Purchase consideration under the net assets method
Value the purchase consideration from agreed asset and liability values, then show how it is discharged in shares and cash.
Marks
6 marks
Exam time
10 min
Difficulty
Moderate
The question
A Ltd takes over the business of B Ltd. The agreed values of assets taken over are: Land ₹5,00,000, Machinery ₹3,00,000, Stock ₹2,00,000 and Debtors ₹1,00,000. The liabilities taken over are Creditors ₹1,50,000 and Debentures ₹2,00,000. The purchase consideration is to be discharged by issuing 50,000 equity shares of ₹10 each at a premium of ₹3 per share, and the balance in cash. Compute the purchase consideration and show its discharge.
- Given
- Assets taken over at agreed values (four items)Liabilities taken over (two items)50,000 equity shares of ₹10 issued at ₹13Balance settled in cash
Formulas used
- Purchase consideration (net assets method) = Agreed value of assets taken over − Agreed value of liabilities taken over
- Value of shares issued = Number of shares × Issue price
- Cash payable = Purchase consideration − Value of shares issued
Step-by-step working
01Total the assets taken over
1.5Land ₹5,00,000 Machinery ₹3,00,000 Stock ₹2,00,000 Debtors ₹1,00,000 ───────── Total assets taken over ₹11,00,000Use agreed values throughout, never the book values in B Ltd's balance sheet. Under the net assets method, book values are irrelevant.
02Total the liabilities taken over
1.5Creditors ₹1,50,000 Debentures ₹2,00,000 ───────── Total liabilities taken over ₹3,50,000Only liabilities actually taken over are deducted. A liability the transferor retains and discharges itself does not enter this computation.
03Compute the purchase consideration
1Purchase consideration = ₹11,00,000 − ₹3,50,000 = ₹7,50,00004Show the discharge
2Equity shares: 50,000 × ₹13 ₹6,50,000 (₹10 capital + ₹3 premium) Cash (balancing figure) ₹1,00,000 ───────── Total discharge ₹7,50,000 ✓ Of which: Equity share capital ₹5,00,000 Securities premium ₹1,50,000Split the ₹6,50,000 between capital and premium explicitly. The examiner is checking that you know the premium is credited separately, and it carries its own mark.
Purchase consideration
₹7,50,000 — ₹6,50,000 in shares, ₹1,00,000 in cash
Where marks are lost
- Using book values instead of agreed values for the assets taken over.
- Valuing the shares at face value ₹10 rather than issue price ₹13, which understates the discharge by ₹1,50,000.
- Deducting liabilities that the transferor company retains rather than transfers.
- Including fictitious assets such as preliminary expenses or a debit balance of profit and loss in the assets taken over — these are never taken over.
In the exam
Read the question for which method is prescribed. Under the net payments method you total what the transferee actually pays and ignore the asset and liability schedule entirely; under net assets you do the opposite. Answering with the wrong method loses the whole question, not part of it.
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Talk to usWhat is the difference between the net assets and net payments methods?
Net assets values what the transferee receives — agreed assets less agreed liabilities. Net payments totals what the transferee gives — shares, debentures and cash issued to the transferor's shareholders. Use whichever the question's data supports, and never mix the two.
Is goodwill computed as part of the purchase consideration?
No. Goodwill or capital reserve emerges afterwards, when the purchase consideration is compared with the net assets recorded in the transferee's books under the purchase method. It is a consequence of the consideration, not a component of it.
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