A Complete Conversion, Worked
Chapter Twenty-Six
Syllabus topic 1, 2, 3 and 4, the whole of Module II
Pages 78 to 79 of 168
The question
L and M are partners in LM & Co sharing profits 3:2. Their balance sheet as at 31 March 2027 is:
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| Creditors | 80,000 | Land and building | 2,00,000 |
| Bills payable | 20,000 | Plant | 1,20,000 |
| General reserve | 40,000 | Stock | 90,000 |
| Capital: L | 2,00,000 | Debtors | 60,000 |
| Capital: M | 1,60,000 | Cash | 30,000 |
| Total | 5,00,000 | Total | 5,00,000 |
On 1 April 2027 the business is taken over by LM Ltd. The company takes all the assets except the cash and takes over the creditors. The bills payable are not taken over and are discharged by the firm out of its cash. The assets are taken at land and building Rs 2,60,000, plant Rs 1,10,000, stock Rs 85,000 and debtors Rs 60,000 subject to a provision of Rs 3,000. The purchase consideration is discharged by the issue of 35,000 equity shares of Rs 10 each fully paid and 1,000 twelve per cent debentures of Rs 100 each. L is to take all the debentures and M the remaining cash of the firm, the balance of each account being settled in shares.
Prepare the realisation account, the partners' capital accounts and the cash account in the books of the firm, the journal entries in the books of LM Ltd, and its balance sheet.
Step one: the consideration and the goodwill
| Rs | |
|---|---|
| 35,000 equity shares of Rs 10 each | 3,50,000 |
| 1,000 debentures of Rs 100 each | 1,00,000 |
| Purchase consideration | 4,50,000 |
| Assets taken over, at agreed values | Rs |
|---|---|
| Land and building | 2,60,000 |
| Plant | 1,10,000 |
| Stock | 85,000 |
| Debtors, Rs 60,000 less provision Rs 3,000 | 57,000 |
| Total | 5,12,000 |
| Rs | |
|---|---|
| Assets taken over | 5,12,000 |
| Less: creditors taken over | 80,000 |
| Net assets | 4,32,000 |
| Rs | |
|---|---|
| Purchase consideration | 4,50,000 |
| Less: net assets taken over | 4,32,000 |
| Goodwill | 18,000 |
Neither the cash nor the bills payable is in that computation, because neither passed.
Step two: the realisation account
In the books of LM & Co
| Dr | Rs | Cr | Rs |
|---|---|---|---|
| To Land and building | 2,00,000 | By Creditors | 80,000 |
| To Plant | 1,20,000 | By Bills payable | 20,000 |
| To Stock | 90,000 | By LM Ltd | 4,50,000 |
| To Debtors | 60,000 | ||
| To Cash, bills payable discharged | 20,000 | ||
| To Profit to L's capital | 36,000 | ||
| To Profit to M's capital | 24,000 | ||
| Total | 5,50,000 | Total | 5,50,000 |
Check: the consideration of Rs 4,50,000 less the net book value of what passed, being Rs 4,70,000 of assets less Rs 80,000 of creditors, that is Rs 3,90,000, gives a profit of Rs 60,000, shared 3:2 as Rs 36,000 and Rs 24,000.
Step three: the cash account
| Dr | Rs | Cr | Rs |
|---|---|---|---|
| To balance brought down | 30,000 | By Realisation, bills payable | 20,000 |
| By M's capital | 10,000 | ||
| Total | 30,000 | Total | 30,000 |
The cash account closes, and the Rs 10,000 it hands to M is what makes the capitals exceed the consideration.
A Complete Conversion, Worked
Step four: the partners' capital accounts
| Particulars | L, Rs | M, Rs |
|---|---|---|
| By balance brought down | 2,00,000 | 1,60,000 |
| By General reserve, 3:2 | 24,000 | 16,000 |
| By Realisation, profit 3:2 | 36,000 | 24,000 |
| Total credited | 2,60,000 | 2,00,000 |
| Particulars | L, Rs | M, Rs |
|---|---|---|
| To 12% Debentures in LM Ltd | 1,00,000 | nil |
| To Cash | nil | 10,000 |
| To Equity shares in LM Ltd | 1,60,000 | 1,90,000 |
| Total debited | 2,60,000 | 2,00,000 |
The proof:
| Rs | |
|---|---|
| Total owed to the partners | 4,60,000 |
| Purchase consideration | 4,50,000 |
| Difference, being the cash retained and distributed | 10,000 |
And the shares distributed, Rs 1,60,000 to L and Rs 1,90,000 to M, come to Rs 3,50,000, exactly the shares received.
