Page 18 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 1: Acquisition of Business

Excess of average profits (super profit) notes
= ` 75,250 – ` 44,000 = ` 31,250

Goodwill = 4×31,250 = ` 1,25,000
2. Calculation of Purchase Consideration–
`
Goodwill calculated in (1) above 1,25,000

Buildings (` 2,12,500 – ` 21,250) 1,91,250
Plant and Machinery (` 4,00,000 – ` 40,000) 3,60,000
Stock (` 1,37,500 – ` 13,750) 1,23,750
Sundry Debtors (` 1,62,500 – ` 16,250) 1,46,250
Patents (` 15,000 – ` 1,500) 13,500

9,59,750
less: Trade liabilities taken over
Bills Payable (` 1,00,000 - ` 5,000) 95,000
Creditors (` 2,00,000- ` 10,000) 1,90,000 2,85,000

purchase consideration 6,74,750
3. In the absence of information for part payment of purchase consideration and realisation
expenses the company has taken a bank loan i.e.; ` 74,750 + ` 4000 = ` 78,750.
4. When the business of a partnership firm is sold and a part of purchase consideration is
received in shares at the time of distribution of shares, the following points should be kept
in mind:
(a) If any ratio has been agreed among partners for the distribution of share, these must
be distributed in that ratio.
(b) If the partners want that dividend from the new company should be distributed
in the old profit-sharing ratio, equity shares as well as preference shares must be
distributed in the old profit-sharing ratio.
(c) Distribution of shares in the old profit-sharing ratio means that partners are entitled
to get profit in the old profit-sharing ratio. It does not protect the right of repayment
of capital in priority over other partners. If repayment of capital is to be guaranteed
than the capital, it can be protected by allotting the preference shares because
preference shares have a priority to refund of capital over ordinary shares. Here,
dividend on these shares may correspond to the interest on capital.
(d) If any partner has given a loan to the firm, he must be satisfied by first preference
shares. This guarantees the repayment of loan (preference shares) priority over other
partners’ capital (ordinary shares). This entire process can be understood by the
following illustration:
Illustration 5 (Distribution of Shares among Partners)

Ram, Rahim and Rogers carry business in partnership under the style of M/s. R. & Co. sharing
profits and losses in the ratio of 5:3:2. They have floated R. Pvt. Ltd. for the purchase of takeover
of their business. The following is the balance sheet of the firm as on 30th September, 2011:

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