Partnership Accounts- Dissolution, Insolvency, sale to a Company and Piecemeal Distribution

PARTNERSHIP ACCOUNTS- DISSOLUTION, INSOLVENCY, SALE TO A COMPANY AND

PIECEMEAL DISTRIBUTION

DISSOLUTION Definition :According to Section 39 of the Indian Partnership Act, 1932, “the Dissolution of partnership between all the partners of a firm is called the Dissolution of the firm.”

Dissolution of a Firm is the complete breakdown of a partnership and partners do not continue the firm. Dissolution of the Partnership means a reconstitution of the firm due to the retirement of a partner and the remaining partners provide for the continuance of the firm in pursuance of an express or implied agreement to that agreement to that effect.

On Dissolution of a firm, the firm’s assets are realized and the liabilities are discharged because the firm is to be closed, whereas on Dissolution of a partnership, the share of the outgoing partner is ascertained and the firm is not closed.

Modes of Dissolution of Firm :Sections 40 to 44 of the Indian Partnership Act, 1932 deal with the various ways in which a firm may be dissolved. A firm may be dissolved in any of the following ways :

Dissolution by agreement : A firm is dissolved when all the partners agree that it should be dissolved. A partnership firm is the creation of an agreement; similarly a firm can be dissolved by an agreement.

Dissolution on the happening of contingencies : A firm is dissolved in any of the following ways unless there is a contract between the partners to the contrary :(i) By the expiry of the term of duration of the firm.(ii) By the completion of the adventure for which the firm was constituted.(iii) By the death of a partner.(iv) By the adjudication of a partner as insolvent. Dissolution by the notice of partnership at will : When the partnership is at will, the firm may be dissolved at any time by any partner giving notice in writing to all the other partners of his intention to dissolve the Firm.

Compulsory dissolution or dissolution by the operations of law : A firm is compulsorily dissolved in any of the following ways :(v) When all the partners except become insolvent.(vi) When al the partners become insolvent.(vii) When the business becomes illegal.(viii) When the numbers of partners exceed twenty in case of ordinary business or ten in case of banking

business.

Dissolution by the court : At the suit of a partner a court may order the dissolution of the firm in any of the following ways :(i) When a partner becomes of unsound mind.(ii) When a partner suffers from permanent incapacity and becomes incapable of

performing his duties as a partner.(iii) When a partner is guilty of misconduct affecting the business of the firm.(iv) When a partner commits willful or persistent breaches of agreement.(v) When a partner has transferred the whole of his interest in the firm to a third party or

when his share has been attached under a decree or sold under process of law(vi) When the business of the firm cannot be carried on except at a loss.(vii) When the court is satisfied as to grounds which render it just and equitable dissolve the

firm.

Basis :1. Time factor

2. Recording of assets

3. Purpose

4. Expenses

5. Effect

Realisation account :It is prepared at the time of dissolution of the firm.It records the book value of and the realised value of assets and liabilities. Its main purpose is to realize the assets of the firm and to utilize this amount in payment of liabilities of the firm and hence distribute the profit or loss due to this effect among all the partners.It contains an entry for the expenses of dissolution.It records the effect of realisation of various assets and payment of liabilities. After opening this account, all the accounts in the ledger are closed i.e. there is winding up.

Revaluation account : It is prepared at the time of admission retirement, death of the partner etc.It records increase or decrease in the value of assets and liabilities.

Its main purpose is to revalue the assets and liabilities of the firm on admission, retirement or death of the partner in order to ensure that no partner benefits or suffers due to change in partnership.It does not contain any entry for the expenses incurred on revaluation of assets and liabilities.

It records the effect of revaluation of assets and liabilities. The firm continues after opening this account.

REALISATION ACCOUNT AND REVALUATION ACCOUNT

It is prepared in order to realise the assets of the firm and the amount so realised is utilised for the payment of liabilities of firm according to the provisions of the Act. If there are any expenses incurred by the firm in realising the assets of the firm (known as realisation expenses), they are debited to this account. The difference between two sides of this account discloses either the profit or loss on realisation and will be transferred to Partners’ Capital Accounts in their profit sharing ratio. Realisation Account is different from the Revaluation Account.

