by Journal Entries of Merger involve recording the acquisition or amalgamation of one company into another, depending on the accounting method used—Pooling of Interest or Purchase Method. Under the Pooling of Interest Method, assets and liabilities are recorded at book value and reserves are carried forward. The journal entry debits assets, credits liabilities and share capital. Under the Purchase Method, assets and liabilities are recorded at fair value; any excess of purchase consideration over net assets is recorded as goodwill, or a capital reserve if the opposite. Consideration is settled through shares, cash, or a mix, and is recorded accordingly.
Components of Journal Entries of Merger:
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Assets Taken Over
Assets of the transferor company are recorded in the transferee company’s books. Under the Pooling of Interest Method, they are recorded at book value, while under the Purchase Method, they are taken at fair value. These include tangible assets like land, building, machinery, and intangible assets like patents or goodwill. The journal entry debits the respective asset accounts, reflecting their inclusion into the acquiring company’s financial statements post-merger.
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Liabilities Assumed
Liabilities of the transferor company, such as creditors, loans, and outstanding expenses, are recorded in the books of the transferee company. These are credited in the journal entry, reflecting the acquiring company’s obligation to settle them. Under the Pooling of Interest Method, they are recorded at their book values, whereas under the Purchase Method, they may be adjusted to reflect fair value. This ensures that the new balance sheet reflects the true financial responsibility post-merger.
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Purchase Consideration
Purchase consideration refers to the amount paid by the transferee company to acquire the transferor company. It can be discharged through shares, cash, debentures, or a mix. The journal entry records it by debiting the Business Purchase Account and crediting the relevant payment method accounts. Accurate calculation of purchase consideration is crucial as it directly affects the recognition of goodwill or capital reserve in the books of the acquiring company.
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Goodwill or Capital Reserve
This component arises when there is a difference between purchase consideration and the fair value of net assets acquired. If consideration exceeds net assets, the difference is debited as Goodwill; if it’s less, the credit is recorded as a Capital Reserve. Goodwill represents expected future benefits from the merger, while Capital Reserve is a gain. These entries are applicable only in the Purchase Method and not under Pooling of Interest, where such differences are not recognized.
Accounting entries of Journal Entries of Merger:
| S. No. | Particulars | Journal Entry | Explanation |
|---|---|---|---|
| 1 | For business purchase | Business Purchase A/c Dr.
To Liquidator of Transferor Co. A/c |
Records the total purchase consideration payable to the transferor company. |
| 2 | For recording assets taken over | Respective Assets A/c Dr.
To Business Purchase A/c (or to Liquidator A/c) |
Assets taken over by transferee at book value (Pooling) or fair value (Purchase Method). |
| 3 | For recording liabilities assumed | Business Purchase A/c Dr. (or Liabilities A/c Dr.)
To Respective Liabilities A/c |
Reflects liabilities taken over from the transferor company. |
| 4 | For payment of purchase consideration | Liquidator of Transferor Co. A/c Dr.
To Equity Share Capital A/c / Bank A/c / Debentures A/c |
Payment through shares, debentures or cash. |
| 5 | For goodwill (if purchase consideration > net assets) | Goodwill A/c Dr.
To Capital Reserve A/c |
Applicable under Purchase Method when consideration exceeds net assets acquired. |
| 6 | For capital reserve (if net assets > consideration) | Capital Reserve A/c Dr.
To Goodwill A/c |
Applicable under Purchase Method when net assets exceed purchase consideration. |
| 7 | For incorporation of reserves (Pooling method only) | General Reserve A/c Dr.
P&L A/c Dr. To Respective Reserves A/c |
Reserves of transferor are carried over in Pooling of Interest Method. |
