LECTURE 1

PARTNERSHIP ACCOUNTS

1.1 LECTURE OUTLINE

1.1 The provision of the Partnership Act
1.1.1 Formation/ membership limits
1.1.2 Rights of partners
1.1.3 Obligations of partners
1.1.4 Dissolutions of partnerships Business/ Firm
1.1.5 Privileges of partners
1.2 Realignments
1.2.1 Treatment of goodwill in partnership Admission of new partners
1.2.2 Admission of new partners Retirement of partners
1.2.3 Retirement of partners
1.3 Dissolution of partnerships
1.3.1 Piece-meal Dissolutions of partnerships
1.3.2 All Partners liquid, no loss
1.3.3 All Partners liquid, loss on realization of Assets
1.3.4 Any one Partner Insolvent
1.3.5 Rule of Garner Vs Murray
1.4 Amalgamations of partnerships
1.5 Sale of a Partnership to a limited company
1.6 Conversion of a partnership to a limited liability company

1.1 INTRODUCTION

1.2 OBJECTIVES
At the end of the lecture the learner should be able to:

(i) State the provisions of the partnerships Act Laws of Kenya.

(ii) Prepare adjustments in partners’ shareholdings upon
admission of new partners, retirement of partners and
reallocation of partners’ profit and loss sharing ratios.
(iii) Prepare amalgamations of partnerships by preparing accounts
for retirement of partnerships combination of partnerships into
single new firms.
(iv) Prepare accounts for conversion of a partnership into a limited
company.
(v) Prepare accounts for acquisition of a partnership by another
partnership or a limited company.
(vi) Prepare distribution schedule in event of a piecemeal
distribution.

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1.3 PROVISIONS OF THE PARTNERSHIP ACT-LAWS OF KENYA

This is a preview of the basic issues in Partnership Act Laws of Kenya. You need this
background knowledge to enable you to provide necessary advise on fundamental legal issues of
formation, operations, reorganisation, conversions and if necessary dissolution of partnerships.
For a detailed understanding, please examine the Act itself.

1.4 TREATMENT OF GOODWILL IN PARTNERSHIP

1.4.1 Definition and Causes of Goodwill
Goodwill has received various legal definitions e.g. “The benefit arising from old
connections and reputation”. “It is the benefit and advantage of the good name, reputation and
connection of business”. “It is the attractive force which brings in customers. It is one thing
which distinguishes an old established business from a new business at its first start. Goodwill is
composed of variety of elements. It differs in its composition in different trades and in different
businesses in the same trade.”
A business builds up some reputation after it has continued for some time. If the reputation is
good, it acquires good clientele. This is a very valuable asset which one cannot touch, feel, or
see. The asset, in other words, is an intangible one but certainly nor fictitious. To the
Accountant, Goodwill may be said to be that element arising from the reputation, connection or
other advantages possessed by a business which enables it to earn greater profit than the return
normally to be expected on the capital employed in the business. The reputation of the firm
depends on various factors, such: -

1) Personal reputation of partners and management of the firm;

2) The reputation of the goods dealt in and the quality of service rendered to the clientele;
3) The location or site of the business in relation to customers;
4) Monopoly nature of business;
5) Special advantage enjoyed in respect of supplies and sales of products;
6) Possession of efficient and contended staff;
7) Ownership or agency of valuable patents, copyrights or trade marks which are widely known
etc.

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 All factors mentioned above contribute to extra and goodwill arises only when the business is
profitable. A business running in losses will not, generally has goodwill. You should remember
that it is the expectation of profits in future that makes goodwill a valuable asset. Note that
goodwill should never appear in the books of the business unless:
(a) It has been purchased;
(b) It is necessary to raise upon introduction of a new partner; or
(c) It is necessary to raise upon death or retirement of a partner to ascertain the true value of such
partner’s share.

1.4.2 Methods of Valuation of Goodwill

There are three methods which are commonly used for valuation of goodwill. These are:

(i) Average Profit basis: The profits for past few years are averaged and the average is
multiplied by a certain number say 2 or 3 as agreed. For example, it is expressed as three
years purchase for past five years profit. If the profits are as under, the goodwill will be
Shs 27000/=.

Year Profit

1963 8500.00
1964 9600.00
1965 7400.00
1966 9500.00
1967 10000.00
Total 45000.00 Average = Shs 45000/= = 9000/=
Goodwill = 9000 x 3 = Shs 27000/=

(ii) Super Profits Basis: In this method, interest on capital employed and reasonable salary of
the partners are deducted first from the average profits and then what remains is “Super
Profits” or profits on account of special advantage of the firm. Suppose, in the

illustration given above, capital was Shs 80000/= and 7 1

2 % is a reasonable return in
the industry, the normal profit would be Shs 6000/=. Thus actual average profit is Shs.
9000/=. The super profit is, therefore, Shs 3000/=. If this is multiplied by say 8 years
purchase agreed upon you get the Goodwill figure, i.e. 3000x8 = ,Shs. 24000/=.

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(iii) Capitalisation Method: In this method the value of the whole business is found out by the
following formula:

Pr ofit 9000
 100 i.e.  100 = 120,000/=.
Re asonable Re turn 7.5

Then from this figure of Shs 120,000, the net assets of the firm (Shs 80,000) are deducted
and the remainder is goodwill of Shs 40,000.

1.4.3 Necessity of Valuing of Goodwill in Partnership

The question of valuation of goodwill arises in the following circumstances: (a) When profit
sharing proportions are changed; (b) When a new partner is admitted to the partnership; (c)
When a partner retires or dies; and (d) When partnership is dissolved, converted or sold.

1.4.3.1 Change in Profit Sharing Proportion

If the partners agree to change the proportion different from the one that which would be
inexistence, the gaining partner must compensate the losing partner unless otherwise agreed by
them. The compensation is the value of goodwill represented by the gain because the change in
proportion means one partner is buying form another share of the profit.
For example, if Kintu and Musoke are partners sharing profits as follows: -
Kintu-3/4 and Musoke-1/4 .They decide to share profits equally i.e. ½ and ½. This means Kintu
is selling to Musoke ¼ share of profits. If the profit is Shs 20000/=; previously Kintu was
getting Shs 15000/= and Musoke Shs 5000/=. After the change in Ratio, they would each get
Shs 10,000/=. Kintu, therefore, loses Shs 5000/= and Musoke gains Shs 5000/=. If the goodwill
is valued at Shs 40000/= Musoke must pay Kintu one-fourth of Shs 40000/= i.e. Shs 10000/= for
forgoing his ¼ share in the profit.

