CHAPTER 9

BUSINESS PURCHASE

By the end of the topic, learners should be able to;

 explain the business purchase
 record accounting entries to close books business taken over
 record accounting entries for purchase by cash, issue of shares and loan notes
 calculate goodwill
 prepare business purchase account
 prepare statement of financial position after the business purchase

Introduction
The purchase of a business should be distinguished from the purchase of assets of
another business. Where a company buys the assets of another business, the later will
cease to trade. Such an arrangement does not involve the payment for goodwill.
However, a business purchase involves a company buying another business by taking
over its assets and liabilities and continuing with the operations, that is, as a going
concern. This arrangement will normally involve a payment for goodwill.

Goodwill
Goodwill is computed as the excess of the purchase consideration over the net value
of the assets taken over. It is used as a measurement tool of the successfulness of the
business as buyers will be prepared to pay more to acquire the business than the value
of the assets. So the purchaser of a business should pay for this excess because they
will be taking over an already established business with reputation.

Factors contributing to goodwill creation

 quality of goods and services offered, reliability and fair pricing
 efficiency of its workforce and management
 reputation of the business which may arise as a result of good governance and
good business ethics
 favourable location of the business which may be regarded as strategic
 excellent profits over the past years
 good prospects in the future

Forms of goodwill
Goodwill is classified into purchased and non-purchased goodwill

Purchased goodwill
This comes as a result of one business purchasing another. Purchased goodwill is the
goodwill paid by the business buyer during the acquisition of the business. This form
of goodwill is shown in the statement of financial position of the business as an
intangible non-current asset according to IAS 38.

Non-purchased goodwill
This is internally generated within the business. It is the value of the business that is
attributable to the reputation and customer relationships of the business or skills of the
employees. Inherent goodwill is not shown in the statement of financial position of
the business because it does not have value that can be reliably measured.

Purchase consideration
This is the price tag for the purchase of a business by another. It is regarded as the
agreed amount paid when purchasing another business. The purchase consideration
might be in form of cash, issuing shares or debentures or combination of the three
methods.

Purchase of a sole trade business by a limited company

When a sole trade business is purchased by a limited company, assets taken over
should be revalued. Assets and liabilities taken over are used to calculate the net
assets and are included in the new statement of financial position of the limited
company that acquired the sole trade business.

Example 9.1
Simrac Ltd takes over the business of J.Makumbe on 1 January 2022. Makumbe’s
statement of financial position at 31 December 2021 is provided below;

Makumbe’s
Statement of financial position as at 31 December 2021
Assets $ $
Non-current assets
Fixtures and fittings 30 000
Office machinery 18 000
48 000
Current assets
Inventory 12 000
Trade receivables 16 000
Bank 10 000 38 000
Total assets 86 000
Equity and liabilities
Capital 80 000

Liabilities
Trade payables 6 000
86 000
Additional information
1) It was agreed that Makumbe’s assets should be valued as follows;
$
Fixtures and fittings 25 000
Office machinery 15 000
Inventory 10 000
Trade receivables 14 500
2) All the assets and liabilities of Makumbe are taken over except cash at bank. The
purchase consideration for the sale was $62 000 which was settled by payment to
Makumbe of $7 000 in cash and the issue to him of $50 000 ordinary shares in
Simrac Ltd.
3) Simrac’s statement of financial position was as follows;

Statement of financial position as at 31 December 2021

Assets $ $
Land and buildings 40 000
Fixtures and fittings 35 000
Office machinery 20 000
95 000
Current assets
Inventory 15 000
Trade receivables 20 000
Bank 14 500 49 500
Total assets 144 500
Equity and liabilities
Share capital and reserves
Share capital of $1 100 000
Retained earnings 40 000
140 000
Current liabilities
Trade payables 4 500
144 500

Required:
a) Journal entries to record the purchase of the business of Makumbe
b) Calculate goodwill
c) Business purchase account
d) The statement of financial position of Simrac Ltd immediately after the
acquisition of Makumbe’s business.

