Chapter 13: Accounting for Reconstruction - Test 2: answer key

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

Scenario. On 1 July 2026, Crestline Foods Ltd. (Crestline), a listed packaged-food manufacturer, is absorbed by Axiom Consumer Ltd. under an approved scheme of amalgamation. Crestline's books are to be closed on that date. Its balance sheet extract immediately before the transfer (₹ lakh) is as follows: Assets: Property, plant and equipment 160; patents 20; inventories 60; trade receivables 40; cash and bank 15. Total assets 295. Equity and liabilities: Equity share capital (8,00,000 shares of ₹10 each) 80; 9% preference share capital 30; free reserves 35; 12% debentures 50; trade payables 70; accrued debenture interest 10; warranty provision 20. Total 295. The warranty provision includes an estimated claim obligation of ₹14 lakh, which is accepted by Axiom. The remaining ₹6 lakh is no longer required. Axiom takes over property, patents, inventories and receivables at their carrying amounts, but does not take over the bank balance. It assumes the debenture principal, trade payables and the ₹14 lakh expected warranty obligation. Accrued interest remains Crestline's obligation and is settled by Crestline at its book amount. Axiom agrees to pay aggregate shareholder purchase consideration of ₹166 lakh. Preference shareholders receive new Axiom preference shares valued at ₹33 lakh, representing their ₹30 lakh capital plus a 10% premium. Equity shareholders receive Axiom equity shares valued at ₹100 lakh and cash of ₹33 lakh. Crestline initially pays liquidation expenses of ₹7 lakh. Under the agreement, Axiom is responsible for ₹3 lakh and reimburses that amount to Crestline. The remaining ₹4 lakh is borne by Crestline. The purchase consideration is unconditional, and the replacement debentures issued by Axiom are delivered directly to the debenture-holders. Ignore taxation and any other adjustments.

At what amount should the assets taken over by Axiom be transferred to the Realisation Account in Crestline's books?

1. ₹295 lakh
2. ₹280 lakh (correct answer)
3. ₹265 lakh
4. ₹275 lakh

Answer: B — ₹280 lakh

Explanation. Under Section 6, step 1 of the ICAI Study Material, all assets taken over are transferred to Realisation at their book values. PPE ₹160 lakh + patents ₹20 lakh + inventories ₹60 lakh + receivables ₹40 lakh = ₹280 lakh. The bank balance of ₹15 lakh is not taken over and must remain in Crestline's books. It is therefore excluded. The transferor's Realisation Account records carrying amounts, irrespective of any different valuation that might be adopted by the purchasing company.

Where it goes wrong. Including the bank balance despite its specific exclusion from the takeover.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, step 1

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

Which combination correctly represents the amount credited to Realisation Account for liabilities assumed by Axiom and the surplus warranty reserve transferred to Equity Shareholders Account?

1. ₹134 lakh and ₹6 lakh respectively (correct answer)
2. ₹140 lakh and Nil respectively
3. ₹120 lakh and ₹14 lakh respectively
4. ₹134 lakh and ₹20 lakh respectively

Answer: A — ₹134 lakh and ₹6 lakh respectively

Explanation. The liabilities taken over are debentures ₹50 lakh, trade payables ₹70 lakh and the expected warranty obligation ₹14 lakh. Therefore, ₹134 lakh is credited to Realisation Account. The warranty reserve originally stands at ₹20 lakh, but only ₹14 lakh represents an expected liability. The remaining ₹6 lakh is an unnecessary reserve and is transferred to Equity Shareholders Account. Accrued interest of ₹10 lakh is excluded because Crestline itself will discharge it.

Where it goes wrong. Transferring the entire warranty provision instead of only the expected liability.

Authority. ICAI Study Material, Chapter 13, Section 6, step 2

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

What is the profit or loss on realisation to be transferred to Equity Shareholders Account after considering liquidation expenses and the preference-share premium?

1. Loss of ₹13 lakh
2. Profit of ₹10 lakh
3. Loss of ₹7 lakh
4. Profit of ₹13 lakh (correct answer)

Answer: D — Profit of ₹13 lakh

Explanation. Debit Realisation with assets ₹280 lakh, Crestline's share of liquidation expenses ₹4 lakh and preference-share premium ₹3 lakh. Total debits are ₹287 lakh. Credit it with liabilities taken over ₹134 lakh and purchase consideration ₹166 lakh, totalling ₹300 lakh. The resulting balance is a profit of ₹13 lakh, transferred to Equity Shareholders Account. The reimbursable ₹3 lakh expense is charged to Axiom and does not reduce Crestline's realisation profit.

