Business purchase account

Accounting treatment under amalgamation / absorption or external reconstruction:

1. at the time of making binding agreement (Due entry)

2. on transfer of possession of assets and liabilites. (incorporation of assets and liabilites)

3 on settlement of consideration. (Discharge of consideration by purchasing co)

Generally above three situation will not be on one single day.

Profit = Net assets - purchase consideration

         = 100    - 80  = 20

amount paid lesser than the asset values.

Net assets - Purchase Consideration is goodwill right?

No actually it's NET ASSETS - CAPITAL = PROFIT

NOW ITS LIKE THIS IF WE GO BY BOOK , THEN WE HAVE TO TRANSFER THE ASSETS AND LIABILITIES WHICH AREA NOT TAKEN OVER IN CAPITAL RATIO AND IF WE DO THAT THEN. CAPITAL OF OLD FIRM WOULD BE 61000 AND IF WE LESS PC 80,000 AND PROFIT THEY GAINED WOULD BE 19000 , SINCE GOODWILL IS NOT EARNING LESS IT I.E., 6000 AND YOU WOULD GET PROFIT 130000

Try closing firm capital a/c so you would understand