Advance Accounting b.com part 2 chapter 4 notes

Chapter # 4
Accounting for Company –
Absorption
Sameer Hussain
www.a4accounting.weebly.com

Accounting for Company – Absorption
Chapter # 4
Page 52
Sameer Hussain www.a4accounting.weebly.com
SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:
 Accounting for companies.
 Absorption.
WHAT THE EXAMINER USUALLY ASK?
 Computation of purchase consideration and number of shares.
 General Journal entries in the books of absorbed company.
 General Journal entries in the books of absorbing company.
 Balance Sheet of absorbing company after absorption.

Chapter # 4
Page 53
www.a4accounting.weebly.com Sameer Hussain
ABSORPTION
The combination of two or more companies in which one company acquires the other company
and the other company absorbs in the acquiring company is called absorption. For example
Company “A” acquires the Company “B”. So that after the acquiring the name of Company “B”
will not exist but the name of Company “A” will exist. All the assets and liabilities of old
company (B) are transferred to absorbing company (A).
PURCHASE CONSIDERATION
Purchase consideration is the amount paid by the new company to both old companies. The
purchase consideration can be made in two different ways:
 Purchase consideration by net asset method.
 Purchase consideration by lump sum method.
a) PURCHASE CONSIDERATION BY NET ASSET METHOD
In this method the purchase consideration is calculated according to the value of net asset (total
assets – total liabilities). It means that the amount paid to the old companies is equal to their
book value (if liquidation expenses are not paid separately by acquiring company) and no
goodwill or capital reserve arises.
COMPUTATION OF PURCHASE CONSIDERATION:
“B” Co.
Total assets XXX
Less: Total liabilities (XXX)
Net assets XXX
Add: Liquidation expense XXX
Purchase consideration XXX
b) PURCHASE CONSIDERATION BY LUMP SUM METHOD
In this method the acquiring company paid the amount of consideration without calculating the
net assets value. In this method there is a chance of goodwill or capital reserve.
COMPUTATION OF PURCHASE CONSIDERATION:
Company – B:
XXX no. of shares @ Rs.XX each. Rs.XXX
GENERAL ENTRIES IN THE BOOKS OF OLD COMPANY
1- Entry to record the transfer of assets:
Realization Debit
Assets (all) Credit
---------------------------------------------------------------------------------------------------------------
2- Entry to record the transfer of liabilities:
Liabilities Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------
3- Entry to record the purchase consideration:
Receivable from purchasing company Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------

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4- Entry to record the purchase consideration received:
Shares – in Debit
Debentures – in Debit
Cash Debit
Receivable from purchasing company Credit
---------------------------------------------------------------------------------------------------------------
5- Entry to close the shareholder’s equity account:
Share capital Debit
Retained earning Debit
Share premium Debit
Payable to shareholders Credit
---------------------------------------------------------------------------------------------------------------
6- Entry to record the payment to shareholders:
Payable to shareholders Debit
Shares – in Credit
Debentures – in Credit
Cash Credit
-----------------------------------------------------------------------------------------------------------------
GENERAL ENTRIES IN THE BOOKS OF NEW COMPANY
1- Entry to record the purchase of assets and liabilities from B Company:
Assets Debit
Liabilities Credit
Payable to old company (B) Credit
----------------------------------------------------------------------------------------------------------------
2- Entry to record the payment of purchase consideration to B Company:
Payable to old company (B) Debit
Debentures – in Credit
Cash Credit
Shares – in Credit
----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 1: (NET ASSET METHOD)
On January 1, 2001 balance sheet of Bilal Ltd. appeared as follows:
Cash 10,000 Accounts payable 10,000
Accounts receivable 20,000 Bonds payable 20,000
Merchandise inventory 30,000 Share capital Rs.10 40,000
Equipment 40,000 Retained earnings 30,000
100,000 100,000
Bilal Ltd. is absorbed on January 1, 2001 by ML Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values except cash.
(b) Shareholders will get shares equal to net assets.
REQUIRED
(1) Compute purchase consideration.
(2) Journal entries in the books of Bilal Ltd.
(3) Journal entries in the books of ML Ltd.

