Module 2: Absorption of Joint Stock Company

(As per NEP-2020 – SRTMU, Nanded)

2.1 Introduction to Absorption

Meaning of Absorption

Absorption means taking over of one or more existing companies by another existing company, where:

• The absorbed (vendor) company is dissolved, and

• The absorbing (purchasing) company continues its existence.

(मराठी टीप: एक कंपनी संपते आणि दुसरी कंपनी चालू राहते – यालाच Absorption म्हणतात.)

Definition

Absorption is a business combination in which one company takes over the business of another company, which is then dissolved.

Difference between Amalgamation and Absorption (Quick View)

(Exam Tip: Difference is a common short-note / theory question.)

2.2 Purchase Consideration in Absorption

Meaning

Purchase consideration is the amount paid by the absorbing company to the absorbed company for taking over its business.

Methods

• Net Payment Method

• Net Asset Method

(Same concept as Module 1, but applied specifically to Absorption.)

2.3 Ledger Accounts in the Books of Absorbed (Dissolved) Company

Important Accounts

1. Realisation Account

2. Equity Shareholders’ Account

3. Purchasing Company Account

A) Realisation Account

Prepared to:

• Transfer assets

• Transfer liabilities

• Determine profit or loss on absorption

Entries:

1️⃣ Transfer of assets:

2️⃣ Transfer of liabilities:

3️⃣ Purchase consideration receivable:

B) Equity Shareholders’ Account

Used to:

• Transfer share capital

• Transfer reserves

• Receive purchase consideration

(मराठी टीप: Equity Shareholders A/c म्हणजे vendor company चा final account.)

2.4 Accounting Entries in the Books of Absorbing Company

1. Recording Purchase of Business

2. Assets Taken Over

3. Liabilities Taken Over

4. Payment of Purchase Consideration

5. Treatment of Goodwill / Capital Reserve

• If Purchase Consideration > Net Assets → Goodwill

• If Purchase Consideration < Net Assets → Capital Reserve

(Exam Tip: This point is almost always tested.)

2.5 Balance Sheet After Absorption

Teacher’s Instruction:
Prepare Balance Sheet in BOTH formats.

A) OLD FORMAT – Companies Act, 1956

Vertical Balance Sheet

Balance Sheet of Absorbing Company
(After Absorption)

Liabilities

• Share Capital

• Reserves & Surplus

• Secured Loans

• Unsecured Loans

• Current Liabilities & Provisions

Assets

• Fixed Assets

• Investments

• Current Assets

• Miscellaneous Expenditure

(मराठी टीप: जुना format परीक्षेसाठी अजूनही महत्त्वाचा आहे.)

B) NEW FORMAT – Companies Act, 2013

Schedule III Balance Sheet

Balance Sheet of Absorbing Company

Equity and Liabilities

1. Shareholders’ Funds

2. Non-current Liabilities

3. Current Liabilities

Assets

1. Non-current Assets

2. Current Assets

(Exam Tip: Schedule III headings exactly लिहा.)

Illustrative Problem (Model Type)

Problem (Outline)

A Ltd. absorbs B Ltd.
Assets and liabilities are taken over at agreed values.
Purchase consideration is paid by issue of equity shares and cash.

Required:

1. Calculate Purchase Consideration

2. Pass journal entries in:

   • Books of B Ltd. (absorbed company)

   • Books of A Ltd. (absorbing company)

3. Prepare Balance Sheet of A Ltd. in:

   • Old format (1956 Act)

   • New format (2013 Act)

(Complete solved numericals will be included in the Solved Problems PDF.)

Exam-Oriented Points

• Absorbed company is always dissolved

• Realisation Account is compulsory

• Working Notes must be shown

• Balance Sheet format must be specified

• Goodwill / Capital Reserve treatment is crucial

(मराठी टीप: Absorption मध्ये Vendor Company चे books पूर्ण बंद होतात.)