Business acquisition and merger: Practice Questions

When a limited company acquires a partnership and the purchase consideration is higher than the fair value of the identifiable net assets, which account is debited to record this difference in the company's books?

When a limited company acquires a partnership business, which of the following forms part of the purchase consideration?

State two different forms of purchase consideration that a limited company might provide when acquiring an existing partnership business.

Identify two distinct advantages for a business that decides to grow by acquiring another entity, rather than pursuing organic (internal) expansion.

What is the main accounting distinction between the acquisition of a business as a whole and the purchase of its individual assets?

David, a sole trader, decided to acquire the business of Emily, another sole trader, on 1 January 2024. The following are the summarised statements of financial position for both businesses as at 31 December 2023, just before the acquisition:

David's Business

• Non-current assets: $120,000
• Inventory: $30,000
• Trade receivables: $25,000
• Cash: $5,000
• Trade payables: $15,000
• Capital: $165,000

Emily's Business

• Non-current assets: $80,000
• Inventory: $20,000
• Trade receivables: $15,000
• Cash: $2,000
• Trade payables: $10,000
• Capital: $107,000

David acquired Emily's business for a purchase consideration of $120,000, paid in cash. All assets and liabilities of Emily's business are taken over at their book values, except for non-current assets which are revalued at $85,000 for the purpose of acquisition.

a) Calculate the goodwill arising from the acquisition of Emily's business by David.

b) Prepare the necessary journal entries to record the acquisition of Emily's business by David. (Narrations are not required).

c) Briefly explain one advantage for David of acquiring an existing business rather than starting a new one from scratch.