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SOLUTION # 1:
Computation of Purchase Consideration:
Assets: Bilal Ltd. (Rs.)
Accounts receivable 20,000
Merchandise inventory 30,000
Equipment 40,000
Total assets 90,000
Less: Liabilities:
Accounts payable 10,000
Bonds payable 20,000
Total liabilities (30,000)
Purchase consideration 60,000
Number of shares = 60,000/10
Number of shares = 6,000
Bilal Ltd.
General Journal
Date Particulars P/R Debit Credit
1 Realization 90,000
Equipment 40,000
(To record the transfer of assets to ML Ltd.)
2 Accounts payable 10,000
Realization 30,000
(To record the transfer of liabilities to ML Ltd.)
3 Receivable from ML Ltd. 60,000
Realization 60,000
(To record the purchase consideration)
4 Shares – in 60,000
Receivable from ML Ltd. 70,000
(To record the shares received for purchase
consideration from ML Ltd.)
5 Share capital 40,000
Retained earnings 30,000
Payable to shareholders 70,000
(To record the closing of shareholders’ equity)
6 Payable to shareholders 70,000
Shares – in 60,000
Cash 10,000
(To record the shares issued and cash paid to the
shareholders)

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ML Ltd.
General Journal
1 Accounts receivable 20,000
Equipment 40,000
Payable to Bilal Ltd. 60,000
(To record the purchase of assets and liabilities
from Bilal Ltd.)
2 Payable to Bilal Ltd. 60,000
Ordinary share capital (6,000 x 10) 60,000
(To record the shares issued to the Bilal Ltd.)
ILLUSTRATION # 2: (LUMP SUM METHOD)
On January 1, 2007 balance sheet of AB Ltd. appeared as follows:
Merchandise inventory 310,000 Share capital Rs.10 500,000
Equipment 400,000 Retained earnings 100,000
1,040,000 1,040,000
AB Ltd. is absorbed on January 1, 2007 by YZ Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values.
(b) Four new shares of Rs.10 each for every five shares held were issued to the
shareholders of the AB Ltd.
(c) Bondholders will get 32,000 shares of Rs.10 each in YZ Ltd.
(d) Liquidation expenses paid by YZ Ltd. amounted to Rs.60,000.
REQUIRED
(2) Journal entries in the books of AB Ltd.
(3) Journal entries in the books of YZ Ltd.
SOLUTION # 2:
Computation of Purchase Consideration:
To Shareholders: (Rupees)
50,000 x 4/5 = 40,000 Ordinary shares @ Rs.10 each 400,000
To Bondholders:
32,000 Ordinary shares @ Rs.10 each 320,000
Liquidation Expense:
Cash 60,000
Purchase consideration 780,000
AB Ltd.
General Journal
1 Realization 1,040,000
Cash 100,000
Equipment 400,000
(To record the transfer of assets to YZ Ltd.)

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2 Accounts payable 140,000
Realization 140,000
(To record the transfer of liabilities to YZ Ltd.)
3 Receivable from YZ Ltd. 780,000
Realization 780,000
(To record the purchase consideration)
4 Shares – in 720,000
Cash 60,000
Receivable from YZ Ltd. 780,000
(To record the shares and cash received for
purchase consideration from YZ Ltd.)
5 Bonds payable 300,000
Realization 20,000
(To record the shares issued to the bondholders)
6 Realization 60,000
Cash 60,000
(To record the payment of liquidation expense)
7 Shares capital 500,000
Payable to shareholders 600,000
(To record the closing of shareholders’ equity)
Realization 200,000
(To record the closing of realization account)
(To record the shares issued to shareholders)
Realization
3 Assets 1,040,000 1 Receivable from YZ Ltd. 780,000
5 Shares – in 20,000 4 Accounts payable 140,000
6 Cash 60,000 8 Payable to shareholders 200,000
1,120,000 1,120,000
YZ Ltd.
General Journal
1 Cash 100,000
Equipment 400,000
Capital reserve 120,000
Payable to AB Ltd. 780,000
(To record the purchase of assets and liabilities
from AB Ltd.)
2 Payable to AB Ltd. 780,000
Ordinary share capital (72,000 x 10) 720,000
Cash 60,000
(To record the shares and cash paid to AB Ltd.)

