Chapter 13: Accounting for Reconstruction - Test 5: answer key

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

Scenario. Apex Components Ltd. agreed to absorb Beacon Auto Parts Ltd. under a scheme of amalgamation effective from 1 July 2026. The amalgamation is in the nature of purchase, and Apex will take over Beacon's entire undertaking, including its assets, liabilities and inventories. Immediately before amalgamation, the following reciprocal balances appear in their respective books (₹ lakh): Apex Components Ltd.: Trade receivables from Beacon 18; Bills receivable accepted by Beacon 6; Trade payables to Beacon 4. Beacon Auto Parts Ltd.: Trade payables to Apex 18; Bills payable accepted in favour of Apex 6; Trade receivables from Apex 4. The balances of ₹4 lakh appearing reciprocally in trade receivables and trade payables are also confirmed by both companies. There are no outstanding differences or unrecorded transactions. During the year, Apex sold goods to Beacon at a profit of 25% on cost. Goods invoiced at ₹25 lakh remained unsold in Beacon's inventory on the amalgamation date. Separately, Beacon sold goods to Apex at a profit equivalent to 20% of the selling price. Goods invoiced at ₹18 lakh from this transaction remained in Apex's inventory on the same date. Both inventory balances are included at their respective invoice amounts. Apex will recognise the acquired assets and liabilities under the purchase method. The stock adjustments are to be made in accordance with the ICAI Study Material's treatment of inter-company unrealised profits. The scheme specifically provides for elimination of mutual debts and bills after the usual acquisition entries. No third-party claims are included in the reciprocal balances, and all figures are stated before the amalgamation adjustments.

What is the aggregate amount of inter-company trade receivables, trade payables, bills receivable and bills payable that must be eliminated after amalgamation, considering the reciprocal balances appearing in the books of both companies?

1. ₹24 lakh (correct answer)
2. ₹18 lakh
3. ₹30 lakh
4. ₹12 lakh

Answer: A — ₹24 lakh

Explanation. Trade receivables and trade payables of ₹18 lakh are reciprocal balances and must be cancelled. Similarly, bills receivable and bills payable of ₹6 lakh are eliminated. The aggregate amount eliminated on each side is ₹18 + ₹6 = ₹24 lakh. The reciprocal ₹4 lakh balances are also cancelled, but they are not part of the ₹18 lakh and ₹6 lakh figures specified as the principal mutual balances in the calculation. The same amount must be removed from the corresponding asset and liability balances.

Where it goes wrong. Adding both sides of each reciprocal balance and incorrectly treating ₹48 lakh as the amount to be eliminated.

Authority. AS 14, para 3(e)(i); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company owing, p. 13.32

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

Which journal entry correctly eliminates the bills payable accepted by Apex and the corresponding bills receivable held by Apex after amalgamation?

1. Bills Receivable Dr. ₹6 lakh; To Bills Payable ₹6 lakh.
2. Bills Payable Dr. ₹6 lakh; To Bills Receivable ₹6 lakh. (correct answer)
3. Trade Payables Dr. ₹6 lakh; To Trade Receivables ₹6 lakh.
4. Bills Payable Dr. ₹6 lakh; To Bank Account ₹6 lakh.

Answer: B — Bills Payable Dr. ₹6 lakh; To Bills Receivable ₹6 lakh.

Explanation. Bills payable is a liability and must be debited to eliminate it. Bills receivable is the corresponding asset and must be credited. The correct entry is Bills Payable Dr. ₹6 lakh, To Bills Receivable ₹6 lakh. Debiting Bills Receivable and crediting Bills Payable would increase both balances rather than cancel them. The trade payable and trade receivable balances require a separate corresponding entry.

Where it goes wrong. Reversing the debit and credit treatment of the reciprocal bill balances.

Authority. AS 14, para 3(e)(i); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company owing, p. 13.32

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

Calculate the unrealised profit included in Beacon's inventory in respect of goods purchased from Apex and determine the value at which this portion of inventory should be recognised by Apex.

1. Profit ₹4 lakh; inventory ₹21 lakh.
2. Profit ₹6.25 lakh; inventory ₹18.75 lakh.
3. Profit ₹5 lakh; inventory ₹20 lakh. (correct answer)
4. Profit ₹3.75 lakh; inventory ₹21.25 lakh.

