Chapter 13: Accounting for Reconstruction - Test 1: answer key

Question 1 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. On 1 April 2026, Meridian Textiles Ltd. (Meridian), an established fabric manufacturer, entered into a scheme to absorb Sterling Garments Ltd. (Sterling), a garment exporter. The scheme has been approved under Section 232 of the Companies Act, 2013, with 1 April 2026 as the effective date. Sterling’s summarised balance sheet as at 31 March 2026 is set out below (₹ lakh): Equity and liabilities: Equity share capital (10,00,000 shares of ₹10 each) 100; 10% preference share capital (50,000 shares of ₹100 each) 50; reserves 120; 8% debentures 60; trade payables 45; other liabilities 5. Total 380. Assets: Property, plant and equipment 220; investments 45; inventories 55; trade receivables 40; cash and cash equivalents 20. Total 380. Under the scheme, Meridian will take over property, plant and equipment at an agreed value of ₹240 lakh, investments at ₹40 lakh, inventories at ₹50 lakh and receivables at ₹35 lakh. Sterling’s cash balance of ₹20 lakh will not be taken over. Meridian will assume the debentures of ₹60 lakh and trade payables of ₹45 lakh at the amounts agreed; other liabilities of ₹5 lakh will remain with Sterling and be discharged by it. Each preference shareholder will receive one Meridian preference share valued at ₹110 for each Sterling preference share. Each equity shareholder will receive 0.6 Meridian equity share for every Sterling equity share; Meridian’s shares have a face value of ₹10 and an agreed market/issue value of ₹25. In addition, an aggregate cash amount of ₹55 lakh will be distributed among Sterling’s equity shareholders. Meridian will replace the debentures by issuing its own debentures of equivalent agreed value; that settlement is separate from shareholder entitlements. A further ₹8 lakh may become payable if a sales milestone is achieved in 2027–28, but at the effective date the payment is not probable and cannot be reasonably estimated. Ignore liquidation expenses.

Applying the Net Payment Method, what is the purchase consideration payable by Meridian to Sterling’s shareholders?

1. ₹255 lakh
2. ₹265 lakh
3. ₹260 lakh (correct answer)
4. ₹270 lakh

Answer: C — ₹260 lakh

Explanation. AS 14 para 3(g) confines consideration to securities and cash or other assets provided to Sterling’s shareholders. Equity consideration is 6,00,000 Meridian shares × ₹25 = ₹150 lakh; preference consideration is 50,000 × ₹110 = ₹55 lakh; and the additional shareholder cash is ₹55 lakh. The total is ₹260 lakh. Meridian’s debentures issued to Sterling’s debenture-holders are not shareholder consideration, and the ₹5 lakh liability retained by Sterling is outside the transaction.

Where it goes wrong. Including debentures issued to debenture-holders in purchase consideration.

Authority. AS 14, para 3(g); AS 14, para 14

Question 2 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

What is the purchase consideration under the Net Assets Method, considering the agreed values of assets and liabilities actually taken over by Meridian?

1. ₹260 lakh (correct answer)
2. ₹270 lakh
3. ₹255 lakh
4. ₹280 lakh

Answer: A — ₹260 lakh

Explanation. Under the net-assets method, include only assets and outside liabilities actually taken over, using the agreed values. Assets taken over are ₹240 + ₹40 + ₹50 + ₹35 = ₹365 lakh. Liabilities assumed are debentures of ₹60 lakh and trade payables of ₹45 lakh, totalling ₹105 lakh. Purchase consideration is therefore ₹260 lakh. The retained cash of ₹20 lakh and unassumed liability of ₹5 lakh are both excluded. AS 14 para 36 supports use of carrying amounts or fair-value allocation in the purchase method.

Where it goes wrong. Including assets not taken over or deducting liabilities retained by the transferor.

Authority. AS 14, para 3(g); AS 14, para 36

Question 3 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

What is the value of the equity-share component of purchase consideration payable to Sterling’s equity shareholders?

1. ₹60 lakh
2. ₹205 lakh
3. ₹260 lakh
4. ₹150 lakh (correct answer)

Answer: D — ₹150 lakh

Explanation. The equity exchange is 10,00,000 Sterling shares × 0.6 = 6,00,000 Meridian shares. The scheme specifies an agreed market/issue value of ₹25 per Meridian share, so the equity-share component is 6,00,000 × ₹25 = ₹150 lakh. The ₹10 face value is not the relevant value where the agreed issue value is expressly given. The separate ₹55 lakh cash payment to equity shareholders is another component of purchase consideration, not part of this share-only amount.

