Question

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.

Hint:

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.

Answer 1

Workings: (A) Calculate Net Assets Taken Over:

Assets = Building (\(15,50,000\)) + Machinery (\(11,40,000\)) + Furniture (\(1,10,000\)) = Rs 28,00,000.
Liabilities = Rs 2,00,000.
Net Assets = Assets - Liabilities = 28,00,000 - 2,00,000 = Rs 26,00,000. (B) Calculate Goodwill/Capital Reserve:

Purchase Consideration (PC) = Rs 25,00,000.
Net Assets = Rs 26,00,000.
Since PC (\(25L\)) $t;$ Net Assets (\(26L\)), the difference is Capital Reserve.
Capital Reserve = Net Assets - PC = 26,00,000 - 25,00,000 = Rs 1,00,000. (C) Calculate Number of Debentures Issued:

Issue Price per Debenture = Face Value + Premium = Rs 100 + (25% of Rs 100) = 100 + 25 = Rs 125.
Number of Debentures = \(\frac{\text{Purchase Consideration}}{\text{Issue Price per Debenture}}\) = \(\frac{25,00,000}{125}\) = 20,000 debentures. (D) Calculate Amounts for Debenture Issue Entry:

Face Value = 20,000 debentures \( \times \) Rs 100 = Rs 20,00,000.
Securities Premium = 20,000 debentures \( \times \) Rs 25 = Rs 5,00,000. Journal Entries in the books of Apoorv Ltd.:
\vspace{0.2cm} \begin{tabularx}{\textwidth}{X r r} \toprule Particulars & Dr. (Rs) & Cr. (Rs)
\midrule \multicolumn{3}{l}{\textit{(i) For acquisition of assets and liabilities:}}
Building A/c \dotfill & 15,50,000 &
Machinery A/c \dotfill & 11,40,000 &
Furniture A/c \dotfill & 1,10,000 &
\quad To Liabilities A/c \dotfill & & 2,00,000
\quad To Dhruv Ltd. (Vendor) A/c \dotfill & & 25,00,000
\quad To Capital Reserve A/c \dotfill & & 1,00,000
\textit{(Being assets and liabilities of Dhruv Ltd. acquired for PC of 25,00,000, balance being Capital Reserve)} & &
\midrule \multicolumn{3}{l}{\textit{(ii) For issue of debentures to settle purchase consideration:}}
Dhruv Ltd. (Vendor) A/c \dotfill & 25,00,000 &
\quad To 12 Debentures A/c \dotfill & & 20,00,000
\quad To Securities Premium A/c \dotfill & & 5,00,000
\textit{(Being 20,000, 12 Debentures of Rs 100 each issued at a premium of 25 to Dhruv Ltd.)} & &
\bottomrule \end{tabularx} \vspace{0.2cm}