Liabilities Amount Assets Amount

Creditors 28,000 Less : reserve for discounts 1,000Reserve for contingenciesMrs. Vikas loan Reserve fund Jyoti’s loanJyoti’s Capital accountVikas’s Capital account

27,0005,00010,00015,0008,00021,00018,0001,04,000

Cash at bank Debtors 42,000Less : Provision for Doubtful debts 2,000Stock Furniture Plant and MachineryPrepaid expenses

2,500

40,00032,0003,50025,0001,0001,04,000

ILLUSTRATION 1 :

Jyoti and Vikas were equal partners in a manufacturing business. On June 30, 2010, they dissolved the firm on which date their balance sheet was as below :

Stock, Debtors, Plant and Machinery and Goodwill realised Rs. 27,000; Rs. 38,000; Rs. 20,000 and Rs. 5,000 respectively. Furniture did not realise any value. An amount of Rs. 6,000 was paid on account of contingent liabilities. The expenses of realisation were Rs. 1,000.The firm had previously made some investment in shares of a joint stock company and had written off this investment on finding it useless. The investment now realised Rs. 1,500.Close the books of the firm and show the necessary ledger accounts.

Date Particulars L.F. Debit(Rs.) Credit(Rs.)2010June 30

Realisation account Dr. To Debtors To Stock To Furniture To Plant and Machinery To Prepaid expenses(Being transfer of assets at book values on the dissolution of the firm)

1,03,00042,00032,0003,50025,0001,000

June 30 Creditors Dr.Reserve for contingencies Dr. Mrs. Vikas loan Dr. Provision for doubtful debts Dr. To realisation account (Being transfer of liabilities to third parties ad Provision for doubtful debts on the dissolution of the firm)

28,0005,00010,0002,000

45,000

June 30 Realisation account Dr. To Reserve for discounts on creditors(Being transfer of reserve for discounts on creditors on the dissolution)

1,0001,000

SOLUTION :

June 30 Reserve fund Dr. To Jyoti’s Capital account To Vikas’s Capital account(Being transfer of reserve fund to capital accounts in the profit sharing ratio)

1500015000

June 30 Bank account Dr. To Realisation account(Being assets realised : Stock 27,000 Debtors 38,000 Plant and Machinery 20,000 Goodwill 5,000 Investment in shares 1,500

91,500 )

9150091500

June 30 Realisation account Dr. To Bank account(Being payment of liabilities as follows : Creditors 27,000 Contingent liabilities 6,000 Mrs. Vikas loan 10,000 43,000 )

43,00043,000

June 30 Realisation account Dr. To Bank account(Being payment of realisation expenses)

1,0001,000

June 30 Jyoti’s Capital account Dr.Vikas’s Capital account Dr. To Realisation account(Being payment of realisation expenses.)

6,0006,000

12,000

June 30 Jyoti’s loan account Dr. To Bank account (Being payment of Jyoti’s loan)

8,0008,000

June 30 Jyoti’s Capital account Dr.Vikas’s Capital account Dr. To Bank account (Being payment of the amount due to partners)

22,50019,500

42,000

Ledger accounts

Realisation account

To Debtors a/cTo Stock a/cTo Furniture a/cTo Plant and Machinery a/cTo Prepaid expenses a/cTo Reserve for discount on creditors a/cTo Bank (liabilities paid)To Bank (Realisation expenses)

42,00032,0003,50025,0001,000

1,00043,0001,000

By Creditors a/cBy Provision for doubtful debts a/cBy Reserve for contingencies a/cBy Mrs. Vikas’s loan a/cBy Bank (Assets realised)By Loss on realisation transferred to Capital accounts :Jyoti 6,000Viaks 6,000

28,0002,0005,00010,00091,500

12,000

Particulars Amount Particulars Amount

1,48,500 1,48,500

Bank account

To balance b/dTo Realisation a/c (Assets realised)

2,50091,500

By Realisation a/c (liabilities paid)By Realisation a/c (expenses)By Jyoti’s loan a/cBy Joyti’s Capital a/cBy Vikas’s Capital a/c

