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 buying a business:
1. Record Assets Dr. and Liabilities Cr.
2. Credit Vendor with Purchase Consideration (PC).
3. If Assets Dr. $>$ (Liabilities Cr. + PC Cr.), the difference is Capital Reserve Cr. (Gain).
4. If (Liabilities Cr. + PC Cr.) $>$ Assets Dr., the difference is Goodwill Dr. (Cost).
5. When paying PC with securities issued at premium/discount, calculate the number of securities = PC / Issue Price per security.

Answer 1

Working Note 1: Calculation of Net Assets
Assets = Building + Machinery + Furniture
Assets = Rs 15,50,000 + Rs 11,40,000 + Rs 1,10,000 = Rs 28,00,000
Liabilities = Rs 2,00,000
Net Assets = Assets - Liabilities
Net Assets = Rs 28,00,000 - Rs 2,00,000 = Rs 26,00,000
Working Note 2: Calculation of Goodwill/Capital Reserve
Purchase Consideration (PC) = Rs 25,00,000
Net Assets = Rs 26,00,000
Since Net Assets $>$ PC, the difference is Capital Reserve (Gain on Bargain Purchase).
Capital Reserve = Net Assets - PC
Capital Reserve = Rs 26,00,000 - Rs 25,00,000 = Rs 1,00,000
Working Note 3: Calculation for Issue of Debentures
Purchase Consideration Payable = Rs 25,00,000
Debentures issued at a premium of 25%.
Issue Price per Debenture = Face Value + Premium
Issue Price per Debenture = Rs 100 + (25% of Rs 100) = Rs 100 + Rs 25 = Rs 125.
Number of Debentures to be Issued = PC Payable / Issue Price per Debenture
Number of Debentures = Rs 25,00,000 / Rs 125 = 20,000 debentures.
Total Face Value = 20,000 \( \times \) Rs 100 = Rs 20,00,000
Total Securities Premium = 20,000 \( \times \) Rs 25 = Rs 5,00,000
Journal Entries in the books of Apoorv Ltd.
\begin{longtable}{|p{1.5cm}|p{8cm}|r|r|} \hline Date & Particulars & Dr. (Rs) & Cr. (Rs)
\hline \endfirsthead \hline \endfoot \hline \endlastfoot (i) & Building A/c \hspace{4.7cm} Dr. & 15,50,000 &
& Machinery A/c \hspace{4.3cm} Dr. & 11,40,000 &
& Furniture A/c \hspace{4.5cm} Dr. & 1,10,000 &
& \indent To Sundry Liabilities A/c & & 2,00,000
& \indent To Dhruv Ltd. (Vendor) A/c & & 25,00,000
& \indent To Capital Reserve A/c (Bal. Fig.) & & 1,00,000
& \textit{(Being assets and liabilities of Dhruv Ltd. taken over for a purchase consideration of Rs 25,00,000 and difference credited to Capital Reserve)} & &
\hline (ii) & Dhruv Ltd. (Vendor) A/c \hspace{2.5cm} Dr. & 25,00,000 &
& \indent To 12\% Debentures A/c & & 20,00,000
& \indent To Securities Premium A/c & & 5,00,000
& \textit{(Being issue of 20,000, 12\% Debentures of Rs 100 each at a premium of 25\% to Dhruv Ltd. in settlement of purchase consideration)} & &
\hline \end{longtable}