“A” LEVEL ACCOUNTING

BUSINESS PURCHASE

REVISION QUESTIONS

BOOKLET

Tinofamba nevanofamba

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 QUESTION 1

Brian Mills and Beryl Smart had been in partnership for many years. Accounts were prepared
to 30 April. It was decided that the partners would retire on 30 April 2012 and the business
was sold to Chipperfield Ltd.

The partnership's statement of financial position at 30 April 2012 was as follows:

$ $
Non-current assets
Property 85 000
Fixtures and fittings 27 500
Plant and machinery 14 750
127 250
Current assets
Inventories 28 800
Trade receivables 10 950
Bank 5 450 45 200
Total assets 172 450
Current liabilities
Trade payables 13 950
Non-current liabilities
Loan from Brian Mills at 8% per annum 15 000
Loan from Beryl Smart at 6% per annum 10 000 25 000
Net assets 133 500
Capital accounts
Brian Mills 76 000
Beryl Smart 57 500 133 500

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Chipperfield Ltd’s statement of financial position at 30 April 2012 was as follows:

$ $
Non-current assets
Property 145 000
Fixtures and fittings 57 750
Plant and machinery 18 750
221 500
Current assets
Inventories 39 450
Trade receivables 12 380
Bank 69 675 121 505
Total assets 343 005
Current liabilities
Trade payables 18 675
324 330
Equity
300 000 Ordinary shares of $0.50 150 000
Share premium 75 000
Retained earnings 99 330
324 330

Chipperfield Ltd purchased the business on 1 May 2012 for $160 000. The company took
over all of the assets (except the bank account) together with the current liabilities.

The purchase consideration was:

i. 120 000 ordinary shares of $0.50 nominal value issued at a premium of $0.10.
ii. 30 000 6% non-redeemable preference shares of $0.50.
iii. 10% debentures redeemable in 2020 issued so that Brian and Beryl receive the
same interest payments as in the partnership.
iv. The balance paid from the bank account.

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The partnership assets were re-valued as follows:

$
Property 95 000
Fixtures and fittings 24 500
Plant and machinery 12 500
Inventories 27 500
Trade receivables 10 250

REQUIRED

a. Prepare Chipperfield Ltd’s statement of financial position at 1 May 2012, after the
partnership had been acquired. [22]
Chipperfield Ltd’s profit for the year ended 30 April 2012 was $82 350. The budgeted
profit for the year ended 30 April 2013 is $116 000.

REQUIRED

b. Calculate the return on capital employed for the two years. State whether
Chipperfield Ltd has benefited from the purchase of the partnership. [7]

Additional information:

During the next financial year it is anticipated that plant modernisation will be
required and that additional capital will have to be raised. The directors are
considering four options:

i. Bonus issue.
ii. Issue of 10% debentures.
iii. New share issue.
iv. Rights issue.

REQUIRED

c. Explain the advantages and disadvantages of each option and recommend the most
appropriate option. [11]
[Total: 40]

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 QUESTION 2

Alvin, Bertram and Chana are in partnership preparing accounts to 30 June. They share
profits and losses in the ratio 4:3:1. On 30 June 2013, the partners decided to convert the
business to a new limited company, Albech Ltd.

Statement of Financial Position at 30 June 2013

$ $
Assets
Non-current assets (NBV) 250 000

Current assets
Inventories 89 345
Trade receivables 53 485
Cash and cash equivalents 9 250 152 080
Total assets 402 080

Equity
Capital account
Alvin 75 000
Bertram 90 000
Chana 60 000 225 000
Current accounts
Alvin 24 840
Bertram 44 950
Chana 18 555 88 345
Total equity 313 345

Liabilities
Non-current liabilities
Alvin 8% loan account 40 000
Current liabilities
Trade payables 48 735
Total liabilities 88 375

Total equity and liabilities 402 080

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The terms of the transfer were as follows:

i. The agreed valuation of the business was $475 000.

ii. Consideration was to be satisfied as follows.
- 200 000 ordinary shares of $1 each.
- 200 000 8% non-redeemable preference shares of $0.50 each.
- Sufficient 10% long term debentures to enable Alvin to receive the same
amount of annual interest he currently receives on his loan.
- The balance to be cash in the form of a long term bank loan.
iii. The ordinary shares and cash were allocated in the profit sharing ratio whilst the
preference shares were allocated in the ratio of the capital account balances at 30
June 2013.
iv. All assets and liabilities were transferred to the new company with the exception
of trade receivables, trade payables and the cash and cash equivalents.
v. A bad debt of $720 was written off.
vi. Discounts of $3060 were agreed with the suppliers.
vii. All other assets were transferred at their book value.
viii. The loan from Alvin was repaid to him.

REQUIRED

a. Prepare the partnership realisation account. [8]

b. Prepare the bank account. [8]
c. Prepare the partners’ capital accounts to close the partnership. [8]
d. Prepare the opening statement of financial position of Albech Ltd at 1 July 2013. [10]
[Total: 34]

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 QUESTION 3

Amandeep, Bruce and Chetan have been in partnership trading as Abcan. They share profits
and losses in the ratio 3:2:1 respectively. Gurpreet and Hibo have been in partnership trading
as Gurbo. They share profits and losses equally.

