Acquisition of Business

UNIT III
ACQUISITION OF BUSINESS
WHAT IS AN ACQUISITION?
An acquisition is when one company purchases most or all
of another company's shares to gain control of that
company. Purchasing more than 50% of a target firm's stock
and other assets allows the acquirer to make decisions about
the newly acquired assets without the approval of the
company’s shareholders. Acquisitions, which are very
common in business, may occur with the target company's
approval, or in spite of its disapproval. With approval, there
is often a no-shop clause during the process.
DIFFERENCE BETWEEN NET PAYMENT METHOD &
NET ASSETS METHOD
•In the net payment method all the payments made to the
shareholders of the transferor company by the transferee company
are added to calculate the purchase consideration.
•The net asset method or adjusted net asset method is a business
valuation procedure which is used in acquisition accounting. It
changes the stated values of a company's assets and liabilities in
order to reflect its current fair market values.
Under the net assets method the values of various assets are added
and deducted from the values of various liabilities to calculate the
purchase consideration. The values of these assets and liabilities are
agreed upon by the purchasing company and the vendor company.
They are not the values of these assets and liabilities which are
entered in the vendor company's Balance Sheet.
WHEN NEW SET OF BOOKS IS OPENED JOURNAL ENTRIES
IN THE BOOKS OF PURCHASING COMPANY
SI.NO. PARTICULARS DEBIT CREDIT
1. For purchase of business:
Business Purchase A/C Dr. XXX
To Vendor’s A/C XXX
(Being with the amount of purchase
consideration)
2. For assets and liabilities taken over:
Assets taken over(individually)A/C Dr. XXX
To Liabilities taken over A/C XXX
To Business Purchase A/C XXX
Note:
(a) If the credits exceed the
debits, the difference should be
debited to
goodwill A/C.
(b) If the debits exceed the
credits, the difference should be credited to
Capital Reserve account.
(Being Assets and Liabilities Taken)
3. For Payment to Vendor:

Vendor’s A/C Dr. XXX
To Cash A/C XXX
To Share Capital A/C XXX
To Securities Premium A/C XXX
To Debentures A/C XXX
(Being with the respective amounts)
4. For Interest Due(On purchase price)
Interest A/c Dr. XXX
To Vendor’s A/c XXX
(Being Interest Due)
5. Interest Paid:
Vendor’s A/c Dr. XXX
To Bank A/c XXX
(Being Interest Paid)
IN THE BOOK OF VENDOR COMPANY
1. For assets taken over by purchasing

company:
Realisation A/C Dr. XXX
To Assets A/C XXX
(Being Assets taken over)
2. For Liabilities taken over by purchasing

company:
Liabilities A/C Dr. XXX
To Realisation A/C XXX
(Being Liabilities taken over)
3. For Purchase Consideration:

Purchasing Company A/C Dr. XXX
To Realisation A/C XXX
(Being Purchase Consideration Due)
4. For Realisation expenses paid by Vendor
company:
Realisation A/C Dr. XXX
To Bank A/C XXX
5. (Being expenses paid)
For receipt of purchase consideration:
Bank A/C Dr. XXX
Shares in new company Dr. XXX
Debentures in new company Dr. XXX
To Purchasing company A/C XXX
(Being Payment Received)
DEBTORS AND CREDITORS TAKEN OVER
ON BEHALF OF THE DEBTORS
Often, a company does not take over the debtors and creditors
belonging to the vendor but merely agrees to collect the debts and pay
the creditors on behalf of the vendor. This means that any profit or
loss made in the process will belong to the vendor.
•Write a note on ‘Vendors Suspense account’.
In the process of collection of book debts and payment to creditors if any
loss and expenses and gains such as bad debts, discounts, etc., arise, such
profit or loss will have to be borne by the vendor. In this case, purchasing
company opens a vendor’s suspense account in its books.
•Debtors’ Suspense account:
A Debtor suspense account is arises when a company take over the debtor
of another company the difference between the amount due and the amount
realized will be transferred to suspense account.
•Creditors’ Suspense account:
A Creditor suspense account is arises when a company take over the
creditor of another company the difference between the amount to be paid
and the amount paid will be transferred to suspense account.
IN THE BOOK OF PURCHASING COMPANY
(DEBTORS AND CREDITORS TAKEN OVER ON BEHALF OF VENDORS)
SI.NO PARTICULARS DEBIT CREDIT
1. For the acquisition of debtors and creditors on behalf

of vendor:
Vendor’s Debtors A/C Dr. XXX
To Vendor’s Creditors A/C XXX
To Vendor’s Suspense A/C XXX
(Being Debtors and Creditors Taken Over )
2. For realisation of amount of debtors:
Bank A/C Dr. XXX
To Vendor’s Debtors A/C XXX
(Being Amount Realised from Debtors)
3. For loss on account of bad debts and discount
allowed to debtors:
Vendor’s Suspense A/C Dr. XXX
To Vendor’s Debtors A/C XXX
(Being Loss Transfered)
4. For Payment made to creditors:
Vendor’s Creditors A/C Dr. XXX
To Bank A/C XXX
(Being Payment made)
SI.NO PARTICULARS DEBIT CREDIT
5. For gain on account of discount received from

creditors:
Vendor’s Creditors A/C Dr. XXX
6. (Being Discount received from Creditors )
When irrecoverable bad debts are recovered:
Bank A/C Dr. XXX
7. (Being Bad debts are recovered)
For commission due to purchasing company:
To Commission A/C XXX
8. (Being Commission Due )
For final payment to settle the vendor’s debtors and
creditors:
To Bank A/C XXX
To Share Capital A/C (if shares are issued) XXX
To Debentures A/C (if debentures are issued) XXX
(Being final payment made )

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UNIT III

3. For Payment to Vendor:

SI.NO. PARTICULARS DEBIT CREDIT

1. For assets taken over by purchasing

2. For Liabilities taken over by purchasing

3. For Purchase Consideration:

1. For the acquisition of debtors and creditors on behalf

5. For gain on account of discount received from

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