Chapter 11 Partnership Dissolution

Notes to teachers

1 Students should know that legally speaking, a partnership has to be terminated when one of its partners
withdraws, dies or goes bankrupt. In reality, the partnership will usually continue to operate (registration
will need to be made of the new partnership). The dissolution cases mentioned in this chapter (and also
in most public examination questions) refer to a situation when a partnership actually ceases its
operations, dispose of all of its assets, discharge all liabilities, and finally settles all partners’ capital
balances.

2 The profit on dissolution usually arises from the disposal of assets. It seldom arises from the discharge of
liabilities, except when the following occur:
• Discounts received from creditors
• Liabilities assumed by a partner or partners personally
In the above cases, the relevant amounts will be entered in the realisation account. Otherwise, no
liabilities should appear in the realisation account.

3 The capital deficiency of an insolvent partner is usually made good by other partners according to their
profit and loss sharing ratio. Students should also learn about the Garner vs. Murray rule, in case exam
questions ask about this rule.

4 This topic is sometimes complicated by giving an asset to a partner as a gift, donating assets to charitable
organisations, a partner taking over an asset as settlement of the salary owed to him, a partner being
personally responsible for the partnership’s dissolution expenses, and so on.

5 The topic of a partnership being taken over by another business has been added. Teachers are advised to
teach it as additional material.

Q1 There could be many reasons, which include the following:

1 The partnership has been making substantial losses.
2 One of the partners is leaving due to ill health or has died.
3 There are serious conflicts among the partners.
Q2 Bank
2010 $ 2010 $
Apr 1 Cash 1,200 Apr 1 Balance b/f 8,200
" 1 Realisation — Machinery 20,800 " 1 Accounts payable 9,450
Office furniture 10,500 " 1 Realisation — Dissolution costs 2,420
Accounts receivable 13,800 " 1 Capital — Final settlement
Paul 1,315
Raymond 24,915
46,300 46,300

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 Q3 The capital deficiency of the insolvent partner would have to be shared by the solvent partners. This
sharing ratio should be agreed by all the partners beforehand.
If no agreement exists as to the ratio of sharing the capital deficiency of insolvent partners, the Garner vs.
Murray rule applies. This rule states that unless there is an agreement to the contrary, the capital
deficiency of an insolvent partner is to be shared by the solvent partners in the ratio of their ‘last agreed
capital’.
The ‘last agreed capital’ refers to the credit balances of capital accounts in the balance sheet drawn up at
the end of the last accounting period before dissolution.

Q4 (a) The following entries would be made:

Dr Accounts payable/Other payables
Cr Cash/Bank
(b) The following entries would be made:
Dr Accounts payable/Other payables
Cr Partners’ capital
(c) The following entries would be made:
Dr Accounts payable/Other payables
Cr Realisation

A1 Dissolution costs that have to be paid upon the dissolution of a business include:
• Legal fees
• Tax return preparation and filing fees
• Accountants’ fees
• Employee severance payments
• All other amounts required to pay off the expenses, liabilities and obligations of the business.
A2 The partner has gone bankrupt.

ASSESSMENT

Short Questions
1 (a) See text, Section 11.2.
(b) (i) Realisation
$ $ $
Equipment 80,000 Cash — Accounts receivable 270,000
Furniture and fixtures 85,000 Equipment 40,000
Debtors 280,000 Furniture and fixtures 95,000
Cash — Dissolution costs 10,000 Discounts received 20,000
Loss on realisation —
Capital: Kwan ( 12 ) 15,000
Wong ( 12 ) 15,000 30,000
455,000 455,000

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 (ii) Capital
Kwan Wong Kwan Wong
$ $ $ $
Realisation — Share of loss 15,000 15,000 Balances b/f 200,000 150,000
Cash — Settlement 185,000 135,000
200,000 150,000 200,000 150,000

(iii) Cash
$ $
Balance b/f 180,000 Realisation — Dissolution costs 10,000
Realisation — Accounts receivable 270,000 Accounts payable ($275,000 – $20,000) 255,000
Equipment 40,000 Capital: Kwan (settlement) 185,000
Furniture and fixtures 95,000 Wong (settlement) 135,000
585,000 585,000

2X (a) Dissolution costs include:

