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Purchase of a business: Revaluation account and the purchaser's entries

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

A takeover is recorded in two sets of books. Before the transfer, the vendor (or each merging company) may revalue its assets in a Revaluation account. The purchaser then records the assets and liabilities it acquires, the goodwill and the consideration it gives in its own journal and ledger accounts.

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Revaluation account (vendor's books)

When assets are revalued to agreed values before a sale or merger, the changes go through a Revaluation account:

An increase in an asset: Dr Asset, Cr Revaluation.
A decrease in an asset (or an increase in a liability): Dr Revaluation, Cr Asset (or liability).
Balance the account. A net gain belongs to the shareholders: Dr Revaluation, Cr Sundry shareholders (or the capital and reserves accounts). A net loss goes the other way.

The assets then pass to the Realisation account at their new (revalued) book values, so any further profit or loss on realisation is only the difference between those values and the purchase consideration.

Worked Revaluation account

Severn Ltd's assets are revalued before Avon plc takes it over (figures from the previous lesson).

Dr	£	Cr	£
Inventory (decrease)	20,000	Property, plant and equipment (increase)	250,000
Trade receivables (decrease)	10,000
Sundry shareholders: gain on revaluation	220,000
Total	250,000	Total	250,000

Revaluation account (Severn Ltd)

The purchaser's entries

In the purchaser's books the acquisition is recorded in two steps (as a journal, or through a Business purchase or Vendor account):

1. Acquire the net assets: Dr each asset taken over at fair value, Dr Goodwill (the consideration in excess of the fair value of the net assets), Cr each liability taken over, Cr Vendor with the purchase consideration.

2. Pay the vendor: Dr Vendor, Cr Ordinary share capital (nominal value of the shares issued), Cr Share premium (the excess of their agreed value over nominal), Cr Bank (any cash paid).

The Vendor account then has no balance. A gain on a bargain purchase would be a credit instead of goodwill.

Worked purchaser's journal

Avon plc issues 1,000,000 £1 shares valued at £1.60 and pays £160,000 cash.

Account	Dr £	Cr £
Property, plant and equipment	1,450,000
Inventory	240,000
Trade receivables	170,000
Cash	60,000
Goodwill	280,000
Trade payables		140,000
Bank loan		300,000
Severn Ltd (vendor): purchase consideration		1,760,000
Total	2,200,000	2,200,000

Journal of Avon plc: acquisition of Severn Ltd

Worked example

Give the journal entry in Avon plc's books to settle the purchase consideration of £1,760,000 owed to Severn Ltd.

Shares issued: 1,000,000 x £1 nominal = 1,000,000 to ordinary share capital
Premium: 1,000,000 x £0.60 = 600,000 to share premium
Cash: 800,000 x £0.20 = 160,000 from bank
Dr Severn Ltd 1,760,000; Cr Ordinary share capital 1,000,000; Cr Share premium 600,000; Cr Bank 160,000

Answer: Dr Severn Ltd £1,760,000; Cr Ordinary share capital £1,000,000; Cr Share premium £600,000; Cr Bank £160,000

Key idea: Vendor: increases in assets are credited and decreases debited to the Revaluation account, and the net gain goes to the shareholders. Purchaser: Dr assets at fair value and goodwill, Cr liabilities and Cr Vendor; then Dr Vendor, Cr share capital, share premium and bank.

Check yourself

Before a takeover, land with a book value of £400,000 is revalued to £520,000, inventory of £90,000 is written down to £75,000 and an allowance of £3,000 is made against trade receivables. Calculate the net gain on revaluation.
Show answer
£102000. 120,000 - 15,000 - 3,000 = £102,000.
In the vendor's Revaluation account, on which side is a decrease in the value of inventory recorded?
- Debit
- Credit
- It is not recorded
- In the Sundry Shareholders account only
Show answer
Debit. A decrease is a loss on revaluation: Dr Revaluation, Cr Inventory.
A vendor company being wound up has a net gain on its Revaluation account. Where is it transferred?
- Debit of the Sundry Shareholders account
- Credit of the purchaser's share premium account
- Credit of the Sundry Shareholders account
- Credit of the Realisation account as purchase consideration
Show answer
Credit of the Sundry Shareholders account. The gain belongs to the vendor's shareholders, like a profit on realisation.
A purchaser takes over assets with a fair value of £2,600,000 and liabilities of £700,000, for a purchase consideration of £2,150,000. What amount is debited to goodwill in the purchaser's journal?
Show answer
£250000. 2,150,000 - (2,600,000 - 700,000) = £250,000.
To settle a purchase consideration, the purchaser issues 400,000 £1 ordinary shares valued at £2.50 each and pays £150,000 cash. What amount is credited to share premium?
Show answer
£600000. 400,000 x (2.50 - 1.00) = £600,000.
For the same settlement (400,000 £1 shares valued at £2.50 plus £150,000 cash), what total is debited to the Vendor account?
Show answer
£1150000. 1,000,000 + 150,000 = £1,150,000, the full purchase consideration.
At what value does the purchaser record the assets it acquires?
- The vendor's book value
- Original cost to the vendor
- Nominal value
- Fair value
Show answer
Fair value. The purchaser records what it has bought at fair value; any excess paid is goodwill.
Which entry records the purchase consideration owed when the purchaser takes over the net assets?
- Dr Vendor account
- Cr Goodwill
- Cr Vendor account
- Dr Share premium
Show answer
Cr Vendor account. Dr assets and goodwill, Cr liabilities and Cr Vendor; the Vendor account is cleared when shares and cash are given.

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