Where it goes wrong. Charging the entire ₹7 lakh liquidation expenditure to Realisation.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, steps 1-5 and step 7

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

Determine the amount payable to equity shareholders according to the balance of Equity Shareholders Account immediately before settlement.

1. ₹121 lakh
2. ₹128 lakh
3. ₹134 lakh (correct answer)
4. ₹137 lakh

Answer: C — ₹134 lakh

Explanation. Equity Shareholders Account is credited with equity share capital ₹80 lakh, free reserves ₹35 lakh, surplus warranty reserve ₹6 lakh and profit on realisation ₹13 lakh. The balance is ₹80 + ₹35 + ₹6 + ₹13 = ₹134 lakh. The preference shareholders' entitlement of ₹33 lakh is settled separately and is not included in the equity shareholders' account. The account represents the final amount due to equity shareholders, including their entitlement to the residual cash.

Where it goes wrong. Omitting the surplus warranty reserve or the realisation profit from shareholders' entitlement.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 9-10

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

Scenario. On 30 September 2026, Kestrel Infra Equip Ltd. (Kestrel) transfers its undertaking to Monarch Projects Ltd. (Monarch), following an approved scheme of amalgamation. Kestrel's balance sheet extract on the appointed date (₹ lakh) is: Assets: Plant and machinery 250; building 100; inventories 70; trade receivables 60; bank balance 20. Total 500. Equity and liabilities: Equity share capital 140; 8% preference share capital 40; general reserve 80; workmen compensation reserve 10; debentures 70; trade creditors 100; outstanding debenture interest 10; provision for tax 20; term loan 30. Total 500. Monarch takes over all assets except the bank balance at their book values. It assumes the debentures of ₹70 lakh and trade creditors of ₹100 lakh. The workmen compensation reserve contains a probable claim of ₹6 lakh, which Monarch accepts as a liability. The remaining ₹4 lakh is no longer required. Outstanding interest, tax provision and term loan are not taken over by Monarch. Kestrel settles the unassumed liabilities before dissolution: outstanding debenture interest of ₹10 lakh at book value, tax liability of ₹20 lakh for ₹22 lakh, and term loan of ₹30 lakh for ₹29 lakh. The sale agreement fixes shareholder purchase consideration at ₹304 lakh, without any contingent adjustment. Preference shareholders are entitled to a premium of 10% over their share capital and are to receive Monarch preference shares. The balance of the purchase consideration is payable to equity shareholders. Liquidation expenses amount to ₹9 lakh. The agreement provides that Monarch will bear up to ₹6 lakh. Kestrel pays the entire invoice and subsequently receives reimbursement of ₹6 lakh from Monarch. The unreimbursed ₹3 lakh is borne by Kestrel. Monarch's debentures issued in replacement of Kestrel's debentures are delivered directly to debenture-holders. Assume all figures are final and no other assets or liabilities are involved.

What is the balance of Realisation Account after accounting for the takeover, preference-share premium, liquidation expenses and settlement differences on liabilities not assumed?

1. Loss of ₹8 lakh (correct answer)
2. Profit of ₹8 lakh
3. Loss of ₹6 lakh
4. Profit of ₹6 lakh

Answer: A — Loss of ₹8 lakh

Explanation. Assets transferred are ₹480 lakh; liabilities assumed are ₹70 + ₹100 + ₹6 = ₹176 lakh; and purchase consideration is ₹304 lakh. These three amounts initially balance Realisation. The vendor-borne liquidation expense is ₹3 lakh. Preference premium adds a debit of ₹4 lakh. Tax settled at ₹22 lakh against ₹20 lakh creates a loss of ₹2 lakh, while the term loan settled at ₹29 lakh against ₹30 lakh creates a gain of ₹1 lakh. Net loss is ₹3 + ₹4 + ₹2 − ₹1 = ₹8 lakh.

Where it goes wrong. Ignoring settlement differences or charging the full liquidation invoice to Realisation.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 1-7

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

How much of the liquidation expenses should ultimately be charged to Realisation Account in Kestrel's books?

