B.

Com II Year Subject- Corporate Account

SYLLABUS

Class – B.Com. II Year

Subject – Corporate Account

UNIT – I Company profits: Declaration of dividend , profit and loss

appropriation account and disposal of profits,
Managerial remuneration, Profit or loss prior to and post
incorporation, Final accounts of companies
UNIT – II Valuation of goodwill, Valuation of shares, Accounts of public
utility companies
UNIT – III Holding companies, Liquidation of companies
UNIT – IV Accounting for merger as per AS 14, internal reconstruction of
a company as per Indian Accounting Standard 14 (Excluding
inter company holdings and reconstruction scheme)
UNIT – V Accounting of banking companies; Accounts of insurance
companies with claim settlement

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B.Com II Year Subject- Corporate Account

UNIT-I

1. Declaration of Dividend, P&L Appropriation a/c and Disposal of Profits

Divisible Profits
Divisible profits represent the portion of the profits earned by the company which is available for the
distribution of dividend in shareholders.
At first, provisions for income tax as required u/s (198) of Companies Act 2013 and provision for
depreciation u/s 123(1)(a) are made out of the profits of current year. Then out of remaining profit
sufficient amounts are transferred to the reserves and funds of the company. Now the balance available
in the profit and loss account is called divisible profits. The divisible profits are distributed in
shareholders in the following two forms:
(1) In the form of dividend
(2) In the form of Bonus

Meaning of dividend
Dividend is the portion of company’s profit which can be distributed in the shareholders. U/s 2(14)
dividend includes interim dividend. The interim dividend is included in the definition of dividend to
control the delay in the payment of dividend to the shareholder and declaration of interim dividend by
the companies. U/s 205(1) the directors are empowered to declare interim dividend.

Provision of Company’s act regarding divided

(1) Out of profits- Dividend can be declared and paid out of the profits of current year. The profits
must be calculated after providing for depreciation u/s 123(1)(a).
(2) Previous year’s profit- If there are undistributed profits of previous year, then divided can be
declared and paid out of such profits also, provided that the provisions for depreciation is made
u/s 123(a).
(3) Guarantee by Government- Dividend can be distributed out of the money received from the
central or state government as guarantee.
(4) Provision for depreciation- Dividend can be distributed out of profits only when the
depreciation is provided for, but the central Government can exempt any company from this
provision in public interest. Provisions to provide depreciation are given u/s 123(1)
(5) Cash payment of dividend – Dividend must be paid in cash (or cheque) and not in kind. The
bonus shares can be issued for the capitalization of profits. Alternatively the partly paid up
shares can be converted in to the fully paid up shares by using the profits of company.
(6) Payment of registered shareholders only – Payment of dividend is made to the registered
shareholders only or to the persons or bankers as ordered by them.
(7) Period for the payment of dividend – Dividend must be paid within 30 days from the
declaration of dividend.
(8) Rate of dividend by directors – The rate of dividend is decided by directors.

Appropriation of Profits
At the time of disposal or appropriation of profits the two main points should be taken care of – First
the shareholder should be paid dividend at an appropriate rate, and the second, the creation or
reserves and funds to strengthen the financial position of the company. The transfers to various
provisions, reserves, and funds out of profits are called appropriation or disposal of profits. An account
is prepared for this purpose after preparing profit and loss account. The remaining balance in the
profit and loss appropriation account is shown in the Balance Sheet.

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B.Com II Year Subject- Corporate Account

Distinction between Profit & Loss Account and Profit & Loss Appropriation Account
In profit loss account all the items of charge against are taken, while in profit & loss appropriation
account all the item of Appropriation of profit ate taken. Profit & Loss account is called ‘above line’ and
profit & loss appropriation account is called ‘below line.’

Items to be debited to profit & Loss appropriation account –

1. The loss of last year brought forward.
2. The loss of current year transferred from profit & loss account of current year.
3. Transfer to various reserves.
4. Transfer to sinking fund for redemption of debentures, dividend equalization fund, employees’
welfare fund etc.
5. bonus (if provided for from this account)
6. Interim dividend paid
7. Proposed dividend
8. Corporate dividend tax u/s 115 – 0
9. Balance to be carried forward.

Items to be credited to profit & /Loss appropriation account –

1. The credit balance of last year brought forward
2. The profit of current year transferred from profit & loss account
3. Transfer from various reserves
4. The reserves created in the past but now not required.

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B.Com II Year Subject- Corporate Account

2. Managerial Remuneration
Managerial Remuneration
Overall managerial remuneration – Section 197 puts a maximum limit (exclusive of any fees payable to
directors, for attending meeting of the Board or any committee of the Board) of 11% of the net profits
on total remuneration payable by the company to its directors, including managing directors and its
manager (if any).

Managerial remuneration includes any expenditure incurred by the company –

1. In providing any rent-free accommodation, or any other benefit or amenity in respect of
accommodation free of charge;
2. In providing any other benefit or amenity free of charge or at a concessional rate.
3. In respect of any obligation or services which, but for such expenditure by the company, would
have been incurred by the person concerned; and
4. To affect any insurance on the life of, or to provide any pension, annuity or gratuity for, the
person concerned or his spouse or child.
However, if in any financial year a company has no profits or its profits are inadequate, the company
any pay to its managing or whole-time director or manager remuneration according to schedule XIII,
part II, section II

The managerial remuneration will be calculated according to the following rates –

S.No Managerial Personnel Maximum % of Net profit

1. Overall limit to all the managerial Personnel (S.198) 11
2. All directors, when the company is having managing director,
whole time director or manager. 1
3. All directors, when the company is not having a managing
director, whole-time director or manager 3
4. Manager 5
5. Managing director ore whole-time director when there is one 5
6. Managing director or whole-time directors when there is more
than one 10

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B.Com II Year Subject- Corporate Account

3. Profit and loss Prior to and Post incorporation

In corporate world, it is a normal practice that a company, which is not yet incorporates, acquires the
running business of another company, partnership firm or sole trader. The incorporation of the
purchasing company takes place on a later date.

