New business - journal entries

New business - journal entries

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Hi

My client acquired a new business from his friend. There was no cash exchanged, only an agreement saying that my client gets the business on condition that he will repay all the debts worth of £30k. He also gets some stock worth around £3k.
I'm just trying to think of the opposite side of the journal entry... what would you suggest?
Many thanks

Replies (28)

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By tom123
22nd Nov 2014 10:29

See below

(assuming this was a sole trade business, rather than limited company)

Dr Stock            £3000.00

Cr Creditors                               £30,000

Dr Capital ac    £27,000.

 

The capital account is overdrawn, as the owner will need to inject further cash to repay the acquired debts. Do you think there is any value to the goodwill acquired? It begs the question what exactly have the acquired debts been taken on for?

The friend has done rather well, walking away from £30k creditors, don't you think?

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By andy.partridge
22nd Nov 2014 10:53

On the face of it

It looks like a goodwill valuation of £27k.

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By johngroganjga
22nd Nov 2014 10:58

Yes the balancing figure is clearly goodwill.

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By tom123
22nd Nov 2014 11:18

Do we have enough to go on

That's why I asked about goodwill in my answer - but do we have enough to go on to assume it exists?

The OP needs to establish (in my view) what form the GW takes - has he got a good customer list, for example?

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By johngroganjga
22nd Nov 2014 11:35

The purchaser must already have satisfied himself as to the value of what he was getting before he did the deal. It's not for the accountant to come along after the event and say that he would not have done the same deal if he had been in the client's position. That helps no-one.

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Replying to timcbaker:
Routemaster image
By tom123
22nd Nov 2014 11:43

I bow to you.

johngroganjga wrote:
The purchaser must already have satisfied himself as to the value of what he was getting before he did the deal. It's not for the accountant to come along after the event and say that he would not have done the same deal if he had been in the client's position. That helps no-one.

OK - I will bow out (we always seem at the opposite ends of things John...) it is just my natural curiousity getting the better of me - and of course you don't often get much detail in the original question. My day to day life is in industry rather than practice - hence, I think, why some of my thinking differs to others. The original poster did, after all, make no mention of goodwill.

Have a good weekend,

Tom

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Replying to bounce100:
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By andy.partridge
22nd Nov 2014 11:52

True, but . .

tom123 wrote:

The original poster did, after all, make no mention of goodwill.

 


The OP is a wombat
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By buttinski
22nd Nov 2014 13:42

Strange business

with no tangible assets apart from some stock - what else is wombat's client getting for his money?

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By johngroganjga
22nd Nov 2014 14:06

The goodwill of the business.

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By buttinski
22nd Nov 2014 14:32

Tangible assets?

I know that most things are possible - but I suspect there is more to it.

Also the OP says it is a new business  so I wonder how any goodwill arose.
Or does he mean new to him?  So many questions!

OOI do you realise how may people post incomplete opening questions - so that we spend hours debating what the situation might be, in order to give any number of possible answers - only for the OP never to be heard of again - not even a word of thanks or a hee hee gotya!!

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By johngroganjga
22nd Nov 2014 14:50

What's the problem?
The question is how to account for the transaction described, which was answered in the first two posts.

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Replying to Colin M Spencer:
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By buttinski
22nd Nov 2014 14:56

The problem - if there is one

johngroganjga wrote:
The question is how to account for the transaction described, which was answered in the first two posts.

Is that the first two answers contradict one another and the following points raise further issues that might need considering.

If you are taking that stance you should reread any number of your own responses where you question the 'facts' stated in the opening post.

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By johngroganjga
22nd Nov 2014 15:05

The first answer is incomplete. It's the first two together that collectvely provide the response.

It's only "facts" that can't be right that need to be questioned before an answer can be given. That is not the case here.

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By wombat
22nd Nov 2014 15:06

Filling the gaps
Thanks for all your replies.
The client has just incorporated, so it is a completely new business.
What are you getting out of this was my first question when I read the agreement. The answer was - because I believe this business has a huge potential if run properly :/
Well, it's the client's decision if he wants to start his business this way... my worry is to correctly reflect this in the accounts.

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By buttinski
22nd Nov 2014 15:10

No comment

I'm out.

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By Jekyll and Hyde
22nd Nov 2014 19:16

Did barings bank have any goodwill when it was sold?
I don't know the answer, but it is clear that if it were a distreased sale that there may not necessation be goodwill.

to answer the question I would question whether any journals are needed at present. If there were goodwill then it would clearly be Dr goodwill £27k.

However if there is no deemed future trade and it is just a bundle sale, then the purchase price is £0 or perhaps £1, which is what the stock has been purchased at. only when the creditors have been paid would there been a transaction to enter.

so I wonder whether the answer lies in the legal trana action of what has taken place.

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By Stuart.thomson
22nd Nov 2014 19:39

There is definitely goodwill of £27k. However its carrying value needs to be reviewed and potentially impaired/written off if he has over paid. I don't think it can be capital account as it would mean a negative purchase price which does not fit with the facts.

As to comments from industry accountants, I think they add a good balance. The profession needs to stay up to date and it tends to be industry which is driving transactions and developments which the profession has to keep catching up. Their perspective on value is often useful even if it is not how a client will be engaged -but that is down to the professional and his client relationship.

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By User deleted
22nd Nov 2014 19:52

Will the OP shed some light as to what's the nature of business taken over and what sort of debt does this 30k constitute?

