Professional Documents
Culture Documents
Advanced Issues in
Partnership Accounts
UNIT 1 : DISSOLUTION OF PARTNERSHIP FIRMS
BASIC CONCEPTS
On the dissolution of a partnership, firstly, the assets of
the firm, including goodwill, are realized. Then the amount
realized, is applied first towards repayment of liabilities to
outsiders and loans taken from partners; afterwards the
capital contributed by partners is repaid and, if there is still
surplus, it is distributed among the partners in their profitsharing ratio.
Conversely, after payment of liabilities of the firm and
repayment of loans from partners, if the assets of the firm left
over are insufficient to repay in full the capital contributed by
each partner, the deficiency is borne by the partners in their
profit-sharing ratio.
On dissolution of partnership, the mutual rights of the
partners, unless otherwise agreed upon, are settled in the
following manner:
(a) Losses including deficiencies of capital are paid, first
out of profits, next out of capital and, lastly, if
necessary, by the partners individually in the
proportion in which they are entitled to share profits.
(b) The assets of the firm, including any sums
contributed by the partners to make up deficiencies of
capital have to be applied in the following manner
and order :
(i)
3.2
Advanced Accounting
Capital Ratio
on Insolvency
3.3
Insolvency of
all Partners
On dissolution
assets are realized and all liabilities are paid off
(if any liability remains unpaid then it is to be realized from
partners in their profit sharing ratio).
Piecemeal
describes two
methods
DISSOLUTION
Question 1
X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of
4 : 3 : 2. Following is the Balance Sheet of the firm as at 31st March, 2012:
Balance Sheet as at 31st March, 2012
Liabilities
Partners Capitals:
X
Y
Z
General Reserve
Sundry Creditors
` Assets
Fixed Assets
4,00,000 Stock in trade
3,00,000 Sundry debtors
2,00,000 Cash in hand
90,000
3,20,000
13,10,000
`
5,00,000
3,00,000
5,00,000
10,000
13,10,000
Advanced Accounting
3.4
Partners of the firm decided to dissolve the firm on the above said date.
Fixed assets realized ` 5,20,000 and book debts ` 4,40,000.
Stocks were valued at ` 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to ` 6,000.
You are required to prepare:
(i)
Realisation account;
(ii)
(iii)
Cash account.
Answer
(i)
Realisation Account
To
Fixed assets
5,00,000 By
Creditors
3,20,000
To
Stock in trade
3,00,000 By
Cash
(5,20,000+4,40,000)
9,60,000
To
Debtors
5,00,000 By
2,50,000
To
Cash - Expenses
To
Cash -Creditors
(3,20,000 x 95%)
6,000 By
3,04,000
transferred
to
Loss
partners
capital
accounts
X
Y
35,555
26,667
17,778
16,10,000
Partners Capital Accounts
(ii)
To
Realisation
16,10,000
35,555
26,667
2,00,000
Account
To
Realisation
- 2,50,000
- By General
Account
To
Cash
40,000
30,000
20,000
4,40,000 3,30,000
2,20,000
reserve
4,04,445
53,333
2,02,222
4,40,000 3,30,000
2,20,000
3.5
Cash Account
(iii)
`
To
To
Balance b/d
Realisation A/c
(Fixed assets and
book debts realized)
10,000
9,60,000
`
By
By
6,000
3,04,000
By
By
By
X
Y
Z
4,04,445
53,333
2,02,222
9,70,000
9,70,000
Question 2
P, Q and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on
31st March, 2011 is as follows:
` Assets
Liabilities
Capital accounts
P
Q
R
1,20,000
48,000
24,000
Reserve Fund
Creditors
Stock
1,92,000 Sundry debtors
60,000 Cash
48,000
3,00,000
`
1,08,000
24,000
60,000
48,000
60,000
3,00,000
They decided to dissolve the business. The following are the amounts realized:
`
Plant and Machinery
Fixtures
Stock
Sundry debtors
1,02,000
18,000
84,000
44,400
Creditors allowed a discount of 5% and realization expenses amounted to ` 1,500. There was
an unrecorded asset of ` 6,000 which was taken over by Q at ` 4,800. A bill for ` 4,200 due
for sales tax was received during the course of realization and this was also paid.
You are required to prepare:
(i)
Realisation account.
Advanced Accounting
3.6
Answer
Realisation Account
Particulars
Debtors
Stock
Fixtures
Plant and machinery
Cash A/c (Creditors)
Cash A/c (Sales tax)
Cash A/c (Realisation
expenses)
To Profit on Realisation
P
3,960
Q
3,960
R
1,980
To
To
To
To
To
To
To
`
48,000 By
60,000 By
24,000
1,08,000
45,600
4,200
1,500 By
Particulars
Creditors
Cash A/c (Assets realized):
Plant and Machinery 1,02,000
18,000
Fixtures
Stock
84,000
44,400
Sundry Debtors
Q (Unrecorded asset)
48,000
2,48,400
4,800
9,900
3,01,200
3,01,200
`
To Realisation A/c
(unrecorded
asset)
To Cash (Bal. Fig.)
`
4,800
Particulars
To
To
Particulars
Balance b/d
Realisation A/c (Assets)
Particulars
`
60,000 By Realisation A/c (Creditors)
2,48,400 By Realisation A/c (Expenses)
By Realisation A/c (Sales Tax)
By Ps Capital A/c
By Qs Capital A/c
By Rs Capital A/c
3,08,400
`
45,600
1,500
4,200
1,47,960
71,160
37,980
3,08,400
An unrecorded asset is in the nature of gain hence realization account is credited. Since this asset has been
taken over by Q, therefore, his account has been debited.
3.7
Question 3
Read, Write and Add give you the following Balance Sheet as on 31st March, 2011.
