Business Combinations

A business combination is deemed to have occurred when two or more businesses join
together to form a new and usually bigger business.
The combinations may bring the following advantages:
 Economies of scale
 Price control and market dominations

Amalgamations and Absorptions

Amalgamation result in a new company being formed. For example CAT Ltd is formed to
take over the activities of A Ltd and B Ltd. The two companies A Ltd and B Ltd have to be
liquidated.

Absorption of companies
When an existing company takes over the business of another existing company, this is
known as absorption. This happens where a relatively large company assumes the activities
of another company and the latter company is liquidated.

Purchase Consideration

When a form of combination has been agreed it means that the company bought must be
valued. That is, the price at which the company is to be bought must be determined its price is
generally referred to as purchase consideration.
The forms of payment of this purchase consideration must be specified.
The purchase consideration may be paid in the form of:
a. Cash
b. Shares
c. Loan capital (debentures)
d. Or any combination of the above
The purchase consideration depends on:
a) Valuation of assets
b) Valuation of liabilities

Purchase consideration
Once the purchase consideration has been determined and agreed and the forms of payment
resolved, the payment will be made by the buying company to the liquidator of the seller
company. A liquidator is appointed to oversee the liquidation process of the company being
bought hence payment is made to him/her.

Computation of the purchase consideration

There are various ways of determining the purchase consideration amongst them the
following:
a) The purchase consideration may be stated as a definite lump sum. For example A Ltd
pay B Ltd P200 000 and take over the business. The sum paid is purchase
consideration
b) The purchase consideration may be calculated by adding up the values of each assets
and deducting liabilities.

1
Accounting Entries
The seller company is liquidated upon agreement of a purchase consideration and form of
payment.
Journal entries to close the books of the seller company are required.
The liquidation process will be on the basis of the balances appearing in the sellers books.
The main account in the books of the seller company is the realisation account.
This account is prepared to ascertain profit or loss on the liquidation of the seller company.
Transfer of assets
Realisation account is opened in the books of the seller company and all the assets are
transferred to this account. Thereby closing all the individual assets accounts. The entries are:
Dr Cr
Realisation account X
Various individual assets account X
( with total amount of assets transferred, crediting the individual asset accounts)
Fictitious assets such as profit and loss debit balance, preliminary expenses not written off,
discount on issue of shares not written off are usually transferred to shareholders account.
Goodwill will be taken over by the purchasing company and should be transferred to
realisation account.
Transfer of liabilities
Liabilities are transferred to the credit side of the realisation account thereby closing the
individual liabilities taken over.

If there are liabilities to be discharged or paid by the Vendor Company, the following entry
will be made:
Debit liability
Credit cash

If there are assets not taken over by the purchasing company, this means that these will be sold
directly and the receipts debited to the Bank Account of the seller company.
The journal entries will be as follows:
Dr Cr
Bank x
Realisation account x
(With the amount of sale proceeds)
The liabilities not taken over by the purchasing company are paid off
Dr Cr
Individual liabilities X
Bank X
(With the amount of liabilities not taken over)
If there is profit or loss on payment of liabilities, this should be transferred to realisation account.

If the seller company pays for liquidation expenses the following entries are made:
Dr Cr
Realisation X
Bank X
(With amount of expenses paid)
When the seller company receives the purchase consideration
Dr Cr
Cash/bank shares/debentures X
Purchasing company X
(With the amount of purchase consideration received)

2
Question 1

Babusi Ltd took over the assets and liabilities with the exception of cash of Sesung Ltd on 31
December 2017 paying P 104 000 for the net assets. The statement of financial position of Sesung
Ltd on the date of takeover is as given below: Payment to Sesung Ltd was in the form of shares.

Sesung Ltd statement of financial position as at 31 December 2017

Non-current assets P P
Fixtures 60 000
Current assets
Inventory 16
000
Accounts receivables 14
000
Bank 2 000
32 000
Total assets 92 000

Share capital 86 000

Current liabilities
Accounts payables 6 000
Total capital and liabilities 92 000
You are required to:

a) Pass journal entries to close the accounts in the books of Sesung Ltd.
b) Prepare the opening statement of financial position of Babusi Ltd.
Suppose the same amount of P104 000 was paid by Babusi to take over fixtures with a value of P
74 000, Inventory with a value of P15 000 and account receivables with value of P 13 000, accounts
payable at P6 000.
Prepare the opening statement of financial position of Babusi Ltd after the takeover.
Question 2

Two businesses ABC Ltd and XYZ Ltd agree to amalgamate and form a new company called Zero Ltd.
The statement of the two businesses before amalgamation is given below:

ABC Ltd statement of financial position as at 31 December 2017

Non-current assets P P
Fixtures 30 000

Current assets
Inventory 8 000
Accounts receivables 7 000
Bank 1 000
16 000
Total assets 46 000

Share capital 43 000

Current liabilities

3
 Accounts payables 3 000
Total capital and liabilities 46 000
XYZ Ltd statement of financial position as at 31 December 2017

Non-current assets P P
Premises 20 000
Fixtures 5 000
25 000
Current assets
Inventory
.6 000
Accounts receivables 9 000
Bank 2 000
17 000
Total assets 42 000

Share capital 37 000

Current liabilities
Accounts payables 5 000
Total capital and liabilities 42 000
You are required to prepare the statement of financial position of Zero Ltd as at 1 January 2018
just after amalgamation.

Question 3
K Ltd bought the business of Emang Ltd. The purchase consideration was P120 000 cash. The
company placed the following values on the assets taken over:
Machinery 60 000
Inventory 20 000.

The financial statements of the two businesses before the take over was as shown below:
Emang Ltd statement of financial position
Machinery 60 000
Inventory 20 000
80 000
Capital 80 000

K Ltd Statement of financial position

Machinery 220 000
Inventory 100 000
Bank 180 000
500 000

Share capital 400 000

Retained Profit 100 000
500 000
Required to prepare:
a) The statement of financial position of K Ltd after the takeover of Emang Ltd.
b) The statement of financial position assuming payment by K Ltd was made by the issue of
ordinary shares of P1 each to the value of P120 000.
c) The statement of financial position assuming payment was made by issuing 120 000 shares of
P1 each at a premium of 50%.

4
Question 4

Two companies Katlo Ltd and Kaone Ltd carrying on similar business enter into a contract to
amalgamate and form a new company called Sebilo Ltd. The following are the respective statements
of financial position for Katlo Ltd and Kaone Ltd showing the values of the assets as agreed in the
contract. It is further provided that the new company shall issue fully paid P50 shares to the value of
the net assets of each of the old companies.
Katlo Ltd Kaone Ltd
Non-Current assets
Property 95 000 Property 75 000
Machinery 90 000 Machinery 100 000
185 000 175 000

Current assets Current assets

Inventory 75 000 Inventory 45 000
Bank 11 000 85 000 Receivables 35 000
Bank 35 000 115 000
Total assets 271 000 290 000

Capital and liabilities Capital and

liabilities
Capital 2 500 shares 250 000 Capital 2 000 200 000
of P100 each shares of P100
each
Profit and Loss (20 000) Profit and loss 10 000
General 50 000
Reserve
230 000 260 000
Current liabilities 41 000 Current 30 000
Creditors liabilities
Total capital & 271 000 290 000
Liabilities

Required to:
a) State the total number of shares each company will receive from the new company
b) Show the opening entries in the books of the new company
c) Prepare a statement of financial position of the new company.