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JAMB Principles of Accounts 1999 Question 36

Question 36

Purchase of Business

If a sole proprietorship is purchased for cash, then

  1. A.the purchaser debits his business purchase account with the consideration he pays
  2. B.all assets and liabilities must be bought
  3. C.goodwill results where value of liabilities taken is higher than the value of assets
  4. D.the vendor debits his business purchase account with the consideration he receives.
Show the answer and explanation

Answer: A (the purchaser debits his business purchase account with the consideration he pays)

Explanation

The buyer debits the business purchase account with the price paid and later transfers the assets and liabilities out of it.