Q.Manav Ltd. purchased Sundry Assets from Varun Ltd. for Rs. 28,60,000. The amount was paid by issuing fully paid Equity shares of Rs. 100 each at a premium of 10%. How many Equity shares are issued to Varun Ltd.?
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Purchase Consideration
What is Purchase Consideration? Start with an everyday intuition
Imagine you want to buy a small shop from its owner. You don't just pay for the goods on the shelves — you also pay for the shop's name, its customer base, the furniture, the pending bills, and maybe even the goodwill. The total amount you agree to pay the seller for everything — all assets, all liabilities, the whole business — is the purchase consideration.
In simple terms: when one business buys another business (not just its products), the lump sum paid is purchase consideration. It is the price of the entire business as a going concern.
The precise meaning (as per NCERT / Class 12)
Purchase Consideration is the agreed amount payable by the purchasing company to the vendor company (the one being sold) for the acquisition of its business.
It is not the same as the net assets (assets minus liabilities). It is a negotiated figure — often different from the book value of net assets. If the purchase consideration is higher than the net assets, the difference is goodwill. If lower, it is capital reserve.
Why does it matter?
Because the entire accounting entry for the purchase of a business hinges on this one number. You cannot record the acquisition without first determining:
- How much to pay the old firm
- Whether goodwill arises or capital reserve is created
- How to settle the payment (cash, shares, debentures, or a mix)
In board exams, the most common mistake is confusing purchase consideration with net assets. They are not the same.
Methods of calculating Purchase Consideration
NCERT prescribes four methods. You need to know all, but the Net Assets Method is the most frequently tested.
| Method | Basis |
|---|---|
| Net Assets Method | Purchase consideration = Agreed value of assets taken over – Agreed value of liabilities taken over |
| Net Payment Method | Purchase consideration = Total of all payments made by the purchasing company (cash, shares, debentures) to the vendor |
| Lump Sum Method | A single fixed amount agreed upon, no breakup |
| Intrinsic Value / Share Exchange Method | Based on the number of shares issued and their intrinsic value |
In the Net Assets Method, you use agreed values, not book values. If the vendor's machinery is worth ₹5,00,000 in the books but both parties agree it is worth ₹6,00,000, you take ₹6,00,000.
Accounting Treatment — The Journal Entry
When the purchasing company acquires the business, it records the following:
Step 1: Record the assets and liabilities taken over
The journal entry in the books of the purchasing company is:
Sundry Assets A/c Dr. [Agreed value of assets taken over]
Goodwill A/c (if PC > Net Assets) Dr. [Difference]
To Sundry Liabilities A/c [Agreed value of liabilities taken over]
To Vendor (or Business Purchase) A/c [Purchase Consideration]
To Capital Reserve A/c (if PC < Net Assets) [Difference]
Goodwill and Capital Reserve cannot both appear in the same entry. Only one of them arises — the difference between purchase consideration and net assets.
Step 2: Discharge of purchase consideration
When the purchasing company pays the vendor:
Vendor (or Business Purchase) A/c Dr. [Purchase Consideration]
To Bank A/c (if paid in cash)
To Share Capital A/c (if shares issued)
To Debentures A/c (if debentures issued)
The format / proforma for the Net Assets Method
In your exam, you will often be asked to compute purchase consideration using the Net Assets Method. Here is the standard working note format:
Net Assets Method – Computation of Purchase Consideration
| Particulars | Amount (₹) |
|---|---|
| Assets taken over (at agreed values) | |
| Goodwill | xx,xxx |
| Land & Building | xx,xxx |
| Plant & Machinery | xx,xxx |
| Stock | xx,xxx |
| Debtors | xx,xxx |
| Cash at Bank | xx,xxx |
| Total Assets (A) | X,XX,XXX |
| Less: Liabilities taken over (at agreed values) | |
| Sundry Creditors | (xx,xxx) |
| Bills Payable | (xx,xxx) |
| Outstanding Expenses | (xx,xxx) |
| Total Liabilities (B) | (X,XX,XXX) |
When shares are issued at a premium to discharge a purchase consideration, the number of shares to be issued = Purchase Consideration ÷ Issue Price per share (face value + premium).
