Exact ltd purchased a running business from M/s sikka and sons for a s...
Journal Entries for the Purchase of Business
1. Purchase of Business Assets:
Debit: Plant and Machinery (15 lakh)
Debit: Land and Building (8 lakh)
Debit: Sundry Debtors (1 lakh)
Debit: Stock in Trade (6 lakh)
Debit: Equipment (6 lakh)
Credit: Cash/Bank (total purchase consideration - 24 lakh)
2. Assumption of Liabilities:
Debit: Sundry Creditors (4 lakh)
Credit: Cash/Bank (4 lakh)
3. Issue of Equity Shares:
Debit: Equity Share Capital (24 lakh)
Credit: Share Application (24 lakh)
4. Payment through Cheque:
Debit: Cash/Bank (balance payable through cheque)
Credit: Cash/Bank (balance payable through cheque)
Explanation:
The purchase of a running business involves the acquisition of its assets and liabilities. In this case, Exact Ltd has purchased a business from M/s Sikka and Sons for a total consideration of Rs 30 lakh. Let's break down the journal entries for each aspect of the transaction.
1. Purchase of Business Assets:
The assets acquired by Exact Ltd include plant and machinery (Rs 15 lakh), land and building (Rs 8 lakh), sundry debtors (Rs 1 lakh), stock in trade (Rs 6 lakh), and equipment (Rs 6 lakh). These assets are recorded on the debit side of the journal entries. The total purchase consideration of Rs 30 lakh is reduced by the value of equity shares issued (Rs 24 lakh) and the remaining amount is paid in cash or through a bank.
2. Assumption of Liabilities:
Exact Ltd also assumes the liabilities of the business, which in this case include sundry creditors (Rs 4 lakh). The liability of Rs 4 lakh is recorded on the debit side, and an equal amount of cash or bank is credited to settle this liability.
3. Issue of Equity Shares:
To pay a part of the purchase consideration, Exact Ltd issues fully paid equity shares of Rs 10 each worth Rs 24 lakh. The equity share capital account is debited for this amount, and an equal amount is credited to the share application account.
4. Payment through Cheque:
The balance amount payable to M/s Sikka and Sons, after considering the equity shares issued, is paid through a cheque. The cash or bank account is debited for this payment, and an equal amount is credited to the cash or bank account.
By recording these journal entries, Exact Ltd properly accounts for the acquisition of the running business from M/s Sikka and Sons, reflecting the purchase of assets, assumption of liabilities, issuance of equity shares, and payment made through cash or bank.
Exact ltd purchased a running business from M/s sikka and sons for a s...
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