Amalgamation, Conversion, Sale of Partnership Firm

Table of contents

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Amalgamation of Partnership Firms

 As defined earlier, a Partnership firm is formed with two or more persons. But it can also be formed in any of the following ways.

(A) When two or more sole proprietors forms new partnership firm;

(B) When  one  existing  partnership  firm  absorbs  a  sole  proprietorship;

(C) When  one  existing  partnership  firm  absorbs  another  partnership  firm;</p

(D) When two or more partnership firms form new partnership firm.

The amalgamation is used to be done to avoid competition amongst them and to maximize the profit of the firm/firms.

Accounting entries  under different  situation  are  in  below:

(A) When two or more sole proprietors form a new partnership firm

When  two  or  more  sole  proprietorship  businesses  amalgamate to  form  a  new  partnership  firm,  the existing sets of books will be closed and a new set of books of accounts to be opened, recording all assets, liabilities  and  transactions  of  the  partnership.

Steps to be taken for the existing books.

Step 1 : Prepare the Balance Sheet of the business on the date of dissolution.

Step 2 : Open a Realisation Account and transfer all   assets and liabilities, except cash in hand and cash at bank, at their book values.

However, cash in  hand and cash at  bank  are  transferred to  Realisation Account only  when  they  are taken over by the new firm.

Step 3 : All undistributed reserves or profits or losses (appearing in the balance sheet) are to be transferred to Partners’ Capital  Accounts.

Step 4 : Calculate  Purchase Consideration on the  basis of terms and conditions agreed  upon  by  the parties. Generally, purchase consideration is calculated on the basis of agreed value of assets and liabilities taken over by the new firm. The purchase consideration is calculated as under:

Agreed values of assets taken over    xxxx 

Less: Agreed values of liabilities assumed  (xxx)

Purchase consideration   xxxx

Step 5 : Credit  Realisation Account by  the  amount of  Purchase Consideration.

Step 6 : If there are any unrecorded assets or liabilities, they are to be recorded.

Step 7 : The Profit or loss on relisation (balancing figure of Realisation Account) to be transferred to the Capital Account of the proprietor.

Step 8 : To ensure that all the accounts of the Sole Proprietor’s business are closed

Accounting Entries in the Books of Amalgamating Sole Proprietors 

1. For transferring sundry assets to Realisation Account

Realisation  A/c

To, Sundry Assets A/c  (Assets transferred to  Realisation Account at  their  book values except Cash and Bank i.e. if not taken over by the new firm)

 2. For  transferring  sundry  liabilities  to  Realisation  Account 

Liabilities A/c

To, Realisation A/c (Liabilities  transferred to  Realisation Account at  their  book  values)

3. For the amount of purchase consideration

New Firm A/c

To, Realisation A/c (Purchase consideration due from the new firm)

 4. For assets taken over by the proprietor

Capital A/c

To, Realisation A/c (Assets taken over by the proprietor)

 5. For realisation of assets not taken over by the new firm

BankA/c

To, Realisation A/c  (Realisation of assets not taken over by the new firm)

 6. For  recording of unrecorded assets

AssetsA/c

To, CapitalA/c (Unrecorded  assets are recorded)

 7. For realisation of unrecorded assets

Bank A/c

To, Assets A/c (Realisation  of  unrecorded  assets)

(Note: If unrecorded assets are taken over by the new firm,  it is also transferred to Realisation Account along with other assets.)

 8. For payment of liabilities not taken over

Realisation A/c

To, Bank A/c (Payment of liabilities not taken overby the new firm)

 9. For  recording of unrecorded  liabilities

Capital A/c

To, Liabilities A/c (Being  the  unrecorded liabilities are recorded)

 10. For  payment  of  unrecorded liabilities

Liabilities A/c

To, Bank A/c  (Payment  of  unrecorded liabilities)

(Note : If unrecorded liabilities are taken over by the new firm, it is also transferred to  Realisation  Account  along  with  other  liabilities.) 11. For liabilities taken over by the proprietor

Realisation A/c

To, Capital A/c  (Being  liabilities  assumed by  the  proprietor

 12. For  realisation  expenses

Realisation A/c

To, Bank A/c (Realisation  expenses  paid)

 13. For  profit  on realisation

Realisation A/c

To, Capital A/c (Profit  on  realisation  transferred to  Capital  Account)

 14. For  loss  on  realisation

Capital A/c

To, Realisation A/c (Loss  on  realisation  transferred to  Capital  Account)

 15. For  accumulated  profits / reserves

Reserves A/c

Profit and Loss A/c

To, Realisation A/c (Undrawn profits  transferred to  Capital  Account)

16. For  accumulated  losses 

Capital A/c

To, Profit and Loss A/c (if any) (Accumulated losses transferred to  Capital  A/c))

 17. For settlement of purchase consideration by the New firm

Capital in New Firm A/c

To, Realisation A/c (Settlement  of  purchase  consideration)

18. For  final  adjustment

Capital A/c

To,  Capital in New Firm A/c

To, Bank A/c (if any) (Settlement  of  purchase  consideration)

Accounting Entries in the Books of the New Firm

The new firm records all the assets and liabilities at the values it has decided to take over. If the purchase consideration  payable  is,  more  than  the  net  assets (assets  minus  liabilities)  acquired,  it  represents goodwill.  Conversely,  if  the purchase  consideration  payable  is  less  than  the  net  assets  acquired, it represents capital reserve.

 1. If the  net  acquired assets is equal  to  purchase consideration.

Assets A/c [Acquired  value]

To,  Liabilities A/c [Assumed  value]

To, Partners’  Capital A/c [Purchase   consideration]

 2. If the  net  acquired asset is more than  the  purchase consideration:

Assets A/c [Acquired  value]

To,  Liabilities A/c [Assumed  value]

To, Partners’  Capital A/c [Purchase   consideration]

To, Capital  Reserve A/c [Purchase  consideration  -  net  assets]

 3. If the net acquired asset is less than the amount of purchase consideration, it represents goodwill.

Assets A/c [Acquired  value]

Goodwill A/c [Purchase  consideration  -  net  assets]

To,  Liabilities A/c [Assumed  value]

To, Partners’  Capital A/c [Purchase   consideration]

 Illustration 39

A and B carry on independent business and their position on 31.03.20X1 are reflected in the Balance Sheet given below:

Liabilities	A	B	Assets	A	B
	₹	₹		₹	₹
Sundry creditors for purchases	1,10,000	47,000	Stock-in-trade	1,70,000	98,000
Sundry creditors for expenses	750	2,000	Sundry Debtors	89,000	37,000
Bills payable	12,500	-	Cash at bank	13,000	7,500
Capital A/c	1,53,000	95,500	Cash in hand	987	234
			Furniture and Fixtures	2,750	1,766
			Investments	513	-
	2,76,250	1,44,500		2,76,250	1,44,500

Both of them want to form a partnership firm from 1.4.20X1 in the style of AB & Co. on the following terms:

(a) The capital of the partnership firm would be ₹ 3,00,000 and to be contributed by them in the ratio of 2:1.

(b) The assets of the individual businesses would be evaluated by C at which values, the firm will take them over and the value would be adjusted against the contribution due by A and B.

(c) C gave his valuation report as follows :

Assets of A : Stock-in trade to be written-down by 15% and a portion of the sundry debtors amounting to ₹ 9,000 estimated unrealisable; furniture and fixtures to be valued at ₹ 2,000 and investments to be taken at market value of ₹ 1,000.

Assets of B : Stocks to be written-up by 10% and sundry debtors to be admitted at 85% of their value; rest of the assets to be assumed at their book values.

(d) The firm is not to consider any creditors other than the dues on account of purchases made.