43,0001,0008,00022,00019,500

Particulars Jyoti Particulars Vikas

94,000 94,000

Capital accounts

To Realisation a/c (Loss)To Bank account

6,00022,500

6,00019,500

By balance b/dBy Reserve fund

21,0007,500

18,0007,500

Particulars Jyoti Vikas Particulars Jyoti Vikas

28,500 25,500 28,500 25,500

ILLUSTRATION 2 :P, Q and R are partners sharing and losses equally. On 31st march, 2020, their Balance Sheet stood as follows :

The firm was dissolved on the above mentioned date. P agreed to pay creditors at par. Q took over the entire furniture for Rs. 36,000. The remaining assets are sold for Rs. 5,53,000. Bills payable were retired at a discount of Rs. 100 received for payment before the due date of maturity. Expenses of dissolution amounted to Rs. 1,200.Prepare important ledger accounts and Cash book. Current accounts and Capital accounts may be prepared in columnar form.

Liabilities Amount Assets Amount Bills Payable CreditorsLoan from QP’s Current accountQ’s Current accountP’s capital accountQ’s Capital accountR’s Capital account

16,0001,19,00025,00030,00015,0002,00,0001,00,0001,00,0006,20,000

Cash at bank Debtors StockFurniture Machinery R’s Current account

15,0001,25,0002,90,00040,0001,20,00030,000

6,20,000

SOLUTION :

To Debtors a/cTo Stock a/cTo Furniture a/cTo Machinery a/c To P’s Current a/c (creditors)To Bank (Bills payable paid Rs. 16,000- Rs.100 )To Bank (expenses)To Profit transferred to Current a/c’s :PQR

1,25,0002,90,00040,0001,20,0001,19,000

15,9001,200

12,9007,24,000

By Bills Payable a/cBy Creditors a/cBy Q’s Current a/c (Furniture)By Bank (Debtors, Stock and Machinery sold)

16,0001,19,00036,0005,53,000

7,24,000

Realisation account

Particulars Rs. Rs.

Particulars P Q R Particulars P Q R

To balance b/dTo Realisation a/c (Furniture) To P’s Capital a/c

-

- 1,48,000

-

36,000

30,000

-

By balance b/d By General Reserve a/cBy Realisation a/c (Creditors)By Realisation a/c (Profit)By Q’s Capital a/cBy R’s Capital a/c

15,000

10,000

1,19,000

4,300

15,000

10,000

-

4,3006,700

-

10,000

-

4,300

15,700

Current accounts

1,48,300 36,000 30,000 1,48,000 36,000 30,000

Capital accounts

Particulars P Q R Particulars P Q R To Q’s Current a/cTo R’s Current a/cTo Bank a/c

- -3,48,000

6,700 - 93,300

-

15,7003,48,000

By Balance c/dBy P’s Current a/c

2,00,000

1,48,300

1,00,000

-

1,00,000

-

3,48,000 1,00,000 1,00,000 3,48,000 1,00,000 1,00,000

Bank account

Particulars Amount (Rs.) Particulars Amount (Rs.)

To balance b/d To Realisation a/c (assets realised)

15,000

5,53,000

By Realisation a/cBy Realisation a/c (expenses)By Q’s loan a/cBy Capital a/c’sPQR

15,9001,20025,000

3,48,00093,30084,300

5,68,000 5,68,000

INSOLVENCY

If a partner’s capital account shows a debit balance on the dissolution of the firm, he is to pay the debit balance to the firm to settle this account. But if such a partner insolvent, i.e., unable to satisfy his debt to the firm, then his deficiency which he is not able to bring will be borne by the other solvent partners in accordance with decision in Garner vs. Murray.

In this case it was ruled, in the absence of any agreement to the contrary, the deficiency of the insolvent partner’s Capital account must be borne by the firm. The effect of this ruling is to make a distinction between an ordinary loss due to trading or realisation of assets and loss on account of insolvency of a partner.

The loss in case of insolvency is a capital loss should be borne by other solvent partners in their capitals.

