A Level Accounting: Business acquisition and merger (Cambridge 9706) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow section 3.3 Business acquisition and merger (A Level content) of the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028. All businesses and figures are invented and all amounts are in dollars. Read the study guide or the revision notes first. See the course hub, the printable checklist and the free diagnostics.

Questions

1. Wetherby Foods Ltd buys the whole business of Hartshorne Tiles at these agreed values: premises 60,000, equipment 14,000, inventory 9,200, trade receivables 7,800, bank 1,500, trade payables 6,500 (all taken over). It pays 40,000 ordinary shares of 1 issued at 1.50, debentures of 20,000 and 20,000 cash.

(a) Calculate the net assets acquired. [2] (b) Calculate the purchase consideration. [2] (c) Calculate the goodwill. [1]

2. (a) Distinguish between buying a business as a whole and buying its individual assets. [2] (b) State two reasons why two sole traders might choose to merge. [2]

3. Pargeter Bikes and Ostler Cycles merge to form a partnership. Pargeter contributes equipment 7,500, inventory 4,800, trade receivables 2,600, bank 900 and owes trade payables 3,100; goodwill of 3,000 is agreed. Ostler contributes equipment 12,000, inventory 6,100, trade receivables 3,400, owes a bank overdraft 1,300 and trade payables 2,900; goodwill of 4,500 is agreed.

(a) Prepare the journal entry in the partnership’s books for Pargeter’s business. [5] (b) Calculate Ostler’s opening capital. [3]

4. Mowbray Seeds and Prowse Hire merge to form Seedhire Services Ltd, which issues 1 ordinary shares at par equal to the agreed value of each business including goodwill. Mowbray: equipment 20,000, inventory 8,000, trade receivables 5,000, trade payables 3,000, goodwill 6,000. Prowse: equipment 25,000, trade receivables 4,500, bank 1,500, trade payables 2,000, goodwill 4,000.

(a) Calculate the shares issued to each trader. [2] (b) Prepare the journal entry for Prowse’s business. [4] (c) State the total issued share capital. [1]

5. Loveday and Redfern share profits 2:1. Their assets are premises 30,000, equipment 8,000, inventory 5,500, trade receivables 4,200 and bank 1,800; trade payables are 3,500; capitals are Loveday 28,000 and Redfern 18,000. They agree new values: premises 36,000, equipment 7,200, inventory 5,000, trade receivables 4,000. Goodwill of 9,000 is created in the old ratio. Wragby, a sole trader, then joins with equipment 4,000, inventory 2,400, trade receivables 1,600, trade payables 1,100 and agreed goodwill of 1,500.

(a) Prepare the revaluation account. [4] (b) Calculate the three partners’ capital balances after all entries. [5]

6. Bellerby Foods Ltd acquires the partnership of Pellew and Dunstan. Agreed values: premises 48,000, equipment 16,500, inventory 7,200, trade receivables 5,400, trade payables 4,300 (taken over). Consideration: 40,000 ordinary shares of 1 at 1.50, debentures of 12,000 and 6,000 cash.

(a) Calculate the goodwill. [4] (b) Prepare the journal entries in Bellerby’s books. [5]

7. In Pellew and Dunstan’s books, the book values were premises 44,000, equipment 17,000, inventory 7,600, trade receivables 5,700 and trade payables 4,300. Capitals were Pellew 42,000 and Dunstan 28,000, profits shared 3:2. Using the consideration in question 6, Pellew takes 26,000 shares and 7,800 of debentures; Dunstan takes 14,000 shares, 4,200 of debentures and the cash.

(a) Prepare the realisation account. [4] (b) Show each partner’s closing capital and what each receives. [3]

8. Before the acquisition in question 6, Bellerby’s statement of financial position showed: non-current assets 150,000; inventory 32,000; trade receivables 24,000; bank 21,000; share capital 80,000; share premium 10,000; retained earnings 69,000; 5% debentures 40,000; trade payables 28,000. Prepare the statement of financial position after the acquisition. [9]

9. In the first full year after the acquisition, Bellerby earned an operating profit of 38,000 from its existing activities and 11,400 from the acquired business. Ignore tax and dividends.

