Model: When the vendor company holds shares in purchasing company—Net assets method Basu Ltd. and Vasu Ltd. had the following financial position as on 31 March 2011:
|
Liabilities |
Basu Ltd. |
Vasu Ltd. Rs |
Assets |
Basta Ltd. |
Vasu Ltd. |
|
Share Capital: |
Goodwill |
2,000 |
400 |
||
|
Equity Shares of Z100 Each |
3,200 |
2,400 |
Fixed Assets |
1,600 |
2,800 |
|
Fully Paid |
|||||
|
General Reserve |
1,200 |
800 |
Investments at Cost |
1,200 |
800 |
|
Investment Allowance |
— |
1,200 |
Current Assets |
1,200 |
1,000 |
|
Reserve |
|||||
|
Liabilities |
1,600 |
600 |
|||
|
6,000 |
5,000 |
6,000 |
5,000 |
It was decided that on that date, Basu Ltd. will take over the business of Vasu Ltd. on the basis of the respective share value, adjusting, wherever necessary, the book values of assets and liabilities on the strength of the information given below:
- Investment of Vasu Ltd. included 4,000 shares in Basu Ltd., acquired at a cost of Rs.150 per share. The other investment of Vasu Ltd. have a market value of Rs.1,00,000.
- Investment allowance reserve was in respect of additions made to fixed assets by Vasu Ltd. during the year 2009-10, on which income tax relief has been obtained. In terms of Income Tax Act, the company has to carry forward till 2014, reserve of Rs.6,00,000 for utilization.
- Goodwill of Basu Ltd. and Vasu Ltd. are to be taken at Rs.1,600 thousand and Rs.800 thousand, respectively.
- The market value of investment of Basu Ltd. was Rs.800 thousand.
- Current assets of Basu Ltd. included Rs.320 thousand of stock in trade obtained from Vasu Ltd., which normally sold goods at a profit of 25% over cost.
- Fixed assets of Basu Ltd. & Vasu Ltd. are valued at Rs.2,000 thousand and Rs.3,000 thousand, respectively. Suggest the scheme of absorption and show the journal entries in the books of Basu Ltd. Also prepare the balance sheet of that company after take over of the business of Vasu Ltd.