Financial Accounting · Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

Purchase Consideration: Net Assets and Payments Methods

Updated 10 October 2026 · Fact-checked

Purchase consideration is the amount a company agrees to pay a partnership firm for the business it takes over. You find it by the net assets method (agreed value of assets taken minus liabilities taken) or by the payments method (add up what the company actually pays in shares, debentures and cash).

Understand Purchase Consideration and Its Methods of Calculation

When a firm is sold to a company, the company pays the firm for the business. This price is the purchase consideration. The firm's partners receive it, usually in a mix of shares, debentures and cash.

The price is not the book value of the firm's balance sheet. It is what the two sides agree. The company may take only some assets, may take them at revised values, and may take only some liabilities. So you first decide what is being taken over and at what value.

There are two ways to find the figure. In the net assets method, you value what the company takes and subtract the liabilities it assumes. In the payments method (also called the net payment method), you add the amounts the company pays: shares at issue price, debentures at their value, and cash. If the agreement is clear, both methods give the same number. In an exam, one method is used to compute it and the other is a useful check.

The consideration is then settled in parts. Shares and debentures may be issued at par, at a premium or at a discount. Always value shares at the issue price, not the face value, when you use the payments method. Cash is added as it is.

Two points often change the answer. Assets the company does not take (often cash, bank or personal assets of partners) stay with the firm and are left out. Liabilities the company does not take over are left out too, and the firm settles them.

Key rules to remember

Net assets method: Purchase consideration = Agreed value of assets taken over − Liabilities taken over; Use the agreed (revalued) values, not book values, if the question gives them. Include goodwill if the company agrees to pay for it.
Payments method: Purchase consideration = Shares (number × issue price) + Debentures + Cash and other payments; Shares are counted at issue price including premium, and net of discount if issued at a discount.
Shares issued: Number of shares = Amount payable in shares ÷ Issue price per share; Divide by issue price, not face value, when the amount is fixed in rupees.
Cross-check: Net assets method figure = Payments method figure; A mismatch means an asset, liability or payment has been missed.

How to solve Purchase Consideration and Its Methods of Calculation questions

Follow this order for any purchase consideration question. Read the agreement line by line, because every phrase affects the figure.

1List which assets the company takes over and which it leaves with the firm (cash, bank and personal items are often excluded).
2Write the agreed value of each asset taken. Use revalued figures, and add goodwill if the company pays for it.
3List the liabilities the company takes over. Leave out those the firm will pay itself.
4Compute net assets: total agreed asset values minus liabilities taken. This is the purchase consideration under the net assets method.
5If payment terms are given, compute the payments: shares at issue price, debentures, cash. Add them to confirm the same total.
6If only part of the payment is stated, find the missing item as the balancing figure (for example, shares = consideration − debentures − cash).
7Compute the number of shares as amount payable in shares ÷ issue price.
8Present the working neatly with a heading for each method so step marks are secured.

Quickest way: Asset list, liability list, one subtraction

When to use it: Use when the question gives a balance sheet with a few adjustments and asks only for the consideration.

Write two columns: assets taken and liabilities taken.
Strike out every excluded item straight away.
Adjust each remaining item to the agreed value shown in the question.
Subtract the liabilities total from the assets total.
If payment terms are given, verify by adding shares at issue price, debentures and cash.

Common mistakes in Purchase Consideration and Its Methods of Calculation

Using book values when the agreement gives revalued values.
Students copy figures from the balance sheet and skip the adjustment notes.
Fix: Read the notes first and mark each asset with its agreed value before adding.
Including cash or bank that the company did not take over.
Students assume all assets in the balance sheet pass to the company.
Fix: Check the wording for the assets taken. If cash is not mentioned as taken, leave it out.
Deducting liabilities the firm will settle itself.
All liabilities in the balance sheet are subtracted by habit.
Fix: Deduct only the liabilities the company assumes under the agreement.
Valuing shares at face value in the payments method.
The premium is ignored when shares are issued above par.
Fix: Multiply the number of shares by the issue price, including any premium, or net of any discount.
Forgetting goodwill or treating it as part of net assets automatically.
Goodwill may appear in the balance sheet or be agreed separately, and students mix the two.
Fix: Include goodwill only at the value the agreement states the company pays for it.

Worked examples

Example 1

Ravi and Suman, sharing profits equally, sell their firm to Kaveri Ltd. Kaveri Ltd takes over: land and building ₹6,00,000 (agreed at ₹7,00,000), machinery ₹3,00,000 (agreed at ₹2,50,000), stock ₹1,50,000, debtors ₹2,00,000 (agreed at ₹1,80,000) and creditors ₹1,20,000. Cash and bank are not taken over. Compute the purchase consideration by the net assets method.

Show the solution

Assets taken at agreed values: land and building ₹7,00,000 + machinery ₹2,50,000 + stock ₹1,50,000 + debtors ₹1,80,000.
Total assets = ₹7,00,000 + ₹2,50,000 = ₹9,50,000; + ₹1,50,000 = ₹11,00,000; + ₹1,80,000 = ₹12,80,000.
Liabilities taken over: creditors ₹1,20,000.
Net assets = ₹12,80,000 − ₹1,20,000 = ₹11,60,000.

Answer: Purchase consideration = ₹11,60,000.

Example 2

Using the figures of the previous question, Kaveri Ltd pays the purchase consideration as follows: ₹2,00,000 in cash, ₹2,60,000 in 10% debentures, and the balance in equity shares of ₹10 each issued at ₹14 per share. Find the number of shares issued and verify by the payments method.

Show the solution

Purchase consideration = ₹11,60,000.
Cash and debentures = ₹2,00,000 + ₹2,60,000 = ₹4,60,000.
Balance payable in shares = ₹11,60,000 − ₹4,60,000 = ₹7,00,000.
Number of shares = ₹7,00,000 ÷ ₹14 = 50,000 shares.
Check by the payments method: shares 50,000 × ₹14 = ₹7,00,000; debentures ₹2,60,000; cash ₹2,00,000.
Total = ₹7,00,000 + ₹2,60,000 + ₹2,00,000 = ₹11,60,000, which matches the net assets figure.

Answer: Kaveri Ltd issues 50,000 equity shares of ₹10 each at ₹14 (face value ₹5,00,000, premium ₹2,00,000). The payments total ₹11,60,000, matching the net assets figure.

Exam tips

Underline every phrase such as "not taken over" or "agreed at" before you start. Each one changes the figure.
Show both the asset list and the liability list, even if the answer is short. Step marks come from the working.
For MCQs, test the trap options: book value instead of agreed value, or liabilities not deducted.
When a share count is asked, divide by the issue price and check that the result is a whole number.
Always write the method name as a heading so the examiner can see you chose the correct basis.

Practice questions from Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

Purchase Consideration and Its Methods of Calculation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Purchase Consideration and Its Methods of Calculation: frequently asked questions

What is the difference between the net assets method and the payments method?

The net assets method values what the company takes over and subtracts the liabilities it assumes. The payments method adds up what the company pays in shares, debentures and cash. Both should give the same purchase consideration.

Are shares valued at face value or issue price for purchase consideration?

Use the issue price. If shares of ₹10 are issued at ₹12, each share counts as ₹12 in the payments method. The premium is part of the consideration.

Is cash always included in the assets taken over?

No. Include cash or bank only if the agreement says the company takes it. Many questions leave it with the firm.

Does goodwill form part of purchase consideration?

Yes, if the company agrees to pay for it. The consideration then includes the agreed goodwill value, which increases the net assets taken over.