Another ruling is that the solvent partners should bring in cash equal to their share of loss on realisation. This ruling has been given to bring the capitals accounts of the solvent partners to the figures they stood before transferring the loss of realisation.

Definition :

Fixed and Fluctuating Capitals :While determining the capital ratio of the solvent partners, distinction should be observed between fixed and fluctuating capitals.If the capitals of the partners have been agreed to be fixed, then no adjustment is required for accumulated profits or losses, interest on capitals, drawings etc. and deficiency of the insolvent partner is borne by the solvent partners in proportion to their agreed fixed capitals.

If the capital accounts are maintained on fluctuating basis, then capital accounts should be adjusted for reserves, profit or losses, interest on capitals, drawings and unrecorded assets and liabilities on the date of the balance sheet just before the dissolution of the fir.

Date/ Sr. no. Particulars L.F Debit Credit

Solvent Partners’ Current a/c Dr. To Insolvent Partners’ Capital a/c(Being transfer of the deficiency of the insolvent partner to the solvent partners’ current accounts in proportion to their agreed fixed capitals)

Date/ Sr. no. Particulars L.F Debit Credit

Solvent Partners’ Capital a/c Dr. To Insolvent Partners’ Capital a/c(Being transfer of the deficiency of the insolvent partner to the solvent partners’ capital accounts)

ILLUSTRATIONX, Y and Z are partners sharing profits and losses in the ratio of 4 : 2 : 3. On 1st January 2010, they agreed to dissolve the partnership. Their Balance sheet was as follows :

The assets realised : Investments Rs. 20,400; Bills receivable and Debtors Rs. 28,200; Stock Rs. 14,500; Furniture Rs. 2,050; Machinery Rs. 8,600; Buildings Rs. 26,400. all the liabilities were paid off. The cost of realisation was Rs. 600, Z had become bankrupt and Rs. 1,024 only was recovered from his estate once and for all. Partners were finally paid off. Show the Realisation account, the Bank account, and the Capital accounts of the partners when the capitals are fluctuating.

Liabilities Amount Assets Amount Profit and LossReserve FundBills Payable Sundry CreditorsLoan from XCapital Accounts :ZYX

4,50012,6004,1009,0004,000

3,00046,00068,0001,51,200

BuildingsMachinery Furniture StockDebtors InvestmentsBills ReceivableCash in Bank Cash at hand

45,00015,0003,70019,40031,00024,0005,6006,5001,0001,51,200

SOLUTION :

Particulars Rs. Particulars Rs.

To BuildingsTo MachineryTo Furniture To StockTo DebtorsTo InvestmentsTo Bills Receivable To Bank (Bills Payable & Creditors)To Bank (Cost of Realisation)

45,00015,0003,70019,40031,00024,0005,60013,1006001,57,400

By Bills Payable By Sundry CreditorsBy Bank (assets realised)By Loss on realisation transferred to capital a/csX 19,600Y 9,800Z 14,700

4,1009,0001,00,000

44,100

1,57,400

Realisation account

Particulars Rs. Particulars Rs.

To Balance b/dTo Cash in handTo Realisation a/c (assets realised)To X’s Capital a/c (Realisation Loss brought in)To Y’s Capital a/c (Relaisation Loss brought in)To Z’s capital a/c

6,5001,0001,00,000

19,600

9,8001,0241,38,124

By Realsation a/c (payment of Bills Payable and Creditors)By Realisation a/c (Cost of Realisation)By X’s Loan a/cBy X’s Capital a/cBy Y’s Capital a/c

13,100

6004,00072,63247,792

1,38,124

Bank account

Particulars X Y Z Particulars X Y Z

To Realisation a/c (Loss)To Z’s Capital a/c (Rs. 4,976 in the ratio of 75,600 : 49,800)To bank a/c

19,600

3,00072,600

95,200

9,800

1,97647,824

59,600

14,700

14,700

By balance b/dBy Profit and Loss a/cBy Reserve Fund

By Bank (Realisation loss brought in)By BankBy X’s Capital a/c (126/209 share of Z’s deficiency)By Y’s capital a/c(83/209 share of Z’s deficiency)

68,000

2,0005,600

46,000

1,0002,800

3,000

1,5004,200

75,600

19,600

95,200

49,800

9,800

59,600

8,700

1,024

3,000

1,97614,700

Capital accounts

When all Partners are Insolvent :When all partners are insolvent and are not able to bring the amount due from them, then the creditors of the firm cannot be paid in full. Then there are two methods for closiig the books of accounts of the firm.