Where it goes wrong. Using the face value of the shares instead of their stipulated issue value.

Authority. AS 14, para 3(g); AS 14, para 14

Question 4 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

How should the additional ₹8 lakh sales-linked payment be treated at 1 April 2026, and what is the purchase consideration currently recognised?

1. Include ₹8 lakh; total consideration is ₹268 lakh.
2. Exclude ₹8 lakh; total consideration is ₹260 lakh. (correct answer)
3. Include ₹8 lakh partially; total consideration is ₹252 lakh.
4. Include ₹5 lakh; total consideration is ₹255 lakh.

Answer: B — Exclude ₹8 lakh; total consideration is ₹260 lakh.

Explanation. AS 14 para 15 (and the corresponding main-principle para 41) requires a future-event adjustment to be included at the amalgamation date only when the additional payment is probable and can reasonably be estimated. Here the ₹8 lakh sales-linked amount is expressly neither probable nor reasonably estimable at 1 April 2026. It is therefore excluded from the current computation; it is recognised when the adjustment becomes determinable. The fixed shareholder consideration remains ₹260 lakh.

Where it goes wrong. Automatically including the maximum possible contingent payment.

Authority. AS 14, para 15; AS 14, para 41

Question 5 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. Aster Digital Ltd. (Aster) agreed to acquire the business of Zenith Technologies Pvt. Ltd. (Zenith) under a scheme effective from 1 July 2026. The scheme specifies that agreed values, rather than carrying amounts, are to be used for the identifiable assets and liabilities taken over. Zenith’s balance sheet extract immediately before the scheme (₹ lakh) is as follows: Assets: Property, plant and equipment 200; patents 30; inventories 60; trade receivables 50; cash 10. Total 350. Equity and liabilities: Share capital 150; reserves 80; 12% debentures 50; trade payables 60; employee and other provisions 10. Total 350. Aster takes over the property, plant and equipment at ₹225 lakh, patents at ₹35 lakh, inventories at ₹54 lakh and receivables at ₹44 lakh. Cash is not taken over. The debentures are assumed at an agreed settlement value of ₹55 lakh, including a 10% redemption premium; trade payables and employee provisions are assumed at agreed values of ₹45 lakh and ₹15 lakh respectively. Aster will discharge the debenture-holders by issuing its own debentures for the agreed ₹55 lakh liability. That issue is made to the debenture-holders, not to Zenith’s shareholders. The shareholder consideration comprises cash of ₹90 lakh, 6,00,000 Aster equity shares with an agreed issue value of ₹20 each (face value ₹10), and a portfolio of listed securities transferred by Aster. The portfolio has a reliably measurable market value of ₹18 lakh and a carrying amount of ₹14 lakh in Aster’s books. The scheme also provides an additional payment of ₹15 lakh to Zenith’s shareholders on achievement of a customer-retention milestone. At 1 July 2026, the milestone payment is considered probable and its amount can reasonably be estimated. Use the fair values and terms stated above; ignore liquidation expenses and tax effects.

Determine the purchase consideration under the Net Assets Method, using the agreed values of assets and liabilities taken over by Aster.

1. ₹253 lakh
2. ₹243 lakh (correct answer)
3. ₹193 lakh
4. ₹258 lakh

Answer: B — ₹243 lakh

Explanation. For the net-assets method, assets taken over at agreed values total ₹225 + ₹35 + ₹54 + ₹44 = ₹358 lakh. Outside liabilities taken over total ₹55 + ₹45 + ₹15 = ₹115 lakh, including the debentures at their agreed redemption amount. The net assets, and hence purchase consideration under this method, are ₹358 − ₹115 = ₹243 lakh. Cash is not taken over and is excluded. Share capital and reserves are not liabilities to be deducted.

Where it goes wrong. Using book values instead of agreed values or overlooking redemption premium.

Authority. AS 14, para 36; AS 14, para 40

Question 6 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

What is the purchase consideration under the Net Payment Method, including the additional payment provided in the scheme?

1. ₹228 lakh
2. ₹239 lakh
3. ₹298 lakh
4. ₹243 lakh (correct answer)

Answer: D — ₹243 lakh

Explanation. The net-payment method totals the shareholder entitlements: cash ₹90 lakh + 6,00,000 Aster shares × ₹20 = ₹120 lakh + listed securities at fair value ₹18 lakh + probable earn-out ₹15 lakh. The result is ₹243 lakh. The shares are valued at the agreed issue value, not their ₹10 face value, and the listed portfolio is measured at its reliable market value rather than its ₹14 lakh carrying amount. Debentures issued to debenture-holders are excluded under AS 14 para 3(g).

