment to creditors or debenture holders (who are liabilities taken over).
• Methods of calculating purchase consideration: lump sum, net assets method (agreed value of assets taken − liabilities taken), net payment method (total of shares and cash paid to shareholders), intrinsic value/share exchange method (based on the value of shares of both companies).
• If purchase consideration > net assets → goodwill; if less → capital reserve.
• Ind AS 103 (Business Combinations) applies to Ind AS companies; it uses the acquisition method.

Important terms

• Realisation account – opened in the transferor's books to close assets and liabilities and find profit or loss on realisation.
• Business purchase account – debited in the transferee's books with purchase consideration.
• Statutory reserve – a reserve kept by law for a period (e.g. investment allowance reserve).
• Fair value – the amount for which an asset could be exchanged between willing parties.

Formats and formulas

• Purchase consideration (net assets method) = agreed value of assets taken over − agreed value of liabilities taken over.
• Goodwill = purchase consideration − net assets taken over (if positive).

Worked problem (absorption, purchase method): A Ltd takes over B Ltd. B's assets taken at agreed values: PPE ₹3,40,000; inventory ₹1,00,000; receivables ₹80,000; cash ₹20,000. Liabilities taken: creditors ₹60,000; debentures ₹1,00,000. A Ltd pays 30,000 equity shares of ₹10 each at ₹12 per share and ₹40,000 in cash.

Entries in A Ltd's books:

5 important questions

Q1. Distinguish between amalgamation and absorption.

In amalgamation two or more companies are wound up and a new company is formed to take them over. In absorption an existing company takes over one or more companies and no new company is formed.

Q2. What is purchase consideration?

It is the amount agreed to be paid by the transferee company to the shareholders of the transferor company for taking over its business, in shares, other securities or cash (AS-14).

Q3. State the conditions of amalgamation in the nature of merger as per AS-14.

All assets and liabilities taken over; at least 90% of equity shareholders (by face value) become shareholders of the transferee; consideration paid only in equity shares (cash only for fractional shares); business continued; no adjustment to book values except for uniform accounting policies.

Q4. Explain the methods of calculating purchase consideration.

Outline: lump sum, net assets, net payment, intrinsic value (share exchange ratio) methods; formula and a short example for each; treatment of goodwill and capital reserve.

Q5. Explain the entries in the books of the transferor company.

Outline: transfer assets to Realisation A/c; transfer liabilities to Realisation A/c; purchase consideration due (Transferee Co. Dr, To Realisation); receipt of consideration; realisation expenses; closing Realisation A/c (profit/loss to equity shareholders); close share capital and reserves to Equity Shareholders A/c; distribute shares and cash.

Exam tip

Show the purchase consideration working first in a box; most of the marks for this question are in that working and in the Realisation account.