1. ₹9 lakh
2. ₹6 lakh
3. ₹3 lakh (correct answer)
4. Nil

Answer: C — ₹3 lakh

Explanation. The total invoice is ₹9 lakh, but Monarch has agreed to bear ₹6 lakh. Kestrel pays ₹9 lakh initially by debiting Monarch ₹6 lakh and Realisation ₹3 lakh, and crediting Bank ₹9 lakh. On reimbursement, Kestrel debits Bank ₹6 lakh and credits Monarch. Thus, only ₹3 lakh is Kestrel's expense and reduces the realisation result. The reimbursable ₹6 lakh is not an expense of the vendor company.

Where it goes wrong. Debiting Realisation with the entire invoice instead of only the vendor's contractual share.

Authority. ICAI Study Material, Chapter 13, Section 6, step 5(b)

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

What is the net loss or gain transferred to Realisation Account from settlement of liabilities not assumed by Monarch?

1. Net gain of ₹1 lakh
2. Net loss of ₹1 lakh (correct answer)
3. Net loss of ₹3 lakh
4. Net gain of ₹3 lakh

Answer: B — Net loss of ₹1 lakh

Explanation. The outstanding interest of ₹10 lakh is paid at book value, producing no difference. The tax provision of ₹20 lakh is settled for ₹22 lakh, resulting in a loss of ₹2 lakh. The term loan of ₹30 lakh is settled for ₹29 lakh, resulting in a profit of ₹1 lakh. The net settlement loss is therefore ₹2 lakh − ₹1 lakh = ₹1 lakh. The difference between the carrying amount and actual settlement is transferred to Realisation Account.

Where it goes wrong. Treating a liability settled below its book value as a realisation loss.

Authority. ICAI Study Material, Chapter 13, Section 6, step 6

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

What amount should be credited to Preference Shareholders Account when Kestrel's preference shareholders receive a 10% premium on their capital?

1. ₹40 lakh
2. ₹42 lakh
3. ₹46 lakh
4. ₹44 lakh (correct answer)

Answer: D — ₹44 lakh

Explanation. Preference share capital is ₹40 lakh. The scheme grants a premium of 10%, amounting to ₹4 lakh. Therefore, Preference Shareholders Account is credited with ₹44 lakh. The corresponding entry is Preference Share Capital Dr. ₹40 lakh and Realisation Dr. ₹4 lakh, To Preference Shareholders ₹44 lakh. The premium is an additional amount payable under the scheme, not an increase in the existing preference share capital.

Where it goes wrong. Crediting preference shareholders only with their original share capital.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 7-8

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

Scenario. On 1 October 2026, Vardhan Machine Tools Ltd. (Vardhan), a precision-equipment manufacturer, is absorbed by Helios Industrial Ltd. Vardhan's closing balance sheet (₹ lakh) shows: Assets: Plant and machinery 150; patents 20; inventories 50; trade receivables 30; bank balance 25. Total assets 275. Equity and liabilities: Equity share capital (8,00,000 shares of ₹10 each) 80; 10% preference share capital 30; reserves 25; 10% debentures 50; trade creditors 70; accrued debenture interest 20. Total 275. Helios takes over plant, patents, inventories and receivables at book value, but excludes Vardhan's bank balance. It assumes the debenture principal of ₹50 lakh and trade creditors of ₹70 lakh. Accrued debenture interest is not assumed and remains payable by Vardhan. The agreed purchase consideration for all equity and preference shareholders is a fixed ₹150 lakh. Preference shareholders receive Helios preference shares valued at ₹33 lakh, including a 10% premium over their ₹30 lakh capital. The equity-shareholder component is therefore ₹117 lakh. Of Vardhan's equity shares, holders of 1,00,000 shares dissent from the share-exchange arrangement and are to receive cash of ₹15 per share. Holders of the remaining 7,00,000 shares receive Helios equity shares having an agreed value of ₹102 lakh. Vardhan pays liquidation expenses of ₹6 lakh itself. It discharges the outstanding debenture interest of ₹20 lakh by paying ₹19 lakh, with the debenture-holders accepting the discounted settlement in full. No other asset, liability or distribution adjustment arises.

What amount should be credited to Realisation Account in respect of the liabilities assumed by Helios?

1. ₹140 lakh
2. ₹100 lakh
3. ₹120 lakh (correct answer)
4. ₹150 lakh

Answer: C — ₹120 lakh

Explanation. Helios assumes the debenture principal of ₹50 lakh and trade creditors of ₹70 lakh. The total liabilities transferred to Realisation are therefore ₹120 lakh. Accrued debenture interest of ₹20 lakh is expressly not assumed and remains payable by Vardhan. It must not be included in the liabilities transferred to Realisation. The subsequent discharge of this interest is dealt with separately in Vardhan's books.