You are required to pass necessary Journal entries in the books of A and B. Also prepare the opening Balance Sheet of the firm as on 1.4.20X1.

Solution:

In the books of A
Journal

Date	Particulars		Amount (₹)	Amount (₹)
2022 Apr.1	Realisation A/c	Dr.	2,76,250
	To Stock-in-trade A/c			1,70,000
	To Sundry Debtors A/c			89,000
	To Cash at bank A/c			13,000
	To Cash in hand A/c			987
	To Furniture & Fixture A/c			2,750
	To Investments A/c			513
	(Transfer of different Assers to Realisation A/c)
	Creditors for Goods A/c	Dr.	1,10,000
	Creditors for Expenses A/c	Dr.	750
	Bills Payable A/c	Dr.	12,500
	To Realisation A/c			1,23,500
	(Transfer of different liabilities to Realisation A/c)
	AB & Co. A/c (Note 1)	Dr.	1,18,987
	To Realisation A/c			1,18,987
	(Purchase consideration due)
	Capital A/c	Dr.	34,013
	To Realisation A/c			34,013
	(Realisation loss transferred to Capital A/c)
	Capital in AB & Co. A/c	Dr.	1,18,987
	To AB & Co. A/c			1,18,987
	(Settlement of purchase consideration)
	Capital A/c	Dr.	1,18,987
	To Capital in AB & Co. A/c			1,18,987
	(Final adjustment to close the books of account)

In the books of B

Journal

Date	Particulars		Amount(₹)	Amount(₹)
2022 Apr. 1	Realisation A/c	Dr.	1,44,500
	To Stock-in-trade A/c			98,000
	To Sundry Debtors A/c			37,000
	To Cash at bank A/c			7,500
	To Cash in hand A/c			234
	To Furniture & Fixture A/c			1,766
	(Transfer of different Assers to Realisation A/c)
	Creditors for Goods A/c	Dr.	47,000
	Creditors for Expenses A/c	Dr.	2,000	49,000
	To Realisation A/c
	(Transfer of different liabilities to Realisation A/c)
	AB & Co. A/c	Dr.	1,01,750
	To Realisation A/c			1,01,750
	(Purchase consideration due )
	Realisation A/c	Dr.	6,250
	To Capital A/c			6,250
	(Realisation Profit transferred to Capital A/c)
	Capital in AB & Co. A/c	Dr.	1,01,750
	To AB & Co. A/c			1,01,750
	(Settlement of purchase consideration)
	Capital A/c	Dr.	1,01,750
	To Capital in AB & Co. A/c			1,01,750
	(Final adjustment to close the books of account)

Balance Sheet of AB & Co. as on 01.04.20X1

Liabilities	Amount ₹	Assets	Amount ₹
Capital Accounts :		Furniture & Fittings	3,766
A	2,00,000	Investments	1,000
B	1,00,000	Stock-in-trade	2,52,300
Sundry creditors for purchases	1,57,000	Sundry Debtors	1,11,450
Bills payable	12,500	Cash at bank (13,000 + 7,500 + 81,013 - 1,750)	99,763
		Cash in hand (987 + 234)	1,221
	4,69,500		4,69,500

Working :

(1) Calculation of purchase consideration :

Particulars	A (₹)	B (₹)
Furniture	2,000	1,776
Investments	1,000	-
Stock-in-trade	1,44,500	1,07,800
Sundry Debtors	80,000	31,450
Cash at bank	13,000	7,500
Cash in hand	987	234
	2,41,487	1,48,750
Less : Sundry creditors for purchases	1,10,000	47,000
Bills payable (Assumed arising out of credit purchases)	12,500	-
Net assets taken over by the AB & Co.	1,18,987	1,01,750
Capital as per agreement	2,00,000	1,00,000
Less: Net assets taken over	1,18,987(+)	1,01,750(-)
Cash to be introduced (+) / withdrawn (-)	81,013	1,750

(B) When an existing partnership firm absorbs a sole proprietorship

When a sole proprietorship is taken over by an existing firm, the original business of the sole proprietor is  dissolved and compensated by  a  share of  the  partnership  firm which is  acquiring  it.  In  this  case, assets and liabilities of the sole proprietorship business are taken over by the partnership firm at agreed values. The procedures for closing the books of account of the sole proprietorship are same as explained earlier.

However, the following points are to be noted:

1. The assets and liabilities of the sole proprietorship taken over by the existing firm, are added with the existing  assets and liabilities  of the  firm.
2. The capital of the new partner (the sole proprietorship) is equal to the purchase consideration agreed  upon.
3. Calculation and treatment for goodwill and Capital reserve are same as explained   in situation (A).
4. Before amalgamation, all the assets and liabilities of the firm may be revalued. Any profit or loss on revaluation  is  transferred to  the  Partners’ Capital  Accounts in  the  old profit-sharing  ratio.
5. Goodwill of the firm is to be adjusted by crediting the Partners’ Capital Accounts in their old profit-sharing ratio.
6. Balance of reserve and surplus of the firm is also to be credited to partners’ Capital Accounts in the  old  profit-sharing  ratio 

 Illustration 40

Following are the Balance Sheets of partners X and Y (sharing profits and losses in the ratio of their capital) and the sole proprietor Z as on 31.03.20X1 :

Liabilities	Partners X & Y	Sole Proprietor Z	Assets	Partners X & Y	Sole Proprietor Z
Capital X Y Z	15,000	-	Goodwill	-	2,000
Creditors	5,000	-	Building	25,000	-
Loan	-	10,000	Stock	10,000	15,000
	26,000	13,000	Bills receivable	5,000	5,000
	-	5,000	Debtors	4,000	6,000
			Cash in Hand	2,000	-
	46,000	28,000		46,000	28,000

The partners decided to admit Z as a partner and Z agreed to amalgamate his business with that of the partnership on the following terms :

1. The new profit-sharing ratio among X, Y, and Z will be in the ratio of their capitals.

2. The building is to be appreciated by Rs. 15,000 and provision @ 5 % is to be created on debtors.

3. The goodwill of the partnership is valued at Rs. 10,000 and of the sole proprietor at Rs. 1,500; both are to be recorded in the books.

4. Stock is to be taken at Rs. 9,200 and Rs. 16,800, respectively of the firm and the sole proprietor.

Prepare ledger accounts to close the books of Z, to make necessary Journal entries in the books of the firm and prepare the Balance Sheet of the re-constituted partnership.

Solution:

Working Note : Calculation of purchase consideration

Assets taken over :	₹	₹
Goodwill	1,500
Stock	16,800
Bills receivable	5,000
Debtors	6,000	29,300
Less: Liabillties taken over:
Creditors	13,000
Loan	5,000
Provision for bad debts	300	18,300
Purchase consideration		11,000

In the books of Z

 Realization Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To Goodwill A/c	2,000		By Creditors A/c	13,000
	To Stock A/c	15,000		By Loan A/c	5,000
	To Bills receivable A/c	5,000		By Partners X & Y A/c	11,000
	To Debtors A/c	6,000
	To Capital A/c - Profit	1,000
		29,000			29,000

Capital Account

Dr.			Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To Partners X & Y A/c	11,000		By Balance b/d	10,000
				By Realisation A/c	1,000
		11,000			11,000

Partners X & Y Account

Dr.			Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To Realisation A/c	11,000		By Capital A/c	11,000
		11,000			11,000

