Companies Taking Over Other
Business
1
Introduction
 Limited companies often expand their
businesses by taking over another business
as a going concern
 Business taking over may be in the form of an
acquisition or an exchange of shares
2
Acquisition
3
Acquisition
Sole proprietorship,
partnership or
Limited company
Liquidation
Asset+ liabilities
Purchasing company
Shares, debentures
or cash
Business purchase account
Realization account
4
Seller’s book
5
Acquisition
Seller’s Book
Transfer of assets to the realization
account
Dr. Realization
Cr. Assets (at net book values)
Expenses paid for realization
Dr. Realization
Cr. Cash
Sale proceeds from disposing of those
assets which are not taken over
Dr. Cash
Cr. Realization
Transfer of liabilities to the realization
account
Dr. Liabilities
Cr. Realization
Liabilities settled by the company itself
Dr. Liabilities
Cr. Cash
6
Acquisition
Seller’s Book
Discounts received on the settlement
of creditors by the company itself
Dr. Creditors
Cr. Realization
Purchase consideration agreed upon
Dr. Purchasing company
Cr. Realization
Profit on realization
(Reverse the entries for any loss on
realization)
For Sole Trader
Dr. Realization
Cr. Capital
For Partnership
Dr. Realization
Cr. Partners’ Capital
For Limited Company
Dr. Realization
Cr. Sundry Shareholders
7
Acquisition
Seller’s Book
Transfer of balances from partners’
current accounts to the capital
accounts
Dr. Partners’ Current
Cr. Partners’ Capital
(for partnership only)
Transfer of balances from the profit
and loss account and reserve
accounts to the sundry shareholders
account
Dr. Profit and Loss/Reserves
Cr. Sundry Shareholders
(for limited company only)
Receipt of cash, shares or debentures
from the purchasing company for the
settlement of the purchase
consideration
Dr. Cash/Shares/Debentures in
purchasing company
Cr. Purchasing company
8
Acquisition
Seller’s Book
Distribution of cash, shares or debentures
between the partners or shareholders
For Sole Trader
Dr. Capital
Cr. Cash/Shares/Debentures in purchasing
company
For partnership
Dr. Partners’ Capital
Cr. Cash/Shares/Debentures in purchasing
company
For Limited Company
Dr. Sundry Shareholders
Cr. Cash/Shares/Debentures in purchasing
company
9
Buyer’s book
10
Acquisition
Buyer’s Book
Assets taken over at their revised values
Dr. Assets
Cr. Business Purchase
Liabilities taken over
Dr. Business Purchase
Cr. Liabilities
Purchase consideration agreed upon
Dr. Business Purchase
Cr. Vendor
Profit on the acquisition
Dr. Business Purchase
Cr. Capital Reserve
Loss on the acquisition
Dr. Goodwill
Cr. Business Purchase
Settlement of the purchase consideration
by cash and/or issuing shares and
debentures
Dr. Vendor
Cr. Cash/Share Capital/Debentures
11
Example 1
Taking over a sole traders
12
 On 31 Dec 1997 Sino Trading Company Ltd. Acquired the business of
K. Chan The purchase consideration was $350000 cash. The company
revalued the assets taken over as follows:
Machinery
$180000
Motor vehicles
$70000
Stock
$40000
Debtors
$50000
Balance Sheet as at 31 Dec 1997 (before takeover)
Sino trading co.
K. Chan
Land & Buildings
$300000
Machinery
260000
$185000
Furniture & Fittings
70000
Motor Vehicles
130000
68000
Stock
84000
43000
Debtors
98000
52000
Cash
420000
7000
1362000
355000
Share capital/capital
1000000
352000
Profit and loss
320000
Creditors
42000
3000 13
1362000
355000
In K. Chan’s Book (Seller)
Machinery
Motor Vehicles
Stock
Debtors
All assets and liabilities taken over should be stated
At book value before the takeover in the realization
account
Realization
185,000 Creditors – taken over
68,000 Sino Trading – purchase
43,000
consideration
Bal b/ f
Sino trading co.
Cash
350,000
52,000
Capital – Profit on Realization 5,000
353,000
(bal. fig.)
