holding co. questions
TRANSCRIPT
-
7/30/2019 holding co. questions
1/77
Valuation of goodwill
Methods of Valuation of Goodwill
Since goodwill is an intangible asset it is very difficult toaccurately calculate its value. Various methods have been
advocated for the valuation of goodwill of a partnership firm.
Goodwill calculated by one method may differ from the
goodwill calculated by another method. Hence, the method
by which goodwill is to be calculated, may be specificallydecided between the existing partners and the incoming
partner.
The important methods of valuation of goodwill are as follows:
1. Average Profits Method
2. Supper Profits Method
3. Capitalisation Method
-
7/30/2019 holding co. questions
2/77
The profit for the last five years of a firm were as follows
year 2002 Rs. 4,00,000; year 2003 Rs. 3,98,000; year 2004 Rs.
4,50,000; year 2005 Rs. 4,45,000 and year 2006 Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years purchaseof 5 years average profits.
Solution
Year Profit
(Rs.)
2002 4,00,000
2003 3,98,000
2004 4,50,000
2005 4,45,000
2006 5,00,000
Total 21,93,000
-
7/30/2019 holding co. questions
3/77
Average Profit = Total Profit of Last 5 Years
No. of years
= Rs. 21,93,000
5
= Rs. 4,38,600
Goodwill = Average Profits No. of years purchased
= Rs. 4,38,600 4 = Rs. 17,54,400
-
7/30/2019 holding co. questions
4/77
The Profits of firm for the last five years were as follows:
Year Profit
(Rs.)
200203 20,000
200304 24,000
200405 30,000
200506 25,000200607 18,000
Calculate the value of goodwill on the basis of three years
purchase of weighted average profits based on weights
1,2,3,4 and 5 respectively to the profits for2002,2003,2004,2005 and 2006.
-
7/30/2019 holding co. questions
5/77
Solution
Year Ended 31st March Profit Weight Product
(Rs.)
200203 20,000 1 20,000
200304 24,000 2 48,000
200405 30,000 3 90,000
200506 25,000 4 1,00,000200607 18,000 5 90,000
15 3,48,000
Weighted Average Profit = Rs. 3,48,000 / 15
= Rs. 23,200
Goodwill = Rs. 23,200 3 = Rs. 69,600
-
7/30/2019 holding co. questions
6/77
Calculate goodwill of a firm on the basis of three year purchase
of the weighted average profits of the last four years. The
profit of the last four years were: 2003 Rs. 20,200; 2004 Rs.
24,800; 2005 Rs. 20,000 and 2006 Rs. 30,000.The weights assigned to each year are : 2003 1; 2004 2; 2005
3 and 2006 4.
You are supplied the following information:
1. On September 1, 2005 a major plant repair was undertaken forRs. 6,000, which was charged to revenue. The said sum is to
be capitalised for goodwill calculation subject to adjustment of
depreciation of 10% p.a. on reducing balance method.
2. The Closing Stock for the year 2004 was overvalued by Rs.2,400.
3. To cover management cost an annual charge of Rs. 4,800
should be made for purpose of goodwill valuation.
-
7/30/2019 holding co. questions
7/77
Calculation of Adjusted Profit 2003 2004 2005 2006
Rs. Rs. Rs. Rs.
Given Profits Less 20,200 24,800 20,000 30,000
Management Cost 4,800 4,800 4,800 4,800
Add: Capital Expenditure 15,400 20,000 15,200 25,200
Charged to Revenue - - 6,000 -
15,400 20,000 21,200 25,200Less: Unprovided Depreciation - - 200 580
15,400 20,000 21,000 24,620
Less; over valuation of Closing Stock - 2,400 - -
15,400 17,600 21,000 24,620
Add: over value of opening stock - - 2,400 -
Adjusted Profits 15,400 17,600 23,400 24,620
-
7/30/2019 holding co. questions
8/77
Calculation of weighted average profits:
(Rs.)