• Legal fees
• Tax return preparation and filing fees
• Accountants’ fees
• Employee severance payments
• All other amounts required to pay off the expenses, liabilities and obligations of the business.
(Any two of the above)

(b) (i) Realisation

$ $ $
Fixtures 124,000 Bank — Fixtures 196,000
Office equipment 66,000 Office equipment 59,000
Inventory 98,500 Inventory 82,200
Accounts receivable 24,500 Accounts receivable 23,100
Bank — Dissolution expenses 6,500 Accounts payable — Discounts received 600
Profit on realisation —
Capital: Bai ( 23 ) 27,600
Ng ( 13 ) 13,800 41,400
360,900 360,900

(ii) Bank
$ $
Balance b/f 5,000 Accounts payable ($27,000 – $600) 26,400
Realisation — Fixtures 196,000 Realisation — Dissolution expenses 6,500
Office equipment 59,000 Capital: Bai 200,600
Inventory 82,200 Ng 131,800
Accounts receivable 23,100
365,300 365,300

(iii) Capital
Bai Ng Bai Ng
$ $ $ $
Bank — Final settlement 200,600 131,800 Balances b/f 173,000 118,000
Realisation — Share of profit 27,600 13,800
200,600 131,800 200,600 131,800

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 Application Problems
3 (a) Realisation
$ $ $
Premises 240,000 Capital: Ellen (assets taken over) —
Furniture 26,240 Inventory 72,000
Inventory 64,000 Furniture 22,000
Accounts receivable 16,960 Accounts receivable 16,400
Profit on realisation — Premises 420,000
Capital: Daisy ( 12 ) 91,600
Ellen ( 14 ) 45,800
Faye ( 14 ) 45,800 183,200
530,400 530,400

(b) Bank
$ $
Capital: Ellen (mortgage loan) 320,000 Balance b/f 5,200
Accounts payable 22,000
Capital: Daisy (settlement) 167,000
Faye (settlement) 125,800
320,000 320,000

(c) Capital: Daisy

$ $
Capital: Ellen (personal loan) 84,600 Balance b/f 160,000
Bank — Settlement 167,000 Realisation — Share of profit 91,600
251,600 251,600

Capital: Ellen
$ $
Realisation (assets taken over) — Balance b/f 80,000
Inventory 72,000 Realisation — Share of profit 45,800
Furniture 22,000 Bank 320,000
Accounts receivable 16,400 Capital: Daisy (personal loan) 84,600
Premises 420,000
530,400 530,400

Capital: Faye
$ $
Bank — Settlement 125,800 Balance b/f 80,000
Realisation — Share of profit 45,800
125,800 125,800

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 4X (a) Realisation
$ $ $
Store buildings 1,450,000 Capital — Yam (van) 57,000
Fixtures 179,000 Capital — Fang (van) 29,000
Vans 123,700 Capital — Au (inventory) 110,000
Inventory 219,100 Capital — Yam (store buildings) 1,950,000
Accounts receivable 98,000 Bank — Fixtures 160,000
Bank — Dissolution expenses 6,800 Vans 28,000
Profit on realisation — Inventory 88,500
5
Capital: Yam ( 10 ) 222,000 Accounts receivable ($98,000 – $1,800) 96,200
Fang ( 103
) 133,200 Discounts received 1,900
2
Au ( 10 ) 88,800 444,000
2,520,600 2,520,600

(b) Bank
$ $
Cash 7,100 Balance b/f 217,700
Realisation — Vans 28,000 Accounts payable ($123,900 – $1,900) 122,000
Fixtures 160,000 Loan from Chow 160,000
Inventory 88,500 Realisation — Dissolution expenses 6,800
Accounts receivable Capital: Fang (final settlement) 718,200
($98,000 – $1,800) 96,200 Au (final settlement) 248,100
Capital: Yam (final settlement) 1,093,000
1,472,800 1,472,800

(c) Capital
Yam Fang Au Yam Fang Au
$ $ $ $ $ $
Realisation — Balances b/f 692,000 614,000 269,300
Assets taken over Realisation —
Vans 57,000 29,000 — Share of profit 222,000 133,200 88,800
Inventory — — 110,000 Bank —
Store buildings 1,950,000 — — Final settlement 1,093,000 — —
Bank —
Final settlement — 718,200 248,100
2,007,000 747,200 358,100 2,007,000 747,200 358,100

