Record cash, shares and loan notes as purchase consideration
Add the agreed forms of consideration and distinguish the purchase value from how it is financed or distributed to former owners.
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 buyer pays $60,000 cash and issues shares worth $90,000. What is total consideration?
What you will learn
- Identify common forms of purchase consideration
- Calculate the total agreed consideration
- Explain share-capital and loan-note effects in the acquiring entity
Purchase consideration may use more than one payment form
A buyer may settle the price with cash, shares, loan notes or a combination of these, using the values given in the question. The total consideration is the sum of the agreed amounts. A loan note is a liability of the issuer; a share issue increases contributed equity according to the share terms.
Do not count the same consideration twice. If a purchase price is $250,000 and the company settles $100,000 with cash, $120,000 with shares and $30,000 with loan notes, total consideration remains $250,000. The forms of settlement affect the new entity's cash, equity and liabilities differently.
Consideration belongs to the sellers under the agreement
The purchase price is the amount the buyer agrees to provide for the business. How that value is distributed among partners or owners depends on their rights, agreed sharing arrangements and the question's instructions. Partners do not automatically receive equal amounts merely because there are two of them.
When shares are issued, separate nominal share capital from any share premium if the question gives both a nominal value and an issue value. Follow the course's stated accounting format and the agreed consideration. The buyer records its issued shares; the former owners' entitlement follows their contract or partnership settlement.
Pause and explain
A company issues shares with nominal value $1 each at an agreed issue value of $2 each. What should be separated in its equity entry?
Worked example
A new company pays $45,000 cash and issues shares worth $135,000 to acquire a sole trader's business. Calculate consideration and explain the effect of the settlement forms.
Show the worked solution
- Total consideration = $45,000 + $135,000 = $180,000.
- Cash decreases by $45,000; issued shares increase equity by the agreed $135,000 value, with nominal capital and any premium separated if provided.
- The goodwill calculation uses the total $180,000, not just the cash portion.
Answer Total purchase consideration is $180,000. The new company uses cash and share capital to settle it; both forms are included in the acquisition comparison.
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.
A business is bought for $320,000: cash $70,000, shares $200,000 and loan notes $50,000. Reconcile the total and state each balance-sheet effect.
Give me a hint
Add the forms, then classify each form in the acquiring entity.
Compare my reasoning
- Total consideration = $70,000 + $200,000 + $50,000 = $320,000.
- Cash falls by $70,000; shares increase equity by $200,000 at the agreed value.
- Loan notes create a $50,000 liability; include all $320,000 in the goodwill comparison.
Consideration reconciles to $320,000. It uses $70,000 cash, $200,000 share value and $50,000 borrowing; all count toward purchase consideration.
Look for these in your work
- Total reconciles
- Cash and equity separated
- Loan liability included
A partnership's purchase consideration is $180,000. A and B share residual profits 3:2. The agreement says distribute the consideration using the old profit-sharing ratio. Calculate each partner's entitlement.
Give me a hint
The agreement supplies the allocation rule; apply the ratio to the whole consideration.
Compare my reasoning
- Total ratio parts = 3 + 2 = 5.
- A receives 3/5 × $180,000 = $108,000.
- B receives 2/5 × $180,000 = $72,000; check that the total is $180,000.
A receives $108,000 and B receives $72,000 under the stated agreement.
Look for these in your work
- Agreement followed
- Ratio applied
- Total reconciles
Two partners share profits 1:1 but contributed capital of $90,000 and $40,000. The business is sold for $200,000. A partner says each must receive $100,000 because the profit ratio is equal. What should be checked before agreeing?
Give me a hint
Do not infer the distribution basis from either capital or profit ratio without the agreement and account balances.
Compare my reasoning
- Check the sale agreement and partnership agreement for how proceeds and realisation profit are allocated.
- Separate repayment of capital balances from any realisation profit, loan claims or drawings.
- The partners' equal profit ratio does not by itself prove that all proceeds are split equally.
Do not accept an equal split without checking the agreement and closing accounts. Capital repayment, realisation profit and other balances may produce a different entitlement.
Look for these in your work
- Agreement checked
- Capital distinguished from profit
- Unsupported equal split rejected
Common mistakes
- Calculating goodwill using only cash when shares or notes also form consideration
- Recording loan notes as equity
- Splitting a partnership's consideration equally without checking partner rights
What can you explain now?
How should loan notes issued as consideration be classified in the new company?
Compare with the explanation
As a liability under the loan terms
Loan notes create a borrowing obligation; the terms determine subsequent interest and repayment.
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
Name three possible consideration forms and explain why the seller distribution is a separate question from the total purchase price.
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.