Where it goes wrong. Transferring accrued interest to Realisation merely because the related debenture principal is assumed.

Authority. ICAI Study Material, Chapter 13, Section 6, step 2

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

What amount of cash is payable to the dissenting equity shareholders under the scheme, and how is the payment recorded when their entitlement has already been transferred to Equity Shareholders Account?

1. ₹15 lakh; debit Equity Shareholders Account and credit Bank (correct answer)
2. ₹10 lakh; debit Realisation Account and credit Bank
3. ₹12 lakh; debit Equity Share Capital and credit Bank
4. ₹18 lakh; debit Preference Shareholders Account and credit Bank

Answer: A — ₹15 lakh; debit Equity Shareholders Account and credit Bank

Explanation. The dissenting shareholders hold 1,00,000 shares and are entitled to ₹15 per share. Their cash entitlement is 1,00,000 × ₹15 = ₹15,00,000. Once the shareholders' entitlement has been credited to Equity Shareholders Account, its settlement is recorded by debiting that account and crediting Bank. The payment is part of the agreed shareholder consideration and is not a liquidation expense or a payment of preference share capital.

Where it goes wrong. Charging dissenting shareholders' settlement directly to Realisation or Share Capital.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, steps 9-10

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

Calculate the profit or loss on realisation in Vardhan's books, after considering the discounted settlement of accrued debenture interest and the liquidation expenses.

1. Loss of ₹12 lakh
2. Profit of ₹12 lakh (correct answer)
3. Profit of ₹9 lakh
4. Loss of ₹9 lakh

Answer: B — Profit of ₹12 lakh

Explanation. Assets transferred are ₹250 lakh and assumed liabilities are ₹120 lakh. Purchase consideration is ₹150 lakh, giving an initial realisation profit of ₹20 lakh. Liquidation expenses borne by Vardhan are ₹6 lakh and preference premium is ₹3 lakh, both debited to Realisation. Accrued interest of ₹20 lakh is settled for ₹19 lakh, creating a gain of ₹1 lakh. Final profit is ₹20 − ₹6 − ₹3 + ₹1 = ₹12 lakh.

Where it goes wrong. Treating the discounted settlement of accrued interest as a loss rather than a gain.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, steps 1-7

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

What is the final balance of Equity Shareholders Account before settlement with the equity shareholders?

1. ₹105 lakh
2. ₹110 lakh
3. ₹114 lakh
4. ₹117 lakh (correct answer)

Answer: D — ₹117 lakh

Explanation. Equity Shareholders Account receives credits for equity share capital of ₹80 lakh, reserves of ₹25 lakh and profit on realisation of ₹12 lakh. Its balance is ₹80 + ₹25 + ₹12 = ₹117 lakh. The preference shareholders' entitlement of ₹33 lakh is accounted for separately. The equity shareholders' balance is discharged through Helios shares worth ₹102 lakh and cash of ₹15 lakh paid to dissenting shareholders, aggregating exactly ₹117 lakh.

Where it goes wrong. Including preference shareholders' capital or excluding the gain on realisation.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 9-10

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

Scenario. A transferor company has the following debit balances immediately before amalgamation (₹ lakh): building 96; plant and machinery 54; patents 12; inventories 38; trade receivables 20; bank balance 16; Profit and Loss Account (debit balance) 8; preliminary expenses not written off 4. The transferee takes over every asset except the bank balance. What amount should be debited to Realisation Account?

A transferor company has the following debit balances immediately before amalgamation (₹ lakh): building 96; plant and machinery 54; patents 12; inventories 38; trade receivables 20; bank balance 16; Profit and Loss Account (debit balance) 8; preliminary expenses not written off 4. The transferee takes over every asset except the bank balance. What amount should be debited to Realisation Account?

1. ₹220 lakh (correct answer)
2. ₹236 lakh
3. ₹232 lakh
4. ₹224 lakh

Answer: A — ₹220 lakh

Explanation. The assets transferred are building ₹96 lakh, plant ₹54 lakh, patents ₹12 lakh, inventories ₹38 lakh and receivables ₹20 lakh. The total is ₹220 lakh. Bank is specifically not taken over and remains outside Realisation. A debit balance in Profit and Loss Account and unamortised preliminary expenses are not assets to be transferred to Realisation. The entry therefore debits Realisation with ₹220 lakh and credits the respective asset accounts.