` Assets
Liabilities
Reads Loan
Capital Accounts:
30,000
Read
30,000
Stock
Write
10,000
Debtors
Add
2,000
Sundry Creditors
Loan on Hypothecation of
Stock
Joint Life Policy Reserve
2,000
10,400
18,400
(400)
18,000
15,000
10,000
8,000
12,400
93,400
93,400
The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. Firm
was dissolved on 31st March, 2011 and you are given the following information:
(a) Add had taken a loan from insurers for ` 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of ` 10,200 after deducting ` 5,000
for. Adds loan and ` 300 as interest thereon.
(b) One of the creditors took some of the patents whose book value was ` 6,000 at a
valuation of ` 4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had written
them off on finding them useless. The shares were now found to be worth ` 3,000 and
the loan creditor agreed to accept the shares at this value.
(d) The remaining assets realized the following amount:
Plant and Machinery
Fixtures and Fittings
Stock
Debtors
`
17,000
1,000
9,000
16,500
Advanced Accounting
3.8
Answer
Realisation Account
`
To
To
30,000 By
2,000 By
Stock
Debtors
Patents and
Trademarks (W.N.5)
To Bank
10,400 By
18,400 By
5,500 By
To
To
To
2,300
By
400
3,000
500
12,900
45,500
6,300
68,600
68,600
Bank Account
`
To
To
To
To
Balance b/d
Joint Life Policy
Realisation A/c
Adds Capital A/c
Read
To Bank
To Realisation
A/c
To Bank (Bal.
Fig.)
2,800
1,400
27,200
30,000
8,600
10,000
5,300 By Balance
2,100
b/d
By Bank A/c
(bal.fig.)
30,000
10,000
2,000
7,400
30,000
5,400
10,000
7,400
3.9
Working Notes:
1.
`
To Bank A/c
2.
15,000
15,000
`
4,500 By
500
12,800
17,800
`
17,800
Balance b/d
17,800
3.
`
To Realisation A/c
To Bank A/c
4.
`
To Balance b/d
To Realisation A/c
5.
6,200
`
To Balance b/d
6,200
12,400
15,500
27,900
`
By
By
By
10,000
Creditors A/c
Realisation A/c
Realisation A/c (bal.fig.)
4,500
1,500
4,000*
10,000
Question 4
Explain Garner V/S Murrary rule applicable in the case of partnership firms. State, when is
this rule not applicable.
Answer
Garner vs. Murray rule: When a partner is unable to pay his debt due to the firm, he is said
to be insolvent and the share of loss is to be borne by other solvent partners in accordance
with the decision held in the English case of Garner vs. Murray. According to this decision,
normal loss on realisation of assets is to be brought in cash by all partners (including insolvent
partner) in the profit sharing ratio but a loss due to insolvency of a partner has to be borne by
the solvent partners in their capital ratio. In order to calculate the capital ratio, no adjustment
will be made in case of fixed capitals. However, in case of fluctuating capitals, ratio should be
Advanced Accounting
3.10
calculated on the basis of adjusted capital before considering profit or loss on realization at
the time of dissolution.
Non-Applicability of Garner vs Murray rule:
1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their
capital ratio. If incidentally a solvent partner has a debit balance in his capital account,
he will escape the liability to bear the loss due to insolvency of another partner.
2.
3.
When there is an agreement between the partners to share the deficiency in capital
account of insolvent partner.
4.
Question 5
W paid a premium to other partners of the firm at the time of his admission to the firm,
with a condition that the will not be dissolved before expiry of five years. The firm is
dissolved after three years. W claims refund of premium.
(i)
(ii) Also list any two conditions when no claim in this respect will arise.
Answer
If the firm is dissolved before the term expires, as is the case, W being a partner who
has paid premium on admission will have to be repaid / refunded
The criteria for calculation of refund amount are:
(i)
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence.
No claim for refund will arise if:
(i)
Liabilities
Capital
Building
3.11
Amount (`)
1,20,000
90,000 Stock
85,500
B
C
90,000 Investments
- Debtors
29,000
42,000
35,000 Cash
24,000 C
14,500
General reserve
Trade creditors
Bills payable
15,000
47,000
20,000
3,06,000
3,06,000
A cheque for ` 4,300 received from debtor was not recorded in the books and was
misappropriated by C.
(ii) Investments costing ` 5,400 were sold by C at ` 7,900 and the funds transferred to his
personal account. This sale was omitted from the firms books.
(iii) A creditor agreed to take over investments of the book value of ` 5,400 at ` 8,400. The
rest of the creditors were paid off at a discount of 2%.
(iv) The other assets realized as follows:
Building
Stock
` 78,000
Investments
Debtors
` Particulars
To Building
`
47,000
Advanced Accounting
3.12
To Stock
To Investment
29,000 By Cash
To Debtors
42,000
Building
37,828
Stock
78,000
Investments (W.N.2)
23,000
Debtors (W.N. 3)
33,176
4,900
To Cash-expenses
To Cash-bills payable (20,000-400)
19,600
20,000
1,26,000
2,60,176
By Debtors-unrecorded
4,300
By Investments-unrecorded
7,900
B 171
C 137
D
69
548
3,39,376
3,39,376
Cash Account
Particulars
Amount Particulars
`
To Balance b/d
Building
By Realisation-bills payable
1,26,000
Stock
78,000
Investments
23,000
Debtors
33,176
To Cs capital A/c
By Realisation-expenses
37,828
19,600
4,900
By Capital account
A
90,528
2,60,176
90,528
4,000
35,292
2,78,676
Amount
2,78,676
D Particulars
90,000
90,000
To Balance b/d
15,000
By Balance b/d
- 35,000
4,300
By General reserve
7,500
7,500
6,000
3,000
To Investment-misappropriation
7,900
By Realisation profit
171
171
137
69
7,143
7,143
90,528 90,528
4,000
7,143
By Bs capital A/c
7,143
By Ds capital A/c
2,777
97,671
97,671
27,200 38,069
To Debtors-misappropriation
3.13
3.14
Advanced Accounting
Working Notes:
1.
