Purchase of Business Account – SS3 Financial Accounting Lesson Note (First Term)

A purchase of a business happens when a company takes over the assets and liabilities of an existing business. The assets and liabilities are revalued, and the purchase consideration is worked out. The company then pays it in shares, debentures, cash or a mix of these. The company records the takeover with journal entries in its own books and prepares a new balance sheet.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Prepare journal entries and ledger accounts for the purchase of a business.
2. Solve exercises on the purchase of a business account.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

How is the purchase of a business account prepared?

Worked example: B.K. Limited

B.K. Limited, registered with a capital of $1,000,000 in equity shares of $10 each, acquired the business of John Brothers. The balance sheet of the firm at the date of acquisition was as shown below.

The assets and liabilities were subject to the following revaluation:

• Machinery and furniture to be depreciated at 10% and 15% respectively.
• Premises to be appreciated by 20%.
• Make provision for bad debts on debtors at 2.5%.
• Goodwill of the firm valued at $24,000.
• Purchase consideration to be discharged as follows:
  • Allotment of 10,000 equity shares of $10 each at $12 each.
  • Allotment of 500 10% debentures of $100 each at a discount of $10 each.
  • Balance in cash.

Required: Show journal entries in the books of the company and prepare the balance sheet.

Solution: calculation of purchase consideration

Journal entries in the books of B.K. Limited

Balance sheet of B.K. Limited

Balance sheet of B.K. Limited as on ……..

Evaluation

Andrew Young agreed to take over the business of Ayo. He takes over the assets and liabilities except the cash balance. The balance sheet of Ayo as of 31st December 1976 is given.

Andrew Young takes over the business on the following terms:

1. The purchase consideration is to be ₦150,000.
2. Assets to be revalued as follows: fixtures ₦60,000, motor van ₦25,000, debtors ₦13,500 and stock ₦15,000.
3. The purchase price was paid on 6 January 1977.

Prepare:

1. Journal entries in respect of the acquisition.
2. Ledger entries.
3. Balance sheet.