1.4.3.2 Admission of a new partner

When a new partner is admitted, two major problems arise. One is the (1) Treatment of
Goodwill and the other is the (2) Revaluation of Assets and Liabilities. When an existing
partnership firm admits a new partner either for introduction of additional capital, influence
bringing in exceptional skill or extension of business, the new comer is required to pay some

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premium to compensate the existing partners to surrender part of the profits which they had been
hitherto enjoying in full. Such premium is called “Goodwill” and that is quite a distinct from any
amount that he may have agreed to bring in as capital. Goodwill may thus be looked upon as a
compensation paid by new comer in an established business to the existing partners for their past
efforts and the risk of capital undertaken to bring the business in the present stage of reputation
and profit earning capacity and in return for their agreeing to forgo a share of future profits for
his benefit.
(1) Methods of treatment of Goodwill on admission of a new partner
The various methods are as under-:
(a) The new partner brings goodwill in cash which is left in business
The entries are-:

(i) Debit: Cash/Bank xx

Credit: Goodwill Account xx
(b) Debit: Goodwill Account xx
Credit: Old Partner’s A/c xx
(With the ratio in which old partners suffer on admission of new partner. )

(2) The new partner brings Cash which old partners withdraw. The entries are same
As (a) above except that on additional entry is required when cash is withdrawn.

Debit: Old Partner’s Capital A/cs xx

Credit: Cash/Bank xx
(With cash withdrawn by the old partner.)

(3) The amount of goodwill is paid by the new partner to the old partners privately

No entry is required. The cash is shared by the old partners in the proportion
In which they lose.

(4) Goodwill is not brought in cash but is raised in the books of the firm. If is called
“Revaluation method”. The entries are:

Debit: Goodwill Account xx

Credit: Old partner’s capital A/cs. xx
(In their profit sharing proportions)

Note: Full value of goodwill appears in the balance sheet on asset sides.

(5) Goodwill is raised in the books and is immediately written off. All partners
(both old and new) will be debited in the new profit sharing proportions. This
is called “Memorandum Revaluation method”. The entries are:

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 Debit: Goodwill Account xx
Credit: Old partner’s capital A/cs xx
(In old proportions.)

Debit: All Partners’ Capital Accounts xx

Credit: Goodwill Account xx
(in their new profit /loss ratios)
Let us now see some of the practical examples to understand different methods. The first three
methods are very simple and therefore, need no further elaboration by means of practical
illustrations.
Illustration:
Musoke and Kogi shared profits in proportion of 3:2 and had capitals of Shs 20000/= and Shs
15000/= respectively. They agree to admit Shivji into partnership as for year starting 1-1-2007
with the following terms in return for 1/3 shares in future profits.
(a) That Shivji should bring in Shs 20,000/= as capital.
(b) That as Shivji is unable to bring his share of Goodwill in cash, the goodwill be raised in
books. Goodwill of the firm was valued at Shs 15,000/= and a Goodwill A/c opened.

Required:
Capital accounts of the partners and the goodwill account. State also the future profit sharing
proportions of the partners.

Suggested Solution
JOURNAL ENTRIES
Yr 9 Particulars Shs Shs
Jan 1 Bank Account Dr 20,000
Shivji’s Capital A/c 20,000
(Being the amount brought in by Shivji as capital)
Goodwill Account Dr
Musoke’s Capital A/c 15,000
Kogi’s Capital 9,000
(Being the goodwill raised in the firm’s books and 6,000
corresponding credit to old partner’s in the old profit
sharing proportions)

New profit sharing Proportions: - Musoke - 3/5 x 2/3 = 6/15

Kogi - 2/5 x 2/3 = 4/15
Shivji - 1/3 = 5/15
If in the above illustration, the partners decide to wipe – off the Goodwill from their
books, the entry necessary to bring this about will be to debit the Capital Accounts of each of the
partners in their new profit – Sharing proportions and credit the goodwill account. The accounts
will then appear as under.

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Dr PARTNERS’s CAPITAL ACCOUNT Cr
Yr 9 Particulars S Msk Kogi Yr 9 Particulars Shvj Msk Shs
Jan 1 Goodwill a/c 5,000 6,000 4,000 Jan 1 Balance b/d 20,000 15000
Jan 1 Balance c/d 15,000 23,000 17,000 Jan 1 Goodwill A/c 9,000 6000
Bank A/c 20,000
20,000 29,000 21,000 20,000 29,000 21,000
Jan 1
Balance c/f 15,000 23,000 17000

Dr GOODWILL ACCOUNT Cr
Yr 9 Particulars Shs Yr 9 Particulars Shs
Jan 1 Musoke’s Capital A/c 9000 Jan 1 Musoke’s Capital A/c 6000
Jan 1 Kogi’s Capital A/c 6000 Jan 1 Kogi’s Capital A/c 4000
Jan 1 Shivji’s Capital A/c 5000
15,000 15,000

PARTNERS’s CAPITAL ACCOUNT Cr

Yr 9 Particulars S Msk Kogi Yr 9 Particulars Shvj Msk Shs
Jan 1 Goodwill a/c 5,000 6,000 4,000 Jan 1 Balance b/d 20,000 15000
Jan 1 Balance c/d 15,000 23,000 17,000 Jan 1 Goodwill A/c 9,000 6000
Bank A/c 20,000
20,000 29,000 21,000 20,000 29,000 21,000
Jan 1
Balance c/f 15,000 23,000 17000

PARTNERS’s CURRENT ACCOUNT Cr

Yr 9 Particulars S Msk Kogi Yr 9 Particulars Shvj Msk Shs
Jan 1 Goodwill a/c 5,000 6,000 4,000 Jan 1 Balance b/d 20,000 15000
Jan 1 Balance c/d 20,000 23,000 17,000 Jan 1 Goodwill A/c 9,000 6000
Bank A/c 20,000
20,000 29,000 21,000 20,000 29,000 21,000
Jan 1
Balance c/f 20,000 23,000 17000

PARTNERS’s CAPITAL ACCOUNT Cr

Yr 9 Particulars S Msk Kogi Yr 9 Particulars Shvj Msk Shs
Jan 1 Goodwill a/c 5,000 6,000 4,000 Jan 1 Balance b/d 20,000 15000
Jan 1 Balance c/d 15,000 23,000 17,000 Jan 1 Goodwill A/c 9,000 6000
Bank A/c 20,000
20,000 29,000 21,000 20,000 29,000 21,000
Jan 1
Balance c/f 15,000 23,000 17000

Note: From the above, it is clear that Musoke benefits to the extent of Shs. 3000/= and Kogi to
the extent of Shs 2000/= whereas Shivji’s Capital Account gets a debit of Shs 5000/=. If Shivji

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had brought in his 1/3 share of goodwill in cash; viz. Paid Shs 5000/= in cash, Bank account
would have been debited and the capital accounts of Musoke and Kogi would have been credited
with Shs 3000/= and SHS 2000/= respectively in proportions of 3:2. The only difference in this
case is that instead of Bank A/c being debited, it’s Shivji’s Capital Account that gets the debit as
he failed to bring in his proportionate amount of goodwill. The ultimate position of the old
partners is just the same as in a case where the new-comer brings his share of goodwill in cash.