Answer: C — Profit ₹5 lakh; inventory ₹20 lakh.

Explanation. Apex sold the goods at cost plus 25%. Therefore, selling price represents 125% of cost. The cost is ₹25 lakh × 100/125 = ₹20 lakh, and the embedded unrealised profit is ₹5 lakh. Since the goods remain in the transferor's inventory but were originally sold by the transferee, the inventory acquired by Apex must be reduced to its cost of ₹20 lakh. This reduction also affects the goodwill or capital reserve arising on acquisition.

Where it goes wrong. Calculating 25% of the invoice price instead of extracting profit from a 25% markup on cost.

Authority. AS 14, para 3(e)(v); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

What is the unrealised profit adjustment for goods sold by Beacon to Apex and remaining in Apex's inventory? Identify the appropriate accounting treatment.

1. ₹2.40 lakh; debit inventory and credit Goodwill.
2. ₹4.50 lakh; debit Capital Reserve and credit inventory.
3. ₹3 lakh; debit inventory and credit Capital Reserve.
4. ₹3.60 lakh; debit Goodwill or adjust Capital Reserve and credit inventory. (correct answer)

Answer: D — ₹3.60 lakh; debit Goodwill or adjust Capital Reserve and credit inventory.

Explanation. Beacon's profit is 20% of the selling price. The unrealised profit is therefore ₹18 lakh × 20% = ₹3.60 lakh. Since the original seller is the transferor and the inventory is held by the transferee, Apex must debit Goodwill or Capital Reserve, as applicable, and credit Inventory by ₹3.60 lakh. This differs from goods sold by Apex to Beacon, where the inventory acquired is reduced to Apex's original cost and the balancing acquisition figure adjusts accordingly.

Where it goes wrong. Applying the cost-plus percentage formula when the question expressly gives profit as a percentage of selling price.

Authority. AS 14, para 3(e)(v); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

Scenario. Meridian Engineering Ltd. proposes to absorb Summit Industrial Ltd. with effect from 1 August 2026. The scheme has been approved by the Tribunal under Section 232 of the Companies Act, 2013. The amalgamation is in the nature of purchase, and Meridian will continue Summit's principal manufacturing operations. Summit's issued equity share capital comprises 3,00,000 fully paid equity shares of ₹10 each. Immediately before the amalgamation, Meridian holds 60,000 Summit equity shares as a long-term investment, recorded in Meridian's books at ₹12 per share. Under the scheme, Summit's other shareholders will receive two new Meridian equity shares for every three Summit equity shares held. The agreed issue value of each new Meridian share is ₹18, although its face value is ₹10. No consideration is payable to Meridian in respect of its existing investment in Summit. Summit also holds 40,000 fully paid equity shares of Meridian, each having a face value of ₹10. These shares were acquired by Summit at ₹13 per share and appear in its balance sheet as non-current investments at their historical cost. Consequently, following amalgamation, these shares would otherwise become shares held by Meridian in its own name. The sanctioned scheme specifically provides that the 40,000 Meridian shares held by Summit are to be cancelled or extinguished, consistent with Section 232(3)(b) of the Companies Act, 2013. The corresponding nominal share capital is to be extinguished. All shareholdings and investments are authenticated as at the appointed date, and no other cross-holdings, preference shares or additional cash consideration exist. Ignore tax and transaction expenses.

How many new Meridian equity shares must be issued to Summit's shareholders other than Meridian, considering the existing shareholding of Meridian in Summit?

1. 1,60,000 shares (correct answer)
2. 2,00,000 shares
3. 1,80,000 shares
4. 2,40,000 shares

Answer: A — 1,60,000 shares

Explanation. Summit has 3,00,000 equity shares, of which 60,000 are already held by Meridian. Consideration is therefore payable only to holders of the remaining 2,40,000 shares. Under the exchange ratio of two Meridian shares for every three Summit shares, Meridian must issue 2,40,000 × 2/3 = 1,60,000 shares. The 60,000 shares already held by Meridian are not exchanged for further shares or included in the external shareholder consideration.

Where it goes wrong. Applying the exchange ratio to the entire transferor share capital without excluding shares already held by the transferee.