Accounting Treatment of Pre-incorporation Profit/Loss-

Profit prior to incorporation
Any profit prior to incorporate may be dealt with as follows –
1. Credited to capital reserve account
2. Credited to goodwill account to reduce the amount of goodwill arising from acquisition of
business
3. Utilized to write down the value of fixed assets acquired.

Loss Prior to incorporation

Any loss prior to incorporation may be dealt with as follows –
1. Debited to goodwill account
2. Debited to capital reserve account arising from acquisition of business.
3. Debited to a suspense account, which can be written off later as a fictitious assets.

Post incorporation profit /Loss

The post incorporation profit is a revenue profit available at company’s disposal. This can be used for
distribution of dividend to shareholders. It can be used to write off revenue losses. If there is post
incorporation loss it is taken to profit & loss account. The final balance of profit & loss account will be
shown in balance sheet. Debit balance is shown on asset side and credit balance on liabilities side.

Basis of distribution of expenses

Basis Items
1. Time ratio Rent, Salaries, Insurance Premium, Tax, Rates, Printing, Stationery, Postage,
Depreciation, fixed expenses, General expenses, sundry expenses, Bank
charges, Repairs, Electricity expenses, Office expenses, Administrative
expenses etc.
2. Sales Ratio Selling expenses, Advertisement, Discount allowed, Bad debts etc.
3. Prior to incorporation Salary and commission to vendor.
4. Post incorporation Expenses and discount on issue of shares and debentures, underwriting
Commission, Preliminary expenses, formation expenses, Audit fees, Interest
on debentures, Directors fees, Managing director’s remuneration,
Subscription to political party by the company, Goodwill written off.

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B.Com II Year Subject- Corporate Account

4. Final Account of companies

As per 129 of Companies Act, 2013, the board of directors of every company is required to present in
the annual general meeting the statement of profit and loss and the balance sheet on the last day of the
financial year. In the meeting, the director’s reports and auditor’s reports too will be presented.
The statement profit and loss and balance sheet shall related –
(a) in case of first annual general meeting of the company, to the period beginning with the
incorporation of the company and ending with a day which shall not precede the day of the meeting by
more than 9 months; and
(b) in case of subsequent annual general meeting of the company, to the period beginning with the
day immediately after the period for which of the accounts were last. Submitted and ending with a day
which shall not precede the day of the meeting by more than 6 months, or in cases where extension of
time has been granted for holding the meeting as per the provision of the Act, by more than 6 months
and the extension so granted. The period to which accounts aforesaid relate is referred to in this Act as
a financial year and it may be less than or more the calander year but it shall not exceed 15 months,
provided that it may extend to 18 months where special permission has been granted in that behalf by
the register.
Proforma of balance sheet
As per of Companies Act 2013, every company has to present a true and fair view of company’s state
of affairs relating to the last day of the financial year to which the company’s balance sheet is related.
The proforma for this should be as per part I of schedule III of the Act or as may be prescribed by the
Central Government. Similarly a true and fair view of the profit or loss for the period corresponding to
the period of the statement of profit and loss, should be presented in the form as prescribed in part II of
schedule III. It should be noted that the statement of profit and loss is the annexure of balance sheet
and always presented after the balance sheet. Balance sheet of a company shall be presented in the
following form-

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B.Com II Year Subject- Corporate Account

PART I – FORM OF BALANCE SHEET

Name of the Company….
Balance sheet (as at…) (Rupees in……)
Particulars Notes Figure as at the Figure as at the end
No. end of current of the reporting
reporting period period
I. EQUITY AND LIABILITIES
(1) Shareholder’s funds
(a) Share capital
(b) Reserves and surplus
(c) money received against share
Warrants

(2) Share application money pending

allotment
(1) Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (net)
(c) Other long term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions

TOTAL

II. ASSETS
(1) Non-current assets
(a) fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c) Trade receivable
(d) Cash and cash equivalents
(e) short-term loans and
advances
(f) Other current assets
TOTAL

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B.Com II Year Subject- Corporate Account

UNIT — II
5. EVALUATION OF GOODWILL
Meaning and definition of goodwill
Goodwill, also known as reputation or fame is a scale to measure the popularity of the business.
Customers like only one or a few out of many businessmen engaged in the same filed due to goodwill
only. The businessmen with good reputation gain favour among the customers and those with no fame
do not gain any favour among the customers.

LR Dicksee – “When a man pays for goodwill, he pays for something which places him in the position of
being able to earn more money than he would be able to do by his own unaided efforts.”

