Theory question 102
Purchase of BusinessSection B (answer three questions only from this section)
2. Naira Enterprises Ltd. decided to buy the business of Alhaji Kura Magoro on 1st January, 1995. The company is to take over all the assets and liabilities by issuing Alhaji Magoro 30,000 ordinary shares of N1 each at a price of N1.20 per share. The Balance sheets of Alhaji Magoro and Naira Enterprises Ltd. were as follows:
Alhaji Kura Magoro – Balance Sheet as at 1st January, 1995
Capital N41,000; Creditors N4,000; total N45,000
Machinery N30,000; Stock N9,000; Debtors N6,000; total N45,000
Naira Enterprises Ltd. – Balance Sheet as at 1st January
Share capital: 70 ordinary shares of N1 each N70,000; Share premium N10,000; Creditors N20,000; total N100,000
Machinery N50,000; Stock N15,000; Debtors N12,000; Bank balance N23,000; total N100,000
You are required to prepare in the books of Naira Enterprises Ltd:
(a) Purchase of Business Account,
(b) Balance sheet as at 1st January, 1995 immediately after the arrangement is concluded.
Show the model answer
Purchase consideration = 30,000 shares × N1.20 = 36,000 (share capital 30,000 + share premium 6,000).
Net assets taken over = 45,000 − 4,000 = 41,000, so there is a capital reserve (negative goodwill) of 5,000.
(a) Purchase of business account: Dr creditors 4,000; Alhaji Magoro (vendor) 36,000; capital reserve 5,000 = 45,000. Cr machinery 30,000; stock 9,000; debtors 6,000 = 45,000.
(b) Balance sheet as at 1/1/95: machinery 80,000; stock 24,000; debtors 18,000; bank 23,000; total 145,000.
Share capital 100,000 ordinary shares of N1 = 100,000; share premium 16,000; capital reserve 5,000; creditors 24,000; total 145,000.
Compare the purchase price with the net assets taken over: paying more gives goodwill, paying less gives a capital reserve.