Step-by-step working
Step 1 — Issue price per share
Face value per share = Rs. 100
Premium @ 10% = Rs. 10
Issue price per share = Rs. 100 + Rs. 10 = Rs. 110
Step 2 — Number of shares to be issued
Purchase consideration = Rs. 28,60,000
Number of shares = Rs. 28,60,000 ÷ Rs. 110 = 26,000 shares
Verification: 26,000 shares × Rs. 110 = Rs. 28,60,000 ✓
The journal entry in Manav Ltd.'s books would be:
Sundry Assets A/c Dr 28,60,000 …
Showing the 12 most recent of 17 on this concept.
- CBSE 2026Set 67/3/11 markMCQQ.Mogra Ltd. purchased assets of ₹ 14,40,000 from DK Ltd. It issued 9% Debentures of ₹ 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to DK Ltd. were : (A) 14,400 (B) 15,000 (C) 3,60,000 (D) 1,500
›Reveal solutionSolution
Mogra Ltd. issued 15,000 debentures of ₹100 each at a4% discount to settle a purchase consideration of ₹14,40,000. The correct answer is option (B).
Concept First: Why This Entry Works
When a company buys assets and pays by issuing debentures, the seller (DK Ltd.) is not paying cash — they are accepting debentures as full payment. The total value of what the seller gives up (the assets) must equal the total value of what they receive (the debentures). This is the purchase consideration.
The tricky part here is the discount. Mogra Ltd. is issuing ₹100 face-value debentures but only receiving ₹96 per debenture in terms of settlement value (because of the 4% discount). So the company must issue more debentures than the face value would suggest, to make up the full ₹14,40,000.
The journal entry follows the golden rule: Debit what comes in (assets), Credit what goes out (debentures and discount). The assets account is debited with the full value of assets acquired. The 9% Debentures account is credited with the face value of debentures issued. The difference — the discount — is debited to a Discount on Issue of Debentures account (a loss for the company).
Watch outCommon Mistake
Many students calculate the number of debentures as ₹14,40,000 ÷ ₹100 = 14,400 debentures. This is wrong because it ignores the discount. The seller is not accepting debentures at face value — they are accepting them at the issue price of ₹96 each. Always divide the purchase consideration by the issue price, not the face value.
Solution
Step 1: Calculate the Issue Price per Debenture
Face value of each debenture = ₹100
Discount = 4% of ₹100 = ₹4
Issue price = ₹100 − ₹4 = ₹96
Step 2: Calculate the Number of Debentures Issued
Number of debentures = Purchase Consideration ÷ Issue Price per Debenture
= ₹14,40,000 ÷ ₹96
= 15,000 debentures
TipShortcut
When the discount is given as a percentage, you can use: Number of debentures = Purchase Consideration ÷ (Face Value × (1 − Discount Rate)). Here: 14,40,000 ÷ (100 × 0.96) = 15,000. …
- CBSE 2026Set 67/4/11 markMCQQ.White Ltd. purchased Plant and Machinery worth ₹ 3,96,000 from Nath Ltd. The purchase consideration was paid by issue of 9% Debentures of ₹ 100 each at 10% discount. The number of debentures issued were : (A) 3,960 (B) 4,000 (C) 4,400 (D) 3,600
›Reveal solutionSolution
White Ltd. issues 4,400 debentures of ₹100 each at 10% discount to discharge a purchase consideration of ₹3,96,000; the answer is (C) 4,400.
Concept: Purchase Consideration and Issue of Debentures at Discount
When a company acquires an asset and pays for it by issuing debentures (rather than cash), the purchase consideration — the agreed price of the asset — must equal the amount credited to the vendor. If debentures are issued at a discount, the company must issue more debentures than the face value would suggest, because each debenture is accepted by the vendor at less than its nominal (face) value.
Here the debentures have a face value of ₹100 each but are issued at 10% discount, meaning each debenture is issued at ₹90. The vendor (Nath Ltd.) receives debentures whose issue price totals ₹3,96,000, even though the face value (the liability recorded in the books) will be higher.
