Purchase Of A Sole Proprietor’s Business (Part 1)

July 30th, 2007 Comments off
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This type of purchase of business is usually a mere “conversion” of a sole-proprietorship to a limited company where the seller (sole-proprietor) will be allotted shares in the Limited Company.

In the Purchaser’s books, the following steps need to be taken:

(a) transfer all assets & liabilities into the Purchase of Business a/c

(b) the purchase consideration to be discharged is taken up in the Purchase of Business a/c and satisfied as share capital ( with premium re: share premium), preference shares, debentures, cash, etc

(c) where there is goodwill ( purchase consideration > net assets), a goodwill account is opened whilst

(d) where there is negative goodwill or capital reserve ( purchase consideration < net assets), the Capital Reserve a/c is opened up accordingly

Entries In The Purchaser’s Books:

PURCHASE OF SOLEPROPRIETOR’S BUSINESS

Transactions Debit Credit

1.   Assets acquired at acquisition values

Assets A/c Purchase of Business A/c
2. Liabilities assumed by purchaser Purchase of Business A/c Liabilities A/c
3. Purchase consideration Purchase of Business A/c (a) Share Capital A/c

(b) Share Premium A/c

(c) Debentures A/c

(d) Cash A/c

4. Goodwill Goodwill A/c Purchase of Business A/c
5. Capital Reserve Purchase of Business A/c Capital Reserve A/c
Illustration:

Aum Ltd is incorporated to take over the business of Mr. A.

The Balance Sheet of the Sole-Proprietorship is as follows:

$
Freehold premises 40,000
Plant & machinery 10,000
Stock 15,000
Debtors 15,000
Bank 10,000
Total Assets 90,000
$
Capital 70,000
Trade Payables 20,000
90,000

Other details as follows:

(i) Total purchase consideration is $150,000,

payable to Mr. A as follows:

$60,000 in ordinary shares of $1 each fully paid,

$20,000 in 6% preference shares of $1 each fully paid,

$10,000 in 5% debentures and the balance in cash Solution:-

JOURNAL Debit Credit
Freehold premises 40,000
Plant and machinery 10,000
Stock 15,000
Debtors 15,000
Bank 10,000
Goodwill 80,000
Trade Payables 20,000
Purchase of Business Account 150,000
170,000 170,000
Being Assets & Liabilities Taken Over From Sole-proprietor, Mr. A.
Purchase of Business Account 150,000
Ordinary Share Capital 60,000
6% Preference Share Capital 20,000
5% Debentures 10,000
Cash 60,000
150,000 150,000
Being discharge of Purchase Consideration

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Financial Accounting

 
 

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