Financial Reporting and Ethics

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REGULREGULREGULREGULREGULAAAAATORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORK OFOFOFOFOFFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORTINGTINGTINGTINGTING

1 .01 .01 .01 .01 .0 LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES

After studying this chapte r, the read er will be a ble to und erstan d the:

! Need for the existence of a reg ulatory framework;

! Various reg ulatory frame work for corporate fina ncial reporting ;

! Composition, functions a nd powers of the Nigerian Accounting Stand ard s Board;

! Processes involved in the production of an accounting standard; and

! Current Statements of Accounting Standards issued by NASB.

1 .11 .11 .11 .11 .1 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

Regulation of accounting information is aimed at ensuring that users of

financial sta tements receive a minimum amount of information that will enable

them take mea ningful decisions regard ing their interest in a reporting entity.The b odies responsible for these regulations a re often sta tutory agencies such

as the Accounting Standa rds Board , Securities and Exchange Commission and

the Stock Exchange. The bulk of this framework is usually contained in

Accounting Standa rds. The Nigerian Accounting Standards Board is the b ody

responsible for the issua nce of Account ing Standa rds in Nigeria. This board,

was initially an advisory body responsible for the production of stand ards tha t

will serve a s a guide to Accountan ts in the prepa ration of financial statements.

Until 2003, when the Nigerian Accounting Standa rds Board Act was enacted ,

which now ma kes it manda tory for accountan ts prepa ring corporate reports to

adhere strictly to the provisions of the Accounting Standards issued by the

board, the standards were treated as just generally accepted accounting

principles. This manda tory approach a rises from the fact tha t there is the need

to:

(a) ensure uniformity in the preparation and presentation of corporate

reports throughout the country;

(b) ensure that accountants comply with the Generally Accepted Accounting

Principles in the d ischa rge of their functions;

(c) ensure that the standards comply with existing regulatory frameworks;

(d) ensure that the standards comply with the domestic accounting need of

our country.

With the p assing into law of the NASB Act 2003, the NASB is now the

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only body recognized by law for the development, issuance a nd review

of accounting standa rds for prepa rers and users of financial statements.

1 .21 .21 .21 .21 .2 OTHER REGULOTHER REGULOTHER REGULOTHER REGULOTHER REGULAAAAATORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORK

Other institutions responsible for the regulation of account ing informat ion in

Nigeria include:

(a) The Central Bank of Nigeria (CBN);

(b) The Nigerian Insurance Commission (NAICOM);

(c) The Securities and Exchange Commission.

Each of these regulatory authorities has an enabling law that guides the

activities of the various institut ions opera ting in the sector. The CBN has the

Banks and Other Financial Institutions Act (BOFIA) 1991, NAICOM has the

Nigerian Insurance Act 2003, while the Securities an d Exchange Commission

has the Investment a nd Securities Act, 1999. These Acts provide some specificrequirements relating to the Accounts of every corpora te en tity within its fold.

BOFIA, for insta nce p rovides specific requirements rela ting to the minimum

paid up capital, sta tutory reserves, lending limit, classification of assets, returns

and p ublication of annua l accounts by banks. The Insurance Act also provides

for the minimum paid up capital, types and classification of insurance

businesses, statutory deposit, books and accounting records to be kept,

maintenance of technical reserves and solvency margin required by all

insurance businesses in Nigeria. The Investment and Securities Act on the other

han d m akes provision for the reg istration of cap ital ma rket operators, public

offer and sale of securities an d mergers, take-over and a cquisitions. All these

requirements a re made to supplement the elaborate provisions of the NigerianAccounting Standards.

1 .31 .31 .31 .31 .3 COMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIAN

ACCOUNTING STACCOUNTING STACCOUNTING STACCOUNTING STACCOUNTING STANDARDS BOARDANDARDS BOARDANDARDS BOARDANDARDS BOARDANDARDS BOARD

1.3 .11 .3 .11 .3 .11 .3 .11 .3 .1 CCCCComposit ionomposit ionomposit ionomposit ionomposit ion

The NASB was established in 1982 to issue accounting standards in

Nigeria which will take into cognizance our peculiar business

environment, customs, laws and level of economic development. From

inception to da te, the membership of the Board chan ged considerablyfrom 8 to 13, 13 to 14 and to the present a rrang ement wh ich provided

for a four strata membership comprising of 17 members all of whom

are appointed by the President. The p resent membership as p rovided

un der S. 2(2) of NASB Act, includes:

(a ) The Chairman;

(b) Two members each from the Institute of Chartered Accountants

of Nigeria (ICAN) and the Association of Nationa l Accountants of

Nigeria (ANAN).

(c) A representative each from the following:


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(i) Federal Ministry of Commerce;

(ii) Federal Ministry of Finance;

(iii) Central Bank of Nigeria;

(iv) Nigerian Accounting Association (NAA);

(v) Corporate Affairs Commission;

(vi) Federal Inland Revenue Service;

(vii) Nigerian Deposit Insurance Corporation;

(viii) Securities and Exchange Commission;

(ix) Auditor General for the Federation;

(x) Accountant General of the Federation;

(xi) Chartered Institute of Taxation of Nigeria; and

(xii) Niger ian Assoc ia t ion of Cham bers of Commerce ,

Industries, Mines a nd Agriculture .

(d) The Executive Secretary of the Board.Each mem ber of the Board sha ll hold office for a period of four

years or on such terms or conditions that may be specified in

their letters of appointmen t.

1 .3 .21 .3 .21 .3 .21 .3 .21 .3 .2 FFFFFunctions of the Boarunctions of the Boarunctions of the Boarunctions of the Boarunctions of the Boarddddd

The Boards functions as provided in S. 6 of the Act, include the following:

(a) Developing and publishing in public interes t, accounting

standards to be observed in the preparation of financial statements;

(b) Reviewing from time to time the accounting standards developed

in line with the prevalent social, economic and politicalenvironments;

(c) Promoting and enforcing compliance with accounting standards

developed or reviewed by the Board ;

(d) Promoting the general acceptance and adoption of standards by

prepa rers of financial statemen ts;

(e) Receiving from time to time notices of non-compliance with its

standa rd from the prepa rers, users and a uditors of an account;

(f) Receiving copies of all qualified reports together with detailed

explanations for such qualificat ions from auditors of the a ccounts

within a period of 60 da ys from the d ate of such qualifications;(g) Advising the Minister on the making of regulations under S. 356

of Companies and Allied Matters Act;

(h) Advis ing the Federa l Government on mat te rs rela t ing to

accounting standa rds; and

(i) Performing such other duties which, in the opinion of the Council,

are necessary or exped ient to ensure the efficient performa nce

of the functions of the Board under th is Act.

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1.3.3 Powers1.3.3 Powers1.3.3 Powers1.3.3 Powers1.3.3 Powers

Powers of the Board include the following:

(a) Identifying accounting statements which require standardization

and e stablish order of priority for add ressing them;

(b) Determining the scope and objectives of each standard;

(c) Prescribing the methods and procedure for the production of

standards;

(d) Prescribing the time-table for the production of standards;

(e) Approving discussion papers, exposure drafts and standards;

(f) Enforcing and approving enforcement of compliance with

accounting sta nda rds in Nigeria; an d

(g) Exercising such powers as are necessary or expedient for giving

effect to the p rovisions of this Act.

1 .41 .41 .41 .41 .4 PROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STANDARDANDARDANDARDANDARDANDARD

The procedure to be a dopted in the production of an accounting sta nda rd is

provided under S.8 of the Act as follows:

(a) Choice of a topic for standardisation;

(b) Prepare and publish exposure draft ;

(c) Allow at least three months for comments by stakeholders;

(d) Conduct a public hearing where necessary;

(e) Incorporate all reasonable additional ideas to the documents;

(f) Issue a sta tement of accounting standard.