In the Books of X & Y Journals

Date	Particulars		L.F	Amount ₹	Amount ₹
	Building A/c	DR.		15,000
	To Revaluation A/c				15,000
	(Increase in the Value of Building)Revaluation A/c
	Revaluation A/c	Dr.		1,000
	To Stock A/c				800
	To Provision for Bad Debt A/c				200
	(Decrease in the value of assets)
	Revaluation A/c	Dr.		14,000
	To X Capital A/c				10,500
	To Y Capital A/				3,500
	(Profit on revaluation transferred)
	Goodwill A/c	Dr.		10,000
	To X Capital A/c				7,500
	To Y Capital A/c				2,500
	(Goodwill raised in the books)
	Goodwill A/c	Dr.		1,500
	Stock A/c	Dr.		16,800
	Bills Receivable A/c	Dr.		5,000
	Debtors A/c	Dr.		6,000
	To Loan A/c				5,000
	To Creditors A/c				13,000
	To Provision for Bad Debt A/c				300
	To Z Capital A/c				11,000
	(Assets and liabilities taken over)

Balance Sheet of X, Y & Z (after absorption) as at 01.04. X1

Liabilities	Amount ₹	Assets	Amount ₹	Amount ₹
Capital Account		Goodwill		11,500
-X	33,000	Building		40,000
-Y	11,000	Stock		26,000
-Z	11,000	Bills Receivable		10,000
Loan	5,000	Debtors	10,000
Crditors	39,000	Less: Provision	500	9,500
		Cash in hand		2,000
	99,000			99,000

(C) When one firm takes over another firm

In this case, the procedures for closing of books are same as earlier. The assets of the absorbed firm added with the firm who absorbed the firm.

The treatment for capital reserve and goodwill are same as before.

Illustration 41

Following is the Balance sheet of AB & Co. and CD & Co. as on 31.03.20X1.

Liabilities	AB (₹)	CD (₹)	Assets	AB (₹)	CD (₹)
Bank Loan	10,000	-	Stock-in-trade	32,000	24,000
Bills Payable	30,000	40,000	Sundry Debtors	18,000	30,000
Capital A	60,000	-	Machinery	60,000	20,000
Capital B	30,000	-	Cash in hand	12,000	2,000
Capital C		36,000	Furniture	8,000	6,000
Capital D		24,000	Investments	-	18,000
	130,000	100,000		130,000	100,000

AB & Co. absorbed CD & Co. on 01.04.20X1 on the following terms:

(a) that the value of the goodwill of CD & Co. would be ₹ 12,000;

(b) that the investments of CD & Co. to be sold out for ₹ 24,000 and the realised cash will be introduced in the acquiring business;

(c) that the stock of CD & Co. to be reduced to ₹ 22,000;

(d) that the machinery of CD & Co. will be increased by 40%;

(e) that the Furniture of CD & Co. will be reduced by 10%.

It was further agreed that for AB & Co., following are the adjustments to be made :

(i) Assets are to be revalued as follows :

Goodwill- ₹ 16,000; Stock - ₹ 40,000; Machinery - ₹ 84,000; Furniture - ₹ 7,200;

(ii) Bank loan to be repaid

Show necessary Ledger Accounts to close the books of CD & Co. and to prepare necessary Journal entry and Balance Sheet of AB & Co. after absorption.

Solution:

Workings :

Calculation of purchase consideration

Assets taken over :	₹
Machinery	28,000
Furniture	5,400
Stock	22,000
Debtors	30,000
Cash (₹ 24,000 + ₹ 2,000)	26,000
Goodwill	12,000
	1,23,400
Less : Liability taken over
– Bills payable	40,000
Purchase consideration	83,400

In the books of CD & Co.

 Realisation Account

Dr.					Cr.
Date	Particulars	Amount ₹	Date	Particulars	Amount ₹
	To Stock-in-trade	24,000		By Bills Payable A/c	40,000
	“ Sundry Debtors	30,000		By AB & Co A/c	83,400
	“ Machinery	20,000
	“ Cash in hand	26,000
	“ Furniture
	To Partners’ Capital A/cs:	6,000
	C - 8,700
	D - 8,700	17,400
		1,23,400			1,23,400

Cash Account

Dr.					Cr.
Date	Particulars	Amount ₹	Date	Particulars	Amount ₹
	To Balance b/d	2,000		By Realisation A/c	26,000
	To Investments A/c	24,000
		26,000			26,000

Partners’ Capital Accounts

Dr.				Cr.
Date	Particulars	C ₹	D ₹	Date	Particulars	C ₹	D ₹
	To Capital in AB & co A/c	47,700	35,700		By Balance b/d	36,000	24,000
					By Profit on Sale of Investment A/c	3,000	3,000
					By Realisation A/c	8,700	8,700
		47,700	35,700			47,700	35,700

In the books of AB & Co.

Partners’ Capital Accounts

Date	Particulars	A ₹	B ₹	Date	Particulars	A ₹	B ₹
	To Balance c/d	83,600	53,600		By Balance b/d	60,000	30,000
					By Goodwill A/c	8,000	8,000
					By Revaluation A/c	15,600	15,600
		83,600	53,600			83,600	53,600

Balance Sheet as on 01.04.20X1

Liabilities	Amount ₹	Assets	Amount ₹
Capital Accounts		Goodwill	28,000
A	83,600	Machinery	1,12,000
B	53,600	Furniture	12,600
C	47,70	Stock	62,000
D	35,700	Debtors	48,000
Bills payable	70,000	Cash (26,000 + 12,000 – 10,000)	28,000
	2,90,600		2,90,600

Journal

Date	Particulars		L.F.	Amount (₹)	Amount (₹)
1.4.X1	Bank Loan A/c	Dr.		10,000
	To Cash A/c				10,000
	(Being the bank loan repaid)
	Goodwill A/c	Dr.		16,000
	To A’s Capital A/c				8,000
	To B’s Capital A/c				8,000
	(Being the goodwill raised )
	Stock A/c	Dr.		8,000
	Machinery A/c	Dr.		24,000
	To Revaluation A/c				32,000
	(Being increase in the value of assets)
	Revaluation A/c	Dr.		800
	To Furniture A/c				800
	(Being the decrease in the value of furniture)
	Revaluation A/c	Dr.		31,200
	To A’s Capital A/c				15,600
	To B’s Capital A/c				15,600
	(Being the profit on revaluation transferred to Partners’ Capital A/cs in the profit-sharing ratio)
	Goodwill A/c	Dr.		12,000
	Machinery A/c	Dr.		28,000
	Furniture A/c	Dr.		5,400
	Stock A/c	Dr.		22,000
	Debtors A/c	Dr.		30,000
	Cash A/c	Dr.		26,000
	To Bills Payable A/c
	To C ‘s Capital A/c				40,000
	To D’s Capital A/c				47,700
	(Being the introduction of capital by C & D)				35,700

(D) When two or more partnership firms form a new partnership firm

When two or more partnership firms amalgamate to form a new partnership firm, the books of account of the old firm is to be closed. In the books of each old firm, a Realisation Account to be opened. The accounting entries of the amalgamating firm is same as before as they were absorbed.

Illustration 42

Two partnership firms, carrying on business under the style of R & Co. (Partners A & B) and W & Co. (Partners C & D) respectively, decided to amalgamate into RW & Co. with effect from 1st April 20X1. The respective Balance Sheets of both the firms as on 31st March, 20X1 are in below :

Liabilities	R (Rs.)	W (Rs.)	Assets	R (Rs.)	W (Rs.)
Capital B	19,000	-	Goodwill	-	5,000
Capital C	-	10,000	Machinery	10,000	-
Capital D	-	2,000	Stock-in-trade	20,000	5,000
Bank Loan	15,000	-	Sundry Debtors	10,000	10,000
Creditors	10,000	9,500	Cash in hand	-	1,500
			Capital - A	4,000	-
	44,000	21,500		44,000	21,500

Profit sharing ratios are : A & B = 1:2; C & D = 1:1. Agreed terms are :

1. All fixed assets are to be devalued by 20%.

2. All stock-in-trade is to be appreciated by 50%.

3. R & Co. owes Rs. 5,000 to W & Co. as on 31st March 20X1. This is settled at Rs. 2,000. Goodwill is to be ignored for the purpose of amalgamation.

