Financial Statements after an Acquisition or a Merger (Cambridge International A-Level Accounting)

Spec point — how to prepare statements of profit or loss and statements of financial position for the newly formed business entity following the acquisition or merger, for example the limited company acquiring the partnership

Financial statements after an acquisition or a merger

How does an acquisition or a merger affect a statement of profit or loss?

• The statement of profit or loss is prepared in the usual way

• The new entity might have new finance costs, such as:

  • debenture interest if it is a limited company
  • partner's loan interest if it is a partnership

• If the new entity is a partnership, then you have to prepare the appropriation account

How does an acquisition or a merger affect a statement of financial position?

• The statement of financial position is prepared in the usual way

• For a limited company after an acquisition:

  • Include the purchased goodwill as an intangible non-current asset

  • Include the assets and liabilities at the agreed values, not the book values

  • Increase the ordinary share capital and share premium by the amounts issued

    • Make sure you use the nominal value to increase the share capital

  • Include debentures if they were issued to the sole trader or partners

• For a partnership after a merger:

  • Include the capital accounts for the partners

Exam Hint It is possible for the purchased goodwill to be negative, it occurs when the acquiring business pays less than the fair value of the net assets for a business. However, it is very unlikely for negative goodwill to appear in an exam question. If it does, you still list it with the non-current assets, but you put brackets around the amount.

Worked Example Alpha and Beta had been in partnership for several years, sharing profits and losses in the ratio of 3:2. On 1 January 2026, they agreed to sell their business to a newly formed company, Omega Limited.

The statement of financial position of the partnership immediately prior to the sale was as follows:

	$**	**$
Non-current assets
Property		150 000
Equipment		40 000
		190 000
Current assets
Inventory	30 000
Trade receivables	25 000
Cash and cash equivalents	5 000	60 000
Total assets		250 000
Capital accounts
Alpha	140 000
Beta	90 000	230 000
Current liabilities
Trade payables		20 000
Total capital and liabilities		250 000

The following terms were agreed for the acquisition:

1. Omega Limited took over all the assets and liabilities of the partnership, with the exception of the cash and cash equivalents.

2. The assets taken over were revalued as follows:

• Property: $180 000
• Equipment: $35 000
• Inventory: $28 000

1. An allowance for irrecoverable debts of $1 000 is to be created for the trade receivables. Trade payables were taken over at their book value.

2. The value of goodwill on acquisition was agreed at $43 000.

3. The purchase consideration was settled by Omega Limited as follows:

• The issue of 150 000 ordinary shares of $1 each at a premium of $0.40 per share to the partners.
• The issue of an 8% debenture (2030) for $50 000 to the partners.
• The balance of the purchase consideration was paid to the partners in cash.

To help finance the new company and provide working capital, Omega Limited issued an additional 50 000 ordinary shares of $1 each at par value for cash to private investors on 1 January 2026.

(a) Calculate the total purchase consideration paid by Omega Limited for the partnership business.

(b) Prepare the opening statement of financial position of Omega Limited at 1 January 2026.

Answer:

(a)

Use the agreed values

• Subtract the allowance for irrecoverable debts from the trade receivables

	$
Property	180 000
Equipment	35 000
Inventory	28 000
Trade receivables	24 000
Total assets	267 000
Less: Trade payables	(20 000)
Net assets	247 000
Goodwill	43 000
Total purchase consideration	290 000

(b)

Calculate the ordinary share capital and share premium

150 000 × $1 = $150 000

150 000 × $0.40 = $60 000

Calculate the amount paid to the partners

	$
Total purchase consideration	290 000
Less: Ordinary shares	150 000
Less: Share premium	60 000
Less: Debentures	50 000
Amount paid in cash	30 000

Subtract the cash paid from the amount received from the issue of additional shares

$50 000 - $30 000 = $20 000

Prepare the statement of financial position

Omega Limited

Statement of financial position at 1 January 2026

	$**	**$
ASSETS
Non-current assets
Intangible assets: Goodwill		43 000
Property		180 000
Equipment		35 000
		258 000
Current assets
Inventory	28 000
Trade receivables	24 000
Cash and cash equivalents	20 000	72 000
Total assets		330 000
EQUITY AND LIABILITIES
Equity
Ordinary share capital		200 000
Share premium		60 000
Total equity		260 000
Non-current liabilities
8% Debentures (2030)		50 000
Current liabilities
Trade payables		20 000
Total equity and liabilities		330 000