The GG Company Ltd. sells its business to the DD Company Ltd. on December, 2022, on which date its Balance Sheet was as under: Liabilities Rs. Assets Rs. : : : : Equity Shares of Rs.100 each 600,000…

a. Purchase Consideration

The purchase consideration is the total amount paid by DD Company Ltd. to acquire GG Company Ltd. It includes:

1. Assets taken over at 15% less than book value (excluding cash and goodwill)
2. Payment for goodwill (Rs. 70,000)
3. Takeover of debentures (Rs. 200,000)
4. Cost of liquidation (Rs. 15,000)

Step 1: Calculate the value of assets taken over (excluding cash and goodwill)

The assets taken over are:

• Land and Building (Rs. 500,000)
• Plant and Machinery (Rs. 300,000)
• Stock (Rs. 40,000)
• Debtors (Rs. 60,000)

Total book value of assets (excluding cash and goodwill) = Rs. 900,000

Since DD Company Ltd. takes these assets at 15% less than book value: $$\text{Value of assets taken over}=900,000-(15\%\times 900,000)=900,000-135,000=\text{Rs. 765,000}$$

Step 2: Add goodwill and debentures taken over

• Goodwill taken over = Rs. 70,000
• Debentures taken over = Rs. 200,000

Step 3: Total purchase consideration before liquidation cost

$$765,000+70,000+200,000=\text{Rs. 1,035,000}$$

Step 4: Add liquidation cost (Rs. 15,000)

$$\text{Total purchase consideration}=1,035,000+15,000=\text{Rs. 1,050,000}$$

Final Purchase Consideration = Rs. 1,050,000

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b. Journal Entries in the Books of GG Company Ltd.

Journal Entry 1: Transfer of assets and liabilities to Realization Account

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Realization A/c                 |      | Dr.          | 1,050,000    |
|            | To Land and Building A/c        |      |              | 500,000      |
|            | To Plant and Machinery A/c      |      |              | 300,000      |
|            | To Stock A/c                    |      |              | 40,000       |
|            | To Debtors A/c                   |      |              | 60,000       |
|            | To Goodwill A/c                  |      |              | 60,000       |
|            | To Equity Shares A/c             |      |              | 600,000      |
|            | To General Reserve A/c          |      |              | 100,000      |
|            | To Profit and Loss A/c           |      |              | 70,000       |
|            | To 12% Debenture A/c             |      |              | 200,000      |
|            | To Creditors A/c                 |      |              | 80,000       |
|            | (Being assets and liabilities transferred to Realization A/c) | | | |

Journal Entry 2: Adjustment for assets taken over at 15% less than book value

The assets (excluding cash and goodwill) are taken over at 15% less than book value, meaning a loss of Rs. 135,000 is recognized.

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Realization A/c                 |      | Dr.          | 135,000      |
|            | To Land and Building A/c        |      |              | 75,000       |
|            | To Plant and Machinery A/c      |      |              | 52,500       |
|            | To Stock A/c                    |      |              | 6,000        |
|            | To Debtors A/c                   |      |              | 9,000        |
|            | (Being loss on revaluation of assets) | | | |

Journal Entry 3: Goodwill taken over by DD Company Ltd.

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Realization A/c                 |      | Dr.          | 60,000       |
|            | To Goodwill A/c                 |      |              | 60,000       |
|            | (Being goodwill taken over by DD Company Ltd.) | | | |

Journal Entry 4: Payment for goodwill by DD Company Ltd.

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Goodwill A/c                    |      | Dr.          | 70,000       |
|            | To Realization A/c              |      |              | 70,000       |
|            | (Being goodwill paid by DD Company Ltd.) | | | |

Journal Entry 5: Takeover of debentures by DD Company Ltd.

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | 12% Debenture A/c               |      | Dr.          | 200,000      |
|            | To Realization A/c              |      |              | 200,000      |
|            | (Being debentures taken over by DD Company Ltd.) | | | |

Journal Entry 6: Payment of liquidation cost

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Realization A/c                 |      | Dr.          | 15,000       |
|            | To Cash A/c                     |      |              | 15,000       |
|            | (Being liquidation cost paid) | | | |

Journal Entry 7: Final settlement with DD Company Ltd.