Characteristics or salient features of goodwill –

1) Intangible assets
2) Goodwill is a capital item
3) Goodwill is not a fictitious or unreal asset
4) Friend in good time only
5) Goodwill affects and is affected by the earning capacity
6) Fluctuating asset
7) First in last out
8) Undetectable from business
9) Sign of growth

Methods for valuation of goodwill –

Goodwill affects and is affected by profits of business directly or indirectly. If the profit earning capacity
of a business is high its goodwill is also high. So at the time we think of the valuation of goodwill, there
is profit in our conscious or sub-conscious mind. If we are going to buy a running business and the
vendor demands for goodwill, we think whether we will be able to earn that much amount of profit as
is demanded by the vendor as goodwill.
There are several methods for valuation of goodwill, but the basis of the valuation of goodwill in all the
methods is profit, because goodwill and profit are closely interrelated. These methods are as under –
1) Average profit method
2) Super profit method
3) Capitalization method
4) Annuity method

1) Average profit method – The basis of the valuation under this method is that how much the normal
annual profit the business has earned during some previous years?
To calculate the value of goodwill –
Goodwill = Future probable or maintainable profit x No. of years purchase

2) Super profit method – Generally all the accountants agree that the goodwill is the result of
additional profit. This additional profit is called super profit. Only those businesses have the goodwill
which earns super profits. If there is no super profit, there is no goodwill.
Capital employed =
Total of the list of assets – total of the list liabilities

Average capital employed =

Closing capital employed – Half of current year’s profit

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B.Com II Year Subject- Corporate Account

To Calculate super profit – This is calculate by the following formula –

Future probable or maintainable profit …………..
Less: Normal return i.e. (capital or average capital employed x Normal rate of return ) …………..
Super profit …………..

Goodwill = Super profit x number of years’ purchase.

3) Capitalization method – Under this method, goodwill is the sum equal to the capital required to
earn the super profit of the business at normal rate of return.
Under this ethod goodwill can be found out by any of the following two formulae –
1) By capitalization of super profit:
𝑆𝑢𝑝𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡 𝑥 100
Goodwill = 𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛

2) By capitalization of maintainable profit:

𝐹𝑢𝑡𝑢𝑟𝑒 𝑝𝑟𝑜𝑏𝑎𝑏𝑙𝑒 𝑜𝑟 𝑚𝑎𝑖𝑛𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 𝑥 100
= 𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛
𝑥 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑜𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

4) Annuity method – Valuation of goodwill, time factor has been totally ignored. The amount of
goodwill is to be paid today and the super profit, on the basis of which it is calculated, will be earned in
future and that too in annual installments. The goodwill under the super profit method, is the total of
the amount of the installments of super profits, whereas the present value of all the super profits to be
earned in future years should be the value of goodwill.
Goodwill = Super profit x value of annuity

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B.Com II Year Subject- Corporate Account

6. VALUATION OF SHARES
Meaning and definitions of shares –
Under section 2(46) of companies act, 1956 “Share means share in the share capital of a company and
includes stock except where a distinction between share and stock is expressed or implied.”
In other words we can say that share or stock is a unit of ownership of a company.
Valuation of shares –
Valuation of share means the computation of the value of a share on which it can be bought or sold,
transferred or assessed under tax laws.

Methods of Valuation of shares

Asset Income
Fair value Valuation of Valudation of
valuation valuation
method right shares bonus shares
method method

Expected rate
Dividend rate Earning
of return
base capacity base
base

1) Asset valuation method –

𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Value per share =
𝑁𝑜.𝑜𝑓 𝑠𝑕𝑎𝑟𝑒𝑠

Net assets – List of revalued figures of real assets (-) List of external liabilities
2) Income or yield valuation method –
The underlying concept of this method is how much income or dividend a company is paying or can pay
to its shareholders or what is the earning capacity of the company?
If this figure is higher the value of shares too will be higher and if this figure is lower the value of share
will also be lower. There are following three bases for the valuation of shares under this method.
1) On the basis of dividend rate
2) On the basis of expected rate of return
3) On the basis of earning capacity

1) On the basis of dividend rate -

𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Value per share = 𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 x paid-up value per share

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
Actual rate of dividend = 𝑃𝑎𝑖𝑑 𝑢𝑝 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑕𝑎𝑟𝑒𝑠
x 100

2) On the basis of expected rate of return –

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛
x 100
𝑇𝑜𝑡𝑎𝑙 𝑝𝑎𝑖𝑑 −𝑢𝑝 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

The value of shares is calculated as under –

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑟 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑑
value per share = 𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑟 𝑛𝑜𝑟𝑚𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑎𝑡𝑒 x paid-up value per share

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B.Com II Year Subject- Corporate Account

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠𝑕𝑎𝑟𝑒 𝑕𝑜𝑙𝑑𝑒𝑟𝑠

Expected rate of return = 𝑃𝑎𝑖𝑑 𝑢𝑝 𝑒𝑞𝑢𝑖𝑡 𝑦 𝑠𝑕𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
x 100

3) On the basis of earning capacity –

Under this method the following formulae is used –

𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑒𝑎𝑟𝑛𝑖𝑛𝑔

value per share = 𝑁𝑜𝑟𝑚𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑒𝑎𝑟𝑛𝑖𝑛𝑔
x paid-up value per share

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
Expected rate of return = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
x 100

3) Fair value method –

This is not a new method, but the average of the two values of a share as per net assets method and
income valuation method (earning capacity). This is calculated by the following formula –

𝐼𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 +𝑉𝑎𝑙𝑢𝑒 𝑎𝑠 𝑝𝑒𝑟 𝑒𝑎𝑟𝑛𝑖𝑛𝑔 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦

Fair value =
2

Right shares –
If an existing company makes further issue of shares, they must be proposed to the existing
shareholders u/s 81 of companies act. This is the right of existing shareholders, which is called ‘Right
shares’.
The value of right is calculated by the following formula –
Value of right =
(1) the market value of one existing share -
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑠𝑕𝑎𝑟𝑒𝑠 𝑕𝑒𝑙𝑑 +𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑤 𝑠𝑕𝑎𝑟𝑒𝑠
𝑁𝑜.𝑜𝑓 𝑜𝑙𝑑 𝑠𝑕𝑎𝑟𝑒𝑠 𝑕𝑒𝑙𝑑 +𝑁𝑒𝑤 𝑠𝑕𝑎𝑟𝑒𝑠

