Question

Prepare the journal entries in the records of Dave Ltd to account for the acquisition of Ten Ltd. and show all workings

•The trial balance of Ten Ltd is as attached:

•Dave Ltd acquired the business of Ten Ltd by taking over all assets as at 1 June 2023. All the identifiable net assets were recorded at fair value except inventories which were considered to be worth 28,000.

•David Ltd paid $40,000 in cash and 20,000 fully paid ordinary shares of $2 each. These shares have a fair value of $2.50 per share on the date of acquisition. The cost of issuing shares in Dave Ltd were $250.

	Dr	Cr
Share capital		90,000
Retained earnings	24,000
Accounts payable		20,000
Plant (net)	30,000
Inventories	26,000
Accounts receivables	30,000

Answer 1

Journal Entries to record the acquisition of the business

Date	Accounts Titles and Explanations	Debit	Credit
	Plant (net)	$30,000
	Inventories	$28,000
	Accounts Receivable	$30,000
	Accounts Payable		$20,000
	Capital Reserve (balance)		$68,000
	(Business purchase by one party to another party at net assets method and items recorded and balance transfer to capital reserve account)
	OR
	Business purchase	$68,000
	Vendor		$68,000
	(As business purchase at net assets method recorded)
	Vendor	$40,000
	Cash		$40,000
	(Being vendor paid the partly paid the amount in cash
	Vendor (20,000 * $2.50)	$50,000
	Ordinary share (20,000 * $2)		$40,000
	Securities premium (20,000 * $0.50)		$10,000
	(Being partly payment in share at $2.50 which is at premium that is 20,000 * $2.50)
	Shares issues expenses	$250
	Bank		$250
	(Being share issue expenses paid in cash 0

Working:

1.

As business purchase at net assets method and balance transferred to capital reserve account, as if debit is short than balance transferred to goodwill account and if credit is short than amount transfer to capital reserve account.

Being all assets are debited ans liabilities are credited

2.

Business purchase partly by paying cash and the rest by issuing 20,000 shares at $2.50 which is at premium so entries are adjusted accordingly

3.

Shares issues expenses are paid in cash of $250 so is debited and bank account is credited