4. The fixed capital accounts in the new firm (RW & Co.) are to be : Mr A Rs. 2,000; Mr. B Rs. 3,000; Mr C Rs. 1,000 and D Rs. 4,000.

5. Mr. B takes over bank overdraft of R & Co. and contributed to Mr. A the amount of money to be brought in by Mr. A to make up his capital contribution.

6. Mr C is paid off in cash from W & Co. and Mr. D brings in sufficient cash to make up his required capital contribution.

Pass necessary Journal entries to close the books of both the firms as on 31st March 20X1.

Solution:

Calculation of Purchase Consideration

Assets taken over :		R & Co.	W & Co.
Plant & Machinery		8,000	-
Stock-in-trade		30,000	7,500
Sundry Debtors [(* After adjustment of ₹ 3,000(₹ 5,000 – 2,000)]		10,000	*7,000
	(A)	48,000	14,500
Liability taken over:
Sundry Creditors [(* ₹ (10,000 – 3000)]	(B)	*7,000	9,500
Purchase consideration	(A-B)	41,000	5,000

In the books of R & Co.

Journals

				Dr.	Cr.
Date	Particulars		L.F	Amount ₹	Amount ₹
31.3. X1	Realisation A/c	Dr.		40,000
	To Plant and Machinery A/c				10,000
	To Stock-in-trade A/c				20,000
	To Sundry Debtors A/c				10,000
	(Different assets transferred)	Dr.		10,000
	Sundry Creditors A/c				10,000
	To Realisation A/c
	(Sundry creditors transferred to Realisation Account)
	Bank Loan A/c	Dr.		15,000
	To B Capital A/c				15,000
	(Bank overdraft taken over by B)
	RW & Co. A/c	Dr.		41,000
	To Realisation A/c				41,000
	(Purchase consideration due)
	Realisation A/c	Dr.		11,000
	To A Capital A/c				11,000
	To B Capital A/c
	(Profit on realisation transferred to partners capital in the ratio of 1:2)
	B Capital A/c	Dr.		2,333
	To A Capital A/c				2,333
	(Deficit in A’s capital made good by B)
	A Capital A/c	Dr.		2,000
	B Capital A/c (3,000 + 36,000)	Dr.		39,000
	To RW & Co. A/c				41,000
	(Capital accounts of the partners closed by transfer to RW & Co.)
	Alternatively Shows:
	A Capital A/c	Dr.		2,000
	B Capital A/c	Dr.		3,000
	Loan from B A/c	Dr.		36,000
	To RW & Co. A/c				41,000

Note : It should be noted that the credit balance in B’s capital account is ₹ 39,000. His agreed capital in RW & Co is ₹ 3,000 only. Since there is no liquid assets in R & Co. from which B can be repaid, the excess amount of ₹ 36,000 should be taken over by RW & Co. as loan from B.

In the books of W & Co.

Journals

Date	Particulars		L.F.	Amount ₹	Amount ₹
31.3.X1	Realisalion A/c	Dr.		20,000
	To Goodwill A/c				5,000
	To Stock-in-trade A/c				5,000
	To Sundry Debtors A/c				10,000
	(Different Assets transferred)
	Sundry Creditors A/c	Dr.		9,500
	To Realisation A/c				9,500
	(Sundry creditors transferred)
	RW & Co. A/c	Dr.		5,000
	To Realisation A/c				5,000
	(Purchase consideration due)
	C’s Capital A/c	Dr.		2,750
	D’s Capital A/c	Dr.		2,750
	To Realisation A/c				5,500
	(Loss on realisation transferred to Capital Account equally)
	Cash A/c	Dr.		4,750
	To D’s Capital A/c				4,750
	(Being the necessary amount brought in by D to make up his required capital contribution)
	C’s Capital A/c	Dr.		7,250
	D’s Capital A/c	Dr.		4,000
	To RW & Co. A/c				5,000
	To Cash A/c				6,250
	(Capital accounts of the partners closed by transfer to RW & Co. and balance paid by cash)
	Alternatively Shows:
	C’s Capital A/c	Dr.		6,250
	To Cash A/c				6,250
	(Being the C's Capital is paid off)
	C’s Capital A/c	Dr.		1,000
	D’s Capital A/c	Dr.		4,000
	To RW & Co. A/c				5,000
	(Being the Partner's Capital transferred to RW & Co.)

Realization Account

Dr.					Cr.
Particulars	R & Co. ₹	W & Co. ₹	Particulars	R & Co. ₹	W & Co. ₹
To Goodwill	-	5,000	By Creditors	10,000	9,500
“ Machinery	10,000	-	By RW & Co.	41,000	5,000
“ Stock-in-trade	20,000	5,000	By C’s Capital		2,750
“ Sundry Debtors	10,000	10,000	By D’s Capital		2,750
“ Cash in hand	-
“ A’s Capital	3,667
“ B’s Capital	7,333
	51,000	20,000		51,000	20,000

Partners’ Capital Accounts of R & Co.

Dr.							Cr.
Date	Particulars	A (₹)	B (₹)	Date	Particulars	A (₹)	B (₹)
20X1				20X1
Mar X1	To Balance b/d	4,000	-	Mar 31	By Balance b/d	-	19,000
	₹₹ A Capital A/c	-	2,333		₹₹ Realisation A/c (Profit)	3,667	7,333
	₹₹ Loan A/c	-	36,000		₹₹ Bank overdraft A/c	-	15,000
	₹₹ R W & Co. A/c	2,000	3,000		₹₹ B’s Capital A/c	2,333	-
		6,000	41,333			6,000	41,333

Partners’ Capital Accounts of W & Co.

Dr.							Cr.
Date	Particulars	C (₹)	D (₹)	Date	Particulars	C (₹)	D (₹)
20X1				20X1
Mar X1	To Realisation A/c (Loss)	2,750	2,750	Mar 31	By Balance b/d	10,000	2,000
	`` Cash A/c	6,250	-		`` Cash A/c	-	4,750
	`` R W & Co. A/c	1,000	4,000
		10,000	6,750			10,000	6,750

Illustration 43

A and B carry on independent business in provisions and their position as at 31.3.2022 are reflected in the Balance Sheets given below:

	A (₹)	B (₹)
Stock in Trade	1,70,000	98,000
Sundry Debtors	89,000	37,000
Cash at Bank	13,000	7,500
Cash in hand	987	234
Furniture and Fixtures	2,750	1,766
Investments	513	-
	2,76,250	1,44,500
Represented by Sundry Creditors for
Purchases	1,10,000	47,000
Expenses	13,250	2,000
Capital Account	1,53,000	95.500
	2,76,250	1,44.500

Both of them want to. form a partnership firm from 1st April, 2022 on the following understanding:

(a) The capital of the partnership would,be ₹3 lakhs which would be contributed by them in the ratio of 2 :1.

(b) The assets of the individual business would be evaluated by C at which values, the firm will take them over and the value would be adjusted against the contribution due by A and B.

(c) C gave his valuation report as follows:

Business of A: Stock in Trade to be written down by 15% and a portion of Sundry Debtors amounting to ₹9,000 estimated unrealisable not to be assumed by the firm; furniture and fixtures to be valued at ₹2,000 and investments to be taken of market value of 1,000. Assets of B: Stocks to be increased by 10%, and Sundry

Debtors to be admitted at 85% of their value; rest of the assets to be assumed at their book value.