1 .51 .51 .51 .51 .5 STSTSTSTSTAAAAATEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUED

Since its establishment in 1982, the NASB has so far issued thirty (30)

account ing standards which include :

SAS 1 Disclosure of Accounting Policies

SAS 2 Information to be Disclosed in Financial Statements

SAS 3 Accounting for Property, Plant and Equipments

SAS 4 Stocks

SAS 5 Construction Contracts

SAS 6 Extraordinary Items and Prior Year AdjustmentSAS 7 Foreign Currency Conversions and Translations

SAS 8 Accounting for Employees Retirement Benefits

SAS 9 Accounting for Depreciation

SAS 10 Accounting for Banks and Non-Banks Financial Institutions (Part I)

SAS 11 Lea ses

SAS 13 Accounting for Investments

SAS 14 Accounting in the Petroleum Industry: Upstream Activities

SAS 15 Accounting for Ban ks and Non-Ban ks Financial Institutions

(Part II)

SAS 16 Accounting for Insurance Companies


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SAS 17 Accounting in the Petroleum Industry: Downstream Activities

SAS 18 Statement of Cash flows

SAS 19 Accounting for Deferred Taxes

SAS 20 Abridge Financial Statements

SAS 21 Earnings Per Share

SAS 22 Research and Development Costs

SAS 23 Provisions, Contingent Liabilities and Contingent Assets

SAS 24 Segment Reporting

SAS 25 Telecommunications Activities

SAS 26 Business Combinations

SAS 27 Consolidated and Separate Financial Statements

SAS 28 Investments in Associates

SAS 29 Interests in Joint Ventures

SAS 30 Interim Financial Reporting

1 .61 .61 .61 .61 .6 SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS

This chapter has discussed the various bodies and laws regulat ing corporate

financial reporting in Nigeria. It ha s also given d eta ils about the composition,

functions and powers of the Nigerian Account ing Standa rds Board as well as

the p rocess involved in p roducing an Accounting Standa rd.

Refer to Comprehensive Questions an d Suggested Solutions in Append ix II,

page 269.

1 .71 .71 .71 .71 .7 REVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONS

1.7 .11 .7 .11 .7 .11 .7 .11 .7 .1 MULMULMULMULMULTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONS

1. Which of the following institutions is not responsible for the regulation of

accounting informat ion in Nigeria?

A. Cen tra l Ba nk of Nig eria .

B. Securit ie s and Exchange Commission .

C. Nig eria Accou nt in g Sta n da rd s Boa rd .

D. Nig eria In su ra n ce Com mission .

E. Corporate Affa ir s Commission .

2. The following are represented on the Nigerian Accounting Standards Board

except:

A. Inst itu te of Chartered Accountants of Nigeria .B. Fe de ra l Min ist ry of Com me rce .

C. Associa t ion of Nat ional Accountants of Nigeria ,

D. Economic and Financia l Crimes Commission.

E. Corporate Affa ir s Commission .

3. One of the following is not part of the processes to be adopted in producing

an accounting standard:

A. Choosing a top ic for st anda rd iza t ion .

B. Pre pa rin g an d pu blish in g an exp osu re dra ft .

C. Allowing a t least one month for comments by shareholders .

D. Conduct ing pub lic hea ring if necessa ry.

E. Incorpora ting a ll reasonable addit ional ideas to the document .

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4 . Which o f the fo llowing s ta tements o f Accoun t ing Standa rds gove rns

construction contracts?

A. SAS 5

B. SAS 10

C. SAS 2D. SAS 6

E. SAS 4.

5 . Sta tements of Account ing Standards Number 10 and 15 are concerned

with:

A. Accou ntin g for In vestm en ts

B. Accounting for Banks and Non-Bank Financial Institutions.

C. Leases

D. Segment for Reporting.

E. Business combina tions.

1 .7 .21 .7 .21 .7 .21 .7 .21 .7 .2 SHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONS

1. In Nigeria, Accounting Standards are issued by the... .. .. .. .. .. .. .. .. .. .. .. .. ..

2. The acronym BOFIA stand s for.........................................................

3. Statement of Accounting Standard 29 is to regulate accounting information

on...........................

4. The subject of SAS 21 is.... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

5. Extraordinary Items and Prior Year Adjustments are the subject of SAS..... ..

Refer to Sugge sted Solutions in Appe nd ix I, Page 263.


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ACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORTINGTINGTINGTINGTINGPOLICIESPOLICIESPOLICIESPOLICIESPOLICIES


After studying this chapte r, the read er will be a ble to und erstan d the:

! Genera l an d Specific reporting policies;

! Guidelines for the selection of Reporting Policies;

! Methods of recognizing Assets and Liabilities;

! Difference bet ween legal a nd commercial views of Account ing; an d

! Concepts of fair pre senta tion and true a nd fair view.

2 .12 .12 .12 .12 .1 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

Accounting policies are specific bases used by a particular business and

regarded as a ppropriate to the circumstances of the business and suitable for

the fair presentation of its results and financial position. Disclosure ofaccounting policies becomes necessary in circumstances where alternative

trea tments for a n umber of items a ppearing in financial statements exist. As a

guide to users of financial statements, prepares of an entitys financial

statemen t a re requ ired to state categorically which of the various alternative

policies is ad opted . The Sta tement of Accounting Standard 1 (SAS 1) requires

that every company shall disclose its accounting policies in relation to the

following g eneral issues:

(a ) Overall accounting policy (e.g. historical cost, general purchasing power,

replacement value);

(b) Consolidation policy; ( for group entities)(c) Taxation;

(d ) Long term con tracts;

(e) Events subsequent to the balance sheet date;

(f) Leases, hire purchase or instalment transactions and related interest;

(g) Conversion or translation of foreign currencies including the disposition

of exchange ga ins and losses; and

(h) Franchises.

The presentation of accounting policies in financial statements varies from

one en terprise to another. In order to provide an over-view of the accounting

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policies of an enterprise, these accounting policies should be disclosed together,

rath er than as notes to individual items in the financial statements. However,

many enterp rises disclose in notes to their financial statements, the significant

accounting policies which they have adopted in treat ing the following items:

Assets Related Items:Assets Related Items:Assets Related Items:Assets Related Items:Assets Related Items:

(a ) Debtors or rece ivables;

(b) Stock and work-in-progress (inventories) and related cost of

goods sold;

(c) Deprecia tion;

(d) Investments, subsidiary companies, associated companies, and other

investments;

(e ) Resea rch and deve lopmen t;

(f) Pa tent a nd tra dema rks; a nd

(g) Goodwill.

Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:

(a ) Warranties;

(b) Commitments and contingencies;

(c) Pension costs and re tirement plans; and

(d) Severance and redundancy payments.

Profit and losses:Profit and losses:Profit and losses:Profit and losses:Profit and losses:

(a) Methods of revenue recognition;

(b) Maintenance, repairs and improvement expenditure;(c) Gains and losses on disposal of property;

(d) Reserve accounting, statutory or otherwise, including direct charges and

credits to surplus a ccounts; and

(e) Establishment and building costs.

2 .22 .22 .22 .22 .2 IMPLEMENTIMPLEMENTIMPLEMENTIMPLEMENTIMPLEMENTAAAAATION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTSTSTSTSTS

AND ACCOUNTSAND ACCOUNTSAND ACCOUNTSAND ACCOUNTSAND ACCOUNTS

Here we d iscuss a practical applicat ion of account ing policies adopted by real

businesses as shown in their annua l reports and a ccounts:

2 .2 .12 .2 .12 .2 .12 .2 .12 .2 .1 Excerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of Lion Bank ofBank ofBank ofBank ofBank of

Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)

The following are the significant accounting policies adopted and

consistently applied by the bank in the preparation of its financial

statements:

(a ) Basis of accountingBasis of accountingBasis of accountingBasis of accountingBasis of accounting

The a ccounts a re prep ared und er the historical cost convention.


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(b ) Loans and AdvancesLoans and AdvancesLoans and AdvancesLoans and AdvancesLoans and Advances

Loans a nd advances are either performing or non-performing

and a re stated after deducting provisions aga inst debts

considered doubtful of recovery.

(c) Bad and doubtful debtsBad and doubtful debtsBad and doubtful debtsBad and doubtful debtsBad and doubtful debts

Provisions are ma de a ga inst loans and a dvances in accordance

with the Prudent ial Guide lines issued by the Cent ral Ban k of

Nigeria.

(d ) IncomeIncomeIncomeIncomeIncome

(i) Interest is accrued on a daily basis on all performing

ad vances. Interest a ccruing on non-performing accounts

is not taken to the credit of profit and loss account un til

the debt is recovered.(ii) Credit-related fee income, where material, is amortized

over the life of the credit. Otherwise, fees and commissions

are recognized as earned upon the completion of the

related services.

(e ) Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets

Fixed assets a re stated at cost less accumula ted depreciation.

(f) Assets on LeaseAssets on LeaseAssets on LeaseAssets on LeaseAssets on Lease

Assets on lease are accounted for strictly in a ccordance with the irlega l form as fixed a ssets. The relevan t assets a re purchased in

the na me of the ba nk and subsequen tly leased to customers as

operating leases.

(g ) Depreciat ionDepreciat ionDepreciat ionDepreciat ionDepreciat ion

(i) Depreciation charged on fixed assets is calculated on the

straight-line basis to write off their costs over their

estimated useful lives at the following annua l rates:

Freehold buildings 2%

Leasehold buildings and improvements:50 years and over 2%

Below 50 years over the term of the lease

Assets on lease over the term of the lease

Motor Vehicles 25%

Furniture and Fittings 20%

Machinery and Equipment 20%

Computer Equipment 20%

(ii) No depreciation is charged on assets until they are put

into use.