Solution
a) Journal entries
Debit ($) Credit ($)
 Fixtures and fittings 25 000
Office machinery 15 000
Inventory 10 000
Trade receivables 14 500
Business purchase account 64 500
Goodwill 3 500
Business purchase account 3 500
Business purchase account 6 000
Trade payable 6 000
Business purchase account 62 000
Cash 7 000
Ordinary share capital 50 000
Share premium 5 000

b) Calculation of goodwill

The determination of the net assets

Assets $ $
Fixtures and fittings 25 000
Office machinery 15 000
Inventory 10 000
Trade receivables 14 500
64 500
Less liabilities
trade payables (6 000)
Net assets 58 500

Goodwill = purchase considerations – net assets

= $(62 000 – 58 500)
= $3 500

c) Business purchase account

$ $
Purchase consideration 62 000 Fixtures and fittings 25 000
Trade payables 6 000 Office machinery 15 000
Inventory 10 000
Trade receivables 14 500
_______ Goodwill (bal figure) 3 500
68 000 68 000

d) Statement of financial position as at 1 January 2022

Assets $ $
Goodwill 3 500
 Land and buildings $(40 000 + 0) 40 000
Fixtures and fittings $(35 000 + 25 000) 60 000
Office machinery $(20 000 + 15 000) 35 000
138 500
Current assets
Inventory $(15 000 + 10 000) 25 000
Trade receivables $(20 000 +14 500) 34 500
Bank $(14 500 – 7 000) 7 500 67 000
Total assets 205 500
Equity and liabilities
Share capital and reserves
Share capital of $1 $(100 000 + 50 000) 150 000
Share premium 5 000
Retained earnings 40 000
195 000
Current liabilities
Trade payables $(4 500 + 6 000) 10 500
205 500

Determination of share premium on share issue

When shares are issued as part of the purchase consideration, the share premium is
not usually indicated and therefore should be determined because it should be
reflected in the new statement of financial position. Share premium is determined as
follows;

$ $
Purchase consideration xxx
Less: cash payment xxx
: Loan notes or debentures xxx
: shares issued at par value xxx (xxx)
Share premium on issue xxx

Using the above example;

Required:
Compute share premium on issue
Solution
Computation of share premium on issue of share
$ $
Purchase consideration 62 000
Cash 7 000
Ordinary shares at par value 50 000 (57 000)
Share premium 5 000

Purchase of partnership business by a limited company

When a partnership business is purchased by a limited company, a realisation account,
capital and bank account should be prepared to close the accounts of the partnership
business. The profit on realisation is shared between or among partners on profit
sharing ratio.

Realisation account
This refers to an account prepared with an aim to determine the realisation profit or
loss. Assets taken over are debited in the realisation account in their agreed values
whilst the purchase consideration and all liabilities taken over are credited in the
realisation account. Realisation profits are debited in realisation account and credited
to capital account. Loss on realisation reduces capital, and therefore is debited in
capital accounts and credited to realisation account.

Example 9.2
Benaiah and Bethuel are equal partners in a business and their statement of financial
position as at 31 December 2021 is as follows;

Assets $ $
Non-current assets
Land and buildings 70 000
Motor van 25 000
Office machinery 15 000
110 000
Current assets
Inventory 20 000
Trade receivable 16 000
Bank 6 000 42 000
Total assets 152 000
Equity and liabilities
Capitals
: Benaiah 60 000
: Bethuel 40 000
100 000
Non-current liability
Loan from Bethuel at 12% 15 000

Current liabilities
Trade payables 37 000
152 000

The partners accepted an offer from Kunaka Ltd to purchase the business for $140
000. It is agreed that the company Kunaka Ltd will take over all the assets and
liabilities of the partnership with exception of the bank account. However, for the
purpose of the business purchase, the partnership assets are to be valued as follows;
 $
Land and buildings 75 000
Motor van 23 000
Office machinery 10 000
Inventory 16 000
Trade receivables 14 500

Kunaka Ltd settled the purchase consideration as follows;

 A cash payment of $35 000
 Sufficient 6% loan notes issued to Bethuel such that he continues to receive the
same amount of interest annually as he has received from the partnership
 The balance to be settled by an issue of ordinary shares of $1 in Kunaka Ltd at
$1.25 per share. The partners will share the shares in proportion to their capital
balances at 31 December 2021

The statement of financial position of Kunaka Ltd as at 31 December 2021 was as

follows;

