Apoorv Ltd. acquired building worth Rs 15,50,000, Machinery worth Rs 11,40,000 and Furniture worth Rs 1,10,000 from Dhruv Ltd. and took over its liabilities of Rs 2,00,000 for a purchase consideration of Rs 25,00,000. Apoorv Ltd. paid the purchase consideration by issuing 12% debentures of Rs 100 each at a premium of 25%.
Pass the necessary journal entries in the books of Apoorv Ltd. for the above transactions.
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When purchasing assets/business:
1. Debit individual assets, Credit individual liabilities, Credit Vendor with Purchase Consideration (PC).
2. If Assets $>$ (Liabilities + PC), credit difference to Capital Reserve.
3. If (Liabilities + PC) $>$ Assets, debit difference to Goodwill.
4. When issuing shares/debentures for PC at premium/discount, calculate issue price per security and number of securities. Credit Share/Debenture Capital with Face Value and Securities Premium/Debit Discount on Issue accordingly.
1. Acquisition of Assets and Liabilities from Dhruv Ltd.
Date
Particulars
L.F.
Debit (₹)
Credit (₹)
Building A/c
15,50,000
Machinery A/c
11,40,000
Furniture A/c
1,10,000
To Sundry Creditors A/c
2,00,000
To Dhruv Ltd.
25,00,000
To Capital Reserve A/c
1,00,000
(Assets and liabilities acquired from Dhruv Ltd.)
Calculation of Capital Reserve:
Total Value of Assets Taken = Building + Machinery + Furniture = 15,50,000 + 11,40,000 + 1,10,000 = 28,00,000
Liabilities taken = 2,00,000 Net Assets Taken = 26,00,000
Purchase consideration = 25,00,000
Capital Reserve = Net Assets Taken – Purchase consideration 26,00,000 - 25,00,000 = 1,00,000
2. Issue of 12% Debentures to Dhruv Ltd.
Face Value per Debenture: ₹100 Premium: 25% Issue Price per Debenture: ₹100 + (25% of ₹100) = ₹125
Number of Debentures to be issued = Purchase Consideration / Issue Price per Debenture Number of Debentures to be issued = 25,00,000 / 125 = 20,000 Debentures
Date
Particulars
L.F.
Debit (₹)
Credit (₹)
Dhruv Ltd. A/c
25,00,000
To 12% Debentures A/c
20,00,000
To Securities Premium Reserve A/c
5,00,000
(Issue of 20,000; 12% Debentures of ₹100 each at a premium of 25% in satisfaction of purchase consideration)
Explanation:
Entry 1: Records the assets acquired and liabilities taken over. A capital reserve arises if the net assets acquired exceed the purchase consideration.
Entry 2: Records the issue of debentures to settle the purchase consideration. The debentures are issued at a premium, so the "Securities Premium Reserve" account is credited with the premium amount.