Where it goes wrong. Omitting contingent consideration or measuring consideration securities at face value.

Authority. AS 14, para 3(g); AS 14, para 14; AS 14, para 15

Question 7 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

At what amount should the listed securities portfolio transferred by Aster to Zenith’s shareholders be included in purchase consideration?

1. ₹14 lakh
2. ₹32 lakh
3. ₹18 lakh (correct answer)
4. ₹20 lakh

Answer: C — ₹18 lakh

Explanation. The listed securities portfolio is an asset transferred by Aster to Zenith’s shareholders as part of the consideration. AS 14 para 14 requires the fair value of consideration elements to be assessed; for other assets, fair value may be determined by reference to market value. Since the ₹18 lakh market value is stated to be reliably measurable, ₹18 lakh is included. The ₹14 lakh book carrying amount is not used merely because it appears in Aster’s books; net book value is a fallback when market value cannot be reliably assessed.

Where it goes wrong. Using the transferee’s carrying amount despite a reliably measurable market value.

Authority. AS 14, para 14; AS 14, para 40

Question 8 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Which statement correctly describes the treatment of the ₹55 lakh debentures assumed by Aster and discharged by issuing its own debentures?

1. Exclude ₹55 lakh from PC, but deduct it as an assumed liability under the net-assets method. (correct answer)
2. Exclude ₹55 lakh from PC and also omit it from liabilities taken over.
3. Include ₹55 lakh in PC because new debentures are issued to settle it.
4. Include ₹55 lakh in PC and deduct it again as a liability taken over.

Answer: A — Exclude ₹55 lakh from PC, but deduct it as an assumed liability under the net-assets method.

Explanation. The identity of the recipient matters. Under AS 14 para 3(g), the ₹55 lakh of Aster debentures issued to Zenith’s debenture-holders is not consideration paid to Zenith’s shareholders, so it is excluded from net-payment purchase consideration. However, Zenith’s debentures are an outside liability expressly taken over at ₹55 lakh, so that amount is deducted when computing net assets under the net-assets method. Excluding it from PC does not mean omitting an assumed liability from the net-assets calculation.

Where it goes wrong. Confusing exclusion from purchase consideration with exclusion from liabilities taken over.

Authority. AS 14, para 3(g); AS 14, para 36

Question 9 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. Orion Specialities Ltd. (Orion) proposes to absorb Vardhan Chemicals Ltd. (Vardhan) under a scheme effective from 1 October 2026. Vardhan’s balance sheet extract as at 30 September 2026 (₹ lakh) shows: property, plant and equipment 320; patents 45; inventories 90; trade receivables 65; cash 20; total assets 540. Its equity share capital is ₹240 lakh, comprising 24,00,000 equity shares of ₹10 each; reserves are ₹160 lakh; 10% debentures are ₹70 lakh; trade payables are ₹50 lakh; and other liabilities are ₹20 lakh. All assets and liabilities are to vest in Orion. No revaluation is intended, except that Vardhan’s inventory, previously valued using weighted average, will be restated from ₹90 lakh to ₹93 lakh solely to align with Orion’s FIFO accounting policy. Orion intends to continue Vardhan’s business. The intrinsic value per equity share is ₹90 for Vardhan and ₹120 for Orion. Accordingly, the scheme provides three Orion equity shares for every four Vardhan equity shares held by participating shareholders. Orion shares have a face value of ₹10. Immediately before the amalgamation, 2,00,000 Vardhan shares are held by Orion’s wholly-owned subsidiary or its nominee. Holders of a further 20,00,000 Vardhan shares agree to become Orion equity shareholders under the scheme. The holders of the remaining 2,00,000 shares not held by Orion’s group do not join the equity share exchange and are to receive cash of ₹35 per share. The 2,00,000 shares held by Orion’s subsidiary or nominee are not separately rewarded under the scheme and will be cancelled or extinguished as required. The facts are provided to assess the share-exchange computation and the conditions for classification as an amalgamation in the nature of merger.

Based on the intrinsic values specified in the scheme, how many Orion equity shares must be issued to the participating holders of Vardhan shares?

1. 16,50,000 shares
2. 13,50,000 shares
3. 18,00,000 shares
4. 15,00,000 shares (correct answer)

Answer: D — 15,00,000 shares

Explanation. The intrinsic-value exchange ratio is Vardhan ₹90 ÷ Orion ₹120 = 0.75, or three Orion shares for every four Vardhan shares. Only the 20,00,000 Vardhan shares held by participating shareholders enter this exchange calculation. Accordingly, Orion must issue 20,00,000 × 3/4 = 15,00,000 equity shares. The 2,00,000 dissenting shares are settled in cash, while the 2,00,000 shares held by Orion’s subsidiary or nominee are not exchanged.