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(h ) Exchange ra tesExchange ra tesExchange ra tesExchange ra tesExchange ra tes

(i) Transactions in foreign currencies are translated to the

na ira at the ra tes of exchange ruling a t the da te of the

transactions.(ii) Foreign currency balances are converted to the naira at

the rate of exchange ruling a t the ba lance sheet da te and

the resultant p rofit or loss on exchange is taken to the

profit a nd loss account.

(i) Deferred taxationDeferred taxationDeferred taxationDeferred taxationDeferred taxation

Provision for deferred taxation is made using the liability method

and calculated at the current ra te of taxation on the differences

between the net book values of qua lifying fixed a ssets and their

corresponding ta x written down values in a ccordance with theSta tement of Accounting Standard No. 19 (SAS 19) issued by the

NASB in December 2000.

From the foregoing, it is clea r tha t sta ting the policies becomes

necessary as different m ethods of trea tmen t exist. For instance,

ba sis of accounting could be historical cost or current cost. Of

these options the bank chooses to adopt the historical cost

method. The bank has indicated its accounting policies in relat ion

to such items as loans and advances, bad an d doubtful debts,

income, fixed assets, depreciation and deferred taxation. The

statement of the policy provides a guide for the reader/user ofthe financial statements to have an ad equa te picture of certain

assumptions underlying the treatmen t of items in the accounts.

2 .2 .22 .2 .22 .2 .22 .2 .22 .2 .2 Excerpts froExcerpts froExcerpts froExcerpts froExcerpts from the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entity

(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)

The following a re the significant accounting policies adopted by the

Group in the prepa ration of its financial statements:

(a ) Basis of AccountingBasis of AccountingBasis of AccountingBasis of AccountingBasis of Accounting

The a ccounts a re prepa red under the historical cost convention

modified to include the revaluation of certain land a nd buildings

(own premises only).

(b ) Basis of ConsolidationBasis of ConsolidationBasis of ConsolidationBasis of ConsolidationBasis of Consolidation

(i) Subs id ia r i e sSubs id ia r i e sSubs id ia r i e sSubs id ia r i e sSubs id ia r i e s

The Group financial sta tements incorporate the financial

statements of the Bank and four of its wholly owned

subsidiaries, FBN Bank (UK) Limited, FBN Capital

Limited , First Trustees Nigeria Limited and First Registrars

Nigeria Limited, a ll made up to March 31, 2007. The other


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subsidiaries whose results are considered immaterial

have not been consolida ted.

All intra-group transactions, balances, incomes and

expenses are eliminated on consolida tion.

(ii) Investments in Associated CompanyInvestments in Associated CompanyInvestments in Associated CompanyInvestments in Associated CompanyInvestments in Associated Company

Investments in associated company are carried on the

ba lance sheet a t cost. Profit and losses are elimina ted to

the extent of the Groups interest in the associated

company.

(iii) FFFFForororororeign Operationseign Operationseign Operationseign Operationseign Operations

The a ssets and liab ilities of foreign entities a re converted

to Naira a t the ruling exchange ra tes at the reporting da te

except for share capital and pre-acquisition reserves,which a re translated at the historical rates. Incomes and

expenses are tra nslated to Naira using a verage rate s.

(c) Goodwill on ConsolidationGoodwill on ConsolidationGoodwill on ConsolidationGoodwill on ConsolidationGoodwill on Consolidation

Goodwill represents the excess of the purchase consideration over

the fair value of the Groups share of the sepa rab le net a ssets of

the legacy banks acquired. Goodwill arising on consolida tion of

legacy banks is accounted for in line with the provision of

schedule 2 Section 65 of the Companies a nd Allied Matte rs Act

CAP C20 LFN 2004.

(d ) Ca sh a nd Short-Cash and Short-Ca sh a nd Short-Cash and Short-Ca sh a nd Short-TTTTTerm Ferm Ferm Ferm Ferm Fundsundsundsundsunds

Cash a nd Short-Term funds comprise cash balances on hand, cash

deposited with the Centra l Bank of Nigeria, cash deposited with

other ba nks and financial institutions (local a nd foreign) other

tha n the Central Ban k of Nigeria. The Balance is stated less

provisions for doub tful ba lances.

(e ) Bills DiscountedBills DiscountedBills DiscountedBills DiscountedBills Discounted

Holdings in bills discounted (treasury bills) are stated at facevalue as it is the Banks policy to hold these to maturity.

Diminution in value of investments is noted in the financial

statements.

(f) TTTTTrading Securi t iesrading Securi t iesrading Securi t iesrading Securi t iesrading Securi t ies

Trad ing securities comprise of government b onds and oth er

securities.

(i) Trading securities held for fixed redemption date are

stated at cost.



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(ii) Dealing securities are stated at the lower of cost and

market value.

(iii) P remiums and d is coun ts a r is ing on pu rchase a re

amortized on the yield to redemption.

(g ) Inves tmentsInves tmentsInves tmentsInves tmentsInves tments

Investments are classified as short or long term investments.

Those intended to be held for a period exceeding one year a nd

which are either held to ma turity or available for sale in response

to need s for liquidity or changes in interest ra tes are classified

as long term investments. Debt a nd equity securities held for a

period not exceeding one year are classified as short-term

investments.

(i) Quoted investments other than dated securities are stated

at the lower of cost and market value.(ii) Unquoted investments are stated at cost less provision

for doubtful investments.

(iii) Dated securities are stated at cost.

(iv) Investments in subsidiaries are stated at cost.

(h ) Bad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful Accounts

Loans and a dvances are sta ted a fter deducting provisions against deb ts

considered d oubtful of recovery. Loans are classified as performing and

non-performing. They a re considered n on-performing when principa l

and interest repa yment obliga tions are in a rrears for three months ormore. Specific provisions are made on non-performing accounts as

follows:

Interes t and/or principalInteres t and/or principalInteres t and/or principalInteres t and/or principalInteres t and/or principal ClassificationClassificationClassificationClassificationClassification ProvisionProvisionProvisionProvisionProvision

outs tanding for:outs tanding for:outs tanding for:outs tanding for:outs tanding for:

More than 90 days but less than Sub-standard 10%

180 days

180 days but less than 360 days Doubtful 50%

360 days and over Lost 100%

A gen era l provision of 1%is ma de on a ll performing ba lances in linewith the Prudentia l Guidelines of the Central Bank of Nigeria.

(i) In te res tIn te res tIn te res tIn te res tIn te res t

Interest on advances is accrued to the profit and loss account until such

a time as reasonable doubt exists about its collectability. Interest

accruing on non-performing a ccounts is not taken to the credit of the

profit and loss account un til the deb t is recovered.


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(j) Advances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance Lease

Advances to customers und er finance leases are sta ted net of unearned

income. Lease fina nce is recognized in a m an ner wh ich provides a

constan t yield on the outstanding net investment over the lease period.

(k) Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets

Fixed assets are stated at cost or valuation less accumulated

depreciation.

(l) Depreciat ionDepreciat ionDepreciat ionDepreciat ionDepreciat ion

Depreciation is provided to write off the cost of fixed assets over their

estimated useful lives on a straight line ba sis at the following annua l

rates:

Freehold buildings - 2%from date of useLeasehold bu ildings:

50 years and over - 2%from date of use.

Below 50 years - Over the term of the lease.

Assets on Lease - Over the term of the lease.

Motor Vehicles - 25%

Computer equipment - 331/3%

Other fixed assets - 20%

(m ) FFFFFororororore ign curreign curre ign curreign curreign currenciesenciesenciesenciesencies

Tran sactions in foreign currencies are tra nslated to Naira at the ra te ofexchange ruling a t the date of the transactions.

Foreign currency ba lances are converted to Naira a t the rate of exchange

ruling at the balance sheet date and the resultant profit/loss on

conversion is taken to profit and loss account in respect of Bank-owned

funds and th e rest charged/credited to third part ies. The Ban ks equity

investm ent in FBN Bank (UK) Limited is sta ted a t tra nsa ction cost.

(n ) TTTTTaxa t ionaxa t ionaxa t ionaxa t ionaxa t ion

Income ta x is provided on t axable profit at the current statutory rate.

Provision for deferred ta xat ion is mad e using th e liability method a nd

calculated at the current ra te of taxation on the differences between the

net book values of qualifying fixed a ssets and the ir correspond ing ta x

written down values.