The accounting treatment is:
Account Debit Credit Rule Plant and Machinery A/c ₹3,96,000 Asset acquired (debit the receiver / what comes in) Discount on Issue of Debentures A/c (to be found) Loss/expense (debit; it is a capital loss, written off over the life of debentures or against Securities Premium) 9% Debentures A/c Face value Liability created (credit) Nath Ltd. (Vendor) A/c ₹3,96,000 Liability to vendor discharged by issue of debentures The key relationship:
Issue Price per Debenture=Face Value−Discount=100−10=₹90
Number of Debentures=Issue Price per DebenturePurchase Consideration=903,96,000
Solution
Working Note 1: Calculation of Number of Debentures Issued
Particulars Amount (₹) Purchase Consideration (Plant and Machinery) 3,96,000 Face Value per Debenture 100 Discount per Debenture (10% of ₹100) 10 Issue Price per Debenture 90 Number of Debentures = ₹3,96,000 ÷ ₹90 4,400 The vendor Nath Ltd. is paid by issuing 4,400 debentures, each accepted at ₹90 (the discounted price), which exactly equals the purchase consideration of ₹3,96,000.
Working Note 2: Face Value and Discount (for completeness)
Particulars Amount (₹) Number of Debentures issued 4,400 Face Value per Debenture 100 Total Face Value of Debentures (Liability) 4,40,000 Total Issue Price (Purchase Consideration) 3,96,000 Discount on Issue of Debentures 44,000 - CBSE 2026Set 67/5/11 markMCQQ.Universal Ltd. took over machinery of ₹ 3,30,000, furniture of ₹ 1,60,000 and liabilities of ₹ 80,000 from Amol Ltd. for a purchase consideration of ₹ 4,50,000. The payment to Amol Ltd. was made by issue of 10% Debentures of ₹ 50 each at a discount of 10%. The number of debentures issued to Amol Ltd. was : (A) 1,000 (B) 4,500 (C) 45,000 (D) 10,000
›Reveal solutionSolution
The number of 10% debentures issued is 10,000 (Option D). The purchase consideration of ₹4,50,000 is settled by issuing debentures of face value ₹50 each at a 10% discount, meaning each debenture is issued at ₹45.
Concept First: Purchase Consideration and Settlement
When one company (Universal Ltd.) takes over the business of another (Amol Ltd.), the buying company must pay a purchase consideration — the agreed price for the net assets acquired. This consideration can be paid in cash, or by issuing shares or debentures of the buying company.
The key accounting principle here is that the purchase consideration is the total amount payable to the selling company, regardless of the form of payment. It is not the same as the net assets taken over (assets minus liabilities). The purchase consideration is a negotiated figure — in this case, ₹4,50,000 — while the net assets acquired are ₹3,30,000 (machinery) + ₹1,60,000 (furniture) - ₹80,000 (liabilities) = ₹4,10,000. The difference of ₹40,000 is capital reserve or goodwill, depending on the agreement.
Now, the question focuses on how Universal Ltd. settles this ₹4,50,000 consideration. They issue 10% Debentures of ₹50 each at a discount of 10%. This means:
- Face value of each debenture = ₹50
- Discount = 10% of ₹50 = ₹5
- Issue price per debenture = ₹50 - ₹5 = ₹45
The selling company (Amol Ltd.) receives debentures worth the purchase consideration amount. So, the number of debentures issued is simply:
Number of debentures = Purchase Consideration / Issue Price per Debenture
Watch outCommon Pitfall
Students often mistakenly divide the purchase consideration by the face value (₹50) instead of the issue price (₹45). Remember: when debentures are issued at a discount, the company receives less than the face value per debenture. The selling company gets debentures whose total issue price equals the purchase consideration, not whose total face value equals it.