Authority. AS 14, para 3(g); Companies Act, 2013, Section 232(3)(b)

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

What is the value of the equity-share purchase consideration payable to Summit's outside shareholders, using the agreed issue value of Meridian shares?

1. ₹24 lakh
2. ₹28.80 lakh (correct answer)
3. ₹32.40 lakh
4. ₹36 lakh

Answer: B — ₹28.80 lakh

Explanation. Meridian issues 1,60,000 shares to Summit's outside shareholders. Their agreed issue value is ₹18 per share, not the ₹10 face value. Accordingly, the consideration is 1,60,000 × ₹18 = ₹28,80,000 or ₹28.80 lakh. The investment held by Meridian in Summit does not generate a fresh shareholder entitlement, and using the face value of the new shares would understate the agreed consideration.

Where it goes wrong. Valuing consideration at the face value of the new shares rather than their agreed issue value.

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

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

Summit holds 40,000 Meridian equity shares of ₹10 each. On amalgamation, these shares become shares held by Meridian itself and are cancelled under the scheme. What nominal amount of Meridian's issued share capital is extinguished?

1. ₹5.20 lakh
2. ₹3.20 lakh
3. ₹4 lakh (correct answer)
4. ₹5.60 lakh

Answer: C — ₹4 lakh

Explanation. The transferee cannot retain its own shares following amalgamation. Section 232(3)(b), proviso, requires such shares to be cancelled or extinguished. The nominal capital represented by the 40,000 shares is 40,000 × ₹10 = ₹4,00,000. Summit's historical investment cost of ₹5.20 lakh is not the basis for determining the nominal share capital extinguished. That carrying amount relates to the investment asset recorded by Summit.

Where it goes wrong. Using the historical investment cost of ₹5.20 lakh instead of the face value of the cancelled Meridian shares.

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

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

What amount of Meridian's investment in Summit must be eliminated rather than carried forward as a non-current investment after the amalgamation?

1. ₹6 lakh
2. ₹8.40 lakh
3. ₹10.80 lakh
4. ₹7.20 lakh (correct answer)

Answer: D — ₹7.20 lakh

Explanation. Meridian holds 60,000 Summit shares at a carrying amount of ₹12 each. Its recorded investment is therefore ₹7.20 lakh. On Summit's amalgamation into Meridian, the underlying Summit shares cease to exist, and the investment cannot remain as an asset in Meridian's post-amalgamation financial statements. The amount is eliminated rather than carried forward as an investment in its own resulting entity. No fresh consideration is payable in respect of this existing holding.

Where it goes wrong. Carrying forward the transferee's investment in the transferor as an asset after the transferor's separate identity ceases.

Authority. AS 14, para 3(g); Companies Act, 2013, Section 232(3)(b)

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

Scenario. Orbit Electronics Ltd. is absorbing Vega Systems Ltd. under a scheme effective from 1 October 2026. Vega's equity shareholders are entitled to an exchange of two fully paid Orbit equity shares for every three fully paid Vega equity shares. Orbit's equity shares have a face value of ₹10 and an agreed issue value of ₹30. Fractional share entitlements are to be settled in cash at the agreed issue value of an Orbit share. Vega has 100 individual equity shareholders, each holding exactly 12,001 equity shares of ₹10 each. Every shareholder participates in the exchange, and the scheme provides that whole shares will be allotted while the fractional entitlement will be paid in cash. No shareholder has opted out of the exchange. There are also inter-company inventory transactions outstanding on the amalgamation date. Vega had sold goods to Orbit for an invoice price of ₹24 lakh. The transaction included profit equal to 25% of the selling price, and the entire quantity remains in Orbit's inventory. Separately, Orbit had supplied goods to Vega at a profit of 20% on cost for an invoice price of ₹36 lakh. The entire quantity remains in Vega's closing inventory. Both amounts are included in their respective inventory balances at invoice price. Orbit will incorporate the assets and liabilities acquired from Vega under the applicable amalgamation accounting method. The parties have agreed that inter-company unrealised profits must be eliminated in accordance with the direction of the original sale and the company holding the inventory on the amalgamation date. There are no other inter-company balances, stock transfers or shareholdings. Ignore taxes, transaction costs and other adjustments.

How many whole Orbit equity shares will be allotted to Vega's shareholders under the agreed share exchange ratio, after considering the fractional entitlement of each shareholder?

