Journal Entries for Demerger

 Recently, we are seeing the Demerger in corporate level business. NIIT Ltd  became NIIT Ltd and NIIT Learning System Ltd after demerger and Reliance industry has also demerger into reliance and jio finance ltd.

Before this understand Demerge

Demerge means dividing one company into two. All assets and liabilities division and whole business division. So, if you are shareholder, you will get share also in new company. Ratio may be different which may decide by board of directors. 

Suppose there is demerge of A company into B company and C company, so

A company is demerged company

B and C company is resulting company

 So for new accountant and also old accountant who do not know about what journal entries will pass at the time demerger, this content will be useful. 

1. In the Books of Shareholder

Investment in Resulting Company Account Debit 

Profit and Loss Account (If Loss after Demerger or there is less market value than your invested value) Debit 

Investment in Demerged Company Account Credit 

Profit and Loss Account (If Gain after Demerger or If profit after Demerger or there is more market value than your invested value) Credit 

Logic of Above Journal Entry

 

a) Now, your asset changed, so, for showing asset at true name with current company, you need to show debit of resulting company

b) Loss always debit because company has decision to give less as per current market situation, you have to show loss in your financial result reports and balance sheet. This may be gain and gain always credit

c) Old company investment is no more after demerged and new company has came in the existence. so, old company your asset decrease. So, it will credit

Example 

See My DEMAT Account. KNow when NLS showed in my DEMAT Account

In invested Rs. 32888.09 with buying 120 shares of NIIT ltd and after demerged new companies is NIIT and NIIT Learning system whose total market value is 

Resulting company NIIT Ltd Rs. 9516

Resulting company NIIT Learning system  Ltd Rs. 44310

Total = 53826

Net profit to me after demerged = Rs. 20937.91

So, I will show this journal entries at the time when it show me in my DEMAT account 

Investment in NIIT Learning System Ltd  Account Debit   Rs. 44310

Investment in NIIT Ltd  Account Debit Rs. 9516 

Investment in Demerged NIIT Ltd Company Account Credit  Rs. 32888.09 

Profit and Loss Account (If Gain after Demerger or If profit after Demerger or there is more market value than your invested value) Credit Rs. 20937.91

2. In the books of Resulting Companies

Assets  ( at Takover  or market value ) Account Debit 

Goodwill (If more consideration to shareholders  than market value - Balancing figure)  Account Debit 

Outside Liabilities ( Current value of debt Takover) Account Credit

Shareholder of demerged company 's Capital Account (Consideration to Shareholders of demerged company ) Credit 

Capital reserve (If more Less consideration to shareholders than market value - Balancing figure)  Account Credit 

Logic of Above Journal Entry

1. When resulting company takeover assets, it means its consideration must be given to old shareholders, means old shareholder will get benefit instead consideration to shareholder

So, takeover asset is coming of asset in new resulting company, so, it will debit

it may current asset and non current assets 

2. outside liabilities are coming in resulting company, so increasing liability must credit as per journal entry rule. 

3. Now, demerged company's shareholders get consideration for this. So, it will credit

if it is consideration is less than actual market value, it will be the balancing figure as capital reserve. 

In the books of Demerged Companies

Outside Liabilities ( Current value of debt given ) Account Debit

Resulting Company Account (Consideration to Shareholders of demerged company) Debit

Capital reserve or profit and loss account (If more Less consideration to shareholders than market value - Balancing figure)  Account Debit

Assets  ( at given or transferred at market value ) Account Credit

Goodwill or reserve or profit and loss account (If more consideration to shareholders  than market value - Balancing figure)  Account Credit

Above journal entry is simple,

but 

• [tab]
• you must Know What will Debit 
• you must know resulting company account as debit   - It  just like decreasing the liability of shareholder of demerged company.
• Second Important Learn 
• No, shareholder claim that his market value has decreased because this takeover by resulting company. 

Never forget to

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