(a) Calculate total finance costs, if new debentures carry 8%. [2] (b) Calculate the profit for the year. [2] (c) Explain one reason why this profit cannot be compared directly with the previous year. [2]

10. Cobbett Signs earns an annual profit of 24,000 and Delamere Print 21,000. Each rents a unit for 6,000 a year; a shared unit would cost 6,000. Delamere has an overdraft of 9,000. They are considering a merger as a partnership with agreed goodwill of 10,000. Evaluate whether they should merge and make a recommendation. [8]

Answers

1. (a) Assets: 60,000 + 14,000 + 9,200 + 7,800 + 1,500 = 92,500 [1]. Less trade payables 6,500 = 86,000 [1] [2] (b) Shares 40,000 x 1.50 = 60,000 [1]. Plus 20,000 + 20,000 = 100,000 [1] [2] (c) 100,000 - 86,000 = 14,000 [1] [1] Examiner insight: Separate working for net assets and consideration usually lets partly correct work earn credit, whereas a single unexplained goodwill figure does not.

2. (a) A whole business takes over the assets and usually the liabilities for one price, so goodwill can arise [1]. Individual assets are chosen one by one, liabilities stay with the seller and no goodwill arises [1] [2] (b) Any two: pool capital or skills; gain customers or market share; share premises and costs; remove a competitor; limited liability if a company [1] [1] [2] Examiner insight: Answers tend to gain credit when each reason is a distinct idea, so two wordings of “to grow” would count once at most.

3. (a) Dr equipment 7,500, inventory 4,800, trade receivables 2,600 [2]; Dr bank 900 and goodwill 3,000 [1]; Cr trade payables 3,100 [1]; Cr capital: Pargeter 15,700 [1] (debits 18,800 = credits 18,800) [5] (b) Net assets 12,000 + 6,100 + 3,400 - 1,300 - 2,900 = 17,300 [2]; plus goodwill 4,500 = 21,800 [1] [3] Examiner insight: A journal that does not balance is a visible warning to check; the goodwill debit is the item most often missing.

4. (a) Mowbray: 20,000 + 8,000 + 5,000 - 3,000 = 30,000, plus 6,000 = 36,000 shares [1]. Prowse: 25,000 + 4,500 + 1,500 - 2,000 = 29,000, plus 4,000 = 33,000 shares [1] [2] (b) Dr equipment 25,000, trade receivables 4,500 and bank 1,500 [2]; Dr goodwill 4,000 [1]; Cr trade payables 2,000 and Cr share capital 33,000 [1] [4] (c) 36,000 + 33,000 = 69,000 [1] [1] Examiner insight: Because shares are issued at par, no share premium arises; answers that add one have usually mixed up this case with an issue at a premium.

5. (a) Revaluation account. Dr: equipment 800, inventory 500, trade receivables 200 (losses 1,500) [1]; Cr: premises 6,000 [1]; profit 6,000 - 1,500 = 4,500 [1]; shared Loveday 3,000, Redfern 1,500 [1] [4] (b) Goodwill credited 6,000 and 3,000 [1]. Wragby: 4,000 + 2,400 + 1,600 - 1,100 = 6,900 [1]; plus goodwill 1,500 = 8,400 [1]. Loveday 28,000 + 3,000 + 6,000 = 37,000 [1]; Redfern 18,000 + 1,500 + 3,000 = 22,500 [1] [5] Examiner insight: Using the old ratio for both the revaluation profit and the existing goodwill matters; using the new ratio changes every capital balance.

6. (a) Net assets 48,000 + 16,500 + 7,200 + 5,400 - 4,300 = 72,800 [2]. Consideration 60,000 + 12,000 + 6,000 = 78,000 [1]. Goodwill 5,200 [1] [4] (b) Journal 1: Dr premises 48,000, equipment 16,500, inventory 7,200, trade receivables 5,400, goodwill 5,200 [1]; Cr trade payables 4,300 and business purchase 78,000 [1]. Journal 2: Dr business purchase 78,000 [1]; Cr share capital 40,000, share premium 20,000 [1]; Cr debentures 12,000 and bank 6,000 [1] [5] Examiner insight: The premium is the issue price above nominal value (0.50 x 40,000), not the whole 60,000; answers that show nominal value and premium separately are easier to follow.