OR
𝑁𝑒𝑤 𝑆𝑕𝑎𝑟𝑒𝑠
(2) x (Market value of old share – value of new share)
𝑇𝑜𝑡𝑎𝑙 𝑆𝑕𝑎𝑟𝑒𝑠 (𝑂𝑙𝑑 +𝑁𝑒𝑤 )

Bonus Shares
𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
1) Value of a share before bonus issue =
𝑁𝑜.𝑜𝑓 𝑠𝑕𝑎𝑟𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑕𝑒 𝑏𝑜𝑛𝑢𝑠 𝑖𝑠𝑠𝑢𝑒

𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
2) Value of a share after bonus issue = 𝑁𝑜.𝑜𝑓 𝑜𝑙𝑑 𝑠𝑕𝑎𝑟𝑒𝑠 +𝑁𝑜.𝑜𝑓 𝑛𝑒𝑤 𝑠𝑕𝑎𝑟𝑒𝑠

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B.Com II Year Subject- Corporate Account

7. ACCOUNTS OF PUBLIC UTILITY COMPANIES

Public utility companies are incorporated under special statutes passed by parliament or state
legislative assemblies. They are issued licece by the government.
Double account system is a special accounting system adopted by public utility companies to prepare,
present and publish their annual accounts in a specialized way under which revenue and capital items
are categorized under fixed and current basis. Fixed items and current items are shown in different
accounts.

Main characteristics of Double account system –

1) Balance sheet in two parts 6) Receipts and expenditure of fixed nature
2) Profit & loss account in two parts 7) Balance of capital account
3) columns 8) General balance sheet
4) Expenditure side 9) Revenue account
5) Receipts side 10) Net revenue account

Objects of double account system

Double account system is adopted by public utility companies to achieve the following objectives:
1) To maintain the fixed assets out of revenue
2) The show the relation between asset and capital in a better way
3) Comparison with previous year

Merits, advantages or importance of double account system

1) Information of additions in current year
2) Standardized formats
3) Public information
4) Separate information for current assets and liabilities
5) Extent of capitalization
6) Operating result

Preparation of Final Accounts under Double account System

In this system while preparing the final accounts, different accounts are to be prepared and at the end
balance sheet is prepared.
i) Revenue account – It is as good as the ordinary profit and loss account of any trading concern,
showing on the debit side all items of expenditure and showing on the credit side all items of income.
ii) Net revenue account
iii) Capital account
iv) General balance sheet

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Net Revenue Account

(For the year ending………)
Particulars Amount Particulars Amount
To Interest on Bank loan By Balance b/d (From last year)
To Sinking Fund By Balance from Revenue A/c
To Reserve Fund By Interest receivable and accrued
To Interest on debenture By Non-operating income
To Debenture holder’s trustee’s remuneration
To Contingencies reserve
To Income Tax
To Dividend proposed & paid
To Interim Dividend

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General Balance Sheet

(As on………)
Liabilities Amount Assets Amount
Capital A/c Capital A/c
Sundry Creditors Stores in hand
Balance of Net Revenue A/c (Cr.) Sundry debtors
Reserve Fund Cash at Bank
Depreciation fund Cash in Hand
Special items Investments
(to be specified) Short working A/c
Balance of Net Revenue A/c Dr.

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Unit III

8. Holding Company (with one subsidiary company)

Holding Companies
Meaning of Holding and Subsidiary Company
Normally, holding company is also called parent company. Similarly subsidiary company is also known
as Offspring Company. When one company’s control is in the hands of the company and also the
majority of (more than 50%) paid up equity share capital is in the hands of the former company, then it
is called holding company and the other is called subsidiary company.

Definitions
When a company purchases more than 50% shares of another company, the purchasing company is
called holding company and the selling company is called subsidiary company. Two companies are
defined in following.
A. Holding Company – According to section 2(19) of companies act, 1956: Clause 4(4) of the said
section defines a holding company as :
A company shall be deemed to be the holding company of another, if but only if, that other is its
subsidiary.
Meaning of holding company cannot be understood well without understanding the meaning of
subsidiary company.
B. Subsidiary Company – According to sec. 4 of Companies Act 1956:
i. Company is that in which other company controls the compositions of its Board of
Directors.
ii. More than half of total voting rights are under the control of another company.
iii. Another company holds more than of the nominal value of ita equity share capital

Advantages of Holding Companies

1. Eliminate competition and advantage of monopoly
2. Consolidation of knowhow and economical benefits.
3. Separate entity of subsidiary companies.
4. Separate accounts and results
5. Control on many companies by less investment
6. Research, reduction in cost and improvement in the quality

Disadvantages of Holding Companies

Following are the disadvantages of holding companies –
1. Fraud and manipulation in accounts
2. Oppression of minority shareholders or outside shareholders
3. Exploitation of subsidiary companies by the holding company through fraudulent policies
4. Earning capacity and economical condition are not known
5. Exploitation of labour and customers
6. Centralization of monopoly and economic power

Procedure for preparing consolidated

Balance Sheet
(i) Calculation of goodwill or capital reserve:- When the price paid by holding company is
more than the holding company share in sum of subsidiary company’s share capital reserve
and surplus up to the date of purchase and P & L arising on revaluation of assets, the excess
is capital loss and it is called goodwill as cost of control. If the position is Reverse that is the

