COMPANIES - BUSINESS PURCHASE 2013-14.doc

8/10/2019 COMPANIES - BUSINESS PURCHASE 2013-14.doc

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12 NOTES

COMPANIES BUSINESS PURCHASE

It is important to distinguish between a company buying the assets of another business, andthe purchase by the company of that other business. A company may buy the assets of another business which may then cease to trade. The customers of that other businessmust find another supplier. That is very different from a company buying another business;the company takes over the assets and liabilities of that business together with itscustomers and carries on the trade of the business taken over. The distinction is importantbecause the purchase only of assets does not involve any payment for Goodwill; thepurchase of a business usually does involve payment for Goodwill. A Company often issuesshares to the owner of a business as payment. The shares may be issued at a premium.

ometimes a sole trader or a partnership may decide to convert their business into a limitedcompany. This is done by forming a new company which purchases the partnershipbusiness. !"am includes the following different type of #uestions$

A Company can purchase the business of a Sole trader (Sample answer 1).

A Company can purchase the business of a partnership firm (Sample answer 2).

A Partnership firm can convert its business to form a limited company (Sampleanswer 3).

wo Partnership firms can combine their businesses to form a limited company (Sample answer !).

A Sole trader and a partnership firm combine their businesses to form a limited company (Sample answer ").

Goodwill

%hen a company purchases a business, it will usually buy the assets less the liabilities at anagreed valuation. In addition, it usually pays for the advantage of ac#uiring an establishedtrade. The company does not have to build up a new business from nothing; the businesshas been build up by the previous owner who will normally e"pect to be rewarded for hisefforts. Goodwill is the amount paid for the ac#uisition of a business in e"cess of the fair value of its separable net assets. The term & sepa a!le "e# asse#s$ is used to describe thesale of the assets of a business and the settlement of its liabilities out of the proceeds

It is important to distinguish between p% &'ased Goodwill and I"'e e"# Goodwill('urchased Goodwill has been paid for. Inherent Goodwill has not been paid for and willarise, for instance, if a trader decides that he wants to show the Goodwill of his business inhis (alance heet; he debits a Goodwill account in his books and credit his Capital accountwith any amount that he wish to show as Goodwill.

Accounting tandard )IAS*+, states that only purchased Goodwill should be shown incompany (alance heets and should be shown as an &intangible) non current asset. If theamount paid for a business is less than the fair value of its separable net assets, thedifference is called "e-a#i.e Goodwill , and must be shown as negative amount among theintangible non current assets in the (alance heet.

COMPANIES BUSINESS PURCHASE Page 1


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Sample answer 1 ( Company ta#e over the business of a Sole trader) $

Bo/ L#d( purchased the business of A( S0i#' , a sole trader, on * st +ctober -**. mith)s(alance heet at that date was$

No" &% e"# asse#s'roperty * ----'lant and e#uipment ----/otor vehicles 0 ---

1 ---C% e"# asse#sInventory *0---Trade receivables 2---(ank *----

1 ---)3, C% e"# lia!ili#ies

Trade payables 0---2---

Ne# asse#s 2455556i"a"&ed !7

mith Capital 245555

The assets and liabilities were taken over at the following values$

'roperty *3----'lant and e#uipment 43---/otor vehicles 1 ---Inventory *----Trade receivables 3---Trade payables 0---

(o" 5td. did "o# take over mith)s (ank account. (o" 5td paid mith *555558 made up asfollows$

Cash 95555 and; 255555 +rdinary shares of 1 each

(o" 5td)s (alance heet at * +ctober -** before it ac#uired the business of A. mith wasas follows$ No" &% e"# asse#s 'roperty 0----- 'lant and e#uipment *4---- /otor vehicles 2----

31----



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C% e"# asse#sInventory 0 ---Trade receivables 1 ---Cash 6 cash e#uivalents 30---

*12---)3, C% e"# lia!ili#iesTrade payables *0--- * 0---

:;9555E


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hare premium account 3---- 0---= *2---@et current assets ?3---Ne# asse#s 1519555

E


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o A * debenture producing annual interest of 7?--- will be 7


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S#ep : Clos% e o? Pa #"e $s Capi#ala&&o%"#s

Pa #"e s$ Capi#ala&&o%"#s

Cas' Ba"@ O di"a 7s'a esP e?e e"&e s'a esDe!e"#% esCo".e #i!le Loa"s#o&@

Sample answer 2 (Company ta#e over the business of a partnership firm)$

A #'% a"d C'a les are partners in a business sharing profit and losses e#ually. Their (alance sheet at 1* December -** is as follows$

