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Accounting For The Purchase Of A SoleProprietor Business(Part1)
Published by slang July 31st, 2007 in Purchase Of BusinessThis type of purchase of business is usually a mere “conversion” of a sole-proprietorship to a limited company where the seller (sole-proprietor) will be allotted shares in the Limited Company.
Accounting for Purchase of a soleproprietorship business:
In the Purchaser’s books, the following steps need to be taken:
(a) transfer all assets & liabilities into the Purchase of Business a/c
(b) the purchase consideration to be discharged is taken up in the Purchase of Business a/c and satisfied as share capital ( with premium re: share premium), preference shares, debentures, cash, etc
(c) where there is goodwill ( purchase consideration > net assets), a goodwill account is opened whilst
(d) where there is negative goodwill or capital reserve ( purchase consideration < net assets), the Capital Reserve a/c is opened up accordingly
Entries In The Purchaser’s Books:
|
PURCHASE OF SOLEPROPRIETOR’S BUSINESS |
||||||||||||||||||||||||
| Transactions | Debit | Credit | ||||||||||||||||||||||
|
1. Assets acquired at acquisition values |
Assets A/c | Purchase of Business A/c | ||||||||||||||||||||||
| 2. Liabilities assumed by purchaser | Purchase of Business A/c | Liabilities A/c | ||||||||||||||||||||||
| 3. Purchase consideration | Purchase of Business A/c | (a) Share Capital A/c(b) Share Premium A/c(c) Debentures A/c(d) Cash A/c | ||||||||||||||||||||||
| 4. Goodwill | Goodwill A/c | Purchase of Business A/c | ||||||||||||||||||||||
| 5. Capital Reserve | Purchase of Business A/c | Capital Reserve A/c | ||||||||||||||||||||||
Illustration: Aum Ltd is incorporated to take over the business of Mr. A. The Balance Sheet of the Sole-Proprietorship is as follows:
Other details as follows:
(i) Total purchase consideration is $150,000,
|
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