Record the acquisition of a partnership by a limited company
Apply the transfer terms to an acquiring company and the partnership being sold, including goodwill, liabilities and excluded balances.
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 acquires $200,000 assets and $70,000 liabilities. What net assets are acquired?
What you will learn
- Record agreed assets and liabilities taken over by a limited company
- Calculate acquisition goodwill from consideration and net assets
- Distinguish the company's purchase entry from the partnership's realisation and partner settlement
The company records the business it accepts
When a limited company acquires a partnership, list the partnership assets taken over at their agreed acquisition values and the liabilities the company accepts. A bank account, a partner loan or another balance may be excluded. The company records what it takes over, not every item in the partnership's old trial balance.
Total consideration can include cash, shares or loan notes. Compare that agreed value with the acquired net assets to calculate goodwill under the syllabus method. In the company books, bring in assets and goodwill as debits and assumed liabilities and consideration as credits before recording the settlement form.
The partnership closes through a realisation and settlement
The old partnership transfers assets and liabilities, receives or is owed consideration, and closes its accounts. A realisation account compares the book values transferred with the consideration received and liabilities taken over under the question's method. The resulting profit or loss is shared using the old partnership's profit-sharing ratio unless told otherwise.
The company then has its own share capital, share premium, cash, loan notes, goodwill and acquired operating balances. Do not transfer the old partners' capital accounts as company equity; settle those balances among the partners after realisation and other agreed adjustments.
Pause and explain
The company acquires a partnership's trade payables. What is the accounting effect in the company books?
Worked example
A company pays $240,000 to acquire a partnership. It takes assets valued at $310,000 and assumes liabilities of $95,000. It excludes the partnership bank account. Calculate goodwill and state what should not be included.
Show the worked solution
- Net assets acquired = $310,000 − $95,000 = $215,000.
- Goodwill = $240,000 consideration − $215,000 net assets = $25,000.
- The partnership bank account is excluded and does not form part of the company's acquired assets or goodwill calculation.
Answer Goodwill is $25,000. Exclude the bank account because the company did not acquire it.
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 company takes over equipment $125,000, inventory $28,000 and receivables $17,000, and assumes payables $22,000. Consideration is $170,000. Calculate net assets and goodwill; state the partner-account step that remains.
Give me a hint
Add transferred assets, subtract assumed liabilities and compare with consideration.
Compare my reasoning
- Assets total $125,000 + $28,000 + $17,000 = $170,000.
- Net assets = $170,000 − $22,000 = $148,000; goodwill = $170,000 − $148,000 = $22,000.
- The old partnership must still allocate any realisation profit or loss to partners under its old ratio and settle capital/current balances.
Net assets $148,000; goodwill $22,000. The old partnership separately completes its realisation and partner settlement.
Look for these in your work
- Assets summed
- Goodwill calculated
- Old firm settlement identified
A company pays $300,000: $180,000 in shares, $70,000 cash and $50,000 loan notes. It takes over net assets with agreed value $248,000. Calculate goodwill and state the company-side classifications.
Give me a hint
Compare all consideration forms with net assets, then classify the forms in the company.
Compare my reasoning
- Total consideration = $180,000 + $70,000 + $50,000 = $300,000.
- Goodwill = $300,000 − $248,000 = $52,000.
- Shares are equity, cash reduces assets and loan notes are liabilities.
Goodwill $52,000; settlement is $180,000 equity, $70,000 cash and $50,000 borrowing.
Look for these in your work
- Total consideration reconciled
- Goodwill correct
- Three forms classified
A partnership's assets are revalued for a sale and the acquiring company does not assume one partner loan. Explain how to keep the partnership and company records consistent without importing the excluded loan.
Give me a hint
Use separate books: transfer in the company, realisation and settlement in the partnership.
Compare my reasoning
- Record only the assets and liabilities the company accepts at the agreed values.
- Leave the excluded partner loan out of the company's assumed liabilities and settle it in the partnership's closing accounts.
- Reconcile the company's consideration with the seller partnership's realisation and then allocate the old firm's result and settle partner balances.
The company records the agreed transferred balances only. The partnership retains and settles the excluded partner loan, completes realisation and distributes remaining balances under its agreement.
Look for these in your work
- Accepted balances recorded
- Excluded loan left with old firm
- Both entities' accounts linked
Common mistakes
- Transferring the partnership bank balance despite an explicit exclusion
- Crediting the old partners' capital to company share capital
- Allocating realisation profit using the new rather than old ratio
What can you explain now?
Which profit-sharing ratio normally allocates a dissolving partnership's realisation result?
Compare with the explanation
The old partners' agreed profit-sharing ratio unless instructed otherwise
Realisation arises in the old partnership, so apply its agreement unless the question specifies another basis.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What does the acquiring company record, and what remains for the partnership to settle after the transfer?
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.