Shares issued for business purchased
Shares issue for business purchased is also known as issue of shares other than cash or shares issued for non-cash consideration.
Generally, company purchases similar types of business.
When the company purchases business from other company, purchase consideration is fixed.
Company can pay this purchase consideration by issuing equity shares and debentures and partial cash.
While issuing shares, it may be at par, at discount or at premium.
Sometimes purchasing company purchases only assets from Vendor Company.
Sometimes, purchasing company purchases both assets and liabilities.
While purchasing business, there may be capital reserve or goodwill; it is calculated as balancing figure.
Purchasing company can issue some shares to public for cash.
Company issues these shares on lump-sum basis at par, at discount or at premium.
Net value or purchase consideration = Total assets – Total liabilities |
|
Purchase value = Net value Purchase value > Net value Purchase value < Net value |
neither goodwill nor capital reserve goodwill capital reserve |
Sometimes numbers of purchasing shares are given in the question and sometimes purchase consideration is given.
If numbers of shares are not given, following formula can be applied:
Number of shares (If shares are issued at par) = Purchase consideration ÷ Par value per share
Number of shares (If shares are issued at discount) = Purchase consideration ÷ (Par value per share – Discount)
Number of shares (If shares are issued at premium) = Purchase consideration ÷ (Par value per share + Premium)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 34
Jagdamba Steels Ltd has 200,000 equity shares of $/₹/Rs 100 each. The company purchased business of Everest Rolling (P) Ltd. Purchase consideration was made by 100,000 equity shares at 5% premium to take over following assets and liabilities:
Land and building 50,00,000 Current assets 15,00,000 |
Plant and machinery 55,00,000 Current liabilities 10,00,000 |
The company also issued 50,000 equity shares at 5% discount to public
Required: Journal entry and balance sheet
[Answer: Capital reserve = Rs 5,00,000; Balance sheet = Rs 1,70,00,000]
SOLUTION
Journal Entries
In the book of Jagdamba Steels Ltd
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Business purchase |
|
|
|
|
|
Business purchase account To Everest Rolling Company account (Being- business purchased) |
Dr
|
|
1,05,00,000
|
1,05,00,000
|
|
Assets and liabilities taken |
|
|
|
|
|
Land and building account Plant and machinery account Current assets account To Capital reserve (b/f) To Current liabilities To Business purchase account (Being- assets and liabilities taken balance as capital reserve) |
Dr Dr Dr
|
|
50,00,000 55,00,000 15,00,000
|
5,00,000 10,00,000 1,05,00,000
|
|
Purchase consideration paid |
|
|
|
|
|
Everest Rolling Company account To Share capital account To Share premium (security premium) (Being- payment made by issuing 100,000 equity shares @ Rs 100 each at 5% premium) |
Dr
|
|
1,05,00,000
|
1,00,00,000 5,00,000 |
|
Shares issued to public |
|
|
|
|
|
Bank account Discount on shares account To Share capital account (Being- 50,000 equity shares issued to public at 5% discount) |
Dr Dr |
|
47,50,000 2,50,000 |
50,00,000 |
Balance Sheet
Jagdamba Steels Ltd
Liabilities + Capital + Profit |
Amount |
Assets |
Amount |
Authorized capital:200,000 Equity shares of Rs 100 Issued and paid up capital:150,000 Equity shares of Rs 100 Share or security premium Current liabilities Capital reserve |
– 2,00,00,000 – 1,50,00,000 5,00,000 10,00,000 5,00,000 |
Land and building Plant and machinery Current assets Bank balance Discount on debentures
|
50,00,000 55,00,000 15,00,000 47,50,000 2,50,000 |
1,70,00,000 |
1,70,00,000 |
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PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
Basic Problem: 34
Zonal Company has been registered with the capital of Rs 40,00,000 divided into 40,000 shares of $/₹/Rs 100 each. The company issued 10,000 shares at a premium of 10% to purchase the following assets and liabilities of a District Company
Land and building Rs 4,00,000 Sundry creditors Rs 2,50,000 Sundry debtors Rs 4,00,000 |
Plant and machinery Rs 3,00,000 Stock in trade Rs 2,50,000 Furniture and fixture Rs 3,00,000 |
The company also issued 10,000 shares for cash at 5% discount
Required: (1) Entry for purchase of assets and liabilities
(2) Opening balance sheet for the company after issue of above shares
[Answer: Capital reserve = Rs 300,000; Balance sheet = Rs 26,50,000;
*Purchase consideration = 10,000 x 110 = Rs 11,00,000
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