`
Book value
Less: Creditors taking over investments
Less: Discount @ 2%
47,000
( 8,400)
38,600
(772)
37,828
2.
`
Book value
29,000
Less: Misappropriated by C
(5,400)
23,600
(5,400)
18,200
4,800
23,000
3.
`
Book value
42,000
(4,300)
37,700
4.
(4,524)
33,176
Deficiency of C
`
Balance of capital as on 31st March, 2012
Debtors-misappropriation
Investment-misappropriation
15,000
4,300
7,900
27,200
(137)
(6,000)
(4,000)
3.15
17,063
Net deficiency of capital
This deficiency of ` 17,063 in Cs capital account will be shared by other partners A, B
and D in their capital ratio of 90 : 90 : 35.by
Accordingly,
As share of deficiency
Bs share of deficiency
Ds share of deficiency
Question 7
P, Q, R and S had been carrying on business in partnership sharing profits & losses in the
ratio of 4:3:2:1. They decided to dissolve the partnership on the basis of following Balance
Sheet as on 30th April, 2011:
Amount (`) Assets
Liabilities
Capital Accounts
P
1,68,000
1,08,000
Amount (`)
2,46,000
65,000
1,00,000
2,76,000 Stock
General reserve
Capital reserve
95,000 Debtors
25,000 Cash in hand
Sundry creditors
Mortgage loan
1,10,000 R
S
72,500
15,500
25,000
18,000
43,000
5,42,000
(i)
5,42,000
2,30,000
42,000
Stock
72,000
Debtors
65,000
(ii)
(iii)
(iv)
R became insolvent and nothing was realized from his private estate.
Advanced Accounting
3.16
Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account,
Partners Capital Accounts and Cash Account.
Answer
Realisation Account
Amount (`) Particulars
Particulars
To
To
To
To
Amount
(`)
36,000
1,10,000
2,30,000
42,000
72,000
65,000
7,800
54,000
Q = 30,090
R = 20,060
S = 10,030
1,00,300
6,55,300
6,55,300
S Particulars
40,120
12,636
2,03,364 1,35,576
28,500 19,000
9,500
1,68,000 1,08,000
38,000
By Capital
- Reserve
10,000
7,500
- By Cash A/c
(realization
loss)
40,120
30,090
By Ps Capital
A/c
By Qs Capital A/c
By Cash A/c
2,56,120 1,74,090 45,060 28,030
By General
Reserve
5,000
2,500
- 10,030
12,636
8,424
6,000
3.17
Note: P, Q and S brought cash to make good, their share of the loss on realization. However, in
actual practice they will not be bringing any cash, only a notional entry will be made.
Cash Account
Particulars
To Balance b/d
To Realization A/c:
Land and building
Furniture & fixtures
Stock
Debtors
To P, Q, Ss capital A/cs
(40,120+30,090+10,030)
To Ss capital A/c
Amount Particulars
(`)
Amount
(`)
7,800
54,000
1,10,000
2,03,364
1,35,576
80,240
6,000
5,10,740
5,10,740
Working Note:
As per Garner Vs. Murray rule, solvent partners have to bear the loss due to insolvency of a
partner in their capital ratio.
Calculation of Capital Ratio of Solvent Partners
Opening capital
Add:
General reserve
Capital reserve
(`)
(`)
(`)
1,68,000
1,08,000
(18,000)
38,000
10,000
28,500
7,500
9,500
2,500
2,16,000
1,44,000
(6,000)
Though S is a solvent partner yet he cannot be called upon to bear loss on account of
insolvency of R because his capital account has a debit balance.
Therefore, capital ratio of P & Q = 216 : 144 = 3 : 2
Deficiency of R = ` {(25,000 + 20,060) (19,000 + 5,000)} = ` 45,060 ` 24,000 = ` 21,060.
Deficiency of R will be shared by P & Q in the capital ratio of 3 : 2 i.e.
P = ` 21,060 X 3/5 = ` 12,636
Q = ` 21,060 X 2/5 = ` 8,424
Advanced Accounting
3.18
Question 8
Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing
profits and losses in the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the
basis of the following Balance Sheet as on 30th April, 2014:
Liabilities
Capital Account:
Neptune
Jupiter
1,00,000
60,000
` Assets
Premises
Furniture
1,60,000 Stock
1,20,000
40,000
1,00,000
General Reserve
56,000 Debtors
Capital Reserve
14,000 Cash
Sundry Creditors
Mortgage Loan
(i)
40,000
8,000
80,000
_______
Venus
Pluto
10,000
12,000
3,30,000
The assets were realised as under:
22,000
3,30,000
`
Debtors
Stock
24,000
60,000
Furniture
Premises
16,000
90,000
`
By Sundry creditors A/c
By Cash A/c (assets
1,20,000
40,000
realised): Premises
Furniture
`
20,000
90,000
16,000
Stock
1,00,000
Sundry Debtors
To Cash A/c (creditors
paid)
To Cash A/c (expenses)
40,000
Debtors
32,000 By Loss transferred to
Capital Accounts:
4,000
60,000
24,000 1,90,000
Neptune
Jupiter
54,000
Venus
18,000
18,000 1,26,000
Pluto
36,000
3,36,000
Cash Account
`
To
Balance b/d
To
Realisation A/c
(assets realised)
To
To
8,000
1,90,000
Capital A/c
(realisation loss
made good):
Neptune
54,000
Jupiter
Pluto
36,000
18,000
Pluto's Capital
A/c
3.19
3,36,000
`
By
32,000
By
By
Mortgage loan
4,000
80,000
By
By
1,18,857
73,143
1,08,000
2,000
3,08,000
_______
3,08,000
Particulars
Neptune
Jupiter
To
Balance b/d
To
Realisastion
A/c (loss)
To
To
54,000
36,000
Venus's
Capital
A/c (loss)
11,143
6,857
Cash A/c
1,18,857
73,143
Pluto
10,000
12,000
18,000
18,000
Neptune
Jupiter
Venus
Pluto
1,00,000
60,000
24,000
16,000
8,000
8,000
By
Balance b/d
By
General reserve
A/c
(3 : 2 : 1 :1)
By
6,000
4,000
2,000
2,000
By
54,000
36,000
18,000
By
Neptune's Capital
A/c
11,143
By
Jupiter's Capital
A/c
6,857
By
Cash A/c
2,000
1,84,000
1,16,000
28,000
30,000
_______
_______
_____
_____
1,84,000
1,16,000
28,000
30,000
Particulars
Advanced Accounting
Venus
3.20
3.21
`
Liability for interest on loans from :
`
1,000
Investments
Spouses of partners
2,000 Furniture
2,000
Partners
1,000 Machinery
1,200
Stock
4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure.
