CA Inter P1 · Chapter 11
Amalgamation of Companies MCQs with Answers
10 multiple-choice questions on Amalgamation of Companies for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Nirmal Ltd takes over the business of Ojas Ltd. Assets taken over at agreed values are PPE ₹40,00,000, inventory ₹12,00,000, trade receivables ₹8,00,000 and cash ₹2,00,000. Liabilities taken over are trade payables ₹7,00,000 and debentures ₹15,00,000. Under the net assets method, the purchase consideration is:
- A) ₹38,00,000
- B) ₹40,00,000
- C) ₹55,00,000
- D) ₹62,00,000
Show answer & explanation
Answer: B) ₹40,00,000
Under the net assets method, purchase consideration = agreed value of assets taken over - liabilities taken over. Assets = 40,00,000 + 12,00,000 + 8,00,000 + 2,00,000 = 62,00,000. Liabilities = 7,00,000 + 15,00,000 = 22,00,000. PC = ₹40,00,000.
Question 2
Case: Pankaj Ltd absorbs Qamar Ltd, which has 1,50,000 equity shares. Pankaj Ltd will issue 3 equity shares of ₹10 each, at an issue price of ₹15, for every 2 shares of Qamar Ltd, and will also pay ₹2 in cash per share of Qamar Ltd. The purchase consideration is:
- A) ₹33,75,000
- B) ₹36,75,000
- C) ₹25,50,000
- D) ₹30,75,000
Show answer & explanation
Answer: B) ₹36,75,000
Shares to be issued = 1,50,000 x 3/2 = 2,25,000 shares; value at issue price = 2,25,000 x 15 = 33,75,000. Cash = 1,50,000 x 2 = 3,00,000. Purchase consideration = ₹36,75,000. Shares issued must be valued at issue price, not face value.
Question 3
Case: In an amalgamation in the nature of purchase, Rajat Ltd pays a purchase consideration of ₹40,00,000 for net assets of Sneh Ltd that are recorded at their fair value of ₹46,00,000. Under AS 14, Rajat Ltd should record:
- A) A gain of ₹6,00,000 in the statement of profit and loss
- B) Neither goodwill nor capital reserve
- C) Goodwill of ₹6,00,000
- D) Capital reserve of ₹6,00,000
Show answer & explanation
Answer: D) Capital reserve of ₹6,00,000
When the purchase consideration is less than the value of net assets acquired, the excess (46,00,000 - 40,00,000 = 6,00,000) is credited to capital reserve under AS 14. Goodwill arises only when consideration exceeds net assets, and the excess is not taken to profit and loss.
Question 4
Case: Tanvi Ltd amalgamates with Uday Ltd in an amalgamation in the nature of merger. Tanvi Ltd has share capital of ₹20,00,000, general reserve of ₹8,00,000 and a credit balance in profit and loss of ₹3,00,000. Uday Ltd issues equity shares with a face value of ₹22,00,000 as consideration. Under the pooling of interests method, the net increase in the aggregate reserves (including the profit and loss balance) of Uday Ltd as a result of the amalgamation is:
- A) ₹11,00,000
- B) ₹9,00,000
- C) ₹8,00,000
- D) ₹13,00,000
Show answer & explanation
Answer: B) ₹9,00,000
Under pooling of interests, the transferor's reserves are recorded at their existing amounts: 8,00,000 + 3,00,000 = 11,00,000. AS 14 requires the excess of share capital issued over the transferor's share capital (22,00,000 - 20,00,000 = 2,00,000) to be adjusted in reserves; no goodwill arises. Net increase in Uday Ltd's reserves = 11,00,000 - 2,00,000 = ₹9,00,000, whichever reserve the 2,00,000 is debited to.
Question 5
Case: On amalgamation, the trade payables of Vimal Ltd (transferee) are ₹18,00,000 and those of Waman Ltd (transferor) are ₹9,00,000. Waman Ltd's payables include ₹3,00,000 owed to Vimal Ltd for goods supplied. The trade payables in the balance sheet of Vimal Ltd after amalgamation are:
- A) ₹24,00,000
- B) ₹27,00,000
- C) ₹21,00,000
- D) ₹15,00,000
Show answer & explanation
Answer: A) ₹24,00,000
Inter-company owings are eliminated on amalgamation because a company cannot owe money to itself. Combined payables = 18,00,000 + 9,00,000 = 27,00,000; less the mutual owing of 3,00,000 = ₹24,00,000. The corresponding receivable in Vimal Ltd's books is also eliminated.