Where it goes wrong. Applying the exchange ratio to all issued shares instead of participating shares.

Authority. AS 14, para 3(g); AS 14, para 3(e)(iii); AS 14, para 14

Question 10 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

What is the total purchase consideration for Vardhan’s equity shareholders, including the consideration paid to holders who do not join the share exchange?

1. ₹1,800 lakh
2. ₹1,875 lakh
3. ₹1,870 lakh (correct answer)
4. ₹1,940 lakh

Answer: C — ₹1,870 lakh

Explanation. The shares issued to participating holders are 15,00,000 × ₹120 intrinsic value per Orion share = ₹1,800 lakh. The 2,00,000 non-joining shareholders receive cash of 2,00,000 × ₹35 = ₹70 lakh. Total purchase consideration is therefore ₹1,870 lakh. The 2,00,000 shares already held by Orion’s subsidiary or nominee are not rewarded under the scheme and are cancelled or extinguished. AS 14 para 3(g) includes both shares and cash paid to transferor shareholders.

Where it goes wrong. Ignoring cash paid to non-joining shareholders or rewarding group-held shares.

Authority. AS 14, para 3(g); AS 14, para 14

Question 11 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

What is the minimum number of Vardhan equity shares whose holders must become Orion shareholders to satisfy the 90% condition for amalgamation in the nature of merger?

1. 21,60,000 shares
2. 19,80,000 shares (correct answer)
3. 18,00,000 shares
4. 20,00,000 shares

Answer: B — 19,80,000 shares

Explanation. AS 14 para 3(e)(ii) measures the 90% test after excluding shares already held immediately before amalgamation by the transferee, its subsidiaries or their nominees. Eligible shares are therefore 24,00,000 − 2,00,000 = 22,00,000. Ninety per cent is 19,80,000 shares (face value ₹198 lakh). Since holders of 20,00,000 eligible shares become Orion shareholders, the condition is satisfied at 90.91%; calculating 90% on all 24,00,000 shares would use the wrong denominator.

Where it goes wrong. Applying the 90% threshold to the entire issued capital without the statutory exclusion.

Authority. AS 14, para 3(e)(ii); AS 14, para 29(ii)

Question 12 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Does the payment of ₹35 per share in cash to the 2,00,000 dissenting shareholders automatically violate the equity-consideration condition for an amalgamation in the nature of merger?

1. No; the cash is for non-assenting holders, while the equity-only test applies to holders who become members. (correct answer)
2. Yes; any cash payment to any transferor equity holder violates the merger condition, apart from fractional shares.
3. Yes; dissenting holders must also receive only equity shares unless a fractional entitlement arises under the ratio.
4. No; cash paid to dissenters is outside purchase consideration because such persons cease to be shareholders.

Answer: A — No; the cash is for non-assenting holders, while the equity-only test applies to holders who become members.

Explanation. AS 14 para 3(e)(iii) requires the consideration receivable by equity shareholders who agree to become equity shareholders of Orion to be discharged wholly by equity shares, except cash for fractional shares. The 20,00,000 participating shares receive only Orion equity shares. The separate cash payment is made to holders who do not join the exchange; it does not change the nature of consideration received by the participating holders. The 90% test is independently satisfied under para 3(e)(ii).

Where it goes wrong. Extending the equity-only requirement to shareholders who do not join the exchange.

Authority. AS 14, para 3(e)(ii)-(iii); AS 14, para 29(ii)-(iii)

Question 13 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Nova Industries Ltd. agrees to pay a fixed amount of ₹725 lakh to the equity and preference shareholders of a transferor company. It will additionally assume borrowings of ₹85 lakh and directly settle trade creditors of ₹28 lakh. What is the purchase consideration under the Lump-Sum Method?

Nova Industries Ltd. agrees to pay a fixed amount of ₹725 lakh to the equity and preference shareholders of a transferor company. It will additionally assume borrowings of ₹85 lakh and directly settle trade creditors of ₹28 lakh. What is the purchase consideration under the Lump-Sum Method?

