Partnership Formation and Firm Amalgamation

PATNERSHIP—AMALGAMATION OF FIRMS AND CONVERSION / SALE TO A COMPANY
[A] WHEN TWO OR MORE PROPRIETORS FORM A NEW PARTNERSHIP:

When two or more proprietors amalgamate to form a new partnership firm, it is usually desired to close the set of
existing set of books and open new set of books for recording all assets and liabilities and transactions of the firm.
To close the existing set of books following steps are followed:
Step—1: Prepare the balance sheet of the business on the date of dissolution.
Step—2: Open realization account and transfer all assets and liabilities except cash in hand and cash at bank at their book
values.
Note: If the new firm takes over the cash in hand and cash at bank then only they are to be transferred to the
realization account.
Step—3: Calculate the purchase consideration on the basis of the terms and conditions agreed up on. Generally the
purchase consideration is calculated on the basis of the assets and liabilities taken over by the firm. The purchase
consideration is calculated as under
Agreed value of assets taken over xxx
Less: agreed value of liabilities assumed xxx
Purchase consideration xxx
Step—4: Credit realization account by the purchase consideration.
Step—5: If there are any unrecorded assets and liabilities then they are to be recorded.
Step—6: The entire purchase consideration is then matched with the book value of the assets and liabilities taken over to
ascertain profit or loss on realization. This is done on the realization account. Any profit or loss on realization is then
transferred to the capital account of the proprietor.
Accounting entries in the books of the amalgamating sole proprietors
[1] For transferring different assets to realization account

Realization account Dr
To sundry assets account [individually]
Note: if cash in hand and cash at bank are not taken over by the new firm these are not to be transferred
[2] for transferring different liabilities to realization account

Sundry liabilities account Dr [individually]
To realization account
[3] for purchase consideration

New firm account Dr
[4] for assets taken over by the proprietor

Capital account Dr
[5] for realization of assets not taken over by the new firm
Bank account Dr
[6] for recording unrecorded assets

Assets account Dr
To capital account
[7] for realization of unrecorded assets

Bank account Dr
Note: in unrecorded assets are taken over by the new firm then these are also to be transferred to the realization account
[8] for payment of liabilities not taken over

To bank account
[9] for recording unrecorded liabilities

Capital account Dr
To unrecorded liability account
[10] for payment unrecorded liabilities
Liabilities account Dr
To bank account
Note: if the unrecorded liabilities are taken over by the new firm then these are to be transferred to the realization account
along with other assets and liabilities
[11] for liabilities assumed by the proprietor
To capital account
[12] for realization expenses

To bank account
[13] for profit on realization

To capital account
[14] for loss on realization

Capital account Dr
[15] for accumulated profit or reserves

Reserves account Dr
Accumulated profit account Dr
To capital account
[16] for accumulated loss

Capital account Dr
To loss account
[17] for settlement of purchase consideration by the new firm

Capital in the new firm account Dr
To new firm account
[18] for final adjustment

Capital account Dr
To capital in the new firm account
To bank account (if any)
Accounting entries in the books of the new firm