1. 8,00,000 shares (correct answer)
2. 8,00,066 shares
3. 8,00,100 shares
4. 8,00,200 shares

Answer: A — 8,00,000 shares

Explanation. Each shareholder holds 12,001 Vega shares. Under the ratio of two Orbit shares for every three Vega shares, entitlement per shareholder is 12,001 × 2/3 = 8,000 2/3 shares. Each receives 8,000 whole shares, with the remaining 2/3 settled in cash. For 100 shareholders, whole shares allotted are 100 × 8,000 = 8,00,000 shares. The aggregate fractional portion is not rounded into additional whole shares.

Where it goes wrong. Ignoring the individual fractional entitlement or rounding the aggregate fractional shares up to a whole share.

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

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

Calculate the total cash payable to Vega's 100 shareholders in settlement of their fractional Orbit share entitlements.

1. ₹1,000
2. ₹2,000 (correct answer)
3. ₹1,600
4. ₹2,400

Answer: B — ₹2,000

Explanation. Each shareholder has a fractional entitlement of 2/3 Orbit share. For 100 shareholders, the aggregate fractional entitlement is 100 × 2/3 = 66 2/3 shares. At ₹30 per Orbit share, cash in lieu is 66 2/3 × ₹30 = ₹2,000. The amount is calculated using the agreed issue value, not the ₹10 face value. Whole shares allotted separately are 8,00,000.

Where it goes wrong. Valuing the fractional shares at their nominal value instead of the agreed issue value.

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

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

What is the unrealised profit included in Orbit's inventory arising from goods originally sold by Vega, and which adjustment is required in Orbit's books?

1. ₹4.80 lakh; debit inventory and credit Goodwill.
2. ₹6 lakh; debit inventory and credit Capital Reserve.
3. ₹6 lakh; debit Goodwill or Capital Reserve and credit inventory. (correct answer)
4. ₹4 lakh; debit Goodwill and credit inventory.

Answer: C — ₹6 lakh; debit Goodwill or Capital Reserve and credit inventory.

Explanation. Vega sold goods to Orbit at ₹24 lakh, and its profit represents 25% of the selling price. Unrealised profit is ₹24 lakh × 25% = ₹6 lakh. Since the transferor was the original seller and the inventory is held by the transferee, Orbit must debit Goodwill or Capital Reserve, as applicable, and credit Inventory by ₹6 lakh. The acquired inventory's value is thereby reduced to the cost recognised by the group.

Where it goes wrong. Applying the cost-plus percentage formula to a margin expressly calculated on selling price.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, p. 13.33

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

Orbit sold goods to Vega at a profit of 20% on cost for ₹36 lakh, and these goods remain in Vega's closing inventory. What is the correct amount at which this inventory component should be recognised by Orbit after amalgamation?

1. ₹36 lakh
2. ₹32 lakh
3. ₹28.80 lakh
4. ₹30 lakh (correct answer)

Answer: D — ₹30 lakh

Explanation. The transfer invoice price is ₹36 lakh and represents 120% of cost because Orbit charged a 20% markup on cost. Original cost is ₹36 × 100/120 = ₹30 lakh, so unrealised profit is ₹6 lakh. As the stock remains with the transferor and was sold by the transferee, Orbit must incorporate it at ₹30 lakh. The balancing goodwill or capital reserve is automatically affected by this reduction in acquired inventory.

Where it goes wrong. Reducing inventory by 20% of the invoice price instead of extracting profit from the 20% markup on cost.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

Scenario. At the date of amalgamation, the transferee's books show trade receivables from the transferor of ₹9.50 lakh and bills receivable accepted by the transferor of ₹4.50 lakh. The transferor's books show corresponding trade payables and bills payable of identical amounts. By what amount should aggregate current assets and aggregate current liabilities each be reduced on elimination?

At the date of amalgamation, the transferee's books show trade receivables from the transferor of ₹9.50 lakh and bills receivable accepted by the transferor of ₹4.50 lakh. The transferor's books show corresponding trade payables and bills payable of identical amounts. By what amount should aggregate current assets and aggregate current liabilities each be reduced on elimination?

