Theory question 103
Purchase of BusinessEtuk Enterprises opted to buy the business of Haruna Enterprises on 1st January 1989 on the basis of its last Balance Sheet which is as follows:
Haruna Enterprises Balance Sheet as at 31st December 1989
Capital Account ₦166,000
Current Liabilities: Creditors ₦10,000; Salaries Accrued ₦750; total ₦10,750
Total ₦176,750
Fixed Assets: Premises ₦60,000; Motor Vehicles ₦70,000; Fixtures & Fittings ₦20,000; Office Equipment ₦6,000; total ₦156,000
Current Assets: Stock ₦7,500; Debtors ₦8,000; Bank ₦5,000; Cash ₦250; total ₦20,750
Total ₦176,750
Additional information: (a) The purchases consideration was agreed at ₦180,000 (b) Debtors realised ₦7,500 and creditors were paid ₦8,000 in full settlement (c) All the assets and liabilities except cash and bank balance were to be taken over (d) Etuk Enterprises paid the purchases price on 1st January 1989.
Prepare: (i) Journal entries in respect of the acquisition and (ii) Balance sheet as at 1st January 1989.
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Taking (b) to mean Haruna collected the debtors and paid off the creditors before the sale, Etuk takes over the fixed assets, stock and accrued salaries
Net assets taken over = 156,000 + 7,500 − 750 = 162,750; goodwill = 180,000 − 162,750 = ₦17,250
(i) Journal: Dr premises 60,000; motor vehicles 70,000; fixtures and fittings 20,000; office equipment 6,000; stock 7,500; goodwill 17,250 / Cr accrued salaries 750; Haruna (vendor) 180,000 (being assets and liabilities taken over)
Dr Haruna (vendor) 180,000 / Cr bank (or capital introduced) 180,000 (being purchase price paid)
(ii) Etuk Enterprises Balance Sheet as at 1 January 1989: fixed assets 156,000; goodwill 17,250; stock 7,500; total ₦180,750
Financed by: capital 180,000 (the price paid, treated as capital introduced); accrued salaries 750; total ₦180,750
Goodwill is the price paid minus the net assets taken over.