Understanding Purchase Consideration in Accounting
Learn how to calculate Purchase Consideration in the context of company absorption, covering scenarios such as lump sum payments, net assets, net payments, and share values.
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Specialised Accounting By JAHANAVI DEO Bcom 2 Department of Commerce M.L Arya College, Kasba
Puchase Consideration in Absorption of Companies In absorption questions, students face difficulties in computing the amount of Purchase Consideration. That is why, we have list down the various circumstances so that this difficulty can be removed and make sure you get full marks in the examination hall.
Purchase consideration 1. Lump Sum Amount - when in the question, purchasing question agrees to pay the vendor company, a lump sum amount, then t his will be taken as Purchase Consideration. 2. Net Asset - If the lump sum payment is not made by the purchasing company, then we have to calculate the net worth of assets taken. Net worth of the asset is calculated as follows: Value of assets as mutually agreed xxx (xxx) xxx Less: Value of liabilities as mutually agreed Purchase Consideration
3. Net Payment - if the absorption invloves payments to shareholders, debenture holders and creditors of the absorbed company. The payment may be in the form of cash, shares and debentures. Purchase consideration is computed as follows: Payment to the shareholder of absorbed company Shares in purchasing company Debentures issued Cash paid xxx xxx xxx xxx
4. Value of Shares - if the purchasing company is buying the vendor company on the basis of the value offered per share. For example, Beta company has 20,000 shares. The company Cone approached Beta and offered $ 20 per share which the management has approved and signed the absorption agreement. Purchase consideration = 20,000 x 20 = $ 400,000
