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Statement of financial position after a purchase or merger

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

After a takeover, the purchaser's statement of financial position includes the assets and liabilities it has acquired, the goodwill, the new shares it issued and the cash it paid.

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Step by step

1. Add the acquired assets and liabilities at fair value to the purchaser's own figures.

2. Add goodwill as an intangible non-current asset.

3. New shares issued: nominal value to share capital, the excess of market value over nominal to share premium.

4. Cash paid: deduct from the purchaser's bank (this can create an overdraft, shown as a current liability).

5. The vendor's share capital and reserves do not appear: they were cancelled by the consideration.

6. Check: total assets = total equity and liabilities.

Purchase with shares or cash, and mergers

Purchase for cash: no new shares; cash falls by the price; equity unchanged.
Purchase for shares: share capital and share premium rise; cash unchanged.
Merger: often a new company is formed which issues shares to the shareholders of both companies and takes over both businesses. Its share capital is the nominal value of all shares issued; any premium goes to share premium; goodwill may arise on each company acquired (Pearson mark schemes show 'Goodwill' for each).

Worked statement

Avon plc after buying Severn Ltd (from the purchase price lesson: 1,000,000 new £1 shares at £1.60 and £160,000 cash).

	Avon before £	Avon after £
Goodwill	0	280,000
Property, plant and equipment	3,000,000	4,450,000
Inventory	500,000	740,000
Trade receivables	400,000	570,000
Cash	300,000	200,000
Total assets	4,200,000	6,240,000
Ordinary shares of £1	2,000,000	3,000,000
Share premium	200,000	800,000
Retained earnings	650,000	650,000
Debentures	1,000,000	1,000,000
Bank loan	0	300,000
Trade payables	350,000	490,000
Total equity and liabilities	4,200,000	6,240,000

Statement of financial position of Avon plc

Worked example

Show the workings for Avon plc's share capital, share premium and cash after the purchase.

Share capital = 2,000,000 + 1,000,000 x £1 = £3,000,000
Share premium = 200,000 + 1,000,000 x £0.60 = £800,000
Cash = 300,000 + 60,000 taken over - 160,000 paid = £200,000

Answer: Share capital £3,000,000; share premium £800,000; cash £200,000

Key idea: Combine at fair value, add goodwill, record new shares at nominal value plus share premium, deduct cash paid; the vendor's equity disappears; the statement must balance.

Check yourself

A purchaser with share capital of £5,000,000 (£1 shares) issues 1,500,000 new £1 shares, valued at £2.40 each, to buy a company. What is its share capital afterwards?
Show answer
£6500000. 5,000,000 + 1,500,000 x £1 = £6,500,000.
For the same purchase (1,500,000 £1 shares valued at £2.40), by how much does share premium rise?
Show answer
£2100000. 1,500,000 x £1.40 = £2,100,000.
A purchaser has cash of £420,000. It takes over the vendor's cash of £35,000 and pays £600,000 cash as part of the consideration. What is its cash position afterwards? Give an overdraft as a negative number.
Show answer
£-145000. 420,000 + 35,000 - 600,000 = -145,000: an overdraft of £145,000.
The purchaser's PPE is £4,100,000. The vendor's PPE has a book value of £900,000 and a fair value of £1,150,000. What PPE figure appears after the purchase?
Show answer
£5250000. 4,100,000 + 1,150,000 (fair value) = £5,250,000.
What happens to the vendor company's retained earnings in the purchaser's statement of financial position?
- They are added to the purchaser's retained earnings
- They are added to share premium
- They become goodwill
- They do not appear
Show answer
They do not appear. The vendor's equity is replaced by the consideration; only the purchaser's own reserves (plus new share capital and premium) appear.
Where does goodwill on acquisition appear?
- Current assets
- Non-current assets (intangible)
- Equity
- Non-current liabilities
Show answer
Non-current assets (intangible). Goodwill is an intangible non-current asset.
In a merger, a new company issues shares to the shareholders of two existing companies. What determines the new company's share capital?
- The market value of all the shares it issues
- The total of the two old companies' share capital
- The goodwill on the merger
- The nominal value of all the shares it issues
Show answer
The nominal value of all the shares it issues. Share capital is always recorded at nominal value; any excess goes to share premium.

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Last updated 8 November 2026. Spotted a mistake? Tell us.