(d) The firm is not to assume any Creditors other than the dues on account of purchases made.

Prepare the opening Balance Sheet of the firm. 

Solution:

Calculation Net Assets taken over

	A (₹)	B (₹)
Investments	1,000	-
Sundry debtors	80,000	31,450
Furniture & fixtures	2,000	1,766
Stock in trade	1,44,500	1,07,800
Cash in hand	987	234
Cash at bank	13,000	7,500
	2,41,487	1,48,750
Less:  Sundry Trade Creditors	1,10,000	47,000
	1,31,487	1,01,750
Add: Additional Cash bought is by A	68,513	-
Less: Excess Amount transferred to Current A/c.	-	1,750
	2,00,000	1,00,000

M/s A & B 

Balance Sheet as at 01.04.2022 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital			Furniture and Fixtures		3,766
A	2,00,000		Investments		1,000
B	1,00,000	3,00,000	Sundry Debtors		1,11,450
Sundry Creditors		1,57,000	Stock in Trade		2,52,300
B’s Current A/c		1,750	Cash in hand		1 ,221
			Cash at Bank		89,013
		4,58,750			4,58,750

Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

For  various  reasons,  an  existing  partnership  may  sell  its  entire  business  to  an  existing  Joint  Stock Company. It can also convert itself into a Joint Stock Company. The former case is the absorption of a partnership firm by a Joint Stock Company but the latter case is the flotation of a new company to take over the  business of the  partnership.

In either of the above cases, the existing partnership firm is dissolved and all the books of account are closed. Broadly, the procedure of liquidation of the partnership business is same as what has already been  explained  in  “Amalgamation  of  Partnership”

Some  important  points :

(1) The Purchase Consideration is satisfied by the Company either in the form of cash or shares or debentures or a  combination of two  or more of these.  The shares may be  equity  or preference  shares.  The  shares  may  be  issued  at  par,  at  a  premium  or  at  a  discount.  For  the partnership,  the  issue price is relevant  which may form a  part  of the  purchase consideration.

(2) In the absence of any agreement, share received from purchasing company should be distributed among the partners in the same ratio as profits and losses are shared.

Accounting Entries in the books of selling firms.

1. For  transferring  different  assets  to  Realisation Account

Realisation  A/c

To, Sundry Assets A/c  (Assets transferred to  Realisation Account at  their  book values)

2. For  transferring  different liabilities  to  Realisation  Account 

Liabilities A/c

To, Realisation A/c (Liabilities transferred to Realisation Account at their book values)

3. For purchase consideration  due

New Firm A/c

To, Realisation A/c (Purchase consideration due from the new firm)

4. For assets taken over by the proprietor

Capital A/c

To, Realisation A/c (Assets taken over by the proprietor)

5. For realisation of assets not taken over by the Company

BankA/c

To, Realisation A/c  (Realisation of assets not taken over by the new firm)

6. For recording unrecorded assets

AssetsA/c

To, CapitalA/c (Unrecorded  assets recorded)

7. For realisation of unrecorded assets

Bank A/c

To, Assets A/c (Realisation  of  unrecorded  assets)

8. For payment of liabilities not taken over

Realisation A/c

To, Bank A/c (Payment of liabilities not taken overby the new firm)

9. For  recording of unrecorded  liabilities

Capital A/c

To, Liabilities A/c (Being  the  unrecorded liabilities are recorded)

10. For  payment  of  unrecorded liabilities

Liabilities A/c

To, Bank A/c  (Payment  of  unrecorded liabilities)

(Note: If unrecorded liabilities are taken over by the Company, it is also transferred to Realisation Account along with other liabilities.)

11. For liabilities taken over by the proprietor

Realisation A/c

To, Capital A/c  (Being  liabilities  assumed by the proprietor

 12. For  realisation  expenses

Realisation A/c

To, Bank A/c (Realisation  expenses  paid)

 13. For  profit  on realisation

Realisation A/c

To, Capital A/c (Profit  on  realisation  transferred to  Capital  Account)

 14. For  loss  on  realisation

Capital A/c

To, Realisation A/c (Loss  on  realisation  transferred to  Capital  Account)

 15. For  accumulated  profits / reserves

Reserves A/c

Profit and Loss A/c

To, Capital A/c (Undrawn profits  transferred to  Capital  Account)

16. For Loss : Reverse entry of 15.

17.  For transferring  partners’ current  accounts  (Credit  balances) to  capital  accounts

Partners’  Current  A/cs

To,  Partners’  Capital A/cs (If there is a debit balance in current account, the reverse entry shall be  recorded.)

 18. For settlement of purchase consideration by the company

Shares  in  Purchasing  Co.

Debentures  in  Purchasing  Co.

Cash  A/c

To, Purchasing Co. A/c

19. For  final  adjustment

Partners’ Capital A/c

To,  Shares  in  Purchasing Co. A/c

To, Debenture  in  Purchasing Co. A/c

To,  Cash A/c

Accounting Entries in the books of the Purchasing Company

The  purchasing  company  will  record  all  the  assets  and  liabilities  at  agreed  values.  Calculation  of Goodwill and  Capital  Reserve  same  as  explained  earlier.

1. For assets and liabilities taken over (When net assets taken over  is  less than the Purchase consideration)

Assets A/c (Agreed Value)

Goodwill A/c (Balancing  figure)

To, Liabilities A/c (Agreed Value)

To, Firm A/c [Purchase consideration] (Being  different  assets and liabilities  taken  over)

(When net assets taken over  is  more  than the Purchase consideration)

Assets A/c (Agreed Value)

To, Liabilities A/c (Agreed Value)

To, Firm A/c [Purchase consideration]

To, Capital  Reserve A/c [Purchase  consideration  -  net  assets] (Balancing  Figure) (Being  different  assets and liabilities  taken  over)

 2. For  discharge  of  Purchase  Consideration

Firm A/c (Purchase   Consideration)

To,  Share  Capital  (Face  value of  shares issued)

To, Securities Premium A/c (if any)

To, Debentures A/c

To,  Bank A/c

 Illustration 44

X and Y were in partnership in XY & Co. sharing profits in the proportions 3:2. On 31st March 20X1, they accepted an offer from P. Ltd. to acquire at that date their fixed assets and stock at an agreed price of ₹ 7,20,000. Debtors, creditors and bank overdraft would be collected and discharged by the partnership firm.

The purchase consideration of ₹ 7,20,000 consisted of cash ₹ 3,60,000, debentures in P Ltd. (at par) ₹ 1,80,000 and 12,000 Equity Shares of ₹ 10 each in P. Ltd. X will be employed in P. Ltd. but, since Y was retiring X agreed to allow him ₹ 30,000 in compensation, to be adjusted through their Capital Accounts. Y was to receive 1,800 shares in P. Ltd. and the balance due to him in cash. The Balance Sheet of the firm as on 31.03.20X1 is in below :

Liabilities	Amount ₹	Assets	Amount ₹
X’s Capital Account	1,20,000	Fixed Assets	4,80,000
Loan from X	2,10,000	Stock	45,000
Bank overdraft	1,50,000	Debtors	75,000
Creditors	1,80,000	Y’s Capital Account	60,000
	6,60,000		6,60,000

The sale of the assets to P. Ltd. took place as agreed; the debtors realised ₹ 60,000 and creditors were settled for ₹ 1,71,000. The firm then ceased business. You are required to pass necessary Journal entries and show: (a) Realisation Account (b) Bank Account (c) Partners’ Capital Accounts.

Solution:

In the books of XY & Co.