(a) Where outside liabilities are not transferred to Realisation account :

Following procedure is followed :

(i) Sundry assets (except cash and bank balance) are transferred to the debit side of Realisation Account as usual.

(ii) On Realisation of assets, Realisation account is credited.(iii) For Realisation expenses, Realisation account is debited and Cash account is credited.(iv) If any liability is secured, then that liability will be paid on priority basis to the extent of

realisation of the asset kept as security.(v) Amount brought by any partner from his private estate is credited to his Capital account and

debited to Cash account.(vi) Cash account is prepared in order to calculate the amount available for payment to

unsecured outside liabilities. The balance in unsecured outside liabilities account represents amount not paid to these creditors and is closed by transfer to Deficiency acccount.

(vii) Capital accounts (after all entries) are closed by transferring their balances to Deficiency account.

(viii)Deficiency account, if prepared, will tally.

ILLUSTRATION :

Following is the balance sheet as on 31st march, 2010 of a firm having three partners, Alfa, Beta ad Gama sharing profits and losses equally :

The firm was dissolved due to insolvency of all the partners. Stock was sold for Rs. 9,000 while furniture fetched Rs. 5,000. Rs. 4,100 were received from debtors. Realisation expenses totalled Rs. 220. Nothing could be recovered from Beta and Gama, but Rs. 600could be collected from Alfa’s private estate.Close the books of the firm.

Liabilities Amount Assets Amount Sundry CreditorsLoan (Secured by furniture )Capital Accounts :AlfaBeta Gama

20,00010,000

8,0006,0001,00045,000

Debtors StockFurniture Profit and Loss accountCash

4,72015,6309,53012,0003,120

45,000

SOLUTION :Realisation account


To Sundry Assets Stock Debtors FurnitureTo Cash (Realisation expenses)

15,6304,7209,530

220

30,100

By Cash : Stock 9,900 Furniture 5,000 Debtors 4,100By Loss transferred to Capital a/cs Alfa 3,700 Beta 3,700 Gama 3,700

19,000

11,10030,100

Particulars Amount (Rs.) Particulars Amount (Rs.)To balance b/d To Realisation a/cTo Alfa’s Capital a/c

3,12019,000600

22,720

By Realisation a/c (expenses)By loan a/c (upto realisable value of furniture)By Sundry Liabilities

220

5,00017,50022,720

Cash account


To Cash a/c (70% paid)To Deficiency a/c

17,5007,50025,000

By Loan By Creditors

5,00020,00025,000

Sundry Liabilities account

Particulars Alfa Beta Gama Particulars Alfa Beta Gama To Realisation a/cTo Profit & Loss a/cTo Deficiency a/c

3,700 4,000 9008,600

3,700

4,000 -7,700

3,700

4,000 - 7,700

By Balance b/dBy CashBy Deficiency

8,000600 -

8,600

6,000 -1,700

7,700

1,000 -6,700

7,700


To Beta’s Capital a/cTo Gama’s Capital a/c

1,7006,7008,400

By Sundry LiabilitiesBy Alfa’s Capital a/c

7,5009008,400

Capital accounts

Deficiency account

(b) If the effect of realisation of all assets and liabilities is to be passed through Realisation Account :

In this case outside liabilities are also transferred to Realisation account. Outside liabilities are paid with the amount available for unsecured outside liabilities which can be ascertained by preparing Cash account. Secured creditors (to the extent of relisation of security) are always paid on priority basis as compared to unsecured creditors. The realisation loss is transferred to Capital accounts. The balances in Capital accounts are transferred to Deficiency account. Deficiency account, when prepared, will tally.