Year Profit Weight Product
2003 15,400 1 15,4002004 17,600 2 35,200
2005 23,400 3 70,200
2006 24,620 4 98,480
Total 10 2,19,280Weight Average Profit = Rs. 2,19,280/ 10 = Rs. 21,928
Goodwill = Rs. 21,928 3 = Rs. 65,784
Notes to Solution
(i) Depreciation of 2005 = 10% of Rs. 6000 for 4 months= Rs. 6000 *10/100 * 4/12 = Rs. 200
(ii) Depreciation of 2006 = 10% of Rs. 6000 Rs. 200 for one year
= Rs. 5800 * 10/100 = Rs. 580
(iii) Closing Stock of 2004 will become opening stock for the year 2005
-
7/30/2019 holding co. questions
9/77
In previous study the term capital employed is defined as
simple equation as:
Total assets out side liabilities
But in practice, in large size of companies the following twodifferent type of approaches are adopted to compute the
value of capital employed:
1. Assets side approach
2. Liabilities side approach
-
7/30/2019 holding co. questions
10/77
Assets side approach
Value of capital employed, under this approach, is calculate as follows:
Assets at market value ***
(excluding goodwill, all deferred expenditure)Less:
Liabilities to outsiders ***
Capital employed ------
Less:
50% of profit during the year ***
Average capital employed ------
-
7/30/2019 holding co. questions
11/77
Liabilities side approach
Share capital ****
Add:
Profit , reserve, workman compensation reserve,
Gain on revaluation of assets and liabilities ****
Less:
Goodwill, loss on revaluation of assets and liabilitiesLosses, preliminary expenses, investment, ****
Capital employed ------
Less:
50% of profit during the year ****Average capital employed ------
-
7/30/2019 holding co. questions
12/77
You are required to calculate a) capital employed and b) average
capital employed from the following balance sheet:
Liabilities Amount Assets Amount
12% preference share capital
Equity share capital
Reserve ( including profit of the
current year Rs. 50,000)
Workman compensation fund
Depreciation fund:Land and building 30,000
Plant 30,000
Debenture
Creditor
1,00,000
3,00,000
90,000
60,000
60,000
90,000
80,000
Goodwill
Land and building
Plant
Current assets
Investment
Investment for replacement ofplant
Preliminary expenses
30,000
90,000
1,50,000
4,00,000
70,000
30,000
10,000
7,80,000 7,80,000
-
7/30/2019 holding co. questions
13/77
Assets side approach
Total of assets other than goodwill and preliminary expenses
7,80,000 30,000 10,000 = 7,40,000
Less: Debenture 90,000
Creditors 80,000
Depreciation 60,000 2,30,000
5,10,000Less: 50% of profit 25,000
Average capital employed 4,85,000
-
7/30/2019 holding co. questions
14/77
Liabilities side approach
Share capital
Equity 1,00,000
Preference share capital 3,00,000 4,00,000Add: reserve (90,000-50,000) 40,000
Profit 50,000
Workman compensation 60,000 1,50,000
5,50,000
Less: goodwill 30,000
Preliminary exp. 10,000 40,000
Capital employed 5,10,000
Less: 50% profit of c.y. 25,000
Average capital employed 4,85,000
-
7/30/2019 holding co. questions
15/77
You are required to calculate a) capital employed and b) average
capital employed from the following balance sheet:
Liabilities Amount Assets Amount
Equity share of Rs. 10 each fully
paid up
Reserve
Profit and loss a/c
15% Debenture
Workman compensation fundCreditor
Workman profit sharing reserve
10,00,000
3,00,000
2,00,000
2,00,000
30,00060,000
50,000
Goodwill
Land and building 3,00,000
Less: Dep. 30,000
Plant 6,00,000
Less: Dep. 1,00,000
Furniture 70,000Less: Dep. 20,000
Trade investment
(cost 2,00,000)
Stock
Debtors 4,00,000
Less: provision 50,000Cash at bank
Preliminary expenses
1,00,000
2,70,000
5,00,000
50,000
1,75,000
2,80,000
3,50,000
90,000
25,000
18,40,000 18,40,00
0
-
7/30/2019 holding co. questions
16/77
Building are now worth Rs. 5,00,000 and plant and machinery is worth Rs.4,75,000.
You are required to compute the value of capital employed.Assets side approach
Total assets 18,40,000Goodwill (100000)
Less: P. Exp. (25,000)
Less: building book value (2,70,000)
Add: building market value 5,00,000Less: plant book value (5,00,000)
Add: plant market value 4,75,000
Required new total assets 19,20,000
Less: 15% debenture 2,00,000Creditors 60,000
Workmen profit sharing reserve 50,000 3,10,000
Capital employed 16,10,000
-
7/30/2019 holding co. questions
17/77
Liabilities side approach
Share capital 10,00,000
Add: G/R 3,00,000
Profit and loss a/c 2,00,000
Workmen compensation 30,000
Increase in the value of building 2,30,000
17,60,000Less: Goodwill (1,00,000)
Investment loss (25,000)
Decrease in the value of assets (25,000)
Capital employed 16,10,000
-
7/30/2019 holding co. questions
18/77
the following balance sheet of Raj Com. Ltd. as on 31st march 2010:
You are ask to value the goodwill of Raj Ltd. on the basis of 5 year
purchase for which following information is supplied:Adequate provision have been made in the accounts for income tax
and depreciation.
The rate of income tax may be taken at 50%.
Liabilities Amount Assets Amount
Equity share of Rs. 10 each fully
paid upReserve
Profit and loss a/c
Creditor
Provision for taxation
5,00,000
30,000
50,000
1,00,000
70,000
Goodwill
Land and buildingPlant
Stock
Debtors 1,00,000
Less: provision 5,000
Cash at bank
50,000
2,50,0002,00,000
1,50,000
95,000
5,000
7,50,000 7,50,000
-
7/30/2019 holding co. questions
19/77
The average rate of dividend by the company for the past 5 year
was 15%.
The return on the company invested is 12%.