Revaluation of Assets and Liabilities

When a new partner is admitted it is natural that he should not benefit from any
appreciation in the value of assets nor should he suffer because of any fall in the value of assets.
It, therefore, at their true values on the date of admission so that neither the existing partner nor
the new comer may be put to any disadvantage. The book values are scrutinised carefully by the
old partners and the new partner with a view to see if any readjustments are necessary. Whatever
adjustments are then mutually determined as equitable is given effect to in the books of the old
firm in order that assets may be transferred in the new firm’s books at their agreed values.
A profit and Loss Adjustment Account is therefore opened. You will notice that I refer to
this Profit and Loss Adjustment Account in some places as a Revaluation Account. Do note that
that is its name too. You will then have to go through the following steps will then have to be
performed:

(a) If the values of assets increase,

Dr the particular asset account XX
Cr Profit and Loss Adjustment Account (with increase only)). XX

(b) If the values of assets fail,

Dr Profit and Loss Adjustment Account XX
Cr the relevant asset account (with the difference only) XX

(c) Increase in the amount of liabilities is a loss, so the entry is:-

Dr Profit and Loss Adjustment A/c (with the increase only) XX
Cr the relevant liability A/c XX
(d) Any reduction in the liabilities is a profit and therefore,
Dr the liability account XX
Cr the adjustment A/c with the reduction amount. XX

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(e) The adjustment Account should be closed by transferring of the difference there on to the old
partners’ capital, or current, accounts in the old profit – sharing proportions.

Illustration:
Alexander and Robert, sharing profits in proportions of ¾ and ¼ prepare. The following balance
sheet on 31st Dec Yr 8.

BALANCE SHEET AS AT 31ST DECEMBER, Yr 8

Liabilities Shs Assets Shs
Creditors 37500 Cash at Bank 22500
General Reserve 4000 Bills receivable 3000
Capital Accounts: Debtors 16000
Alexandar 30,000 Stock 21000
Robert 16,000 Office Furniture 1000
46000 Land and Buildings 25000
87500 87500

They admit John into partnership on 1st January Yr 9 on the following terms:
i. That John pays Shs 10000/= as his capital for a fifth share in the future profits.
ii. That a goodwill account be raised in the books of the new firm at a value of Shs. 20000/=.
iii. That Stock and Fixtures be reduced by 10% and a 5% Reserve for Doubtful Debts is created
on debtors. Land and buildings to be appreciated by Shs 5000/=.
iv. That capital account of all the partners be re-adjusted on the basis of their profit sharing
arrangements and any additional amount be temporarily credited to their current A/cs and
be immediately withdrawn by them.

Required:
Set out the journal entries, the Profit and Loss Adjustment Account. The Capital Accounts of
partners, the Goodwill Account, and the opening Balance Sheet of the new firm.

Journal Entries
Yr 8 Particulars F Dr Cr
Dec. 31 Goodwill Account Dr 20000
Alexander’s Capital A/c 15000
Robert’s Capital A/c
(Being the goodwill raised in the firms books and its
5000
distribution between old partners)
Dec. 31 Profit and loss Adjustment A/c Dr 29000
Stock A/c 2000
Office furniture A/c
Reserve for Doubtful Debts A/c
100
(Being adjustment for writing down the values of Assets). 800
Dec. 31 Land and Buildings A/c Dr 5000
Profit and Loss A/c 5000
Adjustment A/c.

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 (Being of appreciation in value of Land and
Building)
Dec. 31 General Reserve Account A/c Dr 4000
Profit and Loss Adjustment A/c 4000
(Being the transfer of Reserve to Profit and Loss Adjustment)
Dec. 31 Profit and Loss Adjustment A/c Dr 6100
Alexander’s Capital A/c 4575
Robert’s Capital A/c
(Being the transfer of Profit arising from adjustments to
1525
partner’s capital A/c in their profit sharing proportions)
Dec. 31 Bank Account Dr 10000
John’s Capital A/c 10000
(Being the amount brought in by John as his capital)
Dec. 31 Alexander’s Capital A/c Dr 19,575
Alexander’s current A/c 19,575
(Being the transfer of excess of capital over his profit sharing
proportion to his C/D/A/c)
Dec. 31 Robert’s Capital A/c Dr 12425
Robert’s Current A/c 12525
(Being the transfer of excess of capital over his profit sharing
to C/D/A/c)
Dec. 31 Alexander’s Current A/c Dr 19575
Robert’s Current A/c Dr 12525
Bank 32100
(Being the amount withdrawn by partners from their current
A/cs)

Dr PROFIT AND LOSS ACCOUNT (B) (1-1-Yr9) Cr

Particulars Shs Particulars Shs
Stock 20000 Land Buildings 5000
Office Furniture 100 General Reserve 4000
Reserve for Doubtful Debts to
Capital A/cs: 800
Alexander ¾ 4,575
Robert ¼ 1,525 6100
9000 9000

Dr ALEXANDER’s CAPITAL ACCOUNT Cr

Yr 9 Particulars Rob Alex Yr 9 Particulars John Rob Alex
Jan 1 Current A/c 12,525 19575 Jan Balance b/d 16,000 30000
Jan 1 Balance c/d 10,000 10,000 30000 1 Goodwill A/c 5,000 15000
P/L Adj. A/c 1,525 4575
Bank A/c 10,000
10,000 10,000 30,000 10,000 22,525 49.575
Balance b/d 10,000 10,000 30000

Dr GOODWILL ACCOUNT (D) Cr

Yr 9 Particulars Shs Yr 9 Particulars Shs

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Jan 1 Alexander’s Capital A/c 15000 Jan 1 Balance c/d 20000
Jan 1 Robert’s Capital A/c 5000
20,000 20,000
Jan 1 Balance b/d 20,000

BALANCE SHEET OF ALEXANDER, ROBERT &JOHN

AS AT 1ST JAN Yr9
Liabilities Shs Assets Shs
Sundry Creditors 37,000 Cash at Bank 400
Capital Accounts: Bills Receivable 3,000
Alexander 30,000 Sundry Debtors 16000
Robert- 10,000 Prov for Doubtful Debts 800 15,200
John- 10,000 Stock 18,000
Office Furniture 900
Land and Buildings 30,000
Goodwill 20,000
87,500 87,500

Illustration:
Kintu and Muwanga have been carrying on business in partnership sharing profits and losses in
the ratio of ¾ and ¼ respectively. Their Balance Sheet on 3oth June Yr 8 was under:

BALANCE SHEET AS AT 30TH JUNE, Yr 8

Assets Shs Liabilities
Land and Buildings 50,000 Kintus Capital 60,000
Office Furniture 2,000 Muwanga’s Capital 32,000
Accounts Receivable 33,000 Accounts Payable 75,000
Less Provisions 1,000 32,000 General Reserves 8,000
Bills Receivable 6,000
Inventories 40,000
Bank balance 45,000
175,000 175,000

Tamale is admitted as a partner on 1st July, Yr 8 and the following arrangements were agreed
upon: -

i. Tamale to bring in Shs. 20000/= as his capital and to be entitled to a fifth share in the profit.