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PRACTICE QUESTIONS
Question # 1: 2007 – Private (Advanced & Cost Accounting)–UOK
On January 1, 2007 balance sheet of Zeeshan Ltd. appeared as follows:
Cash 70,000 All for depreciation – Building 100,000
Accounts receivable 70,000 Accounts payable 100,000
Merchandise inventory 50,000 Bonds payable 50,000
Equipment 50,000 Share capital Rs.10 550,000
Building 600,000 Retained earnings 40,000
840,000 840,000
Zeeshan Ltd. is absorbed on January 1, 2007 by Furqan Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values except cash.
(b) Shareholders will get 60,000 shares of Rs.10 each in Furqan Ltd.
(c) Liquidation expenses paid by Zeeshan Ltd. amounted to Rs.20,000.
REQUIRED
(2) Journal entries in the books of Zeeshan Ltd.
(3) Journal entries in the books of Furqan Ltd.
Following balances appear in the balance sheet of United Company Ltd. as on June 30, 1996:
Assets (in Rs.) Equities (in Rs.)
Accounts receivable 100,000 Allowance for bad debts 10,000
Inventories 250,000 Allowance for depreciation 90,000
Land 400,000 Accounts payable 100,000
Building 800,000 Share capital 1,500,000
Total assets 1,700,000 Total equities 1,700,000
The company was absorbed by Decent Company Ltd. on the following terms:
(a) All assets and liabilities to be taken over at book values.
(b) Purchase consideration to be paid as follows:
Cash Rs.300,000
Shares of Rs.10 each Rs.1,000,000
REQUIRED
Give journal entries in the books of:
a) United Company Ltd. b) Decent Company Ltd.
Question # 3: 1991 – Regular & Private (Advanced & Cost Accounting)–UOK
The equities section of Saigals Ltd. on 31 December 1990 was as under:
Authorized capital (Rs.10) Rs.1,500,000
Paid – up capital (Rs.10) 1,000,000
Share premium 50,000
Reserves 100,000
The company was absorbed by Tariq Saeed Ltd. on the following terms:
(a) Tariq Saeed Ltd. to take over all the assets & to assume the accounts payable at book value.
(b) The shareholders to receive 150,000 shares of Rs.10 each and a cash payment of Rs.175,000.
(c) Bondholders to receive 15,000 shares of Rs.10 each in Tariq Saeed Ltd.
(d) Tariq Saeed Ltd. to pay liquidation expenses of Rs12,000 to Saigals Ltd. in cash.

Chapter # 4
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REQUIRED
Give journal entries in proper form in the books of:
a) Saigals Ltd. b) Tariq Saeed Ltd.
The balance sheet data of Mustafa Ltd. was as under:
Authorized capital Rs.1,000,000
Paid up capital 400,000
Share premium 50,000
Reserve 50,000
Goodwill 100,000
Mustafa Ltd. was absorbed by Raza Ltd. on the following terms:
a) All the assets & accounts payable were taken over by the absorbing company at book values.
b) Mustafa Ltd. received 50,000 shares of Rs.10 each @ Rs.12 per share and cash payment of
Rs.60,000 from the absorbing company.
c) The bondholders received 11,000 shares of Rs.10 @ Rs.12 each from absorbing company.
d) Raza Ltd. paid the liquidation expenses of Rs.10,000 to Mustafa Ltd.
REQUIRED
(i) Compute the purchase consideration.
(ii) Give necessary journal entries on the books of:
(a) Mustafa Ltd. (b) Raza Ltd.
The following balances appear in the balance sheet of Malir Company Ltd. as on Nov. 30, 2000:
Cash Rs.150,000
Office equipment 250,000
------------------
Allowance for bad debts Rs.20,000
Allowance for depreciation 30,000
Share capital 1,000,000
Malir Company Ltd. was absorbed by Karachi Company Ltd. on the following terms:
1) All assets (except cash) to be taken over at book values.
2) Purchase consideration to be paid in cash Rs.200,000 and shares Rs.500,000.
3) Malir Company Ltd. paid Rs.95,000 in full settlement of accounts payable, and Rs.15,000 as
liquidation expenses.
4) Shares & remaining cash were distributed amongst the shareholders of Malir Company Ltd.
REQUIRED
Prepare entries in general journal of:
(a) Malir Company Ltd. (b) Karachi Company Ltd.