Solution
Calculation of Number of Debentures
Particulars Amount (₹) Purchase Consideration 4,50,000 Face Value of each Debenture 50 Discount @ 10% 5 Issue Price per Debenture (₹50 - ₹5) 45 Number of Debentures Issued (₹4,50,000 / ₹45) 10,000 TipShortcut
If the issue price is ₹45 per debenture, then for every ₹45 of consideration, 1 debenture is issued. For ₹4,50,000, the number is simply 4,50,000 ÷ 45 = 10,000.
Journal Entry in the Books of Universal Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Machinery A/c Dr. 3,30,000 Furniture A/c Dr. 1,60,000 To Liabilities A/c 80,000 - CBSE 2026Set ANNUAL1 markMCQQ.Read the following and give answers (Q. No. xi to xiv): "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%." How many numbers of 8% debentures will be issued in above question? A) 330 B) 297 C) 270 D) 275
›Reveal solutionSolution
330 debentures must be issued to settle the ₹2,97,000 purchase consideration - option (A).
Issue price per debenture = Face value - Discount = ₹1,000 - 10% of ₹1,000 = ₹1,000 - ₹100 = ₹900.
…
- CBSE 2026Set ANNUAL1 markMCQQ.(Based on the passage: "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%.") Which account will be credited on purchase of the plant? A) Snehlata Ltd.'s A/c B) Vishakha Ltd.'s A/c C) Plant A/c D) 8% Debenture A/c
›Reveal solutionSolution
The vendor Snehlata Ltd.'s Account is credited on purchase of the plant - option (A).
When assets are bought from a vendor, the entry is:
Plant A/c ... Dr (asset acquired)
To Vendor's (Snehlata Ltd.'s) A/c (amount payable)
…
- CBSE 2026Set ANNUAL1 markMCQQ.Sweekar Ltd. purchased assets worth ₹ 16,20,000 from Rajashree Ltd. By issuing 8% Debentures of ₹ 150 per debenture at a premium of 20%. What is the total number of debentures issued by the company to settle this purchase consideration ?(a) 16,200 Debentures(b) 13,500 Debentures(c) 10,800 Debentures(d) 9,000 Debentures
›Reveal solutionSolution
Number of debentures issued = Purchase Consideration ÷ Issue price per debenture = 16,20,000 ÷ 180 = 9,000 debentures.
Step 1 — Find the issue price per debenture:
Face value per debenture = ₹150
Premium on issue = 20% of ₹150 = ₹30
Issue price per debenture = ₹150 + ₹30 = ₹180
Step 2 — Find the number of debentures to be issued:
When a company purchases assets from a vendor and settles the purchase consideration by issuing debentures (instead of cash), the number of debentures issued is calculated as:
Number of Debentures = Purchase Consideration ÷ Issue Price per Debenture
= ₹16,20,000 ÷ ₹180
= 9,000 Debentures
Check: 9,000 debentures × ₹180 = ₹16,20,000, which exactly equals the purchase consideration — confirming the figure is correct.
The journal entries for this transaction (in Sweekar Ltd.'s books) would be:
Sundry Assets A/c Dr. 16,20,000 …
- CBSE 2025Set 67/6/11 markMCQQ.Shyamla Ltd. purchased machinery of ₹ 9,50,000 from Rohini Ltd. The payment was made by issue of 9% debentures of ₹ 100 each at a discount of 5% redeemable at a premium of 10% after four years. The number of debentures issued in favour of Rohini Ltd. will be : (A) 10,000 (B) 9,500 (C) 9,050 (D) 8,636
›Reveal solutionSolution
Shyamla Ltd. must issue 10,000 debentures of ₹100 each to Rohini Ltd. to discharge the purchase consideration of ₹9,50,000, because the debentures are issued at a discount of 5% (₹95 per debenture).
Concept: Purchase Consideration and Issue of Debentures as Consideration
When a company acquires an asset and pays for it by issuing debentures instead of cash, the purchase consideration (the agreed price of the asset) must equal the issue price of the debentures, not their face value or redemption value.