Solution :
Assets side approach
Total assets 7,50,000
Less: goodwill (50,000)
Required new total assets 7,00,000
Less: liabilities
Creditors (1,00,000)
Provision for taxation (70,000)Capital employed 5,30,000
Goodwill = super profit * No. of purchase year
Super profit = average profit or current profit Normal profit
-
7/30/2019 holding co. questions
20/77
Calculation of current profit
Provision for taxation is Rs. 70,000
That is at 50% of the profit
Total profit 100% will be Rs. 1,40,000Current Profit after providing tax (1,40,000 70,000) = 70,000
Calculation of Normal profit
Normal profit = capital employed * rate of return
= 5,30,000 * 12/100= 63,600
Calculation of super profit
Super profit = average profit or current profit Normal profit
= 70,000 63,600= 6,400
Value of goodwill = super profit * No. of purchase year
= 6,400 * 5 = 32,000
-
7/30/2019 holding co. questions
21/77
the following balance sheet of sudarshan. Ltd. as on 31st march2010:
the company started business in 2005 with paid up capital Rs. 20,00,000. profitearned before taxation have been as follows:
2006 = 6,00,000, 2007= 7,00,000, 2008 = 8,00,000, 2009 = 5,00,000, 2010 = 9,00,000
Income tax rate 50%. Dividend have been distributed from the profit of first 3 year @10% and 15% next 2 year of the paid up capital.
Liabilities Amount Assets Amount
Equity share of Rs. 10 each fullypaid up
Bank overdraft
Profit and loss a/c
Creditor
Provision for taxation
20,00,000
3,00,000
5,00,000
7,00,000
3,75,000
GoodwillLand and building
Plant
Stock
Debtors
2,00,0009,00,000
8,00,000
12,00,000
7,75,000
38,75,000 38,75,000
-
7/30/2019 holding co. questions
22/77
Find the goodwill by capitalization method
Total assets
(38,75,000 2,00,000)= 36,75,000
Less: Total liabilities3,00,000 + 7,10,000 + 3,75,000 = 13,85,000
Net assets = 22,90,000
Calculation of average profit
6+7+8+5+9=35,00,000 / 5 = 7,00,000Less: provision for tax @ 50% = 3,50,000
Average profit = 3,50,000
Average dividend = 10%+10%+10%+15%+15% / 5
Fair rate of return = 12%Capitalized value of business
100 x 3,50,000 / 12 = 29,16,666.6
Goodwill = Capitalized value of business Net Assets
Goodwill = 29,16,666.6 - 22,90,000 =6,26,666.67
-
7/30/2019 holding co. questions
23/77
Future Maintainable Profits
We all know that goodwill is abstract asset.
It represents the Future Maintainable Profits of a business. As
is clear from the name itself, Future Maintainable Profits arethe profits that are expected to be earned by the business in
the coming future. For calculating the Future Maintainable
Profits of a concern, we should have a look into the profits
earned by that concern in the few previous years say 2,3,4 or5 years. Its always better to take a short and recent time
period for calculation of Future Maintainable Profits or
Adjusted Average Past Profits.
-
7/30/2019 holding co. questions
24/77
The following factors should be considered
For the FMP
Interest on debenture and depreciation on fixed assets
should be included.
Provision for liabilities should be made
Preference dividend must be deducted
Result of any development that will arise in future should
be taken into account
The following items should not taken into account
1. Transfer to general reserve
2. Redemption of liabilities
3. Dividend equalization fund
4. Non trading assets
5. Any income derived from Non trading assets
-
7/30/2019 holding co. questions
25/77
Exp. For the year ended 31st march 2010 a
company reported a profit of 14,000 after
paying income tax @ 30%. It was found thatthe year income included Rs. 1,000 for a claim
lodged in 2007-08 for which no entry has been
passed then. The plan to launch a new
product and the following are the estimate in
respect of this.
Sales 12,000
Expenditure on raw material 5,000
Wages and fixed expenses 6,500
You are asked to find FMP
-
7/30/2019 holding co. questions
26/77
Solution
Profit before tax
14,000 * 100 / 70 = 20,000
Less: income of 2007-08 = 1,000
Normal profit 19,000
Add: expected profit of new product
Sales 12,000
Less: expenses (5,000 +6,500) 11,500 500
Expected profit before tax =(19,000+500) = 19,500
Less: income tax @ 30% = 5850
FMP 13650
-
7/30/2019 holding co. questions
27/77
Valuation of share
Following are the condition in which valuation
of share has become utmost important Amalgamation of companies
Reconstruction
Conversion
Assessment of tax
To meet shareholders demand
-
7/30/2019 holding co. questions
28/77
Methods of valuation of shares
Net asset method
Following are the most important steps in this method
Step 1. Total Assets (at market value)
Step 2. less: Total liabilities ( including Debenture and preference share)
Step 3. Result = Net Assets
Step 4. Value of share = Net Assets / Number of equity share
Following are the factors should be considers
Goodwill:
It should be valued at current cost
Inventory:
Raw material, stock and WIP should be valued at cost
Finished goods should be valued at market valueFictitious Assets:
Should be eliminated
Nontrading assets:
at market price
-
7/30/2019 holding co. questions
29/77
Debtors:
After provision for bad and doubtful debts
Other assets:
If market value of assets are not given, should be value at book value
Share capital:
If both share capital are given, preference share capital should be
deducted
Intrinsic value of share (I.V.S.) : net assets / no. of equity share
Example
Valuation of fully paid shareValuation of partly paid share
Valuation of fully paid shares
-
7/30/2019 holding co. questions
30/77
Valuation of fully paid shares
Q1. the following is balance sheet of A ltd. Company as on 31/3/10
Liabilities
3000, 10% P.S. of Rs. 100 each 30000050000 E.S. of Rs. 10 each 500000
B/P 60000
Creditor 120000 1000000
Assets
Sundry Assets as Book value 1000000
Other information's
The market value of 70% of the assets is estimated to be 20%
more then the book value and that of the remain 30% at 10%
less than the book value. There are unrecorded liabilities of Rs.