This will be more clear from the following Illustration :

ILLUSTRATION :A, B and C had the following Balance sheet on 31st December, 2009.

The firm was dissolved. Stock realized Rs. 10,000 and fixed assets and debtors realized Rs. 30,000 in all.The private position of all the partners was as under :

Private Estate Private LiabilitiesA Rs. 10,000 Rs. 15,000B Rs. 8,000 Rs. 6,000 C was able to pay 50 paise in the rupee of what was payable on his own account to the partnership. The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively.The loss on realisation is to be determined after considering the amount finally paid to the creditors. You are required to close the books of the firm by preparing the necessary Ledger Accounts.

Liabilities Amount Assets Amount CreditorsLoan from Mrs. A (with a charge on Stock)Loan from ACapital accountsA 20,000B 20,000C 10,000

40,000

15,00010,000

50,0001,15,000

Debtors StockFixed assets Cash at BankLoss

24,00020,00040,0001,00030,000

1,15,000

SOLUTION :


To Sundry Assets Stock Debtors Fixed assets To Bank (payment of Mrs. A’s loan to the extent of value of stock realized)To Bank (Creditors paid)(Rs. 33,000 + Rs. 5,059)

20,00024,00040,000

10,000

38,0591,32,059

By CreditorsBy loan from Mrs. ABy Bank Stock 10,000Debtors & Fixed Assets 30,000By Loss to Capital a/c A 14,823 B 11,118 C 11,118

40,00015,000

40,000

37,0591,32,059

Realisation account

Particulars Amount (Rs.) Particulars Amount (Rs.)To balance b/d To Realisation a/cTo B’s Capital a/cTo C’s Capital a/c

1,00040,0002,0005,05948,059

By Realisation a/c By Sundry Creditors a/c (Rs. 33,000 + Rs. 5,059)

10,000

38,059

48,059

Bank account

Particulars A B C Particulars A B C To LossTo Realisation a/cTo deficiency a/c

12,000

14,8233,177

30,000

9,000

11,1181,882

22,000

9,000

11,118 -

20,118

By Balance b/dBy Loan from A a/cBy BankBy Deficiency

20,000

10,000 - -30,000

20,000

-2,000 -22,000

10,000

-5,0595,05920,118

Capital accounts


To C’s Capital a/c 5,059

5,059

By A’s Capital a/cBy B’s Capital a/c

3,1771,8825,059

Deficiency account

SALE TO A COMPANY

Conversion of a partnership means changing the status of the partnership firm into a joint stock company. A new company is formed to take over the business of the firm. Conversion is just like a sale of partnership business to a new company.

Need for conversion of partnership into a company :

(i) Liability of he shareholders will become limited.

(ii) The company can collect more fund for expansion of its business.

(iii) The entity of the company will be separate from its members. The admission, death, insolvency of the members will not affect the continuity of the company.

(iv) To take advantage of less rate of income-tax.

(v) To enjoy the benefits of large production.

(vi) To have continuous existence of the business unit.

Definition :

Methods of calculation of Purchase condition :

1. Lumpsum method : When a fixed amount or lumpsum is given by the purchasing company of the vendor firm, it is called lump sum method.

2. Net payment method : Under this method, the purchase consideration is the total of all the payments made by the company to the vendor firm in the form of shares, debentures and cash.

3. Net assets method : Under this method, the total of assets taken over by the company at agreed value is calculated and the agreed value of liabilities assumed is deducted.

Purchase consideration :

It is the amount paid by the purchasing company to the vendor firm for taking over its assets and liabilities. The company may take over all assets or liabilities or any of them.