Journals

Date	Particulars		L.F.	Amount ₹	Amount ₹
31.3. X1	Realisalion A/c	Dr.		6,00,000
	To Fixed Assets A/c				4,80,000
	To Stock-in-trade A/c				45,000
	To Sundry Debtors A/c				75,000
	(Different Assets transferred)
	Creditors A/c	Dr.		1,80,000
	To Realisation A/c				1,80,000
	(Sundry creditors transferred)
	P. Ltd A/c	Dr.		7,20,000
	To Realisation A/c				7,20,000
	(Purchase consideration due)
	Bank A/c	Dr.		3,60,000
	Debentures in P Ltd.	Dr.		1,80,000
	Shares in P Ltd	Dr.		1,80,000
	To P. Ltd A/c				7,20,000
	(Purchase consideration Received)
	Bank A/c	Dr.		60,000
	To Realisation A/c				60,000
	(Debtors realized)
	Realisation A/c	Dr.		1,71,000
	To Bank A/c				1,71,000
	(Payment to Creditors)
	Realisation A/c	Dr.		1,89,000
	To X Capital A/c				1,13,400
	To Y Capital A/c				75,600
	(Profit on realisation transferred to Capital Account)
	Loan from X	Dr.		2,10,000
	To X Capital				2,10,000
	(Loan Balance transferred)
	X Capital A/c	Dr.		30,000
	To Y Capital A/c				30,000
	(Adjustment for compensation)
	X Capital A/c	Dr.		4,13,400
	To Share in P Ltd				1,53,000
	To Debenture in P Ltd. To Bank A/c				1,80,000
	(Final settlement of accounts of X)				80,400
	Y Capital A/c	Dr.		45,600
	To Shares in P Ltd.				27,000
	To Bank				18,600
	(Final settlement of accounts of Y)

Realisation Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Fixed Assets A/c	4,80,000	By Creditors A/c	1,80,000
To Stock A/c	45,000	By Bank A/c (Debtors realised)	60,000
To Debtors A/c	75,000	By P Ltd A/c (Purch. Consid.)
To Bank A/c (creditor's payment) To	1,71,000	Bank	3,60,000
To  X’s Capital A/c (profit)	1,13,400	Debentures in P Ltd	1,80,000
To Y’s Capital A/c (profit)	75,600	Shares in P Ltd.	1,80,000
	9,60,000		9,60,000

Bank Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Realisation A/c (Debtors realised)	60,000	By Balance b/d	1,50,000
To S Ltd. A/c (Purchase Consideration)	3,60,000	By Realisation A/c	1,71,000
		By Capital A/c - X	80,400
		By Capital A/c - Y	18,600
	4,20,000		4,20,000

Partners’ Capital Accounts

Date	Particulars	X	Y	Date	Particulars	X	Y
	To Balance b/d	-	60,000		By Balance b/d	1,20,000	-
	To Y Capital A/c	30,000			By Loan from X	2,10,000	-
	To Shares in P Ltd	1,53,000	27,000		By Realisation A/c (profit)	1,X1,400	75,600
	To Debentures in P Ltd A/c	1,80,000	-		By X ‘s Capital A/c	-	30,000
	To Bank A/c (final payment)	80,400	18,600
		4,43,400	1,05,600			4,43,400	1,05,600

Note :

Value of equity shares		₹
Total Purchase consideration		7,20,000
Discharged:	3,60,000
In Cash	1,80,000	5,40,000
By Debentures		1,80,000
Balance by 12,000 Equity shares of ₹ 10 per each
So the cost of each equity share be ₹ 1,80,000/12,000 = ₹ 15 per share.
Thus in the books of P Ltd. Security premium will be ₹ 12,000 × 5 = ₹ 60,000

 Illustration 45

Suchandra, Ashmita and Kasturi were running partnership business sharing Profit and Losses in 2:2:1 ratio. Their Balance Sheet as on 31.03.20X1 stood as following:

 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Fixed Capital			Fixed Assets		920.00
Suchandra	690.00		Investment		115.00
Ashmita	460.00		Current Assets:
Ashmita	230.00	1,380.00	Stock	230.00
Current Account:			Debtors	632.50
Suchandra	138.00		Cash in Bank	287.50	1,150.00
Kasturi	92.00	230.00
Unsecured Loan		230.00
Current Liabilities		345.00
		2,185.00			2,185.00

On 1.4.20X1, they agreed to form new company TT (P). Ltd. with Ashmita and Kasturi each taking up 460 eq. share of ₹10 each, which shall take over the firm as going concern including Goodwill, but excluding cash and bank balance.

The following are also agreed upon:

(a) Goodwill will be valued at 3 years purchase of super profit.

(b) The actual profit for the purpose of Goodwill valuation will be ₹ 4,60,000.

(c) The normal rate of return will be 18% p.a. on Fixed Capital.

(d) All other assets and liabilities will be taken at Book value.

(e) Ashmita and Kasturi are to acquire interest in the new company at the ratio 3:2.

(f) The purchase consideration will be payable partly in shares of ₹10 each and partly in cash. Payment in cash being to meet the requirement to discharge Suchandra, who has agreed to retire.

(g) Realisation expenses amounted to ₹ 1,17,300.

You are required to close the books of the firm by passing necessary journal entries. 

Solution:

	Particulars		Dr. (₹)	Cr. (₹)
(a)	Realization A/c	Dr.	26,49,600
	To, Fixed Assets A/c			9,20,000
	To, Investment A/c			1,15,000
	To, Stock A/c			2,30,000
	To, Sundry Debtors A/c			6,32,500
	To, Goodwill N			6,34,800
	To, Bank A/c (Realization Expenses)			1,17,300
	(Being transfer of Assets To, Realization A/c)
(b)	Unsecured loan A/c	Dr.	2,30,000
	Current liabilities A/c	Dr.	3,45,000
	To, Realisation A/c			5,75,000
	(Being transfer of liabilities To, Realization A/c)
(c)	Suchandra’s Capital A/c	Dr.	46,920
	Ashmita’s Capital A/c	Dr.	46,920
	Kasturi’s Capital A/c	Dr.	23,460
	To, Realisation A/c			1,17,300
	(Being transfer of realization losses To, partner’s Capital A/c)
(d)	TT (P) Ltd. A/c__________W.N.(3)	Dr.	19,57,300
	To, Realisation A/c			19,57,300
	(Being purchase consideration due)
(e)	Goodwill A/c__________W.N.(2)	Dr.	6,34,800
	To, Suchandra’s Capital A/c			2,53,920
	To, Ashmita’s Capital A/c			2,53,920
	To, Kasturi’s Capital No			1,26,960
	(Being transfer of goodwill To, parties Capital A/c)
(f)	Suchandra’s Current A/c	Dr.	1,38,000
	Kasturi’s Current A/c	Dr.	92,000
	To, Suchandra’s Capital A/c			1,38,000
	To, Kasturi’s Capital A/c			92,000
	(Being transfer of Current A/c balances To, Capital A/c)
(g)	Suchandra’s Capital A/c	Dr.	10,35,000
	To, Bank A/c			10,35,000
	(Being amount of Capital paid To, Suchandra)
(h)	Ashmita’s Capital A/c	Dr.	11,500
	To, Kasturi’s Capital A/c			11,500
	(Being amount payable by Kasturi To, Ashmita in order To, make their claim in new company as 3:2)
(i)	Bank A/c	Dr.	8,64,800
	Shares in TT (P) Ltd. A/c	Dr.	10,92,500
	To, TT (P). Ltd. A/c			19,57,300
	(Being amount received, amount shares in Tata (P) Ltd. distributed for Purchase consideration)

Working Notes:

1.