10,000.
Find the value of one equity share
-
7/30/2019 holding co. questions
31/77
Solution
Total assets is Rs. 1000000 out of which 70% is appreciate by 20%
= 840000
And rest of 30% is depreciated by 10% = 270000
Total assets at market value 1110000
Less : current liabilities
B/P 80000Creditors 120000
Unrecorded liabilities 10000
210000
900000
Less: preference share capital 300000
Net assets available for E.S.H. 600000
I.V.S. = 600000 / 50000 = Rs. 12
-
7/30/2019 holding co. questions
32/77
Q.2 the following is balance sheet of A ltd. Company as on 31/3/10
Liabilities Assets
5000 E.S. of Rs. 100 each 500000 goodwill 120000
P&L a/c 50000 investment 480000
GR 150000 stock 500000
10% Debenture 450000 Debtors 300000
Workman S.B. a/c 200000 cash at bank 100000
Creditor 150000 -------------- ---------
1500000 1500000The profit for the past 5 years were:
25000,35000,60000,50000,80000
The market value of investment was Rs. 400000
Goodwill is to be valued as 3 years purchase of average annual profitfor the last 5 years. Find the intrinsic value of share.
-
7/30/2019 holding co. questions
33/77
Solution
Step 1 calculate goodwill
Goodwill at new value = 150000
Investment at new value = 400000
Other assets 900000
Total assets 1450000
Less liabilities :Debenture 450000
Creditors 150000
Works S.B. a/c 200000
Total liabilities 800000
Net assets available for E.S.H. 650000
I.V.S. = 650000 / 5000 = 130
/ /
-
7/30/2019 holding co. questions
34/77
Q.3 the following is balance sheet of A ltd. Company as on 31/12/09
Liabilities Assets
150000 E.S. of Rs. 10 each 1500000 Building 500000
P&L a/c 200000 P&M 300000
Div. Eq. fund 150000 stock 1000000
B.O.D.* 50000 Debtors 450000
Provision for tax* 100000 ------------- ---------
Creditor * 250000 -------------- ---------
2250000 2250000The profit for the past 5 years were:
05-200000,06-225000,07-250000,08-275000,09-300000
On 31st Dec 09 the value of building were valued at Rs. 625000 and
P&M at 375000. in view of the business, it is considered that 10% isreasonable on capital. goodwill is calculate on the basis of 3 year
super profit method.
-
7/30/2019 holding co. questions
35/77
Solution:
Step 1- (total assets liabilities) = net assets 2050000
Step2 average capital employed = (net assets half of current
year profit)= (2050000 150000) = 1900000
Step 3 calculate Goodwill
Average profit = 250000
Normal profit = 190000Super profit = A.P N.P.
Goodwill = S.P. X 3
= 180000
Step 4 Net assets + Goodwill= 2050000+180000 = 2230000
Step 5 Calculate IVS
= 2230000/ 150000 = 14.86
Q 4 31st h 2010 th b l h t f A ltd f ll
-
7/30/2019 holding co. questions
36/77
Q.4 on 31st march 2010, the balance sheet of A ltd. was as followsLiabilities Assets1000, 10% P.S. 100000 Goodwill 5000050000 E.S. 500000 land & Building 200000
GR 100000 Machinery 250000CR 20000 furniture 20000P&L 80000 investment (F.V. 60000)750006% Debenture * 160000 stock 400000Creditors* 100000 Debtors 80000
Pro. For tax* 40000 cash 250001100000 1100000
The assets are revalued as- land & Building 280000, machinery 220000Furniture 30000. the normal return in capital is 10%, the basicValuation of goodwill is 4 year purchase of super profits. 50% of
investment in building is treated as non-trading assets because a sumof Rs. 12000 is collected as rent from building. You are required tocalculate the value of each equity share assuming that average annualprofit after tax at 50% is Rs. 132500
-
7/30/2019 holding co. questions
37/77
Solution :
Step 1- calculate capital employed
Total assets total liabilities
Step 2 calculate normal profitCapital employed * rate/100
Step 3 calculate average trading profit
Average annual profit - non trading income ( rent 50%, interest
on investment at F.V. less tax 50%)
Step 4 calculate super profit
Average profit normal profit
Step 5 calculate Goodwill
Super profit * no. of year purchase
Step 6- calculate Net assetsTotal assets total liabilities preference share capital
Step 7- calculate IVS
Net assets/ no. of Equity share
S l i
-
7/30/2019 holding co. questions
38/77
Solution :
Step 1- calculate capital employed
Total assets total liabilities
TA=(280000+220000+30000+400000+80000+25000-50% of 280000)
TL=(160000+100000+40000)
Step 2 calculate normal profit
Capital employed * rate/100
Step 3 calculate average trading profit
Average annual profit - non trading income ( rent 50%, interest oninvestment at F.V. less tax 50%)
Step 4 calculate super profit
Average profit normal profit
Step 5 calculate GoodwillSuper profit * no. of year purchase
Step 6- calculate Net assets
Total assets total liabilities preference share capital
Step 7- calculate IVS
Net assets/ no. of Equity share
Valuation of partly paid shares
-
7/30/2019 holding co. questions
39/77
Valuation of partly paid shares
Following are the extract of balance sheet of A ltd. on 31st march 2010
5000, 10% P.S. of Rs. 100 each 500000
10000, E.S. of Rs. 10 each, Rs. 5 paid up 5000010000, E.S. of Rs. 10 each, Rs. 2.5 paid up 25000
10000, E.S. of Rs. 10 each, Fully paid up 100000
Reserve and Surpluses 200000
P&L a/c 1250001000000
On revaluation of assets it was found that they had appreciated by Rs.
