In this article we will discuss about the accounting provisions regarding inter-company stocks, explained with the help of illustrations.
Inter-Company Owings generally arise because of purchases and sales that are made before the amalgamation or absorption. When the vendor company has purchased goods from purchasing company it is possible that some of which remains unsold at the time of merger.
Similarly, when the purchasing company has purchased goods from vendor company some of which remains in the stock at the time of merger. Such stock therefore includes profit element which is un-realised. No ‘ special treatment is required in the books of vendor company. The purchasing company, in addition to usual acquisition entries, will pass an additional entry for such un-realised profit.
Illustration 1 (Amalgamation in the Nature of Merger with Inter-Company Owings):
A Ltd. is absorbed by B Ltd. On that date, the balance sheet of A Ltd. is as follows:
The consideration for absorption is as follows:
(i) Payment of Rs. 15 per equity share in cash.
(ii) Allotment of one 14% preference share of Rs. 100 each in B Ltd. for every 4 equity shares held in A Ltd.
(iii) Allotment of 5 equity shares of Rs. 100 each in B Ltd. for every 4 equity shares held in A Ltd.
The creditors of A Ltd. include Rs. 50,000 due by A Ltd. to B Ltd. The cost of liquidation amounts to Rs. 10,000.
Close the books of A Ltd. and give opening entries in the books of B Ltd.
Illustration 2 (Inter-Company Stocks):
X Ltd. takes over Y Ltd. for Rs. 2, 00,000 in shares of Rs. 10 each Their Balance Sheets are as under:
The stock of X Ltd. includes Rs. 20,000 goods purchased from Y Ltd. on which Y Ltd. made a profit of 25% on sales. Y Ltd’s stock includes Rs. 8,000 goods purchased from X Ltd. on which X Ltd. made a profit of 25% on cost. Show the acquisition entries and the Balance Sheet of X Ltd.
Illustration 3 (Absorption: Inter-Company Owings and Stocks):
The following is the Balance Sheet of X Co. Ltd as on June 30, 2006:
The business of the company is taken over by Y. Co. Ltd. as on that date on the following terms:
(i) Y. Co. Ltd. to take over all assets except cash, to value the assets at book values less 10% except goodwill which is to be valued at 4 years purchase of the excess of average (5 years) profits over 8% of the combined amount of share capital and reserves.
(b) Y Co. Ltd. to take over trade liabilities which was subject to a discount of 5%.
(c) The purchase consideration was to be discharged in cash to the extent of Rs 1, 50,000 and the balance in fully paid equity shares of Rs 10 each valued at Rs 12.50 per share. The average of the five year’s profits was Rs 30,100. The expenses of absorption, Rs 4,000 were paid by X Co. Ltd. but afterwards reimbursed by Y Co. Ltd.
X Ltd. had sold, prior to 30th June 2006 goods costing Rs 40,000 to Y Ltd. for Rs 50,000. On the date of absorption Rs 15,000 worth of goods were still in stock of Y Ltd. Debtors of X Ltd. include Rs 25,000 still due from Y Ltd.
Show the necessary journal entries in the books of X Co. Ltd and Y Co. Ltd.