No" C% e"# asse#s 5and and buildings *-----Ei"tures and fittings 13---+ffice machinery 0---

*3----C% e"# asse#sInventory 10---Trade receivables *3---(ank 2---

42---C% e"# lia!ili#iesTrade payables < 0---=@et current assets 10---

*?0---No" &% e"# lia!ili#ies2 5oan from Charles < 4---=Ne# asse#s 14 5556i"a"&ed !7Capi#al a&&o%"#s Arthur *----- Charles ----

* ----C% e"# a&&o%"#s Arthur 4--- Charles


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Re


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Trade receivables * ---42---

)3, Trade payables < 0---=Ne# Asse#s 2*9555

Goodwill = P% &'ase P i&e 3 Ne# Asse#s = 2;5555 3 2*9555 = 14555

'urchase consideration 4----)3, Cash


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C% e"# lia!ili#iesTrade payables 0---=


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+n * +ctober -**, the partners decided to form a limited company, DE6 Li0i#ed , to takeover the business of the firm. It was agreed that all the assets )e/&ep# !a"@, and currentliabilities would be transferred to the company at the following values$

@on current assets 4----Inventory 4----Trade receivables 1?---Trade payables 1----

The purchase price of *2;555 was settled as follows$

+5555 11 'reference hares of 7* each; 12 Debentures sufficient to give Angela the same income as she received from her

loan to the partnership and; (alance remaining is to be covered through the issue of 1;5555 +rdinary hares of

7* each.

Re 1?--- 1----=

: 7*3---

)!,DE6 Li0i#ed

Bala"&e s'ee# as a# 1 s# Oo!e 8 2511

No" &% e"# asse#sGoodwill *3---+ther non current assets 4----

33---C% e"# Asse#sInventory 4----Trade receivables 1?---



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2?---)3, C% e"# Lia!ili#iesTrade payables


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Jinds ?----*;5555 1 ;555

The partners agreed to form a limited company, SIGMA L#d , to take over both businesses ( All / Asse#s were transferred to IG/A 5td with the e"ception of trade receivables andbalance at bank. The agreed values of assets taken over by the company are$

S>M A H

'remises ---- -----/achinery 3---- ----Ei"tures 6 fittings ---- 1---The remaining vehicles 14--- HInventory *2--- *----

/ collected 2;+55 cash from trade receivables. Trade payables accepted 19*55 in fullsettlement of amounts due to them. Costs involved in dissolving the / partnershipamounted to 12;55( The three vehicles which have been used by the partners were taken

over by them as follows$

Pa #"e s A- eed #[email protected] p i&e

imon *----ones 4--

Clark 4--

The 'urchase Consideration for S>M was 9+5555 distributed as follows$

o 145555 2 'reference shares of 1 each to be distributed in 'rofit sharing ratios;

o ufficient 12 Debentures to give Clark the same return as he had received on hisloan to the partnership;

o The balance as +rdinary shares of 1 at a premium of 5(2; per share distributed tothe partners in proportion to their Capital Account balances at 1* /ay -**.

Costs to dissolve the A H partnership were 4255( A H collected 19555 cash fromtrade receivables. Trade payables were paid the amounts due to them.

The 'urchase Consideration for A H was 2:5555 distributed as follows$

o :5555 2 'reference shares of 7* each to be distributed in p o?i# sharing ratios;

o The balance as +rdinary shares of 1 at a premium of 5(2; per share to be sharede


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)a, 'repare 'artnership Capital Accounts at 1* /ay -** for both businesses to show theclosing entries in both sets of partnership books of account.

It was agreed that the issued +rdinary hare Capital would be held as follows$

imon 1-ones *4

Clark *4 Allen - Jinds -

It was further agreed that the transfer price of any +rdinary share would be 1(2; per share.

Re


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+rdinary shares *-2--- *-2--- 40--- (ank H 1 *-- H(ank 140-- H * --

21:955 1: ;55 1;1255 21:955 1: ;55 1;1255

A HRealisa#io" A&&o%"#

'remises *0---- IG/A 5td *3----= : 1 3---



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Pa #"e s'a es

imon


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Sample Answer " (A Sole trader and a partnership firm combine their businesses toform a %imited Company)

Wo"- was a sole trader. G %!e a"d G%p#a were in partnership and did not have apartnership agreement. (oth of the businesses had been e"periencing falling profits for anumber of years due to large supermarkets opening in their town. They agreed that GWGL#d be formed on * April --2 to take over both businesses in order that they could better compete with larger businesses.