7. (a) Dr assets at book value 74,300 [1]; Cr trade payables 4,300 [1]; Cr Bellerby Foods Ltd 78,000 [1]; balancing profit on realisation 78,000 - 70,000 = 8,000 on the debit side [1] (both sides total 82,300) [4] (b) Profit shared 3:2: Pellew 4,800, Dunstan 3,200 [1]. Closing capital: Pellew 46,800 and Dunstan 31,200 [1]. Pellew receives 39,000 shares + 7,800 debentures; Dunstan 21,000 shares + 4,200 debentures + 6,000 cash, which clears both accounts [1] [3] Examiner insight: The shares are valued at the issue price of 1.50, so receipts only match the capital balances when that price is used.

8. Non-current assets 150,000 + 48,000 + 16,500 + 5,200 = 219,700 [1]; inventory 39,200 [1]; trade receivables 29,400 [1]; bank 21,000 - 6,000 = 15,000 [1]; total assets 303,300 [1]. Share capital 120,000 [1]; share premium 30,000 [1]; retained earnings 69,000; debentures 52,000 [1]; trade payables 32,300 [1]; total equity and liabilities 303,300 [9] Examiner insight: Both totals should agree; if they do not, the usual cause is goodwill left out or the debentures omitted from non-current liabilities.

9. (a) Existing 40,000 x 5% = 2,000; new 12,000 x 8% = 960 [1]; total 2,960 [1] [2] (b) Operating profit 38,000 + 11,400 = 49,400 [1]; less 2,960 = 46,440 [1] [2] (c) The profit now includes the acquired business and extra debenture interest, so the earlier year is not like for like [2] [2] Examiner insight: A comparison point gains more when it says what changed and why it matters, rather than only saying the profit rose.

10. Advantage: shared unit saves 6,000, lifting combined profit from 45,000 to 51,000 [1]. Advantage: combined skills and customers could increase sales [1]. Disadvantage: unlimited liability means each partner is exposed to the other’s 9,000 overdraft [1]. Disadvantage: the 10,000 goodwill must be agreed and profit sharing may be disputed [1]. Context used for at least two points [1]. Judgement, for example merge if they agree a ratio and clear the overdraft first, because the 6,000 saving is secure and the risks can be managed [3]. Credit also for the opposite view if justified [8] Examiner insight: Evaluation answers usually gain more from a point tied to the figures given than from a general statement, and a recommendation needs a reason.

Where marks are usually lost

• Using book values when the question gives agreed values.
• Forgetting to deduct liabilities taken over before finding goodwill.
• Putting the whole issue price into share capital.
• Sharing the revaluation profit or existing goodwill in the new ratio.
• Omitting the goodwill entry or crediting it to the wrong capital account.
• Totals that do not balance and are not checked.
• Leaving the new debentures out of the statement of financial position.
• Evaluation with no figures and no justified recommendation.

Frequently asked questions

Are these Cambridge 9706 acquisition and merger questions from past papers? No. They are ten original questions on section 3.3 Business acquisition and merger of Cambridge 9706, written for revision. Use them alongside the official past papers.

Why should I show net assets and consideration as separate workings? Separate workings let partly correct work earn credit, whereas a single unexplained goodwill figure leaves little to credit if it is wrong.

What are the most common mistakes in business acquisition questions? Common errors include using book values when agreed values are given, forgetting to deduct liabilities taken over, putting the whole share issue price into share capital, and leaving new debentures out of the statement of financial position.

How do I write a strong evaluation of a proposed merger? Tie each point to the figures given and finish with a justified recommendation. General statements with no figures gain less credit.

Next steps

• Revise with the revision notes and the study guide.
• Check your progress against the course hub and checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Accounting 9706 syllabus for examination in 2026, 2027 and 2028, section 3.3 Business acquisition and merger, published by Cambridge University Press & Assessment (Cambridge International).