Professor Vipin Conversion of Partnership into Company. Meaning

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Neal Green
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1 Meaning Conversion of Partnership into 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 Sl No Particulars Amount Amount 1 2 For transferring assets to realization account Realization a/c To Sundry assets a/c (Assets transferred to realization a/c to their book values) For transferring different liabilities to Liabilities a/c (Liabilities transferred to realization a/c to their book values) 3 For purchase consideration due Purchasing Co a/c (Purchase consideration due from the new firm) 4 For assets taken over by the proprietor Page 1

2 5 Capital a/c (Assets taken over by the proprietor) For realization of assets not taken over by the company Bank a//c (realization of assets not taken over by the new firm) 6 For recording unrecorded assets Assets a/c To Capital a/c (Unrecorded assets recorded) 7 For realization of unrecorded assets Bank a//c To Assets a/c For payment of liabilities not taken 8 over Realization a/c To Bank a/c (Payment of liabilities not taken over by the new firm) 9 For recording unrecorded liabilities Capital A/c To Liabilities A/c (Being the unrecorded liabilities recorded) 10 For payment of unrecorded liabilities Liabilities A/c To Bank A/c (Payment of unrecorded liabilities) 11 For liabilities taken over by the proprietor To Capital A/c (Being liabilities assumed by the proprietor) 12 For realization expenses To Bank A/c (Realization expenses paid) 13 For profit on realization Page 2

3 To Capital A/c (Profit on realization transferred to Capital Account) 14 For loss on realization Capital A/c To (Loss on realization 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 For transferring partners current accounts (Credit balances) to capital accounts Partners Current A/c To Partners Capital A/c For Settlement of purchase 18 consideration by the company Shares in Purchasing Co Debentures in Purchasing Co Cash A/c To Purchasing Company 19 For final adjustment Partners Capital A/c To Shares in Purchasing Co. To Debenture in Purchasing Co. To Cash A/c Page 3

4 Accounting Entries in the Books of the Purchasing Company The purchasing company will record all the assets and liabilities at agreed values. Sl No Particulars Amount Amount For assets and liabilities taken over. (When net assets taken over is less than the Purchase consideration) Goodwill A/c Dr. (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 Dr. (Agreed Value) To Liabilities A/c (Agreed Value) To Firm A/c (Purchase Consideration) To Capital Reserve A/c (Balancing Figure) (Being different assets and liabilities taken over) For discharge of Purchase Consideration: Firm A/c (P.C) To Share Capital A/c (Face value of shares issued) To Securities Premium A/c (if any) To Debentures A/c To Bank A/c Example 1 X and Y were in partnership in XY & Co. sharing profits in the proportions 3:2. On 31st March 2008, they accepted an offer from P. Ltd. to acquire at that date their fixed assets and stock at an agreed price of Rs Debtors, creditors and bank overdraft would be collected and discharged by the partnership firm. The purchase consideration of Rs consisted of cash Rs , debentures in P Ltd. (at par) Rs and 12,000 Equity Shares of Rs 10 each in P. Ltd. A will be employed in P. Ltd. but, since B was retiring, A agreed to allow him Rs in compensation, to be adjusted through their Capital Accounts. B was to receive 1800 shares in P. Ltd. and the balance due to him in cash. The Balance Sheet of the firm as on is in below Page 4

5 Liabilities Amount Assets Amount X s Capital Account Fixed Assets Loan from X Stock Bank overdraft Debtors Creditors Y s Capital Account The sale of the assets to P. Ltd. took place as agreed; the debtors realized Rs 60,000 and creditors were settled for Rs The firm then ceased business. You are required to pass necessary Journal entries and show: (a) Realization Account (b) Bank Account (c) Partners Capital Accounts. Solution 1 In the books of XY & Co Sl No Particulars Amount Amount Mar To Fixed Assets A/c To Stock-in-trade A/c To Sundry Debtors A/c (Different Assets transferred) Creditors A/c To (Sundry creditors transferred) P. Ltd A/c To Realisation A/c (Purchase consideration due) Bank A/c Debentures in P Ltd Shares in P Ltd To P. Ltd A/c (Purchase consideration Received) Bank A/c To Realisation A/c (Debtors realized) Realisation A/c To Bank A/c (Payment to Creditors) Realisation A/c To X Capital A/c To Y Capital A/ (Profit on realisation transferred to Capital Account) Page 5

6 Loan from X To X Capital (Loan Balance transferred) X Capital A/c To Y Capital A/c (adjustment for compensation) X Capital A/c To Share in P Ltd To Debenture in P Ltd To Bank A/c (Final settlement of accounts of X) Y Capital A/c To Shares in P Ltd To Bank (Final settlement of accounts of Y) Realization Account Particulars Amount Particulars Amount To Fixed Assets A/c By Creditors A/c To Stock A/c To Debtors A/c To Bank A/c (creditors payment To X s Capital A/c (profit) To Y s Capital A/c (profit) By Bank A/c (Debtors realised) By P Ltd A/c (Purch. Consid.) Bank Debentures in P Ltd Shares in P Ltd Bank Account Particulars Amount Particulars Amount To Realisation A/c (Drs By Balance b/d realised) To P Ltd A/c (P.C.) By Realisation A/c (Crs payment) By Capital A/c - X By Capital A/c - Y Page 6

7 Partners Capital Accounts Particulars X Y Particulars X Y To Balance b/d By Balance b/d To Y Capital A/c By Loan from X To Shares in P Ltd By Realisation A/c (profit) To Debentures in P Ltd A/c By X s Capital A/c To Bank A/c (final payment) Note: Total Purchase consideration Discharged by: In Cash By Debentures and Balance by 12,000 Equity shares of Rs 10/ each 1,80,000 So the cost of each equity share be Rs 1,80,000/ = Rs 15 /per share. Thus in the books of P Ltd. Security premium will be Rs X 5 =Rs 60,000 Page 7

PARTNERSHIP ACCOUNTS

PARTNERSHIP ACCOUNTS CHAPTER-2 Q. 1. Thin, Short and Fat were in partnership sharing profits and losses in the ratio of 2 : 2 : 1. On 30th September, 2012 their Balance Sheet was as follows : Capital Accounts : Premises 50,000