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

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