5 (a) Realisation
$ $ $ $
Plant and machinery 545,260 Accounts payable 438,400
Furniture and fittings 342,500 Bank overdraft 34,250
Inventory 404,150 Capital (ordinary and preference shares):
Accounts receivable 164,400 George ( 35 ) 986,400
Profit on realisation — Peter ( 25 ) 657,600 1,644,000
Capital: George ( 35 ) 396,204
Peter ( 25 ) 264,136 660,340
2,116,650 2,116,650

(b) Capital
George Peter George Peter
$ $ $ $
Realisation (share of ordinary Balances b/f 753,500 230,160
and preference shares) 986,400 657,600 Realisation — Share of profit 396,204 264,136
Bank — Final settlement 163,304 — Bank — Final settlement — 163,304
1,149,704 657,600 1,149,704 657,600

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 (c) Purchase consideration = (1,000,000 × $1 × 120%) + (185,000 × $2 × 120%) = $1,644,000
Fair value of net assets taken over = $983,660
Purchased goodwill = $1,644,000 − $983,660 = $660,340

6 (a) (i) Realisation

$ $ $
Premises 500,000 Bank — Premises 450,000
Furniture and fittings 125,000 Inventory 46,000
Vehicle 68,000 Accounts receivable 50,000
Inventory 54,000 Capital:
Accounts receivable 53,000 Mok — Furniture and fittings 125,000
Bank — Dissolution costs 15,000 Au — Vehicle 50,000
Loss on realisation —
5
Capital: Au ( 10 ) 47,000
3
Mok ( 10 ) 28,200
2
Kong ( 10 ) 18,800 94,000
815,000 815,000

(ii) Bank
$ $
Balance b/f 21,000 Realisation — Dissolution costs 15,000
Realisation — Sales proceeds of assets Accounts payable 48,000
($450,000 + $46,000 + $50,000) 546,000 Loan from bank 20,000
Capital: Au (final settlement) 320,100
Mok (final settlement) 163,900
567,000 567,000

(iii) Capital
Au Mok Kong Au Mok Kong
$ $ $ $ $ $
Current — — 303,000 Balances b/f 400,000 300,000 116,000
Realisation — Current 120,000 120,000 —
Furniture and fittings — 125,000 — Capital: Au — — 102,900
Vehicle 50,000 — — Mok — — 102,900
Share of loss 47,000 28,200 18,800
Capital: Kong 102,900 102,900 —
Bank — Final settlement 320,100 163,900 —
520,000 420,000 321,800 520,000 420,000 321,800

(b) If no agreement exists as to the ratio of sharing the capital deficiency of insolvent partners, the
Garner vs. Murray rule applies. This rule states that, unless there is an agreement to the contrary, the
capital deficiency of an insolvent partner is to be shared by the solvent partners in the ratio of their
‘last agreed capital’. The ‘last agreed capital’ refers to the credit balances of capital accounts in the
balance sheet drawn up at the end of the last accounting period before dissolution. In this case, Au
$400,000
would share $117,600 ($205,800 × $400,000 + $300,000 ), while Mok would share $88,200
$300,000
($205,800 × $400,000 + $300,000 ).

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 7X (a) Lee, Ko and Ma
Income Statement for the year ended 30 September 2009 (extract)
$ $
Gross profit 116,300
Less Closing inventory overvalued (2,200)
Sales overstated (2,800)
111,300
Less Operating expenses ($92,800 + $2,400) 95,200
Depreciation [($192,000 – $70,500) × 15%] 18,225
Increase in allowance for doubtful accounts {[($21,400 – $2,800) × 4%] – $719} 25 (113,450)
Net loss (2,150)
5
Shared by: Lee ( 10 ) 1,075
3
Ko ( 10 ) 645
2
Ma ( 10 ) 430 (2,150)

