Accounting For The Purchase Of A Partnership Business(Part2)

Published by slang December 1st, 2007 in Purchase Of Business

When a partnership is taken over by a limited company, the partnership is considered as dissolved and the business is sold as a going concern to the limited company. Accounting entries in the Purchaser’s book ( limited company) is similar to the sole trader’s business.

Refer to Part 1 re: purchase of a sole-trader business.As for the seller or the partnership, it will show a Realization Account, a Purchaser’s Account and a Partners Capital Account. The discharge of purchase consideration by the limited company will close the partnership book.

Refer below:-

Entries in the Partnership’s or Seller’s Book

Transactions

Debit

Credit

1. Assets transferred at book value

Realization A/c

Assets A/c

2. Liabilities assumed by purchaser

Liabilities A/c

Realization A/c

3. Liabilities paid off

Liabilities A/c

Cash A/c

4. Purchase consideration

Purchaser’s A/c

Realization A/c

5. Expenses of realization

Realization A/c

Cash A/c

6. Profit on realization

Realization A/c

Capital A/c

7. Payments to partners to close the book

Capital A/c

(a) Shares A/c(b) Debentures A/c

Illustration:Question:

Mr A, Mr B & Mr C are partners who share profits and losses in the ratio of 3:2:1. They have agreed to convert the partnership into a limited company called Aumno Ltd

Balance Sheet of Partnership	$
Freehold premises	30,000
Plant & machinery	30,000
Stock	40,000
Bank	20,000
Total Assets	150,000
	$
Capital – Mr A	80,000
Capital – Mr B	20,000
Capital – Mr C	20,000
	120,000

Trade Payables	30,000
	150,000

Other details as follows:

(i) Total purchase consideration is $180,000, payable as follows:

$90,000 in ordinary shares of $1 each fully paid,

$30,000 in 6% preference shares of $1 each fully paid,

$10,000 in 5% debentures and the balance in cash

Questions:

(a) Show the ledger accounts closing the partnership’s book

(b) Show the opening journal entries in Aumno Ltd/ Purchaser’s book

Answer:

(a) Ledger Accounts in the Partnership’s Book:

Realization Account

	$		$
Freehold premises	30,000	Trade Payables	30,000
Plant & machinery	30,000	Aumno Ltd- Purchase consideration	180,000
Stock	40,000
Debtors	30,000
Bank	20,000
Profit on realization:
Capital – Mr A (1/2)	30,000
Capital – Mr B (1/3)	20,000
Capital – Mr C (1/6)	10,000
	210,000		210,000

Purchaser/Aumno Ltd’s Account

	$		$
Realization Account	180,000	Ordinary Share	90,000
		6% Preference Share	30,000
		5% Debenture	10,000
		Cash	50,000
	180,000		180,000

Ordinary Share in Aumno Ltd

	$		$
Aumno Ltd	90,000	Capital A/c- Mr. A (110/180)	55,000
		Capital A/c- Mr. B (40/180)	20,000
		Capital A/c- Mr. C (30/180)	15,000
	90,000		90,000

6% Preference Shares in Aumno Ltd

	$		$
Aumno Ltd	30,000	Capital A/c- Mr. A (110/180)	18,333
		Capital A/c- Mr. B (40/180)	6,667
		Capital A/c- Mr. C (30/180)	5,000
	30,000		30,000

5% Debenture In Aumno Ltd

	$		$
Aumno Ltd	10,000	Capital A/c- Mr. A (110/180)	6,112
		Capital A/c- Mr. B (40/180)	2,222
		Capital A/c- Mr. C (30/180)	1,666
	10,000		10,000

Cash Account

	$		$
Aumno Ltd	50,000	Capital A/c- Mr. A (110/180)	30,555
		Capital A/c- Mr. B (40/180)	11,111
		Capital A/c- Mr. C (30/180)	8,334
	50,000		50,000

Partners Capital Account

	Mr.A	Mr. B	Mr.C		Mr.A	Mr. B	Mr.C
Ordinary Share	55,000	20,000	15,000	Balance b/f	80,000	20,000	20,000
6% Preference Shares	18,333	6,667	5,000	Realization A/c	30,000	20,000	10,000
5% Debentures	6,112	2,222	1,666
Cash	30,555	11,111	8,334
	110,000	40,000	30,000		110,000	40,000	30,000

(110/180) (40/180) (30/180)

Answer:- (b) Journal Entries in Aumno Limited Company’s Book

JOURNAL

Debit

Credit

Freehold premises

30,000

Plant and machinery

30,000

Stock

40,000

Debtors

30,000

Bank

20,000

Goodwill

60,000

Trade Payables

30,000

Purchase of Business Account

180,000

210,000

Being Assets & Liabilities Taken Over From the Partnership of Mr. A, Mr. B & Mr. C

Purchase of Business Account

180,000

Ordinary Share Capital

90,000

6% Preference Share Capital

30,000

5% Debentures

10,000

Cash

50,000

180,000

Being discharge of Purchase Consideration

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