Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICSSUGGESTED SOLUTION 3.1In closing the books of ABC Ltd, the creditors and cash account will be as follows:Creditors Accountm mCash 8 Bal b/d 28Realisation (Discountfrom creditors) 4ABAK Ltd 1628 28Cash Accountm mBal b/d 9.2 Creditors foramalgamation expenses 1.2Creditors 8.09.2 9.2Notes1. Amalgamation expense is a priority item and therefore should be settledbefore trade creditors. Hence the payment of 1.2 million. The balanceof cash of 8 million was used to settle a debt of 12 million. It impliesthat a discount of 4 million was received from creditors.2. Although the question did not specify the position of other creditors. Itis assumed that the creditors that were not paid off by the discontinuingbusiness are taken over by the new company.3.5.4 Liabilities settled above the book valueWhere a liability has been settled above its book value, the differencebetween the book value and the take over value is debited to realisationaccount. This implies that a loss was incurred in settling the liability.The accounting entries will be:Dr.Cr.ILLUSTRAUSTRATION TION 3.2Realisation account with the difference between the book valueand the take-over valueLiability account with the amount paid.Assume the figures in illustration 3.1 except that the assets and liabilities ofXYZ Ltd were taken over as follows:24