(b) Realisation
$ $ $
Non-current assets Capital: Lee (non-current assets) 30,000
($192,000 – $70,500 – $18,225) 103,275 Capital: Lee (accounts receivable) 16,963
Inventory ($27,200 – $2,200) 25,000 Capital: Ko (inventory) 19,000
Accounts receivable Accounts payable — Discounts received 180
[($21,400 – $2,800) × 96%] 17,856 Bank — Non-current assets 41,400
Bank — Realisation expenses 3,782 Loss on realisation —
5
Capital: Lee ( 10 ) 21,185
3
Ko ( 10 ) 12,711
2
Ma ( 10 ) 8,474 42,370
149,913 149,913

(c) Bank
$ $
Realisation — Non-current assets 41,400 Balance b/f 7,331
Realisation — Realisation expenses 3,782
Accounts payable 5,820
Accrued electricity 2,400
Capital: Lee 12,056
Ko 10,011
41,400 41,400

(d) Capital
Lee Ko Ma Lee Ko Ma
$ $ $ $ $ $
Share of loss 1,075 645 430 Balances b/f 90,000 40,000 20,000
Realisation — Current 42,000 31,000 —
Non-current assets 30,000 — — Accounts payable — 6,000 —
Accounts receivable 16,963 — — Capital: Lee — — 12,721
Inventory — 19,000 — Ko — — 7,633
Realisation — Share of loss 21,185 12,711 8,474
Drawings 38,000 27,000 16,300
Current — — 15,150
Capital: Ma 12,721 7,633 —
Bank — Final settlement 12,056 10,011 —
132,000 77,000 40,354 132,000 77,000 40,354

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 8X (a) Realisation
2010 $ $ 2010 $
Jan 1 Buildings 300,360 Jan 1 Gasfield Ltd 450,000
" 1 Office equipment 51,600
" 1 Van 12,050
" 1 Inventory 24,000
" 1 Accounts receivable 34,000
" 1 Profit on realisation —
Capital: Albert ( 12 ) 13,995
Alex ( 12 ) 13,995 27,990
450,000 450,000

(b) Capital
Albert Alex Albert Alex
$ $ $ $
Current — 3,990 Balances b/f 200,000 200,000
Gasfield Ltd [(30,000 × $13) × 12 ] 195,000 195,000 Current 20,000 —
Bank 38,995 15,005 Realisation — Share of profit 13,995 13,995
233,995 213,995 233,995 213,995

9X (a) Realisation
2009 $ 2009 $ $
Apr 30 Premises 1,060,000 Apr 30 Bank — Premises 1,080,000
" 30 Motor vehicles 37,120 " 30 Capital: Cheung
" 30 Office equipment 25,550 (motor vehicles) 16,400
" 30 Goodwill 66,000 " 30 Capital: Lo
" 30 Inventory 27,620 (motor vehicles) 13,200
" 30 Accounts receivable 32,851 " 30 Capital: Cheung
" 30 Bank — Dissolution expenses 12,600 (office equipment) 12,000
" 30 Bank — Office equipment 10,230
" 30 Capital: Lo (inventory)
($27,620 × 12 × 60%) 8,286
" 30 Bank — Inventory 10,060
" 30 Capital: Cheung
(accounts receivable) 34,400
" 30 Accounts payable —
Discounts received
($29,310 – $24,030) 5,280
" 30 Loss on realisation —
4
Capital: Cheung ( 10 ) 28,754
4
Poon ( 10 ) 28,754
2
Lo ( 10 ) 14,377 71,885
1,261,741 1,261,741

(b) Bank
2009 $ 2009 $
Apr 30 Cash 2,138 Apr 30 Balance b/f 10,230
" 30 Realisation — " 30 Realisation — Dissolution expenses 12,600
Premises 1,080,000 " 30 Accounts payable 24,030
Office equipment 10,230 " 30 Final settlement —
Inventory 10,060 Capital: Cheung 806,435
" 30 Capital: Poon 500 Capital: Lo 249,633
1,102,928 1,102,928

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 (c) Capital
Cheung Poon Lo Cheung Poon Lo
2009 $ $ $ 2009 $ $ $
Apr 30 Current — 174,326 — Apr 30 Bal. b/f 540,000 200,000 180,000
" 30 Realisation — " 30 Current 129,709 — 106,356
Motor vehicles 16,400 — 13,200 " 30 Loan: Cheung 230,000 — —
Office equipment 12,000 — — " 30 Bank — 500 —
Inventory — — 8,286 " 30 Capital: Cheung — 1,720 —
Accounts receivable 34,400 — — " 30 Capital: Lo — 860 —
Share of loss 28,754 28,754 14,377
" 30 Capital: Poon 1,720 — 860
" 30 Bank 806,435 — 249,633
899,709 203,080 286,356 899,709 203,080 286,356