(o) BorrowingsBorrowingsBorrowingsBorrowingsBorrowings

Borrowings are recorded a t the proceeds received, plus direct issue costs.

The cap italized direct issuing costs are amortized over the tenor of the

underlying instrument.



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(p) DividendDividendDividendDividendDividend

Proposed dividend for the yea r is recognized a s a liability only when

declared and approved by shareholders at the Annua l Genera l Meeting.

(q) Retirement BenefitsRetirement BenefitsRetirement BenefitsRetirement BenefitsRetirement Benefits

Arrangement for retirement benefits for memb ers of sta ff is based on

the provisions of the Nigerian Pension Act 2004, which is contribu tory.

The ma tching contribu tions of 8.5% and 16.5% for sta ff an d b an k

respectively are based on curren t salaries and eligible allowances and

are charged to profit and loss account. Membership of the scheme is

open to members of staff upon confirmation of employment with the

Bank.

The Bank also maintains the defined benefit plan scheme based on

16.5% an d 8.5% contribut ions on curren t sa laries a nd eligible

emoluments by the ban k and sta ff respectively for employees who are

not covered und er the Nigeria Pensions Act 2004.

(r) Off Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet Engagements

Transactions tha t a re not currently recognized a s assets or liab ilities in

the balance sheet but which nonetheless give rise to credit risks,

contingencies and commitmen ts are reported off ba lance sheet. Such

transactions include letters of credit, bonds, guara ntees, indemnities,

acceptances, trade related contingencies such a s documentary credit,

etc.

Outstand ing an d unexpired commitments a t the year end in respect of

these transactions a re shown by way of note to the financial statements.

Income on off balance sheet engagements is in form of commission

which is recognized a s and when transactions are executed.

(s) Income RecognitionIncome RecognitionIncome RecognitionIncome RecognitionIncome Recognition

(i) Interest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest Expense

Interest is accrued on da ily balances on a ll assets and liab ilities

to which inte rest is ap plicable.

(ii) FFFFFees, Commissions and Other Incomesees, Comm issions a nd Oth er Incomesees, Commissions and Other Incomesees, Comm issions a nd Oth er Incomesees, Commissions and Other Incomes

Fees an d commissions, where ma teria l, are amortized over the

life of the related service. Otherwise fees, commissions and other

incomes are recognized as earned upon completion of the related

service.

(iii) Investment IncomeInvestment IncomeInvestment IncomeInvestment IncomeInvestment Income

This is recognized on an accrua l basis and credited to the profit

and loss account.


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(iv) Lease Finance IncomeLease Finance IncomeLease Finance IncomeLease Finance IncomeLease Finance Income

This is recognized on a ba sis tha t provides a constant yield on

the outstanding p rincipal over the lease term.

(v) Dividend IncomeDividend IncomeDividend IncomeDividend IncomeDividend Income

This is recognized on actua l basis and credited to the p rofit and

loss account.

(t) ProvisionsProvisionsProvisionsProvisionsProvisions

Provision is recognized when the compa ny has a present obliga tion

whether lega l or constructive as a re sult of a past even t for which it is

probable that an outflow of resources embodying economic benefits

will be required to settle the obligation in accordance with the Statement

of Accounting Sta ndard (SAS) 23.The excerpt ab ove is similar to the ea rlier one except that in the la tter

excerpt, certain a ssumptions which guided group en tity were ma de.

These include; the ba sis used in consolidating the a ccounts and the

trea tmen t of the g oodwill arising on consolidation.

2 .32 .32 .32 .32 .3 CHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIES

Judgment is required in the choice of the accounting policies which are

app ropriate to the circumstances of an en terprise and are best suited to present

the true an d fair view of its results an d financial position.

In the choice and application of the app ropriate accounting policies, there a re

instances where some fundamental concepts contradict one another. It is

however not possible to develop genera l rules for the exercise of judgmen t.

The following principles have been evolved for use in pa rticular circumstances:

(a ) Substance Over FSubstance Over FSubstance Over FSubstance Over FSubstance Over Formormormormorm

Although business transactions are often governed b y lega l principles,

but where the legal principles contradict the financial reality, such

transactions should be a ccounted for in accordance with their substance

an d fina ncial reality an d not merely with their lega l form.

(b ) ObjectivityObjectivityObjectivityObjectivityObjectivity

This principle provides that the accountant preparing the financial

statements should exercise independ ence of judgmen t supported b y

verifiable evidence in his choice of an accounting policy.

(c) FFFFFa i r n e s sa i r n e s sa i r n e s sa i r n e s sa i r n e s s

This principle requ ires tha t the choice of an a ccount ing policy should

be such that the reports prepared do not favor any user group or

segment of society.



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(d) Mater ia l i tyMater ia l i tyMater ia l i tyMater ia l i tyMater ia l i ty

The principle holds that only items of material values are accorded

their strict accounting trea tment.

(e ) PrudencePrudencePrudencePrudencePrudence

This principle demands exercising great care in the recognition of profit

whilst all known losses a re ad equ ately provided for.

2 .42 .42 .42 .42 .4 METHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIES

Assets are resources controlled by the ente rprise as a result of past events a nd

from which future economic ben efits are expected to flow to the ente rprise.

Liab ilities on the other hand , represent obliga tions of the en terprise arising

from past events, settlement of which is expected to result in an outflow ofresources from the en terprise an d embodying economic benefits.

In circumstances where legal principles contrad ict the fina ncial rea lities of a

transaction, the substance of the t ransaction should be accounted for while its

lega l principles are ignored. Accountan ts are often faced with th is conflict in

certain transa ctions such as:

Sale and Repurchase Agreement: These arra ngements occur where a n a sset

is sold b y the seller to a buyer on terms that the seller repurchases the a sset

from the buyer at a future da te. This transaction has two possible interpretations

of either a secured loan or a sale and lease ba ck. If the arrangements providethat the seller retains right to determine assets use while the buyer only

receives return (secured loan ) the asset will only be recognized in the books of

the seller. The t ran sfer of title by way of purchase is ignored.

Where the transaction resembles a finance lease arrangement, that is, the

ownership t itle passes to the buyer, the assets shall be recorded a s tha t of the

buyer.

2 .52 .52 .52 .52 .5 SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS

This chapter discussed the genera l and specific policies tha t could be a doptedby a reporting entity. The chapter also delved into guidelines for selecting

relevant policies, methods of recognising a ssets and liab ilities as well as the

distinction between lega l and commercial views of account ing. Excerpts from

annua l reports which h ighlight accounting policy implementa tion a re given

in the cha pter.

Refer to Comprehensive Questions an d Suggested Solutions in Append ix II,

page 269.


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2 .62 .62 .62 .62 .6 REVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONS

2.6 .12 .6 .12 .6 .12 .6 .12 .6 .1 MULMULMULMULMULTIPLE-TIPLE-TIPLE-TIPLE-TIPLE-CHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONS

1. The Sta tement of Account ing Standard Number 1 requires every companyto disclose its a ccounting policies in relat ion to a ll the following except:

A. Franchises

B. Taxation

C. Board of Directors

D. Long Term Contra cts

E. Leases.

2. Goodwill on consolida tion rep resent s:

A. Excess of cos t of acquis it ion over the va lue acquired.

B. Excess of Assets over Liabilit ies.

C. Excess of liab ilit ie s ove r a sse ts.

D. Excess of tangible asse ts over in tangible assets.

E. Excess of the purchase consideration over the fair value of assets

acquired.

3. Which of the following is not an a sse t re la ted it em:

A. Stock a n d Work-In -Prog re ss.

B. Resea rch a nd Develop ment.

C. Warranties.

D. Patent and Tra demarks

E. Investments.

4 . A commercia l banks cash and short- te rm funds comprise :

(i) cash ba lances on hand

(ii) cash depos ited with the Centra l Bank of Nigeria(ii i) cash deposited with other banks and financial insti tutions.

A. (i) only

B. (i) and (ii) only

C. (ii) only

D. (i), (ii) and (iii)

E. (ii) and (iii) only.

5. A bank loan is regarded as lost if the interest and/or principal is outstanding

for:

A. More th an 30 d ays b ut le ss t ha n 6 0 d a ys.

B. More t ha n 6 0 d ays b ut le ss t ha n 9 0 d a ys.

C. More th a n 9 0 d ays b ut le ss t ha n 1 80 d a ys.D. More th an 18 0 d a ys b ut le ss t ha n 36 0 d a ys.

E. 360 days and above.

2 .6 .22 .6 .22 .6 .22 .6 .22 .6 .2 SHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONS

1. In the preparation of consolidation schedule, goodwill represents the excess

of purchase consideration over the...........

2. The excess of the cost of acquiring a controlling interest in a subsidiary

over the value of interest acquired is the....................