Answer
Statement of Distribution of Cash
Realisation Interest on
loans from
partners
spouses
`
Balances due (1)
(i) Sale of investments
1,000
2,000
Interest on
loans from
partners
Partners Capitals
A
Total
2,000
(1,000)
1,000
(1,000)
-
1,000
1,000
(1,000)
-
9,600
6,000
8,400
24,000
(22,800)
1,200
1,800
9,600
840 (2,640)
1,200
6,000
7,200
1,200
22,800
Advanced Accounting
3.22
(18,800)
(4,000)
18,800
Question 10
Amar, Akbar and Antony are in partnership. The following is their Balance Sheet as at
March 31, 2010 on which date they dissolved their partnership. They shared profit in the ratio
of 5:3:2.
Liabilities
Creditors
Loan A/c
Capital A/cs -
` Assets
Amar
Amar
Akbar
Antony
80,000
20,000
1,00,000
30,000
90,000
3,20,000
60,000
80,000
60,000
1,20,000
3,20,000
It was agreed to repay the amounts due to the partners as and when the assets were realised, viz.
April 15, 2010
May 1, 2010
May 31, 2010
` 60,000
` 1,46,000
` 94,000
Prepare a statement showing how the distribution should be made under maximum loss
method and write up the cash account and partners capital accounts.
Answer
(a) Statement of Distribution of Cash by Maximum Loss Method
Creditors
Amars
Loan
Amar
Akbar
Antony
20,000 1,00,000
30,000
90,000
20,000 1,00,000
30,000
90,000
20,000
Nil 1,00,000
30,000
90,000
Balance due
80,000
th
15 April 2010 realised ` 60,000
Paid to creditors
(60,000)
20,000
Balance due
st
1 May, 2010 realised ` 1,46,000
20,000
Paid to creditors
(` 20,000)
(` 20,000)
Paid to Amars loan
Balance due (1)
Nil
3.23
(2,210)
40,790
59,210
4,200
30,000
(1,990)
65,210
24,790
(10,000)
49,210
10,000
(6,000)
24,000
6,000
(4,000)
20,790
4,000
Cash Account
`
To Realization Account
60,000
To Realization Account
To Realization Account
20,000
20,000
40,790
65,210
49,210
20,790
24,000
3,00,000
3,00,000
Amar
Akbar
Antony
30,000
90,000
30,000
90,000
`
To Cash
To Cash
To Balance c/d
Realization loss*
Akbar Antony
1,00,000
3.24
Advanced Accounting
If no further realization takes place, then Amar, Akbar and Anthony will bear loss on realization
` Assets
15,000
7,500
15,000
4,500
16,500
58,500
Factory Building
Plant & Machinery
Debtors
Stock
Cash at Bank
24,160
16,275
5,400
12,390
275
58,500
On balance sheet date all the three partners have decided to dissolve their partnership. Since
the realization of assets was protracted, they decided to distribute amounts as and when
feasible and for this purpose they appoint C who was to get as his remunerations 1% of the
value of the assets realized other than cash at Bank and 10% of the amount distributed to the
partners.
Assets were realized piecemeal as under:
First instalment
Second installment
Third installment
Last instilment
Dissolution expenses were provided for estimated amount of
The creditors were settled finally for
` 18,650
` 17,320
` 10,000
` 7,000
` 3,000
` 15,900
Prepare a statement showing distribution of cash amongst the partners by Higher Relative
Capital Method.
Answer
Statement showing distribution of cash amongst the partners
Creditors
Balance Due
On 1st Instalment amount with
16,500
Bs
Loan
A(`)
4,500 15,000
Capitals
B(`)
C(`)
7,500 15,000
3.25
18,925
(3,000)
15,925
Less: Cs remuneration of 1% on
assets realized (18,650 x 1%)
(187)
15,738
to (15,738)
Nil
17,320
(173)
17,147
(162)
16,985
(4,500)
12,485
(15,738)
762
(162)
600
(4,500)
nil
(1,135)
11,350
(3,750)
7,600
(7,600)
nil
10,000
(3,750)
11,250
(4,343)
10,657
- (3,257)
7,500 7,993
(657)
10,000
(3,140)
6,860
(493)
7,500 7,500
(2,355) (2,355)
5,145 5,145
(100)
9,900
(900)
9,000
(1,150)
7,850
(7,850)
nil
3.26
Advanced Accounting
7,000
(70)
6,930
(630)
6,300
(6,300)
(2,520)
4,340
(1,890) (1,890)
3,255 3,255
Working Note:
(i)
` 275 added to the first instalment received on sale of assets represents the Cash in
Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is ` 762/-.
However, since the creditors were settled for ` 15,900/- only the balance 162/- were paid
and the balance ` 600/- was transferred to the Profit & Loss Account.
(iii)
(A)
15,000
4
3,750
7,500
3
2,500
15,000
3
5,000
(B)
Capital
10,000
5,000
7,500
nil
7,500
7,500
(D)
4
1,250
3
2,500
5,000
nil
3,750
3,750
Therefore, firstly ` 3,750 is to be paid to C then A and C to be paid in proportion of 4:3 upto
` 8,750 to bring the capital of all partners A, B and C in proportion to their profit sharing ratio.
