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

This guide covers 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. It sits in topic 3, Financial accounting, which is the A Level content that Paper 3 assesses. AS Level content is assumed knowledge, so you should be comfortable with journals, ledger accounts and the statement of financial position first. All businesses and figures are invented and all amounts are in dollars.

Use it with the revision notes and the practice questions. Related background is in Business entities and the accounting system and Accounting for non-current assets. See also the course hub, the printable checklist and the free diagnostics.

What section 3.3.1 asks you to do

Syllabus point	Where it is covered
Nature and purpose of merging different types of business	Why businesses combine
Journals and ledger accounts: sole traders merging into a partnership or limited company	Cases A and C
Sole trader merging with an existing partnership to form a new partnership	Case B
Sole trader or partnership acquired by a limited company	Case C
Goodwill on acquisition	Goodwill and purchase consideration
Statement of profit or loss and statement of financial position of the new entity	Case C and the statements
Advantages and disadvantages	Evaluating the decision

Why businesses combine

A merger joins two or more businesses into a new entity. An acquisition is when one entity buys another. Owners do it to grow faster than they could alone. The purposes are usually to gain customers or a wider product range, to share premises and equipment, to combine skills, to raise more finance than one owner can, or to remove a competitor.

The entity types matter. Sole traders merging into a partnership pool capital and skills. Sole traders merging into a limited company gain limited liability and can raise capital by issuing shares. A limited company acquiring a partnership pays with shares, debentures, cash or a mixture.

Whole business or individual assets

The syllabus separates two kinds of purchase.

	Business as a whole	Individual assets
What is bought	All the assets and usually the liabilities	Only the assets chosen
Price	One negotiated figure, often above the net assets	The value of each asset
Goodwill	Arises if the price exceeds net assets at fair value	None is recognised
Entry	Business purchase account	Debit each asset, credit bank or payables

Fair value means the value the buyer and seller agree for each asset, which can differ from the seller’s book value. A seller’s equipment might be carried at 18,000 but agreed at 16,500.

Goodwill and purchase consideration

Purchase consideration is what the buyer gives: cash, shares, debentures, or a mixture. Shares are recorded at the value they are issued for, so shares with a nominal value of 1 issued at 1.75 give share capital of 1 and share premium of 0.75 each.

Goodwill on acquisition is the excess of the purchase consideration over the fair value of the net identifiable assets acquired.

Goodwill = purchase consideration - (assets at agreed values - liabilities taken over)

This is purchased goodwill: it is paid for. Inherent goodwill is built up by a business over time and is not recorded until someone pays for it. In a merger forming a partnership, the partners agree a goodwill figure for each business and credit it to that owner’s capital account.

Case A: two sole traders form a partnership

Ines Gresley (Gresley Bindery) and Yaron Hobday (Radley Papers) merge to form Gresley & Hobday Press. The agreed values are below, with Gresley’s book values in brackets where they differ.

	Gresley	Hobday
Equipment	16,500 (18,000)	9,000
Inventory	5,900 (6,400)	7,000
Trade receivables	3,800 (4,100)	5,000
Bank	1,200	overdraft 800
Trade payables	3,300	4,100
Goodwill agreed	5,000	3,000

Net assets are 24,100 for Gresley and 16,100 for Hobday. Adding goodwill gives opening capital of 29,100 and 19,100. The journal in the new partnership’s books:

Account	Dr	Cr
Equipment	25,500
Inventory	12,900
Trade receivables	8,800
Bank	1,200
Goodwill	8,000
Bank overdraft		800
Trade payables		7,400
Capital: Gresley		29,100
Capital: Hobday		19,100
	56,400	56,400

Opening statement of financial position: non-current assets are equipment 25,500 and goodwill 8,000; current assets are inventory 12,900, trade receivables 8,800 and bank 1,200; total assets are 56,400. Trade payables and the overdraft are 8,200, leaving net assets of 48,200, which equals the two capital accounts.

If the merger formed a limited company instead, the journal has the same debit side. The credit side shows liabilities taken over and share capital issued to each owner, for example one share per dollar of agreed value at par.

Case B: a sole trader joins an existing partnership

Yarrow & Kellaway Joinery shares profits 3:2. Corin Maddox, a sole trader, joins. The existing assets are revalued first, using a revaluation account.

Revaluation account	Dr	Cr
Equipment (14,000 to 12,500)	1,500
Inventory (9,000 to 8,200)	800
Trade receivables (6,500 to 6,100)	400
Profit: Yarrow 5,580	5,580
Profit: Kellaway 3,720	3,720
Premises (40,000 to 52,000)		12,000
	12,000	12,000

The partners value the existing goodwill at 12,000, shared in the old ratio (7,200 and 4,800). Maddox brings equipment 6,000, inventory 3,500, trade receivables 2,200 and trade payables 1,800, and goodwill of 2,000 is agreed for his business.

