I've a situation where a client had two very small companies. One wasn't making money so he was advised to have his profitable company buy all the assets and liabilities of the failing company and then dissolve the failed company. There was no tax liability, or third party creditors. Looking at the latest balance sheet, the only material figures are the directors loan account to the company and the negative P & L account. The client has asked me why his loan to the company hasn't been included in his other company, when it was purchased (he's a new client - I haven't prepared the accounts). To be honest, I don't know. It seems reasonable to me that if there is a loan to a company, and another company buys all the assets and liabilities, then the loan is still due? Am I missing something?
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First of all you can't "buy"
First of all you can't "buy" a liability. That's just a logical impossibility. However a liability can be assigned from one debtor to another with the agreement of the creditor.
It sounds as though no assignment of your client's loan from company A to company B was reflected in the last accounts prepared by your predecessor. Whether that was the result of some misunderstanding, or whatever, perhaps doesn't matter.
Of course it is open to the client to instruct you to put entries through the next accounts to reflect one company repaying his loan on behalf of the other. No doubt you will point out to him that the inter-company balance thus created would have to be written off as a bad debt (the debtor company having no assets and no trade to create them with). Whether it is better for him personally or the company to suffer the bad debt is something you can no doubt advise him on.
Thanks for that. I thought we should be able to, but as the previous accountants only transferred the fixed assets, I was worried that I was missing something.