Theory question 108
Purchase of BusinessPQ Limited took over the business of XY Enterprises on 30th June, 2023. The balance sheets as at 30th June, 2023 being the date of the takeover were as follows:
Balance Sheets as at 30th June, 2023 (₦) — PQ Limited | XY Enterprises
Fixed Assets: Premises 360,000 | 270,000; Equipment 75,000 | 330,000; Furniture 24,000 | 66,000; Total 459,000 | 666,000
Current Assets: Stock 180,000 | 240,000; Debtors 37,500 | 150,000; Prepayments 16,500 | –; Banks 1,131,000 | 22,500; Total 1,365,000 | 412,500
Current Liabilities: Creditors 97,500 | 22,500; Accruals 22,500 | 45,000; Total (120,000) | (67,500)
Working capital 1,245,000 | 345,000
Net Assets 1,704,000 | 1,011,000
Financed by: Share capital 1,500,000 | 900,000; Loan 204,000 | 111,000; Total 1,704,000 | 1,011,000
Additional information:
(i) The assets of XY Enterprises were valued at: Premises ₦375,000; Equipment ₦225,000; Furniture ₦45,000
(ii) Stock was valued at cost and the debtors were settled less 10%.
(iii) The agreed purchase consideration of ₦1,125,000 was settled by cheque and XY Enterprises was to take care of its loan.
You are required to prepare in the books of PQ Limited:
(a) The Purchase of Business Account;
(b) Balance Sheet as at 1st July, 2023.
Show the model answer
Net assets taken over (₦): premises 375,000 + equipment 225,000 + furniture 45,000 + stock 240,000 + debtors (150,000 − 10%) 135,000 + bank 22,500 = 1,042,500, less creditors 22,500 and accruals 45,000 = 975,000. Goodwill = 1,125,000 − 975,000 = 150,000.
(a) Purchase of Business Account: Dr Premises 375,000; Equipment 225,000; Furniture 45,000; Stock 240,000; Debtors 135,000; Bank 22,500; Goodwill 150,000 = 1,192,500 | Cr Creditors 22,500; Accruals 45,000; Bank/Vendor (purchase consideration) 1,125,000 = 1,192,500.
(b) PQ Limited Balance Sheet as at 1 July 2023 (₦):
Goodwill 150,000
Fixed assets: Premises (360,000 + 375,000) 735,000; Equipment (75,000 + 225,000) 300,000; Furniture (24,000 + 45,000) 69,000 = 1,104,000 (with goodwill 1,254,000)
Current assets: Stock (180,000 + 240,000) 420,000; Debtors (37,500 + 135,000) 172,500; Prepayments 16,500; Bank (1,131,000 + 22,500 − 1,125,000) 28,500 = 637,500
Less current liabilities: Creditors (97,500 + 22,500) 120,000; Accruals (22,500 + 45,000) 67,500 = 187,500
Working capital 450,000; Net assets 1,704,000
Financed by: Share capital 1,500,000; Loan 204,000 = 1,704,000
Value the net assets taken over (XY's loan stays with XY); the excess of the price over them is goodwill.