The new company has an Authorised share capital of ;55555 ordinary shares of 1 each.The summarised balance sheets of %ong and Gruber and Gupta at 1* /arch --2 areshown.

Wo"- G %!e a"dG%p#a

No" C% e"# asse#s a# NBF'remises *3--- 4----!#uipment ---- 1----

*4555 +5555C% e"# asse#sInventory 3--- *4---Trade receivables 1--- **---(alance at bank *--- H

15555 24555)3, C% e"# lia!ili#iesTrade payables


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ea e"ded *1Ma &'

Wo"- G %!e a"d G%p#a

--0 ?--- 44-----4 4--- 0?-----3 * --- 0 ----- *1--- 4-----2 **--- *?---

The purchase consideration had been agreed at * #i0es the average profits for the past ?i.e7ea s( The purchase consideration was settled by ea&' of %ong, Gruber and Guptareceiving$

2;555 : debentures < - 2= issued at par, and

29555 ordinary shares of 7* each in G%G 5td

Addi#io"al i"?o 0a#io"

1( Trade receivables and trade payables were not taken over by G%G 5td. %ong andGruber and Gupta each undertook to collect their own debtors and pay their owncreditors.

2( %ong)s trade receivables paid 2+55 in full settlement and Gruber and Gupta collected15555 from their customers.

*( %ong paid his trade payables *455 while Gruber and Gupta paid their suppliers in full.

9( %ong sold his e#uipment for 1+555 cash.

;( Costs of dissolution for %ong)s business were :55 and for Gruber and Gupta 2155 .

4( The remaining assets were taken over by G%G 5td at the following agreed values$

Wo"- G %!e a"d G%p#a

@on current assets H 'remises 4---- 2---- H !#uipment H ----Inventory 4--- *04--

:( Gruber and Gupta each have enough personal cash resources to make up any deficit

which may arise on their capital accounts.

Re


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)!, 'repare a realisation account, a bank account and capital accounts to close thepartnership books of account.

)&, 'repare the balance sheet of G%G 5td at * April --2 immediately after the formation of

the company and before any other transactions had taken place.

NOF 5+ P9

S%--es#ed a"swe

)a, Wo"-Realisa#io" A&&o%"#

'remises *3--- Cash bank


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)!, G %!e a"d G%p#a

Realisa#io" A&&o%"#

@on current assets 2---- G%G 5td


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C% e"# Asse#sInventory *?4--

* *---)3, No" C% e"# Lia!ili#ies: Debentures < 4---=

Ne# asse#s 4555

E


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&o0pa"7,

Mo#o .e'i&les ///

Dis&o%"# e&ei.ed (if partners ta#e

responsibility) ///

I".es#0e"#s ///

C% e"# a & Capi#al a &(any assets

ta#en over by partners) ///i".e"#o 7 /// P% &'ase p i&e (company name) ///T ade e&ei.a!les (if ta#en over by

company) ///

Loss o" ealiJa#io"

Current a&c or Capital a&c ///Ba"@ (if ta#en over by company) ///Dis&o%"# allowed (if partners ta#e

responsibility) ///Bad de!#s (if partners ta#e

responsibility) ///Dissol%#io" &os#s ///Gai" o" ealiJa#io" 3

Current a&c or Capital a&c /// ////// ///

PARTNERS$ CURRENT ACCOUNTS

A B A B

Bala"&e ! d /// /// Bala"&e ! d /// ///Loss o" ealiJa#io" /// /// Gai" o" ealiJa#io" /// ///

D awi"-s )asse#s #a@e"o.e , /// /// T a"s?e #o Capi#al a&&o%"# /// ///

T a"s?e #o Capi#al a&&o%"# /// ////// /// /// ///

PARTNERS$ CAPITAL ACCOUNTS



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A B A B

C% e"# a&&o%"# !ala"&e /// /// Bala"&e ! d /// ///Loss o" ealiJa#io" /// /// C% e"# a&&o%"# !ala"&es /// ///D awi"-s )asse#s #a@e"o.e , /// ///

Pa #"e s$ Loa" /// ///

De!e"#% es /// /// Gai" o" ealiJa#io" 3 /// ///Co".e #i!le loa" s#o&@ /// /// Cas' Ba"@ /// ///P e?e e"&e s'a es /// ///O di"a 7 s'a es /// ///Cas' Ba"@ /// ///

/// /// /// ///


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COMPANIES - BUSINESS PURCHASE 2013-14.doc