Where it goes wrong. Treating deferred expenses and debit Profit and Loss balance as assets.

Authority. ICAI Study Material, Chapter 13, Section 6, step 1

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

Scenario. During amalgamation, the transferee agrees to record certain assets at values different from the transferor's carrying amounts. The transferor's books show land ₹75 lakh, plant with gross cost ₹180 lakh and accumulated depreciation ₹60 lakh, patents ₹18 lakh, inventories ₹42 lakh, trade receivables ₹27 lakh and cash ₹20 lakh. Cash is not taken over. What amount must the transferor debit to Realisation Account?

During amalgamation, the transferee agrees to record certain assets at values different from the transferor's carrying amounts. The transferor's books show land ₹75 lakh, plant with gross cost ₹180 lakh and accumulated depreciation ₹60 lakh, patents ₹18 lakh, inventories ₹42 lakh, trade receivables ₹27 lakh and cash ₹20 lakh. Cash is not taken over. What amount must the transferor debit to Realisation Account?

1. ₹302 lakh
2. ₹282 lakh (correct answer)
3. ₹342 lakh
4. ₹300 lakh

Answer: B — ₹282 lakh

Explanation. The transferor transfers assets at book values, not the agreed fair values used by the transferee. Plant is transferred at its net book value of ₹180 − ₹60 = ₹120 lakh. The other assets total ₹75 + ₹18 + ₹42 + ₹27 = ₹162 lakh. Total assets transferred are therefore ₹282 lakh. The excluded cash of ₹20 lakh is not included. The transferee's revaluation does not alter the transferor's asset-transfer entry.

Where it goes wrong. Using the transferee's agreed asset values instead of the transferor's carrying amounts.

Authority. ICAI Study Material, Chapter 13, Section 6, step 1

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

Scenario. A transferee company has agreed to pay purchase consideration of ₹286 lakh to the shareholders of a transferor company. Which journal entry records the consideration becoming receivable in the transferor's books?

A transferee company has agreed to pay purchase consideration of ₹286 lakh to the shareholders of a transferor company. Which journal entry records the consideration becoming receivable in the transferor's books?

1. Realisation Account Dr. ₹286 lakh; To Transferee Company ₹286 lakh
2. Bank Account Dr. ₹286 lakh; To Realisation Account ₹286 lakh
3. Transferee Company Dr. ₹286 lakh; To Realisation Account ₹286 lakh (correct answer)
4. Equity Shareholders Account Dr. ₹286 lakh; To Transferee Company ₹286 lakh

Answer: C — Transferee Company Dr. ₹286 lakh; To Realisation Account ₹286 lakh

Explanation. When purchase consideration becomes receivable, the transferee company is treated as a debtor of the transferor company. Accordingly, Transferee Company Account is debited and Realisation Account is credited with ₹286 lakh. Receipt of the consideration is a separate subsequent entry in which the assets or securities actually received are debited and the Transferee Company Account is credited. Crediting the Transferee Company at the receivable stage would reverse the required entry.

Where it goes wrong. Confusing recognition of consideration receivable with actual receipt of consideration.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, step 3

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

Scenario. A transferor company has 25,000 fully paid 10% preference shares of ₹100 each. Under the amalgamation agreement, preference shareholders are entitled to receive consideration at a premium of 12%. What amount should be credited to Preference Shareholders Account?

A transferor company has 25,000 fully paid 10% preference shares of ₹100 each. Under the amalgamation agreement, preference shareholders are entitled to receive consideration at a premium of 12%. What amount should be credited to Preference Shareholders Account?

1. ₹25 lakh
2. ₹26.50 lakh
3. ₹27.50 lakh
4. ₹28 lakh (correct answer)

Answer: D — ₹28 lakh

Explanation. The preference share capital is 25,000 × ₹100 = ₹25 lakh. Premium payable is 12% of ₹25 lakh, amounting to ₹3 lakh. Thus, the preference shareholders are entitled to ₹28 lakh. The entry is Preference Share Capital Dr. ₹25 lakh, Realisation Dr. ₹3 lakh, To Preference Shareholders ₹28 lakh. The preference premium is charged to Realisation because it arises under the terms of the amalgamation scheme.