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Replying to stepurhan:
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By wombat
22nd Nov 2014 20:14

More info...
Thank you for all your input, really appreciate it.
The business is a small shop and the debt is a bank loan taken by the previous business owner, which my client agreed to pay off (in monthly installments) straight to the bank.
I have actually just received an email from my client in which he mentioned that he is related to the previous business owner (which I wasn't aware of)...

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Replying to DJKL:
By johngroganjga
24th Nov 2014 11:56

Bank loan

wombat wrote:
Thank you for all your input, really appreciate it. The business is a small shop and the debt is a bank loan taken by the previous business owner, which my client agreed to pay off (in monthly installments) straight to the bank. I have actually just received an email from my client in which he mentioned that he is related to the previous business owner (which I wasn't aware of)...

The additional point you now need to take into account is how, if at all, your client has become liable to repay the bank loan.  How, if at all, were the bank involved?

If your client is not in fact formally liable you can't put the bank loan on his balance sheet.  Perhaps he is just paying for the goodwill and stock on deferred terms by instalments.

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By User deleted
22nd Nov 2014 20:33

I presume you're a bookkeeper and if you're one, your job would be to pass bookkeeping entries in accordance with the information that you have received. As others have said the difference in this case of £27k should clearly be debited to Goodwill A/c. We the readers (may be yourself included) can only guess that this £27k faithfully represents the value arising out of items like the location where the shop is situated, possibly a list of loyal ( and local ) customers that frequent the shop, may be some unique and memorable name that the shop is known by etc etc. 

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By buttinski
23rd Nov 2014 16:17

Despite the criticism from John

I am struggling to understand what has actually happened here.

We are told that Wombat's client has acquired a new business from a friend.

We are then told that the client has incorporated.

We are then told that the client and the previous owner are related.

We don't know the financial situation of the shop but it is possible (only possible, John) that it operated at a loss and the previous owner raised a loan to fund his own drawings.

Because the new owner pays well over the odds for the only asset being acquired, the contributors to this thread say the difference is goodwill.

The shop doesn't appear to have any equipment, fixtures or fittings - we are not told whether there is any lease being taken over.

Is the previous owner retaining the fixed assets and renting them to the new owner (which must raise the question as to whether goodwill has passed).

The presumption is that all other trade creditors and any debtors remain with the previous owner but what about apportionments?

There are so many unknowns.

Is the new corporate owner of the goodwill expecting a tax deduction for (what in fact is) someone else's debt?

And so it goes.

Simply to answer the OP's original question is doing no-one any favours (sorry if I have offended you again, John)

This really is my last contribution - I have work to do - yes on a Sunday!

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By tonyh
23rd Nov 2014 17:54

My advice

Would be for wombat to discuss situation with client's accountant who one would hope be aware of the situation and be able to advise.

A bank loan that client has agreed to pay off. Yes I can imagine the local bank manager saying that is fine Jim just transfer it to Joe. Put it in to company's balance sheet don't worry if if has Jim's name on company has now become liable.Then you can dump the company and hey ho bank has lost its money.What a cunning plan.

Reality is that from the information  provided the only entry to be made into ltd co account is dr stock cr directors loan account.

The bank loan is personal and does not appear in company accounts.

The question of goodwill needs to be considered in the light of any sale/purchase agreement.

 

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By wombat
24th Nov 2014 14:14

Just a thought

Maybe it would be easier if my client purchased this business (together with stock and debts) for a token price, let say £1...? What do you think?

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Replying to leshoward:
By johngroganjga
24th Nov 2014 19:53

What diference?

wombat wrote:

Maybe it would be easier if my client purchased this business (together with stock and debts) for a token price, let say £1...? What do you think?

Why do you think increasing the price by £1 makes a difference to anything? But anyway, isn't this a done deal, which now just needs to be accounted for?

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By tonyh
24th Nov 2014 18:44

Tax implications

This is a serious situation and there could be tax implications. You need to get the company's accountant to deal with it.

Just putting a token £1 when the client believes he is paying £27K could lead to a claim against you at some future date.

Frankly there are too many unknowns and possible outcomes for a public forum.

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Replying to Duffman:
By johngroganjga
24th Nov 2014 20:00

Misunderstanding

tonyh wrote:

This is a serious situation and there could be tax implications. You need to get the company's accountant to deal with it.

Just putting a token £1 when the client believes he is paying £27K could lead to a claim against you at some future date.

Frankly there are too many unknowns and possible outcomes for a public forum.

I think you misunderstand. The proposal is to increase the purchase price for the goodwill from £27,000 to £27,001 - hardly an earth-shattering change. There is no suggestion of accounting for the transaction in any way differently from the reality of what occurs.

Also what are the unknowns that concern you?

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By Shunmas
11th Feb 2016 23:16

Negative Goodwill / Bargain Purchase Price

Hello !

The question (post) is quite old but quite practical and thought-provoking. There are many useful comments.

@wombat

What your client is acquiring (regardless of his relations with the seller) is:

FV of Assets Acquired = £3K

Liabilities assumed = £30K

Its clearly a case of bargain purchase (negative goodwill, given the scenario mentioned) since the liabilities assumed are more than the assets acquired. Your client would/must have already paid £1 token (logically) recognizing negative goodwill if he is preparing consolidated accounts (if your client's company is buying the entire issued capital of seller's company).

If your client is buying into the business as an individual (as a new shareholder without involving any acquiring company), then only in that case, the share/ownership structure would have changed by the introduction of your client and no journal entries would be required in that case.

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But again, it is not possible to have an imbalanced balance sheet. The business must have other figures too, or there might be incomplete records (single entry system, which would need to be converted into double entry and then effect the purchase.

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