Thereafter, balance available will be paid in their profit sharing ratio 4:3:3 to all partners viz A,
B and C.
3.27
Question 12
The partners P, Q & R have called you to assist them in winding up the affairs of their
partnership on 31.12.2013. Their balance sheet as on that date is given below:
Amount ` Assets
Liabilities
Capital Accounts:
50,000
P
Q
46,000
10,000
32,000 Stock
16,000 Debtors
14,500
14,000
Sundry Creditors
Cash at Bank
Loan P
Loan Q
Total
Amount `
1,63,500 Total
9,000
13,000
7,000
1,63,500
(a) The partners share profit and losses in the ratio of 4:3:2.
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:
January 2014
February 2014
As part payment of his capital, R accepted a machinery for ` 9,000 (book value ` 3,500)
3.28
Advanced Accounting
You are required to prepare a schedule of cash payments amongst the partners by "Higher
Relative Capital Method".
Answer
Particulars
Balance due after loan
January
Balance available
Realization less expenses and cash
retained
Amount available and paid
Balance due
February
Opening Balance
Expenses paid and cash carried forward
Available for distribution
Cash paid to Q and Machinery given to
R
Balance due
March
Opening Balance
Amount realized less expenses
Amount paid to partners
Loss
Cash
Creditors
Capitals
` P ( `)
Q (`)
R ( `)
16,000 52,000 43,500 32,000
9,000
10,000
19,000
-
(16,000)
- 52,000
- 3,000
43,500 29,000
6,000
3,000
3,000
-
3,000
9,000
52,000
40,500 20,000
41,689
10,311
32,767 14,844
7,733 5,156
P ( `)
Q (`)
R ( `)
65,000 50,500
(13,000) (7,000)
(A)
52,000 43,500
4
Profit Sharing Ratio
3
Capital / Profit sharing Ratio
13,000 14,500
Capital in profit sharing ratio, taking Ps capital as base
52,000 39,000
(B)
32,000
32,000
2
16,000
26,000
2,000
87,300
89,300
Working Note:
(i)
4,500
3
1,500
4,500
3.29
6,000
2
3,000
3,000
3,000
P ( `)
52,000
4
13,000
40,000
Q (`)
40,500
3
13,500
30,000
12,000
4
3,000
12,000
-
10,500
3
3,500
9,000
1,500
(1,500)
9,000
12,000
(12,000)
40,000
(29,689)
41,689
(9,000)
30,000
(22,267
)
32,767
10,311
7,733
R ( `)
20,000
2
10,000
20,000
20,000
(14,844
)
14,844
5,156
Advanced Accounting
3.30
for the wrongful acts or commissions of other partners of the LLP. Wrongful acts will
include acts of fraud and wilful omissions. Hence, the liability may fall only on that
partner, who is guilty of any wrongful acts or commissions in respect of debts or
liabilities acquired by such acts.
Exercise
1
The firm of Kapil and Dev has four partners and as of 31st March, 2011, its Balance Sheet stood
as follows:
Balance Sheet as on 31st March, 2011
Liabilities
Capital A/cs:
F. Kapil
S. Kapil
R. Dev
Current A/cs
F. Kapil
S. Kapil
R. Dev
Loan from NBFC
Current Liabilities
`
2,00,000
2,00,000
1,00,000
Assets
Land
Building
Office equipment
Computers
Debtors
Stocks
Cash at Bank
Other Current Assets
Current A/c :
B. Dev
`
50,000
2,50,000
1,25,000
70,000
4,00,000
3,00,000
75,000
22,600
50,000
1,50,000
1,10,000
5,00,000
70,000
87,400
13,80,000
13,80,000
The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve
the firm on 1.4.2011 on the basis of the following understanding :
(a)
(b)
(c)
The following assets are to be adjusted to the extent indicated with respect to the book
values :
Land
200%
Building
120%
Computers
70%
Debtors
95%
Stocks
90%
In the case of the loan, the lenders are to be paid at their insistence a prepayment premium
of 1%.
B. Dev is insolvent and no amount is recoverable from him. His father, R.Dev, however, agrees
to bear 50% of his deficiency. The balance of the deficiency is agreed to be apportioned
according to law.
Assuming that the realisation of the assets and discharge of liabilities is carried out immediately,
show the Cash A/c, Realisation Account and the Partners Accounts.
(Hints: Profit on realisation: F. Kapil ` 9,600, S. Kapil ` 9,600, R. Dev ` 2,400.,B. Dev ` 2,400)
3.31
The firm of LMS was dissolved on 31.3.2011, at which date its Balance Sheet stood as follows:
Liabilities
Creditors
Bank Loan
Ls Loan
Capital
L
M
S
Assets
Fixed Assets
Cash and Bank
`
2,00,000
5,00,000
10,00,000
15,00,000
10,00,000
5,00,000
47,00,000
`
45,00,000
2,00,000
47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets
and distribute the cash after discharge of liabilities. Their fees which are to include all expenses is
fixed at ` 1,00,000. No loss is expected on realisation since fixed assets include valuable land
and building.
Realisations are:
S.No.
1
2
3
4
5
Amount in `
5,00,000
15,00,000
15,00,000
30,00,000
30,00,000
The Chartered Accountant firm decided to pay off the partners in Higher Relative Capital
Method. You are required to prepare a statement showing distribution of cash with necessary
workings.
(Hints: Realization profit credited to partners L ` 15,66,667, M ` 15,66,667, S ` 15,66,666)
3.