100000 over the value in the aggregate. The article of association of the
company state that in case of liquidation, the preference share holder
would have a further claim of the surplus assets, if any. You are required
to ascertain the value of share assuming that liquidation of the
company has to take place on 31st
march 2010.
S l ti
-
7/30/2019 holding co. questions
40/77
Solution
Step 1- calculate Net assets
Ps + Eq + R&S + P&L+ appreciation on revaluation
Step 2- less equity share capital and preference share capital
Step 3- less surplus to preference share holder (10% of surplus)
Result is surplus assets available to equity share holder
Step 4- calculation of total amount available for EQ.S.H.
(Equity share capital + surplus assets available to equity share holder)
Step 5- calculation of value of Rs. 1 of paid-up capital= total amount available for EQ.S.H / paid-up capital
Step 6- calculate value of each Rs. 5 paid up share
Rs. 5 * value of Rs. 1 of paid-up capital
Step 7- calculate value of each Rs. 2.5 paid up shareRs. 2.5 * value of Rs. 1 of paid-up capital
Step 8- calculate value of each Rs. 10 paid up share
Rs. 10 * value of Rs. 1 of paid-up capital
T t t f f h
-
7/30/2019 holding co. questions
41/77
Treatment of preference share
The following is the balance sheet of A ltd. On 31st march 2008.
Liabilities Assets
2000, 10% P.S. 200000 sundry Assets 1000000
50000 E.S. 500000 discount on Deb. 5000
GR 25000 Pre. Exp. 15000
Debenture RR 50000 P&L a/c 80000
5% debenture* 100000 --------- ------
Depreciation fund* 25000 --------- -------Creditors* 200000 --------- -------
1100000 1100000
The debenture interest are for one year is outstanding and dividend
on P.S. is arrear for 2 years. In following cases find the value of EQ.S.and P.S.Preference share are preferential as to capital and arrears are payable
Preference share are preferential as to capital but arrears are not payable
Preference share do not priority of capital but arrears are payable
Neither Preference share enjoy priority of capital nor the payment of arrears
-
7/30/2019 holding co. questions
42/77
Solution
Step 1- calculation of Net Assets
Total Assets Total liabilities including outstanding interest
Case :Preference share are preferential as to capital and arrears are payable
Step 1- calculation of assets available for Eq. share holders
Net assets preference share capital arrears of 2 years
Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.In this case value of preference share is Rs. 100
Case :Preference share are preferential as to capital but arrears are not payable
Step 1- calculation of assets available for Eq. share holders
Net assets preference share capital
Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.
In this case value of preference share is Rs. 100
case: Preference share do not priority of capital but arrears are
-
7/30/2019 holding co. questions
43/77
case: Preference share do not priority of capital but arrears arePayable
Step 1- calculation of assets available for Equity and Preference share
holders
Net assetsarrears of 2 yearsStep 2- IVS = assets available for Eq. share / No. of Eq. S. + P.S. holders
case: Neither Preference share enjoy priority of capital nor the
payment of arrearsStep 1 = Net Assets/ No. of Eq. S. + P.S. holders
Fair value of share - on the basis of minority holding and majority
-
7/30/2019 holding co. questions
44/77
y g j y
holding
Minority holding is based on expected rate of return
F.V. of M.H. = IVS + Yield value (based on expected rate of return)2
Majority holding is based on Average rate of return
F.V. of M.H. = IVS + Yield value (based on Average rate of return)
2
Q. Determine the value of 200 share held by Mr. Ram of A Ltd. to be
-
7/30/2019 holding co. questions
45/77
y
transferred to Mr. Ramesh on the basis of minority and majority
basis. The balance sheet of A Ltd. Is as follows on 31st march 2010.