The new firm records all assets and liabilities at the values it has decided to take over. If the purchase consideration
payable is more than the net assets taken over (net assets= assets minus liabilities), it represents goodwill. Conversely if the
purchase consideration is less than the net assets taken over then it represents capital reserve.
[1] if the net assets taken over are equal to the purchase consideration, the following entry is passed
Assets account Dr [acquired value]
To liabilities account [assumed value]
To partners capital account [purchase consideration]
[2] if the net assets acquired are more than the purchase consideration, it represents capital reserve and the following entry
is passed
To capital reserve account [balance figure]
[3] if the net assets acquired by the new firm are less than the purchase consideration it represents goodwill and the
following entry is passed
Goodwill account Dr [balance figure]
Illustration: A and B are independent business men and their position on 31/12/1997 is reflected in the balance sheet given
below:
Particulars A B Particulars A B
Sundry creditors for purchase 110000 47000 Stock in trade 170000 98000
Sundry creditors for expenses 750 2000 Sundry debtors 89000 37000
Bills payable 12500 - Cash at bank 13000 7500
Capital account 153000 95500 Cash in hand 987 234
Furniture and fittings 2750 1766
Investments 513 --
Both of them desired to form a partnership firm from 1/1/1998 on the following terms and conditions:
[a] the capital of the firm will be Rs 300000 which would be contributed by A and B in 2:1 ratios.
[b] the assets of the individual businesses will be revalued by C and at these values the firm will take them over and it will be
adjusted against the contribution due by A and B.
[c] C gave his valuation report as follows. Assets A—Stock in trade is to be written down by 15% and portion of the sundry
debtors amounting to Rs 9000 is unrealizable and not to be assumed by the new firm. furniture and fittings are to be
revalued at Rs 2000 and investments are to be taken at their market value which is Rs 1000. Assets B—stock in trade is to
be written up by 10% and sundry debtors is to be assumed at 85% of their book value and rest of the assets are to be
assumed at their book value.
[d] the firm is not to assume any creditors other than those made for purchase.
Pass journal entries and prepare balance sheet of the new firm.
Solution:
Journal entries in the books of A
Particulars Debit Rs Credit Rs
Realization account Dr 276250
To stock in trade account 170000
To sundry debtors account 89000
To cash in hand account 13000
To cash at Bank account 987
To furniture and fittings account 2750
To investment account 513
Sundry creditors account Dr 110000

Bills payable account 12500
Creditors for Expenses account Dr 750
To realization account 123250
New firm account Dr 118987


To capital account 750
(Being the creditors for expenses not taken over by the firm transferred to capital account )
Capital account Dr 34763

(Loss on realization )
Capital in the new firm account Dr 118987

To new firm account 118987

To capital in new firm account 118987
Journal in the books of B

To cash in hand account 7500
To cash at Bank account 234

Creditors for Expenses account Dr 2000

(Being the creditors for expenses not taken over by the firm transferred to capital account )

(profit on realization )
Capital in the new firm account Dr 101750

To new firm account 101750

To capital in new firm account 101750
Balance sheet of the firm A and B as on 1/1/1998

Liabilities Rs Assets Rs
Capital account Furniture and fittings 3766
A 200000 Investments 1000
B 100000 Stock in trade 252300
Sundry creditors 157000 Sundry debtors 111450
Bills payable 12500 Cash at bank 99763
Cash in hand 1221
Working notes
Calculation of purchase consideration:
Particulars A B
Assets taken over:
Stock in trade 144500 107800
Sundry debtors 80000 31450
Cash at bank 13000 7500
Cash in hand 987 234
Furniture and fittings 2000 1766
Investments 1000 -
[A] Total assets taken ------------ -----------
241487 148750
------------ -----------
Liabilities assumed
Sundry creditors for purchase 110000 47000
Bills payable (as for purchase only) 12500 -
----------- ----------
[B] total liabilities assumed 122500 47000
------------ -----------
Purchase consideration [A] – [B] 118987 101750
Less: capital to me maintained 200000 100000
------------ ----------
Cash to be introduced (-) and cash to be withdrawn (+) (-)81013 (+)1750
====== ======
[2] Cash at bank account (in the books of the firm)

Particulars Rs Particulars Rs
To balance b/d (A+B) 20500 By B’s capital account 1750
To A’s capital account 81013 By balance c/d 99763
Illustration: Mr. Water and Mr. Fall carry on business individually and on 1/1/1998 they decided to form into a partnership
firm on the following terms and conditions:
[a] each partner shall have a fixed capital of Rs 10000

[b] Water’s stock is to be brought in at Rs 3250 and Fall’s stock is to be brought in at Rs 2750 as per valuation.
[c] the reserve for bad debts is to be increased to 6% on debtors.
[d] Fall is to dispose off his furniture and fittings to his best advantage
[e] Any deficiency on the net asset brought in is to be paid into firm’s bank account
The balance sheet of both of them on 31/12/1997 is as follows
Balance sheet of Mr. Water
Sundry creditors 1810 Office furniture and fittings 350
Capital account 10625 Plant and machinery 5000
Stock 3400
Sundry debtors 2750
Less: provision 120 2630
Cash at bank 980
Cash in hand 75
Balance sheet of Mr. Fall