Ajay, Vijaya, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of
4 : 1 : 2 : 3. The following is their Balance Sheet as at 31st March, 2011 :
Liabilities
Sundry Creditors
Capital A/cs :
Ajay
Shyam
`
3,00,000
7,00,000
3,00,000
10,00,000
13,00,000
Assets
Sundry Debtors
Less: Doubtful Debts
Cash in hand
Stocks
Other Assets
Capital A/cs:
Vijay
Ram
`
3,50,000
(50,000)
3,00,000
1,40,000
2,00,000
3,10,000
2,00,000
1,50,000
13,00,000
3.32
Advanced Accounting
On 31st March, 2011, the firm is dissolved and the following points are agreed upon:
Ajay is to takeover sundry debtors at 80% of book value
Shyam is to takeover the stocks at 95% of the value and
Ram is to discharge sundry creditors.
Other assets realise ` 3,00,000 and the expenses of realisation come to ` 30,000.
Vijay is found insolvent and ` 21,900 is realised from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c.
The loss arising out of capital deficiency may be distributed following the decision in Garner vs
Murray.
(Hints: Vijays deficiency will be borne by Ajay and Shyam in the ratio of 7 : 3 i.e. on
opening capitals of ` 7,00,000 and ` 3,00,000. Ram will not bear any portion of the loss
since at the time of dissolution he had a debit balance in his capital account. Loss on
realization- Ajay ` 28,000, Vijay ` 7,000, Ram ` 14,000, Shyam ` 21,000)
3.33
Advanced Accounting
3.34
Liabilities
P & Co.
`
Capitals:
P
Q
R
Reserves
Sundry creditors
Due to P & Co.
Bank overdraft
P & Co.
R & Co.
2,40,000
1,60,000
---50,000
1,20,000
---80,000
---2,00,000
1,00,000
1,50,000
1,16,000
1,00,000
-----
6,50,000
6,66,000
Fixed assets:
Building
Plant & machinery
Office equipment
Current assets:
Stock-in-trade
Sundry debtors
Bank balance
Cash in hand
Due from R & Co.
60,000
50,000
1,50,000 1,60,000
20,000
6,000
1,20,000 1,40,000
1,60,000 2,00,000
30,000
90,000
10,000
20,000
1,00,000
----6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ` 1,00,000.
(b) Plant and machinery of P & Co. was valued at ` 2,50,000 and that of R & Co. at
` 2,00,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill valued of P & Co. at ` 1,20,000 and R & Co. at ` 60,000, but the same will not
appear in the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their
capitals according to the profit sharing ratio.
(f)
Provisions for doubtful debts has to be carried forward at ` 12,000 in respect of debtors
of P & Co. and ` 26,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of new firm and capital accounts of the
partners in the books of old firms.
Answer
Balance Sheet of M/s PQR & Co. as at 31st March, 2009
Liabilities
Capitals:
` Assets
P
Q
R
Building
(` 1,00,000 + ` 60,000)
5,52,000
Plant & machinery
(` 2,50,000+` 2,00,000)
3,68,000
Office equipment
(` 20,000+` 6,000)
1,84,000 11,04,000 Stock-in-trade
(` 1,44,000+` 1,68,000)
`
1,60,000
4,50,000
26,000
3,12,000
Particulars
To
Capital A/cs
M/s PQR & Co.
Particulars
To Capital A/cs
M/s PQR & Co.
Sundry debtors
2,36,000 (` 1,60,000+` 2,00,000)
80,000 Less: Provision for doubtful debts
(` 12,000+` 26,000)
Bank balance (` 30,000+
` 90,000)
Cash in hand
14,20,000
3.35
3,60,000
(38,000)
3,22,000
1,20,000
30,000
14,20,000
P
`
2,40,000
37,500
Q
`
1,60,000
12,500
2,11,500
4,89,000
70,500
2,43,000
Q
`
2,00,000
1,00,000
R
`
1,00,000
50,000
68,000
34,000
3,68,000
1,84,000
Working Notes:
1.
R & Co.
1,20,000
1,00,000
2,50,000
60,000
60,000
2,00,000
Assets:
Goodwill
Building
Plant & machinery
3.36
Advanced Accounting
Office equipment
Stock-in-trade
Sundry debtors
Bank balance
Cash in hand
Due from R & Co.
(A)
Liabilities:
Creditors
Provision for doubtful debts
Due to P & Co.
Bank overdraft
(B)
Purchase consideration (A-B)
2.
20,000
1,44,000
1,60,000
30,000
20,000
1,00,000
9,44,000
6,000
1,68,000
2,00,000
90,000
10,000
7,94,000
1,20,000
12,000
80,000
2,12,000
7,32,000
1,16,000
26,000
1,00,000
2,42,000
5,52,000
`
12,84,000
(1,80,000)
11,04,000
5,52,000
Qs proportionate capital
Rs proportionate capital
3.
3,68,000
1,84,000
Total
4,89,000
2,43,000
3,68,000
1,84,000
7,32,000
5,52,000
4,89,000
6,11,000
1,84,000
12,84,000
(90,000)
(60,000)
(30,000)
(1,80,000)
Existing capital
Proportionate capital
3,99,000
5,51,000
5,52,000
3,68,000
1,54,000
1,84,000
11,04,000
11,04,000
1,53,000
(1,83,000)
30,000
3.37
4.
`
To
Building
To
`
Creditors
50,000 By
1,50,000 By
To
To
Office equipment
Stock-in-trade
20,000 By
1,20,000
To
Sundry debtors
1,60,000
(W.N.1)
To
Bank balance
To
Cash in hand
Due from R & Co.
To
To
Bank overdraft
1,20,000
80,000
7,32,000
30,000
20,000
1,00,000
70,500
2,82,000
9,32,000
5.
9,32,000
To
To
Building
Plant & machinery
60,000 By
1,60,000 By
Creditors
Due to P & Co.
1,16,000
1,00,000
To
To
Office equipment
Stock-in-trade
6,000 By
1,40,000
5,52,000
To
Sundry debtors
2,00,000
(W.N.1)
To
Bank balance
90,000
To
Cash in hand
10,000
To
68,000
34,000
1,02,000
7,68,000
7,68,000
Note: The adjustments in the Capital Accounts of P, Q and R (both for Goodwill and the
amounts paid to Q by P and R) can be shown in their Capital Accounts in the Books of P
& Co and R & Co respectively. In such a case the Capital Account of the partners carried
to PQR & Co will be the same amounts as shown in the Balance Sheet of PQR & Co.
