Page 11 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 6. When amount of goodwill is adjusted with capital reserve because both are not shown in
the balance sheet:
Capital Reserve Account Dr.
To Goodwill Account (amount adjusted)

Notes If the purchase consideration is more than the net assets, excess should be
treated as goodwill.

self assessment

State whether the following statements are true or false:
6. On the purchase of business, the excess of purchase consideration over the net assets
acquired is called goodwill.

7. On the acquisition of a business of a firm by a corporate body, the purchasing company
must open the new books of accounts.
8. After the sale of business, if the partners of the firm want to receive the dividend from the
new company in their old profit-sharing ratio, they must share the equity shares in their
capital ratio.
9. If the same set of books of the vendor is continued, assets and liabilities not taken over by
the purchasing company must be shared by the partners in their final claim ratio.
10. The payment of realisation expenses is made either by vendor or by purchasing company.
Illustration 1 (When Purchase Price is given)
The Balance Sheet of Alfa Mills is given below as on 31 Dec., 2011.
st
liabilities ` assets `
Capital 1, 66,000 Machinery 70,000
Sundry Creditors 64,700 Investments 40,000
Bills Payable 20,000 Stock 28,700
Bank Balance 62,000
Debtors 50,000
2, 50,700 2, 50,700
Bita Ltd. was formed to purchase the business of Alfa Mills. Its purchase consideration was
decided ` 2,00,000 which was payable in equity shares of ` 50,000, 12% debentures of ` 1,00,000
and balance in cash. Pass the necessary journal entries in the books of Bita Ltd.
Solution
Bita limited
Journal entries
Date Particulars L.F. ` `
Machinery Account Dr. 70,000
Investments Account Dr. 40,000
Stock Account Dr. 28,700

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