Where it goes wrong. Calculating the preference shareholders' entitlement without including the agreed premium.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 7-8

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

Scenario. A liability of ₹18 lakh appearing in the transferor's books is not taken over by the transferee. The transferor settles the liability for ₹16.20 lakh in cash before closing its books. What is the effect of this settlement on Realisation Account?

A liability of ₹18 lakh appearing in the transferor's books is not taken over by the transferee. The transferor settles the liability for ₹16.20 lakh in cash before closing its books. What is the effect of this settlement on Realisation Account?

1. Profit of ₹1.80 lakh credited to Realisation (correct answer)
2. Loss of ₹1.80 lakh debited to Realisation
3. Profit of ₹16.20 lakh credited to Realisation
4. Loss of ₹18 lakh debited to Realisation

Answer: A — Profit of ₹1.80 lakh credited to Realisation

Explanation. The liability has a carrying amount of ₹18 lakh, but the transferor pays only ₹16.20 lakh. The liability is debited for ₹18 lakh and Bank is credited for ₹16.20 lakh. The difference of ₹1.80 lakh represents a gain and is credited to Realisation Account. A settlement below the carrying amount creates a realisation profit, while payment above the carrying amount would create a loss.

Where it goes wrong. Reversing the direction of the gain or loss when settling an outside liability.

Authority. ICAI Study Material, Chapter 13, Section 6, step 6

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

Scenario. A transferor company maintains a workmen compensation reserve of ₹15 lakh. The transferee assumes an estimated workmen compensation liability of ₹9 lakh. The remaining reserve is found to be unnecessary. What is the appropriate treatment in the transferor's books?

A transferor company maintains a workmen compensation reserve of ₹15 lakh. The transferee assumes an estimated workmen compensation liability of ₹9 lakh. The remaining reserve is found to be unnecessary. What is the appropriate treatment in the transferor's books?

1. Credit Realisation with ₹15 lakh and transfer ₹9 lakh to equity shareholders
2. Credit Realisation with ₹9 lakh and transfer ₹6 lakh to Equity Shareholders Account (correct answer)
3. Credit Realisation with ₹6 lakh and transfer ₹9 lakh to Equity Shareholders Account
4. Credit Realisation with ₹9 lakh and transfer ₹15 lakh to Equity Shareholders Account

Answer: B — Credit Realisation with ₹9 lakh and transfer ₹6 lakh to Equity Shareholders Account

Explanation. Only the portion representing the expected liability is transferred to Realisation. Accordingly, ₹9 lakh is transferred as the liability assumed by the transferee. The remaining ₹15 − ₹9 = ₹6 lakh is not required and represents a reserve surplus. That balance is transferred to Equity Shareholders Account. The entire reserve cannot be treated as a liability because the purchaser has accepted only the estimated obligation of ₹9 lakh.

Where it goes wrong. Transferring the entire provision as a liability instead of separating the reserve surplus.

Authority. ICAI Study Material, Chapter 13, Section 6, step 2

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

Scenario. Liquidation expenses of ₹24 lakh are initially paid by a transferor company. Under the scheme, the transferee agrees to bear a maximum of ₹17 lakh and reimburses that precise amount. What amount should ultimately be charged to Realisation Account in the transferor's books?

Liquidation expenses of ₹24 lakh are initially paid by a transferor company. Under the scheme, the transferee agrees to bear a maximum of ₹17 lakh and reimburses that precise amount. What amount should ultimately be charged to Realisation Account in the transferor's books?

1. ₹24 lakh
2. ₹17 lakh
3. ₹7 lakh (correct answer)
4. Nil

Answer: C — ₹7 lakh

Explanation. The transferee's liability is ₹17 lakh and the transferor's own liability is ₹24 − ₹17 = ₹7 lakh. On initial payment, debit the transferee company ₹17 lakh and Realisation ₹7 lakh, and credit Bank ₹24 lakh. On reimbursement, debit Bank ₹17 lakh and credit the transferee company ₹17 lakh. Only ₹7 lakh is borne by the transferor and charged to Realisation.

Where it goes wrong. Debiting the vendor's Realisation Account with the reimbursable portion of liquidation expenses.

Authority. ICAI Study Material, Chapter 13, Section 6, step 5(b)

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

Scenario. Purchase consideration of ₹210 lakh is received by a transferor company through ₹70 lakh cash, equity shares of the transferee valued at ₹110 lakh and debentures of the transferee valued at ₹30 lakh. These debentures are issued directly to the transferor's preference shareholders as part of their shareholder consideration. Which receipt entry is correct?