The purchase consideration is discharged by:

• Allotment of 3,000 shares of Rs. 100 each at a premium of Rs. 10 per share (total = Rs. 330,000)
• Balance in cash = Rs. 1,050,000 - Rs. 330,000 = Rs. 720,000

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Cash A/c                        |      | Dr.          | 720,000      |
|            | Share Capital A/c (3,000 shares @ Rs. 100) |      |              | 300,000      |
|            | Share Premium A/c               |      |              | 30,000       |
|            | To Realization A/c              |      |              | 1,050,000    |
|            | (Being purchase consideration settled) | | | |

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c. Realization Account

| Particulars                     | Amount (Rs.) | Amount (Rs.) |
|---------------------------------|--------------|--------------|
| **To Land and Building A/c**     |              | 500,000      |
| **To Plant and Machinery A/c**  |              | 300,000      |
| **To Stock A/c**                |              | 40,000       |
| **To Debtors A/c**              |              | 60,000       |
| **To Goodwill A/c**              |              | 60,000       |
| **To Equity Shares A/c**        |              | 600,000      |
| **To General Reserve A/c**      |              | 100,000      |
| **To Profit and Loss A/c**       |              | 70,000       |
| **To 12% Debenture A/c**         |              | 200,000      |
| **To Creditors A/c**             |              | 80,000       |
| **Total**                        | **1,050,000**| **1,050,000**|
| **By Land and Building A/c**     | 75,000       |              |
| **By Plant and Machinery A/c**  | 52,500       |              |
| **By Stock A/c**                | 6,000        |              |
| **By Debtors A/c**              | 9,000        |              |
| **By Goodwill A/c**              | 60,000       |              |
| **By Cash A/c (Goodwill)**       | 70,000       |              |
| **By 12% Debenture A/c**         | 200,000      |              |
| **By Cash A/c (Liquidation)**    | 15,000       |              |
| **By Share Capital A/c**        | 300,000      |              |
| **By Share Premium A/c**        | 30,000       |              |
| **By Cash A/c (Balance)**       | 720,000      |              |
| **Total**                        | **1,050,000**| **1,050,000**|

Balance in Realization Account = Nil (Fully settled)

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d. Journal Entries in the Books of DD Company Ltd.

Journal Entry 1: Purchase of assets (excluding cash and goodwill) at 15% less than book value

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Land and Building A/c           |      | Dr.          | 425,000      |
|            | Plant and Machinery A/c         |      | Dr.          | 255,000      |
|            | Stock A/c                       |      | Dr.          | 34,000       |
|            | Debtors A/c                     |      | Dr.          | 51,000       |
|            | Goodwill A/c                    |      | Dr.          | 70,000       |
|            | Cash A/c                        |      | Dr.          | 90,000       |
|            | To GG Company Ltd. A/c           |      |              | 925,000      |
|            | (Being assets purchased) | | | |

Journal Entry 2: Takeover of debentures

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | GG Company Ltd. A/c              |      | Dr.          | 200,000      |
|            | To 12% Debenture A/c             |      |              | 200,000      |
|            | (Being debentures taken over) | | | |

Journal Entry 3: Allotment of shares to GG Company Ltd.

DD Company Ltd. issues 3,000 shares of Rs. 100 each at a premium of Rs. 10 per share (total = Rs. 330,000).

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | Share Capital A/c (3,000 shares @ Rs. 100) |      | Dr.          | 300,000      |
|            | Share Premium A/c               |      | Dr.          | 30,000       |
|            | To Bank A/c                     |      |              | 330,000      |
|            | (Being shares allotted to GG Company Ltd.) | | | |

Journal Entry 4: Payment of balance in cash

The remaining amount after share allotment is Rs. 720,000.

| Date       | Particulars                     | L.F. | Amount (Rs.) | Amount (Rs.) |
|------------|---------------------------------|------|--------------|--------------|
| 2022 Dec   | GG Company Ltd. A/c              |      | Dr.          | 720,000      |
|            | To Bank A/c                     |      |              | 720,000      |
|            | (Being balance paid in cash) | | | |