when a
partnership business is sold to a limited company
what entries are made in the books of the firm?
Answers
Answer:
Step 1: Transfer all recorded assets and liabilities(whether or not taken over by the purchasing company) to the Realization account, except cash and bank balance if not taken over by the purchasing company.
1.1 For transferring recorded assets:
Realization A/C..................Dr.
To sundry assets
1.2 For transferring recorded liabilities
Sundry liabilities..................Dr.
To Realization A/C
Step 2: Make purchase consideration(price) due.
2.1 For purchase price due:
Purchasing company...........Dr.
To Realization A/C
Step 3: If, there remain any assets(whether or not recorded) not taken over by the purchasing company, it may be sold, or may be taken by one of the partners or may be shared among the partners.
3.1 On sale of assets not taken over by the purchasing company:
Bank A/C..................Dr.
To realization A/C
3.2 Such assets taken over by any one of the partners:
Partner's capital A/C...............Dr.
To Realization A/C
3.3 On sharing such assets among the partners:
Partners' capital A/C(capital ratio)............Dr.
To realization A/C
Note: If such unsold assets are considered worthless, they should be shared among the partners in profit sharing ratio.
Step 4: The liabilities (whether or not recorded) by the purchasing company may be discharged or may be assumed by any one of the partners, or must be shared by the partners in their capital ratio.
4.1 On discharge of any liability not taken over by the purchasing company:
Realization A/C .............Dr.
To Bank A/C
If such liability assumed by one of the partners:
Realization A/C...............Dr.
To Partner's capital A/C
If such liability has to be assumed by all partners:
Realization A/C................Dr.
To Partners' capital A/C(capital ratio)
Step 5: When the realization expenses is paid, Realization account is debited.
5.1 For payment of realization expenses:
Realization A/C.............Dr.
To Bank
Step 6: Close the realization account by transferring the balance(profit or loss) to the capital of the partners in profit sharing ratio.
6.1 For profit on realization account:
Realization A/C..............Dr.
To Partners' capital A/C(profit sharing ratio)
6.2 For loss on realization account:
Partners' capital A/C............Dr.
To realization A/C
Step 7: On the receipt of purchase consideration(price), cash/bank account, equity shares in purchasing company or preference shares in purchasing company at their issue prices are debited and purchasing purchasing company's account is credited.
7.1 For the receipt of purchase price:
Cash/bank A/C....................................Dr.
Equity share in purchasing Co...........Dr.
Preference share in purchasing Co....Dr.
Debentures share in purchasing Co...Dr.
To purchasing Co.
Step 8: Transfer all accumulated reserves/profits/losses to the capital accounts of partners in profit sharing ratio.
8.1 For accumulated reserves, profits:
Reserve A/C.................Dr.
Profit and loss A/C.......Dr.
To partners' capital A/C
8.2 For accumulated losses:
Partners' capital A/C.............Dr.
To profit and loss A/C
Step 9: Transfer the current account, if any, in the books, to the capital accounts of the partners.
9.1 For transferring current account to the capital account:
Partners' current Account................Dr.
To partners' capital Account
Step 10: Pay off the partner's loan if any.
10.1 For the payment of partner's loan account:
Partner's loan A/C ..............Dr.
To bank A/C
Step 11: Make final settlement by paying off balances in capital accounts. In the absence of an agreement as to the division of shares(from purchasing company) among partners, such shares are distributed in the ratio of their final claims(i.e. in the ratio of capitals after all the adjustments).
11.1 For final settlement:
Partners' capital A/C ...........Dr.
To equity shares in purchasing Co.
To preference shares in purchasing Co.
To bank A/C
Entries in the books of purchasing company
Assets Account...........................Dr.
Goodwill Account........................Dr.
To liabilities
To share capital
To share premium
(Being assets and liabilities taken over)