1. ₹725 lakh (correct answer)
2. ₹805 lakh
3. ₹677 lakh
4. ₹755 lakh

Answer: A — ₹725 lakh

Explanation. Under the lump-sum method, the agreed fixed amount payable to the transferor’s shareholders is the purchase consideration. The stated ₹725 lakh is therefore the answer; it is not recalculated by deducting assumed borrowings or adjusting the transferor’s asset values. AS 14 para 3(g) still limits the concept to what the transferee provides to shareholders. Any separate settlement of borrowings or trade creditors is not added merely because it forms part of the overall transaction.

Where it goes wrong. Recomputing a fixed lump-sum consideration using the transferor’s balance sheet.

Authority. AS 14, para 3(g)

Question 14 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. In an amalgamation, the transferee makes the following payments: ₹18 lakh cash and ₹60 lakh in equity shares to equity shareholders; ₹22 lakh in preference securities and ₹5 lakh cash to preference shareholders; and transfers another asset worth ₹5 lakh to shareholders. It separately pays ₹11 lakh to debenture-holders and ₹4 lakh to creditors. Determine the purchase consideration.

In an amalgamation, the transferee makes the following payments: ₹18 lakh cash and ₹60 lakh in equity shares to equity shareholders; ₹22 lakh in preference securities and ₹5 lakh cash to preference shareholders; and transfers another asset worth ₹5 lakh to shareholders. It separately pays ₹11 lakh to debenture-holders and ₹4 lakh to creditors. Determine the purchase consideration.

1. ₹105 lakh
2. ₹110 lakh (correct answer)
3. ₹125 lakh
4. ₹99 lakh

Answer: B — ₹110 lakh

Explanation. AS 14 para 3(g) includes all consideration given to transferor shareholders: equity cash ₹18 lakh + equity shares ₹60 lakh + preference securities ₹22 lakh + preference cash ₹5 lakh + other asset ₹5 lakh = ₹110 lakh. The ₹11 lakh paid to debenture-holders and ₹4 lakh paid to creditors are paid to outsiders, not shareholders, and are excluded. The main trap is to include every payment connected with the takeover instead of identifying the recipient of each payment.

Where it goes wrong. Including payments to creditors and debenture-holders in shareholder consideration.

Authority. AS 14, para 3(g); AS 14, para 14

Question 15 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. A transferee company takes over a business and agrees to issue one equity share valued at ₹60 for every four equity shares of the transferor, together with ₹12 cash per transferor equity share. The transferor has 8,00,000 equity shares. Its 5,000 preference shareholders, holding ₹100 shares, will receive preference shares at a 10% premium. The transferee separately settles ₹15 lakh of transferor debentures. Calculate the purchase consideration.

A transferee company takes over a business and agrees to issue one equity share valued at ₹60 for every four equity shares of the transferor, together with ₹12 cash per transferor equity share. The transferor has 8,00,000 equity shares. Its 5,000 preference shareholders, holding ₹100 shares, will receive preference shares at a 10% premium. The transferee separately settles ₹15 lakh of transferor debentures. Calculate the purchase consideration.

1. ₹216.50 lakh
2. ₹236.50 lakh
3. ₹221.50 lakh (correct answer)
4. ₹225.50 lakh

Answer: C — ₹221.50 lakh

Explanation. The equity exchange requires 8,00,000 ÷ 4 = 2,00,000 new shares, valued at 2,00,000 × ₹60 = ₹120 lakh. Cash to equity shareholders is 8,00,000 × ₹12 = ₹96 lakh. Preference shareholders receive 5,000 × ₹110 = ₹5.50 lakh. Total purchase consideration is ₹221.50 lakh. The separate ₹15 lakh debenture settlement is excluded because it is paid to debenture-holders, not transferor shareholders, under AS 14 para 3(g).

Where it goes wrong. Adding the debenture settlement to the consideration payable to shareholders.

Authority. AS 14, para 3(g); AS 14, para 14

Question 16 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferee takes over the following assets: land with book value ₹100 lakh and agreed value ₹130 lakh; plant with book value ₹200 lakh for which no separate value is agreed; inventory with book value ₹66 lakh and agreed value ₹60 lakh; receivables with book value ₹50 lakh and agreed value ₹45 lakh; and investments agreed at ₹80 lakh. Cash of ₹25 lakh is excluded. Debentures with book value ₹70 lakh are assumed at an agreed value of ₹75 lakh, and trade payables with book value ₹40 lakh are assumed at ₹38 lakh. A litigation liability of ₹12 lakh is not taken over. Determine purchase consideration under the Net Assets Method.