1. ₹14 lakh (correct answer)
2. ₹28 lakh
3. ₹9.50 lakh
4. ₹4.50 lakh

Answer: A — ₹14 lakh

Explanation. The reciprocal trade receivable and payable balances are ₹9.50 lakh, and the reciprocal bills receivable and payable balances are ₹4.50 lakh. The total is ₹14 lakh. The transferee eliminates ₹14 lakh of current assets and ₹14 lakh of current liabilities. The amount is not ₹28 lakh because the same mutual debt is recorded once as an asset and once as a liability; elimination removes both sides of that single obligation.

Where it goes wrong. Double-counting the asset and liability sides of reciprocal balances.

Authority. AS 14, para 3(e)(i); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company owing, p. 13.32

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

Scenario. A transferee company holds bills receivable of ₹12 lakh accepted by the transferor. Before amalgamation, the transferee discounted bills of ₹3 lakh with its banker. The transferor's books continue to show bills payable of ₹12 lakh. What amount can be eliminated as mutual bills, and what amount remains payable to an external party?

A transferee company holds bills receivable of ₹12 lakh accepted by the transferor. Before amalgamation, the transferee discounted bills of ₹3 lakh with its banker. The transferor's books continue to show bills payable of ₹12 lakh. What amount can be eliminated as mutual bills, and what amount remains payable to an external party?

1. ₹12 lakh eliminated; Nil remains payable.
2. ₹9 lakh eliminated; ₹3 lakh remains payable to the bank. (correct answer)
3. ₹3 lakh eliminated; ₹9 lakh remains payable to the bank.
4. ₹6 lakh eliminated; ₹6 lakh remains payable to the bank.

Answer: B — ₹9 lakh eliminated; ₹3 lakh remains payable to the bank.

Explanation. The bills receivable remaining in the transferee's books are ₹12 − ₹3 = ₹9 lakh. This amount is matched with ₹9 lakh of the transferor's bills payable and eliminated. The ₹3 lakh discounted portion is no longer held as a bill receivable by the transferee; it is held by the bank. Therefore, the transferor's liability of ₹3 lakh to the external banker continues and cannot be eliminated as an inter-company balance.

Where it goes wrong. Eliminating the entire accepted bill amount even though part has already been discounted and is held by an external banker.

Authority. AS 14, para 3(e)(i); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company owing, p. 13.32

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

Scenario. A transferee company sold goods to the transferor at 25% profit on cost. Goods invoiced at ₹18 lakh remained in the transferor's closing inventory. What amount of unrealised profit must be eliminated?

A transferee company sold goods to the transferor at 25% profit on cost. Goods invoiced at ₹18 lakh remained in the transferor's closing inventory. What amount of unrealised profit must be eliminated?

1. ₹4.50 lakh
2. ₹2.88 lakh
3. ₹3.60 lakh (correct answer)
4. ₹4 lakh

Answer: C — ₹3.60 lakh

Explanation. The invoice value of ₹18 lakh represents 125% of cost. Cost is ₹18 × 100/125 = ₹14.40 lakh, and the embedded unrealised profit is ₹18 − ₹14.40 = ₹3.60 lakh. Since the transferee was the seller and the transferor holds the stock, the acquired inventory should be recorded at ₹14.40 lakh. The difference is reflected through the acquired net assets and resulting goodwill or capital reserve.

Where it goes wrong. Calculating 25% of the selling price instead of applying the correct cost-plus conversion.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

Scenario. A transferor sold goods to the transferee for ₹30 lakh. The invoice price includes a profit margin of 20% on selling price. The goods remain entirely in the transferee's inventory. What is the unrealised profit and its appropriate adjustment?

A transferor sold goods to the transferee for ₹30 lakh. The invoice price includes a profit margin of 20% on selling price. The goods remain entirely in the transferee's inventory. What is the unrealised profit and its appropriate adjustment?

1. ₹7.50 lakh; debit inventory and credit Goodwill.
2. ₹5 lakh; debit Capital Reserve and credit inventory.
3. ₹4.80 lakh; debit inventory and credit Capital Reserve.
4. ₹6 lakh; debit Goodwill or Capital Reserve and credit inventory. (correct answer)

Answer: D — ₹6 lakh; debit Goodwill or Capital Reserve and credit inventory.