Liabilities Assets
80000 Eq. share 800000 Goodwill 40000GR 260000 Building 300000
P&L a/c 160000 Machinery 360000
Creditors 80000 Debtors 400000
---------- -------- Stock 160000---------- -------- Cash at Bank 20000
---------- -------- Pre. Exp. 20000
1300000 1300000
Debtors are estimated to be 10% below book value. Dividend was
paid for the last three years at the rate of 14%,18% and 16%respectively. Normal Expected rate is 10%. P&L a/c shows the net
profit after tax and transfer in general reserve
Solution
-
7/30/2019 holding co. questions
46/77
Valuation of share of under net assets method
Step 1 calculate net assets available to Equity share holders
Total assets total liabilitiesStep 2 IVS = net assets available to Equity share holders / No. of Eq.S
Step 3- calculate intrinsic value of 200 shares
Valuation of share under yield method
Step 1 calculate expected rate of return= profit after tax and GR * 100
Share capital
Step 2 calculate yield value of shares
Expected rate of return *paid up value of equity shareNormal rate of return
Step 3- yield value of 200 shares
200 * yield value of shares
Determination of yield value of minority holding and majority holding
-
7/30/2019 holding co. questions
47/77
y y g j y g
Step 1- calculate Average rate of actual dividend
14%+18%+16% / 3 = 16%
Step 2- calculate value of one shareAverage rate of actual dividend*paid up value of equity share
Normal rate of return
Step 3- yield value of 200 shares
200*16 =3200
Step 4 fair value of minority holding
F.V. of M.H. = IVS + Yield value (based on expected rate of return)
2
Step 5- fair value of majority holding
F.V. of M.H. = IVS + Yield value (based on Average rate of return)
2
Valuation of share by yield basis or market value
-
7/30/2019 holding co. questions
48/77
Yield denotes the income that the investors get for their investment
In this method yield may represent
1. The entire earning2. The dividend paid by company
Following are the steps of share valuation by yield method
1. Future maintainable profit are ascertained
2. The normal rate of return is computed3. Calculation of capitalization factor is to be ascertained
By (100 / normal rate of return)
4. Calculate the capitalized value of future maintainable profit
By ( step 1 X step 2)
5. Calculate the yield value of share
By ( step 4 / Number of equity share)
Q. From the following information calculate the value of an equity
-
7/30/2019 holding co. questions
49/77
share
1. The paid capital of the company consist of 2000, 12% preference
share of Rs. 100 each and 50,000 equity share of Rs.10 each .
2. The average annual profit of the company after providing for
depreciation and taxation amounted to Rs. 64,000
3. The normal rate of return is 10%
Solution
-
7/30/2019 holding co. questions
50/77
Step 1 calculate FMP
Net profit after depreciation 64000
Less preference share dividend 24000
Amount available for equity shareholder (FMP) 40000
Step 2 normal rate of return is giver 10%
Step 3 capitalization factor
100/10=10Step 4 capitalized value of maintainable profit
40000 x 10 = 400000
Step 5 yield value
400000 / 50000 = 8
Dividend basis of yield value
-
7/30/2019 holding co. questions
51/77
Step 1 calculate value of Expected rate
profit available X 100
Total paid-up equity share
Step 2 calculate value of shareExpected rate x paid-up value of equity share
Normal rate
Earning per share basisEPS = earning available to equity share holder / number of equity share
Average EPS = paid up value / normal rate of return
Value of per share = (EPS / Average EPS) X paid up value of equity share
-
7/30/2019 holding co. questions
52/77
-
7/30/2019 holding co. questions
53/77
AMALGAMATION OF LIMITED COMPANIES
-
7/30/2019 holding co. questions
54/77
AMALGAMATION OF LIMITED COMPANIES
Amalgamation means coming together of two or more
limited companies for betterment of the business. It
includes dissolution of one or more limited
companies and formation of one new company.
There can be three situations as below:
Amalgamation-
when one or more than one existing limited
companies come together and form a new limited
company to take over their business.
Absorption-
when one existing limited company takes over the
business of another existing limited company
External reconstruction
-
7/30/2019 holding co. questions
55/77
External reconstruction
when one limited company is newly formed to takeover the business of another existing limited
company which is a loss making company.The I.C.A.I has issued Accounting Standard 14
governing the procedure and accounting ofAmalgamation of companies.
Scope:
Accounting Standard 14 [ Accounting forAmalgamation], prescribed by the Institute ofChartered Accounts of India, deals with accounting
for amalgamations. The meaning and types ofamalgamation, according to AS 14 are explainedbelow.
Amalgamation:
-
7/30/2019 holding co. questions
56/77
Amalgamation:
Amalgamation means an amalgamation pursuant tothe provision of the Companies Act, 1956 or any
other statute which may be applicable to theCompanies, Amalgamation involves acquisition ofone company by another. After Amalgamation, theacquired company is dissolved and ceases to exist.
Transferor Company:Transferor Company means the Company which atransferor another Company ( vendor company).
