Lesson Notes By Weeks and Term - Senior Secondary School 3

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 3

DATE:

TERM: 2nd TERM

 

WEEK ONE

TOPIC: PURCHASE OF BUSINESS

CONTENT

• TERMINOLOGIES IN PURCHASE OFBUSINESS
• ACCOUNTING ENTRIES ILLUSTRATION

INTRODUCTION

Purchase of business is the activity of buying or acquiring a business as a going concern. This means acquiring an existing business with the intention of continuing its operations . this acquisition cam be in any of the following ways

1. A sole trader acquiring the existing business of a sole trader
2. A partnership acquiring the business of another partnership or a sole trader
3. A company may be buying another  or a partnership business.

In any of the acquisitions above , the assets and liabilities taken over by the purchasing businesses will be recorded in the same way.

TERMINOLOGIES IN PURCHASE OF A BUSINESS

1. Vendor. This is the person or partnership or company that sold the business to another. The vendor may be paid cash, cheque  or in shares of the new company
2. Purchase consideration. The is the price which a purchaser would pay to the vendor in order to acquire his business
3. Goodwill. This is the excess of the purchase consideration over the net value of assets taken over. Net assets means total assets less liabilities . it is also called the net worth of the business.
4. Capital reserve. Where the purchase consideration is lesser than the net worth of the business, the difference is referred to as capital reserve.

ACCOUNTING ENTRIES:

1. Agreed  purchase price 

           Dr.Business Purchase A/C 

    Cr. Vendors A/C

2. Take over value of assets

           Dr.Assets Account  

    Cr. Business Purchase A/C

3. Agreed value of liabilities taken over

    Dr. Business Purchase A/C 

    Cr. Liabilities A/C

4. Excess of purchase consideration over net asset

    Dr. Goodwill 

    Cr. Business Purchase A/C

5. Excess of asset over purchase consideration.

    Dr. Business Purchase A/C 

    Cr. Capital Reserve A/C

6. Settlement of the vendor’s  A/C with cash

    Dr. Vendor’s A/C 

    Cr. Cash A/C

7. Settlement of Vendor’s A/C with shares

    Dr. Vendor’s A/C 

    Cr, Share Capital A/C

Journal entries:

JOURNAL

EVALUATION

1. Explain the following terms:
2. Goodwill
3. Capital reserve
4. Purchase consideration
5. Vendor
6. List six factors which can create goodwill for any firm or organization.

ILLUSTRATION

Lanka had taken over the business of Olaiya on 31/1/99 on the bais of the last balance sheet as follows:

                                Balance sheet

    N                                         N

Capital             180,000    Premises                      100,000

Creditors            60.000    Fixtures                         45,000

Accruls              10,000    Motor car                      55,000

    Debtors                         15,000

    Stock                              5,000

    Bank                             30,000

          250,000                                              250,000

ADDITIONAL INFORMATION:

1. The purchase consideration to be N200,000
2. All assets and liabilities where taken over with the exception of bank
3. Assets to be re-valued are as follows :

Premises                                                               140,000

Fixtures                                                                    40,000

Motor car                                                                 57,000

Debtors                                                                    13,000

Stock                                                                        10,000

4. The purchase price was paid on January 10th, 1999.

You are required to prepare

1. Journal entries in respect of the acquisition b)ledger A/C  c) balance sheet

SOLUTION:

JOURNAL

                                                                     DR                                  CR

                                                                                  N                                   N

                       Premises                                          140,000

               Fixtures                                             40,000

               Motor van                                         57,000

               Debtors                                             13,000

               Goodwill                                          10,000             

                Creditors                                                                60,000

                                  Accruals                                                                 10,000

                            Purchase of Business.                                                       200,000

        Assets and liabilities taken over        

Purchase of business A/C              200,000

Vendor A/C                                                                     200,000

Purchase price per agreement

Vendor A/C                                  200,000

Bank A/C                                                                        200,000

Cash or share paid in full settlement

1. LEDGER ACCOUNTS:

                            Business Purchase Account 

    N                                                N

Liabilities taken over     Asset taken over 

Creditors                    60,000    Premises                                 140,000

Accruals                     10,000    Fixtures                                    40,000

Purchase price           200,000    Motor van                                57,000

    Debtor                                      13,000

    Stock                                        10,000

    Goodwill                                  10,000

      270,000                          270,000

    Bank Account   

            Vendor                     200,000

    Vendor Account

Bank              200,000        Purchase Consideration        200,000

                Goodwill Account

Purchase of business  10,000

                                         Balance Sheet 

    N    N

Capital A/C            200,000    goodwill                           10,000

    Premises                        140,000

    Fixtures                            40,000

Creditors                60,000    Motor van                         57,000

Accruals                 10,000    debtors                             13,000

    Stock                                10,000

        270,000      270,000

EVALUATION

Explain the following: i. vendor ii. Purchase consideration

GENERAL EVALUATION/REVISION QUESTIONS

1. State six characteristics of depreciable assets
2. Explain three differences between a trial balance and a balance sheet
3. List seven errors that will affect the agreement of the trial balance
4. Explain the following : (i) real account (ii) nominal account (iii) personal account
5. List eight items that cause disagreement between Cash Book and bank statement balance 

READING ASSIGNMENT

Essential Fin. Accounting by O.A Longe page 299-307.

WEEKEND  ASSIGNMENT

1. Goodwill is a ------- (a) current asset ( b) intangible asset( c) current liability( d)fictitious asset
2. Vendor means the seller of the (a) business (b) asset (c) liabilities (d) capital
3. Capital reserve is( a) current assets( b) fixed assets (c) liabilities (d) equity
4. The double entry for payment of cheque to vendor is (a) Dr. vendor A/C, Cr. bank  (b) Cr. Vendor,Dr. bank (c) Cr.cheque Dr. vendor (d) Dr. Vendor Cr. Cash
5. The double entry for agreed purchase price is (a) Dr.purchase of business A/C,Cr. Vendor   (b) Dr. asset Cr. liabilities  (c) Dr. Cash Cr. Vendor (d) Dr. Asset Cr. Cash 

THEORY

1. Explain the accounting entries in purchase of a business by a partnership from a sole trader.
2. Explain i. Capital reserve  ii. Goodwill on purchase of a business