Question 4 of 85intermediate🔧 ApplyNumerical4 marks

Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry assets of Rs. 3,60,000, sundry creditors Rs.1,00,000 for a consideration of Rs. 3,07,200. It issued 14% debentures of Rs. 100 each fully paid at a discount of 4% in satisfaction of purchase consideration. Record necessary journal entries.

Correct Answer

Books of Nikhil and Ashwin Limited

Journal Entries:

DateParticularsL.F.Debit Amount (Rs.)Credit Amount (Rs.)
Sundry Assets A/c Dr.3,60,000
Goodwill A/c Dr.47,200
To Sundry Creditors A/c1,00,000
To Agarwal Limited3,07,200
(Being business purchased from Agarwal Limited)
Agarwal Limited Dr.3,07,200
Discount on Issue of Debentures A/c Dr.12,800
To 14% Debentures A/c3,20,000
(Being 14% debentures issued at 4% discount in satisfaction of purchase consideration)
Exercise: Do it Yourself | Q: 4 | (Page 18)
For More Understanding

Explanation

This question tests the concept of purchase of business and issue of debentures at a discount. The key steps involve: (1) calculating Goodwill/Capital Reserve by comparing Net Assets with Purchase Consideration, and (2) determining the number of debentures issued at a discount. Since Purchase Consideration (Rs. 3,07,200) exceeds Net Assets (Rs. 2,60,000), the difference of Rs. 47,200 is treated as Goodwill. The debentures are issued at Rs. 96 (Rs. 100 - 4% discount), requiring 3,200 debentures to be issued.

Solution Steps

  1. Step 1: Calculate Net Assets - Sundry Assets (Rs. 3,60,000) - Sundry Creditors (Rs. 1,00,000) = Rs. 2,60,000

  2. Step 2: Calculate Goodwill - Purchase Consideration (Rs. 3,07,200) - Net Assets (Rs. 2,60,000) = Rs. 47,200 (Since Purchase Consideration > Net Assets, difference is Goodwill)

  3. Step 3: Calculate Issue Price per Debenture - Face Value (Rs. 100) - Discount 4% (Rs. 4) = Rs. 96 per debenture

  4. Step 4: Calculate Number of Debentures - Purchase Consideration ÷ Issue Price = Rs. 3,07,200 ÷ Rs. 96 = 3,200 debentures

  5. Step 5: Calculate Total Discount on Issue - Number of Debentures × Discount per Debenture = 3,200 × Rs. 4 = Rs. 12,800

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