Ashmita’s Capital A/c

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Realiztion A/c	46,920	By, Balance c/d	4,60,000
To, Kasturi’s Capital	11,500	By, Goodwill A/c	2,53,920
To, Shares in TT (P) Ltd.	6,55,500
	7,13,920		7,13,920

Kasturi’s Capital A/c

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Realization A/c	23,460	By, Balance c/d	2,30,000
To, Shares in TT (P) Ltd.	4,37,000	By, Goodwill A/c	1,26,960
		By, Current A/c	92,000
		By, Ashmita’s Capital A/c	11,500
	4,60,460		4,60,460

2. Calculation of goodwill.

Normal Ratio of return = 1 8% p.a. or fixed capital

= ₹ 13,80,000 × 18%

= ₹ 2,48,400

Actual Profit = ₹ 4,60,000

(-) Normal Profit = ₹ 2,48,400

Super Profit = ₹ 2,11,600 

Goodwill = ₹ 2,11,600 × 3 years of purchase of S.P.

₹ 6,34,800

Suchandra’s Share = ₹ 6,34,800 × 2/5

= ₹ 2,53,920

Ashmita’s Share = ₹ 6,34,800 × 2/5

= ₹ 2,53,920

Kasturi’s Share = ₹ 6,34,800 × 1/5

= ₹ 1,26,960

3. Computation of Purchases Consideration

	(₹)
Investments	1,15,000
Fixed Assets	9,20,000
Stock	2,30,000
Debtors	6,32,500
Goodwill	6,34,800
	25,32,300
Less: Unsecured loan	2,30,000
Current liabilities	3,45,000
	19,57,300

4. Calculation of cash required from TT (P) Ltd.

	(₹)
Cash required to pay to Suchandra	10,35,000
Less: Cash available after expenses (₹ 2,87,500 - ₹ 1,17,300)	1,70,200
Cash received for purchase Consideration	8,64,800

5. Shares of ₹ 10,92,500 are to be issued to Ashmita and Kasturi in the ratio of 3:2

Ashmita

Kasluri

Exercise

Numerical Questions 

CMA book unsolved questions solution

1. M/s A and Co., having A and B as equal partners, decided to amalgamate with C and Co., having C and D as equal partners on the following terms and condition:

(i) The new firm AC and Co. to pay ₹ 12,000 to each firm for Goodwill.

(ii) The new firm to take over investments at 10% depreciation, land at ₹ 66,800, premises at ₹ 53,000, machinery at ₹ 9,000 and only the trade liabilities of both the firms. The Debtors being taken over at given value.

(iii) Type writers (written off) worth ₹ 800, belonging to C & Co., and not appearing in the balance sheet was also not taken over by the new firm.

(iv) Bills Payable pertains to trade transaction only.

(v) All the four partners in the new firm to bring in ₹ 1, 60,000 as capital in equal shares.

The following were the Balance Sheets of both firms on the date of amalgamation:

Liabilities	A & Co.	C & Co.	Assets	A & Co.	C & Co.
Trade Creditors	20,000	10,000	Cash	15,000	12,000
Bills Payable	5,000	-	Investments	10,000	8,000
Bank Overdraft	2,000	10,000	Debtors  : ₹ 10,000
A’s Loan Capitals :			Less : ₹ 1,000	9,000	4,000
A	6,000	-	Furniture	12,000	6,000
B	35,000	-	Premises	30,000	-
C	22,000	-	Land	-	50,000
D	-	36,000	Machinery	15,000	-
General Reserve	-	20,000	Goodwill (Purchased)	9,000	-
Investment Fluctuation	8,000	3,000
	1,00,000	80,000		1,00,000	80,000

Assuming immediate discharge of bank overdraft, pass necessary Journal Entries to close the books of A & Co. and C & Co. Also pass Journal entries in the books and prepare the Balance Sheet of the New Firm.

Solution:

In the books of A & Co.

Journal

Date	Particulars		Dr. (₹)	Cr. (₹)
	Bank Overdraft A/c	Dr.	2,000
	To Cash A/c			2,000
	(Being the payment of overdraft.)
	Realization A/c	Dr.	99,000
	To Cash A/c			13,000
	To Investment A/c			10,000
	To Debtors A/c			10,000
	To Furniture A/c			12,000
	To Premises A/c			30,000
	To Machinery A/c			15,000
	To Goodwill A/c			9,000
	(Being the transfer of different assets to Realization account)
	Provision for Bad Debts A/c	Dr.	1,000
	Trade Creditors A/c	Dr.	20,000
	Bills Payable A/c	Dr.	5,000
	To Realisation A/c			26,000
	(Being the different liabilities and provisions transferred to Realisation Account)
	M/s AC & Co. (new firm) A/c	Dr.	80,000
	To Realisation A/c (Note 1)			80,000
	(Being the purchase consideration due from the new firm)
	A Capital A/c (Note 6)	Dr.	6,000
	B Capital A/c	Dr.	6,000
	To Realisation A/c			12,000
	(Being furniture taken by the partners equally)
	General Reserve A/c	Dr.	8,000
	Investment Fluctuation Fund A/c	Dr.	2,000
	To A Capital A/c			5,000
	To B Capital A/c			5,000
	(Being the reserve and Surplus distributed between the partners equally)
	Realisation A/c (Note 2)	Dr.	19,000
	To A Capital A/c			9,500
	To B Capital A/c			9,500
	(Being the profit on realisation transferred to the partners’ Capital Accounts equally)
	A’s Loan A/c	Dr.	6,000
	To A Capital A/c			6,000
	(Being A’s loan transferred to his Capital Account)
	Cash A/c	Dr.	9,500
	To B Capital A/c			9,500
	(Being cash brought in by B to raise capital equal to ₹40,000)
	A & B Capital in M/s AC &Co A/c	Dr.	80,000
	To M/s Ac & Co A/c			80,000
	(Being the settlement of purchase consideration)
	A Capital A/c	Dr.	49,500
	B Capital A/c	Dr.	40,000
	To A Capital in AC & Co A/c			40,000
	To B Capital in AC & Co A/c			49,000
	(Being the final adjustment to close the books of account)

In the books of C & Company

Journal

Dr.				Cr.
Date	Particulars		₹	₹
	Bank Overdraft A/c	Dr.	10,000
	To Cash A/c			10,000
	(Being the payment of overdraft)
	Office Equipment (Typewriters) A/c	Dr.	800
	To C Capital A/c			400
	To D Capital A/c			400
	(Being recording of typewriters previously written-off)
	Realization A/c	Dr.	68,800
	To Investment A/c			8,000
	To Debtors A/c			4,000
	To Furniture A/c			6,000
	To Land A/c			50,000
	To Office Equipment A/c			800
	(Being the transfer of different assets to Realisation Account)
	Trade Creditors A/c	Dr.	10,000
	To Realisation A/c			10,000
	(Being the liability transferred to Realisation Account)
	M/s AC & Co. (New firm) A/c	Dr.	80,000
	To Realisation A/c (Note 1)			80,000
	(Being purchase consideration due from the new firm)
	C Capital A/c	Dr.	3,400
	D Capital A/c	Dr.	3,400
	To Realisation A/c			6,800
	(Being furniture and typewriter taken over by the partners equally)
	General Reserve A/c	Dr.	3,000
	Investment Fluctuation Fund A/c	Dr.	1,000
	To C Capital A/c			2,000
	To D Capiatl A/c			2,000
	(Being the reserve and surplus distributed among the partners equally)
	Realisation A/c	Dr.	28,000
	To C Capital A/c			14,000
	To D Capiatl A/c			14,000
	(Being the profit on realization transferred to the Partner’s Capital Accounts equally)
	Cash A/c	Dr.	7,000
	To D Capital A/c			7,000
	(Being cash brought in by D raised his capital to ₹ 40,0000)
	C and D Capital in A & Co. A/c	Dr.	80,000
	To M/s AC & Co. A/c			80,000
	(Being the settlement of purchase consideration)
	C Capital A/c	Dr.	49,000
	D Capital A/c	Dr.	40,000
	To C Capital in AC & Co. A/c			40,000
	To D Capital in AC & Co. A/c			40,000
	To Cash A/c			9,000
	(Being the final adjustment to close the books of account)

In the books of AC & Co.