Capital account 10133 Plant and machinery 5500
Stock 2800
Sundry debtors 3025
Cash at bank 765
Cash in hand 45
Pass journal entries to adjust the value of the assets before amalgamation and prepare the balance sheet of the new firm.
Solution:
Working notes:
Statement showing additional cash to be brought in or withdrawn
Value of net assets taken over Water Fall
Office furniture and fittings 350 -
Plant and machinery 5000 5500
Stock 3250 2750
Sundry debtors 2750 3025
Cash at bank 980 765
Cash in hand 75 45
----------- ----------
12405 12085
Less: liabilities taken over
Creditors 1810 2102
Provision for bad debts 165 181
---------- ---------
Net assets taken over 10430 9802
Less: Capital in the new firm 10000 10000
---------- -----------
Additional cash to be withdrawn or brought in +ve/-ve +430 -198
====== ======
Journal entries in the books of M/s. Water & Co.

Particulars Debit Credit
To stock account (3400-3250) 150
To provision for debtors (old – new) 45

To bank account 430
Journal entries in the books of M/s. Fall & Co.
Particulars Debit Credit
To stock account (2800-2750) 50
To provision for debtors (old – new) 81
Bank account Dr
To capital account
Balance sheet of M/s. Water Fall & Co. as on 1/1/1998
Capital account Plant and machinery 10500
Water 10000 Stock 6000
Fall 10000 Sundry debtors 5775
Cash at bank (980+765+198-430) 1513
Cash in hand 120
[B] WHEN AN EXISTING PARTNERSHIP FIRM ABSORBS A SOLE PROPIRETORSHIP
When a partnership firm absorbs a sole proprietorship, the original sole proprietor gets dissolved and compensated
by a share in the partnership firm acquiring it. In this case the sole proprietorship goes into liquidation and its assets and
liabilities are taken over by the existing firm at agreed values. To close the existing set of books following steps are followed:
values.
The following important points are to be noted

[1] the assets and liabilities of sole proprietorship which are taken over by the firm are added to the respective assets and
liabilities of the firm.
[2] the capital of the new partner (sole proprietor) is the value of the purchase consideration agreed up on.
[3] if the purchase consideration is less than the net assets taken over by the firm then the difference is to be taken as capital
reserve and if the purchase consideration is more then the net assets taken over then the difference is goodwill.
[4] Before amalgamation all assets and liabilities of the firm are to be revalued and any profit or loss on the revaluation is to
be transferred to old partners in the old ratio.
[5] Goodwill of the firm is to be d\adjusted to the old partner’s capital account by crediting them in old ratio.
[6] Balance of the reserve and profits are also to be credited to the old partner’s capital account in the old profit sharing ratio.
Illustration: following is the balance sheet of partner X and Y who share the profit and loss in the ratio of their capital and sole
proprietor Z as on 31/12/1997
Particulars X&Y Z Particulars X&Y Z
Capital 10000 Goodwill - 2000
X 15000 -- Building 25000 -
Y 5000 -- Stock 10000 15000
Creditors 26000 13000 Bills receivable 5000 5000
Loan - 5000 Debtors 4000 6000
Cash 2000 -
The partners agreed to admit Z as a partner and to amalgamate his business with that of the firm on the following terms:
[1] the new profit sharing ratio will be in the ratio of their capital
[2] the building is to be appreciated by Rs 15000 and provision of 5% is to be created on debtors.
[3] the goodwill of the partnership is to be put at Rs 10000 and of the sole proprietor at Rs 1500. both of them are to be
recorded in the books.
[4] stock of the firm is to be taken at Rs 9200 and that of the sole proprietor is to be taken at Rs 16800.
You are required to prepare ledger account in the books of Z and pass necessary journal entries in the books of X and Y and
prepare the balance sheet of the new firm.
Solution: working notes
Calculation of purchase consideration
Particulars Rs Rs
Assets taken over
Goodwill 1500
Stock 16800
Debtors 6000
Bills receivable 5000 29300
Less: liabilities taken over
Creditors 13000
Loan 5000
Provision for debtors 300 18300
Purchase consideration 11000
In the books of Z
Realization account
To goodwill account 2000 By creditors 13000
To stock account 15000 By loan 5000
To bills receivable 5000 By partner X and Y 11000
To debtors 6000
To capital account – profit 1000
In the books of partners X and Y

