Accounting Entries in the Books of the Purchasing Company on Acquisition

Accounting Entries in the Books of the Purchasing Company on Acquisition :

When new set of books are opened:

1. When the business is acquired –

Business Purchase A/c Dr. with the amount of consideration
To Vendors

2. When the assets and liabilities taken over by the company are recorded –

Sundry Assets A/c (Individually) Dr. with the re-valued figure if any otherwise, at book value;

To Sundry Liabilities A/c (Individually) with the values at which they are taken over

To Business Purchase A/c with the consideration

Alternatively, instead of passing the above two entries the following entry may also serve the purpose:

Sundry Assets A/c (Individually) Dr. with the revalued figures, if any, otherwise, at book figures

To Sundry Liabilities (Individually) with the values at which they are taken over

To Vendors with the consideration

Notes: (i) If the credit total is greater than the debit total, the difference should be debited to Goodwill Account.

(ii) If the debit total is greater than the credit total, the difference has to be treated as capital gain and as such, Capital Reserve Account should be credited.

Goodwill or Capital Reserve should be ascertained only as indicated above – the amount appearing in the vendors ,balance sheet is not relevant.

3. When the payment is made to vendors –

Vendors Dr. with the amount due
To Share Capital A/c with the value of shares allotted, if any

To Debentures A/c with the value of debentures allotted, if any

To Cash or Bank A/c with the amount of cash, if any

Notes: (i) Shares capital or Debentures should be credited only with their nominal value.

(ii) If the shares or debentures are issued at a premium, Securities Premium Account should be credited with the amount of the premium.

(iii) Similarly, if the shares or debentures are issued at a discount, Discount on Issue of Shares Account or Discount on Issue of Debentures Account should be debited with the discount.

4. If interest is payable to vendors on the purchase consideration for delayed payment –

Interest to Vendors Dr. with the amount of interest payable
To Vendors

Note: This entry would be made before the payment is made to vendors and the amount of interest would be included in the payment.

5. If the realisation expenses of the vendor are borne by the company and acquisition expenses are incurred by
the company, the same has to be treated as capital loss and the entry for this will be as follows –

Goodwill A/c Dr. with the amount of expenditure
To Cash/Bank A/c

6. If any item of expenses or losses can be adjusted against Securities Premium Account u/s 52 of Companies Act, 2013 the same should be adjusted to the extent possible and for this the entry will be as follows –

Securities Premium A/c Dr. with the amount of adjustment
To Preliminary Expenses A/c
Or To Discount on Issue of Shares A/c
Or To Discount on Issue of Debentures A/c

Illustration : (Where consideration is given in the problem).

Snow View Ltd., was registered with an authorised capital of 1,00,000 Equity Shares of Rs.10 each and it acquired the business of Mr. Bansal of Mr. Bansal at an agreed price of Rs.2,50,000.

The Balance Sheet of Mr. Bansal at the date of acquisition was as follows:

Liabilities	Amonut(Rs.)	Assets	Amonut (Rs.)
Capital	2,00,000	Freehold Premises	1,00,000
Reserve	20,000	Plant and Machinery	80,000
Trade Payables	50,000	Stock	20,000
Bills Payable	30,000	Trade receivables 27,500 Less: Provisions 2,500_	25,000
	———————–	Cash at Bank	___75,000__
	3,00,000		3,00,000

The consideration was to be discharged by the issue of 20,000 equity shares of `10 each as fully paid-up and the balance in cash.

You are asked to journalise the transactions in the books of Snow View Ltd. Also prepare the opening balance sheet of the company.

Solution:

Journal Entries

Particulars	Amonut (Rs.)	Amonut (Rs.)
Business Purchase A/c Dr.	2,50,000
To Bansal		2,50,000
(Consideration due to vendor on purchase of the business as per agreement dated…)

Freehold Premises A/c Dr.	1,00,000
Plant and Machinery A/c Dr.	80,000
Stock A/c Dr.	20,000
Trade receivables A/c Dr.	27,500
Bank Dr.	75,000
Goodwill A/c Dr.	30,000
To Provision for Bad Debts A/c		2,500
To Trade Payables A/c		50,000
To Bills Payable A/c		30,000
To Business Purchase A/c		2,50,000
(Taking over the assets and the liabilities of the vendor debiting the difference to

Goodwill Account)
Bansal Dr.	2,50,000
To Equity Shares Capital A/c		2,00,000
To Bank		50,000
(Allotment of 20,000 Equity Shares of `10 each to vendor as fully paid-up for consideration other than cash and payment of the balance `50,000 in cash as per Board’s resolution)

Balance Sheet of Snow View Ltd. as at…..

	Amonut (Rs.)	Amonut (Rs.)
I EQUITIES AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Authorised Capital
1,00,000 equity shares of ` 10 each		10,00,000
Issued subscribed and paid up capital
20,000 Equity shares of ` 10 each		2,00,000
2 Current Liabilities
Bills Payable	30,000
Trade Payables	_50,000_	__80,000_
TOTAL		2,80,000
II ASSETS
1 Non-current Assets
(a) Fixed Assets
(i) Tangible Assets
Freehold Premises	1,00,000
Plant & Machinery	_80,000_	1,80,000
(ii) Intangible Assets
Goodwill		30,000
2 Current Assets
Stock		20,000
Trade receivables	27,500
Less: Provision for bad debts	__2,500__	25,000
Cash and Cash equivalents		___25,000____
TOTAL		___2,80,000___

Illustration : (Where consideration is not given in the problem).