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3. The principle which st ipula tes tha t grea t care should be exercised in

recognising profit is known as..................

4 . The a ssumption tha t an enterp rise will cont inue in ope ra t ion for the

foreseeable future is referred to as the.................... concept.

5. The required provision on a sub-standard bank loan is .. .. .. .. .. .. .. .. percent.

Refer to Sugge sted Solutions in Appe nd ix I, Page 263.


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AMALGAMAAMALGAMAAMALGAMAAMALGAMAAMALGAMATION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTION


After studying this chapt er, it is expected tha t read ers will understa nd :

! The meaning of business combination;

! The reason(s) why businesses combine;

! The major types of business combinations;

! Accounting entries for bu siness combinations;

! When a company will embark on capital reduction scheme;

! The principles of implementing an already formulated capital reduction scheme;

! The differences between capital reduction and capital reconstruction scheme;

! Distinction between internal and external reconstruction schemes; and

! The formulation of an acceptable capital reduction scheme.

3 .13 .13 .13 .13 .1 INTROINTROINTROINTROINTRODUCTIONDUCTIONDUCTIONDUCTIONDUCTION

The te rm business combination is used to describe an arrangem ent where

two or more businesses owned and operated as separate en tities come together

to become a single entity under the same ownership. The implication of this is

tha t the sepa rate businesses will discontinue their ownership and come under

a single ownership. Business combina tions can be found in sole- proprietorship,

partnership and compa nies business arrangements. Compan ies combine with

a view to elimina ting or reducing competition, to carry on business on a la rgescale or to control prices and ma rkets.

Business combina tion can take two forms:

(a ) Amalgamation

(b) Absorption

Sometimes compa nies are dissolved due to financial problems and after several

adjustments they re-register to carry on normal businesses. This process is

called reconstruction or reorga nisat ion. This exercise is und erta ken by those

companies which either incur heavy losses for a long time and were unabletime and were unabletime and were unabletime and were unabletime and were unable

33333


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to write off such losses, or those ha ving substa ntia l fictitious assets such a s

goodwill, preliminary expenses, profit and loss account debit balances.

Reconstruction can either be internal or externa l.

3 .23 .23 .23 .23 .2 AMALGAMAAMALGAMAAMALGAMAAMALGAMAAMALGAMATIONTIONTIONTIONTION

This refers to a situation where companies tha t exist sepa rately under different

ownerships combine to form a new one. The major feature of this arrangemen t

is tha t the two businesses that a ma lgama te will no longer exist, that is, they

are liquidated . For example, company A may combine with compa ny B to form

company AB which is expected to be la rger a nd more viable. Idea lly suited to

this method a re similar businesses of the same sizes, opera ting on a relatively

small scale.

Reasons/benefits of amalga ma tion include:

(a) The desire to gain larger share of the market.

(b) The desire to a t ta in synergy.

(c) The desire to establish a solid capital base.

(d) To provide efficient customer service.

(e) To acquire a base adequately for raw material sourcing in the case of a

manufacturing firm.

(f) To be able to challenge a major competition.

(g) In order to meet legal and statutory requirement.

When businesses ama lgama te, two major accounting p roblems arise,

viz:

(i) Those concerned with closing the books of the discontinuingbusinesses which a re being wound up;

(ii) Those concerned with the establishment of the new business.

3 .33 .33 .33 .33 .3 CLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPANIESANIESANIESANIESANIES

To close the books of the discontinuing compa nies, the following ledger accounts

are necessary;

(a ) Rea lisa tion account.

(b ) New company account.

(c) Sundry members account.

(d) Each liability account, for example creditors, liquidation expenses

pa yable/creditors for dissolution expenses, loan or debenture account.

(e) Bank account.

(f) Components of purchase consideration, for example ordinary shares

issued, preference shares issued, debenture stock issued a nd cash pa id.

3 .43 .43 .43 .43 .4 REALISAREALISAREALISAREALISAREALISATION ACCOUNTTION ACCOUNTTION ACCOUNTTION ACCOUNTTION ACCOUNT

This is the a ccount in which the profit or loss on the dissolution of a compa ny is

determined . It is usua lly prepared in a columnar form. The number of columns

will depend on the number of compa nies amalga mat ing.


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The following transactions or events a re usually accounted for in the rea lisation

account:

(a) Debit all assets at book values to realisation account;

(b) Determine the purchase consideration and credit it to the realisation

account;

(c) Amalgamation, dissolution or liquidation expenses should be debited

to rea lisation account. This will in effect reduce the profit on rea lisation

or increase the loss on rea lisat ion

(d) Profit or loss on realisation is determined; that is, the balance on

realiation account is transferred to the sundry members account

(ordinary).

3 .53 .53 .53 .53 .5 NEW COMPNEW COMPNEW COMPNEW COMPNEW COMPANY ACCOUNTANY ACCOUNTANY ACCOUNTANY ACCOUNTANY ACCOUNT

This is the account where the purchase considera tion and related transactionsare treated . The purchase considera tion, when agreed, is debited to this account

(remember that the credit entry goes to rea lisation account) while transactions

relating to the purchase consideration are credited to the account when

settlement of the ag reed purchase considera tion is mad e. The a ccount can

therefore be regarded a s a self ba lancing account.

3 .5 .13 .5 .13 .5 .13 .5 .13 .5 .1 Sundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe rence

S h a r e s )S h a r e s )S h a r e s )S h a r e s )S h a r e s )

The following a ccounting transactions/events are effected in the sundry

members account:(a) Transfer the components of the shareholders fund (for example,

ordinary shares, preference shares, and reserves) to the account

by debiting each of the components of the sha reholders fund

and crediting sundry members account;

(b) The profit/loss on realisation is also transferred to this account;

and

(c) Each of the components of purchase consideration, when settlement

is effected as agreed, including cash, are transferred to this

account and th e a ccount will automatically balance.

This account is similar to the partn ers account in the a ma lgamation of

partnership.

It should be noted, however, that if there is more than one class of

preference shares, the classes should be sepa rated and different ledger

accounts opened for each class. For example, if in the balance sheet

there a re 10%preference shares, 8%cumu lative preference shares and

5%redeema ble preference shares, these a re three different classes of

preference shares. Therefore, three different sund ry members preference

accounts mu st be opened to present each of them separa tely.

AMALGAMATION, ABSORPTION AND RECONSTRUCTION


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3.5 .23 .5 .23 .5 .23 .5 .23 .5 .2 Liability AccountsLiability AccountsLiability AccountsLiability AccountsLiability Accounts

Balances on each liab ility account such as trade creditors and long term

loans/debentures should be brought down in their respective ledger

accounts. Each liab ility is either settled by the d iscontinu ing bu sinessor taken over by the new bu siness.

Where the liab ility is settled by the d iscontinu ing bu siness, the liability

account is debited a nd cash/bank account credited. However, where the

liability is taken over by the new business it becomes part of the purchase

considera tion and is trea ted a s follows:

Dr. Liability account

Cr. New Company account

3 .5 .33 .5 .33 .5 .33 .5 .33 .5 .3 Discount Received from CreditorsDiscount Received from CreditorsDiscount Received from CreditorsDiscount Received from CreditorsDiscount Received from Creditors

Where the liability has been settled at less than the book value a nd this

is rega rded a s full and final settlement . It mea ns discount ha s been

received from creditors. The accounting entries a re:

Dr. Liability account

Cr. Realisa tion Account

ILLILLILLILLILLUSTRAUSTRAUSTRAUSTRAUSTRATION 3.1TION 3.1TION 3.1TION 3.1TION 3.1

The illustra tion be low shows clearly how the d iscount received from

creditors is trea ted .

The following ba lance shee ts of two different compan ies were given a s

at 31 December 2004.

ABC LABC LABC LABC LABC LTDTDTDTDTD

Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04

Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets Nm m

Motor Vehicles 40

Plant and Equipment 60

Furniture & Fittings 20 120

Current AssetsCurrent AssetsCurrent AssetsCurrent AssetsCurrent Assets

Stock 12.0

Debtors 26.8

Cash & Bank 9.2

48

Current liab ilities (creditors) (28)

Net Current Assets 20

Net Assets 140


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Financed by:Financed by:Financed by:Financed by:Financed by:

Capital & Reserves

Ordinary share capita l 100

Reserves 40

140

XYZ LXYZ LXYZ LXYZ LXYZ LTDTDTDTDTD

Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04

Fixed Asset m m

Goodwill 20

Premises 20

Motor Vehicles 40

80

Curren t Assets

Stock 18Debtors 24

Bank & Cash 8

50

Current liabilities (creditors) (40)

Net Current Assets 10

Net Assets 90

Financed by:

Capital & Reserves

Ordinary share capita l 100

Unappropria ted loss (10)90

ABC Ltd decided to a ma lga ma te with XYZ Ltd on 31 December 2004 to form a

compa ny known as ABAK Ltd under the following term s:

The assets a nd liab ilities of ABC Ltd are to be taken over a s follows:

m

Motor Vehicles 80

Plant & Machinery 40

Furniture & Fittings 20

Stocks 8

Debtors 24

The cash of the firm was to be retained to pay in full 12,000,000 of the tra de

creditors and the balance of the creditors to be ta ken over by the new company.