Capital accounts	Yarrow	Kellaway	Maddox
Balance b/d	38,000	29,000
Revaluation profit	5,580	3,720
Goodwill	7,200	4,800	2,000
Net assets introduced			9,900
Balance c/d	50,780	37,520	11,900

The new statement of financial position shows premises 52,000, equipment 18,500, goodwill 14,000, inventory 11,700, trade receivables 8,300 and bank 2,500: total assets 107,000. Trade payables are 6,800, so net assets and total capital are both 100,200. Future profits are shared in the new agreed ratio.

Case C: a limited company acquires a business

Garsdale Packaging Ltd buys the whole business of Edith Vickery (Vickery Crates). Agreed values: equipment 38,000, inventory 21,000, trade receivables 12,500, trade payables taken over 14,500. Net assets are 57,000. Consideration is 24,000 ordinary shares of 1 issued at 1.75 (42,000), 12,000 of 6% debentures and 11,000 cash: 65,000 in total. Goodwill is 65,000 - 57,000 = 8,000.

Journal 1: acquire the business	Dr	Cr
Equipment	38,000
Inventory	21,000
Trade receivables	12,500
Goodwill	8,000
Trade payables		14,500
Business purchase (Vickery Crates)		65,000

Journal 2: settle the consideration	Dr	Cr
Business purchase (Vickery Crates)	65,000
Ordinary share capital		24,000
Share premium		18,000
6% debentures		12,000
Bank		11,000

The business purchase account is cleared to nil. In the seller’s books a realisation account records the sale. Vickery’s book values were equipment 40,000, inventory 22,000 and trade receivables 13,000, with the same payables.

Realisation account	Dr	Cr
Equipment	40,000
Inventory	22,000
Trade receivables	13,000
Profit to capital	4,500
Trade payables		14,500
Garsdale Packaging Ltd		65,000
	79,500	79,500

Her capital of 60,500 plus 4,500 profit equals 65,000, which she receives as shares 42,000, debentures 12,000 and cash 11,000. If the seller were a partnership, the profit is shared in the profit-sharing ratio and the consideration is divided between the partners’ capital balances.

The statements after the acquisition

Garsdale’s statement of financial position before and after (retained earnings 73,000 throughout):

	Before	After
Non-current assets (including goodwill 8,000)	210,000	256,000
Inventory	48,000	69,000
Trade receivables	36,000	48,500
Bank	30,000	19,000
Total assets	324,000	392,500
Share capital	100,000	124,000
Share premium	20,000	38,000
Retained earnings	73,000	73,000
Debentures	90,000	102,000
Trade payables	41,000	55,500
Total equity and liabilities	324,000	392,500

The statement of profit or loss changes too. From the date of acquisition it includes the acquired business’s revenue and expenses, depreciation on the acquired equipment, and debenture interest on the new 12,000 (720 a year at 6%). Dividends are paid on the larger number of shares. If the acquisition happens part-way through the year, include only the post-acquisition period.

Suppose Garsdale held the acquired business for the whole of its financial year. The statement of profit or loss then combines the two sets of results, with debenture interest on the old debentures (90,000 at 5%) and on the new ones:

Statement of profit or loss	Garsdale	Acquired business	Combined
Revenue	480,000	150,000	630,000
Cost of sales	288,000	96,000	384,000
Gross profit	192,000	54,000	246,000
Operating expenses, including depreciation	105,000	38,000	143,000
Profit from operations	87,000	16,000	103,000
Finance costs (debenture interest)	4,500	720	5,220
Profit for the year	82,500	15,280	97,780

Evaluating the decision

	Advantages	Disadvantages
Acquirer or new entity	Larger scale and market share; skills and assets combined; competitor removed; access to more capital	Price may be too high; goodwill may never be recovered; integration problems; extra debenture interest
Owners of the business sold or merged	Cash or shares realised; limited liability in a company; shared workload	Loss of control and independence; share of profit falls; disagreements between owners

Weigh the points against the facts given. A good answer uses the figures, for example the size of the goodwill compared with the profit the business earns, or the cash left after paying. Recommendations need a balance of reasons and a justification.

Common errors

• Using the seller’s book values instead of agreed values to calculate goodwill.
• Forgetting that liabilities taken over reduce the net assets acquired.
• Crediting the full issue price to share capital instead of splitting nominal value and share premium.
• Sharing the revaluation profit in the new ratio rather than the old.
• Leaving goodwill off the opening statement of financial position.
• Showing debentures as part of equity.

Frequently asked questions

How do you calculate goodwill on acquisition? Goodwill = purchase consideration − (assets at agreed values − liabilities taken over). It is the excess of what the buyer gives over the fair value of the net assets acquired.

What is the difference between a merger and an acquisition? A merger joins two or more businesses into a new entity. An acquisition is when one entity buys another.

What is the difference between purchased and inherent goodwill? Purchased goodwill is paid for when a business is acquired and can be recorded. Inherent goodwill is built up by a business over time and is not recorded until someone pays for it.

What is purchase consideration? Purchase consideration is what the buyer gives for the business: cash, shares, debentures, or a mixture. Shares issued above nominal value are split between share capital and share premium.

Are debentures part of equity after an acquisition? No. Debentures issued as purchase consideration are shown as non-current liabilities in the statement of financial position, not as equity.

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).