Purchase consideration of ₹210 lakh is received by a transferor company through ₹70 lakh cash, equity shares of the transferee valued at ₹110 lakh and debentures of the transferee valued at ₹30 lakh. These debentures are issued directly to the transferor's preference shareholders as part of their shareholder consideration. Which receipt entry is correct?

1. Bank Dr. ₹70 lakh; To Realisation ₹70 lakh
2. Equity Shares Dr. ₹110 lakh; To Equity Shareholders ₹110 lakh
3. Transferee Company Dr. ₹210 lakh; To Bank ₹70 lakh, To Securities ₹140 lakh
4. Bank Dr. ₹70 lakh, Equity Shares Dr. ₹110 lakh, Debentures Dr. ₹30 lakh; To Transferee Company ₹210 lakh (correct answer)

Answer: D — Bank Dr. ₹70 lakh, Equity Shares Dr. ₹110 lakh, Debentures Dr. ₹30 lakh; To Transferee Company ₹210 lakh

Explanation. The purchase consideration has already been recognised as receivable from the transferee. On actual receipt, Bank is debited ₹70 lakh, equity shares in the transferee are debited ₹110 lakh and debentures in the transferee are debited ₹30 lakh. The aggregate debit is ₹210 lakh, credited to Transferee Company Account. The debentures are included because they are issued to preference shareholders as shareholder consideration, rather than to existing debenture-holders.

Where it goes wrong. Assuming that debentures can never form part of consideration irrespective of their recipient.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, step 4

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

Scenario. A transferor company has equity share capital of ₹150 lakh, general and capital reserves aggregating ₹75 lakh, and a workmen compensation reserve of ₹8 lakh which is no longer required. Its Realisation Account shows a credit balance of ₹12 lakh. What amount should ultimately be credited to Equity Shareholders Account?

A transferor company has equity share capital of ₹150 lakh, general and capital reserves aggregating ₹75 lakh, and a workmen compensation reserve of ₹8 lakh which is no longer required. Its Realisation Account shows a credit balance of ₹12 lakh. What amount should ultimately be credited to Equity Shareholders Account?

1. ₹245 lakh (correct answer)
2. ₹237 lakh
3. ₹233 lakh
4. ₹225 lakh

Answer: A — ₹245 lakh

Explanation. Equity Shareholders Account is credited with equity share capital ₹150 lakh, general and capital reserves ₹75 lakh, unnecessary workmen compensation reserve ₹8 lakh and realisation profit ₹12 lakh. The balance transferred is ₹150 + ₹75 + ₹8 + ₹12 = ₹245 lakh. The workmen compensation reserve is included because it is no longer required to meet a liability. A credit balance in Realisation represents profit and increases the amount available to equity shareholders.

Where it goes wrong. Omitting the released reserve or treating a credit balance in Realisation as a loss.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 2 and 9

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

Scenario. The transferor company transfers assets of ₹480 lakh to Realisation Account. The transferee assumes liabilities of ₹180 lakh and agrees to pay shareholder consideration of ₹310 lakh. Liquidation expenses of ₹6 lakh are entirely borne by the transferor. What is the result on realisation?

The transferor company transfers assets of ₹480 lakh to Realisation Account. The transferee assumes liabilities of ₹180 lakh and agrees to pay shareholder consideration of ₹310 lakh. Liquidation expenses of ₹6 lakh are entirely borne by the transferor. What is the result on realisation?

1. Loss of ₹4 lakh
2. Profit of ₹4 lakh (correct answer)
3. Profit of ₹10 lakh
4. Loss of ₹10 lakh

Answer: B — Profit of ₹4 lakh

Explanation. The debit side of Realisation consists of assets ₹480 lakh and liquidation expenses ₹6 lakh, totalling ₹486 lakh. The credit side comprises liabilities taken over ₹180 lakh and purchase consideration ₹310 lakh, totalling ₹490 lakh. The excess of credits over debits is ₹4 lakh, representing profit on realisation. Since the liquidation expenses are entirely borne by the transferor, the full ₹6 lakh must be debited to Realisation.

