Vendor balance sheet - Net Assets £3.5m, of which £2.5m is cash that is being given to the vendor on completion
Transaction price is £5m, with £1m deferred to the owner of 80% of the shares and the owner of 20% of the shares is rolling all his equity to buying topco
Debt raised to cover purchase is £3m
What are the journals?
What is resulting consolidated balance post?
What is goodwill?
Does P&L reserves of selling business get cancelled out now?
Replies (17)
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You say “I” buy a business with a sale tag of £5m. Are you seriously trying to do that with assistance from anonymous Internet posters?
Hello, accountancy student. You should do your own homework, or you will never learn anything.
Accounting for acquisition/vendor cash
I buy a business, use their cash, new debt and roll 20% of equity - what are journals and goodwill?
Vendor balance sheet - Net Assets £3.5m, of which £2.5m is cash that is being given to the vendor on completion
Transaction price is £5m, with £1m deferred to the owner of 80% of the shares and the owner of 20% of the shares is rolling all his equity to buying topco
Debt raised to cover purchase is £3m
What are the journals?
What is resulting consolidated balance post?
What is goodwill?
Does P&L reserves of selling business get cancelled out now?
Who advised the 20% original owner, from owning 20% of a business with Net assets of £3.5m he now appears to have 20% (if it is 20% he gets) of holdco with liabilities of £4m (3m debt plus £1m deferred price)
Also why does holdco take on £3m of debt when there is £2.5m cash in subco and cash outflow re purchase is initially only £3m?
All presumes £5m transaction price is in effect settled £3m cash at outset, £1m loan and £1m re rolled over shares issued in holdco to previous 20% holder subco.
If this is a homework exercise the OP ought to post the actual question rather than what he/she has provided as there are a lot of holes re information.
PS- the £2.5m given to vendor on completion, does this mean holdco hives up the £2.5m , is this part of the £5m total cost of sub or in addition?
Did you actually tell us in the OP that existing 20% holder in sub is becoming the 100% owner of holdco?
So in effect Holdco B/Sheet post transaction:
Invest in Sub £5m
Bank loan -£3m
Deferred price -£1m
Net assets £1m
rep by shares/share premium £1m
Sub Balance Sheet remains as is.
Net assets £3.5m (not £2.5m I originally had)
Cap/Res £3.5m (not £2.5m I originally had)
Edited to correct sub B/Sheet
I give up- if you do not know whether total price is £5m or £7.5m and what is paid to who (e.g.does 20%holder get £1.3m shares or £1m, does 80% holder get £3m cash,£2.5m cash and £1m deferred) then I certain;y do not; maybe consulting the heads of terms might be a very good idea.
How do you get the £7.5m, take another look at that, you cannot double count the net assets (or the cash) as it is inherent within the price paid for the investment.
I would go and look at a textbook re consolidation and elimination of the investment in holdco with subco's share capital/reserves,I will leave it to you to compute your goodwill on consolidation. (And do remember that Fair Value ought to figure within your thinking)
Edited as I had got into my head the NAV was £2.5 no £3.5 in subco