C hapter 14: Limited companies buying

existing businesses
Contents of chapter
This chapter shows the entries needed in the books of a limited company when it buys (takes over) another
business.

Notes for teachers

Assets purchased are shown at the company’s valuation and not at the book values in the selling firm’s
1
books.

Goodwill is calculated as:

2
Purchase price – Total value of assets taken over = Goodwill

Negative goodwill which is the opposite of goodwill, is calculated as:

3
Total value of assets taken over – Purchase price = Negative goodwill

A limited company may use any of the following in paying the purchase price:
4
A B C D
Cash Only Cash Share Cash
+ Shares + Debentures + Shares
+ Debentures

The new balance sheet is:

5
Existing Company’s Assets, Capital and Liabilities
plus
Goodwill or Negative Goodwill
plus
Shares or Debentures Issued
less
Cash Paid Out
plus
Value of Assets Taken Over

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 Answers to MCQs and exercises
14.1
(a) Wong Ltd
The Journal
Dr Cr
Particulars $ $
Bank 17,500
Application and allotment (70,000 × $0.25) 17,500
Cash received from applications.
Application and allotment (70,000 × $0.75) 52,500
Ordinary share capital 52,500
Letters of allotment dispatched.
Bank (70,000 × $0.50) 35,000
Application and allotment 35,000
Cash received from allotments.
First and final call 31,500
Ordinary share capital (70,000 × $0.25) 17,500
Share premium (70,000 × $0.20) 14,000
First and final call made.
Bank 31,500
First and final call 31,500
Call paid in full.
Stock 38,140
Furniture and fixtures 10,240
Machinery and plant 51,000
Premises 30,500
Goodwill (balancing figure) 40,120
Lee and Ding 170,000
Assets of partnership taken over at agreed amount.
Lee and Ding 170,000
Bank 40,000
Ordinary share capital 130,000
Purchase price paid.

(b) Wong Ltd

Balance Sheet (after transactions completed)
Fixed Assets $ $ $
Premises 30,500
Machinery and plant 51,000
Furniture and fittings 10,240 91,740

Goodwill 40,120

Current Assets
Stock 38,140
Bank (Workings) 44,000 82,140
214,000

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 Financed by:
Share Capital Authorised Issued
Ordinary share capital 300,000 200,000 200,000
Reserves
Share premium 14,000
214,000

Workings:
Bank
$ $
Application and allotment: Application 17,500 Lee and Ding 40,000
Application and allotment: Allotment 35,000 Balance c/d (balancing figure) 44,000
First and final call 31,500
84,000 84,000

14.2X
(a) Bank
$ $
Balance b/f 3,830 D Shen 5,000
Ordinary share capital 12,000 Formation expenses 1,600
Balance c/f 9,230
15,830 15,830

(b) Country Products Ltd

Balance Sheet as at 1 April 20X7
Fixed Assets $ $
Equipment 5,300
Motor vehicles 8,700
14,000

Goodwill (Workings) 15,700

Formation expenses 1,600

Current Assets
Stock 5,150
Debtors 4,920
Bank 9,230
19,300

Less Current Liabilities

Creditors 3,600
Net current assets 15,700
47,000

Financed by:
Preference share capital 15,000
Ordinary share capital ($20,000 + $12,000) 32,000
47,000
Workings:
Net assets taken over = $5,300 + $8,700 + $5,150 + $4,920 + $3,830 – $3,600
= $24,300
Goodwill = $40,000 – $24,300
= $15,700

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 14.3
(a) Chuen Ltd
The Journal
Dr Cr
20X8 $ $
Jan 1 Land and buildings 143,000
Plant and equipment 78,000
Stock 26,000
T Wang and Co 247,000
Jan 1 T Wang and Co 247,000
Bank 52,000
Ordinary share capital 130,000
Negative goodwill (balancing figure) 65,000

