The Purchase Method, Worked in the Transferee's Books
Chapter Thirty
Syllabus topic 3, "Computation of Purchase Consideration and treatment under purchase method only"
Pages 72 to 74 of 85
In one line
Open a Business Purchase Account for the price, bring the assets and liabilities in at their agreed values, let goodwill or capital reserve take the strain, and then discharge the price.
The three entries, always in this order
- Record the price. Business Purchase Account debited, Liquidator of the transferor credited.
- Incorporate what was bought. Assets debited, liabilities credited, Business Purchase Account credited, and the difference to Goodwill or Capital Reserve.
- Discharge the price. Liquidator debited, shares and cash credited.
Entry 2 is the one that carries the marks, and it is a single compound entry.
The facts, gathered
Beta Ltd.'s Balance Sheet, and Alpha Ltd.'s terms, as in the two computation chapters.
| Working note | Computation | Rs |
|---|---|---|
| WN 1. Purchase consideration | 50,000 equity shares of Rs 10 at par, Rs 5,00,000, plus cash Rs 60,000 | 5,60,000 |
| WN 2. Assets taken over at agreed values | Land and buildings 2,50,000; plant 1,60,000; stock 1,10,000; debtors 95,000; cash 80,000 | 6,95,000 |
| WN 3. Liabilities taken over | Debentures 1,00,000; creditors 80,000 | 1,80,000 |
| WN 4. Net assets acquired | WN 2 less WN 3 | 5,15,000 |
WN 5. Goodwill.
| Particulars | Amount |
|---|---|
| Purchase consideration, WN 1 | 5,60,000 |
| Less: Net assets acquired, WN 4 | (5,15,000) |
| Total, being goodwill under paragraph 37 | 45,000 |
The entries in Alpha Ltd.'s books
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| 1. Business Purchase A/c ... Dr | 5,60,000 | |
| To Liquidator of Beta Ltd. A/c | 5,60,000 | |
| (Being the purchase consideration payable to the liquidator of Beta Ltd., WN 1) | ||
| 2. Land and Buildings A/c ... Dr | 2,50,000 | |
| Plant and Machinery A/c ... Dr | 1,60,000 | |
| Stock A/c ... Dr | 1,10,000 | |
| Sundry Debtors A/c ... Dr | 95,000 | |
| Cash at Bank A/c ... Dr | 80,000 | |
| Goodwill A/c ... Dr | 45,000 | |
| To 10% Debentures A/c | 1,00,000 | |
| To Sundry Creditors A/c | 80,000 | |
| To Business Purchase A/c | 5,60,000 | |
| (Being assets and liabilities of Beta Ltd. incorporated at agreed values under the purchase method, the excess of consideration over net assets being goodwill, WN 2 to WN 5) | ||
| 3. Liquidator of Beta Ltd. A/c ... Dr | 5,60,000 | |
| To Equity Share Capital A/c | 5,00,000 | |
| To Bank A/c | 60,000 | |
| (Being the consideration discharged by the issue of 50,000 equity shares of Rs 10 each at par and payment of Rs 60,000 in cash) | ||
| Total | 18,60,000 | 18,60,000 |
The transferee's Balance Sheet after the amalgamation
Entries alone are not the whole answer. MU asks for the Balance Sheet of the transferee after the amalgamation, and it is where the marks for carrying every untouched figure forward are won. So here is Alpha Ltd. before and after.
Alpha Ltd.'s own Balance Sheet immediately before the amalgamation was as follows.
| Liabilities | Rs | Assets | Rs |
|---|---|---|---|
| 1,00,000 Equity shares of Rs 10 each, fully paid | 10,00,000 | Land and buildings | 6,00,000 |
| General Reserve | 3,00,000 | Plant and machinery | 4,00,000 |
| Profit and Loss A/c | 1,00,000 | Stock | 2,00,000 |
| Sundry creditors | 2,00,000 | Sundry debtors | 1,50,000 |
| Cash at bank | 2,50,000 | ||
| Total | 16,00,000 | Total | 16,00,000 |
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.