Explanation. The transferor's profit is 20% of the ₹30 lakh selling price, giving ₹6 lakh of unrealised profit. Since the original seller is the transferor and the stock remains with the transferee, the latter debits Goodwill or Capital Reserve, as applicable, and credits Inventory by ₹6 lakh. The corresponding inventory value is reduced from ₹30 lakh to ₹24 lakh. This treatment is different from a transferor holding goods sold by the transferee.

Where it goes wrong. Reversing the adjustment direction when goods sold by the transferor remain in the transferee's inventory.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, p. 13.33

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

Scenario. The combined inventory immediately after acquisition is ₹60 lakh. It includes goods invoiced at ₹20 lakh originally sold by the transferee to the transferor at 25% profit on cost and goods invoiced at ₹15 lakh originally sold by the transferor to the transferee at 20% profit on selling price. Both quantities remain unsold. Determine the adjusted inventory value.

The combined inventory immediately after acquisition is ₹60 lakh. It includes goods invoiced at ₹20 lakh originally sold by the transferee to the transferor at 25% profit on cost and goods invoiced at ₹15 lakh originally sold by the transferor to the transferee at 20% profit on selling price. Both quantities remain unsold. Determine the adjusted inventory value.

1. ₹53 lakh (correct answer)
2. ₹48 lakh
3. ₹56 lakh
4. ₹50 lakh

Answer: A — ₹53 lakh

Explanation. For the first stock lot, unrealised profit is ₹20 × 25/125 = ₹4 lakh. For the second lot, it is ₹15 × 20% = ₹3 lakh. Total unrealised profit is ₹7 lakh. The adjusted inventory is therefore ₹60 − ₹7 = ₹53 lakh. The calculation uses cost-plus conversion for the first transaction and selling-price margin for the second. Treating both percentages as percentages of selling price would give an incorrect result.

Where it goes wrong. Applying one uniform profit formula to two transactions with different profit bases.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

Scenario. A transferor has borrowed ₹14 lakh from the transferee. The amount is included as a loan liability in the transferor's books and as a loan and advance asset in the transferee's books. Which entry should eliminate this inter-company loan in the transferee's post-amalgamation accounts?

A transferor has borrowed ₹14 lakh from the transferee. The amount is included as a loan liability in the transferor's books and as a loan and advance asset in the transferee's books. Which entry should eliminate this inter-company loan in the transferee's post-amalgamation accounts?

1. Loans and Advances Dr. ₹14 lakh; To Loan Liability ₹14 lakh.
2. Loan Liability Dr. ₹14 lakh; To Loans and Advances ₹14 lakh. (correct answer)
3. Business Purchase Dr. ₹14 lakh; To Loans and Advances ₹14 lakh.
4. Goodwill Dr. ₹14 lakh; To Loan Liability ₹14 lakh.

Answer: B — Loan Liability Dr. ₹14 lakh; To Loans and Advances ₹14 lakh.

Explanation. The transferor's inter-company loan is a liability, whereas the corresponding amount is an asset in the transferee's books. The liability is eliminated by debiting Loan Liability ₹14 lakh and crediting Loans and Advances ₹14 lakh. The entry removes the receivable and payable arising from the same inter-company financing. It is not part of purchase consideration and should not be treated as goodwill or as an external borrowing after amalgamation.

Where it goes wrong. Reversing the elimination entry or treating the internal borrowing as an external liability.

Authority. AS 14, para 3(e)(i); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company Loans, p. 13.33

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

Scenario. A transferee company is acquiring a transferor having 5,00,000 equity shares of ₹10 each. The transferee already holds 90,000 of these shares as an investment. Under the scheme, three new transferee shares having an agreed value of ₹24 each are issued for every six transferor shares held by the other shareholders. Calculate the purchase consideration payable to the outside shareholders.

A transferee company is acquiring a transferor having 5,00,000 equity shares of ₹10 each. The transferee already holds 90,000 of these shares as an investment. Under the scheme, three new transferee shares having an agreed value of ₹24 each are issued for every six transferor shares held by the other shareholders. Calculate the purchase consideration payable to the outside shareholders.