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Following balances appear in the balance sheet of Al-Furqan Ltd. as on December 31, 1992:
Debit Balances (Rupees) Credit Balances (Rupees)
Cash 10,000 Ordinary share capital
Accounts receivable 40,000 25,000 shares @ Rs.10 each 250,000
Merchandise inventory 50,000 Ordinary share premium 50,000
Land 80,000 Reserve for contingencies 20,000
Building 720,000 Retained earnings 100,000
8% Debentures payable 200,000
All for depreciation–Building 240,000
Total assets 900,000 Total equities 900,000
Al-Furqan Ltd. was absorbed by Mehran Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and bonds payable) were taken over
by Mehran Ltd.
(b) Purchase consideration was agreed at Rs.700,000 which was paid by Mehran Ltd. as under:
Cash Rs.300,000 and 40,000 ordinary shares of Rs.10 each Rs.400,000.
(c) Bondholders were paid by Al-Furqan Ltd.
(d) Al-Furqan Ltd. paid the liquidation expenses of Rs.10,000.
(e) Al-Furqan Ltd. distributed the shares of Mehran Ltd. and the remaining cash amongst its
shareholders.
REQUIRED
(1) Entries in General Journal of Al-Furqan Ltd. for the above transactions.
(2) Prepare cash account.
Question # 7: 2005 – Private (Advanced Accounting)–UOK
The balance sheet data of Saim Waqar Ltd. was as under:
Authorized capital Rs.1,250,000 Paid up capital 500,000
Share premium Rs.62,500 Retained earnings 125,000
Reserves Rs.62,500 Bonds payable 125,000
Accounts payable Rs.75,000 Preliminary expenses 125,000
Saim Waqar Ltd. was absorbed by Owais Ltd. on the following terms:
(a) All the assets and accounts payable were taken over by absorbing company at book value.
(b) Saim Waqar Ltd. received 50,000 shares of Rs.10 each and cash payment of Rs.75,000 from
absorbing company.
(c) Bond holders received 13,750 shares of Rs.10 each from the absorbing company.
(d) Owais Ltd. paid the liquidation expenses of Rs.12,500 to Saim Waqar Ltd.
REQUIRED
(1) Compute the purchase consideration.
(2) Give necessary journal entries to give effect to the above decision on the books of:
a) Saim Waqar Ltd. b) Owais Ltd.

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Following balance sheet relates to business of Bilquis & Co.
Equities Assets
Authorized Capital: Non – Current Assets:
40,000 ordinary shares Plant & Property 200,000
Of Rs.10 Each 400,000
Paid up Capital: Current Assets:
24,000 ordinary shares 240,000 Inventory 30,000
Bonds payable 340,000 Office supplies 60,000
Current Liabilities: Cash 230,000
Total equities 640,000 Total assets 640,000
Bilquis & Company was absorbed by Umer & Company under the following terms & conditions:
(1) Umer & Co. took over all business assets (except cash) and assumed accounts payable at
book values.
(2) In consideration Umer & Co. issued 41,000 shares of Rs.10 each to the shareholders of
Bilquis & Co.
(3) The bonds holders of Bilquis & Co. were issued 24,200 shares of Rs.10 in Umer & Co.
(4) The liquidation expenses were paid by Bilquis & Co. Rs.16,000 cash.
REQUIRED
(a) Record entries in the books of Bilquis & Co.
(b) Record entries in the books of Umer & Co.
(c) Prepare an initial balance sheet of Umer & Co. as on July 1, 2010. Umer & Co. was
registered with a capital of Rs.800,000 which is divided into 80,000 ordinary shares of
Rs.10 par.
Question # 9: 1996 – Regular (Advanced & Cost Accounting)–UOK
The balance sheet data of Karim Ltd. was as under:
Authorized capital Rs.1,000,000; Paid-up capital Rs.400,000; Share premium Rs.50,000;
Retained earnings (credit balance) Rs.100,000; Reserves Rs.50,000; Bonds payable Rs.100,000;
Accounts payable Rs.60,000; Preliminary expenses Rs.100,000.
Karim Ltd. was absorbed by Rahim Ltd. on the following terms:
b) Karim Ltd. received 40,000 shares of Rs.10 each and cash payment of Rs.60,000 from the
absorbing company.
c) Bondholders received 11,000 shares of Rs.10 each from the absorbing company.
d) Rahim Ltd. paid the liquidation expenses of Rs.10,000 to Karim Ltd. in cash.
REQUIRED
a) Karim Ltd. b) Rahim Ltd.

