Computing Purchase Consideration: Net Payments Method, Worked
Chapter Twenty-Six
Syllabus topic 3, "Computation of Purchase Consideration and treatment under purchase method only"
Pages 64 to 65 of 85
In one line
Add up everything the transferee gives to the transferor's shareholders, at fair value, and ignore everything it gives to anybody else.
When this method is used
Use it when the question tells you what the transferee agrees to pay or issue. The words to look for are "agreed to issue", "agreed to pay", "in exchange for", "for every five shares held".
Use the net assets method when the question gives you the values at which the assets and liabilities are taken over and no separate price.
If the question gives both, the payments are the consideration. The net assets figure is then used only to find the goodwill or capital reserve.
The rule, restated as a procedure
List every item the transferee gives. For each, ask the question from [Purchase Consideration: What AS 14 Actually Means By It]: does this reach the shareholders of the transferor, as shareholders?
Keep the ones that do, at fair value. Discard the rest.
Worked
Recall Beta Ltd.: 40,000 equity shares of Rs 10 each fully paid, a General Reserve of Rs 60,000, a Profit and Loss credit balance of Rs 40,000, 10 per cent debentures of Rs 1,00,000 and sundry creditors of Rs 80,000.
Alpha Ltd. agreed to take over the undertaking on these terms. Alpha would issue to Beta's shareholders 50,000 equity shares of Rs 10 each, credited as fully paid, and pay them Rs 60,000 in cash. Alpha would discharge Beta's 10 per cent debentures by issuing its own 9 per cent debentures of an equal amount. Alpha would also bear the liquidation expenses of Rs 8,000.
Step 1. List everything the transferee gives.
| Item | Reaches Beta's shareholders? |
|---|---|
| 50,000 equity shares of Rs 10 each | Yes |
| Cash of Rs 60,000 | Yes |
| 9% debentures issued to Beta's debenture-holders | No, they are creditors |
| Liquidation expenses of Rs 8,000 | No, an expense of the winding up |
Step 2. Total the items that qualify.
| Particulars | Amount |
|---|---|
| 50,000 equity shares of Rs 10 each, at par | 5,00,000 |
| Cash paid to shareholders | 60,000 |
| Total | 5,60,000 |
Purchase consideration: Rs 5,60,000.
The debentures of Rs 1,00,000 and the liquidation expenses of Rs 8,000 form no part of it. A student who adds them arrives at Rs 6,68,000 and every subsequent figure, including the goodwill, is wrong.
Where a premium changes the figure
Suppose instead that Alpha issued the 50,000 shares at Rs 12 each. Paragraph 40 requires the non-cash element at fair value, and for securities the value fixed by the statutory authorities may be taken as fair value.
| Particulars | Amount |
|---|---|
| 50,000 equity shares of Rs 10 each issued at Rs 12 | 6,00,000 |
| Cash paid to shareholders | 60,000 |
| Total | 6,60,000 |
The consideration is Rs 6,60,000, and when the entry is passed it splits: Rs 5,00,000 to Equity Share Capital and Rs 1,00,000 to Securities Premium.
The rest of this chapter
Module one is free. The rest of B.Com. (Accountancy) Semester 5 is part of the bundle.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
See the semester for ₹499 Already bought it? Sign in
Free either way: the syllabus, and module one of every subject.
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.