3.38
Advanced Accounting
` Assets
6,40,000
6,60,000
13,00,000
3,27,500
1,50,000
62,500
18,40,000
Stock
Debtors
Furniture
Joint life policy
Plant
Building
`
2,70,000
3,65,000
75,000
47,500
1,72,500
9,10,000
18,40,000
The operations of the business were carried on till 30th September, 2011. S and T both
withdrew in equal amounts half the amount of profits made during the current period of 6
months after 10% per annum had been written off on building and plant and 5% per annum
written off on furniture. During the current period of 6 months, creditors were reduced by
` 50,000, Bills payable by ` 11,500 and Bank overdraft by ` 75,000. The Joint Life policy was
surrendered for ` 47,500 on 30th September, 2011. Stock was valued at ` 3,17,000 and
debtors at ` 3,25,000 on 30th September, 2011. The other items remained the same as on
31st March, 2011.
On 30th September, 2011 the firm sold its business to ST Ltd. The value of goodwill was
estimated at ` 5,40,000 and the remaining assets were valued on the basis of the Balance
Sheet as on 30th September, 2011. The ST Ltd. paid the purchase consideration in equity
shares of ` 10 each. You are required to prepare a Realization Account and Capital accounts
of the partners.
Answer
Realisation Account
Particulars
To Sundry assets:
Stock
Debtors
Plant
Building
Furniture
To Profit:
S
T
` Particulars
By
3,17,000 By
3,25,000 By
1,63,875 By
8,64,500
73,125
2,70,000
2,70,000
5,40,000
22,83,500
Creditors
Bills payables
Bank overdraft
Shares in ST Ltd. (W.N.3)
`
2,77,500
51,000
75,000
18,80,000
22,83,500
3.39
Particulars
2011
April 1 To Cash
Drawings
(W.N. 2)
Sept. To Shares in
30
ST Ltd.
T Date
20,000
Particulars
2011
20,000 April 1 By
By
By
9,50,000 9,70,000
Balance
b/d
6,40,000 6,60,000
Profit
40,000
40,000
(W.N.2)
Realisation
A/c (Profit) 2,70,000 2,70,000
9,50,000 9,70,000
Working Notes:
(1) Ascertainment of total capital:
Balance Sheet as at 30th September, 2011
Liabilities
Sundry creditors
Bills payable
Bank overdraft
Total capital (bal. fig.)
` Assets
2,77,500
51,000
75,000
13,40,000
Building
Less: Depreciation
Plant
Less: Depreciation
Furniture
Less: Depreciation
Stock
Debtors
17,43,500
`
9,10,000
(45,500)
1,72,500
(8,625)
75,000
(1,875)
8,64,500
1,63,875
73,125
3,17,000
3,25,000
17,43,500
`
30th
3.40
Advanced Accounting
`
Total assets (W.N.1)
17,43,500
Add: Goodwill
5,40,000
22,83,500
(4,03,500)
Purchase consideration
18,80,000
Note: The above solution is given on the basis that reduction in bank overdraft is after
surrender of Joint life policy.
CONVERSION OF PARTNERSHIP FIRM INTO A COMPANY
Question 3
Ramesh, Roshan and Rohan were partners of the firm 3R Enterprises sharing profits and
losses in the ratio of 3:2:1 respectively. On 31st March, 2011 their Balance Sheet stood as
follows:
` Assets
Liabilities
Ramesh's Capital A/c
Roshan's Capital A/c
`
14,00,000
11,00,000
6,70,000 Furniture
6,30,000 Stock
6,10,000
8,40,000
Creditors
6,00,000 Debtors
Cash at Bank
6,00,000
1,90,000
47,40,000
47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited
company and named it 3R Enterprises (Private) Ltd.'. The company took over all the assets
including cash at bank and all the creditors for ` 42,00,000 payable in the form of fully paid
equity shares of ` 10 each. It recorded in its books, land and buildings at ` 16,40,000,
machinery at ` 9,90,000 and created a provision for bad debts @ 5% on debtors. The
expenses of the take-over came to ` 23,000 which were paid and borne by the company.
The expenses of getting the company incorporated were ` 57,000.
The partners distributed the company's shares amongst themselves in their profit sharing
ratio. They settled their accounts by paying or receiving cash.
Prepare Realization Account and all the partners' capital accounts in the firm's ledger and
pass journal entries in the books of the company for all of its transactions mentioned above.
3.41
Answer
In the books of 3R Enterprises
Realisation Account
14,00,000 By Creditors
To Machinery
To Furniture
To Debtors
8,40,000
6,00,000
To Cash at Bank
To Rameshs capital
1,90,000
30,000
To Roshans capital
To Rohans capital
20,000
10,000
To Stock
6,00,000
42,00,000
48,00,000
48,00,000
To Shares in 3R
Enterprises
(Pvt.) Ltd. A/c
To Bank A/c
(Settlement)
Ramesh
Roshan
Rohan
85,000 By Realization
A/c (Profit)
By Bank A/c
(Settlement)
21,00,000 14,00,000 7,85,000
Ramesh
Roshan
Rohan
30,000
2,10,000 1,05,000
20,000
10,000
75,000
10,000
21,00,000 14,00,000 7,85,000
`
1.
2.
Dr.
42,00,000
42,00,000
Dr.
Dr.
Dr.
Dr.
Dr.
16,40,000
9,90,000
6,10,000
8,40,000
6,00,000
3.42
Advanced Accounting
Bank A/c
Dr.
1,90,000
To Creditors A/c
To Provision for doubtful debts A/c
6,00,000
30,000
42,00,000
40,000
Dr.