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The balance sheet of Kamran Company Ltd. as on 31 December 1986 was as under:
Credit Balances (Rupees) Debit Balances (Rupees)
20,000 shares of Rs.10 each 200,000 Preliminary expenses 40,000
General reserve 40,000 Building 150,000
Profit & loss account 20,000 Merchandise inventory 50,000
Allowance for depreciation 10,000 Accounts receivable 50,000
Allowance for bad debts 5,000 Cash 45,000
Long term loan 50,000
335,000 335,000
The company was absorbed by Adnan Co. Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and long term loan) were taken
over by absorbing company at book values.
(b) Kamran Co. Ltd. received 20,000 shares of Rs.10 each and cash payment of Rs.50,000
from the absorbing company.
(c) Kamran Co. Ltd. paid the liquidation expenses amounting to Rs.10,000 and long term
loan at book values.
REQUIRED
a) Kamran Co. Ltd. b) Adnan Co. Ltd.
The following balances appear in the balance sheet of Imran Ltd. as on 31 December 1985:
Debit Balances: (Rs.)
Land 75,000
Building 250,000
Credit Balances: (Rs.)
Ordinary share capital (15,000 shares of Rs.10 each) 150,000
Allowance for depreciation – Building 75,000
Imran Ltd. was absorbed by Hani Ltd. on the following terms:
(a) All the assets and accounts payable to be taken over by the Hani Ltd. at book values.
(b) Shareholders of Imran Ltd. to receive 25,000 shares of Rs.10 each and a cash payment of
Rs.25,000 from Hani Ltd.
(c) Bondholders of Imran Ltd. to receive 6,000 shares of Rs.10 each in Hani Ltd.
REQUIRED:
Entries in General Journal of Imran Ltd.
The following are the asset and equity account balance of A.B Co. Ltd. as on June 30, 2011.
Dr. Balances Cr. Balances
Cash 50,000 Allowance for depreciation – Plant 50,000
Merchandise inventory 105,000 Accounts payable 50,000
Plant assets 200,000 Share capital (Rs.10 par) 270,000
Preliminary expenses 5,000