Realization
3,000
353,000
Sino Trading Company Ltd.
350,000 Cash
Cash
7000 Capital
350000
357,000
350,000
357000
357000
Capital
357000
357000
Bal b/f
Realization –profit
352000
14
5000
357000
In Sino Trading Company Ltd.’s Book (Buyer’s Book)
Business Purchase
Creditors
Cash – purchase
consideration
3,000 Machinery
Motor Vehicles
Stock
350,000 Debtors
Goodwill (bal. fig.)
353,000
180,000
70,000
40,000
50,000
13,000
353000
Assets and liabilities taken over should be
Stated at their revised values in the business
Purchases account
15
In Sino Trading Company Ltd.’s Book (Buyer’s Book)
Sino Trading Company Ltd.
Balance Sheet as at 1 January 1998 (after acquisition)
Fixed Assets
Goodwill
Land and Buildings
Furniture and Fittings
Machinery (260,000 + 180,000)
Motor Vehicles (130,000 + 70,000)
Current Assets
Stock (84,000 + 40,000)
Debtors (98,000 + 50,000)
Cash (420,000 – 350,000)
Less: Current Liabilities
Creditors (42,000 + 3,000)
Working Capital
Share Capital
Profit and Loss
13,000
300,000
70,000
440,000
200,000
1,023,000
124,000
148,000
70,000
342,000
45,000
297,000
1,320,000
1,000,000
320,000
1,320,00016
Example 2
Settlement by shares
The facts are the same as those in Example 1,
except that the purchase consideration was
settled by issuing share capital of $350000
instead of paying cash
17
In Sino Trading Company Ltd’s Book (Buyer’s Book)
Sino Trading Company Ltd.
Balance Sheet as at 1 January 1998 (after acquisition)
Fixed Assets
Goodwill
Land and Buildings
Furniture and Fittings
Machinery (260,000 + 180,000)
Motor Vehicles (130,000 + 70,000)
Current Assets
Stock (84,000 + 40,000)
Debtors (98,000 + 50,000)
Cash
13,000
300,000
70,000
440,000
200,000
1,023,000
124,000
148,000
420,000
692,000
Less: Current Liabilities
Creditors (42,000 + 3,000)
Working Capital
Share Capital (1,000,000 + 350,000)
Profit and Loss
45,000
647,000
1,670,000
1,350,000
320,000
1,670,00018
Example 3
Taking over a limited company
19
 The following trial balances are extracted from Astin Ltd. And
cathay Ltd. On 31 Dec 1997
Astin Ltd.
Cathay Ltd.
Dr
Cr
Dr
Cr
Goodwill
$3000
Premises
250000
80000
Plant & Machinery
370000
46000
Stock
120000
72000
Debtors
65000
28000
Bank
53000
14000
Share capital-ord. shares of $1@
560000
200000
Share premium
1000
20000
Profit and loss
130000
5000
5% debentures
100000
13000
Creditors
70000
2000
861000 861000 240000 240000
20

Astin Ltd. Took over Cathay Ltd. ( all the assets and
liabilities ) on 31 Dec 1997.
 Additional information:
1. The debentures in Cathay Ltd. were to be
exchanged for a new issue of 5% debentures in
Astin Ltd. Of the same nominal value.
2. The purchase consideration was discharged by the
issue of 230000 $1 shares at a premium of 10%.
3. The assets were taken over at their book values
except premises, stock and debtors, which were
revalued at $10000, $70000 and 24000 respectively.
21
In Cathy Ltd.’s Book (Seller)
Premises
Plant and Machinery
Stock
Debtors
Bank
Realization
80,000
Debentures
46,000
Creditors
72,000
28,000 Astin Ltd. – purchase
consideration
14,000
(230,000 X 1.1)
Sundry Shareholders
(profit on realization) (bal .fig.)28,000
268,000
13,000
2,000
253,000
268000
Sundry Shareholders
Shares in Astin Ltd.-purchase
Share capital
Consideration
253000 Share premium
Profit and loss
Realization-profit
253000
200000
20000
5000
28000
253000
22
All shares capital and reserves should be closed to the sundry shareholders’ account
In Cathy Ltd.’s Book (Seller)
Business purchase
Debentures
13,000 Premises
Creditors
Astin Ltd. – purchase
consideration
(230,000 X 1.1)
2,000 Plant and Machinery
Stock
Debtors
Bank
253,000 Goodwill (bal. Fig.)
