Financial Statements after an Acquisition or a Merger (Cambridge (CIE) A Level Accounting): Revision Note
Exam code: 9706
Financial statements after an acquisition or a merger
How does an acquisition or a merger affect a statement of profit or loss?
The statement of profit or loss is prepared in the usual way
The new entity might have new finance costs, such as:
debenture interest if it is a limited company
partner's loan interest if it is a partnership
If the new entity is a partnership, then you have to prepare the appropriation account
How does an acquisition or a merger affect a statement of financial position?
The statement of financial position is prepared in the usual way
For a limited company after an acquisition:
Include the purchased goodwill as an intangible non-current asset
Include the assets and liabilities at the agreed values, not the book values
Increase the ordinary share capital and share premium by the amounts issued
Make sure you use the nominal value to increase the share capital
Include debentures if they were issued to the sole trader or partners
For a partnership after a merger:
Include the capital accounts for the partners
Examiner Tips and Tricks
It is possible for the purchased goodwill to be negative, it occurs when the acquiring business pays less than the fair value of the net assets for a business. However, it is very unlikely for negative goodwill to appear in an exam question. If it does, you still list it with the non-current assets, but you put brackets around the amount.
Worked Example
Alpha and Beta had been in partnership for several years, sharing profits and losses in the ratio of 3:2. On 1 January 2026, they agreed to sell their business to a newly formed company, Omega Limited.
The statement of financial position of the partnership immediately prior to the sale was as follows:
$ | $ | |
|---|---|---|
Non-current assets | ||
Property | 150 000 | |
Equipment | 40 000 | |
190 000 | ||
Current assets | ||
Inventory | 30 000 | |
Trade receivables | 25 000 | |
Cash and cash equivalents | 5 000 | 60 000 |
Total assets | 250 000 | |
Capital accounts | ||
Alpha | 140 000 | |
Beta | 90 000 | 230 000 |
Current liabilities | ||
Trade payables | 20 000 | |
Total capital and liabilities | 250 000 |
The following terms were agreed for the acquisition:
Omega Limited took over all the assets and liabilities of the partnership, with the exception of the cash and cash equivalents.
The assets taken over were revalued as follows:
Property: $180 000
Equipment: $35 000
Inventory: $28 000
An allowance for irrecoverable debts of $1 000 is to be created for the trade receivables. Trade payables were taken over at their book value.
The value of goodwill on acquisition was agreed at $43 000.
The purchase consideration was settled by Omega Limited as follows:
The issue of 150 000 ordinary shares of $1 each at a premium of $0.40 per share to the partners.
The issue of an 8% debenture (2030) for $50 000 to the partners.
The balance of the purchase consideration was paid to the partners in cash.
To help finance the new company and provide working capital, Omega Limited issued an additional 50 000 ordinary shares of $1 each at par value for cash to private investors on 1 January 2026.
(a) Calculate the total purchase consideration paid by Omega Limited for the partnership business.
(b) Prepare the opening statement of financial position of Omega Limited at 1 January 2026.
Answer:
(a)
Use the agreed values
Subtract the allowance for irrecoverable debts from the trade receivables
$ | |
|---|---|
Property | 180 000 |
Equipment | 35 000 |
Inventory | 28 000 |
Trade receivables | 24 000 |
Total assets | 267 000 |
Less: Trade payables | (20 000) |
Net assets | 247 000 |
Goodwill | 43 000 |
Total purchase consideration | 290 000 |
(b)
Calculate the ordinary share capital and share premium
150 000 × $1 = $150 000
150 000 × $0.40 = $60 000
Calculate the amount paid to the partners
$ | |
|---|---|
Total purchase consideration | 290 000 |
Less: Ordinary shares | 150 000 |
Less: Share premium | 60 000 |
Less: Debentures | 50 000 |
Amount paid in cash | 30 000 |
Subtract the cash paid from the amount received from the issue of additional shares
$50 000 - $30 000 = $20 000
Prepare the statement of financial position
Omega Limited
Statement of financial position at 1 January 2026
$ | $ | |
|---|---|---|
ASSETS | ||
Non-current assets | ||
Intangible assets: Goodwill | 43 000 | |
Property | 180 000 | |
Equipment | 35 000 | |
258 000 | ||
Current assets | ||
Inventory | 28 000 | |
Trade receivables | 24 000 | |
Cash and cash equivalents | 20 000 | 72 000 |
Total assets | 330 000 | |
EQUITY AND LIABILITIES | ||
Equity | ||
Ordinary share capital | 200 000 | |
Share premium | 60 000 | |
Total equity | 260 000 | |
Non-current liabilities | ||
8% Debentures (2030) | 50 000 | |
Current liabilities | ||
Trade payables | 20 000 | |
Total equity and liabilities | 330 000 |
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