1. ₹60 lakh
2. ₹55.20 lakh
3. ₹49.20 lakh (correct answer)
4. ₹44.40 lakh

Answer: C — ₹49.20 lakh

Explanation. The outside shareholders hold 5,00,000 − 90,000 = 4,10,000 shares. The exchange ratio is three new shares for six old shares, requiring 4,10,000 × 3/6 = 2,05,000 new shares. At ₹24 per share, purchase consideration is 2,05,000 × ₹24 = ₹49.20 lakh. The transferee's existing holding is excluded because no new consideration is payable in respect of those shares.

Where it goes wrong. Including the transferee's existing investment in the transferor while computing the new consideration.

Authority. AS 14, para 3(g); Companies Act, 2013, Section 232(3)(b), proviso

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

Scenario. A transferor company owns 45,000 fully paid equity shares of its transferee company. Each share has a face value of ₹10 and a carrying amount of ₹12 in the transferor's books. The sanctioned amalgamation scheme requires cancellation of these shares. What is the nominal reduction in the transferee's share capital?

A transferor company owns 45,000 fully paid equity shares of its transferee company. Each share has a face value of ₹10 and a carrying amount of ₹12 in the transferor's books. The sanctioned amalgamation scheme requires cancellation of these shares. What is the nominal reduction in the transferee's share capital?

1. ₹5.40 lakh
2. ₹3.60 lakh
3. ₹5 lakh
4. ₹4.50 lakh (correct answer)

Answer: D — ₹4.50 lakh

Explanation. Following amalgamation, the transferor's holding of 45,000 shares in the transferee would become shares held by the transferee in its own name. Section 232(3)(b), proviso, requires such shares to be cancelled or extinguished. Nominal share capital cancelled is 45,000 × ₹10 = ₹4.50 lakh. The historical investment amount of ₹5.40 lakh does not determine the nominal capital reduction.

Where it goes wrong. Using the ₹12 carrying value instead of the ₹10 face value to calculate share capital extinguished.

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

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

Scenario. A transferee company already holds equity shares in the transferor. Following amalgamation, the transferor's separate legal identity ceases. Which treatment correctly reflects the position of the transferee's existing investment in the transferor?

A transferee company already holds equity shares in the transferor. Following amalgamation, the transferor's separate legal identity ceases. Which treatment correctly reflects the position of the transferee's existing investment in the transferor?

1. The investment is eliminated and the transferor's corresponding shares cease to exist under the scheme. (correct answer)
2. The investment is retained as an asset because it was acquired before the amalgamation.
3. The investment is reclassified as an investment in the transferee's own equity shares.
4. The investment is treated as additional purchase consideration payable to outside shareholders.

Answer: A — The investment is eliminated and the transferor's corresponding shares cease to exist under the scheme.

Explanation. The investment represents shares in the transferor, whose separate identity ceases on amalgamation. Those shares do not remain a separate investment asset in the transferee's post-amalgamation financial statements. The consideration payable to shareholders is calculated after excluding the shares already held by the transferee. Section 232(3)(b), read with the sanctioned scheme, requires the relevant shares to be cancelled or extinguished rather than retained as an investment in the transferee itself.

Where it goes wrong. Treating an investment in the transferor as a continuing investment after the transferor has been amalgamated.

Authority. AS 14, para 3(g); Companies Act, 2013, Section 232(3)(b), proviso; Companies Act, 2013, Section 232(3)(d)

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

Scenario. The transferee's books contain a trade receivable from the transferor and the transferor's books contain an equal trade payable. At what stage should the reciprocal balances be eliminated, according to the procedure explained in the ICAI Study Material?

The transferee's books contain a trade receivable from the transferor and the transferor's books contain an equal trade payable. At what stage should the reciprocal balances be eliminated, according to the procedure explained in the ICAI Study Material?

1. Before calculating the purchase consideration and before passing acquisition entries.
2. After the usual acquisition entries have been passed in the transferee's books. (correct answer)
3. Before recording the assets and liabilities taken over in the transferee's books.
4. Only after the transferor's liquidation expenses have been settled.

Answer: B — After the usual acquisition entries have been passed in the transferee's books.

Explanation. The ICAI Study Material specifically explains that inter-company owing is adjusted after the usual acquisition entries have been passed. The reciprocal amount is not purchase consideration because it does not represent payment to shareholders. It is also not an external liability of the combined entity. The adjustment is made by debiting the relevant liability and crediting the corresponding receivable once the acquisition entries have been completed.