268,000
100000
46,000
70,000
24,000
14,000
14000
268000
23
In Astin Ltd.’s Book (Buyer’s Book)
Astin Ltd.
Balance Sheet as at 1 January 1998 (after acquisition)
Fixed Assets
Goodwill (3,000 + 14,000)
Premises (250,000 + 100,000)
Plant and Machinery (370,000 + 46,000)
Current Assets
Stock (120,000 + 70,000)
Debtors (65,000 +24,000)
Bank (53,000 + 14,000)
Less: Current Liabilities
Creditors (70,000 + 2,000)
Working Capital
Share Capital
Share Capital (560,000 + 230,000)
Share Premium (1,000 + 23,000)
Profit and Loss
Long-term Liabilities
5% Debentures (100,000 + 13,000)
17,000
350,000
416,000
783,000
190,000
89,000
67,000
346,000
72,000
274,000
1,057,000
790,000
24,000
130,000
944,000
113,00024
1,057,000
Share Exchanges
25
Share exchange
 A limited company may take over another limited




company by exchanging shares with the
shareholders of the selling company.
The selling company will not be liquidated. It
becomes the subsidiary of the purchasing company.
No entry is necessary in the books of the selling
company,as it is only a change in the identity of the
shareholders.
The shareholders of the selling company now
become shareholders of the purchasing company
The purchasing company now becomes a holding
company, In the books of the holding company, the
subsidiary is regarded as an investment,
26
Share exchange
Shares
Limited company
Holding company
Shares
Subsidiary company
Issue of shares or debentures to
Subsidiary company’s shareholders
No entry in accounts
27
Share Exchange
Accounting Entries
Dr. Investment
Cr. Share Capital
Cr. Share Premium
With the total cost of investment
With the par value of the issue of exchange
With the premium on the new issue
28
Example 4
29
 The following balance sheets reflect the situation of Joyce Ltd and Anna
Ltd. On 31 Dec 1997
Joyce Ltd.
Goodwill
Land & building
Plant & machinery
Office equipment
Stock
Debtors
Bank
1300000
750000
80000
150000
180000
65000
2525000
Share capital- ord. Shares of $1@
Profit and loss account
General reserve
Creditors
2000000
400000
50000
75000
2525000
Anna Ltd.
$20000
1000000
450000
50000
97000
110000
34000
1761000
1000000
600000
60000
101000
1761000
30
 Joyce Ltd. took over Anna Ltd. By exchanging
with the shareholders of Anna Ltd. Three
shares of Joyce Ltd. Were exchanged at a
premium of 20% for every two shares of Anna
Ltd.
 There is no accounting entry required in the
books of Anna Ltd. as there is no liquidation
of Anna Ltd. The only changes is that the
shareholders of Anna Ltd. Become
shareholders of Joyce Ltd.
31
In Joyce Ltd.’s Book (Buyer’s Book)
Joyce Ltd.
Balance Sheet as at 1 January 1998 (after acquisition)
Fixed Assets
Land and Premises
Plant and Machinery
Office Equipment
Investment in Anna Ltd., at cost
Current Assets
Stock
Debtors
Bank
Less: Current Liabilities
Creditors
Working Capital
Share Capital
Ordinary Shares of $1 each (2000000+150000)
Reserves
Share Premium [(1000000*3/2)*20%]
General Reserve
Profit and Loss Account
1300,000
750,000
80,000
2,130,000
1,800,000
150,000
180,000
65,000
395,000
75,000
320,000
4,250,000
3,500,000
300,000
50,000
400,000 32
4250000
Pre-incorporation Profit
33
Pre-incorporation profit
 Limited Co. take over other businesses. It takes p
period of time before they can be incorporated.
 A company cannot earn profits before it legally comes
into existence through incorporation.