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price paid is lower, than the difference is capital profit and it will be transferred to capital
reserve A/c.
The goodwill or capital reserve is calculated as under-
Share of holding company in share capital subsidiary company -
+ Share in pre acquisition profits -
- Share in pre acquisition loss -
+ Share in pre acquisition reserve -
+ Share in revaluation profit on assets -
- Share in revaluation loss on assets -
-
- Cost of Share (Purchase consideration)
Ans. ( + ) Capital Reserve -
Ans. (-) Goodwill
-
(2) Calculation of the amount of consolidated profit and loss account- Consolidated profit
or loss means the amount which comes by adding the share of .holding company in the post
acquisition profit of subsidiary company, to the balance in the profit and loss account of holding
company. Consolidated profit or loss is calculated as under is-
Balance in the P & L A/c of holding company ………
+ Share of holding company in the post acquisition
Profits of subsidiary company +……….
-
.
Consolidate profit to be shown in balance sheet

(3) Consolidated Reserves-This is calculated as under-

Balance in the Reserve account of holding company .........
+ Share of holding company in the post acquisition
Reserves of subsidiary company +……..
Consolidate reserve to be shown in balance sheet --------

(4) Calculation of minority Interest-The remaining shareholders in the subsidiary company

are called minority shareholders and their share in the net assets of subsidiary company is
called minority interest. This is calculated as under-
Share in equity share capital of subsidiary company —
+ Share in total profit of subsidiary company —
- Share in total losses of subsidiary company —
+ Share in reserves of subsidiary company —
+ Share in revaluation profit on assets of subsidiary company —
- Share in revaluation loss on assets of subsidiary company —
- Share in fictitious assets written off —
Minority Interest —
—
(5) Inter company transaction-The transactions between holding company and subsidiary
company are called inter company transaction. In consolidated balance sheet these
transactions are eliminated. Inter company transactions are as under-
(i) Bills receivable and Bills payable-The amount of mutual bills drawn on each other by
holding and subsidiary company is deducted from the total amount of bills receivable and bills
payable in the consolidated balance sheet. But the discounted bills receivable will be mentioned
in consolidated balance sheet.

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(ii) Debtors and creditors-The amount of common debtors and creditors between
holding company and subsidiary company will be deducted from total debtors as well as from total
creditors in consolidated balance sheet.
(iii) Unpaid dividend-The dividend receivable from subsidiary company by the holding
company is mentioned in the assets side of holding company and in liability side of subsidiary
company. This is eliminated in consolidated balance sheet. Only the dividend payable to minorities
will be shown in the liability side of the consolidated balance sheet.
(iv) Proposed dividend-When a subsidiary company proposes dividend, it is debited to profit and
loss account and mentioned in the liabilities side of subsidiary company. But the holding company does
not show this in its balance sheet. At the time of making consolidated balance sheet this amount is
added to profit & loss account. The portion of proposed dividend related to minority shareholders is
either shown separately or added to the minority interest in consolidated balance sheet.
(v) Inter-company debentures-When holding and subsidiary company have bought the
debentures in each other, these are called mutual debentures. The aggregate amount of mutual
debentures is deducted from total debentures in the liability side as well as total investments in the
assets side of consolidated balance sheet.
(vi) Loans and advances-If there is mutual borrowings these are also eliminated in consolidated
balance sheet.
(vii) Unrealised profits and stock reserve-There are frequent purchase and sale transactions
between holding and subsidiary company. The portion of the mutual purchase which is unsold at the
end of year includes profits charged by the selling company. This is called unrealised profit. The
holding company's share is unrealised profit is called stock reserve. This amount of stock reserve is
deducted from the total stock of both the companies on the assets side and amount of consolidated
profit and loss account on the liabilities side in consolidated balance sheet.

(6) Goodwill already appearing in balance sheet-If goodwill appears in the balance sheets of both the
companies this is also aggregated in consolidated balance sheet. If capital reserve arises as a result of
acquisition of shares it is deducted from goodwill in consolidated balance sheet and if goodwill arises it
is added to the goodwill in consolidated balance sheet.

(7) Preference shares-If none of the preference shares in subsidiary company is purchased by holding
company, the total amount of preference shares is added to the minority interest. If the holding
company has purchased the preference shares also in subsidiary company, it is used only for the
calculation of goodwill or capital reserve and not used for the distribution of profit between the two
companies. For this purpose the ratio of equity shares only between holding company and minority
interest is used.

(8) Interim dividend-If a subsidiary company has paid any interim dividend it will be out of pre or post
acquisition profit. If it is out of pre-acquisition profits it will be deducted from pre-acquisition profits.
So the cost of acquisition of shares will be reduced. Now the goodwill or capital reserve will be
calculated. If interim dividend is paid out of post-acquisition profits it is deducted there from and the
remaining post acquisition profit will be divided in holding company and minority shareholders. The
holding company will add its portion in interim dividend to its profits in the balance sheet.

(9) Issue of Bonus Shares-If Bonus shares are issued after the acquisition of shares by holding
company in subsidiary company, it will increase the number of shares held by holding company and
minorities. But the ratio of holding between them will not be changed. It is important to note that
whether the Bonus shares are issued out of pre or post acquisition profits, the treatment in both the
cases will be as under-
(i) Issue of Bonus shares out of pre acquisition profits- In this case the amount of goodwill or
capital reserve on the acquisition will not be changes because the prior profit is converted into
capital.

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(ii) Issue of Bonus share out of post acquisition profits- In such a case the goodwill or capital
reserve will be affected because the revenue profit (Post acquisition profits) is converted in a
capital profit(i.e. share capital) If the issue of bonus shares is not accounted for in the books of
subsidiary company the calculation of capital reserve or goodwill should be made after the
issue of bonus share. The value of goods will reduced because of increase in the paid up value
of share capital.