Assets $ $
Non-current assets
Land and buildings 80 000
Fixtures and fittings 30 000
Office machinery 20 000
130 000
Current assets
Inventory 18 000
Trade receivables 10 000
Bank 45 000 73 000
Total assets 203 000
EQUITY AND LIABILITIES
Ordinary shares of $1 180 000
Retained earnings 17 000
197 000
Current liabilities
Trade payables 6 000
203 000

Required:
a) Prepare realisation account
b) Show the entries in the partner’s capital accounts to close the partnership books
c) Prepare business purchase account
d) Prepare the statement of financial of Kunaka Ltd as it would appear immediately
after acquiring the partnership business
Solution
a) Realisation account
$ $
Land and buildings 70 000 Kunaka Ltd 140 000
Motor van 25 000 Trade payables 37 000
Office machinery 15 000
Inventory 20 000
Trade receivables 16 000
Capital:
: Benaiah 15 500
: Bethuel 15 500 _______
177 000 177 000

b) Capital accounts
Benaiah Bethuel Benaiah Bethuel
$ $ $ $
Ordinary shares 45 000 30 000 Balance b/d 60 000 40 000
6% loan notes 30 000 Realisation 15 500 15 500
Bank 30 500 10 500 Loan 15 000
______ ______ ______ ______
75 500 70 500 75 500 70 500

Kunaka Ltd
$ $
Realisation 140 000 Ordinary shares 75 000
6% loan notes 30 000
________ Cash 35 000
140 000 140 000

Ordinary share capital

$ $
Kunaka Ltd 75 000 Capitals: Benaiah 45 000
_______ : Bethuel 30 000
75 000 75 000

Bank account
$ $
Balance b/d 6 000 Capital : : Benaiah 30 500
Kunaka Ltd 35 000 : Bethuel 10 500
41 000 41 000

Loan notes
 $ $
Kunaka Ltd 30 000 Capital : Bethuel 30 000
30 000 30 000

Bethuel – loan account

$ $
Capital account 15 000 Balance b/d 15 000
15 000 15 000

Computation of the premium on share issue

$ $
Purchase consideration 140 000
Cash 35 000
Loan notes (6% x $15 000 = $1 800). So $1 800/ 30 000
0.06 60 000 ________
Shares at par value of $1.25 15 000
Share premium on issue

c) Business purchase account

$ $
Purchase consideration 140 000 Land and buildings 75 000
Trade payables 37 000 Motor van 23 000
Office machinery 10 000
Inventory 16 000
Trade receivables 14 500
_______ Goodwill 38 500
177 000 177 000

d) Statement of financial position as at 1 January 2022

Assets $ $
Non-current assets
Goodwill 38 500
Land and buildings $(80 000 + 75 000) 155 000
Fixtures and fittings 30 000
Motor van 23 000
Office machinery $(20 000 + 10 000) 30 000
276 500
Current assets
Inventory $(18 000 + 16 000) 34 000
Trade receivables $(10 000 + 14 500) 24 500
Bank $(45 000 – 35 000) 10 000 68 500
Total assets 345 000
EQUITY AND LIABILITIES
 Ordinary shares $(180 000 + 60 000) 240 000
Share premium 15 000
Retained earnings 17 000
272 000
Non-current liabilities
6% loans notes 30 000
302 000
Current liabilities
Trade payables $(6 000 + 37 000) 43 000
345 000

Purchase of limited company by another limited company

When a company purchases another company, all the assets and liabilities taken over
are combined with those of the existing company.

Example 9.3
The statements of financial position of Asante and Cain Limited as at 31 October
2021 were as follows;
ASANTE LTD CAIN LTD
Assets $ $ $ $
Non-current assets
Plant and equipment 40 000 35
Fixtures and fittings 20 000 000
Delivery vans 15 000 9
75 000 000
Current assets 10
Inventory 13 000 11 000 000
Trade receivables 8 000 5 500 54
Bank 22 000 43 000 8 500 000
Total assets 118 000

EQUITY AND LIABILITIES

Share capital and reserves 25 000
Ordinary shares of $1 100 000 79 000
Retained earnings 10 000
110 000
Current liabilities
Trade payables 8 000 70
118 000 000
7
000
 77
000

