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 |
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| Transactions | Debit | Credit | ||||||||||||||||||||||
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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 |
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| 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:
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:- |
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| 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 | ||||||||||||||||||||||||