Step five: the journal in the books of LM Ltd
| Dr, Rs | Cr, Rs | |
|---|---|---|
| Business Purchase A/c | 4,50,000 | |
| To Vendors A/c | 4,50,000 | |
| Total | 4,50,000 | 4,50,000 |
| Dr, Rs | Cr, Rs | |
|---|---|---|
| Land and building | 2,60,000 | |
| Plant | 1,10,000 | |
| Stock | 85,000 | |
| Debtors | 57,000 | |
| Goodwill | 18,000 | |
| To Creditors | 80,000 | |
| To Business Purchase A/c | 4,50,000 | |
| Total | 5,30,000 | 5,30,000 |
| Dr, Rs | Cr, Rs | |
|---|---|---|
| Vendors A/c | 4,50,000 | |
| To Equity Share Capital | 3,50,000 | |
| To 12% Debentures | 1,00,000 | |
| Total | 4,50,000 | 4,50,000 |
Step six: the balance sheet of LM Ltd
Balance Sheet of LM Ltd as at 1 April 2027
| Particulars | Rs |
|---|---|
| I. EQUITY AND LIABILITIES | |
| (1) Shareholders' funds: share capital, 35,000 equity shares of Rs 10 each fully paid | 3,50,000 |
| (3) Non-current liabilities: long-term borrowings, 1,000 twelve per cent debentures | 1,00,000 |
| (4) Current liabilities: trade payables | 80,000 |
| TOTAL | 5,30,000 |
| Particulars | Rs |
|---|---|
| II. ASSETS | |
| (1) Non-current assets: property, plant and equipment | 3,70,000 |
| (1) Non-current assets: intangible assets, goodwill | 18,000 |
| (2) Current assets: inventories | 85,000 |
| (2) Current assets: trade receivables | 57,000 |
| TOTAL | 5,30,000 |
The checks, run
| Check | Result |
|---|---|
| Realisation account balances | Rs 5,50,000 |
| Cash account closes | Rs 30,000, of which Rs 10,000 to M |
| Capitals equal consideration plus cash retained | Rs 4,60,000 |
| Shares distributed equal shares received | Rs 3,50,000 |
| Both company entries balance | Rs 5,30,000 and Rs 4,50,000 |
| Balance sheet totals agree | Rs 5,30,000 |
The two numbers not to confuse
| Rs | Whose books | Measured against | |
|---|---|---|---|
| Profit on realisation | 60,000 | The firm's | Book values |
| Goodwill | 18,000 | The company's | Agreed values |
And they differ by the revaluation surplus of Rs 42,000: land up Rs 60,000, plant down Rs 10,000, stock down Rs 5,000 and debtors down Rs 3,000.
In short
- Order: consideration and goodwill, realisation, cash, capitals, the company's journal, the Schedule III balance sheet.
- Book values in realisation; agreed values in the company's books.
- Reserves and realisation profit in the OLD ratio.
- Cash retained explains the gap between capitals of Rs 4,60,000 and a consideration of Rs 4,50,000.
- The firm's balance sheet is horizontal; the company's is Schedule III.
Answer in one sentence
Work a complete conversion. Compute the consideration from what the company issues, Rs 4,50,000 here, and the goodwill as its excess over the agreed net assets of Rs 4,32,000, namely Rs 18,000; open a realisation account debiting the assets that passed at book value and the cash spent on the bills payable, crediting the liabilities transferred and the consideration, so that the balancing profit of Rs 60,000 goes to L and M in 3:2; run the cash account, which pays the bills payable and hands Rs 10,000 to M; build the capital accounts from the opening capitals, the reserve and the realisation profit, closing them with the debentures, the cash and the shares so that the total owed of Rs 4,60,000 is the consideration plus the retained cash; pass the company's three entries, business purchase against vendors, the assets and goodwill in against business purchase, and the discharge in share capital and debentures against vendors; and draw the company's balance sheet in the Schedule III vertical form, totalling Rs 5,30,000 on each side.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.