Transferee Company:
Transferee Company means the Company into whicha transferor Company is amalgamated (purchasingcompany).
Types of Amalgamations
-
7/30/2019 holding co. questions
57/77
Types of Amalgamations
There are two types of Amalgamations.
(a) Amalgamation in the nature of merger.
(b) Amalgamation in the nature of purchase.
Amalgamation in the nature of merger means
-
7/30/2019 holding co. questions
58/77
Amalgamation in the nature of merger meanswhich satisfies all the following conditions:
i. All the assets and liabilities of the transferor company
are taken over by the transferee company.ii. Shareholders holding not less than 90% of the face
value of equity shares of the transferor companybecome equity shareholders of the transferee
company by virtue of the amalgamation.iii. The consideration for the amalgamation receivable
by those equity shareholders of the transferorcompany who agree to become equity shareholders
of the transferee company is discharged by thetransferee company wholly by the issue of equityshares in the transferee company, except that cashmay be paid in respect of any fractional shares.
-
7/30/2019 holding co. questions
59/77
iv. The business of the transferor company is intended
to be carried on after the amalgamation, by the
transferee company.v. No adjustment is intended to be made to the book
values of the assets and liabilities of the transferor
company when they are incorporated in the financial
statements of the transferee company except to
ensure uniformity of accounting policies.
Amalgamation in the nature of purchase
If Amalgamation does not satisfy any one of theabove five conditions then it will be regarded as
Amalgamation in the nature of purchase.
PURCHASE CONSIDERATION :
-
7/30/2019 holding co. questions
60/77
PURCHASE CONSIDERATION :
MEANING
Purchase Consideration is the sale price of the
business agreed mutually between the two parties,the transferor company (selling company) and the
transferee company (purchasing company). The AS
14 defines the Purchase Consideration as the
aggregate of the shares and other securities issueand payment made in the form of cash or otherwise
by the transferee company to the SHAREHOLDERS
OF THE TRANSFEROR COMPANY.
METHODS OF PURCHASE CONSIDERATION:
-
7/30/2019 holding co. questions
61/77
METHODS OF PURCHASE CONSIDERATION:a. Lump-sum method:
The problem may give the amount of purchase consideration directly and
hence there will not be any need to calculate the purchase consideration.
e.g. Alka techno Ltd. agrees to take over business of WLC Ltd for a sum of
Rs.10 lakhs.
b. Net Payment Method:
If the purchase consideration is not given Lum-sum then this method
should be adopted. Here the purchase consideration is arrived at byadding up cash paid and the agreed values of shares, securities issued by
the transferee company to share holders of transferor company in
discharge of the purchase consideration.
e.g. Engineers Ltd. takes over business of Ramesh Ltd. and agrees to pay the
purchase consideration as follows: issue of 10,000 equity shares of Rs.10each at Rs. 12 each and cash Rs. 50,000. Hence the purchase consideration
would be Rs 10,000 equity shares of Rs.10 each at Rs. 12 each 1,20,000
Cash 50,000 Purchase consideration 1,70,000
-
7/30/2019 holding co. questions
62/77
Net Assets Method :
If the purchase consideration can not be calculated
by above two methods then this methods should beadopted. It is the aggregate of the assets taken over
at agreed values less liabilities taken over at agreed
values.
Assets taken over at agreed values,( excluding fictitiousassets) ******
Less : Liabilities taken over at agreed value ******
Purchase consideration ******
-
7/30/2019 holding co. questions
63/77
Exchange of shares Method / Intrinsic value
Method :
Under this method the intrinsic value of the
shares of both the companies is calculated
and then the transferor company issue the
shares to the transferee company on the basis
of these values.
ACCOUNTING PROCEDURE IN THE BOOKS OF TRANSFEROR
-
7/30/2019 holding co. questions
64/77
COMPANY:
Step 1. Open following Ledger Accounts
1. Realization A/c2. Equity Shareholders A/c
3. Preference Shareholders A/c
4. Cash/ Bank A/c
5. Liabilities not taken over A/c
6. Transferee company's A/c
7. Equity Shares in transferee company A/c
8. Preference Shares in transferee company A/c
Step2. Pass following journal entries
-
7/30/2019 holding co. questions
65/77
Step2. Pass following journal entries
Transfer all assets to realization A/c Whether
taken over or not , at their book values.
Realization A/c Dr.
To Sundry assets A/c
Note:
1.Fictitious assets should not be transferred to realization A/c
2. Cash & bank balance should be transferred to realization A/c
only if it taken over by the transferee company
3. Debtors and R.D.D should be treated as separate A/c. Debtors
should be transferred at their gross value on debit side and
R.D.D should be transferred on the credit side of realization
A/c
4. This entry closes all Assets A/c
Transfer all liabilities which are taken over by the
-
7/30/2019 holding co. questions
66/77
ytransferee company to realization A/c, credit side
Sundry liabilities A/c Dr.