2
000
79
000

It was agreed on 1 November 2021 that Asante Ltd takes over assets of Cain Ltd, with
the exception of bank. The following were the values of assets taken over.
$
Plant and equipment 30 000
Fixtures and fittings 7 000
Delivery vans 8 500
Inventory 9 500
Trade receivables 4 000

Asante Ltd also agreed to take over Cain Ltd trade payables. The purchase
consideration was set at $65 000 which was settled as follows:
 Issue of 40 000 ordinary shares of $1 at a premium of $0.30 in Cain Ltd
 The balance to be paid in cash

Required:
a) Journal entries to record the purchase of Cain Ltd
b) Statement of financial position immediately after acquisition of Cain Ltd

Solution
a) Journal entries
Dr ($) Cr ($)
Plant and equipment 30 000
Fixtures and fittings 7 000
Delivery vans 8 500
Inventory 9 500
Trade receivables 4 000
Business purchase 59 000
Business purchase 2 000
Trade payables 2 000
Goodwill 8 000
Business purchase 8 000
Business purchase 65 000
Ordinary shares 40 000
Share premium 12 000
Cash 13 000
b) Statement of financial position as at 1 November 2021
Assets $ $
Non-current assets
Plant and equipment $(40 000 + 30 000)
Fixtures and fittings $(20 000 + 7 000) 70 000
Delivery vans $(15 000 + 8 500) 27 000
23 500
Current assets 128 500
Inventory $(13 000 + 9 500)
Trade receivables $(8 000 + 4 000) 22 500
Bank $(22 000 – 13 000) 12 000
Total assets 9 000 43 500
172 000
EQUITY AND LIABILITIES
Share capital and reserves
Ordinary shares of $1 (100 000 + 40 000)
Share premium 140 000
Retained earnings 12 000
10 000
Current liabilities 162 000
Trade payables $(8 000 + 2 000) 10 000
172 000

Summary
 Business purchase account is prepared to determine goodwill
 Purchased goodwill is recorded in the statement of financial position
 Inherent goodwill is known as non-purchased goodwill and is not recorded in
the financial statements of the business
 When the business is sold or taken over, a realisation account should be
prepared to determine the profit or loss on realisation

Revision exercises
Multiple choice questions
Choose the most suitable option from A, B, C or D
1. A business with net assets of $120 000 is purchased for $180 000. The purchase
consideration is settled by an issue of $1 ordinary shares at a premium of $2,60
per share. How many shares were issued?
A. 46 154 B. 50 000 C. 69 231 D. 180 000
2. What is the correct treatment of non-purchased goodwill in the financial
statements of a limited company?
A. Do not include it in the statement of financial position
B. Include it in the statement of financial position
 C. Included in the statement of financial position as an asset to be amortized
D. Write it off against reserves
3. Ess is to purchase the business of Tee. The purchase price is $100 000 in cash.
The net asset values of the two businesses at the date of purchase were Ess $250
000 and Tee $80 000.
What was the value of the net assets of the business of Ess immediately after the
purchase?
A. $150 000 B. $230 000 C. $250 000 D. $270
000
4. X Ltd purchases Y Ltd. The purchase consideration was one million ordinary
shares of $1.00 each. The shares had a market value of $1.50 each. Y Ltd had net
assets of $500 000 with a fair value of $700 000.
How much is the goodwill on acquisition?
A. $300 000 B. $500 000 C. $800 000 D. $1 000
000
5. A business was purchased by a company for $1.5 million. Below is an extract
from the balance sheet of the business purchased.
$
Non-current assets 400 000
Net current assets 120 000
Non-current liabilities 200 000

How much did the purchasing company pay for goodwill?

A. $520 000 B. $780 000 C. $980 000 D. $1 180
000
6. Which statement describes the treatment of purchased goodwill for a limited
company?
A. a tangible non-current asset that can be amortised
B. a tangible non-current asset that can be depreciated
C. an intangible non-current asset that can be amortised
D. an intangible non-current asset that can be depreciated
7. A business with net assets of $120 000 is purchased for $180 000. The purchase
consideration is settled by an issue of $1 ordinary shares at a premium of $2.60
per share.
How many shares were issued?
A. 46 154 B. 50 000 C. 69 231 D. 180 000
8. A limited company acquires a business whose net assets are valued at $ 230 000
for $ 250 000. The purchase consideration was settled by an issue of 80 000
ordinary shares of $1 each at a price of $2 each, $ 50 000 6 % debentures and the
balance in cash.