(10) Revaluation of assets of subsidiary company- To calculate the amount of goodwill or capital
reserve arising due to the acquisition of shares by holding company in subsidiary company, it is
necessary to revalue the assets of the subsidiary company on the date of acquisition of shares. The
effect of revaluation will be as follows-
(i) The profit on revaluation is added and loss on revaluation is deducted for the calculation
of goodwill or capital reserve.
(ii) The assets are mentioned at revalued figures in balance sheet.
(iii) Additional depreciation must be charged on asset in case of profit on revaluation and
excess depreciation must be written back in case of loss on revolution.

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9. Liquidation of companies
The word liquidation has not been used anywhere in the companies act 1956. It is the word winding up
which has been used in this act. Liquidation of a company means total closure of the business of the
company. In other word we can say liquidation mean by which the dissolution of a company is brought
about and its assets, realized and applied in payment of its debts and when all the debts are paid off the
balance, if any remaining is paid back to the members in proportion to the contribution made by them
towards the capital of the company.
Winding-up or liquidation of company may take place in any one of the following ways :
1. Voluntary winding up
2. Winding up under supervision of the court.
3. Winding up by the court or compulsory winding up

1. Voluntary winding up : Voluntary winding up means winding up by the members or creditors of a

company without interference by the court. The object of a voluntary winding up is that the company,
i.e. the members as well as the creditors are left free to settle their affairs without going to the court.
They may however apply to the court for any directions, if and when necessary. Voluntary winding up
can take place under the following circumstances:
A. When the period if any fixed for the duration of the company by the articles has expired or the event,
if any has occurred. Then the company in general meeting may pass an ordinary resolution for its
voluntary winding up.
B. A company may at any time pass a special resolution that it be wound up voluntarily.
Types of voluntary winding up :
1. Members voluntary winding up : When the members of the company decide to wind it up even when
its financial position is so sound that it can pay all its debts, this winding up is called members
voluntary winding up.
2. Creditors voluntary winding up : if there is a voluntary winding up in which declaration of solvency
has not been made by the directors this winding up is called creditors voluntary winding up.

2. Liquidation under supervision of the court : According to section 522 of the companies act, at any
time after a company has passed a resolution for voluntary winding up the court may make an order
that the voluntary winding up shall continues subject to the supervision fo the court with such liberty
for creditors, contributories or others to apply to the court and generally on such terms and conditions
as the court thinks just. This type of liquidation is called liquidation under supervision of the court.

3. Compulsory liquidation: A company may be wound up by the court under the following
circumstances and this type of winding-up is called compulsory winding-up or winding-up by court:
1. If the company has by special resolution, resolved that the company may be wound up by the
court;
2. If the default is made in delivering the statutory report to the registrar or in holding the
statutory meeting;
3. If the company does not commence its business within a year from its incorporation or
suspends it for a whole year;
4. If the number of members is reduced, in the case of a public company, below seven, and in the
case of a private company below two;
5. If the company is unable to pay its debts;
6. If the court is of the opinion that it is just and equitable that the company should be wound up.

LISTS OF STATEMENT OF AFFAIRS

Following eight-lists are used in the statement of affairs:
List A: Those assets are recorded in this list which is not specifically pledged and on which there is no
charge or mortgage.

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List B: Those assets are recorded in this list which is specifically pledged either with fully secured
creditors or with partly secured creditors.
List C: Preferential creditors are recorded in this list. These creditors are described in Section 530 of
the Companies Act, 1956 and a detailed description of these creditors has been given earlier in this
chapter.
List D: Such debentures and creditors who have a floating charge in the assets of the company are
recorded in this list.
List E: Unsecured creditors are recorded in this list with their names, occupations and addresses.
List F: Preference shareholders with their names and amounts are recorded in this list.
List G: Equity shareholders with their names and amounts are recorded in this list.
List H: Description of deficiency or surplus is shown in this list.

Other information’s about Statement of Affairs

1. About Surplus: A Company, whose financial position is very sound, may also be dissolved. In
such a case there may be surplus in the statement of affairs. If the company's financial position
is weak, there will be deficit.
2. Calls in arrears. The amount receivable on calls in arrears is shown in List A. The amount which
is not recoverable on calls in arrears is shown as deduction from called up capital.
3. Uncalled up Capital: Uncalled up capital is shown as a note at the end of the statement of affairs.
4. Unclaimed dividend: Unclaimed dividend is shown as unsecured creditors, but this amount will
be paid only after payment of other unsecured creditors.
5. Contingent Liabilities: Contingent liabilities are shown as unsecured creditors. Bills discounted
are contingent liabilities.
6. Debentures: If no other information is given, then debentures are always treated as having a
floating charge on all the assets of the company.

Liquidator’s final statement of account: The liquidator is required to realize the assets of the
company and distribute the proceeds among the parties having claims against the company. In order to
record all daily cash payments the liquidators maintains a proper cash book. At the end of the last year
of winding up he prepares an account which is known as liquidator’s final statement of account.

Statement of affairs : Where the court has made a winding up order or appointed the official
liquidators as provisional liquidators, unless the court in its discretion otherwise orders, there shall be
made out and submitted to the official liquidators a statement as to the affairs of the company in the
prescribed form verified by an affidavit. This is called statement of affairs.

Contributories: Contributories means all those persons who are responsible to make payment to the
company at the time of its winding up. Unless the court dispenses with the settlement of a list of
contributories, the liquidator prepares the list of contributories. If the name of a shareholder falls in the
list of contributories he becomes liable to pay only such amount which has so far not been called and
paid by hum on the shares held by him.