Journal

Dr.				Cr.
Date	Particulars		₹	₹
	Goodwill A/c	Dr.	12,000
	Cash A/c	Dr.	13,000
	Investment A/c	Dr.	9,000
	Debtors A/c	Dr.	10,000
	Premise A/c	Dr.	53,000
	Machinery A/c	Dr.	9,000
	To Provision for Bad Debts A/c			1,000
	To Trade Creditors A/c			20,000
	To Bills Payable A/c			5,000
	To A Capital A/c			40,000
	To B Capital A/c			40,000
	(Being the assets and liabilities taken over by the new firm)
	Goodwill A/c	Dr.	12,000
	Investment A/c	Dr.	7,200
	Debtors A/c	Dr.	4,000
	Land A/c	Dr.	66,800
	To Trade Creditors A/c			10,000
	To C Capital A/c			40,000
	To D Capital A/c			40,000
	(Being the assets and liabilities taken over by the new firm)

Balance Sheet of AC & Co. as at…….

Liabilities	₹	Assets	₹
Partner’s Capitals:		Goodwill	24,000
A	40,000	Land Premise	66,800
B	40,000	Machinery	53,000
C	40,000	Investments	9,000
D	40,000	Debtors	16,200
Creditors	30,000	Less: Provision (14,000 - 1,000)	13,000
Bills Payable	5,000	cash	13,000
	1,95,000		1,95,000

Working Notes:

(1) Calculation of Purchase Consideration

Assets taken over:	A & Co.	C & Co.
Cash (see tutorial note below)	13,000	-
Investment	9,000	7,200
Debtors	9,000	4,000
Premises	53,000	-
Machinery	9,000	-
Land	-	66,800
Goodwill	12,000	12,000
	1,05,000	90,000
Liabilities taken over:
Trade Creditors	20,000	10,000
Bills Payable	5,000	-
	25,000	10,000
Purchase Consideration	80,000	80,000

2. Amar, Akbar and Anthony are equal partners of M/S. Andal & Co. The Balance Sheet of the firm as on 31.12.2022 was as follows: 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Account:			Fixed Assets:
Ram	50,000		Land	50,000
Manas	1,00,000		Building	70,000
Param	(30,000)	1,20,000	Plant & Machinery	2,00,000	3,20,000
Loan from bank		5,00,000	Current Assets:
Creditors		1,00,000	Stock	3,00,000
			Debtors	1,00,000	4,00,000
		7,20,000			7,20,000

On the date, it is decided to convert the partnership into limited company called Pandal limited on the following items:

a. Land to be revalued at ₹ 1,50,000

b. Plant and machinery is to be revalued at ₹ 2,50,000.

c. Depreciation amounting ₹ 20000 is to be written off on building.

d. A provision of 10% books valued to be mate of obsolete stock.

e. Provision of doubtful debts made at 10% of debtors.

f. A discount of 6% would be earned on creditors when paid out.

g. The new company issue ₹ 12,000 equity shares 10 each credited as full paid up, such share capital being valued at ₹ 1,50,000 and the balance payable is to be discharge by issue of 10% debentures of  ₹ 100 each.

Show the necessary ledger accounts to close the books of Andal & Co. and show the opening balance sheet of the new company. All partners are solvent and have sufficient cash resource as may be necessary to settle the respective accounts, Shares and debentures are divided equal among the partner.

Solution:

In the books of Andal & Co

Realisation Account

Dr.			Cr.
Particulars	₹	Particulars	₹
To Land A/c	50,000	By loan from bank A/c,	5,00,000
To Building A/c	70,000	By creditors A/c,	1,00,000
To Plant and machinery A/c	2,00,000	By new company A/c, (purchase confederation)	2,16,000
To Stock A/c	3,00,000
To Debtors A/c	1,00,000
To Partners’ Capital A/c
Amar	32,000
Akbar	32,000
Anthony	32,000
	8,16,000		8,16,000

Partners’ Capital Account

Dr.							Cr.
Particulars	Amar	Akbar	Anthony	Particulars	Amar	Akbar	Anthony
To Balance B/d.	-	-	30,000	By Balance B/d	50,000	1,00,000	-
To Equity sh. In new company	50,000	50,000	50,000	By Realisation A/c (profit)	32,000	32,000	32,000
To 10% debenture in new co.	20,000	22,000	22,000	By Bank A/c (Cash brought in)	-	-	70,000
To Bank A/c	10,000	60,000	-
	82,000	1,32,000	1,02,000		82,000	1,32,000	1,02,000

Bank Account

Dr.			Cr.
Particulars	₹	Particulars	₹
To, partners’ capital A/c	70,000	By Amar A/c	10,000
		By Akbar A/c	60,000
	70,000		7,0000

Andal limited

Balance sheet as at 31st December, 20X1

Particulars	Note No.	Figure as at the End of the current reporting period (₹)
(1)	(2)	(3)
1. EQUITY AND LIABILITIES
(1) Share holders’ Fund :	(1)
(a) share capital		1,20,000
(b) reserves and surplus		30,000
(c) money received against share warrants		-
(2) Share application money pending Allotment:	(2)
(3) Non-current liabilities :	(3)	-
(a) long term borrowings		5,66,000
(b) deferred Tax liabilities (net)		-
(c) Other long term liabilities		-
(d) long –term provisions		-
(4) Current liabilities:	(4)
(a) short term borrowings		-
(b) trade payables		9,40,000
(c) other current liabilities		-
(d) long term provisions		-
TOTAL		8,10,000
II. ASSETS
(1) Non-current assets		4,50,000
(a) fixed assets		-
(i)Tangible assets		-
(ii) Intangible assets		-
(iii)Capital working progress		-
(b) noncurrent investments		-
(c) deferred Tax assets (Net)		-
(d) long term loan and advance		-
(f) other non-current assets		-
(2) Current assets:
(a) current investments		2,70,000
(b) inventories		90,000
(c) trade receivable		-
(d) cash and cash equivalent		-
(e) short term loan and advance		-
(f) other current assets
TOTAL		8,10,000

Notes of accounts:

(1) Share capital	₹	(2) Reserve and Surplus	₹
Particulars		Particulars
Authorized share capital.		Securities premium	30,000
........EQUITY SHARE OF	...........	(4) Fixed assets
₹.......each Issued and subscribed capital		Tangible assets	1,50,000
12000 Equity shares of ₹10 each		Land Building	50,000
(3) long-term borrowing		Building	50,000
(i) Secured loan	₹	Plant and machinery	2,50,0000
10%debentures	66,000		4,50,000
(ii) unsecured bank loans	500000
	566000

Working notes:

(1) Calculation of Purchase Consideration

Particulars	₹	₹
Assets take over by new company
Land	1,50,000
Building (₹70000-20000)	50,000
Plant and machinery Stock	2,50,000
Debtors(₹1,00000-10000)	2,70,000
	90,000
Liabilities taken Over by the new company	5,00,000
Loan from bank	94,000	8,10,000
Creditors (₹ 100000-6000)		5,94,000
Total purchase considerations		2,16,000

(2) Discharge of Purchase Consideration

Particulars	₹
Equity shares (12000 of ₹10 each issued at a premium of ₹2.50 each)	150000
10% Debenture of ₹100 each (balancing figure)	66000
	216000