Computing Purchase Consideration: Net Assets Method, Worked
Chapter Twenty-Five
Syllabus topic 3, "Computation of Purchase Consideration and treatment under purchase method only"
Pages 62 to 63 of 85
In one line
Add up the agreed values of the assets taken over, subtract the agreed values of the liabilities taken over, and the difference is the net assets, which the scheme may adopt as the purchase consideration.
When this method is used
Use it when the question gives you the values at which the assets and liabilities are to be taken over and does not separately fix the price.
Use the other method, worked in the next chapter, when the question tells you what the transferee is to give: so many shares, so much cash.
If the question gives both, the payments the transferee makes are the consideration, and the net assets figure is used only to find the goodwill or capital reserve.
The rules of the computation
Take only what is taken over. An asset the transferee does not take is excluded, however plainly it sits in the Balance Sheet. Cash is often retained by the transferor to meet liquidation expenses, and if so it is excluded.
Take the agreed value, not the book value. The whole point of the exercise is that the two differ.
Exclude fictitious assets absolutely. Goodwill already in the transferor's books, preliminary expenses, a debit balance of Profit and Loss and any discount on issue are not assets and are never taken over at any value.
Deduct only the liabilities taken over, at their agreed values.
Do not deduct reserves or share capital. They are not liabilities; they are what the owners are owed, and they are the very thing being bought out.
Worked
Beta Ltd.'s Balance Sheet stood as follows.
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| 40,000 Equity shares of Rs 10 each, fully paid | 4,00,000 | Land and buildings | 2,00,000 |
| General Reserve | 60,000 | Plant and machinery | 1,80,000 |
| Profit and Loss A/c | 40,000 | Stock | 1,20,000 |
| 10% Debentures | 1,00,000 | Sundry debtors | 1,00,000 |
| Sundry creditors | 80,000 | Cash at bank | 80,000 |
| Total | 6,80,000 | Total | 6,80,000 |
Alpha Ltd. agreed to take over the whole undertaking. The assets were to be taken at the following values: land and buildings Rs 2,50,000; plant and machinery Rs 1,60,000; stock Rs 1,10,000; sundry debtors Rs 95,000; cash at bank at book value. The debentures and the creditors were to be taken over at their book values. The purchase consideration was to be the value of the net assets so taken over.
Step 1. Assets taken over, at agreed values.
| Asset | Agreed value |
|---|---|
| Land and buildings | 2,50,000 |
| Plant and machinery | 1,60,000 |
| Stock | 1,10,000 |
| Sundry debtors | 95,000 |
| Cash at bank | 80,000 |
| Total | 6,95,000 |
Step 2. Liabilities taken over, at agreed values.
| Liability | Agreed value |
|---|---|
| 10% Debentures | 1,00,000 |
| Sundry creditors | 80,000 |
| Total | 1,80,000 |
Step 3. Net assets.
| Particulars | Amount |
|---|---|
| Assets taken over | 6,95,000 |
| Less: Liabilities taken over | (1,80,000) |
| Total | 5,15,000 |
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