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UNIT IV
ACCOUNTING FOR AMALGAMATION OF COMPANIES

(i) Amalgamation : Amalgamation means an Amalgamation pursuant to the provisions of the

Companies Act 1956, or any other statute which may be applicable to companies, in which two
or more companies amalgamation with each other and maintain their identity.
(ii) Transferor Company : Transferor company means the company which is amalgamated into
another company. It was known as vendor company prior to this standard.
(i) Transferee Company : Transferee company mean the company into which a transferee
company is amalgamated. It was know as purchase company prior to this standard.

TYPE OF AMALGAMATION
According to AS 14 there are two types of amalgamation :
(1) Amalgamation in the nature of merger.
(2) Amalgamation in the nature of purchase.

1. Amalgamation in the nature of merger : amalgamation in the nature of merger is an

amalgamation which satisfies all the following five conditions :
(i) All the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company become equity shareholders of the transferee company by virtue of the amalgamation,
other than the equity shares already held therein, immediately before the amalgamation, by the
transferee company or its subsidiaries or their nominees :
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agrees to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional share.
(iv) The business of the transferor company is intended to be carried on after the amalgamation, by
the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
2. Amalgamation in the nature of purchase : amalgamation in the nature of purchase is an
amalgamation which does not satisfy any one or more of the conditions which have been discussed in
amalgamation in the nature of merger.

Journal entries in the books of Transferee Company

as per pooling of interests method (Merger)
Items Entries Dr. Cr.
1. For purchase Business Purchase A/c Dr. P.C.*
consideration To Liquidator of transferor company P.C.*
Company
(Being record of purchase consideration)
2. For the transfer Sundry assets A/c Dr. Balance sheet
of assets and Fictitious assets A/c Dr. values
liabilities General reserve A/c Dr. (Balancing fig.)
To Sundry liabilities A/c Balance sheet
To Sundry reserves A/c values**
To Profit and loss a/c
To Business Purchase A/c   P.C.*

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To General reserve A/c   (Bal. figure)

(Being Sundry Assets, Liabilities and
reserves taken over from transferor
company and balancing figure as General
Reserve)
3. Payment of Liquidator of vendor Co. A/c Dr. P.C.*
Purchase Discount on issues of shares A/c Dr.
consideration To Equity share Capital A/c   Shares given by
To Pref. Share capital a/c   transferee co.
To Bank A/c
(Being payment of purchase consideration)
4. Conversion of Debentures of Vendor Co. A/c Dr. B/S value **
debentures To Debentures A/c B/S value **
(Being conversion of debentures)
5. Liquidation General Reserve A/c Dr. Liqui. Exps.
exps. (if paid by To Bank A/c
transferee (Being liquidation expenses of transferor Liqui. Exps.
company paid by transferee company)
6. Preliminary Preliminary expenses A/c Dr. Preli. Exp.
exps. Of transferee To Bank A/c Preli. Exp.
Company (Being preliminary expenses paid)

Journal entries in the books of transferee company in case of purchase method

Items Particulars Dr. Cr.
1. For purchase Business purchase A/c Dr. P.C.*
consideration To Liquidator of transferor Co. A/c P.C.*
(Being Business Purchases)
2. For transfer of Sundry Assets A/c Dr. Agreed Values** Agreed
Assets & liabilities Goodwill A/c Dr. Bal. figure Values**
P.C.
To Sundry external liabilities A/c (Bal. figure)
To Business Purchase a/c
To Capital Reserve A/c
(Being various assets and liabilities
taken over and balancing figure
debited to Goodwill A/c)
3. Payment of Liquidator of transferor Co. A/c Dr. P.C.**
purchase price To Equity Share Capital A/c Issued shares
To Preference Share Capital A/c Issued shares
To Debentures A/c Issued deben.
To Bank A/c Cash
(Being payment of purchase Payment
consideration)
4. Liquidation & Preliminary expenses A/c Dr. Prel. Exps. Of
preliminary exps. transferee co. Liq.
Goodwill A/c Dr. exps.of transferor co.
To Bank A/c Paid amount
(Being Payment of Preliminary
Expenses and liquidation expenses
paid)
5. Conversion of Debentures of Transferor Co. A/c Dr. Value of debenture
Debenture To Debentures A/c Value of

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(of Transferee Company) debentures

6. Statutory reserves Amalgamation Adjustment A/c Dr. Amount of Statu. Res.
of transferor company To Various Statutory Reserves A/c
(Being incorporation of statutory Amount of
reserves of Transferor Company) Statu. Res.

Journal entries in the books of Transferor Company

Either amalgamation in the nature of merger or in the nature of purchase, in both the cases the
following journal entries in the books of Transferor company:-
Realisation A/c Dr.
To Sundry Assets A/c (at Balance Sheet value)
(Being sundry assets transferred to Realisation A/c)
(2) Transfer of fictitious assets to equity shareholders A/c-
Equity shareholders A/c Dr.
To Discount on share and debentures a/c
To Preliminary Expenses A/c (formation expenses)
To Underwriting Commission A/c
To Expenses on issue of share and debentures
To Development expenses A/c
To Profit and Loss A/c (Dr. balance)
(Being fictitious assets accounts transferred to equity shareholders a/c)
(3). Transfer of liabilities to realisation a/c
Sundry liabilities A/c (at B/S value) Dr.
To Realisation A/c
(Being sundry liabilities accounts transferred to Realisation A/c)
Note:- All the external liabilities, whether or not taken over by transferee company, are transferred to
realisation account.)
(4) Transfer of equity share capital, reserves, and credit balance of profit and loss account to
equity shareholders a/c-
Equity share capital A/c Dr.
Sundry reserve and funds A/c Dr.
Securities premium A/c Dr.
To Equity shareholders A/c
(Being transfer to equity shareholders A/c)
(5) Purchase consideration- P.C.
Transferee Company Dr.
To Realisation A/c
(Being Purchase consideration due)
(6) On receipt of purchase consideration-
Shares in Transferee Company A/c Dr.
Debentures in Transferee Company Dr.
Bank A/c Dr.
To Transferee Company
(Being Purchase consideration received)
(7) In case of amalgamation in nature of purchase, the entry for the sale of the assets not taken
over by the transferee company will be as under-
Bank A/c Dr.
To Realisation A/c
(Being sale of assets)
(8) In case of amalgamation in nature of purchase, the entry for the payment of external liabilities
not taken over by the transferee company-
Realisation A/c Dr.