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 ii. The goodwill of the firm was valued at Shs. 50000/=. Tamale was to bring half of his share
of goodwill in cash and the other ½ was to be purchased by him from the existing partners
by book adjustments. The necessary amount was debited to Tamale’s current Account. No
goodwill account is to be raised in the books of the firm.
iii. The value of stock and furniture was to be reduced by 10% and the Reserve for Doubtful
Debts was to be brought up to ten per cent of the Debtors.
iv. The value of Land and Buildings was to be increased by 15%.
v. The capitals of the partners in the new firm are to be in the profit sharing ratios.
The capital of Tamale being taken as the basic capital, the excess amount of capital, If any,
to be paid off in cash.

Required:
a) Journal entries in the books to give effect to the above.
b) Capital Accounts of partners.
c) Opening balance sheet of the firm.

Suggested Solution

JOURNAL ENTRIES IN THE BOOKS OF THE FIRM

Date
Yr 8 Particulars F Dr Cr

July 1 Bank Account Dr 25000

Tamale’s Capital A/c 20000
Goodwill A/c 5000
(being the amount of capital and Goodwill brought in by Tamale)
July 1 Goodwill Account Dr 5000
Kintu’s Capital A/c 3750
Muwanga’s Capital A/c 1250
(being the amount of goodwill credited to partners capital A/cs and ¼
proportion)
July 1 Tamale’s Current Account 5000
Kintu’s Capital A/c 3750
Muwanga’s Capital A/C 1250
(being the entry for ½ the amount of goodwill purchased by Tamale
from existing partners)
July 1 Profit and Loss Adjustment A/c 6500
Stock 4000
Furniture 200
Reserve for Doubtful Debts 2300
(being entry for reduction in the value of Assets)
July 1 Land and Buildings A/c Dr 7500
Profit and Loss Adjustment A/c 7500
(being entry for increase in the value of Assets)
July 1 Profit and Loss Adjustment A/c 1000
Kintu’s Capital A/c 750
Muwanga’s Capital A/c 250
(being the profit on adjustment transferred to old partners)
July 1 General Reserve A/c Dr 8000
Kintu’s Capital A/c Dr 6000

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 Muwanga’s Capital A/c 2000
(being the amount of general reserve credited to partners Capital A/cs)

July 1 Kintu’s Capital A/c Dr 14250

Muwanga’s Capital A/c Dr 16750
Bank 31000
(being the amount of extra capital withdrawn by the partners in cash)

PROFIT AND LOSS ADJUSTMENT ACCOUNT AS AT 1ST JULY Yr 8

Shs Shs
Sundry Assets – reduction Land and Buildings – 7500
Stock 4,000 appreciation
Furniture 200
Reserve/ Doubtful debts 2,300 6,500

Kintu’s Capital A/c 750

Muwanga’s Capital A/c 250 1,000
7,500 7,500

CAPITAL (Tamale, Muwanga & Kintu) A/cs

Yr 8 Particulars Tam Mwg Kintu Yr 8 Particulars Tama Mwg Kintu
July 1 To Bank - 16,750 14,250 July 1 Bal. b/d 32,000 60,000
July 1 To Bal c/d 20,000 20,000 60,000 P/ L Adj. A/c 250 -
Goodwill 1,250 750
July 1 Tama-Current 1,250 3750
General Resv 2,000 3750
Bank A/c 20,000 - -
July 1 Balance b/d 6000
20,000 36,750 74,250 20,000 36,750 74250
Balance b/d 20,000 20,000 60,000

TAMALE’s CURRENT ACCOUNT

Yr 8 Particulars Shs Yr 8 Particulars Shs
ly 1 Kintu’s Capital a/c 3,750 July 1 Balance c/d 5,000
July 1 Muwanga’s Capital a/c 1,250
5,000 5,000
July 1 Balance b/d 5,000

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 Dr BANK A/c Cr.
Yr 8 Particulars Shs Yr 8 Particulars Shs

July 1 Balance b/d 45,000 July 1 Kintu’s Capital a/c 14,250

July 1 Tamale’s Capital a/c 20,000 July 1 Muwanga’s Capital a/c 16,750
July 1 Goodwill a/c 5,000 July 1 Balance c/d 39,000
70,000 70,000
July 1 Balance b/d 39,000

Dr GOODWILL ACCOUNT Cr
Yr 8 Particulars Shs Yr 8 Particulars Shs
July 1 Kintu’s Capital a/c 3,750 July 1 Bank a/c 5,000
July 1 Muwanga’s Capital a/c 1,250
5,000 5,000

Opening Balance Sheet of Kintu, Muwanga And Tamale As on 1-7-68

Liabilities Shs Assets Shs
Capital Accounts Land and buildings 57,500
Kintu 60,000 Office furniture 1,800
Muwanga 20,000 100,0 Debtors 33,000
Tamale 20,000 00 Less reserve 3,300 29,700
Bills receivable 6,000
Creditors 75,000 Stock in trade 36,000
Tamale’s current a/c 5,000
Cash at bank 39,000

175,000 175,000

Treatment of Reserve Created out of profits:

Reserves existing at the time of the admission of a new partner should always be
transferred to the capital or current account of the old partners in their old profit-sharing
proportions. Students must remember this even if the question is silent on the point.
Capitals of partners to be proportionate to new profit sharing ratio: It is often agreed on
admission of a new partner that the capital of all partners should be in proportion to their
respective shares in the profit. The basis may be the new partner’s capital or the new partner
may be required to bring in capital equal to his share in the firm. If the new partner’s capital is
given, it is easy to find the total capital on the basis of his share. Thus, the capital required of

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other partners can be ascertained. Excess of capital should be transferred to partner’s current
account or paid in cash.

Difference between contribution and purchase of share

An incoming partner may either purchase his share from one or more of the existing
partners or he may contribute to the partner or partners from whom he purchases his share, thus
reducing the share of that partner (partners). The total assets of the firm do not change. In the
later case, the capital of the incoming partner is in addition to that of the others and thus the
assets of the firm are augmented.

1.4.4 Dissolution of a Partnership

Time comes when a partnership may have to be dissolved. Many
reasons may cause this. The accounting treatment of the event of a
partnership is as follows:
Take note:
The basic skillattained in dissolving a partnership is fundamental to
appreciating how to undertake all other liquidation, mergers, acquisitions,
take over of enterprises.

