Mystery in Amalgamation
This query is : Resolved
28 July 2010
Sir, Why we consider "Liquidation Expenses" paid by transferee company as GOODWILL in its account and not a preliminary expense...???
We pass this entry in its(Purchaser) book:-
Goodwill A/c......Dr.
To Bank A/c
Now I wanna know what's logic behind it works....???
or why we don't include such expenses paid in Purchase consideration....???
We pass this entry in its(Purchaser) book:-
Goodwill A/c......Dr.
To Bank A/c
Now I wanna know what's logic behind it works....???
or why we don't include such expenses paid in Purchase consideration....???
28 July 2010
Does any Accounting Standard works behind it...???
29 July 2010
please answer it.
Message likes :
1 times
02 August 2010
If the consideration paid is more than the net assets acquired from the transferor company then the surplus should be debited to the Goodwill account.
02 August 2010
Madam but I'm not talking about the CONSIDERATION.
Yes you are right that Excess Purchase consideration will be Dr. to Goodwill A/c in transferee books.
But I'm talking about that thing which is excluded from PC but still Dr. to Goodwill A/c. It's Liquidation Expenses paid by transferee company.
So plz tell me why is it so....???
Yes you are right that Excess Purchase consideration will be Dr. to Goodwill A/c in transferee books.
But I'm talking about that thing which is excluded from PC but still Dr. to Goodwill A/c. It's Liquidation Expenses paid by transferee company.
So plz tell me why is it so....???
04 August 2010
I gave a cursory glance at AS 14 and didn't find anywhere it being mentioned that the liquidation expense should be given the same treatment as purchase consideration in case of amalgamation.
Message likes :
1 times
05 August 2010
Even I saw the AS-14 and didn't find anything but really ma'am I've done this chapter twice and I've no doubt regarding being
Liquidation Expenses Dr. to Goodwill A/c.
My doubt arises when I think why is it so....???
Plz refer some other material. You'll find it.
Liquidation Expenses Dr. to Goodwill A/c.
My doubt arises when I think why is it so....???
Plz refer some other material. You'll find it.
15 August 2010
Hey please I need yours help..!!!
03 August 2024
In the context of amalgamation, especially when dealing with accounting treatments for liquidation expenses and goodwill, understanding the correct accounting treatment is crucial. Let’s break down the logic and accounting practices involved:
### **1. Understanding Liquidation Expenses and Goodwill**
**a) Liquidation Expenses:**
- **Nature of Expense:** Liquidation expenses are costs associated with the process of winding up the affairs of the company being acquired or amalgamated. These expenses include costs like legal fees, settlement of creditors, and other administrative costs related to the dissolution of the company.
**b) Goodwill:**
- **Nature of Goodwill:** Goodwill is an intangible asset that arises when a company acquires another company for more than its fair market value. It represents the excess of purchase consideration over the net assets acquired.
### **2. Accounting Treatment for Liquidation Expenses**
**a) Treatment as Goodwill:**
- **Why Liquidation Expenses are Treated as Goodwill:** According to accounting standards (particularly AS-14 for amalgamation), liquidation expenses are generally considered part of the overall cost of acquiring the business. However, in practice, these expenses are not always included in the purchase consideration directly but rather treated as part of the acquisition cost that contributes to the calculation of goodwill.
**b) Entry in Books:**
- **Accounting Entry:** When the transferee company pays for liquidation expenses, the accounting entry typically would be:
```plaintext
Goodwill A/c......Dr.
To Bank A/c
```
This entry reflects that the costs associated with the liquidation process are capitalized as part of the goodwill. The rationale is that these expenses are incurred to complete the acquisition and hence are absorbed into the goodwill calculation.
### **3. Why Not Included in Purchase Consideration Directly?**
**a) Purchase Consideration vs. Goodwill:**
- **Purchase Consideration:** This is the total amount paid by the transferee company to acquire the target company’s shares or assets.
- **Goodwill Calculation:** When calculating goodwill, the purchase consideration is compared against the net identifiable assets acquired. Any excess purchase consideration over the net assets is recorded as goodwill.
**b) Exclusion from Direct Purchase Consideration:**
- **Nature of Expenses:** Liquidation expenses are often viewed as part of the cost of the acquisition process but not directly part of the purchase consideration. Instead, they are added to the goodwill to reflect the total cost of acquiring and integrating the target company.
