Business purchase account

A/c entries 6487 views 6 replies

NS

Accountant

36 Points Joined March 2017

IPCC Study material - Advanced accounting - page no: 3.46 - illustration 2- can anybody explain following things for business purchase account -

1. What is the nature of business purchase account - it is showing debit balance

2. Why are assets not taken over transferred to this account?

3. How can we ascertain that the balancing figure is profit ?

4. Thae firm was taken on in March 2012, and the business purchase account is closed in December 2012 only. Why didnt they make the purchase consideration calculations and settlement entries in March 2012 and kept the busines purchase account open till end of the year?

Replies (6)

satish

teaching

2046 Points Joined February 2009

Accounting treatment under amalgamation / absorption or external reconstruction:

1. at the time of making binding agreement (Due entry)

2. on transfer of possession of assets and liabilites. (incorporation of assets and liabilites)

3 on settlement of consideration. (Discharge of consideration by purchasing co)

Generally above three situation will not be on one single day.

Profit = Net assets - purchase consideration

= 100 - 80 = 20

amount paid lesser than the asset values.

shaan vasisth

10 Points Joined March 2017

Net assets - Purchase Consideration is goodwill right?

satish

teaching

2046 Points Joined February 2009

No it's a profit. it is to be transferred to capital reserve.
goodwill any consideration which is paid over and above the value of net assets.
Goodwill = PC - Net assets

BRAIn zeR0 ytr

6 Points Joined February 2021

No actually it's NET ASSETS - CAPITAL = PROFIT

BRAIn zeR0 ytr

6 Points Joined February 2021

NOW ITS LIKE THIS IF WE GO BY BOOK , THEN WE HAVE TO TRANSFER THE ASSETS AND LIABILITIES WHICH AREA NOT TAKEN OVER IN CAPITAL RATIO AND IF WE DO THAT THEN. CAPITAL OF OLD FIRM WOULD BE 61000 AND IF WE LESS PC 80,000 AND PROFIT THEY GAINED WOULD BE 19000 , SINCE GOODWILL IS NOT EARNING LESS IT I.E., 6000 AND YOU WOULD GET PROFIT 130000