Here, Shyamla Ltd. buys machinery worth ₹9,50,000. Payment is made by issuing 9% debentures of ₹100 face value each, but these debentures are issued at a discount of 5%. This means each debenture is issued at:
Issue Price per Debenture=Face Value−Discount=₹100−5% of ₹100=₹100−₹5=₹95
The number of debentures to be issued is determined by dividing the purchase consideration by the issue price per debenture:
Number of Debentures=Issue Price per DebenturePurchase Consideration=₹95₹9,50,000
The redemption premium of 10% and the four-year maturity are relevant for future accounting (the liability at redemption and the amortization of discount/premium), but they do not affect the number of debentures issued today. The vendor, Rohini Ltd., receives debentures whose current issue value equals the machinery's price.
Watch outA common mistake is to use the face value (₹100) or the redemption value (₹110) to calculate the number of debentures. The issue price—what the debentures are worth at the time of issue—is the correct denominator, because that is the consideration actually given to the vendor.
Solution
Working Note 1: Calculation of Number of Debentures
Number of Debentures=₹95₹9,50,000=10,000 debentures
Verification:
- Face Value of 10,000 debentures = 10,000 × ₹100 = ₹10,00,000
- Discount on Issue = 5% of ₹10,00,000 = ₹50,000
- Issue Price (amount credited to vendor) = ₹10,00,000 − ₹50,000 = ₹9,50,000 ✓
The accounting entries in Shyamla Ltd.'s books would be: …
- CBSE 2025Set ANNUAL1 markMCQQ.A company purchased machinery for Rs. 1,15,000 and in consideration issued shares at 15% premium. The face value of shares issued will be ________. (A) Rs. 97,750 (B) Rs. 1,00,000 (C) Rs. 1,15,000 (D) Rs. 1,32,250
›Reveal solutionSolution
Face Value of shares issued = Purchase Consideration ÷ (1 + premium rate) = 1,15,000 ÷ 1.15 = Rs. 1,00,000.
When shares are issued as purchase consideration at a premium, the Issue Price (what the consideration is actually worth) equals Face Value plus the premium:
Issue Price = Face Value × (1 + Premium %)
1,15,000 = Face Value × (1 + 0.15)
1,15,000 = Face Value × 1.15 …
- CBSE 2025Set ANNUAL1 markQ.Manav Ltd. purchased Sundry Assets from Varun Ltd. for Rs. 28,60,000. The amount was paid by issuing fully paid Equity shares of Rs. 100 each at a premium of 10%. How many Equity shares are issued to Varun Ltd.?
›Reveal solutionSolution
When shares are issued at a premium to discharge a purchase consideration, the number of shares to be issued = Purchase Consideration ÷ Issue Price per share (face value + premium).
Step-by-step working
Step 1 — Issue price per share
Face value per share = Rs. 100
Premium @ 10% = Rs. 10
Issue price per share = Rs. 100 + Rs. 10 = Rs. 110
Step 2 — Number of shares to be issued
Purchase consideration = Rs. 28,60,000
Number of shares = Rs. 28,60,000 ÷ Rs. 110 = 26,000 shares
Verification: 26,000 shares × Rs. 110 = Rs. 28,60,000 ✓
The journal entry in Manav Ltd.'s books would be:
Sundry Assets A/c Dr 28,60,000 …
- CBSE 2024Set 67/2/11 markMCQQ.Maharaja Ltd. took over assets of ₹15,00,000 and liabilities of ₹2,00,000 of Dolphin Ltd. for an agreed purchase consideration of ₹12,60,000. It was agreed that the purchase consideration will be paid by issuing 11% Debentures of ₹100 each at 10% discount. The number of debentures issued will be : (A) 13,000 (B) 12,600 (C) 10,000 (D) 14,000
›Reveal solutionSolution
Maharaja Ltd. will issue 14,000 11% Debentures of ₹100 each at a 10% discount to settle the purchase consideration of ₹12,60,000.
When one company acquires the business of another, it takes over its assets and liabilities. The agreed price for this acquisition is called the Purchase Consideration (PC). This PC is the amount that the purchasing company (Maharaja Ltd.) agrees to pay to the vendor company (Dolphin Ltd.) for its business.
