by During amalgamation, it is essential to ensure that the consolidated financial statements of the amalgamated company present a true and fair view. This requires the elimination of inter-company balances, transactions, and unrealized profits to avoid overstatement or duplication of income, expenses, assets, or liabilities. The treatment of these elements is vital, particularly in cases of amalgamation in the nature of merger, where pooling of interests is applied.
Inter-Company Transactions:
Inter-company transactions are mutual dealings between two or more companies that are now becoming a single reporting entity due to amalgamation. Examples include:
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Sale and purchase of goods
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Inter-company services
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Loan or advance transfers
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Rent, interest, or royalty transactions
Treatment:
These transactions must be eliminated from the books to avoid double counting or inflated revenue/expenses. The rationale is that a company cannot transact with itself after amalgamation.
Examples and Entries:
Let’s assume:
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A Ltd. sold goods worth ₹1,00,000 to B Ltd. at a profit of ₹20,000.
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At the time of amalgamation, this stock is still in B Ltd.’s books (unsold).
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Also, B Ltd. owes A Ltd. ₹1,00,000 for these goods.
a) Eliminate Inter-Company Sale and Purchase:
| Journal Entry in Transferee Company (after amalgamation) | Amount (₹) |
|---|---|
| Sales A/c Dr. | 1,00,000 |
| To Purchases A/c | 1,00,000 |
| (To eliminate inter-company sales and purchase) | XXXX |
b) Eliminate Inter-Company Balances (Receivables/Payables):
| Entry to Cancel Inter-Company Debtors and Creditors | Amount (₹) |
|---|---|
| Creditors A/c Dr. (in transferee’s books) | 1,00,000 |
| To Debtors A/c | 1,00,000 |
| (To eliminate mutual dues) | XXXX |
Inter-company debts arise when one company owes another due to borrowings, loans, or unpaid dues. On amalgamation, the debtor and creditor become one entity, so the outstanding balances must be removed.
Treatment:
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All inter-company loans, advances, bills payable/receivable, and interest should be eliminated.
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Any unrecorded interest accrued must be accounted for before elimination.
Example:
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Company A has given a loan of ₹50,000 to Company B.
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Company B has recorded accrued interest payable of ₹5,000 (not yet recorded by A).
a) Adjust and Eliminate Interest:
| Journal Entry in A Ltd. (before elimination) | Amount (₹) |
|---|---|
| Interest Receivable A/c Dr. | 5,000 |
| To Interest Income A/c | 5,000 |
| (To record accrued interest) | XXXX |
b) Consolidated Entry in Transferee Company:
| Entry to Eliminate Loan and Interest | Amount (₹) |
|---|---|
| Loan Payable A/c Dr. | 50,000 |
| Interest Payable A/c Dr. | 5,000 |
| To Loan Receivable A/c | 50,000 |
| To Interest Receivable A/c | 5,000 |
| (To eliminate inter-company debt) | XXXX |
Common Situations of Unrealized Profit:
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Stock (inventory) transferred between companies
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Fixed assets transferred at profit
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Services billed but not yet utilized
Treatment:
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Remove unrealized profits from inventory or assets.
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Adjust retained earnings or general reserve as applicable.
Example:
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A Ltd. sold goods costing ₹80,000 to B Ltd. at ₹1,00,000 (profit of ₹20,000).
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B Ltd. has not yet sold the goods.
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After amalgamation, the combined entity must show the inventory at cost to the group: ₹80,000.
a) Adjustment Entry in Transferee Company:
| Entry to Eliminate Unrealized Profit in Stock | Amount (₹) |
|---|---|
| General Reserve A/c Dr. | 20,000 |
| To Inventory A/c | 20,000 |
| (To eliminate unrealized profit in closing stock) | XXXX |
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A Ltd. sold a machine to B Ltd. for ₹1,20,000. Original cost = ₹1,00,000.
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Profit = ₹20,000.
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Asset is still in use and not yet depreciated in B Ltd.’s books.
| Entry to Eliminate Unrealized Profit on Fixed Asset | Amount (₹) |
|---|---|
| General Reserve A/c Dr. | 20,000 |
| To Machinery A/c | 20,000 |
| (To remove unrealized inter-company profit) | XXXX |
| Aspect | Treatment |
|---|---|
|
Inter-Company Sales |
Cancel sales and purchases |
|
Inter-Company Debtors |
Cancel mutual receivables and payables |
|
Inter-Company Loans |
Cancel loan accounts and interest (ensure accruals are recorded first) |
|
Unrealized Stock Profits |
Reduce inventory and adjust against reserves |
|
Unrealized Asset Profits |
Reduce asset value and adjust against reserves |
|
In Nature of Merger |
All mutual balances eliminated as part of consolidation |
|
In Nature of Purchase |
Only entries in transferee company; transferor’s books closed separately |