### **4. Accounting Standards and Guidelines**
**a) AS-14 (Accounting Standard 14):**
- **Amalgamation Accounting:** AS-14 provides guidelines on how to account for amalgamations. It specifies that all expenses incurred to effectuate the amalgamation are included in the cost of acquisition, which ultimately affects the calculation of goodwill.
**b) No Direct Reference to Liquidation Expenses in AS-14:**
- **Interpretation:** While AS-14 might not explicitly detail the treatment of liquidation expenses, the general practice is to include such costs in the goodwill calculation because they are part of the acquisition process.
### **5. Conclusion**
**a) Rationale for Treatment:**
- **Accounting Practice:** Liquidation expenses are capitalized as part of goodwill because they are integral to the acquisition process. These expenses are not part of the direct purchase consideration but are incurred to complete the transaction.
**b) Recommended Practice:**
- **Goodwill Accounting:** Ensure that all expenses related to the acquisition, including liquidation expenses, are appropriately accounted for in the goodwill calculation. This reflects the total cost incurred to achieve the amalgamation and ensures accurate financial reporting.
For further detailed understanding, you might refer to textbooks on advanced accounting, specific case studies on amalgamation, or practical guidance provided by professional accounting bodies.
### **1. Understanding Liquidation Expenses and Goodwill**
**a) Liquidation Expenses:**
- **Nature of Expense:** Liquidation expenses are costs associated with the process of winding up the affairs of the company being acquired or amalgamated. These expenses include costs like legal fees, settlement of creditors, and other administrative costs related to the dissolution of the company.
**b) Goodwill:**
- **Nature of Goodwill:** Goodwill is an intangible asset that arises when a company acquires another company for more than its fair market value. It represents the excess of purchase consideration over the net assets acquired.
### **2. Accounting Treatment for Liquidation Expenses**
**a) Treatment as Goodwill:**
- **Why Liquidation Expenses are Treated as Goodwill:** According to accounting standards (particularly AS-14 for amalgamation), liquidation expenses are generally considered part of the overall cost of acquiring the business. However, in practice, these expenses are not always included in the purchase consideration directly but rather treated as part of the acquisition cost that contributes to the calculation of goodwill.
**b) Entry in Books:**
- **Accounting Entry:** When the transferee company pays for liquidation expenses, the accounting entry typically would be:
```plaintext
Goodwill A/c......Dr.
To Bank A/c
```
This entry reflects that the costs associated with the liquidation process are capitalized as part of the goodwill. The rationale is that these expenses are incurred to complete the acquisition and hence are absorbed into the goodwill calculation.
### **3. Why Not Included in Purchase Consideration Directly?**
**a) Purchase Consideration vs. Goodwill:**
- **Purchase Consideration:** This is the total amount paid by the transferee company to acquire the target company’s shares or assets.
- **Goodwill Calculation:** When calculating goodwill, the purchase consideration is compared against the net identifiable assets acquired. Any excess purchase consideration over the net assets is recorded as goodwill.
**b) Exclusion from Direct Purchase Consideration:**
- **Nature of Expenses:** Liquidation expenses are often viewed as part of the cost of the acquisition process but not directly part of the purchase consideration. Instead, they are added to the goodwill to reflect the total cost of acquiring and integrating the target company.
### **4. Accounting Standards and Guidelines**
**a) AS-14 (Accounting Standard 14):**
- **Amalgamation Accounting:** AS-14 provides guidelines on how to account for amalgamations. It specifies that all expenses incurred to effectuate the amalgamation are included in the cost of acquisition, which ultimately affects the calculation of goodwill.
**b) No Direct Reference to Liquidation Expenses in AS-14:**
- **Interpretation:** While AS-14 might not explicitly detail the treatment of liquidation expenses, the general practice is to include such costs in the goodwill calculation because they are part of the acquisition process.
### **5. Conclusion**
**a) Rationale for Treatment:**
- **Accounting Practice:** Liquidation expenses are capitalized as part of goodwill because they are integral to the acquisition process. These expenses are not part of the direct purchase consideration but are incurred to complete the transaction.
**b) Recommended Practice:**
- **Goodwill Accounting:** Ensure that all expenses related to the acquisition, including liquidation expenses, are appropriately accounted for in the goodwill calculation. This reflects the total cost incurred to achieve the amalgamation and ensures accurate financial reporting.
For further detailed understanding, you might refer to textbooks on advanced accounting, specific case studies on amalgamation, or practical guidance provided by professional accounting bodies.
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