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Do It Yourself · Q4

Q.Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry assets of ₹3,60,000, sundry creditors ₹1,00,000 for a consideration of ₹3,07,200. It issued 14% debentures of ₹100 each fully paid at a discount of 4% in satisfaction of purchase consideration. Record necessary journal entries.

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Net assets are ₹2,60,000 against a price of ₹3,07,200, so ₹47,200 Goodwill arises; the price is discharged by 3,200, 14% debentures issued at a 4% discount (face value ₹3,20,000, discount ₹12,800).

Concept

On a business purchase, assets and liabilities taken over are recorded at their agreed values and the vendor credited with the purchase consideration. Consideration greater than net assets = Goodwill (a debit); consideration less than net assets = Capital Reserve. The consideration is then paid in debentures, whose number = consideration ÷ issue price and whose face value is always credited in full, the discount being a capital loss.

Working Note

  • Net assets = Sundry assets ₹3,60,000 − Sundry creditors ₹1,00,000 = ₹2,60,000.
  • Purchase consideration ₹3,07,200 > net assets ₹2,60,000 → Goodwill = ₹47,200.
  • Issue price per debenture = ₹100 − 4% = ₹96.
  • Number of debentures = ₹3,07,200 ÷ ₹96 = 3,200.
  • Face value = 3,200 × ₹100 = ₹3,20,000; Discount = 3,200 × ₹4 = ₹12,800.

Solution

Books of Nikhil and Ashwin Limited — Journal

DateParticularsL.F.Debit (₹)Credit (₹)
Sundry Assets A/c Dr.3,60,000
Goodwill A/c Dr.47,200
To Sundry Creditors A/c1,00,000
To Agarwal Limited A/c3,07,200
(Business of Agarwal Limited taken over)

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