Past Exam Questions

10 (a) (i) Realisation Account
2006 $ 2006 $
Dec 31 Furniture and fixtures 129,000 Dec 31 Capital (Chung) — Motor vehicle 150,000
" 31 Office equipment 95,000 " 31 Discount received
" 31 Motor vehicle 137,000 ($710,500 – $660,000) 50,500
" 31 Investments 890,000 " 31 Bank — Investments 1,000,000
" 31 Stock 738,900 " 31 Bank — Trade debtors 1,350,000
" 31 Trade debtors 1,480,600 " 31 Bank — Sales proceeds of assets 750,000
" 31 Bank — Realisation expenses 55,000 " 31 Loss on realisation —
Mr Leung 112,500
Mr Chung 112,500
3,525,500 3,525,500

(ii) Bank Account

2006 $ 2006 $
Dec 31 Balance b/f 665,000 Dec 31 Trade creditors 660,000
" 31 Realisation — Investments 1,000,000 " 31 Realisation — Realisation expenses 55,000
Trade debtors 1,350,000 " 31 Capital: Mr Leung 1,600,000
" 31 Realisation — Sales Mr Chung 1,450,000
proceeds of assets 750,000
3,765,000 3,765,000

(iii) Capital Accounts

Leung Chung Leung Chung
2006 $ $ 2006 $ $
Dec 31 Motor vehicle Dec 31 Balances b/f 1,712,500 1,712,500
taken over — 150,000
" 31 Realisation — Loss
on realisation 112,500 112,500
" 31 Bank 1,600,000 1,450,000
1,712,500 1,712,500 1,712,500 1,712,500

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 (b) Circumstances for the dissolution of the partnership:
(i) The partnership is entered into for a fixed period of time.
(ii) Any partners giving notice to others of his/her intention to dissolve the partnership.
(iii) By death or bankruptcy of any partner.
(iv) The business is declared to be unlawful.
(v) The partners decide to convert the partnership into a limited company.
(Any two points)

11X (a) Circumstances for the dissolution of the partnership:

(i) The partnership is entered into a fixed period of time.
(ii) Any partner giving notice to others of his intention to dissolve the partnership.
(iii) By death or bankruptcy of any partner.
(iv) The business is declared to be unlawful.
(v) The partners decide to convert the partnership into a limited company.
(Any two points)

(b) (i) Realisation Account

2005 $ 2005 $
Mar 31 Office equipment 35,360 Mar 31 Capital (But) — Office furniture 36,000
" 31 Office furniture 40,960 " 31 Bank — Sales proceeds of assets 288,000
" 31 Investments 234,000 " 31 Bank: Investments 305,500
" 31 Inventory 230,580 " 31 Discount received 3,636
" 31 Trade debtors 441,000 " 31 Bank — Trade debtors 432,164
" 31 Realisation expenses 14,400
" 31 Profit on realisation —
Mr But 23,000
Mr To 23,000
Mr Yung 23,000
1,065,300 1,065,300

(ii) Bank Account

2005 $ 2005 $
Mar 31 Balance b/f 292,104 Mar 31 Realisation expenses 14,400
" 31 Realisation — Sales proceeds of assets 288,000 " 31 Trade creditors 187,920
" 31 Realisation — Investments 305,500 " 31 Capital accounts —
" 31 Trade debtors 432,164 Mr But 459,130
Mr To 283,816
Mr Yung 372,502
1,317,768 1,317,768

(iii) Capital Accounts

But To Yung But To Yung
2005 $ $ $ 2005 $ $ $
Mar 31 Office furniture Mar 31 Balance b/f 472,130 260,816 349,502
take over 36,000 — — " 31 Realisation —
" 31 Bank 459,130 283,816 372,502 Profit on
realisation 23,000 23,000 23,000
495,130 283,816 372,502 495,130 283,816 372,502

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