Absorption of Company.pptx

It is a concise PPT for learning the concept of Absorption of Company.

1. advanced company accounts PRESENTATION ON: ABSORPTION OF COMPANY Created By Snehal Pandey From: Banaras Hindu University

2. ABSORPTION OF COMPANY When an existing company purchases another companies doing similar business in lieu of a consideration agreed upon between the companies, it is known as absorption. After this purchase the existence of the vendor company comes to an end. For example : There are three companies in the market A,B and C . C company wants to become powerful in the market. So, C company offers A and B companies to sell their business to it . A and B companies accepts and close their business after getting purchase price from C company

3. Real Examples of absorption . The real life examples of amalgamation is: Tata Tea of Tetley Tea & Tata Steel of Corus Steel

4. If there remains a competition between two companies and one company purchases another company, the competition comes to an end. It creates Economy in the working of both the companies Uniform polices can be made Marketing of products can be made economically and conveniently Object or Merits of Absorption

5. Demerits of absorption Managerial problem: By absorption the size of the business is increased. Under such conditions it becomes difficult to manage a large concern efficiently due to limited managerial capacity of the managers. Non- Co-operation: By absorption of companies, the management of both companies work together, therefore unless they have co-operative attitude there may be difference of opinion which may create non-corporation between them. It can retard the growth of the business. Increase in price: The monopoly achieved through absorption is not always healthy for the market. It may result in charging higher prices from the customer because of having control over Market.

6. Control over supply: The purchaser company may create problems for the customer by creating artificial scarcity of supply in the market. It may create problems to the consumer. Over capitalization: By absorption, the total capital increase while most of the expenditure are reduced, it may not be possible to utilize all the funds. Therefore problems of over capitalization can be created which is difficult to control.

7. Methods of Absorption Existing company purchases the business of a company doing similar business. Winding-up of Vendor Company takes place Purchasing Company takes over the assets of the vendor company as per the agreement between them. The liabilities of the vendor company are either taken over by the purchasing company or are by the vendor company Purchase price is determined according to the agreement entered into between the purchasing and vendor companies. Purchase price can be paid by shares, debentures and cash.

8. Main Accounts prepared in the book of Vendor Company : These 4 main accounts are prepared in the books of Vendor Company: Realisation Account. Purchase Company Account Bank Account Shareholder's Account

9. Purchase Consideration in Absorption of Companies Lump Sum Amount : I n this, the purchaser agrees to pay the vendor company, a lump sum amount, and then this will be taken as Purchase Consideration. Net Asset : In this case lump sum payment is not made by the purchasing company, instead they calculate the net worth of assets taken. Net Payment: I f the absorption involves payments to shareholders, debenture holders and creditors of the absorbed company, it is called Net Payment method. The payment can be in the form of cash, shares and debentures. Value of Shares I n this method the purchasing company is buying the vendor company on the basis of the value offered per share. For example, ABC company has 10,000 shares. The company XYZ approached ABC Co. and offered Rs.100 per share which the management has approved and signed the absorption agreement. Purchase consideration = 10,000 x 100 = Rs. 10,00,000

10. Difference Between Amalgamation and Absorption of Company. Amalgamation : Amalgamation is when two or more companies merge. It is the conversion of two companies and two balance sheets into one company and one (combined) balance sheet. In amalgamation, the identity of both the companies exist and survive. It is the pooling of assets and liabilities and interest of two companies. It usually consists of two companies of same size and stature. Example: 1) Maruti motors(India) and Suzuki(Japan) were amalgamated to form Maruti Suzuki.

11. Difference Between Amalgamation and Absorption of Company . Absorption Absorption refers to takeover. In absorption, one company is taken over by another and hence it loses its own core identity. The identity of absorbing company only sustains. Here, it's not pooling of interest. It is the dominance of absorbing company. Here, it is the taking of a small company by a comparatively bigger business company. Example: : 1) Takeover of Myntra by Flipkart . 2) hutch + Vodafone = Vodafone

12. JOURNAL ENTRIES IN ABSORPTION IN THE BOOK OF PURCHASER

13. Journal Entries In The Books of Vendor

14. Example Question.

15. EXAMPLE QUESTION

16. Conclusion Absorption is a way of business arrangement in which an existing company takes over the business of another entity. The entity who gets absorbed goes into the liquidation process. The payment for such absorption to the old entity can be made either in cash or shares or mixture of both. There are so many reasons of absorption. One of them is that due to the formation of the new company, it will not get the reputation in the market as the old one. So, that is why, purchasing company absorbs an existing company to using its strength to exploit the opportunities exists in the market.