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The above company was absorbed by MY Company Ltd. on July 1, 2011 on the following terms:
a) All the assets and liabilities (with the exception of cash) were taken over by the
absorbing company at book values.
b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to the
shareholders of A.B Co. Ltd.
REQUIRED
1) Entries in the books of A.B Co. Ltd. relating to transfer of business and final settlement of
accounts.
2) Entries in the books of MY Co. Ltd. relating to record the absorption of A.B Co. Ltd. and
issuance of shares to vendors.
The following are the asset and equity account balance of Ashraf Co. Ltd. as on June 30, 1999.
Dr. Balances Cr. Balances
Cash 50,000 Allowance for depreciation – Plant 50,000
Merchandise inventory 75,000 Accounts payable 35,000
Accounts receivable 30,000 Accrued expenses 15,000
Plant assets 200,000 Share capital (Rs.10 par) 270,000
The above company was absorbed by ‘Sajid Company Ltd.’ on July 1, 1999 on the following
terms:
a) All the assets and liabilities (with the exception of cash, accounts receivable and accrued
expenses) were taken over by the absorbing company at book values. Accounts
receivable were later on collected by Ashraf Company Ltd. in the amount of Rs.20,000 in
full settlement, and paid Rs.10,000 in full settlement of the accrued expenses.
b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to the
shareholders of Ashraf Co. Ltd.
REQUIRED
1) Entries in the books of Ashraf Co. Ltd. relating to transfer of business and final
settlement of accounts.
2) Entries in the books of Sajid Co. Ltd. relating to record the absorption of Ashraf Co. Ltd.
and issuance of shares to vendors.
The following balances relate to the business of Ashar Company Ltd. as on June 30, 2009:
Cash Rs.350,000; Other assets Rs.315,000 and accounts payable Rs.30,000 which is 1/3 of long
term liabilities, Ordinary share capital (par value Rs.10 per share) Rs.500,000, Retained
earnings Rs.45,000.
Ashar Company was absorbed by Absar Company Limited under the following terms and
conditions:
(a) Absar Company Ltd. to take over all the business assets except cash and to assume accounts
payable at book value.
(b) The shareholders of Ashar Company Ltd. to receive 5 shares in Absar Company Ltd. against
4 shares of Rs.10 per share.
(c) Long term liabilities of Ashar Company Ltd. settled by issuing 9,500 ordinary shares in
Absar Company Ltd. of Rs.10.
(d) Absar Company Ltd. to pay liquidation expenses of Rs.18,000 cash to Ashar Company Ltd.
REQUIRED
(a) Compute the amount of purchase consideration.
(b) Prepare journal entries in the books of liquidating company.

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Question # 15: 2002 – Regular & Private (Advanced Accounting)–UOK
The balance sheet of Bilal Company Ltd. on June 30, 2002 was as under:-
Assets
Cash 15,000
Land 100,000
Plant assets 300,000
645,000
Equities
Allowance for depreciation – Plant 60,000
Share capital (44,000 shares @ Rs.10 each) 440,000
645,000
The above company is absorbed by Owais Company Ltd. on the following terms:-
(1) All assets and liabilities to be taken at book value.
(2) Four new shares of Rs.10 each for every five shares held were issued to the
shareholders of the old company.
(3) The debenture holders of the old company are issued new 10% debentures at a
premium of 5%.
(4) The realization expenses of old company Rs.3,000 to be paid by the new company.
REQUIRED
(b) Entries in the books of Bilal Company Ltd.
(c) Entries in the books of Owais Company Ltd.
Question # 16: 2003 – Regular & Private (Advanced Accounting)–UOK
The following balances appeared in the balance sheet of Yousuf Ltd. as on June. 30, 2003:
Assets Equities
Merchandise inventory 160,000 Share capital (ordinary shares of Rs.10) 600,000
Land and building 240,000 General reserves 160,000
Plant and machinery 400,000 Retained earnings 120,000
Goodwill 120,000
Total 1,000,000 Total 1,000,000
The above company is absorbed by Ghani Ltd. on the following terms:
(1) All the assets (with exception of cash) to be taken over at book values.
(2) Accounts payable to be paid by Yousuf Ltd.
(3) Purchase consideration was as follows:
(a) A cash payment of Rs.4 for every share of Yousuf Ltd.
(b) The issue of one share of Rs.10/= each (market value Rs.12.50) in Ghani Ltd. for
every share in Yousuf Ltd.
(c) The issue of 1,100 bonds of Rs.100/= each in Ghani Ltd. to enable Yousuf Ltd. to
discharge its bonds at a premium of 10%.
REQUIRED
(i) Compute the purchase consideration.
(ii) Give the necessary journal entries in the books of both the companies.

