Merge two sole traders into a limited company
Record the assets and liabilities accepted by a new company and settle the purchase price with cash or shares.
Section 3.3 · Business acquisition and merger
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover the listed merger and acquisition forms, business-versus-assets distinction, goodwill, consideration, journals, ledger accounts, new-entity statements and evaluation. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 and 3.1 skills for identifying assets and liabilities, recording business transfers, preparing financial statements and separating a company's share capital from the former owners' equity.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company assumes a $12,000 trade payable with an acquired business. What happens to its liabilities?
What you will learn
- Distinguish company share capital from former owners' business balances
- Record assets, liabilities, goodwill and consideration in the new company's books
- Check the opening statement of financial position after a transfer
The company is a new legal entity
When two sole traders merge to form a limited company, identify the assets and liabilities the new company accepts and the values agreed. The company records those acquired balances; each seller closes their own records and receives the consideration specified. The owners may become shareholders, but their old drawings and personal balances do not automatically become company expenses.
The company may settle consideration with cash, ordinary shares or loan notes. Shares form equity and loan notes form liabilities. If the company issues shares at a stated issue value above nominal value, record nominal share capital and share premium separately when required by the question.
Reconcile goodwill and the opening company position
Add the agreed value of all consideration forms and compare with the identifiable net assets transferred to calculate goodwill under the syllabus method. In the company's records, debit transferred assets and any goodwill; credit liabilities assumed and the purchase consideration accounts. Then settle the vendor balance through cash, shares or notes.
An opening statement of financial position should reflect the transferred assets, goodwill if supported, remaining cash, share capital, any share premium and loan notes. Use a balancing check; do not hide an unexplained difference in goodwill or share premium.
Pause and explain
A new company issues $50,000 shares and pays $30,000 cash for a business. What is the total consideration?
Worked example
A new company acquires two sole-trader businesses for $260,000. It accepts assets $340,000 and liabilities $105,000. It issues shares for $180,000 and pays $80,000 cash. Calculate net assets, goodwill and the vendor settlement.
Show the worked solution
- Net assets = $340,000 − $105,000 = $235,000.
- Total consideration = $180,000 shares + $80,000 cash = $260,000; goodwill = $25,000.
- The company records the acquired assets, goodwill and liabilities, then settles $180,000 with equity and $80,000 with cash.
Answer Net assets $235,000; goodwill $25,000; consideration settled with shares $180,000 and cash $80,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
The company accepts assets $190,000 and liabilities $60,000 for consideration $150,000. It issues $100,000 shares and $50,000 loan notes. Calculate net assets and goodwill, then classify the settlement.
Give me a hint
Net the transferred balances and add both consideration forms.
Compare my reasoning
- Net assets = $190,000 − $60,000 = $130,000.
- Goodwill = $150,000 − $130,000 = $20,000.
- Shares of $100,000 increase equity and loan notes of $50,000 create a liability.
Net assets $130,000; goodwill $20,000; settlement is $100,000 shares and $50,000 loan notes.
Look for these in your work
- Net assets correct
- Goodwill correct
- Equity and liability distinguished
A company issues 40,000 $1 ordinary shares at $2.50 each to settle part of a business purchase. Calculate the share issue value, share capital and share premium.
Give me a hint
Issue value uses shares multiplied by issue price; nominal capital uses the nominal value.
Compare my reasoning
- Total issue value = 40,000 × $2.50 = $100,000.
- Share capital = 40,000 × $1 nominal value = $40,000.
- Share premium = $100,000 − $40,000 = $60,000.
Issue value $100,000; share capital $40,000; share premium $60,000.
Look for these in your work
- Total share value calculated
- Nominal capital separated
- Premium reconciles
After an acquisition the new company's opening balances are out by $18,000. A director suggests recording it as goodwill. What checks should be made first?
Give me a hint
Goodwill is calculated from consideration and acquired net assets, not used as a suspense figure.
Compare my reasoning
- Recheck consideration, including the cash, shares and notes actually agreed.
- Recheck assets and liabilities transferred at their agreed values and confirm excluded items were left out.
- Reconcile the vendor account and share capital or premium entries; recognise goodwill only if the supported calculation produces it.
Reconcile consideration, acquired balances and settlement entries first. Goodwill must equal the supported consideration less net assets, not an unexplained balancing amount.
Look for these in your work
- Consideration checked
- Transferred balances checked
- Goodwill formula preserved
Common mistakes
- Recording former sole-trader capital as company share capital without issuing shares
- Leaving assumed liabilities out of the company books
- Crediting the purchase consideration twice when settling the vendor
What can you explain now?
What does a company issue to former owners when it settles acquisition consideration with shares?
Compare with the explanation
Its own shares, recorded as equity under the stated issue terms
Share consideration increases the new company's equity; it does not carry forward the seller's proprietor capital.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
Describe the company's journal logic when it acquires assets, assumes liabilities and issues shares or notes.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.