Step I: Open a Realization Account. You will use his account close down all assets and liabilities
except cash and bank account. It is from this account that assets will be disposed and liabilities
cleared.

Step II: transfer al the assets (except Cash account and or bank account) Realization Account.
This essentially closes down the affected assets accounts.
Dr Realization Account XX
Cr Sundry Assets Accounts XX

Step III: Where a Partner takes up an asset, this should be charged upon the Partners capital
account at an agreed value.

Dr Partners Capital Account XX

Cr Realisation Account XX

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Step IV: Transfer all the Liabilities into the Realisation Account (except Capital Accounts). This
will close down all liabilities accounts.

Dr Sundry Liability Accounts XX

Cr Realisation Accounts XX

Step V: Where a partner has taken up a liability, charge the agreed value against the partner’s
capital account.
Dr The liability Account XX

Cr the Partners Capital Account XX

Step VI: where reserves are in existence, transfer all the reserves to the partners capital account
Ian the old profit and loss sharing ratios.
Dr Reserve Account XX
Cr Partners Capital Account XX

Step VI: Goodwill shall be treated as any other asset by being transferred to the realisation
account.

Step VII: close the Realisation Account to the partners Capital Accounts in their profit and Loss
sharing Ratios. Assuming a case where all partners are liquid and the partnership has sufficient
resources to share to the partners, if so; there will be enough money in the cash account to meet
all the partners’ claims on the firm.

Dr Partners Capital Accounts (in their profit and loss sharing ratios)
Cr Cash Accounts

Take note:
1. what happens when there is loss on realisation;
2. when any one partner is insolvent (Case of Garner and Murray);
3. when assets are taken up by partners.

Illustration I - When there is a loss on realization of assets

A and B were in partnership sharing profits and losses in proportion of ¾ and ¼. They agreed to
dissolve the partnership on 31st December 1968. The assets realized Shs. 75,000/=. The liabilities
were as follows:-

16
Sundry creditors Shs 45,000
Loan from ‘A’ Shs 20,000
A’s capital Shs 10,000
B’s capital Shs 15,000

Required
Show by means of Accounts how the cash realized should be distributed.

Suggested Solution Hint:

The sundry Asset could be found from information regarding liabilities i.e,

Sundry creditors 45,000

Loan from ‘A’ 20,000
Capital 25,000
90,000

Illustration 2 – Assignment 1

Patel and Mehta agree to dissolve their partnership on 31 st December Year 7 on which date their
balance sheet was as follows: -

BALANCE SHEET AS AT 31ST DECEMBER, YEAR 7

Liabilities Shs Assets Shs
Sundry Creditors 6,000 Cash 1,000
Patel’s Loan Account 8,000 Sundry Debtors 5,000
Capital Accounts: Stock 20,000
Patel 20,000 Plant and fixtures 14,000
Mehta 10,000 Goodwill 4,000
44,000
44,000

(i) The partner share profits and loses in proportion to their capitals.
(ii) The sundry debtors realized Shs. 4,200/= stock Shs 1,800/=. Plant and fixtures 20%
less than the book value and the Goodwill Shs 6,000/=.
(iii) The creditors were paid off at a discount of 5%. The cost of dissolution amounted to
Shs 600/=
Required
Pass the journal entries to show the process of realization and open the dissolution accounts
showing the final disposal of cash Balance.

Illustration 3 – Loss on Realization

When on dissolution there a loss on realization of the assets, causing one partners capital
account in debit, which amount he pays into the firms account in cash

17
Jalang’o and Kavuma are in Partnership, with capital of shs 7,000/= and Shs 1,000/=
respectively. The creditors are Shs 23,000/=. The assets realized Shs 19,000/= partners share
profits and losses equally.

Required:
Close the books of the firm, Kavuma having brought in the amount due by him.

Illustration: 4 - Insolvency of Partners – Gamer vs. Murray

Where, on dissolution, partner’s capital account is in debit, and he is unable to discharge his
indebtedness, so that the rule in Garner Vs Murray applies

Alibhai, Baxter and Rubia are partners sharing profits ½ 1/3 and 1/6. On 31 st December Year 7,
the following was the balance Sheet of the firm and it was decided to dissolve the partnership on
that day.
BALANCE SHEET AS AT 31ST DECEMBER YEAR 7
Liabilities Shs Assets Shs
Creditors 2,500 Cash at Bank 2,000
Capital: Sundry Assets 15,000
Alibhai 12,000 Rubia Capital Account 3,500
Baxter 6,000

20,500 20,500

Alibhai took over the business paying Shs 12,000/= for the “Sundry Assets”.
The goodwill of the firm was valued at Shs 6000/=. Show the final adjustments amongst the
partners:
(a) Where Rubia is Solvent and satisfied with hid indebtedness,
(b) Where Rubia is insolvent and unable to bring in anything against his deficiency.

Gradual Realization and Piecemeal Distribution upon Dissolution

In real life, partnerships are not sold once and cash realised immediately as we have

illustrated above. Many times the assets will take a while to realise the cash expected out of
them. Besides the buyers will take some more time to remit the purchase price. More so the very
agreed cash price may take the three agreed instalment payment system. In this scenario, a
piecemeal realisation account or schedule is necessary to keep track of the payment received and
the disbursement plan.
Cash is distributed as and when it is realised following the steps below: (i) In payment of
all third party creditors; (ii) If surplus remains, any loans given to teh partnership by partners,
over and above the partners capital contribution. This amount is paid proportionately to all

18
partners who loaned the firm money, if the amount is not sufficient to cover all partners loan
repayment. (ii) The last group to be paid are the partners capital account balances. This amount is
paid proportionately on the basis of their profit and loss sharing ratios. Any partners contribution
above the proportional capital share must be paid first so as to bring the capital liability in
proportion to their profit sharing ratios.

Illustration: 6

The following is the Balance Sheet of M/s Kihara, Githu and Ojuku who share profits and losses
2/5, 2/5 and 1/5 respectively.

BALANCE SHEET AS AT 31ST DECEMBER YEAR 7

Liabilities Shs Assets Shs
Sundry creditors 15,000 Cash in Hand 2,000
Capitals: Sundry Debtor 22,000
Kihara 15,000 Stock 22,000
Githu 12,000
Ojuk 4,000

46,000 46,000

The firm was dissolved on 31 st December Year 7 and the assets were realized gradually as under:
31st March, Year8-10000-1st Instalment; 30th June Year8-150000-2nd Instalment and on 30th
September Year 8-9000-3rd and final instalment.

Required:
Show the accounts and how each instalment is to be distributed.

