BUSINESS ACQUISITIONS

1. BUSINESS ACQUISITIONS

2. Profit prior to incorporation • Profit prior to incorporation is that profit which a company gets between the period of date of buying and date of incorporation. • Profit and loss of prior period and post period is divided separately because the prior period profit and loss is always credit and charged from capital reserve A/c. Post period profit and loss are credited and charged from Profit & Loss A/c.

3. Profit prior to incorporation • Suppose, A company buys XYZ company on 1st Jan. 2010 and it has to incorporate at 1st April 2010. Then profit between 1st Jan. 2010 and 1st April 2010 will be profit prior to incorporation. This profit can not be used for paying dividend to shareholders. Because current shareholder’s capital is not involved for this profit, so this will be capitalized profit and it will be transferred to capital reserve account. If company gets loss prior to incorporation, it will be transferred to goodwill account.

4. Calculation • Methods of computing profit and loss prior incorporation:- 1st :-close of old books and open new books with the assets and liabilities as the existed at the date of incorporation. In this way, automatically the result to that will be adjusted. 2nd :- split up the profit for the year of the transfer of the business to the company between “pre-Incorporation” and “Post-Incorporation” periods. This is done either on the time basis or on the turnover basis or by a method which combines the two. • Basis of allocation of items between ‘pre’ and ‘post’ incorporation period:- Time basis:- some types of expenses and income which are divided between pre and post period item on the basis of time ratio. For example-Depreciation, salary & wages, Rent and trade expenses etc. Turnover basis:- some types of expenses and income which are divided between pre and post period item on the basis of turnover. For example-sales promotion expenses, bad debts, sales commission and selling expenses.

5. Important points • Some expenses which are treated as always pre-Incorporation period like promoters remuneration, survey report and expenses regarding articles of association and memorandum of association. • Some expenses which are treated as always post-Incorporation period like directors fees and debenture interest.

6. 3. A company taking over a running business may also agree to collect its debts as an agent for the vendor and may further undertake to pay the creditor on behalf of the vendors. In such a case, the debtors and creditors of the vendors will be included in the accounts for the company by debit or credit to separate total accounts in the General Ledger to distinguish them from the debtors and creditors of the business and contra entries will be made in corresponding Suspense Accounts. Also details of debtors and creditors balance will be kept in separate ledger.

7. 4. The vendor is treated as a creditor for the cash received by the purchasing company in respect of the debts due to the vendor, just as if he has himself collected cash from his debtors and remitted the proceeds to the purchasing company. 5. The vendor is considered a debtor in respect of cash paid to his creditors by the purchasing company. The balance of the cash collected, less paid, will represent the amount due to or by the vendor, arising from debtors and creditors balances which have been taken over, subject to any collection expenses. 6.The balance in the suspense accounts will be always equal to the amount of debtors and creditors taken over remaining unadjusted at any time.

8. EXAMPLE • Subhash ltd. was incorporated on 1st march, 2010 and received its certificate of commencement of business on 1st April, 2010. The company bought the business of M/S small and co. with effect from 1st Nov. 2009. From the following figures relating to the year ending 31st Oct. 2010, find out the profits available for dividends. a) Sales for the year were Rs. 6,00,000 out of which sales up to 1st march , were Rs. 2,50,000b) Gross profit for the year was Rs. 1,80,000c) The expenses debited to the profit and loss account were :rent 9000salaries 15000director‘s fees 4800interest on debentures 5000discount on sales 3600depreciation 24000general expenses 48000advertising 18000stationery expenses 3600commission on sales 6000bad debts 500 relate to debts created prior to incorporation 1500interest to vendor on purchase consideration up to 1st may 2010

9. SOLUTION Working Notes :a) Sales ratio is 250000 : 350000 or 5:7b) time ratio except for interest to vendor 4 months : 8 months or 1:2c) time ratio for interest to vendor 4 months : 2 months or 2:1 Director fees and interest on debentures relate to post - incorporation period.