(b) Chuen Ltd

Balance Sheet as at 1 January 20X8
Cost Aggregate Net book
depreciation value
Fixed Assets $ $ $
Land and buildings ($650,000 + $143,000) 793,000 — 793,000
Plant and equipment ($520,000 + $78,000) 598,000 130,000 468,000
1,391,000 130,000 1,261,000
Current Assets
Stock ($195,000 + $26,000) 221,000
Debtors 130,000
Cash 1,300 352,300
Less Current Liabilities
Creditors 110,500
Bank overdraft ($52,000 + $52,000) 104,000 214,500
Net current assets 137,800
1,398,800
Less Long-term Liabilities
10% debentures 130,000
1,268,800
Financed by:
Issued Share Capital
1,007,500 ordinary shares at $1 each ($877,500 + $130,000) 1,007,500
Reserves
Negative goodwill 65,000
Profit and loss account 196,300 261,300
1,268,800

128
14.4X
(a) Lee Ltd
The Journal
Dr Cr
Date Particulars $ $
Jul 1 Freehold premises 160,000
Plant and equipment 16,000
Stock 88,000
T Chang Co 264,000
Assets taken over as per agreed.
" 1 T Chang Co 264,000
Ordinary share capital 192,000
Negative goodwill (balancing figure) 32,000
Bank 40,000
Paid purchase price by issuing 192,000 ordinary shares of $1 each and
a cheque of $40,000.

(b) Lee Ltd

Balance Sheet as at 1 July 20X0
Cost Aggregate Net book
depreciation value
Fixed Assets $ $ $
Leasehold premises 760,000 (W1) — 760,000
Plant and equipment 256,000 (W2) 78,024 177,976
Motor vehicles 13,552 2,712 10,840
1,029,552 80,736 948,816

Current Assets
Stock ($164,080 + $88,000) 252,080
Bank ($154,144 – $40,000) 114,144
Cash 168 366,392

Less Current Liabilities

Creditors and accrued expenses 162,200
Net current assets 204,192
1,153,008

Financed by:
Share Capital
Authorised share capital
1,040,000 Ordinary shares $1 each 1,040,000

Issued share capital

832,000 Ordinary shares of $1 each ($640,000 + $192,000) 832,000

Reserves
Negative goodwill 32,000
Retained profit 289,008 321,008
1,153,008
W1: $600,000 + $160,000 = $760,000
W2: $240,000 + $16,000 = $256,000

129
 14.5
(a) Golden View Ltd
Journal
Date Particulars Dr Cr
20X6 $ $
Jan 1 Premises 50,000
Fixtures and fittings 9,200
Office equipment 16,700
Stock 3,500
Goodwill 640
Business purchase/Lik Co 79,040
Creditors 1,000
Assets and liabilities taken over from Lik Co at a purchase price of $79,040.
Business purchase/Lik Co 79,040
Ordinary share capital 60,000
Share premium (60,000 × $0.3) 18,000
Bank 1,040
Purchase price paid by the issue of ordinary shares and cheque.

(b) Golden View Ltd

Balance Sheet as at 1 January 20X6
Accumulated Net book
Cost depreciation value
Fixed Assets $ $ $
Premises ($500,000 + $50,000) 550,000 — 550,000
Motor vehicles 230,000 100,000 130,000
Furniture 51,000 30,400 20,600
Fixtures and fittings 9,200 — 9,200
Office equipment 16,700 — 16,700
856,900 130,400 726,500

Goodwill 640

Current Assets
Stock ($20,600 + $3,500) 24,100
Debtors 39,100
Prepayment 1,870
Bank ($9,620 – $1,040) 8,580
73,650
Less Current Liabilities
Creditors ($40,000 + $1,000) 41,000
Net current assets 32,650
759,790
Financed by:
Issued Share Capital
460,000 ordinary share of $1 each ($400,000 + $60,000) 460,000
Reserves
Share premium ($120,000 + $18,000) 138,000
Profit and loss 161,790
759,790

