Sometimes companies carrying on similar business combine with each other to obtain the economies of large scale production or to avoid the disastrous results of cut-throat, competition. This combination of two or more business may be done by amalgamation.
When two or more companies or cooperative societies carrying on similar businesses go into liquidation and a new company is formed to take over their businesses, this is called AMALGAMATION.
You should note that from the above statement, it is clear that there are two types of companies i.e. Purchasing Company and Liquidating Company or companies. The purchase price of the company that goes into liquidation may be paid fully or partly by issuing share or debenture to the purchasing company. The shareholders or members of liquidating company who do not like to purchase the share of the purchasing company have the right of requiring the liquidator to purchase their shares at a price to be determined by the agreement.
Purchase consideration is the amount which is paid by the purchasing company for the purchase of the business of the liquidating company. The calculation of purchase consideration is very important and may be calculated in the following ways:
When the purchasing company agrees to pay a lump sum amount to the liquidating company, it is called a LUMP SUM PAYMENT of purchase consideration. For example, "ABC" Nigeria Ltd purchases the business "XYZ" and agrees to pay N1,500,000.00 in all. This is called a lump sum payment.
According to this method, the purchase consideration is calculated by calculating the net worth of the assets taken over by the purchasing company. The net worth is arrived at by adding the agreed value of assets taken over by the purchasing company less value of liabilities to be assumed by the purchasing company
OBJECTIVES
At the end of this unit, you should be able to:- define Amalgamation
- explain Purchase Consideration
- calculate Purchase Consideration by using lump sum payment method
- calculate Purchase Consideration by using Net Worth Basis • give some illustrations in order to explain the calculation of consideration.
Amalgamation Accounts
DefinitionWhen two or more companies or cooperative societies carrying on similar businesses go into liquidation and a new company is formed to take over their businesses, this is called AMALGAMATION.
You should note that from the above statement, it is clear that there are two types of companies i.e. Purchasing Company and Liquidating Company or companies. The purchase price of the company that goes into liquidation may be paid fully or partly by issuing share or debenture to the purchasing company. The shareholders or members of liquidating company who do not like to purchase the share of the purchasing company have the right of requiring the liquidator to purchase their shares at a price to be determined by the agreement.
Purchase Consideration
Before accounting entries, the books of the purchasing company or liquidating company will be discussed, it is necessary to understand "Purchase Consideration".Purchase consideration is the amount which is paid by the purchasing company for the purchase of the business of the liquidating company. The calculation of purchase consideration is very important and may be calculated in the following ways:
A Lump Sum Payment
When the purchasing company agrees to pay a lump sum amount to the liquidating company, it is called a LUMP SUM PAYMENT of purchase consideration. For example, "ABC" Nigeria Ltd purchases the business "XYZ" and agrees to pay N1,500,000.00 in all. This is called a lump sum payment.
Net Worth Basis
According to this method, the purchase consideration is calculated by calculating the net worth of the assets taken over by the purchasing company. The net worth is arrived at by adding the agreed value of assets taken over by the purchasing company less value of liabilities to be assumed by the purchasing company
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