ILLUSTRATION :

A, B and C carried on business in partnership sharing profits and losses in the ration of 3:2:1. They decided to convert their business into a private limited company. A new capital, A B C Private limited was duly formed with an authorised capital of Rs.3,00,000 divided into 22,500 equity shares of Rs. 10 each and 7,500, 10% cumulative preference shares of Rs. 10 each. The company took over the firm’s business as on 31st December, 2009, on which date the firm’s Balance sheet stood as under :

Liabilities Amount Assets Amount Capital accounts A B C Current accounts A CA’s loan Creditors

75,00050,00030,000

14,62510,37520,00014,000

Debtors StockMachinery Motor carFurniture BankB’s current account

26,00090,00032,5009,0003,00043,00010,500

The company agreed to discharge A’s loan by issue to him at par of Rs. 1,500, 10% cumulative preference shares of Rs. 10 each credited a fully paid, and a cash payment of Rs. 5,000. The Balance of the purchase consideration was to be discharged by the issue at par of 15,000 equity shares of Rs. 10 each, credited as fully paid and balance in cash.You are required to prepare Realisation account, Capital accounts and A B C private limited’s account in the books of the firm assuming that all the transactions are duly completed.

The debtors are all good and are taken over by A who has also agreed to pay the creditors. The company took over machinery at its book value, stock at an agreed value of Rs. 83,000, furniture Rs. 2,250, motor car at Rs. 8,000, goodwill values at one year’s purchase at average profits of previous three years and the bank balance. The profits earned by the firm in the previous three years were : 2009, Rs. 22,000 : 2008, Rs. 21,000 : 2007, Rs. 17,000.

SOLUTION :


To MachineryTo Motor Car To Furniture To Stock To Profit transferred to Capital a/c’s : A 5,625 B 3,750 C 1,875

32,5009,0003,00090,00043,000

11,2501,88,750

By ABC Private Ltd.(Purchase consideration)

1,88,750

1,88,750

Realisation account

Particulars Amount (Rs.) Particulars Amount (Rs.)To Realisation a/c 1,88,750

1,88,750

By 10% cumulative Preference shares By Equity SharesBy Cash

15,0001,50,00023,750

1,88,750

A B C Private Limited


To 10% cumulative Preference shares To Cash

15,000

5,00020,000

By Balance b/d 20,000

20,000

A’s Laon account

Particulars A B C Particulars A B C

To Sundry DebtorsTo Current a/cTo Equity Shares a/cTo Cash a/c

26,000

74,0009,2501,09,250

10,500

38,4404,81053,750

37,5604,69042,250

By Balance b/dBy Sundry CreditorsBy Realisation A/c (Profit)By Current a/c

75,000

14,000

5,62514,6251,09,250

50,000

3,750

53,750

30,000

1,87510,37542,250

Capital accounts


To ABC Private limited 1,50,000

1,50,000

By A’s Capital a/cBy B’s Capital a/cBy C’s Capital a/c

74,00038,44037,5601,50,000

Equity Shares accounts


To ABC Private limited 23,750

23,750

By A’s Loan a/cBy A’s Capital a/cBy B’s Capital a/cBy C’s Capital a/c

5,0009,2504,8104,69023,750

Cash accounts

Gradual Realisation of Assets and Piecemeal Distribution :

On a gradual realisation of assets, the cash realised is distributed in the following order to avoid the excess payment to any partner :

1. Expenses of realisation are to be paid in the first instance as these get preference over unsecured creditors. Then the debts of the firm to third parties must be paid out in full prior to any partner being paid any amount in respect of his loan and capital; secured creditors should get preference over unsecured creditors.

2. After the creditors have been paid off, the amount due to a partner as loan should be paid. When the loans are due to more than one partner, the cash available should be paid rateably.

3. After the payment of outside liabilities and loans due to the partners, the capitals of the partners are paid by two methods :

(i) Proportionate Capital Method

(ii) Maximum Loss Method

(i) Proportionate Capital Method :

If the capitals of the partners are in the ratio of their profit sharing arrangement, then each of them is paid out according to his capital ratio at each distribution. If the capitals of the partners are not in the profit sharing ratio, then the first cash available for distribution amongst the partners should be paid to those partners whose capitals are more than their profit sharing ratios to bring their capitals to their profit sharing levels.

Cash available for distribution amongst the partners cannot be distributed according to the profit and loss sharing ratio unless the capitals of the partners are in the profit and loss sharing ratio because that will not leave the unpaid balances of the capital accounts in the profit and loss sharing ratio of the partners.