1.4.5 Amalgamation of Partnership

This is similar to marriage where two different individuals come together and they decide
to live and operate as if it were one person. Essentially these two people merge all their assets
and liabilities and they start operating as single entity sharing all their burdens and pleasures.
Truly, these two people as it is in Christian marriages marry (merger/Amalgamate) as equals.
None is perceived to be superior or inferior to the other, yet each is inferior to the other, because
each one finds value in the other; i.e. they complement one other. The next feature in marriages
is that the individuals loose their individuality to attain a joint family identity.
The above analogy illustrates business amalgamation very well where two or more
business entities decide to merge/amalgamate as equals yet each finding value in the other. This
may acquire different name like Amalgamation, Merging. In this section we shall examine the

19
accounting implementation of partnerships merging/amalgamating together and use the term
“Amalgamation”. The relevant steps to be observed to facilitate an Amalgamation discussed
below.
Step I: a Revaluation Account is opened.
To ensure that dissolving firms disadvantage either party, revaluation of assets and
liabilities is done by each firm. This process involves the following accounting treatment:
a) When there is appreciation of value in an assets, the difference in appreciation is (New
value – the old Value) is transferred to the Revaluation Account.
Dr Relevant Asset Account XX
Cr the Revolution Account (with increase in value) XX

b) When there is decrease in value of an asset, then transfer the reduction to the Revaluation
Account.
Dr Revaluation Account XX
Cr The relevant Asset Account (with decrease) XX

c) When there is an appreciation in the value of a liability, this means that the firm’s liability
has increased, and the increase in the liability is debited to the Revaluation account as the
liability account is increased to the new value.

Dr Revaluation Account (with the increase) XX

Cr The relevant Liability Account XX

d) When there is a decrease in the liability, this implies a reduction in the firms claim,

Dr Relevant Liability Account XX

Cr Revaluation Account (with the Decrease) XX

e) Where a Partner takes up an asset, this should be changed upon the Partners capital account
at an agreed value.

Dr Partners Capital Account XX

Cr Realisation Account XX

f) Where a partner has taken up a liability, charge the agreed value against the partner’s
capital account.
Dr the liability Account XX

20
 Cr the Partner’s Capital Account XX

g) Where some assets are not taken over by the new firm, the value shall be transferred t the
partner’s capital account at their profit and loose sharing ratios.
Dr Partners Capital Account XX
Cr Sundry Assets Accounts XX

h) In case of reserves and any other un-distributable profits, this shall be transferred to the
partner’s capital accounts:
Dr Reserves Account XX
Dr Profit and Loss Account XX
Cr Partners Capital Account XX

h) The revaluation account shall then be closed down to the individual partner’s accounts.
This may be at a gain or at a loss. Where the revaluation yields a gain, the gain shall be
shared amongst the shareholders n their profit and loss sharing ratios,
Dr Revaluation Account XX
Cr Partners Capital Accounts XX
i) Where the revaluation may yield a loss on the partners, then share the loss to all partners
in their profit and loss sharing ratios,
Dr Partners Capital Accounts XX
Cr Revaluation Account XX
j) Each firm is expected to asses its net worth fairly. This is important so that one
partnership does not benefit on the effort of the other partner unfairly. Therefore goodwill
should be assessed. When this happens and there is positive goodwill on the entire firm,
goodwill account is raised and the the gain is reflected in the partners’ capital accounts as
follows,
Dr Goodwill Account (with assessed value) XX
Cr Partners Capital Accounts XX

k) In the event of negative goodwill, a reserve account shall be opened and the negative
goodwill transferred to partner’s capital accounts
Dr Partners’ Capital Account XX
Cr Reserve Account XX

The reserve shall appear in the joint balance sheet just as goodwill would appear in the
joint balance sheet.

21
l) All assets taken over are then transferred to the New Firm’s Amalgamation Account,
Dr New Firm Amalgamation Account XX
Cr Sundry Assets Accounts XX

It should be noted that the assets are being transferred at their new values.
m) All liabilities being taken over by the new joint firm shall be transferred to the New Firm
Amalgamated Account,
Dr New Firm’s Amalgamated Account XX
Cr Sundry liability Accounts XX

Note also that the values so transferred are the new re-valued figure as is the case with
assets.
Step II: The old firms’ accounts shall be closed down to the New Firm’s Amalgamation Account
as explained above.
Step III: Relevant items shall then be transferred to the New Firm Amalgamated Account from
the New Firm Amalgamated Account there by creating a New Firm’s Balance Sheet.
Illustration:
The balance sheets below are for two firms, Kogi & Jiwani Partners and Kintu &
Musoke Partners as on 31st December Year 7 respectively. In both firms, partners shared their
profits and losses equally. The two firms decided to amalgamate on 1 st January Year 8 under the
following terms: (i) That Ochieng’s Loan shall be repaid in full. (ii) The Investments of M/s
Kintu and Musoke shall not be taken over by the new firm. (iii) Goodwill of M/s Kogi and
Jiwani was to be fixed at Shs 8,000 and that of M/s Kintu and Musoke to be fixed at Shs 10,000.
(iv) Premises were re-valued at Shs 50,000. (v) The inventory of M/s Kogi & Jiwani was found
overvalued by Shs 4,000 while M/s Kintu & Musoke’s inventory had been undervalued by Shs
2,000. (vi) A provision of 5% had to be created for bad debts on both firms accounts receivables.
(vi) The new firm’s total capital was to be Shs 80,000 distributed on the basis of 3:2:3:2. (vii)
Goodwill account in the new firm was to be written off. The new firm shall would be called:
(Kogi, Jiwani, Kintu and Musoke Amalgamate Partners).

22
 M/s Kogi & Jiwani and M/s Kintu and Musoke Partners Balancee sheets
Assets K & J K & M Liabilities K & J K & M
Partners Partners Partners Partners
Shs Shs Shs Shs
Investment - 15,000 Capital: Kogi 40,000
Premises 40,000 Jiwani 20,000
Office Furniture 4,000 5,000 Kintu 24,000
Accounts Receivable 15,000 20,000 Musoke 16,000
Inventories 20,400 18,300 Ochinge’s Loan 5,000 -
Bank 5,600 6,700 Accounts Payable 20,000 25,000

85,000 65,000 85,000 65,000

Required:
a) Pass necessary journal entries to close the books of the two firms.
b) Pass necessary journal entries to open the books of the new firm.
c) Provide the opening balance sheet of the new firm.