23,000
To Bank A/c
(Expenses for take over debited to capital reserve)
M/s 3R Enterprises A/c
4.
23,000
Dr.
42,00,000
5.
42,00,000
Dr.
57,000
To Bank A/c
(Expenses incurred to get the company incorporated)
57,000
Question 4
The following is the Balance Sheet of M/s. P and Q as on 31st March, 2012:
` Assets
Liabilities
Capital Accounts:
P
Machinery
50,000 Furniture
54,000
5,000
30,000 Investment
Reserves
20,000 Stock
50,000
20,000
Loan Account of Q
Creditors
15,000 Debtors
40,000 Cash
21,000
5,000
1,55,000
1,55,000
It was agreed that Mr. R is to be admitted for a fourth share in the future profits from 1st April,
2012. He is required to contribute cash towards goodwill and ` 15,000 towards capital.
As per para 56 of AS 26, preliminary expense is charged to Profit and Loss account in the year it
is incurred.
3.43
Profit/(Loss)
25,000
12,500
(2,500)
35,000
30,000
The above Profits and Losses are after charging the Salary of P. The Profit of the year
ended 31st March, 2008 included an extraneous profit of ` 40,000 and the loss for the
year ended 31st March, 2010 was on account of loss by strike to the extent of ` 20,000.
(e) The cash trading profit for the year ended 31st March, 2013 was ` 50,000 before
depreciation.
(f)
(g) The value of other assets and liabilities as on 31st March, 2013 were as under:
`
Machinery (before depreciation)
60,000
10,000
Investment
Stock
50,000
15,000
Debtors
Creditors
30,000
20,000
Investments are held from inception of the firm and interest is received @ 10% p.a.
Advanced Accounting
3.44
(j)
The partners applied for conversion of the firm into a Private Limited Company.
Certificate was received on 1st April, 2013. They decided to convert Capital A/cs of the
partners into share capital in the ratio of 2:1:1 on the basis of a total Capital as on
31st March, 2013. If necessary, partners have to subscribe to fresh capital or withdraw.
Prepare the Profit and Loss Account of the firm for the year ended 31 st March, 2013 and the
Balance Sheet of the Company on 1st April, 2013.
Answer
M/s P, Q and R
Profit and Loss Account for the year ending on 31st March, 2013
`
To Depreciation on Machinery
To Depreciation on furniture
To Interest on Qs loan
To Net Profit to :
23,800
Ps Capital A/c
11,900
Qs Capital A/c
Rs Capital A/c
11,900
47,600
55,000
55,000
1st
April, 2013
Notes No.
I
1,41,600
1
15,900
20,000
1,77,500
63,500
50,000
Total
II
50,000
5,000
15,000
30,000
19,000
1,77,500
3.45
Notes to Accounts
`
1.
2.
15,900
Machinery
Furniture
54,000
9,500
63,500
Working Notes:
1.
Calculation of goodwill
Profits/(Loss)
Adjustment for extraneous profit
of 2007-08 and abnormal loss of
2009-10
Add: Salary of P (750 x12)
Less: Interest on non-trading
investment*
2007-08
2008-09
2009-10
2010-11
2011-12
25,000
12,500
(2,500)
35,000
30,000
(40,000)
(15,000)
9,000
(6,000)
12,500
9,000
21,500
20,000
17,500
9,000
26,500
35,000
9,000
44,000
30,000
9,000
39,000
(5,000)
(11,000)
(5,000)
16,500
(5,000)
21,500
(5,000)
39,000
(5,000)
34,000
1,11,000
(11,000)
1,00,000
20,000
60,000
Average Profit
Goodwill equal to 3 years
purchase
Contribution from R for share
15,000
Old share
3/5
New share
1/2
Sacrificing share
3 1 65 1
=
=
5 2 10
10
Gaining share
Advanced Accounting
3.46
Q
2/5
1/4
R
3.
2 1 85 3
=
=
5 4
20 20
1/4
1/4
Goodwill adjustment entry through Partners capital accounts (in their sacrificing
ratio of 2:3)
`
R s capital A/c
Dr.
15,000
To Ps capital A/c
6,000
To Q s capital A/c
9,000
To Drawings
(1,000 x 12)
To P
To Q
To Balance c/d
12,000
12,000
12,000
50,000
30,000
12,000
8,000
6,000
9,000
30,000
23,800
11,900
11,900
91,800
58,900
41,900
79,800
91,800
5.
Liabilities
46,900
58,900
By Balance
b/d
6,000 By General
Reserve
9,000 By R
14,900 By Bank
(15,000 +
15,000)
By Profit &
Loss A/c
41,900
` Assets
Ps Capital
79,800
Machinery
Qs Capital
46,900
Less : Depreciation
Rs Capital
14,900
1,41,600 Furniture
60,000
(6,000)
54,000
10,000
*As per AS 26 Intangible Assets, only purchased goodwill should appear in the books. Therefore,
goodwill though required to be shown in the books as per the requirement of the question, has been
adjusted through capital accounts of the partners in line with the provisions of AS 26.
15,000
900
Creditors
(500)
9,500
50,000
Investments
15,900 Stock-in-trade
15,000
20,000 Debtors
30,000
Cash (W.N.6)
19,000
1,77,500
6.
3.47
1,77,500
`
Cash trading profit
Add: Investment Interest
Add: Decrease in Stock Balance
`
50,000
5,000
5,000
60,000
9,000
20,000
5,000
30,000
36,000
6,000
5,000
(29,000)
31,000
35,000
66,000
(47,000)
19,000
`
Capital :
Share Capital
Distribution of shares :
P
Q
R
P (1/2)
Q (1/4)
R (1/4)
79,800
46,900
14,900
1,41,600
70,800
35,400
35,400
P and Q should withdraw capital of ` 9,000 (` 79,800 ` 70,800) and `11,500 (` 46,900
` 35,400) respectively and R should subscribe shares of ` 20,500 (`35,400 ` 14,900).