ILLUSTRATION :

A, B and C share profits and losses in the proportion of ½, 1/3 and 1/6. Their Balance sheet is as follows :

The partnership is dissolved and the assets are realised as follows :

1st Realisation 40,000 2nd Realisation 30,0003rd Realisation 54,0004th Realisation 7,000

Prepare a statement showing how the distribution should be made.

Liabilities Amount Assets Amount CreditorsA’s Loan A’s CapitalB’s CapitalC’s Capital

50,00010,00050,00010,00040,000

Land & BuildingsPlant and MachineryStockDebtorsCash

70,00040,00025,00020,0005,000

Particulars Credito-rs

A’s Loan

A’s Capital

B’s Capital

C’s Capital

Amount DueCash in hand paid to creditors

50,0005,000

10,000 50,000 10,000 40,000

Balance dueAmount of 1st realisation paid to creditors

45,000

40,000

10,000 50,000 10,000 40,000

Balance due Amount of 2nd realisation Less : Paid to Creditors

Rs.30,0005,000

5,000

5,000

10,000 50,000 10,000 40,000

Less : A’s Loan paid25,00010,000

10,00010,000

50,000 10,000 40,000

Less : Paid to C15,00015,000

50,000 10,000 40,00015,000

Balance DueAmount of 3rd realisation Less : Paid to C

54,0008,333

50,000 10,000 25,000

8,333

SOLUTION :

STATEMENT SHOWING DISTRIBUTION OF CASH

Less : Paid to A and C45,66745,667

50,00034,250

10,000 16,66711,417

Balance DueAmount of 4th realisationPaid to A and C

7,0001,000

15,750

750

10,000 5,250

250

Less : Paid to A, B and C6,0006,000

15,0003,000

10,0002,000

5,0001,000

Balance Unpaid/Loss on Realisation 12,000 8,000 4,000

(ii) Maximum Loss Method

An alternative method of piecemeal distribution of cash amongst partners is to calculate the maximum possible loss on every realisation after the outside liabilities and the partners’ loans have been paid.

The amount available for distribution amongst partners is compared with the amount of capitals payable to partners and the maximum possible loss is ascertained on the assumption that in future assets will not realize any amount.

The maximum loss so ascertained is deducted from the capitals of the partners in the profit and loss sharing ratio and the balance left in the capital accounts after the deducting the maximum possible loss will be the amount payable to the partners.

But if a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the other partners in their proportion of their capitals which stood on the dissolution date as stated in the case of Garner vs. Murray.

ILLUSTRATION :

Following is the Balance Sheet of X, Y and Z who share profits and losses equally :

The firm dissolved on 1-1-2010 and assets were realised as follows :

First installment Rs. 6,000

Second installment Rs. 9,000

Third installment Rs. 15,000

Last installment Rs. 18,000

Show the distribution of cash under Maximum Loss Method.

Liabilities Amount Assets Amount Capital Accounts X 29,000 Y 20,000 Z 11,000Creditors

60,00010,000

Sundry Assets Cash at bankProfit and Loss a/c

60,0004,0006,000

Particulars

Balance Due as per Balance SheetLess : Loss distributed among partners

Balance of cash at bank paid to creditors

1st RealisationPaid to Creditors 6,000

Nil 2nd RealisationMaximum Loss Rs. 45,000(i.e. Rs. 54,000- Rs. 9,000)

9,000

Deficiency of Z o be borne by X & Y in Capital Ratio 3:2Amount Paid to Partners 9,000Balance Due

SOLUTION :

STATEMENT SHOWING DISTRIBUTION OF CASHCreditors

10,000

4,000

6,000

6,000

Nil

X’s Capital

29,0002,000

27,000

15,000

12,000

-3,600

8,400

18,600

Y’s capital

20,0002,000

18,000

15,000

3,000

-2,400

600

17,400

Z’s Capital

11,0002,000

9,000

15,000

-6,000

+6,000

Nil

9,000

Partnership Accounts- Dissolution, Insolvency, sale to a Company and Piecemeal Distribution

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Transcript of Partnership Accounts- Dissolution, Insolvency, sale to a Company and Piecemeal Distribution