The accounting treatment involves two main steps:
- Recording the takeover of assets and liabilities: The purchasing company debits the individual assets taken over and credits the individual liabilities taken over. The vendor company's account is credited with the Purchase Consideration, as this amount becomes payable to them. Any difference between the net assets (Assets - Liabilities) and the Purchase Consideration is adjusted to either Goodwill (if PC is more than net assets) or Capital Reserve (if PC is less than net assets).
- Settlement of Purchase Consideration: The purchasing company then settles the amount due to the vendor. This can be done through various means, such as cash, shares, or debentures. When debentures are issued at a discount, the vendor's account is debited with the Purchase Consideration, the 'Discount on Issue of Debentures' account is debited (as it's a capital loss), and the 'Debentures Account' is credited with their face value.
In this problem, the Purchase Consideration is ₹12,60,000, and it is to be paid by issuing 11% Debentures of ₹100 each at a 10% discount. The key is to determine the issue price of each debenture, which is the actual amount realised per debenture after accounting for the discount.
Here are the journal entries to illustrate the accounting treatment:
Journal Entries in the books of Maharaja Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Assets A/c Dr. 15,00,000 To Liabilities A/c 2,00,000 To Dolphin Ltd. A/c (Vendor) 12,60,000 To Capital Reserve A/c 40,000 (Being assets and liabilities taken over and purchase consideration due, with the excess of net assets over PC credited to Capital Reserve) Dolphin Ltd. A/c (Vendor) Dr. 12,60,000 Discount on Issue of Debentures A/c Dr. 1,40,000 To 11% Debentures A/c 14,00,000 (Being purchase consideration settled by issuing 11% Debentures at 10% discount) TOTALS 29,00,000 29,00,000 - CBSE 2023Set 67/1/11 markMCQQ.Akshita Ltd. issued fully paid shares of ₹ 5,00,000 in purchase consideration of net assets of ₹ 4,70,000. The balance of ₹ 30,000 will be ______ to ______ account. (A) debited, Goodwill (B) debited, Capital Reserve (C) credited, Capital Reserve (D) credited, General Reserve(OR)Maira Ltd. took over assets of ₹ 12,00,000 and liabilities of ₹ 4,00,000 of Subav Ltd. for an agreed purchase consideration of ₹ 9,00,000. The amount was payable by issue of 11% debentures of ₹ 100 each at 10% discount. The number of debentures issued will be : (A) 9,000 (B) 10,000 (C) 8,000 (D) 11,000
›Reveal solutionSolution
Part (a): the ₹30,000 excess is debited to Goodwill — (A). Part (b): 9,00,000 ÷ 90 = 10,000 debentures — (B).
Part (a)
When the purchase consideration paid is more than the net assets acquired, the surplus represents Goodwill — an intangible asset, so it is debited. (Had the price been less than net assets, the difference would be a Capital Reserve, credited.) Here 5,00,000 − 4,70,000 = ₹30,000 → debited to Goodwill. …
- CBSE 2023Set 67/3/11 markMCQQ.Sunbeam Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 5%. The 'Loss on Issue of Debentures Account' will debited by : (A) ₹ 3,00,000 (B) ₹ 2,00,000 (C) ₹ 1,00,000 (D) ₹ 22,00,000(OR)Nargis Ltd. purchased assets of ₹ 8,00,000 and took over liabilities of ₹ 2,00,000 from Gauri Ltd. The payment was made by issue of 8% Debentures of ₹ 100 each at a premium of 20%. Number of debentures issued will be : (A) 50,000 (B) 5,000 (C) 6,000 (D) 6,00,000
›Reveal solutionSolution
Part (a): Loss on Issue of Debentures A/c debited by ₹1,00,000 — option (C).
Part (b): 5,000 debentures issued — option (B).
Part (a) — Sunbeam Ltd.
20,000 debentures of ₹100 each issued at a 10% premium and redeemable at a 5% premium.
When debentures are redeemable at a premium, the premium payable on redemption is a future liability recognised at issue by debiting the Loss on Issue of Debentures A/c. The premium received on issue is a gain credited to Securities Premium Reserve and does not create any loss. Since these debentures are issued at a premium (not a discount), the only item of loss is the premium on redemption. …
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