Where it goes wrong. Adjusting mutual owing while computing purchase consideration or before recording the usual takeover entries.

Authority. AS 14, para 3(g); Companies Act, 2013, Section 232(3)(a); ICAI Study Material, Chapter 13, Inter-company owing, p. 13.32

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

Scenario. A transferor has 1,000 equity shareholders, each holding 101 fully paid equity shares. The scheme provides for three transferee shares for every four transferor shares. The transferee's shares have an agreed value of ₹24 each. Calculate the total cash payable in lieu of fractional shares.

A transferor has 1,000 equity shareholders, each holding 101 fully paid equity shares. The scheme provides for three transferee shares for every four transferor shares. The transferee's shares have an agreed value of ₹24 each. Calculate the total cash payable in lieu of fractional shares.

1. ₹12,000
2. ₹15,000
3. ₹18,000 (correct answer)
4. ₹24,000

Answer: C — ₹18,000

Explanation. Each shareholder's entitlement is 101 × 3/4 = 75.75 transferee shares. Whole shares allotted per shareholder are 75, leaving a fractional entitlement of 0.75 share. Aggregate fractional shares are 1,000 × 0.75 = 750 shares. Cash payable is 750 × ₹24 = ₹18,000. The value is calculated using the agreed value of the transferee shares and not their face value.

Where it goes wrong. Ignoring fractional entitlements separately for each shareholder or using the nominal share value for the cash settlement.

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

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

Scenario. A transferee has taken over the inventory of a transferor. The aggregate invoice value of goods originally sold by the transferee to the transferor was ₹80 lakh, and 30% of the goods remain unsold at the date of amalgamation. The transferor was charged a profit of 25% on cost. What unrealised profit must be eliminated from the acquired stock?

A transferee has taken over the inventory of a transferor. The aggregate invoice value of goods originally sold by the transferee to the transferor was ₹80 lakh, and 30% of the goods remain unsold at the date of amalgamation. The transferor was charged a profit of 25% on cost. What unrealised profit must be eliminated from the acquired stock?

1. ₹6 lakh
2. ₹5 lakh
3. ₹3.60 lakh
4. ₹4.80 lakh (correct answer)

Answer: D — ₹4.80 lakh

Explanation. The invoice value of unsold goods is ₹80 lakh × 30% = ₹24 lakh. Since the transferor was charged cost plus 25%, the profit element is 25/125 of the selling price. Unrealised profit is therefore ₹24 lakh × 25/125 = ₹4.80 lakh. The inventory acquired by the transferee should be reduced by this amount to its original cost. The calculation must first identify the proportion of stock remaining unsold.

Where it goes wrong. Applying the 25% markup to the entire year's sales instead of only the unsold inventory.

Authority. AS 14, para 3(e)(i); ICAI Study Material, Chapter 13, Adjustment of the value of stock, pp. 13.32-13.33

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

Scenario. In an amalgamation in the nature of merger, participating equity shareholders receive transferee equity shares under the agreed exchange ratio. Certain shareholders are entitled to fractional shares. Which cash settlement is consistent with the condition stipulated under AS 14?

In an amalgamation in the nature of merger, participating equity shareholders receive transferee equity shares under the agreed exchange ratio. Certain shareholders are entitled to fractional shares. Which cash settlement is consistent with the condition stipulated under AS 14?

1. Cash may be paid solely in respect of fractional share entitlements. (correct answer)
2. Cash may be paid for fractional entitlements and any additional fixed cash bonus.
3. Cash may replace the equity shares for shareholders requesting immediate payment.
4. Cash may be paid up to 10% of consideration while the balance is discharged in equity.

Answer: A — Cash may be paid solely in respect of fractional share entitlements.

Explanation. AS 14 para 3(e)(iii) requires consideration receivable by equity shareholders who agree to become equity shareholders of the transferee to be discharged wholly through equity shares. The specific exception permits cash payment in respect of fractional shares. A fixed cash bonus, cash substitution for whole shares or a general cash percentage would go beyond this exception. Accordingly, cash payment solely for fractional entitlements is consistent with the merger condition.

Where it goes wrong. Treating the fractional-share exception as permission for general cash consideration to participating shareholders.

Authority. AS 14, para 3(e)(iii); Companies Act, 2013, Section 232(3)(b)