Building account Dr 15000
To revaluation account 15000
(Being value of the building appreciated by Rs 15000)
Revaluation account Dr 1000

To stock account 800
To provision for debtors 200

To X’s capital account 10500
To Y’s capital account 3500
(Being profit on revaluation of assets transferred to partners account in capital ratio)
Goodwill account Dr 10000

(Being goodwill raised in the books)
1500
Stock account Dr 6000
Bills receivable account Dr 5000
Debtors account Dr
To creditors account 5000
To Loan account 13000
To provision for bad debts account 300
To Z’s capital account 11000
Balance sheet of the new firm after absorption

Capital account Goodwill (10000+1500) 11500
X (15000+10500+7500) 33000 Buildings (25000+15000) 40000
Y (5000+3500+2500) 11000 Stock (9200+16800) 26000
Z 11000 Bills receivable 10000
Creditors 39000 Debtors (6000+4000) 10000
Loan 5000 Less: provision @ 5% 500 9500
Cash in hand 2000
[C] WHEN ONE EXISTING PARTNERSHIP FIRM ABSORBS ANOTHER PARTNERSHIP FIRM
In this case the purchase consideration is shared by the partners of the selling firm in the ratio of their interest in the
old business. At the time of closing the books of account all reserves and surpluses are to be transferred to partner’s capital
account in the old profit sharing ratio. To close the existing set of books following steps are followed:
values.
The following points are important:
[1] the assets and liabilities of the liquidating firm are added to the respective heads in the existing firm
[2] if the purchase consideration is less than the net assets taken over by the firm then the difference is to be taken as capital
reserve and if the purchase consideration is more then the net assets taken over then the difference is goodwill.
Illustration: the balance sheet of partners PQ and RS as on 31/12/1997 are as follows:
Particulars PQ RS Particulars PQ Rs
Capital Machinery 60000 20000
P 60000 - Furniture 8000 6000
Q 30000 - Stock 32000 24000
R - 36000 Debtors 18000 30000
S - 24000 Investment - 18000
Bank loan 10000 - Cash 12000 2000
Bills payable 30000 40000
PQ absorbed RS in the following terms

[1] the value of the goodwill of RS will be Rs 12000
[2] the investment of Rs is to be sold and the amount realized will be introduced in the acquiring business, investments
realized Rs 24000
[3] the stock of RS to be reduced to Rs 22000
[4] the machinery of RS will be increased by 40%
[5] furniture and fittings of RS will be reduced by 10%
It was further decided for PQ that following adjustments are to be made
[1] assets are to be revalued as follows:
[a] Goodwill Rs 16000; Stock Rs 40000; Machinery Rs 84000; furniture Rs 7200
[2] bank loan is to be repaid.
Prepare ledger account to close the books of RS and pass necessary journal entries in the books of PQ and prepare balance
sheet after absorption.
Solution: working notes
Calculation of purchase consideration
Particular Rs Rs
Assets taken over
Goodwill 12000
Stock 22000
Machinery 28000
Furniture 5400
Debtors 30000
Cash (2000+24000) 26000 123400
Liabilities assumed:
Purchase consideration 83400
In the books of RS
Realization account
To machinery 20000 By bills payable 40000
To furniture 6000 By PQ account (purchase consideration) 83400
To stock 24000
To debtors 30000
To cash 26000
To partners capital account
R 8700
S 8700
PQ account
To realization account 83400 By capital in PQ account 83400
Cash account
To balance b/d 2000 By realization account 26000
Partner’s capital account

Particulars R S Particulars R S
To capital in PQ account (b/f) 47700 35700 By balance b/d 36000 24000
By profit on sale of investment 3000 3000
By realization account 8700 8700
In the Books of PQ
Journal entries Dr Cr
Particular Rs Rs
Machinery account Dr 24000
To revaluation account 32000