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To Bank A/c
(Being payment of liability)
(9) Transfer of preference share capital account to preference shareholders account-
Preference share Capital A/c Dr.
To Preference Shareholders A/c
(Being balance of Pref. Share capital transferred to Pref. Shareholders A/c)
(10) On payment to preference shareholder-
Preference shareholders A/c Dr.
Realisation (Premium) A/c Dr.
To Bank A/c
To Realisation (discount) A/c
(Being payment made to Pref. Shareholders)
(11) Transfer of realisation profit to equity shareholders account-
Realisation A/c Dr.
To Equity Shareholder A/c
(Being realisation profit transferred to equity shareholders A/c)
(12) Transfer of realisation loss to equity shareholder account-
Equity Shareholders A/c Dr.
To Realisation A/c
(Being realisation loss transferred to equity shareholders A/c)
(13) On payment of liquidation expenses by transferor company-
Realisation A/c Dr.
To Bank A/c
(Being liquidation expenses paid)
(14) On payment to equity shareholders-
Equity Shareholders A/c Dr.
To Equity Shares in Transferee Company A/c
To Debentures in Transferee Company A/c
To Bank A/c
(Being payment of equity shareholders)

Necessary Ledger accounts

Realisation A/c
Step Particulars Amount Step Particulars Amount
No. No.
1 To Sundry Assets A/c Book Values 2. By Sundry Liabilities A/c Book value
5. To Bank A/c 3. By Transferee Co. A/c
6. To Pref. Shareholder A/c 4. By Bank A/c
7. To Bank A/c 8. By Pref. Equity Shareholders A/c
8. To Equity Shareholders A/c 8. To Equity Shareholders A/c

Transferee Company
1. To Realisation A/c 2. By Equity Shares in transferee
P.C. received

(Purchase consideration company

due) By Pref. shares in transferee
company
By Debenture in transferee
Company
By Bank A/c

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Preference Shareholders A/c

2 To Realisation A/c (Discount) 1.By Equity Shares Capital A/c
3 To Bank or pref. Share in transferee co. A/c 2. By Realisation A/c (Premium)

Equity Shareholders A/c

2 To Fictitious Assets A/c 1 By Equity Share capital A/c
To Profit & Loss A/c (Loss) 2 By General Reserve A/c
3 To Realisation A/c (Loss) By Profit and Loss A/c (Profit)
4 To Equity shares in transferee company 3 By Realisation A/c (Profit)
To Bank A/c
To Debentures in transferee Co.

INTERNAL RECONSTRUCTION
When the prescribed scheme of financial arrangement keeps intact the entity of the existing company,
i.e., neither a new company is formed nor the existing company goes into liquidation, then it is called
internal reconstruction. Thus in internal reconstruction the objective of reconstruction is achieved
without going into the process of liquidation. It means internal reconstruction and reorganization are
synonymous in use. The following are included in internal reconstruction:
(1) Alternation in share capital (2) Reduction in share capital

1. Alternation in Share Capital

Section 94 to 98 of Companies Act deal with alternation of share capital. If may take the form of
fresh issue of new shares, conversion of fully paid shares with stock, cancellation of uninsured capital,
consolidation of existing shares, sub division of existing shares.
(a) Increase its Share Capital by making fresh issue.
(b) Convention of Shares into Stock and Vice versa
(c) Cancellation of uninsured Shares
(d) Consolidation of shares of smaller denomination into share of higher denomination.

2. Reduction in Share Capital

Reduction of Share Capital is possible only if the Articles permit and a special resolution is
passed to that effect. Reduction in share capital of a company may take one or many of the following
forms :
(a) Reducing or extinguishing the uncalled liability on any shares or;
(b) Writing off paid up share capital which is lost or unrepresentative by available assets; or
(c) Return of paid up capital in excess of company’s requirements;
(d) Any other form approved by the Court.

Reduction in share capital u/s 100 of the Companies Act, 1956 becomes necessary (must) when the
company wants to write off past losses or when the value of assets is just equal to share capital i.e.
capital is lost, the capital is more than what is required. If Articles of Association permit, the
company passes a special resolution for reduction in share capital, which must be approved by the
Court.

Entries in the Books

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B.Com II Year Subject- Corporate Account

1. When capital reduction is in the form of writing off paid up capital which is lost :
Share Capital A/c ….. …Dr.
To Capital Reduction A/c (By the amount of reduction)
2. Capital Reduction A/c is used to write off several tangible, intangible and fictitious assets :
Capital Reduction A/c …. ..Dr.
To Profit & Loss A/c (Debit balance)

To Discount on issue of Debenture A/c

To Preliminary Expenses A/c
To Goodwill A/c
To Patents A/c
To Other Assets A/c
3. On payment of any contingent liability :
Capital Reduction A/c …. ..Dr.
To Contingent liability (Mention the name of liability)
Normal entry for payment shall be made.

4. When there is increase in the value of any asset after revaluation :

Particular Assets A/c …. ..Dr.
To Capital Reduction A/c (Amount of increase)

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B.Com II Year Subject- Corporate Account

45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
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