Suggested Solution

JOURNAL ENTRIES IN THE BOOKS OF THE FIRM

Date
Yr 8 Particulars F Dr Shs Cr Shs
M/s Kogi and Jiwani Partners Books
Jan 1 Goodwill A/c Dr 8,000
Kogi’s Capital A/c 4,000
Jiwani’s Capital A/c 4,000
(Being goodwill raised on M/s Kogi and Jiwani Partnership)
Jan 1 Ochieng’s Loan Account Dr 5,000
Bank A/c 5,000
(Being Ochieng’s Loan repaid in full.)
Jan 1 Premises A/c Dr 10,000
Revaluation A/c 10,000
(Being adjustment of appreciation of value of premises upon
revolution)
Jan 1 Revolution A/c Dr 4,000
Inventory 4000
(Being devaluation of value of inventories upon revaluation)
Jan 1 Revaluation A/c Dr 750
Provision for Bad &Doubtful Debt 750
(Being provision for bad debt of 5% on Accounts Receivable)
Jan 1 Revaluation A/c Dt 5,250
Partners Capital A/cs:
Kogi 2,625
Jiwani 2,625
(Being gain on revaluation to partners capital accounts)
Jan 1 KoJiKiMu Amalgamation A/c Dr 94,000
Goodwill A/c 8,000
Premises A/c 50,000
Office Furniture A/c 4,000

23
 Accounts Receivable A/c 15,000
Inventory A/c 16,400
Bank A/c 600
(Being closure of books asset accounts in M/s Kogi and Jiwani
Partners into the new Amalgamation account at adjusted values)
Jan 1 Provision for Bad Debts A/c Dr 750
Accounts Payable A/c Dr 20,000
Partners’ Capital A/cs
Kogi Dr 46,625
Jiwani Dr 26,625
KoJiKiMu Amalgamation Account 94,000
(Being Closure of Liability accounts into the new Amalgamation
account)

Bank A/c
Shs Assets Shs
Balance b/d 5,600 Ochieng’s Loan 5,000
Balance c/f 600
5,600 5,600
Balance B/c 600
Revaluation A/c: Kogi and Jiwani Partners
Shs Assets Shs
Inventory A/c 4,000 Premises 10,000
Provisions for Bad Debts 750
Partners Capital A/cs:
Kogi 2,625
Jiwani 2,625
10,000 10,000

Ochieng Loan A/c

Shs Assets Shs
Bank A/c 5,000 Balance b/d 5,000

M/s Kogi & Jiwani Partners Capital Accounts

Kogi Jiwani Kogi Jiwani
Shs Shs Shs Shs
KoJiKiMu Amalg A/c 46,625 26,625 Balance b/d 40,000 20,000
Goodwill A/c 4,000 4,000
Revaluation A/c 2,625 2,625
46,625 26,625 46,625 26,625

24
 KoJiKiMu Amalgamation A/c
Shs Assets Shs
Goodwill 8,000 Provision for Bad Debts 750
Premises 50,000 Accounts Payable 20,000
Office Furniture 4,000 Partners Capital A/cs:
Accounts Receivable 15,000 Kogi 46,625
Inventory 16,400 Jiwani 26,625
Bank 600
94,000 94,000

Goodwill 10,000 Provision for Bad Debts 1,000

Office Furniture A/c 5,000 Accounts Payable 25,000
Accounts Receivable A/c 20,000 Partnrs Capital A/cs:
Inventory A/c 20,300 Kintu 22,000
Bank A/c 6,700 Musoke 14,000
62,000 62,000

Date Particulars Shs Shs

Year 8 M/Kintu and Musoke Partners Books
Jan 1 Goodwill A/c Dr 10,000
Kintu’s Capital A/c 5,000
Musoke’s Capital A/c 5,000
(Being goodwill raised upon M/s Kintu and Musoke’s firm)
Jan 1 Kintu,s Capital A/c Dr 7,500
Musoke’s Capital A/c Dr 7,500
Investment A/c 15,000
(Being investment not taken over by the new firm hence shared back to the
respective partners)
Jan 1 Inventory A/c Dr 2.000
Revaluation A/c 2,000
(Being adjustment on undervalued inventory )
Jan 1 Revaluation A/c Dr 1,000
Provision for Bad Debts A/c 1,000
(Being provision fo bad debts of 5% on Accounts Receivable)
Jan 1 Revaluation A/c Dr 1,000
Partners’ Capital A/cs
Kintu 500
Musoke 500
(Being gain on revaluation to partners capital)
KoJiKiMu Amalgamation A/c Dr 62,000
Goodwill A/c 10,000
Office Furniture A/c 5,000
Accounts Receivable A/c 20,000
Inventory A/c 20,300
Bank A/c 6,700
(Being sundry assets accounts closed down to Amalgamaation
Account)
Jan 1 Provision for Bad Debts Dr 1,000

25
 Accounts Payable Dr 25,000
Capital A/cs
Kintu Dr 22,000
Musoke Dr 14,000
KoJiKiMu Amalgam 62,000
(Being Closure of Liability accounts into the new
Amalgamation account)

Bank A/c
Shs Shs
Balance b/d 6,700

Revaluation A/c: Kintu and Musoke Partners

Shs Shs
Provision for Bad Debts 1,000 Inventory 2,000
Partners’ Capital A/cs:
Kintu 500
Musoke 500
2,000 2,000

M/s Kintu & Musoke Partners Capital Accounts

Assets Kintu Musoke Liabilities Kintu Musoke
Shs Shs Shs Shs
Investment A/c 7.500 7,500 Balance b/d 24,000 16,000
KoJiKiMu Amalgam 22,000 14,000 Goodwill A/c 5,000 5,000
Revaluation A/c 500 500
29,500 21,500 29,500 21,500

Opening Balance Sheet of Amalgam Partnership will be an aggregation of all the items
from Kintu & Jiwani and Kogi & Musoke Partnerships as collected in the KoJiKiMu
Amalgam Partnership Account.

Activity:
In a horizontal form, provide an opening balance sheet for the joint firms.

1.4.6 Sale of Partnership to a Limited company

26
 This is also called Conversion of Partnership into A Ltd Company. The partnership in
whichever case is dissolved. The company in either case acquires the liabilities and assets or
assets alone. The company pays the price in form of shares, debenture stocks and cash to the
partnership’s partners. Since the partnership is dissolved, partners’ share the shares accruing from
the company in the ratio of their capital proportion as at the time the after the partnership firm
had been dissolved (after considering the realisation of profits and or loss. Any balance in the
capital accounts will be paid in cash to respective partners.

Illustration:
The balance sheet as on 31st December Yr 3 of M,N and O partners, who shared profits
and losses in the ratio 4:3:1 is shown below. They decided to sell off their business to JK Ltd.