10. Conversion OR SALE of partnership firm into limited company • The objective of limiting the personal liabilities of the partners, an existing partnership firm may sell its entire business to an existing limited company, or may convert itself into a limited company. The former is the case of absorption of a partnership firm by the joint stock company whereas, the latter is the case of flotation of a new joint stock company so as to take over the business of the partnership firm. • In both of these cases, the existing partnership firm is dissolved and all the books of accounts are closed. Thus when a partnership firm is sold or converted into a company, the same accounting procedure is followed as for simple dissolution of a firm.

11. PURCHASE CONSIDERATION • The purchase consideration (price) in between the vendor (dissolving) firm and the purchasing company is fixed as mutually agreed upon. It may or may not be specified in a lump sum figure. When it is not specified in a lump sum figure, the difference of agreed values of acquired assets over agreed amount of liabilities are undertaken. • The purchase price is discharged by the purchasing company either in the form of cash or shares (equity or preference) or debentures or a combination of two or more of these. The shares or debentures may be issued by the purchasing company, at par, at a premium or at a discount. • In the absence of any agreement, the shares received from the purchasing company is distributed among partners in the ratio of their final claim i.e. in the ratio of their capital standing after all the adjustments.

12. Conversion of partnership into limited company • In the books of vendor/converting firm, the following journal entries are passed :1) For closing the accounts of assetsRealisation account DebitAssets Account Credit ( At book value )2) For sale of assets and amount receivedCash /Bank Account DebitAssets Account CreditRealisation Account Credit3) For closing the account of liabilities Liabilities Account DebitRealisation Account Credit4) For Payment of liabilitiesRealisation Account Debit ( Loss of payment )Liabilities Account DebitCash / Bank account credit

13. 5 ) For Assets and liabilities are taken over by new companyNew Company Account Debit ( Purchase price = Agreed value of assets - agreed value of liabilities )Realisation account Credit6) For Payment of expenses of realisationa) If pay by partnerRealisation Account DebitCash / Bank Account Creditb) If pay by new companyNew company Account DebitCash /Bank account Credit7) Closing of Realisation accountIf profitRealisation account Debitpartner's capital Account Credit8 ) Receipt of purchase priceCash / Bank /Shares / Debentures Account DebitPurchasing company Account Credit9 ) On distribution of shares / debenture and cash from purchasing companyPartner's capital account Debit ( dividing in adjusted capital ratio )Cash/Bank/ Shares /Debenture Account

14. Entries in the books of purchasing company Assets Account...........................Dr. Goodwill Account........................Dr. To liabilities To share capital To share premium (Being assets and liabilities taken over) • Note: In case debit higher than credit, capital reserve is credited

15. Advantages of converting • All the assets and liabilities of the firm immediately before the conversion become the assets and liabilities of the company. • No Stamp Duty- All movable and immovable properties of the firm automatically vest in the Company. No instrument of transfer is required to be executed and hence no stamp duty is required to be paid. • No Capital Gain Tax- No Capital Gains tax shall be charged on transfer of property from Proprietorship firm to Company. • Continuation of Brand Value- The goodwill of the Proprietorship firm and its brand value is kept intact and continues to enjoy the previous success story with a better legal recognition. • Carry Forward and Set off Losses and Unabsorbed Depreciation- The accumulated loss and unabsorbed depreciation of Partnership firm is deemed to be loss/ depreciation of the successor company for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor company.

16. Mandatory Conditions • All partners of the partnership firm shall become shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the conversion. • The partners receive consideration only by way of allotment of shares in company and the partners share holding in the company in aggregate is 50% or more of its total voting power and continue to be as such for 5 years from the date of conversion.

17. Requirements • Registered Partnership firm with minimum 7 Partners • Minimum Share Capital shall be Rs. 100,000 for conversion into a Private Limited Company • Minimum Share Capital shall be Rs. 500,000 for conversion into a Public Limited Co. • If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered • Minimum 7 Shareholders • Minimum 2 Directors (for Private Limited Co.) and 3 Directors (for Public Limited Co.) • The directors and shareholders can be same person • DIN (Director Identification Number) for all the Directors • DSC (Digital Signature Certificate) for two of the Directors Process • Filing of requisite form for Conversion • Preparation of Foundation documents of the Company • Filing for name approval • Filing of Incorporation documents • Receiving certificate of incorporation

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