Amalgamation of Firms and Sale of Firm to A Company

Amalgamation of Firms: 

Meaning:

Amalgamation of firms is the process of combining two or more firms into a single independent legal entity. It is a type of corporate restructuring in which two or more companies merge together to form a single new company.

Objectives:

The main objectives of amalgamation are to reduce administrative costs, increase profitability and gain competitive advantage.

1. Increase profitability: Merging two companies can help increase profitability by reducing operating costs, increasing sales and creating economies of scale.
2. Increase market share: Amalgamation of firms may increase market share. This is because the merged firm will have a larger customer base, allowing it to acquire a larger portion of the market.
3. Reduction of competition: By combining two companies, the market may become less competitive as the two companies will no longer be competing against each other.
4. Innovation: By bringing together two different teams, companies can benefit from new ideas. This can lead to the development of new products, services and processes which can help the company to remain competitive.

Forms and Issues:   

Forms of amalgamation include merger, consolidation, absorption and purchase of assets. Issues associated with amalgamation include transfer of property, liabilities, capital and profits.

Accounting Treatment in Amalgamating and Amalgamated Firms:

• Accounting treatment of amalgamating and amalgamated firms must be properly documented. 
• In the case of amalgamating firms, all assets, liabilities, capital and profits are transferred to the amalgamated firm. 
• The amalgamated firm is required to record the fair market value of all assets, liabilities, capital and profits at the time of amalgamation.

Sale of Partnership Firm to a Limited Company:

Meaning: 

Sale of partnership firm to a limited company is a process in which the partnership firm is sold to a limited company. This process allows the partners to transfer their ownership and control to the company, thereby gaining the benefits of limited liability.

Advantages:

1. Limited liability: The most important reason to convert a partnership firm into a limited company is the limited liability it offers to its shareholders. In a partnership firm, the partners are personally liable for the debts of the firm, but in a limited company each shareholder is only liable to the extent of the amount of money he/she has invested in the company.
2. Easier to raise capital: In a limited company, the shareholders can easily raise capital through equity financing. This is not possible in a partnership firm. Therefore, a limited company is better positioned to grow its business.
3. Transferability of ownership: In a limited company, the ownership is easily transferable, which is not the case in a partnership firm. The transfer of ownership in a limited company does not require any changes in the agreement or the company's structure.
4. Tax benefits: In a limited company, the tax liabilities are limited and the profits are taxed at a lower rate compared to a partnership firm. This makes it easier for the company to maximize its profits and reinvest them for further growth.
5. Professional management: A limited company is managed by professional managers who are experts in their respective fields. They are usually appointed by the board of directors and are responsible for the day-to-day running of the company. This ensures that the company is managed in an efficient and effective manner.

Accounting Treatment:

• Accounting treatment for the sale of a partnership firm to a limited company must be properly documented. 
• The partnership firm is required to record the fair market value of all assets, liabilities, capital and profits at the time of sale. 
• The company is required to record the cost of acquisition of the partnership in its books.

Computation of Purchase Consideration:

The purchase consideration for the sale of the partnership firm must be computed taking into consideration the fair market value of the assets, liabilities, capital and profits of the firm. The purchase consideration can be in the form of cash, shares or any other form of consideration.

Closure of Firm’s Books:

After the sale of the partnership firm, the books of the firm must be closed. The partners are required to record the closing entries in the books. The closing entries include the transfer of all assets, liabilities, capital and profits to the company.

Opening the Books of New Company:

After the closure of the firm’s books, the books of the new company must be opened. The company is required to record the opening entries in the books. The opening entries include the transfer of all assets, liabilities, capital and profits from the firm to the company.