Summary — What This Chapter Covers
- A merger joins two or more businesses into a new entity; an acquisition is one business buying another.
- Assets and liabilities taken over are recorded at agreed (fair) values, not at the seller’s book values.
- Purchase consideration is what the buyer gives: cash, shares (often at a premium) and/or debentures.
- Goodwill = purchase consideration − net assets taken over at agreed values.
- The buyer records each asset, liability, goodwill and the consideration by journal; the seller closes its books through a realisation account.
- Prepare the statement of financial position and statement of profit or loss of the new or enlarged business, and weigh the advantages and disadvantages.
1. The Nature and Purpose of Mergers and Acquisitions
Syllabus 3.3.1 · A Level · Paper 3
Why businesses combine
Businesses combine to grow faster than they could on their own. Two sole traders may merge to form a partnership or a limited company; a sole trader may join an existing partnership; a limited company may buy the whole business of a sole trader or partnership. The buyer may take over the whole business (all assets and liabilities, and the goodwill) or only selected assets (for example premises and equipment). Buying selected assets creates no goodwill and the seller keeps the rest of its business.
| Advantages | Disadvantages |
|---|
| Economies of scale: bulk buying, shared premises and administration | Different ways of working; owners and staff may clash |
| A larger customer base and possibly less competition | The price paid may be too high; goodwill may not be earned back |
| New skills and expertise brought in by the other owners | Loss of control: each former owner now shares decisions |
| More capital, so easier to borrow and expand | Issuing shares dilutes existing shareholders’ control and earnings per share |
| Spreading risk across more products or locations | Redundancies and reorganisation costs; customers may leave |
Practice Question 1
Pine Ltd is considering buying the whole business of a partnership or buying only its premises. Advise the directors.
2. Merging Sole Traders and Partnerships
Syllabus 3.3.1 · A Level · Paper 3
Capital = agreed net assets + goodwill
When sole traders merge to form a partnership, each one’s capital in the new partnership equals the agreed value of the net assets brought in plus any goodwill agreed for his or her business. The new partnership opens its books with a journal entry for each owner. If goodwill is not to stay in the books, it is then written off against the new capitals in the new profit-sharing ratio.
Worked example: Ann and Ben form a partnership
On 1 January 2026 Ann and Ben merge their businesses. Goodwill is agreed at $20,000 for Ann’s business and $10,000 for Ben’s and is to be kept in the books. The assets and liabilities taken over at agreed values are shown in the journal.
| Journal of Ann and Ben (partnership), 1 January 2026 |
|---|
| Details | Debit $ | Credit $ |
|---|
| Goodwill | 20,000 | |
| Premises | 90,000 | |
| Equipment | 12,000 | |
| Bank |