How much cash was paid?

A. $ 40 000 B. $90 000 C. $100 000 D. $120
000
9. A company purchases the business of a sole trader for $150 000.

The purchase consideration is satisfied by:

i. The issue of 80 000 ordinary shares of $1 in the company at $1.50 each
ii. The issue of 4 000 debentures stock at par in the company
iii. The balance in cash

What is the amount of cash to be paid?

A. $26 000 B. $30 000 C. $66 000 D. $70 000
10. The following information relates to Collen’s business.
$
Trade payables 76 000
Buildings 100 000
Motor vehicles 150 000
Inventory 200 000

The buyer of the business is prepared to pay $500 000.

Collen may receive goodwill worth_________.

A. $126 000 B. $174 000 C. $374 000 D. $450
000
11. A company purchases a partnership for $200 000. The purchase consideration is
satisfied as follows;
 The issue of 100 000 ordinary shares of $1 each at $1.50 cash
 The issue of 10 000 debenture stock at par and the balance in cash.

How much was the cash payment?

A. $40 000 B. $50 000 C. $90 000 D. $100
000
12. A sole trader sold his business to a limited company. His net assets had a book
value of $150 000 and a fair value of $200 000.
The consideration for the sale was satisfied by the issue of 90 000 shares of $1
each at an agreed value of $2.50 each. He also received a cash payment of $35
000. What amount did the company pay for goodwill?
A. $25 000 B. $50 000 C. $60 000 D. $110
000
13. Company X acquires the net assets of Company Y at 31 December 2009. At the
date of acquisition, the value of Company Y based on fair value of assets was
$387 000. Company X paid $467 000 for Company Y.

During the year, Company X employed an advertising agency to promote its new
brand of product. It paid the agency a fee of $45 000 and in addition paid
advertising costs of $160 000 relating to the promotion. At the end of the financial
year, Company X intends to capitalise the purchased goodwill.
 What is the total of goodwill to be recognised in the accounts at 31 December
2010?
A. $80 000 B. $125 000 C. $160 000 D. $285
000

Structured questions
1. Lee ltd purchased the business of Gamanya on 1 January 2024. Gamanya’s
statement of financial position as at 1 January 2024 was as follows:

$ $
Non-current assets
Land and buildings 40 000
Plant and machinery 30 000
Office equipment 16 000
Motor vehicles 8 000
94 000
Current assets
Inventory 7 500
Trade receivables 18 000
Bank 6 500 32 000
Total assets 126 000
Equity and liabilities
Capital 120 000

Liabilities
Trade payables 6 000
126 000

Additional information
1) Assets and liabilities were taken over at the following agreed values:
$
Land and buildings 55 000
Plant and machinery 38 000
Office equipment 20 000
Motor vehicles 10 000
Inventory 7 000
Trade receivables 16 500
Trade payables 6 000
2) Lee ltd did not take over Gamanya’s bank account. The agreed purchase
consideration was $185 000, made up cash $35 000 and 150 000 ordinary
shares of $1 each.
3) Lee ltd statement of financial position as at 1 January 2024 was as follows:
 $ $
Non-current assets
Land and buildings 75 000
Plant and machinery 25 000
Office equipment 45 000
Motor vehicles 55 000
200 000
Current assets
Inventory 28 000
Trade receivables 64 000
Bank 220 000 312 000
Total assets 512 000
Equity and liabilities
Ordinary shares of $1 each 380 000
Retained earnings 20 000
400 000
Liabilities
10% debentures 100 000
Trade payables 12 000
512 000

Required:
a) Calculate goodwill [3]
b) Prepare business purchase [5]
c) Prepare lee Ltd’s statement of financial position immediately after acquiring
Gamanya’s business [12]
2. Hlahla and Dlodlo are partners in a partnership sharing profits and losses at the
ratio 3:2 respectively. The statement of financial position at 31 December 2020
was as follows:

$ $
Non-current assets 62 000
Premises 39 000
Plant and machinery 31 000
Motor vehicles 38 000
Office equipment 170 000

Current assets
Inventory 36 000
Trade receivables 27 000
Cash and cash equivalent 10 000
73 000
Current liabilities
Trade payables (16 000) 57 000
227 000
Non-current liabilities
10% loan from Hlahla (20 000)
207 000

Capital: Hlahla 103 500

: Dlodlo 103 500
207 000

De-facto ltd purchased the partnership business on 31 December 2020. The

partners have accepted an offer from De-facto ltd the purchase consideration of
$300 000 for the business. De-facto limited took over all assets and liabilities with
the exception of cash and cash equivalents.