A transferee takes over the following assets: land with book value ₹100 lakh and agreed value ₹130 lakh; plant with book value ₹200 lakh for which no separate value is agreed; inventory with book value ₹66 lakh and agreed value ₹60 lakh; receivables with book value ₹50 lakh and agreed value ₹45 lakh; and investments agreed at ₹80 lakh. Cash of ₹25 lakh is excluded. Debentures with book value ₹70 lakh are assumed at an agreed value of ₹75 lakh, and trade payables with book value ₹40 lakh are assumed at ₹38 lakh. A litigation liability of ₹12 lakh is not taken over. Determine purchase consideration under the Net Assets Method.

1. ₹390 lakh
2. ₹405 lakh
3. ₹418 lakh
4. ₹402 lakh (correct answer)

Answer: D — ₹402 lakh

Explanation. Agreed asset values are land ₹130 lakh, plant ₹200 lakh (no value agreed, so book value), inventory ₹60 lakh, receivables ₹45 lakh and investments ₹80 lakh: total ₹515 lakh. Assumed liabilities are debentures ₹75 lakh and trade payables ₹38 lakh: total ₹113 lakh. Net assets are ₹402 lakh. Cash is not taken over and the ₹12 lakh litigation liability is not assumed, so neither enters the computation. Share capital and reserves are not outside liabilities.

Where it goes wrong. Deducting unassumed liabilities or using book values where agreed values exist.

Authority. AS 14, para 36; AS 14, para 40

Question 17 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferor company has assets agreed to be taken over at ₹1,250 crore. The transferee agrees to assume outside liabilities of ₹380 crore. The transferor’s equity share capital is ₹400 crore and reserves are ₹200 crore. A separate loan of ₹70 crore is not assumed by the transferee. What is the purchase consideration under the Net Assets Method?

A transferor company has assets agreed to be taken over at ₹1,250 crore. The transferee agrees to assume outside liabilities of ₹380 crore. The transferor’s equity share capital is ₹400 crore and reserves are ₹200 crore. A separate loan of ₹70 crore is not assumed by the transferee. What is the purchase consideration under the Net Assets Method?

1. ₹870 crore (correct answer)
2. ₹670 crore
3. ₹800 crore
4. ₹940 crore

Answer: A — ₹870 crore

Explanation. The net-assets method deducts only outside liabilities taken over from the value of assets taken over. Thus ₹1,250 crore − ₹380 crore = ₹870 crore. The transferor’s ₹400 crore share capital and ₹200 crore reserves represent shareholders’ funds, not outside liabilities; deducting them would wrongly reduce the answer to ₹270 crore. The separate ₹70 crore loan is not assumed and is also excluded. AS 14 para 36 addresses recognition of acquired assets and liabilities under the purchase method.

Where it goes wrong. Treating share capital and reserves as outside liabilities.

Authority. AS 14, para 3(g); AS 14, para 36

Question 18 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Company P, the transferor, has a net worth of ₹30 crore and 40 lakh equity shares. Company Q, the transferee, has a net worth of ₹48 crore and 50 lakh equity shares. Under the Intrinsic Value Method, how many Q shares should be issued for 8 lakh P shares, and what is the corresponding exchange ratio?

Company P, the transferor, has a net worth of ₹30 crore and 40 lakh equity shares. Company Q, the transferee, has a net worth of ₹48 crore and 50 lakh equity shares. Under the Intrinsic Value Method, how many Q shares should be issued for 8 lakh P shares, and what is the corresponding exchange ratio?

1. 6,00,000 shares at 3:4
2. 6,40,000 shares at 4:5
3. 6,25,000 shares at 25:32 (correct answer)
4. 7,50,000 shares at 3:4

Answer: C — 6,25,000 shares at 25:32

Explanation. Transferor intrinsic value per share is ₹30 crore ÷ 40 lakh = ₹75. Transferee intrinsic value per share is ₹48 crore ÷ 50 lakh = ₹96. The share exchange ratio is therefore ₹75:₹96, simplified to 25:32; that is 25 transferee shares for every 32 transferor shares. For 8,00,000 transferor shares, the transferee issues 8,00,000 × 25/32 = 6,25,000 shares. The ratio is not obtained by reversing the two intrinsic values.

Where it goes wrong. Reversing the intrinsic-value ratio of transferor and transferee shares.

Authority. AS 14, para 3(g); AS 14, para 14

Question 19 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. The intrinsic value of a transferor share is ₹80 and that of a transferee share is ₹100. The transferor has 12,00,000 equity shares. The agreed issue value of each new transferee share is ₹130, although its face value is ₹10. What is the value of equity-share consideration under the Intrinsic Value Method?

The intrinsic value of a transferor share is ₹80 and that of a transferee share is ₹100. The transferor has 12,00,000 equity shares. The agreed issue value of each new transferee share is ₹130, although its face value is ₹10. What is the value of equity-share consideration under the Intrinsic Value Method?

