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Chapter 1Chapter 3:History and Purpose of the Conceptual Framework

An Introduction to Financial Accounting 7th edition

Andrew Thomas & Anne Marie Ward

Chapter 29: Chapter 29: Partnership Dissolution and Conversion Partnership Dissolution and Conversion to a Limited Companyto a Limited Company

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ObjectivesObjectives

By the end of the lecture (and with private study) students should be able to:

• Show the journal and ledger entries for the dissolution of a partnership; and

• Show the journal and ledger entries relating to the conversion of a partnership to a limited company.

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Partnership dissolution Partnership dissolution

In the previous chapter, the partnerships continued into the future.

In this chapter a complete cessation of partnership operations occurs. This typically happens in two instances:

1. When the partnership is dissolved.2. When the partnership converts to a

limited company.

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Partnership dissolution Partnership dissolution

Piecemeal realisation - When a partnership is dissolved over a long period of time.

Piecemeal realisation (one partner is insolvent) – Involves the use of the Garner V Murray rule

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Dissolution of partnerships – straight Dissolution of partnerships – straight forwardforward

1. Prepare final financial statements up to the date of the dissolution, including the appropriation of the net profit.

2. Transfer the balances on all the asset (except bank/cash) and provision accounts to a realisation account.

3. The proceeds of sale of assets and receipts from credit customers are debited to the bank account and credited to the realisation account. Any assets taken over by the partners are debited to their capital account and credited to the realisation account.

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Dissolution of partnerships – straight Dissolution of partnerships – straight forwardforward

4. Pay the realisation expenses, trade payables, loan creditors, and partners loans. Any balance remaining on these accounts is transferred to the realisation account.

5. The profit or loss on realisation is transferred to the partners’ capital accounts in their profit sharing ratio.

6. The balances on the partners’ current accounts are transferred to their capital accounts.

7. The partners are paid the balance on their capital account (or bring in cash to clear any debit balance).

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Conversion to a limited company – Conversion to a limited company – partnership bookspartnership books

• Open a realisation account and transfer all assets and liabilities to this (the exception is cash/bank).

• Transfer the partners’ current accounts to the capital accounts.

• Open the ‘company personal account’ and debit the consideration being given for the partnership to this account. Credit the realisation account with the other side of this entry.

• Close off the realisation account, transferring the profit, or loss, on realisation to the partners’ capital accounts in their profit sharing ratio.

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Conversion to a limited company – Conversion to a limited company – partnership bookspartnership books

• Credit the ‘company personal account’ with the share capital, debentures and cash and debit the partnership capital accounts with the shares, cash or debentures in the portions stipulated in the question.

• The balance on the partners’ capital accounts will be the amount owing to them from the partnership, or the amount they owe to the partnership.

• Write cheques to settle any balances remaining as owing to the partners, or get the partners to introduce cash when they owe the partnership funds.

• All accounts will now be closed.

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Conversion to a limited company – Conversion to a limited company – company bookscompany books

• Determine the value of goodwill (excess of the purchase consideration over the fair value of the assets and liabilities).

• Open a purchase of consideration account. Debit it with the purchase consideration and credit the source of the purchase consideration, for example share capital, bank, loan or debentures.

• Credit the purchase consideration account with the asset values and debit the new asset accounts.

• Debit the purchase consideration account with the liabilities value and credit the new liabilities accounts.

• Post the balance (goodwill) to a goodwill account.

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Summary – some key pointsSummary – some key points• When partnerships are dissolved permanently

(cease to exist, or convert to a limited company) then the elements are realised using a ‘realisation account’. All the accounts are closed and the partners withdraw/introduce the amount required to balance their capital accounts.

• When the partnership is converting to a company, a company personal account is established to deal with the purchase consideration.

• In the books of the company a purchase of consideration account is established immediately, this determines the value for goodwill and provides the opening balances for the partnership.

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Student - study actionStudent - study action• Read chapter 29. • Then - try to explain the key terms and concepts

(check your answer with the chapter and the online glossary).

• Go over the examples from the chapter.• Try the review questions (check your answers with

the chapter).• Try the exercise questions that have solutions in the

online student centre (marked with an asterisk). • Try the exercise questions required by your tutor

(solutions to be provided by the tutor at their discretion).

• Try the learning activities on the student online learning centre (www.mcgraw-hill.co.uk/textbooks/thomas)

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