To furniture account 800

To P’s capital account 15600
To Q’s capital account 15600
Bank loan account Dr 10000

To cash account 10000

To P’s capital account 8000
To Q’s capital account 8000

Debtors account Dr 30000
Cash account Dr 26000
Furniture account Dr 5400
To bills payable account 40000
To R’s capital account 47700
To S’s capital account 35700
Particulars R S Particulars R S
To balance b/d 83600 53600 By balance b/d 60000 30000
By goodwill 8000 8000
By profit on revaluation 15600 15600
Balance sheet of the new firm as on 1/1/1998
Capital account Goodwill 28000
P 47700 Machinery (84000+28000) 112000
Q 35700 Furniture (5400+7200) 12600
R 83600 Stock(22000+40000) 62000
S 53600 Debtors(18000+30000) 48000
Bills payable 70000 Cash (26000+12000-10000) 28000
[D] WHEN TWO OR MORE PARTNERSHIP FIRM FORMS A NEW PARTNERSHIP FIRM
When two or more partnership firm amalgamate to a new firm, the books of both the firms are to be closed and the
assets and liabilities of both the firm are to transferred to the realization account at their book value.
ACCOUNTING ENTRIES IN THE BOOKS OF THE AMALGAMATING FIRM

1] For transferring different assets to realization account


New firm account Dr

Capital account Dr
Bank account Dr

Assets account Dr
To capital account

Bank account Dr

To bank account

Capital account Dr
To bank account
[11] For liabilities assumed by the partners

[12] For realization expenses

To bank account


Partners Capital account Dr

Reserves account Dr

To loss account
[17] for transferring the current account of the partners

Partners current account Dr

Partner’s Capital in the new firm account Dr
To new firm account

To partner’s capital in the new firm account
Illustration: A: B=1:2 and X: Y= 1:1. both amalgamate on 1/1/1998, on this date the balance sheet of both the firms are as
follows:
B’s capital account 19000 Plant and machinery 10000
Sundry creditors 10000 Stock in trade 20000
Bank over draft 15000 Sundry debtors 10000
A’s capital account 4000
X’s capital account 10000 Goodwill 5000
Y’s capital account 2000 Stock in trade 5000
Sundry creditors 9500 Sundry debtors 10000
Cash in hand 1500
Following further information is available:
[1] All fixed assets are to be devalued by 20%
[2] All stock in trade is to be appreciated by 50%
[3] AB firm owes Rs 5000 to XY, this debts is settled at Rs 2000.
[4] goodwill is to be ignored for the purpose of amalgamation
[5] the fixed capital account in the new firm will be: A—Rs 2000; B—Rs 3000; X—Rs 1000; Y—Rs 4000
[6] B takes over the bank over draft of AB and gifts to A the amount to be brought in by A to make his capital contribution
[7] X is paid off out of cash of XY and Y brings in sufficient cash to make up his required capital contribution.
Pass necessary journal entries in the books of both the firm as on 31/12/1997.
Solution:
Journal entries in the books of AB and Co.
Particular Rs Rs
To plant and machinery account 10000

Bank over draft account Dr 15000

To B’s capital account 15000
(Being bank over draft is taken over by B)


To A’s capital account 3667
(Being profit on realization transferred to the capital account of the partners)
B’s capital account Dr 2333

(Being the share of A’s capital shared by B)
A’s capital account Dr 2000

To capital in the new firm 41000
Journal entries in the books of XY
Particular Rs Rs
To good will account 5000


X’s capital account Dr 2750

Y’s capital account Dr 2750

Y’s capital account Dr 4000
To capital in the new firm 5000
Journal account in the books of new firm

Particulars Rs Rs
B’s capital account 36000
To B’s loan account 36000
(being excess capital of Be transferred to loan account )
Plan and machinery account Dr 8000

Stock in trade account Dr 37500
Sundry debtors account Dr 17000
To sundry creditors account 16500
To B’s loan account 36000
To Y’s loan account 4000
Balance sheet of the new firm after amalgamation