 The profits generated after the takeover and before
the incorporation are knows as pre-incorporation
profits
 Pre-incorporation profits are capital in nature. They
must be transferred to a capital reserve account
which is not available for dividend distribution.
34
Pre-incorporation Profits
Accounting entries
Dr. Profit and Loss
Cr. Capital Reserve/Goodwill
With the pre-incorporation profits earned
Dr. Goodwill
Cr. Profit and Loss
With the pre-incorporation loss
 After incorporation, the company legally comes into
existence. The profits generated after incorporation
are known post-incorporation profits
 The profits which can be transferred to the profit and
loss appropriation account and is also available for
the distribution of dividends.
35
Allocation of profits
between different parties
36
Allocation of Profits between Different Parties
Case 1
A partnership was taken over by a limited company on 1 April. The company was
incorporated on 1 June.
Date of takeover
1/1
1/4
Date of incorporation
Financial year end
1/6
31/12
Apportionment of profits:
1/1 to 31/3
Partnership
1/4 to 31/5
Pre-incorporation Profits
1/6 to 31/12
Limited company(Post-incorporation profits)
37
Allocation of Profits between Different Parties
Case 2
A partnership was taken over by a limited company on 1 January. The company was
incorporated on 1 April.
Date of takeover
1/1
Date of incorporation
Financial year end
1/4
31/12
Apportionment of profits:
1/1 to 31/3
Pre-incorporation Profits
1/4 to 31/12
Limited company (Post-incorporation profits)
38
Allocation of Profits between Different Parties
Case 3
A partnership was taken over by a limited company on 1 April. The company was
incorporated on the same date.
Date of takeover of incorporation
1/1
Financial year end
1/4
31/12
Apportionment of profits:
1/1 to 31/3
Partnership
1/4 to 31/12
Limited company (Post-incorporation profits)
39
Apportionment of revenues and
expenses
 Theoretically, a separate set of records should be
dept for each period.
 However, a business may not have stock-take or may
not close the accounts when there is a change in
ownership of the business
 Therefore the income and expenditures must be
apportioned over different periods in order to
compute the pre-incorporation profits and the postincorporation profits
 The income and expenditures of the business should
each be apportioned on a different basis
40
Basis of
Apportionment
Examples
Sales
Variable expenses and Revenues
- They would increase proportionally to the increase in
turnover
- e.g. gross profit, selling and distribution expenses,
carriage outwards, cost of goods sold, bad debts,
discounts allowed, etc.
Time
Fixed expenses and revenues
- They would increase proportionally to time
- e.g. rent and rates, interest, administrative exp.,
office salaries, depreciation, etc.
Actual
- There is no need to apportion these expenses and
revenues as they are incurred in a particular period.
41
Apportionment of Revenues and Expenses
Basis of
Apportionment
Actual
Examples
- Partnership
e.g. Interest on drawings, interest on capital,
partners’ salaries, etc.
- Pre-incorporation period
e.g. interest on purchase consideration
- Post-incorporation period
e.g. preliminary expenses, interest on purchase
consideration, debenture interest, directors’
remuneration, etc.
42
Example 5
Refer to textbook P.191-192
43
Example 5
Sales
Cost of Sales
Gross Profit
Less: Expenses
Rent
Sales Comm.
Preliminary Exp.
Debenture
Int. on Purchase
Consideration
Directors’ Fees
Disc. Allowed
Depreciation
Office Salaries
Net Profit
Apportionment
basis
Partnership
(Jan to Mar.)
Pre-incrop.
(Apr. to Sept)
Post-incorp.
(Oct. to Dec.)
Turnover (3:8:4)
Turnover (3:8:4)
360,000
90,000
270,000
960,000
240,000
720,000
480,000
120,000
360,000
Time (3:6:3)
Turnover (3:8:4)
Actual
Actual
30,000
8,400
60,000
22,400
30,000
11,200
10,000
15,000
30,000
5,000
18,000
7,200
12,000
24,000
227,600
Time (6:1)
Actual
Turnover (3:8:4)
Time (3:6:3)
Time (3:6:3)
5,400
12,000
24,000
190,200
14,400
24,000
48,000
521,200
44