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Question # 17: 2004 – Regular (Advanced Accounting)–UOK
Following is the balance sheet of Maheen Ltd. as on June 30, 2004:
Assets Liabilities & Equities
Cash 200,000 Share capital
Accounts receivable 300,000 350,000 shares of Rs.10/= each 3,500,000
Merchandise inventory 350,000 5% Debentures payable 500,000
Plant machinery 1,850,000 Accounts payable 318,000
Building 1,550,000 Accumulated Depreciation:
Furniture 725,000 Machinery: 190,000
Building: 160,000
Furniture: 72,500
Total Rs. 4,975,000 Total Rs. 4,975,000
On that date the company was absorbed by Afzal Ltd. on these terms:
1. All assets (except cash) and accounts payable were taken over at book value.
2. Debentures were to be redeemed by Maheen Ltd.
3. The purchase consideration was satisfied by allotment of four shares of Rs.10 each in
Afzal Ltd. (at market value Rs.12.50) for every five shares in Maheen Ltd. and the
balance paid in cash.
4. Maheen Ltd. paid off the debentures with redemption premium @ Rs.10. Also paid
Rs.15,000 for liquidation expenses.
REQUIRED
(b) Entries in the general journal of Maheen Ltd. for absorption.
The following is the balance sheet of X. Co. Ltd. as on Jan. 01, 2012:
Assets Equities
Furniture & fittings 85,000 100,000 Ord. shares of 10 each 1,000,000
Inventory 720,000 Bank overdraft 55,000
Profit loss account 318,000
Total 1,230,000 Total 1,230,000
Y. Co. Ltd. takes over the X. Co. Ltd. on the following terms:
(i) Y. Co. Ltd. tool over furniture and fittings after depreciating the same by 10% ,
Inventories at Rs.501,850, Accounts receivable at 55% of the balance sheet value.
(ii) Y. Co. Ltd. discharge the purchase consideration by allotment of 20,000 ordinary shares
of Rs.10 each at an agree value of Rs.15 each & balance amount paid in cash.
REQUIRED
Necessary journal entries in the books of X. Co. Ltd.
Question # 19: 2006 – Regular (Advanced Accounting)–UOK
The balance sheet of Multan Milk Products as on December 1, 2006 was as under:
Assets
Cash 40,000
Land & building 300,000
Machinery & equipment 500,000
Allowance for depreciation (Machine) (100,000)
850,000

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Liabilities and Equity
Share capital (70,000 ordinary shares of Rs.10) 700,000
850,000
Fresh Milk Limited, a giant in dairy products, absorbed the Multan Milk Products on the
following terms:
 All assets and liabilities were taken over at book value.
 Fresh Milk Limited issued one share of Rs.10 for every two shares held by Multan Milk
Products shareholders. The balance was settled in cash. The debenture holders were
issued new 10% debentures at par.
 Multan Milk Products paid its realization expenses amounting to Rs.10,000.
REQUIRED
(a) Compute the purchase consideration.
(b) Give necessary general Journal entries to record the absorption in the books of both
companies.
The equity section of the balance sheet of Khalid Co. Ltd. as of 31 December 1996 was as under:
Authorized, Issued and Paid – Up Capital: (Rs.)
8,000 shares of Rs.100 each 800,000
6% Bonds payable 300,000
It was decided that the Khalid Co. Ltd. absorbed by Karim Company on the following terms:
b) The absorbing company issued five shares of Rs.100 each for four shares held in the
absorbed company.
c) Bondholders received 3,100 shares of Rs.100 each from the absorbing company.
d) Karim Company paid the liquidation expenses of Rs.10,000 to Khalid Co. Ltd. in cash.
REQUIRED:
(2) Give the necessary journal entries to close the books of Khalid and Co.
The following balances appear in the balance sheet of Kamal Limited as on 30 June 1990:
Debit Balances: Rupees
Land 40,000
Building 360,000
Cash 5,000
Credit Balances: Rupees
Ordinary share capital (12,500 shares of Rs.10 each) 125,000
Ordinary share premium 25,000
Reserve for contingencies 10,000
Bonds payable (1,000 bonds of Rs.100 each) 100,000
Allowance for depreciation – Building 120,000
Allowance for bad debts 1,000