At 31 March 2007 the summarised balance sheets of both businesses were as follows:

Abcan Gurbo
$ $
Premises 100 000 70 000
Machinery 35 000 13 000
Vehicles 78 000 -
Investments at cost 12 000 -
Stock 10 000 5 000
Debtors 14 000 9 000
Balance at bank 8 500 4 000
257 500 101 000
Less Creditors 7 500 6 000
250 000 95 000
Less 8 % Loan from Chetan 30 000 -
220 000 95 000
Capital accounts
Amandeep 100 000
Bruce 70 000
Chetan 50 000
Gurpreet 50 000
Hibo 45 000
220 000 95 000

The partners agreed to form a limited company, ABCOGH Ltd, to take over both businesses.
All Abcan’s assets were transferred to ABCOGH Ltd with the exception of three vehicles,
investments, debtors and balance at bank.

The agreed values of assets taken over by the company are:

Abcan Gurbo
$ $
Premises 170 000 100 000
Machinery 30 000 10 000
The remaining vehicles 40 000 -
Stock 9 000 5 000

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The purchase consideration for Abcan was $240 000 as follows:

i. 57 000 7 % preference shares of $1 each to be distributed in profit sharing ratios;

ii. sufficient 6% debenture stock to give Chetan the same return as he had received on
his loan to the partnership;
iii. the balance as ordinary shares of $1 at a premium of $0.30 per share distributed to the
partners in proportion to their capital account balances at 31 March 2007.

Abcan collected $12 900 cash from debtors. Creditors accepted $7100 in full settlement of
amounts due to them.

The three vehicles which have been used by the partners were taken over by them as follows:

Partner Agreed takeover price

$
Amandeep 10 000
Bruce 7 500
Chetan 7 800

The investments at cost were purchased by Bruce at an agreed value of $13 400.

The purchase consideration for Gurbo was $134 000 as follows:

i. 43 000 7 % preference shares of $1 each to be distributed in profit sharing ratios;

ii. the balance as ordinary shares to be shared equally.

Costs involved in dissolving the Abcan partnership amounted to $6400; costs to dissolve the
Gurbo partnership were $3100. Gurbo collected $7000 cash from debtors. Creditors were
paid the amounts due to them.

REQUIRED

a. Prepare partnership capital accounts at 31 March 2007 for both businesses to show the
closing entries in both sets of partnership books of account. [27]

It was agreed that the issued ordinary share capital would be held as follows:

Amandeep 30%
Bruce 10%
Chetan 20%
Gurpreet 20%
Hibo 20%

It was further agreed that the transfer price of any ordinary shares would be $1.30 per share.

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REQUIRED

b. Calculate the number of ordinary shares received by each partner. [3]

c. Calculate the amounts of cash payable or receivable by each shareholder to achieve the
required shareholding. [3]
d. Prepare a balance sheet for ABCOGH Ltd at 31 March 2007 immediately after
incorporation. [5]
e. Explain briefly one possible reason why the partners decided to change their business
into a limited company. [2]
[Total: 40]

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 QUESTION 4

On 1 October 2013, Rezwan Limited agreed to purchase the net assets, excluding cash and
cash equivalents, of Nimra, a sole trader. Nimra provided the following information at 30
September.

2013 2012
Assets $ $
Non-current assets
Land and buildings 110 000 110 000
Plant and equipment 76 500 85 000
186 500 195 000
Current assets
Inventory 21 000 17 000
Trade receivables 34 000 28 000
Cash and cash equivalents 11 000 3 500
66 000 48 500

Total assets 252 500 243 500

Equity capital
Balance 207 500 201 500
Profit for the year 58 000 54 000
265 500 255 500
Drawings 54 000 48 000
Total equity 211 500 207 500

Liabilities
Current liabilities
Trade payables 41 000 36 000

Total equity and liabilities 252 500 243 500

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Additional information

On 1 October 2013:

i. The land and buildings are revalued at $170 000.

ii. Additional depreciation of $8 500 is provided on the plant and equipment.
iii. Inventory valued at 15% of the total is written off.
iv. Bad debts equal to 10% of the trade receivables are written off.

REQUIRED

a. Calculate the value of the net assets acquired by Rezwan Limited. [6]

Additional information

The directors of Rezwan Limited agreed to pay Nimra five times the average profit for the
year for the last two years. They made a payment in cash of $100 000 and issued new $1
ordinary shares to Nimra at a premium of $0.50 for the balance of the purchase price.

REQUIRED

b. Calculate the amount the directors of Rezwan Limited paid for Nimra’s business. [2]
c. Calculate the number of new $1 shares issued by Rezwan Limited. [4]

Additional information

Rezwan Limited’s statement of financial position at 30 September 2013 before it acquired

Nimra’s business and assets is as follows:

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Statement of financial position at 30 September 2013

$
Assets
Non-current assets
Land and buildings 120 000
Plant and equipment 60 000
180 000
Current assets
Inventory 45 000
Trade receivables 24 000
Cash and cash equivalents 132 000
201 000
Total assets 381 000
Equity
Ordinary shares of $1 each 200 000
Share premium 20 000
Retained earnings 110 000
Total equity 330 000
Liabilities
Current liabilities
Trade payables 51 000
Total equity and liabilities 381 000

REQUIRED

d. Prepare Rezwan’s statement of financial position at 1 October 2013 immediately

after acquiring Nimra’s business. [14]
e. Explain why the directors of Rezwan Limited are prepared to pay more for the assets
acquired than their book value. [6]

Additional information

The directors of Rezwan Limited expect that the value of goodwill acquired from Nimra may
reduce over a period of years.

REQUIRED

f. Explain, making reference to IAS 36 and 38, how any reduction will be calculated and
state the accounting adjustments which will be made in future financial statements.
[8]
[Total: 40]

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