Ama lgam at ion expense of 1,200 ,000 was incurred a nd pa id by ABC Ltd .

Required :Required :Required :Required :Required :

Prepare

(i) Cred itors Account

(ii) Cash Account.



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SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1

In closing the books of ABC Ltd, the creditors and cash account will be as follows:

Creditors AccountCreditors AccountCreditors AccountCreditors AccountCreditors Account m m

Cash 8 Bal b/d 28

Rea lisat ion (Discount

from creditors) 4

ABAK Ltd 16

2828282828 2828282828

Cash AccountCash AccountCash AccountCash AccountCash Account

m m

Bal b/d 9.2 Creditors foramalga ma tion expenses 1.2

Creditors 8.0

9.2 9.2

NotesNotesNotesNotesNotes

1. Amalgamation expense is a priority item and therefore should be settled

before trade creditors. Hence the pa yment of 1.2 million. The balance

of cash of 8 million was used to settle a debt of 12 million. It implies

tha t a discount of 4 million was received from creditors.

2. Although the question did not specify the position of other creditors. It

is assumed that the creditors tha t were not paid off by the discontinuingbusiness are ta ken over by the new compan y.

3 .5 .43 .5 .43 .5 .43 .5 .43 .5 .4 Liab ilities settled a bove the b ook valueLiabilities settled above the book valueLiab ilities settled a bove the b ook valueLiabilities settled above the book valueLiabilities settled above the book value

Where a liab ility has been se ttled a bove its book value, the difference

between the book value a nd the take over value is debited to realisation

account. This implies tha t a loss was incurred in settling the liab ility.

The a ccounting entries will be:

Dr. Realisation account with the difference between the book value

and the ta ke-over valueCr. Liability account with the amount paid.


Assume the figures in illustra tion 3.1 except that the a ssets and liabilities of

XYZ Ltd were ta ken over as follows:


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million

Goodwill Nil

Premises 16

Motor vehicles 32Stock worthless

Debtors 12

All the tra de creditors were ta ken over for 46m, the excess resulting from a

dispute over undisclosed purchases. The amalgamation expense of 2.4m was

fully borne by the new firm.

Required:Required:Required:Required:Required: Prepare the following accounts:

(a ) Cred itors accoun t

(b) Amalgamation expense account .

SUGGESTEDSUGGESTEDSUGGESTEDSUGGESTEDSUGGESTED SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2

In closing th e books of XYZ Ltd , the cred itors and cash account will be a s

follows:

Creditors AccountCreditors AccountCreditors AccountCreditors AccountCreditors Account

m m

ABAK LTD 46 Bal b/d 40

__ Realisation (loss) 6

46 46

Creditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation Expenses

m m

ABAK LTD 2.4 Realisation 2.4

NotesNotesNotesNotesNotes

The 6m on creditors account is the difference between the book value of

creditors and the ta keover value tha t is, the excess resulting from a dispute

over undisclosed pu rchases.

3 .63 .63 .63 .63 .6 PURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERATIONTIONTIONTIONTION

This is the aggregate amount, which the new company is to pay the owners

(tha t is the sta keholders) of the d iscontinuing business and cred itors.

The components of the purchase considera tion in amalgamation of compa nies

ma y comprise of some or all of the following:

(i) Ordinary shares issued by the new company.

(ii) Preference shares issued by the new company.

(iii) Debenture stock issued by the new company.

(iv) Cash given by the new company.

(v) Liabilities of the old companies taken over by the new company.



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Where liab ilities are ta ken over, they form pa rt of the purchase considera tion.

Such liabilities are debited to the liabilities account a nd credited to the new

companys account.

3 .6 .13 .6 .13 .6 .13 .6 .13 .6 .1 Compone nts of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion accountCompone nts of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion account

Ledger accounts are opened for each of the components of purchase

consideration treated in pa ragraph 3.6 ab ove.

On settlement of the p urchase considera tion a s agreed , the a ccount of

each of the components of the purchase considera tion is deb ited while

the new companys account is credited.

On distribu tion to the owners of discontinuing b usinesses, the sundry

members account is debited and the account of each of the components

of the purchase considera tion is credited.The accounting entries necessary to close the book of discontinuing

businesses being liquidated are summ arized below.

Dr. Rea lisa tion Account

Cr. Individual Assets Account

S/No.S/No.S/No.S/No.S/No. EventsEventsEventsEventsEvents Account to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred ited

1. Book va lue of the a sset Rea lisa tion Accoun t In divid ua l Asset Account

taken over by the company

at th e da te of cessation.

2. Liabilities taken over by Individual Liability Account New Company Accountthe new company at the

da te of cessation, (if pa rt

of purcha se considera tion).

3. Agreed purchase New Companys Account Realisa tion Account

consideration (including

liabilities ta ken over).

4. Realisa tion expenses Realisa tion Account Realisa tion expenses

payable/creditors for payable account/

realisa tion expenses. creditors account for

realisation expen ses.

5. Portion of th e rea lisa tion Liq uid ation exp en ses Ba nk Accou nt

expenses paid by the existing

company being discontinued.

6. Port ion of the realisa tion Included in the purchase Realisa tion Account

expenses to be paid by the consideration recorded in

new company. (3) above. OR New

Comp anys Account

7. Discount received from Creditors account Realisa tion Account

creditors.

8 . Profit on rea lisa t ion (this is Rea lisa t ion account Sundry shareholders and

to be derived) debenture holders account


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9. Loss on rea lisa tion Sun dry sha reh olders a nd Rea lisa tion Accoun t

(this is to be derived) debenture holders account

10. Transfe r of ba lances Share capita l rese rves and Sundry shareholders and

on share capita l, debentures account. debenture holders accountreserves and deb entures

Accounts.

11. Settlement of the agreed Bank and/or shares and/or New Companys Account

purchase consideration by deben tures in new

the new company. company account.

12. Settlement of lia bilities Creditors a ccount Ba nk a ccount

not taken over by the new

company.

13. Distribution of balances. Sundry shareholders and Bank and/or shares and/

debenture holders account or debentures in the

New compan y accoun t.

1 4. Arrea rs of p referen ce Preferen ce d ivid en ds in Su nd ry mem bers

dividend included in the arrears. Preference Shares account

balance sheet as a liability.

1 5. Cu mu la tive p referen ce Ret ain ed p rofit or a ny Su nd ry m emb ers

dividend in arrears but not other revenue reserve preference account.

included in the ba lance account.

sheet and not to be forfeited.

16. Arrears of debenture interest Reta ined profit or an y Debenture Stock Account

(if any). other revenue account.

17. Ordinary share dividend Proposed dividend account Sundry members shares

included in the balance sheet. account.

3 .73 .73 .73 .73 .7 ESTESTESTESTESTABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPANYANYANYANYANY

The a ccounting en tries in the books of the new compa ny can be divided into

two:

(a ) Th e a ma lg am ation journ al

(b) The balance sheet after amalgamation.

3 .7 .13 .7 .13 .7 .13 .7 .13 .7 .1 Amalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lThis is a composite journa l which is prepa red to reflect the a ssets and

liabilities taken over as well as goodwill or capital reserve on

amalgamation.

On the debit side of the journal a re all tang ible assets taken over at

revaluat ion value or ta ken over value. However, if the take over values

are not given, it is assumed that the assets are taken over at book values.

The ta ke over value will only be used when such assets are not revalued.

If revalued, the revaluation value will be used instead of the takeover

value.



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On th e credit side of the journal a re a ll the components of purchase

consideration (including liab ilities taken over) as contained on the credit

side of the new company account in the books of the discontinuing

businesses.

The d ifference between the debit side and the credit side of the journa l

represents goodwill or capital reserve. If the ba lancing figure on the

journa l is an asset (i.e. deb it ba lance) it is referred to as goodwill. If it

is a claim over the a ssets (i.e. credit ba lance) it is referred to as cap ital

reserve.

Proforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation Journal

Dr Cr

Land & Building XPlant & Machinery X

Furniture & Fittings X

Motor Vehicles X

Stocks X

Debtors X

Goodwill (balancing figure) X

Creditors X

Bank overdraft X

3%Debenture X

Ordinary shares XPreference shares __ X

X X

Being a ssets and liab ilities taken over on ama lgam at ion of A ltd and B

ltd to form AB Ltd .

N. BN. BN. BN. BN. B

It is instructive to note that the values of individual a ssets mentioned

above are a combined amount of the takeover values of all the

companies that amalgamate. The amounts on the credit side of thejournal a re a lso combined figures of each item on the n ew company

account as they appeared in the book of the d iscontinuing compa ny.

All transactions after ama lgama tion in the book of the n ew compa ny

must b e journalized by mea ns of a simple journal. Such transactions

may include fresh issue a t or above the nomina l value.

3 .7 .23 .7 .23 .7 .23 .7 .23 .7 .2 Issue of SharesIssue of SharesIssue of SharesIssue of SharesIssue of Shares

Where fresh issues of shares are m ad e for cash, the a ccounting entries

will be:


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Dr - Bank/Cash a ccount

Cr - Ordina ry sha re cap ital account with the nomina l value

Cr - Share premium a ccount with th e prem ium.

After this, the ba lance sheet of the new company can be prepa red.

3 .7 .33 .7 .33 .7 .33 .7 .33 .7 .3 Ba lan ce Shee t of the New Comp a nyBalance Sheet of the New CompanyBa lan ce Shee t of the New Comp a nyBalance Sheet of the New CompanyBalance Sheet of the New Company

The balance sheet of the new company, after ama lgama tion is prepared

using the figures from the opening journa l subject to adjustments for

transactions after a malgama tion as enu merated above.


The Moon Company Limited a nd the Rising Star Company Limited have

ag reed to ama lgam ate. A new compa ny Sunshine Compa ny Limited

has b een formed to take over the combined concerns on 31st January,

2009. The Balance sheet of the two companies as at 31 st December,

2008 were a s follows:

The Moon Company LimitedThe Moon Company LimitedThe Moon Company LimitedThe Moon Company LimitedThe Moon Company Limited

Liabil i t iesLiabil i t iesLiabil i t iesLiabil i t iesLiabil i t ies Assets:Assets:Assets:Assets:Assets:

Issued and paid up capita l: Buildings 50,000

100,000 ordinary shares Machinery 20,000

of 1 each 100,000 Stock 26,00015%Debentures 2,000 Debtors 12,000

Creditors 6,000 Cash 5,000

Unappropria ted profit 5,000 _______

113,000 113,000

The Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company Limited

Liabil i t ies :Liabil i t ies :Liabil i t ies :Liabil i t ies :Liabil i t ies : Assets:Assets:Assets:Assets:Assets:

Issued and paid up capita l: Buildings 30,000

5,000 ordinary shares Machinery 25,000of 10 each 50,000 Goodwill 5,000

Creditors 3,000 Stock 3,000

Bill payable 2,000 Debtors 2,000

General reserves 5,000

Retained Earning 5,000 ______

65,000 65,000

The new compa ny (Sunshine) will take over the assets a nd liab ilities as follows:



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MoonMoonMoonMoonMoon

All assets at book value, except cash; buildings and machinery to be depreciated

at the rate of 10%. Debentu res will be redeemed by the Moon Company Limited

Rising StarRising StarRising StarRising StarRising Star

All assets at book value, except goodwill and stock. All liabilities, except

creditors will be sa tisfied by paying in the form of stock-in-tra de by the Rising

Star Comp any.

The n ew compa ny will pa y purchase considerat ion as follows:

(a) To Moon Company Limited:

( i) 7 ,000 ord inary shares of 10 each

(ii) 2 ,000 preference shares of 10 each

(b) To Rising Star Company Limited:

( i) 5 ,000 ord inary shares of 10 each

(ii) 2 ,000 preference shares of 10 each

Required :Required :Required :Required :Required :

Prepare

(a) Realisation Accounts of Moon and Rising Star Companies.

(b) Shareholders Accounts for Moon an d Rising Star Companies.

(c) Cash account of Moon Company.

(d) Goodwill Account of Rising Star Company.

(5) Balance Sheet of Sunshine Company Limited as at 31st January, 2009.


WorkingsWorkingsWorkingsWorkingsWorkings

The net a ssets and the p urchase consideration of the two old compan ies have

to be determined and compared for identification of goodwill or cap ital reserve.

Moon Company LimitedMoon Company LimitedMoon Company LimitedMoon Company LimitedMoon Company Limited

AssetsBuildings 50,000 - 5,000 (depreciation) 45,000

Machinery 20,000 - 2000 (depreciation) 18,000

Stock 26,000

Debtors 12,000

101,000

Less Creditors 6,000

Net Assets 95,000

N

N

N

N


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Less purcha se considerat ion (shares issued):

7,000 ordinary shares 10 = 70,000

2,000 pref. share 10 = 20,000 90,000

Capita l Reserve 5,000

Rising Star Company LimitedRising Star Company LimitedRising Star Company LimitedRising Star Company LimitedRising Star Company Limited

Assets:Assets:Assets:Assets:Assets:

Buildings 30,000

Machinery 25,000

Debtors 2,000

57,000

Less bills payable 2,000

Net Assets 55,000

Less purcha se considerat ion (shares issued):

5,000 ordinary shares 10 = 50,0002,000 pref. shares 10 = 20,000

70,000

Goodwill 15,000

AAAAACCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPANYANYANYANYANY

Realisation AccountRealisation AccountRealisation AccountRealisation AccountRealisation Account

Buildings 50,000 Creditors 6,000

Machinery 20,000 Sunshine (P.C) 90,000

Stock 26,000 S/holders A/c (loss) 12,000

Debtors 12,000 _______

108,000 108,000

* PC is purchase consideration

Sun shine Comp an ySunshine CompanySun shine Comp an ySunshine CompanySun shine Compa ny

Rea lisation 90,000 Shareholders (shares) 90,000

Shareholders AccountShareholders AccountShareholders AccountShareholders AccountShareholders Account

Realisa tion (loss) 12,000 Ord inary shares 100,000

Sunshine (shares) 90,000 Profit and loss 5,000

Cash 3,000 _______

105,000 105,000


NN

N

N

N


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Cash AccountCash AccountCash AccountCash AccountCash Account

Opening balance 5,000 Debentures (15%) 2,000

_____ Shareholders 3,0005,000 5,000

ACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STAR COMPAR COMPAR COMPAR COMPAR COMPANYANYANYANYANY


Building 30,000 Bills payable 2,000

Machinery 25,000 Sunshine (P.C) 70,000

Debtors 2,000

Shareholders (profit) 15,000 ______72,000 72,000

Sunshine Company AccountSunshine Company AccountSunshine Company AccountSunshine Company AccountSunshin e Comp a ny Accoun t

Realisa tion 70,000 Shareholders 70,000

Balance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBa lan ce Shee t of Sun shine Compa ny

Limited as a t 31 Janu aryLimited a s at 31 Janua ryLimited as a t 31 Janu aryLimited a s at 31 Janua ryLimited as a t 31 Janu ary, 2006., 2006., 2006., 2006., 2006.

Fixed Assets:Fixed Assets:Fixed Assets:Fixed Assets:Fixed Assets:

Goodwill ( 15,000 - 5,000) 10,000Buildings ( 45,000 + 3,000) 75,000

Machinery ( 18,000 + 25,000) 43,000

128,000

Current Assets:Current Assets:Current Assets:Current Assets:Current Assets:

Stock 26,000

Debtors ( 12,000 + 2,000) 14,000

40,000

Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:

Creditor 6000

Bills payable 20008000

Net Current Asset:Net Current Asset:Net Current Asset:Net Current Asset:Net Curren t Asset: 32,000

160,000

Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:

12,000 ordinary shares a t 10 per share 120,000

4,000 preference shares a t 10 per share 40,000

160,000

N

N

N

N

N


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The following are the summa rized ba lance sheets of two companies, Rose Ltd

an d Blacky Ltd as a t 31 October 2008.