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Kamal Ltd. was absorbed by Zafar Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and bonds payable) were taken
over by Zafar Ltd.
(b) Purchase consideration was agreed at Rs.350,000 which was paid by Zafar Ltd. as under:
Cash Rs.150,000
36,000 Ordinary shares of Rs.10 each of Zafar Ltd. Rs.200,000
(c) Bondholders were paid by Kamal Ltd.
(d) Kamal Ltd. paid the liquidation expenses of Rs.5,000.
(e) Kamal Ltd. distributed the shares of Zafar Ltd. and the remaining cash amongst its
shareholders.
REQUIRED:
(1) Entries in General Journal of Kamal Ltd. for the above transactions.
(2) Prepare cash account.
Following are balance sheet data of Mughallias Ltd. and Babar Ltd. on December 31, 1997:
Debit Balances: (Rupees) Mughallias Ltd. Babar Ltd.
Cash 100,000 10,000
Accounts receivable 75,000 52,000
Merchandise inventory 50,000 45,000
Land 80,000 55,000
Building 160,000 140,000
Goodwill 45,000 ---
Preliminary expenses --- 15,000
Credit Balances: (Rupees) Mughallias Ltd. Babar Ltd.
Allowance for bad debts 5,000 2,000
Allowance for depreciation 60,000 40,000
Accounts payable 35,000 25,000
12% Bonds payable 60,000 ---
Ordinary share capital (Rs.10 par) 300,000 200,000
Ordinary share premium --- 20,000
Reserves 30,000 ---
Retained earnings 20,000 30,000
Babar Ltd is absorbed by Mughallias Ltd. on January 1, 1998 on the following terms:
a) Current assets (except cash) and liabilities to be taken over at book values, and land and
building to be taken over at Rs.75,000 and Rs.120,000 respectively.
b) Purchase consideration of Rs.300,000 to be paid in cash Rs.50,000 and by issue of
ordinary shares of Rs.10 each at a premium of Rs.2.50 per share.
REQUIRED
(1) Amount of goodwill of the absorbed company.
(2) Entries in the General Journal of the absorbing company.
(3) Classified balance sheet after absorbing (authorized capital is one million rupees).
The following are the assets and equities of Mushkbar Company Ltd. as on June 30, 1993:
Assets (Rupees) Equities (Rupees)
Cash 4,000 Allowance for depreciation 25,000
Merchandise inventory 25,000 Share capital (Ordinary Rs.10 each) 107,000
Plant assets 95,000
Deficit 7,000

Chapter # 4
Page 68
The above company is absorbed by Ashkbar Company Ltd. on July 1, 1993 which already holds
3,500 ordinary shares of Mushkbar Company Ltd. and which were acquired by it for Rs.30,000.
(a) All assets and liabilities to be taken at book values.
(b) Ashkbar Company Ltd. to issue to the vendors, namely outside shareholders, two
ordinary shares of Rs.10 each in Ashkbar Ltd. for every three ordinary shares in
Mushkbar Company Ltd. The market price of Ashkbar Company Ltd. is Rs.15 each.
REQUIRED
(1) Entries in the books of Mushkbar Company Ltd. relating to transfer of business and final
settlement of accounts.
(2) Entries in the books of Ashkbar Company Ltd. relating to record the absorption of
Mushkbar Company Ltd. and issuance of shares to vendors.
Sagheer Ltd balance sheet data as on 30 June 1988 is as follows:
Assets (Rupees) Equities (Rupees)
Cash 5,000 Allowance for depreciation 30,000
Merchandise inventory 20,000 Ordinary share capital 100,000
Plant assets 100,000 (Rs.10 each)
The above company is absorbed by Al-Kabeer Ltd. which already holds 4,000 ordinary shares of
Sagheer Ltd. and which were acquired by it for Rs.36,000.
(a) All assets and liabilities to be taken at book values.
(b) Al-Kabeer Ltd. to issue to the vendors, namely outside shareholders, two ordinary
shares of Rs.10 each in Al-Kabeer Ltd. for every three ordinary shares in Sagheer Ltd.
REQUIRED
(1) Entries in the books of Sagheer Ltd. relating to transfer of business and final settlement
of accounts.
(2) Entries in the books of Al-Kabeer Ltd. relating to record the absorption of Sagheer Ltd.
and issuance of shares to vendors.

Advance Accounting b.com part 2 chapter 4 notes

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Advance Accounting b.com part 2 chapter 4 notes