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

In the books of a firm sold to a company, the purchase consideration of Rs 5,00,000 is received as 40,000 equity shares of Rs 10 each issued at Rs 12.50 per share. Which entry records the receipt of consideration?

Debit Equity Shares in the company Rs 5,00,000 and credit Realisation Account Rs 5,00,000. Shares are recorded at issue price of Rs 12.50 (40,000 shares), which equals the purchase consideration. Face value would ignore the premium, and the debit and credit cannot be reversed.

  1. ADebit Equity Shares in Cosmos Ltd Rs 5,00,000; Credit Realisation Account Rs 5,00,000Correct
  2. BDebit Equity Shares in Cosmos Ltd Rs 4,00,000; Credit Realisation Account Rs 4,00,000
  3. CDebit Realisation Account Rs 5,00,000; Credit Equity Shares in Cosmos Ltd Rs 5,00,000
  4. DDebit Partners' Capital Accounts Rs 5,00,000; Credit Equity Shares in Cosmos Ltd Rs 5,00,000

Explanation

Shares are valued at issue price: 40,000 x 12.50 = Rs 5,00,000, equal to consideration. The firm debits the investment (shares in the company) and credits Realisation Account. Using face value of Rs 4,00,000 ignores the premium, and reversing the entry is wrong.

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