130
14.6
Adjusted Profits
20X4 20X5 20X6
$ $ $ $ $ $
Profit as per accounts 16,400 23,920 19,650
Add Motor expenses saved (W1) 620 660 700
Depreciation overcharged (W2) 1,500 700 60
Wrapping expenses saved (W3) 420 480 510
Bank overdraft interest saved 180 590 740
Preliminary expenses written off — 2,720 690 3,120 — 2,010
19,120 27,040 21,660

Less Extra management remuneration 1,500 1,500 1,500

Investment income 290 340 480
Rent received 940 420 —
Sales of value less stock — 1,900 —
Profit from sale of property — 2,730 4,800 8,960 — 1,980
Profits as adjusted 16,390 18,080 19,680

Average profit 16,390

18,080
19,680
54,150 ÷ 3 = 18,050
If $18,050 is to be 25% of the purchase price, then

$18 ,050
Purchase price = × 100 = $72,200.
25

(W1) Motor expenses saved:

1
20X4 $1,860 × = $620
3
1
20X5 $1,980 × = $660
3
1
20X6 $2,100 × = $700
3

(W2) Annual depreciation $20,000 × 12.5% = $2,500

Depreciation overcharged
20X4 $4,000 – $2,500 = $1,500
20X5 $3,200 – $2,500 = $700
20X6 $2,560 – $2,500 = $60

(W3) Wrapping expenses saved:

1
20X4 $840 – ($840 × ) = $420
2
1
20X5 $960 – ($960 × ) = $480
2
1
20X6 $1,020 – ($1,020 × ) = $510
2

131
 14.7X
XP Ltd
Journal
Date Particulars Dr Cr
20X4 $ $
July 1 Buildings 700,000
Lorry 125,000
Stocks 140,000
Debtors 225,000
Other current assets 125,000
Goodwill (balancing figure) 210,000
Trade creditors 200,000
Mortgage loans 225,000
Business purchase/SN Company 1,100,000
Assets and liabilities taken over from SN Company at a purchase price of $1,100,000.
Bank 300,000
Preference share applicants 300,000
Monies received from preference share applicants.
Preference share applicants 300,000
5% preference share capital 250,000
Share premium (25,000 × $2) 50,000
Preference shares alloted.
Bank (100,000 × $7) 700,000
Application and allotment 700,000
Application monies received from preference share applicants.
Application and allotment 1,200,000
Ordinary share capital 1,000,000
Share premium 200,000
Open the ordinary share and share premium accounts.
Bank (100,000 × $5) 500,000
Application and allotment 500,000
Allotment monies received from ordinary share applicants.
Business purchase/SN Company 1,100,000
Ordinary share capital 625,000
Bank 475,000
Settlement of the business purchase by issue of shares and cash.

14.8X
(a) In the ledger of the partnership
(i) Realisation
20X8 $ $ 20X8 $
Jan 1 Leasehold properties 300,360 Jan 1 Gasfield Ltd 450,000
Office equipment 51,600
Van 12,050
Stock 24,000
Debtors 34,000
Capital: Profit from dissolution
1
Albert ( ) 13,995
2
1
Alex ( ) 13,995 27,990
2
450,000 450,000

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 (ii) Capital
Albert Alex Albert Alex
$ $ $ $
Current — 3,990 Balances b/f 200,000 200,000
1
Gasfield Ltd (30,000 × $13) × 195,000 195,000 Current 20,000 —
2
Bank 38,995 15,005 Profit on dissolution 13,995 13,995
233,995 213,995 233,995 213,995

(b) In the Ledger of the Gasfield Ltd

Business Purchase
20X8 $ 20X8 $
Jan 1 Ordinary share capital 300,000 Jan 1 Leasehold properties 340,000
Sales premium 90,000 Office equipment 48,000
Bank 60,000 Van 8,000
Negative goodwill 9,000 Stock 30,000
Debtors 33,000
459,000 459,000

133