Rose LtdRose LtdRose LtdRose LtdRose Ltd

SHARE CAPITSHARE CAPITSHARE CAPITSHARE CAPITSHARE CAPITAL:AL:AL:AL:AL: ASSETSASSETSASSETSASSETSASSETS

Ordinary shares of N1 each 150,000 Freehold property (at cost) 45,000

Forfeited share capital 150 Plant & Machinery (at cost) 35,000

Reserve account 10,000 Goodwill 10,000

Profit & loss account 16,865 Stock 68,276

5% Debenture 35,000 Sundry Debtors 25,850

Sundry creditors 5 ,785 Balance a t bank 33,674

217,800 217,800

Blacky LtdBlacky LtdBlacky LtdBlacky LtdBlacky Ltd

ORDINARY SHARESORDINARY SHARESORDINARY SHARESORDINARY SHARESORDINARY SHARES ASSETSASSETSASSETSASSETSASSETS

of 1 ea ch fully paid 39,000 Freehold property (a t cost) 13,000

5% Debentures 7,000 Plant & machinery (a t cost) 11,000

Sundry creditors 25,700 Goodwill 10,000

Bank overdraft 600 Stock 15,200

Sun dry deb tors 9,500______ Profit & loss a ccount 13,600

72,300 72,300

The two compa nies decided to ama lgama te as on 31st December, 2008 and a

new compan y ca lled Yellow Ltd wa s formed with a n a uthorized capita l of

250,000 in ordina ry shares of 1 each. The following terms were agreed on:

Rose LtdRose LtdRose LtdRose LtdRose Ltd

( i) The considera t ion was 6 shares of 1 each fully paid to Rose Ltd in

exchan ge for every 5 sha res in Yellow Ltd and 1,000 cash .

(ii) The debenture holders were to be allotted such debentures in Yellow

Ltd b earing interest at 3 %per a nnum a s would bring them in the

same a mount of interest.

(iii) Yellow Ltd is to take over all assets and liab ilities at their book values.

(iv) The 2,500 expenses of dissolution is to be pa id by Rose Ltd.

Blacky LtdBlacky LtdBlacky LtdBlacky LtdBlacky Ltd

( i) The considera tion was 1 share of 1 each, fully pa id in Yellow Ltd in

exchan ge for every 3 share s in Blacky Ltd an d 500 in cash.

(ii) The debenture holders were to be allotted such debentures in Yellow

Ltd b earing interest at 3%per annum as would bring them in the

same a mount of interest.


N


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(iii) Yellow Ltd to take over all the assets and liabilities (including the bank

overdraft) at their book values.

(iv) Cost of liquidation to be paid by Yellow Ltd 1,000.

The ba lance of the a uthorized share cap ital of Yellow Limited was issued b y

public offer through prospectus. The offer which was payable in full on

app lication was fully subscribed a nd allotted.

YYYYYou arou arou arou arou are re re re re requirequirequirequirequired toed toed toed toed to:

(a) Show the necessary ledger accounts to close the book of each company

(b) The journal entries to open the book of Yellow Ltd

(c) Prepare the balance sheet of Yellow Ltd after amalgamation.



RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky

Goodwill 10,000 10,000 Yellow Ltd (pc) 181,785 50,800

Freehold property 45,000 13,000 Sundry members

Plants & Machinery 35,000 11,000 (Loss on 51,015 11,900

Stock 68,276 15,200 rea lisat ion)

Sund ry deb tors 25,850 9,500

5%Debentu re 15,000 3,000

Creditors forDissolution expen ses 2,500 1,000

Bank 31,174 ________ _________________

232,800 62,700 232,800 62,700

Sundry Members Accoun t (Ordinary)Sundry Members Account (Ordina ry)Sundry Members Accoun t (Ordinary)Sundry Members Account (Ordina ry)Sundry Memb ers Account (Ordinary)

Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky

Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd

Profit & Loss Ordinary share

Account 13,600 capita l 150,000 39,000

Ord share in Forfeited share

Yellow 125,000 13,000 capita l 150 __

Bank 1,000 500 Reserves 10,000 __

Realisation Loss 51,015 11,900 Profit & loss 16,865________

177,015 39,000 177,015 39,000

N N N N


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YYYYYellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Account

Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky

LtdLtdLtdLtdLtd LtdLtdLtdLtdLtd Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd

Rea lisat ion Account 181,785 50,800 Ordina ry shares 125,000 13,000

3%Debentu re 50,000 10,000

Cash 1,000 500

Sundry creditors 5,785 25,700

Cred itors for

Dissolution

__________________ expen ses 1,000

181,785 50,800 181,785 50,800

Bank AccountBank AccountBank AccountBank AccountBank Account

Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd

Bal. b/d 33,674__

Bal. b/d __ 600

Yellow Ltd. 1,000 500 Creditors for

Dissolution

expenses 2,500 __

Yellow Ltd. __ 600 Su nd ry mem ber

(ord.) 1,000 500

_______ ______ Realisation 31,174 ______

34,674 1,100 34,674 1,100

5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t

Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd

3 % Debenture 50,000 10,000 Bal. b/d 35,000 7,000

Account Realisa tion

______ ______ Account 15,000 3,000

50,000 10,000 50,000 10,000

3 % Deb en tu r3 % Deb en tu r3 % Deb en tu r3 % Deb en tu r3 % Deb en tu re in Ye in Ye in Ye in Ye in Yellow Ltd. Accountellow Ltd. Accountellow Ltd. Accountellow Ltd. Accountellow Ltd. Account

Rose LtdRose LtdRose LtdRose LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky Ltd

Yellow Ltd. 50,000 10,000 5% Debenture 50,000 10,000

Sundry Creditors AccountSundry Creditors AccountSundry Creditors AccountSundry Creditors AccountSundry Creditors Account

Rose LtdRose LtdRose LtdRose LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky Ltd

Yellow Ltd. 5,785 25,700 Ba l. b/d 5,785 25,700



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OrOrOrOrOrdinary Shardinary Shardinary Shardinary Shardinary Shares in Yes in Yes in Yes in Yes in Yellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Account

Rose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky Ltd

Ye llow Ltd. 125 ,000 13,000 Sundry members 125 ,000 13,000

(ord.) account

N.B.:N.B.:N.B.:N.B.:N.B.: The amount of 15,000 and 3,000 on 5%Deben ture account transferred

to realisation account represen ts the surplus on issue of 3 %deb enture over

the existing 5%Debentu re.

Dissolution Expenses AccountDissolution Expenses AccountDissolution Expenses AccountDissolution Expenses AccountDissolution Expenses Account

RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky ----- RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky

Lt dLt dLt dLt dLt d Lt dLt dLt dLt dLt d Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd

Bank 2,500 Realisa tion 2,500 1,000

Yellow Ltd. _____ 1,000 _____ _____

2 ,5002 ,5002 ,5002 ,5002 ,500 1 ,0001 ,0001 ,0001 ,0001 ,000 2 ,5002 ,5002 ,5002 ,5002 ,500 1 ,0001 ,0001 ,0001 ,0001 ,000

Determ inat ion of Purchase Considera tionDeterm inat ion of Purcha se Considera tionDeterm inat ion of Purchase Considera tionDeterm inat ion of Purcha se Considera tionDeterm ina tion of Purcha se Considera tion

Rose Ltd.Rose Ltd.Rose Ltd.Rose Ltd.Rose Ltd.

(a) Ordina ry Sha res

6 sha res in Rose = 5 Shares in Yellow

1 sha re in Rose = 5/6 in Yellow

150,000 sha res in Rose = 5/6 x 150,000= 125,000 shares of 1 each

= 125,000

(b) Cash = 1,000

(c) 5%Debenture

Present interest is 5/100 x 35,000 = 1,750

Futu re Interest is 3 X = 1,750100

X = 1,750 x 100 = 50,000

3

(d) Creditors taken over = 5,785

Blacky Ltd.Blacky Ltd.Blacky Ltd.Blacky Ltd.Blacky Ltd.

(a ) Ordina ry Sha res

3 shares in Blacky = 1 in Yellow

1 share in Blacky = 1/3 in Yellow

39,000 shares in Blacky = 1/3 x 39,000

= 13,000 shares of N1each

= 13,000

N


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(b) Cash 500

(c) 5% Deb en tu re5% Deb en tu re5% Deb en tu re5% Deb en tu re5% Deb en tu re

Present Interest = 5/100 x 7,000 = 350

3 %Deben ture to be issued th at will genera te the sam e interest of

350 will be:

3X = 350

100

3 X = 35,000

X = 35,000

3

= 35,000

7/2

= 35000 x 2/7

= 5000 x 2

= 10,000

(d ) Cred itors taken over

Sundry creditors - 25,700

Ban k overdra ft - 600

Cred itors for dissolut ion expenses 1,000

SUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERATIONTIONTIONTIONTION

Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .

Ordinary share capita l 125,000 13,000

3 %Debenture 50,000 10,000

Cash 1,000 500

Creditors taken over 5,785 25,700

Creditors for Dissolution expenses - 1,000

Bank overdraft _______ 600

181,785 50,800

NoteNoteNoteNoteNote

(a) The purchase consideration, as calculated above, is debited to the new

company account (Yellow Ltd) a nd credited to the

Financial Reporting and Ethics

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