B. Ltd. purchased assets of the book value of Rs. 4,00,000 and took over the liability of Rs. 50,000 from Moha

Numerical Questions · Q10

Q. B. Ltd. purchased assets of the book value of Rs. 4,00,000 and took over the liability of Rs. 50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at Rs. 3,80,000, be paid by issuing debentures of Rs. 100 each. What Journal entries will be made in the following three cases, if debentures are issued:

(a) at par;

(b) at 10% discount;

Lakshadweep CbseNCERTSubjective· 5mImportance★★★★★

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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

Note

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]

Watch out

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)

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We first record the acquisition of assets and liabilities and the creation of goodwill. The net assets taken over are:

Assets ₹4,00,000 – Liabilities ₹50,000 = ₹3,50,000.

Purchase consideration is ₹3,80,000, so the excess is goodwill of ₹30,000.

The vendor is paid by issuing debentures. Any fractional debenture is paid in cash.

Case (a) – Debentures issued at par

Each debenture is issued for ₹100.

Number of debentures = ₹3,80,000 ÷ ₹100 = 3,800 (exact integer, no cash payment).

Journal entry:

Particulars	L.F.	Debit (₹)	Credit (₹)
Sundry Assets A/c Dr.		4,00,000
Goodwill A/c Dr.		30,000
	To Sundry Liabilities A/c		50,000
	To Mohan Bros. A/c		3,80,000
(Being assets and liabilities taken over from Mohan Bros.)
Mohan Bros. A/c Dr.		3,80,000
	To 10% Debentures A/c		3,80,000
(Being 3,800 debentures of ₹100 each issued at par to Mohan Bros.)

Case (b) – Debentures issued at 10% discount

Issue price per debenture = ₹100 – 10% of ₹100 = ₹90.

Number of debentures = ₹3,80,000 ÷ ₹90 = 4,222.22…

Full debentures = 4,222; value = 4,222 × ₹90 = ₹3,79,980.

Cash paid for fraction = ₹3,80,000 – ₹3,79,980 = ₹20.

Journal entries:

Particulars	L.F.	Debit (₹)	Credit (₹)
Sundry Assets A/c Dr.		4,00,000
Goodwill A/c Dr.		30,000
	To Sundry Liabilities A/c		50,000
	To Mohan Bros. A/c		3,80,000
(Being assets and liabilities taken over)
Mohan Bros. A/c Dr.		3,80,000
Discount on Issue of Debentures A/c Dr.		42,220
	To 10% Debentures A/c		4,22,200
	To Cash A/c		20
(Being 4,222 debentures of ₹100 each issued at 10% discount and ₹20 paid in cash for fraction)

Note

Discount on issue = 4,222 × ₹10 = ₹42,220. Debentures credited at face value = 4,222 × ₹100 = ₹4,22,200.

Case (c) – Debentures issued at 10% premium

Issue price per debenture = ₹100 + 10% of ₹100 = ₹110.

Number of debentures = ₹3,80,000 ÷ ₹110 = 3,454.545…

Full debentures = 3,454; value = 3,454 × ₹110 = ₹3,79,940.

Cash paid for fraction = ₹3,80,000 – ₹3,79,940 = ₹60.

Journal entries: …

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The purchase consideration of ₹3,80,000 is settled by issuing debentures. The number of debentures varies by issue price: (a) at par: 3,800 debentures;

(b) at 10% discount: 4,222 debentures (with ₹200 paid in cash);

The core concept here is Purchase Consideration — the amount agreed to be paid by the purchasing company (B. Ltd.) to the vendor (Mohan Bros.) for taking over the business. The purchase consideration is settled by issuing debentures, which are a form of long-term debt. The accounting treatment hinges on the issue price of the debentures relative to their face value.

When debentures are issued at par, the company receives exactly the face value. At a discount, the company receives less than face value; at a premium, it receives more. The number of debentures issued is calculated by dividing the purchase consideration by the issue price per debenture. Any fractional entitlement is paid in cash.

The journal entries follow a standard pattern:

For taking over assets and liabilities: Debit the individual asset accounts (or a single "Sundry Assets" account) and credit the liabilities taken over and the vendor's account (Mohan Bros.) with the net amount (Assets – Liabilities = Net Assets). Here, the net assets taken over are ₹4,00,000 (assets) – ₹50,000 (liabilities) = ₹3,50,000. But the purchase consideration is ₹3,80,000, which is higher. The excess is Goodwill (₹30,000). So, the entry is: Debit Assets ₹4,00,000 and Goodwill ₹30,000; Credit Liabilities ₹50,000 and Mohan Bros. ₹3,80,000.
For issuing debentures: Debit Mohan Bros. (the vendor) and credit the Debentures account (at face value) and, if applicable, the Discount on Issue of Debentures (debit) or Securities Premium Reserve (credit). Any cash paid for fractional debentures is credited to Bank.

Let's work through each case.

Case (a): Debentures issued at par

Issue price per debenture = ₹100 (face value).

Number of debentures = Purchase Consideration / Issue Price = ₹3,80,000 / ₹100 = 3,800 debentures. No fraction, so no cash payment.

Journal Entries in the books of B. Ltd.

Particulars	Debit (₹)	Credit (₹)
Sundry Assets A/c Dr.	4,00,000
Goodwill A/c Dr.	30,000
To Sundry Liabilities A/c		50,000
To Mohan Bros. A/c		3,80,000
(Being assets and liabilities taken over from Mohan Bros. as per purchase agreement)
Mohan Bros. A/c Dr.	3,80,000
To 10% Debentures A/c		3,80,000
(Being 3,800 debentures of ₹100 each issued at par to Mohan Bros. in settlement of purchase consideration)

Case (b): Debentures issued at 10% discount

Issue price per debenture = Face value – Discount = ₹100 – (10% of ₹100) = ₹100 – ₹10 = ₹90.

Number of debentures = Purchase Consideration / Issue Price = ₹3,80,000 / ₹90 = 4,222.22... Since debentures cannot be issued in fractions, we issue 4,222 debentures.

Value of debentures issued = 4,222 debentures × ₹100 (face value) = ₹4,22,200.

Amount received from debentures = 4,222 debentures × ₹90 (issue price) = ₹3,79,980.

Cash paid for fraction = Purchase Consideration – Amount received from debentures = ₹3,80,000 – ₹3,79,980 = ₹20.

Discount on issue of debentures = Face value of debentures issued – Amount received = ₹4,22,200 – ₹3,79,980 = ₹42,220. (Alternatively, 4,222 debentures × ₹10 discount each = ₹42,220.)

Watch out

A common mistake is to calculate the discount on the purchase consideration rather than on the face value of debentures issued. The discount is always on the face value of the debentures actually issued. Here, the discount is ₹42,220, not 10% of ₹3,80,000.

Journal Entries in the books of B. Ltd.

Particulars	Debit (₹)	Credit (₹)
Sundry Assets A/c Dr.	4,00,000
Goodwill A/c Dr.	30,000
To Sundry Liabilities A/c		50,000
To Mohan Bros. A/c		3,80,000
(Being assets and liabilities taken over from Mohan Bros. as per purchase agreement)
Mohan Bros. A/c Dr.	3,80,000
Discount on Issue of Debentures A/c Dr.	42,220
To 10% Debentures A/c		4,22,200
To Bank A/c		20

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Case (a): Debentures issued at par

Case (b): Debentures issued at 10% discount

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