M, N and O Balance sheet as at 31st December, Yr 3

Liabilities Shs Assets Shs
Capital Accounts: Plant and Machinery A/c 50,000
M’s Capital A/c 40,000 Furniture A/c 5,440
N’s Capital A/c 30,000 Stocks A/c 15,000
O’s Capital A/c 10,000 Accounts Receivable A/c 25,000
Accounts Payable 20,000 Cash in Hand 4,560
100,000 2,000

JK Ltd. Took over the furniture, stock and plant and Machinery at Shs 100,000 payable in
fully paid up shares of Shs 10/= each. The company agreed to collect the partnerships debtors
and pay the partnership’s creditors, for which services the company was to be entitled to 3% of
the collections from accounts receivables and 2% on payment to the partnership’s accounts
payables.
In January, Yr 4, the company collected Shs 23,000 from the form’s accounts receivables
in full settlement, and paid Shs 18,500 to the firm’s accounts payables in full satisfaction of their
claims. After deucting the commission, the company remitted the balance of cash to the firm.

Required:
Close the books of the firm, and, provide the opening balance sheet of the company.

Suggested Solution:
Realiation A/c
Shs Shs
Accounts Payable 20,000
JK.Ltd. Buyer A/c 100,000
Cash form J.K. Ltd. 3,440

2,000 2,000

27
 Partners’ Capital A/c
M N O Assets M N O
Shs Shs Shs Shs Shs Shs

500
500
2,000 2,000

Cash A/c
Shs Assets Shs
Inventory

Revaluation A/c: Kintu and Musoke Partners

Shs Assets Shs
Provision for Bad Debts 1,000 Inventory 2,000
Partners’ Capital A/cs:
Kintu 500
Musoke 500
2,000 2,000

Revaluation A/c: Kintu and Musoke Partners

Shs Assets Shs
Provision for Bad Debts 1,000 Inventory 2,000
Partners’ Capital A/cs:
Kintu 500
Musoke 500
2,000 2,000

General background

The circumstance whereby one business gains control of the one or more other businesses
is fairly common. Reasons for this occurrence are many and varied but are usually to enable
advantages to be gained or disadvantage to be avoided.

28
 Combination pattern range from the horizontal combination of businesses of similar
nature for purposes of securing economies of scale and of reducing competition to the vertical
combination-a line combination from producer to the retailer – aimed at securing the benefits of
rationalization. A combination is described as diverse when totally dissimilar business, with
little or nothing in common. The usual reason for this is to spread risk.

Methods of combination
The terminology in this area of accounting is imprecise. Different authors use different
labels to describe identical circumstances. It is important, therefore, that the terms used in this
section of the manual must not necessarily mean the same in different textbooks. In particular, in
the context of corporate bodies, the terms acquisitions and mergers have specific meanings and
implications. The main methods by which combination can be effected are described in the
subsection which now follows.

Absoption
This applies when a relatively large , dominanant, business acquire the assets and posibly
liabiities of the other more existing business, which are he n wound up. The diagramiatic
representation of this situatuion is

Acquisition of controlling Interest

Acquisition of controlling interest can also arise without the establishment of a holding
company for the purpose, when an existing dominant company acquires a controlling interest in
one or more of other companies. The acquisition of a controlling interest can also arise without
the establishment of a holding company for the purpose, when an existing dominant company
acquires a controlling interest in one or more other companies.

Types of consideration
Irrespective of the method of combination, consideration can take any of the following form:
a) Cash payment
b) Issue of shares
c) Issue of loan stock
d) A combination of any of the above forms

29
This manual is concerned with recording the consideration and not the determination of the
consideration since that falls under financial management.

Takeover
Takeover can be applied to an amalgamation, an acquisition, a merger or acquisition of
controlling of interest.

Accounting Entries
Accounting entries to record combination vary according to the method of combination
employed.

Case A: Amalgamation and Absorption

In the accounts of the companies being wound up under an amalgamation or absorption scheme,
the following entries are necessary;

a) When asses are taken over at Book value

Dr Realization account XX
Cr. Individual Assets Account XX

b) When Realization expenses are Incurred

Dr Realization Account XX
Cr. Bank/Cash Account XX

c) When Liabilities are taken Over

Dr Individual Liabilities Account XX
Cr Realization Account XX

d) When Purchase consideration is agreed upon

Dr New Company’s account XX
Cr. Realization Account XX

e) When Profit on realized upon realization

Dr Realization Account XX
Cr. Individual shareholders capital account XX

f) When discount is received from creditors

Dr Creditors XX
Cr. Realization Account XX

g) When Loss is realized upon realization

30
 Dr Sundry shareholders capital Account XX
Cr Realization account XX

h) When purchase consideration is received from the new company

Dr Bank if payment is in cash
Dr and /or Shares in the new company account if payment is in shares
Dr and/or Debentures in the new company, if payment is in debentures
Cr New company account XX

i) Where Reserves exist (They should be transferred to individual shareholders capital

accounts)
Dr Share capital Reserve Account XX
Cr. Sundry Shareholders capital Account XX

j) When distributing purchase consideration to shareholders or partners or sole proprietors

Dr Sundry shareholders capital accounts XX
Cr. Bank XX
Cr. and/or shares in the new company XX
Cr And/or Debentures in the new company XX

k) When settling creditors liabilities

Dr Creditors account XX
Cr Bank account XX

When a company is in process of being liquidated a number of other accounts, additional to

those shown above would need to be prepared. This would include the Liquidation’s Account,
Liquidation’s Remuneration account, Deficiency/Surplus Account. The following entries would
be relevant:

l) When there is profit on realization

Dr Realization Account XX
Cr. Deficiency/Surplus Account XX

m) When there is a loss on realization

Dr Deficiency /Surplus Account XX
Cr Realization account XX

The deficiency account would then be transferred to the Sundry Shareholders capital Account.

31
 Please take note:

1. That we assumed that the new company has already been formed and it
is in existence as a going concern.
2. That the entries discussed above may be applied to any form of firm, be
it a partnership or a company.

ASSIGMENT TWO

K, M and B carry on business in partnership sharing profits and losses ½ 3/8, and 1/8
respectively. On 31st March 1968 they agreed to sell their business to a Limited Company,
“Uganda Wholesaler’s Limited”. Their balance Sheet on that date was as under; (BMK (K) Ltd).

BALANCE SHEET AS AT 31ST MARCH YEAR 8

Liabilities Shs Assets Shs

K’s Capital 20,000 Freehold property 18,000

M’s capital 15,000 Machinery 12,000
B’s capital 13,000 Book debts 15,000
Loan on Mortgage 4,000 Stock 13,000
Sundry Creditors 8,000 Cash 2,000

60,000 60,000

The Company took over the assets at the following valuation in shillings:

Freehold property 22,000

Machinery 11,000
Book Debts 14,000
Stock 12,000
Goodwill 4,000

The company also agreed to pay the creditors at Shs 7,700/=. The company paid Shs 33,500 in
fully paid shares of Shs 10/= each and the balance in cash. The expenses amounted to Shs 500/=.

Required:

Prepare the ledger accounts in the books of the firm.

32