Assets and liabilities of the business were taken over at the following agreed
values:
$
Premises 80 000
Plant and machinery 65 000
Motor vehicles 40 000
Office equipment 42 000
Inventory 34 000
Trade receivables 25 000
Trade payables 16 000

De-facto limited will pay the purchase consideration as follows; 200 000 ordinary
shares of $1 each, 8% debentures to Hlahla and the balance will be paid in cash.

De-facto Limited’s statement of financial position on 31 December 2020 was as

follows:

$ $
Premises 100 000
Plant and machinery 90 000
Office equipment 45 000
Motor vehicles 25 000
260 000
Current assets
Inventory 23 000
Trade receivables 27 000
Cash and cash equivalent 169 000
 219 000
Current liabilities
Trade payables (10 000) 209 000
469 000
Non-current liabilities
10% debentures (50 000)
419 000
Share capital and reserves
Ordinary shares 280 000
Share premium 43 000
Retained earnings 96 000
419 000

Required:
a) Realisation account [5]
b) Capital accounts for the partners to dissolve the partnership [6]
c) Business purchase account [5]
d) Statement of financial position of de-facto limited as it will appear
immediately after purchasing the partnership business [14]

3. Gee and Emm have been partners for some years sharing profits and losses
equally. The partnership was taken over by Smith Limited on 31 May 2015

The partnership statement of financial position as at 31 May 2015 was as follows:

Non-current assets $ $
Premises 30 000
Equipment 20 000
50 000
Current assets
Inventory 10 000
Trade receivables 4 000
Bank 2 000
16 000
Current liabilities
Trade payables (4 000) 12 000
62 000

Capital accounts: Gee 30 000

: Emm 12 000
45 000
Current accounts : Gee 10 000
: Emm 7 000
 17 000
62 000

All assets were taken over except bank at the following values:
$
Premises 35 000
Equipment 18 000
Inventory 8 000
Trade receivables 4 000

Gee agreed to pay the trade payables. The purchases consideration was settled as
follows:

50 000 ordinary shares of $1 each at premium of 20%

6% debentures (repayable 2030) $10 000
Cash $8 000

The statement of financial position for Smith Limited before acquiring the
partnership was as follows;

Non-current assets $ $
Premises 150 000
Equipment 50 000
Motor vehicles 25 000
225 000
Current assets
Inventory 25 000
Trade receivables 10 000
Bank 8 000
43 000
Current liabilities
Trade payables (8 000)
35 000
260 000
Financed by:
230 000 ordinary shares of $1 each 230 000
Profit or loss 30 000
260 000
Required:
a) The realisation account [5]
b) (i) The business purchase account [9]
(ii) Statement of financial position immediately after the take-over
[9]
 c) Explain why partners preferred part of their purchase price to be in shares?
[2]
ZIMSEC N2018/2 Qn 4
4. On 1 July 2014, the directors of Ngoda Limited offered to purchase the
partnership of Amanda, Dexta and Ncube.
The statement of financial position at 30 June 2014 for Ngoda Limited is shown
below:

Non-current assets $ $
Buildings 240 000
Equipment 87 000
Motor vehicles 144 000
471 000
Current assets
Inventory 27 600
Trade receivables 38 000
Cash and cash equivalent 56 000
121 600
Less current liabilities
Trade payables (22 000)
Net current assets 99 600
570 600
Share capital and reserves
Ordinary shares of $1 each fully paid 435 000
Retained earnings 135 600
570 600

Currently the dividend in Ngoda Limited is $0.0945 per share. The directors of
Ngoda are confident that the same level of dividend can be maintained if the
partnership business was purchased.