Capital account Plant and machinery 8000
A 2000 Stock in trade 37500
B 3000 Sundry debtors 17000
X 1000
Y 4000
Creditors 16500
B’s loan account 36000
Working notes:
[1] computation of purchase consideration
Particulars AB XY
Assets taken over
Plant and machinery 8000 -
Stock in trade 30000 7500
Sundry debtors (XY= 10000-3000) 10000 7000
Less: liabilities assumed 48000 14500
Sundry creditors (AB= 10000-3000) (7000) (9500)
41000 5000
Realization account
Particulars AB XY Particulars AB XY
To plant and machinery 10000 - By creditors account 10000 9500
To stock in trade 20000 5000 By new firm account 41000 5000
To sundry debtors 10000 10000 By capital account
To goodwill account - 5000 X - 2750
To partners capital account Y - 2750
A 3667 -
B 7333 -

Particulars A B X Y Particulars A B X y
To balance b/d 4000 - - By balance b/d - 19000 10000 2000
To realization account - - 2750 2750 By realization 3667 7333 - -
To A’s capital - 2333 - - By B’s capital account* 2333 - - -
To new firm account 2000 39000 1000 4000 By bank over draft 15000 - -
To cash account - - 6250 - By cash - - 4250
Note:
The capital balance of B in new firm is Rs 3000 only, but his capital account shows Rs 39000. As there is no liquid
asset in the firm of AB, the new firm should transfer Rs 36000 (39000-3000), to a loan account.
The new capital of A in the new firm is Rs 2000 but his debit balance is Rs 333 at the time of amalgamation so, as
promised B has to contribute Rs 2333 to make A’s capital
Illustration: 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:
[1] the new firm AC and Co. is to pay Rs 12000 to each of the firm for Goodwill
[2] the new firm is to take over the investment at 10% depreciation, land at Rs 66800, premises at Rs 53000, machinery at
Rs 9000 and only the trade liabilities of both of the firms. Debtors being taken over at the book value.
[3] Typewriters of C and Co. at written down value Rs 800 not recorded in the balance sheet is also not taken over by the
new firm.
[4] Bills payable pertain to trade transactions only
[5] all the four partners are to bring in Rs 160000 as capital in the new firm in equal shares
The following were the balance sheet of both the firms on the date of amalgamation
Particulars A & Co C & Co. Particulars A & Co C & Co.
Trade creditors 20000 10000 Cash 15000 12000
Bills payable 5000 - Investment 10000 8000
Bank over draft 2000 10000 Debtors 10000
A’s loan 6000 - Less: provision 1000 9000 4000
Capital Furniture 12000 6000
A 35000 - Premises 30000 -
B 22000 - Land - 50000
C - 36000 Machinery 15000 -
D - 20000 Goodwill 9000 -
General reserve 8000 3000
Investment fluctuation reserve 2000 1000
Pass journal entries in the books of both the amalgamating firms and the new firm and prepare the balance sheet of the new
firm.
Solution:
Journal entries in the books of A and Company
Particulars Rs Rs
To debtors account 10000
To premises account 30000
To machinery account 15000
To goodwill account 9000
Provision for bad debts account Dr 1000

Bills payable account Dr 5000
AC. & Co. account Dr 80000


(being furniture distributed equally)

General reserve account Dr 8000

Investment fluctuation reserve account Dr 2000
A’s loan account Dr 6000



Capital in AC. & Co. Account Dr 80000
To AC. & Co. Account 80000
A’ capital account Dr 40000

To capital in AC. & Co. account 80000
Journal entries in the books of C & Co.

Particulars Rs Rs
To debtors account 4000
To land account 50000
Provision for bad debts account Dr 1000

Bills payable account Dr 10000
AC. & Co. account Dr 40000

C’s capital account Dr 3400

D’s capital account Dr 3400
(being furniture and typewriter distributed equally)

General reserve account Dr 3000

Investment fluctuation reserve account Dr 1000
To C’s capital account 2000
To D’s capital account 2000

C’s capital account Dr 9000

Capital in AC. & Co. Account Dr 80000

To AC. & Co. Account 80000
C’ capital account Dr 40000

D’s capital account Dr 40000
To capital in AC. & Co. account 80000
Journal entries in the books of AC & Co.