1. ₹960 lakh
2. ₹1,248 lakh (correct answer)
3. ₹96 lakh
4. ₹1,560 lakh

Answer: B — ₹1,248 lakh

Explanation. The exchange ratio is transferor intrinsic value ÷ transferee intrinsic value = ₹80 ÷ ₹100 = 0.8. For 12,00,000 transferor shares, 9,60,000 transferee shares are issued. The scheme specifies an issue value of ₹130 per new share, so the share consideration is 9,60,000 × ₹130 = ₹1,248 lakh. Using the ₹10 face value or the ₹100 intrinsic value instead of the stated issue value understates the value of the consideration.

Where it goes wrong. Using the face value or intrinsic value when the scheme stipulates a separate issue value.

Authority. AS 14, para 14; AS 14, para 40

Question 20 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. A transferee settles part of its purchase consideration by transferring listed securities to transferor shareholders. Their value fixed by the statutory authority is ₹25 lakh. It also transfers a motor vehicle whose market value cannot be reliably assessed and whose net book value is ₹6 lakh. What amount should be included for these non-cash assets?

A transferee settles part of its purchase consideration by transferring listed securities to transferor shareholders. Their value fixed by the statutory authority is ₹25 lakh. It also transfers a motor vehicle whose market value cannot be reliably assessed and whose net book value is ₹6 lakh. What amount should be included for these non-cash assets?

1. ₹33 lakh
2. ₹25 lakh
3. ₹35 lakh
4. ₹31 lakh (correct answer)

Answer: D — ₹31 lakh

Explanation. AS 14 para 14 requires fair-value assessment of consideration elements. The securities are valued at ₹25 lakh, being the value fixed by the statutory authority. For the vehicle, market value cannot be reliably assessed, so its net book value of ₹6 lakh is used as the fallback. Total non-cash consideration is ₹31 lakh. Using the vehicle’s unsupported indicative market figure of ₹8 lakh would disregard the condition stated in the question.

Where it goes wrong. Using an unreliable market value instead of the vehicle’s net book value.

Authority. AS 14, para 14; AS 14, para 40

Question 21 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferee agrees to pay shareholders fixed consideration of ₹420 lakh, with a further payment not exceeding ₹30 lakh if a specified milestone is achieved. At the date of amalgamation, the additional payment is considered probable and its reasonably estimable amount is ₹24 lakh. What is the total purchase consideration?

A transferee agrees to pay shareholders fixed consideration of ₹420 lakh, with a further payment not exceeding ₹30 lakh if a specified milestone is achieved. At the date of amalgamation, the additional payment is considered probable and its reasonably estimable amount is ₹24 lakh. What is the total purchase consideration?

1. ₹450 lakh
2. ₹420 lakh
3. ₹444 lakh (correct answer)
4. ₹432 lakh

Answer: C — ₹444 lakh

Explanation. AS 14 para 15 requires the additional amount to be included where payment is probable and the amount can reasonably be estimated at the date of amalgamation. The amount meeting both tests is ₹24 lakh, not the contractual maximum of ₹30 lakh. Purchase consideration is therefore ₹420 lakh + ₹24 lakh = ₹444 lakh. If either recognition condition were absent, the adjustment would be recognised when the amount became determinable, rather than automatically including the cap.

Where it goes wrong. Including the contractual maximum instead of the probable, reasonably estimated amount.

Authority. AS 14, para 15; AS 14, para 41; AS 4

Question 22 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. As consideration for an amalgamation, the transferee issues shares valued at ₹40 lakh and transfers a motor vehicle with a fair value of ₹9 lakh to the transferor’s shareholders. It also pays ₹20 lakh directly to trade creditors and issues ₹35 lakh of debentures directly to the transferor’s debenture-holders. Calculate purchase consideration.

As consideration for an amalgamation, the transferee issues shares valued at ₹40 lakh and transfers a motor vehicle with a fair value of ₹9 lakh to the transferor’s shareholders. It also pays ₹20 lakh directly to trade creditors and issues ₹35 lakh of debentures directly to the transferor’s debenture-holders. Calculate purchase consideration.

1. ₹49 lakh (correct answer)
2. ₹69 lakh
3. ₹84 lakh
4. ₹55 lakh

Answer: A — ₹49 lakh

Explanation. AS 14 para 3(g) includes shares and other assets given by the transferee to transferor shareholders. The ₹40 lakh share issue and the vehicle transferred to shareholders at fair value of ₹9 lakh therefore form purchase consideration of ₹49 lakh. The ₹20 lakh cash paid directly to trade creditors and ₹35 lakh debentures issued to debenture-holders are outside the definition. The common error is to treat the instrument issued or the total transaction outflow as decisive, rather than the recipient.