Question 6
Case: At the date of amalgamation, the inventory of Yash Ltd (transferee) includes goods costing it ₹1,20,000 that were purchased from Zubin Ltd (transferor), which had invoiced them at cost plus 20%. The unrealised profit to be eliminated from inventory is:
- A) ₹20,000
- B) ₹24,000
- C) ₹0
- D) ₹30,000
Show answer & explanation
Answer: A) ₹20,000
Since the goods remain within the combined entity, the profit loaded by the transferor is unrealised. Unrealised profit = 1,20,000 x 20/120 = ₹20,000. It is eliminated by crediting inventory and debiting the appropriate reserve (or goodwill/capital reserve). Applying 20% to the invoice value (24,000) uses the wrong base.
Question 7
Case: In an amalgamation in the nature of purchase, Aarav Ltd (transferee) agrees to bear the liquidation expenses of Bina Ltd (transferor) amounting to ₹50,000, and pays them. In Aarav Ltd's books, this amount is:
- A) Debited to Aarav Ltd's statement of profit and loss as an ordinary expense
- B) Debited to goodwill (or reduced from capital reserve) arising on amalgamation
- C) Debited to Bina Ltd's realisation account in Aarav Ltd's books
- D) Included in the purchase consideration paid to Bina Ltd's shareholders
Show answer & explanation
Answer: B) Debited to goodwill (or reduced from capital reserve) arising on amalgamation
Liquidation expenses of the transferor borne by the transferee are not part of the purchase consideration because they are not paid to the transferor's shareholders. In the transferee's books, they are treated as a cost of acquisition and debited to goodwill or, where capital reserve arises, they reduce that capital reserve.
Question 8
Case: Chirag Ltd already holds 20% of the 1,00,000 equity shares of Deepa Ltd. On absorption of Deepa Ltd, Chirag Ltd will issue 1 of its equity shares for every 2 shares of Deepa Ltd held by other shareholders. The number of shares to be issued by Chirag Ltd is:
- A) 50,000
- B) 80,000
- C) 10,000
- D) 40,000
Show answer & explanation
Answer: D) 40,000
Shares held by Chirag Ltd itself are cancelled; consideration is payable only to outside shareholders. Outside shares = 1,00,000 x 80% = 80,000. Shares to be issued = 80,000 x 1/2 = 40,000.
Question 9
Case: Ekta Ltd is to absorb Falak Ltd on the basis of intrinsic values of shares. Falak Ltd's net assets are ₹36,00,000 for 3,00,000 shares, and Ekta Ltd's net assets are ₹75,00,000 for 5,00,000 shares (both companies' shares have a face value of ₹10). The number of Ekta Ltd shares to be issued to Falak Ltd's shareholders is:
- A) 3,60,000
- B) 2,40,000
- C) 3,00,000
- D) 3,75,000
Show answer & explanation
Answer: B) 2,40,000
Intrinsic value of a Falak share = 36,00,000 / 3,00,000 = ₹12; of an Ekta share = 75,00,000 / 5,00,000 = ₹15. Exchange ratio = 12/15 = 0.8, i.e. 4 Ekta shares for every 5 Falak shares. Shares to be issued = 3,00,000 x 0.8 = 2,40,000 (worth 2,40,000 x ₹15 = 36,00,000, equal to Falak's net assets).
Question 10
Case: In the books of Gauri Ltd (transferor), assets transferred to the realisation account have a book value of ₹70,00,000 and liabilities transferred have a book value of ₹25,00,000. The purchase consideration receivable from the transferee is ₹52,00,000, and Gauri Ltd itself pays liquidation expenses of ₹1,00,000. The profit on realisation is:
- A) ₹6,00,000
- B) ₹7,00,000
- C) ₹5,00,000
- D) ₹8,00,000
Show answer & explanation
Answer: A) ₹6,00,000
Realisation account: debit assets 70,00,000 and liquidation expenses 1,00,000; credit liabilities 25,00,000 and purchase consideration 52,00,000. Profit = 52,00,000 + 25,00,000 - 70,00,000 - 1,00,000 = ₹6,00,000. This profit is transferred to the equity shareholders' account.