9706 · 3.3.1

Business Acquisition and Merger — practice questions

Practice and worked examples for 9706 Business Acquisition and Merger. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

P Co Ltd acquires the business of S, a sole trader, on 1 January 20X3. The fair values of S's assets and liabilities were: Premises $250,000, Inventory $45,000, Trade Receivables $30,000, and Trade Payables $20,000. The purchase consideration was settled by: a cash payment of $50,000, the issue of 100,000 ordinary shares of $1 each (market value $1.80 per share), and the issue of $100,000 5% debentures.

Calculate the goodwill arising on this acquisition.

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Step 1: Calculate Fair Value of Net Assets Acquired

Premises                  \$250,000
Inventory                  \$45,000
Trade Receivables          \$30,000
----------------------------------
Total Assets              \$325,000
Less: Trade Payables     (\$20,000)
----------------------------------
Fair Value of Net Assets  \$305,000

Step 2: Calculate Total Purchase Consideration

Cash payment                             \$50,000
Shares issued (100,000 x \$1.80)        \$180,000
Debentures issued                      \$100,000
------------------------------------------------
Total Purchase Consideration           \$330,000

Step 3: Calculate Goodwill Goodwill is the excess of the purchase consideration over the fair value of the net assets acquired. $\text{Goodwill} = \text{Purchase Consideration} - \text{Fair Value of Net Assets}$ $\text{Goodwill} = \text{\textdollar}330,000 - \text{\textdollar}305,000$ Final Answer: The goodwill arising on the acquisition is $25,000.

Worked example 2

Using the information from the previous example (P Co Ltd acquiring S), prepare the journal entries in the books of P Co Ltd to record the acquisition.

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1. To record the assets, liabilities, and goodwill acquired: This entry records the items taken over at their fair values and establishes the total amount due to the vendor in the Business Purchase account.

Account	Debit ($)	Credit ($)
Premises	250,000
---	---
Inventory	45,000
Trade Receivables	30,000
Goodwill	25,000
Trade Payables		20,000
Business Purchase Account		330,000
To record the acquisition of S's business

2. To record the settlement of the purchase consideration: This entry clears the Business Purchase account by showing how the payment was made. Note the split of the share issue value between share capital (nominal value) and share premium.

Account	Debit ($)	Credit ($)
Business Purchase Account	330,000
---	---
Bank		50,000
Ordinary Share Capital (100,000 x $1)		100,000
Share Premium (100,000 x $0.80)		80,000
5% Debentures		100,000
To record settlement of purchase consideration

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