The statement of financial position at 30 June 2014 of the partnership business

was as follows:

Non-current assets $ $
Buildings 85 000
Equipment 40 000
125 000
Current assets
Inventory 12 000
Trade receivables 14 000
Cash and cash equivalent 6 000
32 000
Less current liabilities
Trade payables ( 7 000)
Net current assets 25 000
150 000
Capital accounts: Amanda 80 000
: Dexta 30 000
: Ncube 25 000
135 000
Current accounts: Amanda 10 000
: Dexta 3 000
: Ncube 2 000 15 000
150 000

The net profit made by the partnership in the year 30 June 2014 was $50 000 and
the same amount was earned by the business in the previous years. The
partnership agreement has not changed over the years.

Partners can currently earn 10% per annum on any cash investment they are able
to make.

Ngoda limited has offered to take over the assets and liabilities of the partnership
except for the bank account. For the purpose of takeover, the following
revaluations were made:

Buildings $90 000

Inventory $10 000

The purchase consideration is $189 000; it was settled as follows: $60 000 cash
and $100 000 ordinary shares of $1 each in Ngoda Ltd.

As part of the purchase agreement, the three partners will be offered jobs working
for Ngoda Limited at an annual salary of $10 000 each.

Required:
a) Prepare a realisation account and partners’ capital accounts, in columnar form,
to close the partnership books [12]
b) Calculate the partners’ expected total income, if the partners accept the offer
from Ngoda Limited [4]
c) Advise the partnership whether it should, on financial grounds, accept the
offer from Ngoda Limited [3]
d) State two non-financial factors that the partnership may take into account
before deciding whether or not to accept the offer from Ngoda Limited. [2]
ZIMSEC J2017/3 Qn 2
5. 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

Additional information
On 1 October 2013:
1. The land and buildings are revalued at $170 000.
2. Additional depreciation of $8 500 is provided on the plant and equipment.
3. Inventory valued at 15% of the total is written off.
4. Bad debts equal to 10% of the trade receivables are written off.

Required:

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 sharesto Nimra at a premium of $0.50 for the
balance of the purchase price.
 Required:
a. Calculate the amount the directors of Rezwan Limited paid for Nimra’s
business. [2]
b. 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:

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:
c. Prepare Rezwan’s statement of financial position at 1 October 2013
immediately after acquiring Nimra’s business. [14]
d. Explain why the directors of Rezwan Limited are prepared to pay more for the
assets acquired than their book value.[6] Camb Suppl J2014/3 Qn 1
6. Mashungu and Pashapa were in partnership, sharing profits and losses in theratio
2 :1. They decided to retire and sell their business to Rukudzo Ltd on 31
December 2017. Their statement of financial position on that date is shown below.

Mashungu and Pashapa Statement of Financial position as at 31 December 2017

Assets $ $
Property 150 000
Plant and machinery 120 000
Motor vehicles 36 000
Office equipment 15 000
Inventory 82 000
Trade receivables 94 000
Bank 40 000
537 000
Equity and liabilities
Capital accounts: Mashungu 200 000
: Pashapa 155 000 355 000
12% Loan from Mashungu 75 000
Trade payables 107 000
537 000

Rukudzo Ltd agreed to take over all the assets, except the bank account, based on
the following valuations:
$
Property 300 000
Plant and machinery 90 000
Motor vehicles 27 000
Office equipment 8 000
Inventory 60 000
Trade receivables 75 000

Rukudzo Ltd took over the trade payables at their book value.
The purchase consideration of $600 000 was settled as follows:
1. Mashungu received sufficient 10 % debentures in Rukudzo Ltd to ensure that
he continued to receive the same amount of interest as he had been entitled to
on his loan to the partnership.
2. Rukudzo Ltd. paid $120 000 to the partnership bank account.
3. The balance of the purchase price was settled in ordinary shares of $1each in
Rukudzo Ltd at a price of $1.30 per share.

The shares were distributed among the partners in the profit sharing ratio and the
final balances on their capital accounts were settled in cash.
Required:
a) Prepare the following accounts to close the books of the partnership:
(i) Realisation account [5]
(ii) Bank account [3]
(iii) Capital accounts in columnar form [8]
b) Calculate
(i) the amount paid for goodwill by Rukudzo Ltd. [3]
(ii) the number of ordinary shares issued to Pashapa. [2]
c) Suggest possible reasons why Rukudzo Ltd agreed to pay a substantial amount
for goodwill. [4] ZIMSEC SPECIMEN 2018/3 Qn 3