Acquisition of Business by a company

Take over another business:

1. Sole Proprietorship
2. Partnership
3. Another Company
Typical procedure:

Negotiations take place

Agreement reached
Assets (and at times liabilities) taken over at fair values by the purchasing
company. These may be different than those shown in the selling firms books
Where purchase consideration exceeds the total value of nets assets
acquired, the excess is goodwill
Where the value of net assets acquired exceeds the purchase consideration,
the difference is negative goodwill

Purchase consideration may be:

1.
2.
3.
4.

In cash
Give company shares to the sellers
Give companys loan notes to the sellers
A combination of the above three

Acquire a Sole Proprietorship

Take over assets at values which may be different

Page 1 of 5

Purchasing company records these assets at its own values

If purchase consideration is greater than the fair values of the assets
acquired= Goodwill
If fair values of the assets acquired are greater the purchase consideration =
Negative Goodwill
Purchasing company must eliminate negative goodwill by adjusting the
values of assets obtained
Adjust the companys balance sheet with assets/liabilities acquired
Accounting entries to be routed through Business Purchase Account

Accounting Entries
Transaction
Assets Acquired

Debit
Various Asset Accounts

Liabilities Acquired

Business
Account
Business
Account
Business
Account
Business
Account
Business

Liabilities Cleared by
Purchasing Company
Consideration Paid
Shares Issued to Seller
Loan Notes Issued to
Seller
Goodwill on Acquisition*

Purchase

Credit
Business Purchase
Account
Various Liability Accounts

Purchase

Bank/Cash

Purchase

Bank/Cash

Purchase

Share capital (and share

premium if necessary)
Loan Notes/Debentures

urchase Account

Good will

Business Purchase
Account

*Balancing figure on Business Purchase Account

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Acquire a Partnership

Take over assets at values which may be different

Purchasing company records these assets at its own values
If purchase consideration is greater than the fair values of the assets acquired=
Goodwill
If fair values of the assets acquired are greater the purchase consideration =
Negative Goodwill
Purchasing company must eliminate negative goodwill by adjusting the values of
assets obtained
Adjust the companys balance sheet with assets/liabilities acquired
Accounting entries to be routed through Business Purchase Account

Accounting Entries in Acquirers books

Transaction
Assets Acquired
Liabilities Acquired
Liabilities Cleared by
Purchasing Company
Consideration Paid
Shares Issued to Seller

Debit
Various Asset Accounts
Business Purchase Account
Business Purchase Account

Credit
Business Purchase Account
Various Liability Accounts
Bank/Cash

Business Purchase Account

Business Purchase Account

Bank/Cash
Share capital (and share
premium if necessary)
Loan Notes/Debentures
Business Purchase Account

Loan Notes Issued to Seller

Business Purchase Account
Goodwill on Acquisition*
Good will
*Balancing figure on Business Purchase Account

As the purchase consideration needs to be distributed between the

partners, entries are also required in the Partnership books
Accounting Entries in Partnership books
Transaction
Assets disposed off
Liabilities disposed off
Liabilities paid off by
Partnership
Total Consideration
Profit on Sale

Debit
Realization Account
Various Liability Accounts
Various Liability Accounts

Credit
Various Asset Accounts
Realization Account
Bank/Cash

Purchasers Account
Realization Account

Loss on Sale

Partners Capital Accounts (in

profit sharing ratio)
Cash/Bank
Shares in Company
Loan Notes in
Company
Partners Capital Accounts(in
profit sharing ratio)

Realization Account
Partners Capital Accounts (in
profit sharing ratio)
Realization Account

Receipt of Purchase
Consideration

Final settlement with

Partners
-Shares

Purchasers Account

Shares in Company

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Final settlement with

Partners
-Cash

Partners Capital Accounts

Cash/Bank

Acquire another Company

Two situations:
1. The parent company-subsidiary company relationship (to be covered in
Corporate Accounting II next semester)
2. Assets/ liabilities taken over and the selling company is liquidated

Accounting Entries for Situation 2 above

Entries in Acquirers books

Transaction
Assets Acquired
Liabilities Acquired
Liabilities Cleared by
Purchasing Company
Consideration Paid
Shares Issued to Seller

Debit
Various Asset Accounts
Business Purchase Account
Business Purchase Account

Credit
Business Purchase Account
Various Liability Accounts
Bank/Cash

Business Purchase Account

Business Purchase Account

Bank/Cash
Share capital (and share
premium if necessary)
Loan Notes/Debentures
Business Purchase Account

Loan Notes Issued to Seller

Business Purchase Account
Goodwill on Acquisition*
Good will
*Balancing figure on Business Purchase Account

If the acquired company is then liquidated, the purchase consideration needs to

be distributed between the shareholders, and the accounting is as follows
Accounting Entries in acquirees books
Transaction
Assets disposed off
Liabilities taken over
Liabilities paid off by
company itself
Total Consideration
Receipt of Purchase
Consideration
Transfer of Reserves
Transfer of balance on
Realization
Transfer of Share Capital

Debit
Realization Account (book
values)
Various Liability Accounts
Various Liability Accounts

Credit
Various Asset Accounts

Purchasers Account
Cash

Realization Account
Purchasers Account

Realization Account
Bank/Cash

Shares in Acquirer
Various Reserves
Realization Account
Share Capital

Realization Account
Sundry Shareholders
Account
Sundry Shareholders
Account

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Distribution of Consideration
to Shareholders

Sundry Shareholders Account

Cash
Shares in Acquirer

Page 5 of 5