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