Model: Absorption—inter-company owings A Ltd. agreed to acquire the business of D Ltd. as on 31 March 2011. The balance sheet of D Ltd. as on that date was as follows:
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Liabilities |
Assets |
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|
Paid-up Capital: |
Fixed Assets: |
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|
40,000– 12% Preference Shares of Rs. 10 |
4,00,000 |
Land & Building |
8,00,000 |
|
Each |
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80,000 Equity Share of Rs. 10 Each |
8,00,000 |
Machineries |
4,00,000 |
|
Reserves |
80,000 |
Current Assets: |
|
|
Profits & Loss A/c |
1,20,000 |
Stock |
8,00,000 |
|
12% Debentures |
4,00,000 |
Debtors |
2,00,000 |
|
Sundry Creditors |
6,00,000 |
Cash & Bank Balances |
1,40,000 |
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Miscellaneous Expenditures: |
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Preliminary Expenses |
40,000 |
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Debenture Discount |
20,000 |
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24,00,000 |
24,00,000 |
The consideration payable by A Ltd. was agreed as follows:
- The preference shareholders of D Ltd. were to be allotted 14% preference shares of Rs.4,40,000
- Equity shareholders to be allotted six equity shares of Rs.10 each issued at a premium of 10% and Rs.3 cash against every five shares held
- 12% of D Ltd. to be paid @ 8% premium by issue of 14% debentures at 10% discount
While arriving at the agreed consideration, the directors of A Ltd. valued land & building at 10,00,000; stock at Rs.8,80,000; debtors at their book value subject to an allowance of 5% to cover doubtful debts. Debtors of D Ltd. included Rs.40,000 due from A Ltd. The machineries were valued at book value. It was agreed that before acquisition, D Ltd. will pay dividend at 10% on equity shares. Liquidation expenses are Rs.20,000.
You are required to draft journal entries necessary to close the books of D Ltd. and to record acquisition in the book of A Ltd.