Absorption of Company

Absorption of Company is a way of business arrangement in which an existing company takes over the business of the another entity. The entity who gets absorbed goes into the liquidation process. The payment for such absorption to the old entity can be made either in cash or in shares or mixture of both. 

The absorbed company continue to run operations as it was doing before the absorption and staff continue to work under the new management. If any type of fund is being maintained for the employees of the company, it is taken over by the purchasing company. 

There are so many reasons of absorption. One of them is that due to the formation of the new company, it will not get the reputation in the market as the old one. So, that is why, purchasing company absorbs an existing company to using its strength to exploit the opportunities exists in the market.

Example

The balance sheet of Alpha on 31st Dec, 2011 is as follows:

Total assets $1,000,000
Share capital $100 each) 600,000
Profit & Loss account 240,000
Creditors 160,000
   

After detailed discussion, it was decided that the Alpha should be absorbed into Beta . In order to complete the process of absorption, Beta will issue 4 shares of $100 each for three shares held in the Alpha. All liabilities and assets were taken over by the Beta at the book value.

Required:

Pass journal entries in the books of 

a. Alpha, B. Beta

Solution

   
Shares in Beta (8,000 x 100) $800,000
   
If 03 old shares, so new shares = 4  
If 01 old shares, so new shares = 4/3  
If 6,000 old shares, so new shares = 4/3 x 6,000 = 8,000 shares  

 

Alpha Company

Closing Entries

Description Debit Credit
Realization account 1,000,000   
   All assets   1,000,000 
     
Creditors  160,000  
   Realization account   160,000 
     
Receivable from Beta  800,000  
   Realization account   800,000 
     
Shares in Beta  800,000  
   Receivable from Beta   800,000 
     
Share capital 600,000   
Profit & Loss account 240,000   
   Realization account   40,000 
   Shareholders   800,000 
     
Shareholders 800,000   
   Shares in Beta   800,000 

 

 Beta Company

Journal Entries

Description Debit Credit
All assets 1,000,000  
   Capital reserve   40,000
   Creditors   160,000
   Payable to Alpha   800,000
     
Payable to Alpha 800,000  
   Share capital   800,000