In order to complete the process of amalgamation/ merger, there is a need to close the books of the old company. Entities cannot keep their records open due to the fact they are going to lose their status. In order to understand the closing entries, we take the support of the same example.
Example Question
Two companies Alpha and Beta are in the same line of business. They have decided to merge and form a new company Gamma. Gamma will take all the assets and liabilities of the old companies and that the Gamma will be paid $10 share to the value of net assets for each of the old companies. The Balance sheet of Alpha and Beta are as follows:
Balance Sheet
| Alpha | Beta | |
| Assets | ||
| Machinery | 180,000 | 200,000 |
| Property | 190,000 | 150,000 |
| Patents | 30,000 | – |
| Inventory/ Stock | 150,000 | 90,000 |
| Accounts Receivable | 48,000 | 70,000 |
| Cash | 22,000 | 50,000 |
| Profit & Loss | 10,000 | – |
| Total | 630,000 | 560,000 |
| Equities | ||
| Share capital | 500,000 | 400,000 |
| Accounts payable | 80,000 | 50,000 |
| Notes Payable | 50,000 | – |
| Profit and loss | – | 20,000 |
| Reserve fund | – | 90,000 |
| Total | 630,000 | 560,000 |
Required
1. Journal entries to close the book of Alpha,
2. Journal entries to close the book of Beta,
Solution Answer
Alpha
Closing Entries
| Description | Debit | Credit |
| Accounts payable | 80,000 | |
| Notes Payable | 50,000 | |
| Receivable from Gamma | 490,000 | |
| Machinery | 180,000 | |
| Property | 190,000 | |
| Patents | 30,000 | |
| Inventory/ Stock | 150,000 | |
| Accounts receivable | 48,000 | |
| Cash | 22,000 | |
| Share in Gamma | 490,000 | |
| Receivable from Gamma | 490,000 | |
| Share capital | 500,000 | |
| Profit and loss | 10,000 | |
| Shareholder | 490,000 | |
| Shareholder | 490,000 | |
| Shares in Gamma | 490,000 |
Beta
Closing Entries
| Description | Debit | Credit |
| Accounts payable | 50,000 | |
| Receivable from Gamma | 510,000 | |
| Machinery | 200,000 | |
| Property | 150,000 | |
| Inventory/ Stock | 90,000 | |
| Accounts receivable | 70,000 | |
| Cash | 50,000 | |
| Share in Gamma | 510,000 | |
| Receivable from Gamma | 510,000 | |
| Share capital | 400,000 | |
| Profit and loss | 20,000 | |
| Reserve fund | 90,000 | |
| Shareholder | 510,000 | |
| Shareholder | 510,000 | |
| Shares in Gamma | 510,000 |