Where it goes wrong. Including direct creditor and debenture-holder settlements in PC.

Authority. AS 14, para 3(g); AS 14, para 14

Question 23 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. A transferee discharges the transferor’s shareholders as follows: ₹55 lakh in equity shares to equity shareholders; ₹10 lakh cash and ₹20 lakh of transferee debentures to preference shareholders. It separately issues ₹25 lakh of debentures to the transferor’s debenture-holders and pays creditors ₹9 lakh in cash. What is purchase consideration?

A transferee discharges the transferor’s shareholders as follows: ₹55 lakh in equity shares to equity shareholders; ₹10 lakh cash and ₹20 lakh of transferee debentures to preference shareholders. It separately issues ₹25 lakh of debentures to the transferor’s debenture-holders and pays creditors ₹9 lakh in cash. What is purchase consideration?

1. ₹60 lakh
2. ₹85 lakh (correct answer)
3. ₹110 lakh
4. ₹94 lakh

Answer: B — ₹85 lakh

Explanation. The preference shareholders are shareholders of the transferor company. The ₹20 lakh of Aster debentures issued to them is therefore an ‘other security’ issued as consideration and is included, together with ₹55 lakh of equity shares and ₹10 lakh cash. Total PC is ₹85 lakh. By contrast, the ₹25 lakh debentures issued to Zenith’s debenture-holders and ₹9 lakh paid to creditors are excluded. AS 14 para 3(g) turns on whether the recipient is a shareholder.

Where it goes wrong. Assuming every debenture issued is excluded regardless of who receives it.

Authority. AS 14, para 3(g)

Question 24 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · hard

Scenario. Under Section 232 of the Companies Act, 2013, which of the following is specifically required to be included in the report adopted by the directors of the merging companies under sub-section (2)(c)?

Under Section 232 of the Companies Act, 2013, which of the following is specifically required to be included in the report adopted by the directors of the merging companies under sub-section (2)(c)?

1. An independent valuation report stating fair values, without a directors’ explanation of scheme effects.
2. A financial statement showing forecast profits, without details of the exchange ratio or valuation issues.
3. A creditors’ summary explaining debt settlement, without considering shareholder classes or promoter categories.
4. A directors’ report explaining effects on relevant classes and setting out the exchange ratio and valuation difficulties. (correct answer)

Answer: D — A directors’ report explaining effects on relevant classes and setting out the exchange ratio and valuation difficulties.

Explanation. Section 232(2)(c) of the Companies Act, 2013 requires a report adopted by the directors of the merging companies explaining the effect of the scheme on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders. It must set out, in particular, the share-exchange ratio and specify any special valuation difficulties. An expert valuation report under section 232(2)(d) is a separate document and does not replace this directors’ report.

Where it goes wrong. Confusing the directors’ explanatory report with the separate expert valuation report.

Authority. Section 232(2)(c), Companies Act, 2013

Question 25 · 2 marks · Chapter 13: Accounting for Reconstruction: Amalgamation of Companies · medium

Scenario. Which matter may be provided for in an order of the Tribunal under Section 232(3)(b) of the Companies Act, 2013, in a sanctioned scheme of amalgamation?

Which matter may be provided for in an order of the Tribunal under Section 232(3)(b) of the Companies Act, 2013, in a sanctioned scheme of amalgamation?

1. Transfer of undertakings, properties and liabilities from the date determined by the parties.
2. Continuation of pending legal proceedings by or against the transferee company.
3. Allotment or appropriation of shares, debentures, policies or like instruments under the scheme. (correct answer)
4. Dissolution of transferor companies without winding up after the scheme is sanctioned.

Answer: C — Allotment or appropriation of shares, debentures, policies or like instruments under the scheme.

Explanation. Section 232(3)(b) of the Companies Act, 2013 empowers the Tribunal’s order to provide for allotment or appropriation by the transferee company of shares, debentures, policies or other like instruments to persons under the sanctioned scheme. Section 232(3)(a), by contrast, addresses transfer of the undertaking, property or liabilities. Confusing these neighbouring clauses leads to choosing the asset-transfer provision for an allotment of consideration securities.

Where it goes wrong. Confusing the statutory provision for allotment of securities with the provision for transfer of assets.

Authority. Section 232(3)(b), Companies Act, 2013