Particulars Rs Rs
Goodwill account Dr (Balance figure) 37000
Investment account Dr 16200
Land account Dr 66800
Premises account Dr 53000
To Trade creditors account 30000
To Bills payable account 5000
To Provision for debtors account 1000
To C’s capital account 40000
Balance sheet of AC. & Co.
A’s capital account 40000 Goodwill account 37000
B’s capital account 40000 Investment account 16200
C’s capital account 40000 Land account 66800
D’s capital account 40000 Premises account 53000
Sundry creditors 30000 Machinery account 9000
Bills payable 5000 Debtors account (Less RBD Rs 1000) 13000s
Working notes:
Calculation of goodwill or capital reserve after amalgamation
Particulars A & Co. C & Co.
Assets taken over
Goodwill 12000 12000
Investment 9000 7200
Land - 66800
Premises 53000 -
Machinery 9000 -
Debtors 9000 4000
92000 90000
Less liabilities taken over
Trade creditors 20000 10000
Bills payable 5000 -
Net assets taken over 67000 80000
Less: purchase consideration 80000 80000
Goodwill -ve / +ve capital reserve -13000 -
Realization account
Particulars A &Co. C & Co. Particulars A &Co. C & Co.
To investment account 10000 8000 By provision for bad debts 1000 -
To debtors account 10000 4000 By trade creditors 20000 10000
To furniture account 12000 6000 By bills payable 5000 -
To premises account 30000 - By M/s. AC. & Co. 80000 80000
To land account - 50000 By A’s capital account (WN 1) 6000 3000
To machinery account 15000 - By B’s capital account (WN 1) 6000 3000
To goodwill account 9000 - By C’s capital account (WN 2) - 400
To A’s capital account 16000 - By D’s capital account (WN 2) - 400
To B’s capital account 16000 -
To C’s capital account - 14000
To D’s capital account - 14000
Particulars A B Particulars A B
To realization account 6000 6000 By balance b/d 35000 22000
To capital in AC& Co. 40000 40000 By realization account 16000 16000
To cash account (final 16000 - By A’s loan account 6000 -
settlement) By general reserve account 4000 4000
By investment fluctuation reserve 1000 1000
By cash account (final settlement) - 3000
Particulars C D Particulars C D
To realization account 3400 3400 By balance b/d 36000 20000
To capital in AC& Co. 40000 40000 By realization account 14000 14000
To cash account (final 9000 By general reserve account 1500 1500
settlement) By investment fluctuation reserve 500 500
By type writer account (WN3) 400 400
By cash account (final settlement) - 7000
Cash account
Particulars A & Co C & Co. Particulars A & Co C & Co.
To balance b/d 15000 12000 By B’s capital account 16000 -
To B’s capital account 3000 - By bank over draft account 2000 10000
To D’s capital account - 7000 By C’s capital account 9000
[1] The furniture of A & Co. is not taken over by the new firm so it has been distributed among the partners equally.
[2] The furniture and typewriter of C and Co. is not taken over by the new firm so it has been distributed between C and D
equally.
[3] As the typewriter has not been recorded in the books it has to be credited to the capital account
CONVERSION OR SALE OF A PARTNERSHIP FIRM TO A COMPANY
A partnership firm may sell its business to a Joint stock company or it may convert its business into a company. In both the
cases the partnership is dissolved. following point is to be noted;
[1] the purchase consideration is satisfied by the company either in the form of shares or debentures or cash or combination
of two or more 0of these. The shares may be equity or preferential or they may be issued at par or premium or discount. For
the partnership, the issue price is relevant which may form part of purchase consideration.
[2] in the absence of any agreement the share received from the company are to be distributed in the profit sharing ratio.
ACCOUNTING ENTRIES IN THE BOOKS OF THE SELLING FIRM

1] For transferring different assets to realization account


New firm account Dr

Capital account Dr
Bank account Dr

Assets account Dr
To capital account

Bank account Dr

To bank account

Capital account Dr
To bank account
[11] for liabilities assumed by the partners
[12] for realization expenses