To Realization A/c Transfer Equity Share Capital and Reserves to Equity
share holders A/c
Equity share Capital A/c Dr. x
Securities Premium A/c Dr. x
Capital Reserve A/c Dr. x
C.R.R. A/c Dr. x
General Reserve A/c Dr. xProfit & Loss A/c Dr. x
To Equity Shareholders A/c x
Transfer Preference Share Capital to Preference ShareholdersA/
-
7/30/2019 holding co. questions
67/77
A/c
Preference Share Capital A/c Dr. x
To Preference Shareholders A/c x
Record the sale of businessTransferee Company A/c Dr. x
To Realization A/c x
( with the amount of purchase Consideration)
Receive the amount of purchase considerationEquity shares in transferee company A/c Dr x
Preference shares in transferee company A/c Dr. x
Cash/ Bank A/c Dr. x
To Transferee Company A/c x
Dispose off assets not taken over by the transferee company
-
7/30/2019 holding co. questions
68/77
Cash / Bank A/c Dr. X
To Realization A/c X
Discharge the liabilities not taken over by the Transfereecompany.
Liability A/c Dr. X
Realization A/c ( if loss) Dr. x
To Cash / Bank A/c xTo Realization A/c ( if Profit) x
Payment of realization Expenses
Realization A/c Dr. X
To Cash/ Bank A/c. X
Settle the claim of preference shareholders
-
7/30/2019 holding co. questions
69/77
p
Preference shareholders A/c. Dr. X
Realization A/c. (if paid at premium) Dr. X
To preference Shares in transferee Co. A/c X
To Cash/ Bank A/c. X
To Realization A/c. ( if paid at discount) X
Balance the Realization A/c.
a. If Profit
Realization A/c Dr. XTo Equity shareholders A/c. X
b. If loss
-
7/30/2019 holding co. questions
70/77
Equity shareholders A/c. Dr. X
To Realization A/c. X Close the Equity shareholders A/c.
Equity shareholders A/c. Dr. X
To Equity shares in transferee Co. A/c XTo Cash/ bank A/c X
ACCOUNTING PROCEDURE IN THE BOOKS OF
-
7/30/2019 holding co. questions
71/77
TRANSFEREE COMPANY :
Following Journal Entries are passed in the books of
transferee company.
PURCHASE METHOD
1. Recording Purchase of Business
Business Purchase A/c Dr. xTo Liquidator of transferor company X
(The entry should be passed at purchase consideration
amount.)
2. Recording of assets and liabilities taken over
-
7/30/2019 holding co. questions
72/77
Sundry assets A/c Dr. x ( With Agreed values)
Goodwill A/c (if any) Dr. x
To Sundry Liabilities A/c XTo Business Purchase A/c X
To Capital Reserve A/c X
3. Recording Discharge of purchase considerationLiquidator of transferor company A/c Dr. X
Discount on issue of shares A/c Dr. X
To Equity Share Capital A/c. X
To Preference Share Capital A/c. X
To Securities Premium A/c. X
4. Discharge of Liabilities of Transferor Company
-
7/30/2019 holding co. questions
73/77
Debentures of Transferor Company A/c Dr. X
Discount on issue of Debentures A/c Dr. X
To new Debentures A/c. X
To Securities Premium A/c. X
5. Recording of payment of liquidation expenses
Capital Reserve/ Goodwill A/c. Dr. X
To Cash/Bank A/c. X
6. Recording of Expenses incurred by the transferee
company for its own formation.Preliminary Expenses A/c. Dr. X
To Cash / Bank A/c X
7. Recoding of Statutory Reserve of transferor
-
7/30/2019 holding co. questions
74/77
g y
company
Amalgamation adjustment A/c Dr. X
To Statutory Reserve A/c. X
8. Adjusting of mutual indebtedness of transferor
& transferee companySundry Creditors A/c. Dr. X
To Sundry Debtors A/c. X
MERGER METHOD
-
7/30/2019 holding co. questions
75/77
1. Recording Purchase of Business
Business Purchase A/c Dr.
To Liquidator of transferor company(The entry should be passed at purchase consideration amount.)
2. Recording of assets and liabilities taken over
Sundry assets A/c Dr.
General Reserve A/c (if any) Dr.
To All Reserves of transferor co.(except General reserve)
To Sundry Liabilities A/c
To Business Purchase A/c
To General Reserve A/c (Balancing figure)
3. Recording Discharge of purchase consideration
-
7/30/2019 holding co. questions
76/77
Liquidator of transferor company A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital A/c.To Preference Share Capital A/c.
To Securities Premium A/c.
4. Discharge of Liabilities of Transferor Company
Debentures of Transferor Company A/c Dr.
Discount on issue of Debentures A/c Dr.
To new Debentures A/c.
To Securities Premium A/c.
5. Recording of payment of liquidation expenses
-
7/30/2019 holding co. questions
77/77
General Reserve/ A/c. Dr.
To Cash/Bank A/c.
6. Recording of Expenses incurred by the transferee company for
its own formation.
Preliminary Expenses A/c. Dr.
To Cash / Bank A/c
7. Adjusting of mutual indebtedness of transferor & transferee
company
Sundry Creditors A/c. Dr.
To Sundry Debtors A/c.