Where it goes wrong. Omitting vendor-borne liquidation expenses when calculating the Realisation Account balance.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, steps 1-5

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

Scenario. Under an amalgamation scheme, the transferee company directly pays ₹12 lakh to the liquidator for the transferor company's liquidation expenses. The transferor does not initially pay or subsequently reimburse any part of this amount. What is the correct treatment in the transferor's Realisation Account?

Under an amalgamation scheme, the transferee company directly pays ₹12 lakh to the liquidator for the transferor company's liquidation expenses. The transferor does not initially pay or subsequently reimburse any part of this amount. What is the correct treatment in the transferor's Realisation Account?

1. Debit Realisation with ₹12 lakh
2. Credit Realisation with ₹12 lakh
3. No entry is required in the transferor's books (correct answer)
4. Debit Equity Shareholders Account with ₹12 lakh

Answer: C — No entry is required in the transferor's books

Explanation. Where liquidation expenses are to be borne and directly paid by the purchasing company, the amount may be ignored in the vendor's books. The transferor neither incurs the expenditure through its own Bank Account nor obtains a reimbursement receivable. Consequently, no debit or credit is made in its Realisation Account. This differs from the arrangement where the vendor first pays and subsequently obtains reimbursement, which requires separate entries.

Where it goes wrong. Recording an expense in the transferor's books merely because it relates to its liquidation.

Authority. ICAI Study Material, Chapter 13, Section 6, step 5(b)(i)

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

Scenario. Under an amalgamation scheme, equity shareholders are entitled to consideration of ₹150 lakh. The transferor has 6,00,000 equity shares outstanding. Holders of 60,000 shares reject the share exchange and elect to receive cash of ₹18 per share. What cash payment should be made to these dissenting shareholders when settling Equity Shareholders Account?

Under an amalgamation scheme, equity shareholders are entitled to consideration of ₹150 lakh. The transferor has 6,00,000 equity shares outstanding. Holders of 60,000 shares reject the share exchange and elect to receive cash of ₹18 per share. What cash payment should be made to these dissenting shareholders when settling Equity Shareholders Account?

1. ₹9 lakh
2. ₹15 lakh
3. ₹12.60 lakh
4. ₹10.80 lakh (correct answer)

Answer: D — ₹10.80 lakh

Explanation. The dissenting shareholders hold 60,000 shares and have elected the cash alternative. Their amount payable is 60,000 × ₹18 = ₹10,80,000. Once their entitlement is included in the Equity Shareholders Account, settlement requires debiting that account and crediting Bank with ₹10.80 lakh. The remaining shareholders' entitlement is settled using the agreed share exchange. The dissenters' cash is not an expense of liquidation.

Where it goes wrong. Calculating dissenters' cash using the total equity shareholding instead of the shares actually opting for cash.

Authority. AS 14, para 3(g); ICAI Study Material, Chapter 13, Section 6, steps 9-10

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

Scenario. The transferor company's books show 12% debentures of ₹60 lakh, accrued debenture interest of ₹5 lakh and trade claims of ₹12 lakh. The transferee assumes the debenture principal of ₹60 lakh but does not assume either interest or trade claims. The transferor settles accrued interest at ₹5 lakh and trade claims for ₹13.20 lakh. What is the net credit or debit arising in Realisation Account from these three items?

The transferor company's books show 12% debentures of ₹60 lakh, accrued debenture interest of ₹5 lakh and trade claims of ₹12 lakh. The transferee assumes the debenture principal of ₹60 lakh but does not assume either interest or trade claims. The transferor settles accrued interest at ₹5 lakh and trade claims for ₹13.20 lakh. What is the net credit or debit arising in Realisation Account from these three items?

1. Net credit of ₹58.80 lakh (correct answer)
2. Net credit of ₹60 lakh
3. Net credit of ₹61.20 lakh
4. Net debit of ₹58.80 lakh

Answer: A — Net credit of ₹58.80 lakh

Explanation. The debenture principal of ₹60 lakh is assumed by the transferee and transferred as a credit to Realisation. Accrued interest of ₹5 lakh is paid exactly at book value, so there is no realisation difference. Trade claims of ₹12 lakh are settled for ₹13.20 lakh, creating a loss of ₹1.20 lakh debited to Realisation. The net effect is a credit of ₹60 − ₹1.20 = ₹58.80 lakh. Principal assumed and interest settled separately must not be combined.

Where it goes wrong. Treating the debenture principal and accrued interest as one liability or ignoring the premium paid on the trade claim.

Authority. ICAI Study Material, Chapter 13, Section 6, steps 2 and 6