Woodlands Ltd., registered with a capital of `10,00,000 in equity shares of `10 each acquired the business of M/s A and B, the Balance Sheet of whom at the date of acquisition was as follows:

Liabilities	Amonut(Rs.)	Assets	Amonut(Rs.)
Bills Payable	16,000	Cash at Bank	29,000
Trade Payables	30,000	Bills Receivable	13,000
Reserve	14,000	Trade receivables	48,000
Capital Accounts:		Stock	18,000
A – 70,000		Furniture and Fixtures	2,000
__B – 70,000 __	1,40,000 P	lant and Machinery	40,000
	—————————-	Land and Buildings	_____50,000_____
	_____2,00,000___		____2,00,000____

The assets and liabilities were subject to the following revaluation:
Plant and Machinery to be depreciated by 10%
Furniture and Fittings to be depreciated by 15%
Land and Buildings to be appreciated by 20%
A provision to be made for bad debts on debtors @ 2-1/2%
Goodwill of the firm was valued at Rs.24,000.
The consideration was to be discharged as follows:
(i) Allotment of 10,000 Equity Shares of Rs.10 each at Rs.12 each.
(ii) Allotment of 500, 14% Debentures of Rs.100 each at a discount of 10%.
(iii) Balance in cash.
The cost of acquisition of the company amounted to Rs. 5,000.
You are required to show the journal entries in the books of the company and prepare the opening balance sheet of the company after the acquisition.

Solution:

Particulars	Amount (Rs.)	Amount (Rs.)
Calculation of consideration:
Assets taken over:
Cash and Cash equivalents		29,000
Bills Receivable		13,000
Trade receivables	48,000
Less: Provision for Bad Debts @ 2-1/2%	____1,200__	46,800
Stock		18,000
Furniture and Fixtures	2,000
Less: Depreciation @ 15%	______300___	1,700
Plant and Machinery	40,000
Less: Depreciation @ 10%	____4,000___	36,000
Land and Buildings	50,000
Add: Appreciation @ 20%	___10,000___	60,000
Goodwill		___24,000__
Gross Assets taken over		2,28,500
Less: Liabilities taken over:
Bills Payable	16,000
Trade Payables	___30,000____	___46,000__
Net Assets acquired or consideration		1,82,500

Journal Entries

	Dr. (Rs.)	Cr. (Rs.)
Business Purchase A/c Dr.	1,82,500
To M/s A and B		1,82,500
(Consideration due to vendors on purchase of the business as per agreement dated…)

Bank Dr.	29,000
Bills Receivable A/c Dr.	13,000
Trade receivables A/c Dr.	48,000
Stock A/c Dr.	18,000
Furniture and Fixture A/c Dr.	1,700
Plant and Machinery A/c Dr.	36,000
Land and Buildings A/c Dr.	60,000
Goodwill A/c Dr.	24,000
To Provision for Bad Debts A/c		1,200
To Bills Payable A/c		16,000
To Trade Payables A/c		30,000
To Business Purchase A/c		1,82,500
(Taking over the various assets and the liabilities of the vendor)

M/s A and B Dr.	1,82,500
Discount on Issue of Debentures A/c Dr.	5,000
To Equity Share Capital A/c		1,00,000
To Securities Premium A/c		20,000
To 14% Debentures A/c		50,000
To Bank		17,500
(Allotment of 10,000 Equity Shares of `10 each at a premium of `2 per share and 500 debentures of `100 each at a discount of 10% to vendors for consideration other than cash and the balance of `17,500 paid in cash as per Board resolution dated…..)

Goodwill Dr.	5,000
To Bank		5,000
(Payment of cost of acquisition; added to goodwill since it increases the cost of acquiring the business)

Securities Premium A/c Dr.	5,000
To Discount on Issue of Debentures A/c		5,000
(Writing off of capital losses against Securities Premium Account as per Section 52)

Balance Sheet of Woodlands Ltd. as at…..

	Rs.	Rs.
I EQUITIES AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Authorised Capital : 1,00,000 equity shares of ` 10 each		10,00,000
Issued subscribed and paid up capital
10,000 Equity shares of ` 10 each		1,00,000
(b) Reserve & Surplus
Securities Premium		15,000
2 Non-current liabilities
500, 14% Debentures of `100 each		50,000
3 Current Liabilities
Bills Payable	16,000
Trade Payables	30,000	46,000
TOTAL		2,11,000
II ASSETS
1 Non-current Assets
(a) Fixed Assets
(i) Tangible Assets
Freehold Premises	60,000
Furniture and fixture	1,700
Plant & Machinery	36,000	97,700
(ii) Intangible Assets
Goodwill		29,000
2 Current Assets
Stock		18,000
Trade receivables	48,000
Less: provision for bad debts	1,200	46,800
Cash and Cash equivalents 6,500		6,500
Bills receivable		13,000
TOTAL		2,11,000

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