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

Lotus Ltd. acquires the business of Gupta & Sons. Agreed values: assets ₹15,00,000, taken-over liabilities ₹3,00,000. Lotus Ltd. agrees to pay the liquidation expenses of ₹40,000 on behalf of the firm and to issue shares of ₹10 each at ₹15 (face value ₹10) as consideration. Which statement is correct?

Purchase consideration is ₹12,00,000, being agreed assets of ₹15,00,000 less liabilities of ₹3,00,000 taken over. Liquidation expenses paid by the company on the firm's behalf are not part of consideration and are accounted for separately.

  1. AConsideration is ₹11,60,000 because the expenses are deducted
  2. BConsideration is ₹12,40,000 because the expenses are added
  3. CConsideration is ₹12,00,000; the expenses paid by the company are not part of itCorrect
  4. DConsideration is ₹15,00,000 as liabilities are ignored

Explanation

Consideration = 15,00,000 − 3,00,000 = ₹12,00,000. Expenses of the vendor's liquidation borne by the purchasing company are not part of the consideration paid to the vendor; the company debits them to goodwill/capital reserve or as an expense. Adding or deducting them mis-states the figure.

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