Business Accounting

(A) The Purchase price And How It is to be settled:-

The PURCHASE PRICE:

In any purchase/conversion of a business, there must be certain amount of X purchase consideration for the buyer to pay over to the seller. Simply, the purchase price is the agreed value to be paid by the buyer(new company) to the seller(old business)

 It can satisfies the purchase consideration by giving

• cash,
• shares or debentures
• assuming the trade liabilities
• any combination of cash, shares/debentures/assuming trade liabilities

The element of GOODWILL:

 (a)  the assets acquired are often different from the values shown in the vendor business’s book ( example : ten years ago, the vendor company bought a property for $100,000 and now the purchasing company have to buy it for $1 million)

 (b)  total purchase consideration > net tangible assets of the vendor company where the excess is called goodwill and this goodwill account will appear in the purchasing company’s book

 (c) total purchase consideration < net tangible assets is treated as a Capital Reserve

 OTHERS:

1. ASSETS taken over by buyer:

• only tangible assets are taken over,
• ficititious assets like preliminary expenses are not acquired and
• all the assets taken over normally will be revalued

2.  LIABILITIES taken overy by buyer:

• sometimes, during negotiatin, the liability of the seller is acquired by the buyer at a fair value

3. Liquidation Expenses:

•  If expenses is incurred and the buyer company agree to pay these expenses,t purchase price will include this extra costs incurred.

(B) The Purchaser (limited company) can buy:

· a sole proprietorship or

· a partnership or

· another limited company’s business

Mr A, Mr B & Mr C are partners who share profits and losses in the ratio of 3:2:1. They have agreed to convert the partnership into a limited company called Aumno Ltd

Other details as follows:

(i) Total purchase consideration is $180,000, payable as follows:

$90,000 in ordinary shares of $1 each fully paid,

$30,000 in 6% preference shares of $1 each fully paid,

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

Questions:

(a) Show the ledger accounts closing the partnership’s book

(b) Show the opening journal entries in Aumno Ltd/ Purchaser’s book

 Answer:

(a) Ledger Accounts in the Partnership’s Book:

                                                                   Realization Account

                                 Purchaser/Aumno Ltd’s Account

                                          Ordinary Share in Aumno Ltd

                                         6% Preference Shares in Aumno Ltd

                                                5% Debenture In Aumno Ltd

                                                         Cash Account

                                                        Partners Capital Account

                                                                                                   (110/180) (40/180) (30/180)

Answer:- (b) Journal Entries in Aumno Limited Company’s Book

PURCHASE OF SOLEPROPRIETOR’S BUSINESS

1.   Assets acquired at acquisition values  

(c)     Debentures A/c

(d)     Cash A/c

                   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:-

1. Enjoy limited liability satus;
2. Enjoy economies of scales;
3. Easier to raise finance;
4. Have larger prospec of future growth and expansion;
5. Able to diversify and spread the business risk and
6. other reasons

1. Accounts must be audited;
2. Taxation aspects must be looked as larger amount of taxe to be paid
3. Business needs to comply with the rules and regulation of the Registrar of Companies
4. In the case of public company, there is the larger costs of making sure corporate governance is established ( audit committee, non-executive directors,etc)