To bank account



Reserves account Dr

To loss account
[17] for transferring the current account of the partners

Partners current account Dr

Shares in purchasing company account Dr
Debentures in purchasing company account Dr
Cash account Dr
To purchasing company account

To Shares in purchasing company account
To Debentures in purchasing company account
To Cash account
ACCOUNTING ENTRIES IN THE BOOKS OF THE PURCHASING COMPANY

The purchasing company will record all the assets and liabilities of the firm at the values at which it agreed to take
over. If the purchase consideration is more than the net assets taken over by the company then the difference will be
considered as goodwill and if the purchase consideration is less than the net assets then the difference will be taken as the
capital reserve.
For assets and liabilities taken over

Goodwill account Dr [balance figure]
To liabilities account [acquired value
To share capital account [face value of the shares issued]
To share premium account [if any]
Illustration: Star and Moon carrying on business independently. They agreed to amalgamate and form a new company
Neptune Ltd. With an authorized capital of Rs 200000 divided into 40000 equity shares of Rs 5 each. On 31/12/1995, the
respective balance sheet of Star and Moon were as follows:
Particulars Star Moon
Fixed assets 317500 182500
Current assets 163500 83875
481000 266375
Less: current liabilities 298500 90125
Representing capital 182500 176250
Additional information:
[a] Revalued figures of fixed assets and current assets were as follows:
[b] the debtors and creditors include Rs 21,675 owned by Star to Moon
The purchase consideration is satisfied by the issue of the following shares and debentures
[1] 30000 equity shares of Neptune Ltd. to star and Moon in the proportion of their profitability of their respective business
on the average net profit of last three years which were as follows:
1993 profit 224788 136950
1994 (Loss)/ profit (1250) 171050
1995 profit 188962 179500
[2] 15 % debentures in Neptune Ltd. At par to provide an income equivalent to 8% return on capital employed in their
respective capital as on 31/12/1995 after revaluation of assets. Compute the number of share and debentures to be issued
and show balance sheet of Neptune Ltd. after amalgamation.
Solution:
Statement showing the issue of number of Shares and Debentures
[1] average profit
Star Rs[ 224788-1250+188962] / 3 137500 -
Moon Rs[ 136950+171050+179500] / 3 - 162500
[2] equity shares to be issued

[a] Ratio of distribution 1375 1625
[b] No. Of shares (30000 in 1375: 1625 ratio) 13750 16250
[c] amount of shares @ Rs 5 each 68750 81250
[3] capital employed after revaluation of assets and liabilities

504750 273875
Less: current liabilities 298500 90125
Capital employed 206250 183750
[4] debentures to be issued

8% return on capital employed 16500 14700
Amount of 15 % debentures to be issued to yield equivalent income
Star : 16500 X 100/ 15 110000
Moon: 14700 X 100/15 98000
Computation of purchase consideration

Particulars Star Moon Total
Equity shares issued 68750 81250 150000
15 % debentures 110000 98000 108000
178750 179250 258000
Computation of capital reserve / Goodwill

Particulars Star Moon Total
Net assets taken over
Fixed assets 355000 195000 550000
Current assets 149750 *57200 206950
504750 252200 756950
Less: Current liabilities **276825 90125 366950
227925 162075 390000
Less: purchase consideration 178750 179250 358000
Goodwill - ve - -17175 -
Capital reserve + ve 49175 - -
Final figure Goodwill -ve / Capital reserve +ve 32000
Balance sheet of Neptune Pvt. Ltd. As on 31/12/1998

Share capital Fixed assets 550000
Authorized:
40000 equity shares @ Rs 5 Each 200000 Investments Nil
Issued and subscribed:
30000 equity shares @ Rs 5 Each 150000 Current assets, loans and advances
Current assets 366950
Reserves and Surplus Miscellaneous expenditures Nil
Capital reserve 32000
Secured loan
15% Debentures 108000
Unsecured loans Nil
Current liabilities and provisions

Current liabilities 366950
Illustration: A: B: C= 5:3:2. The trail balance of the firm on 31/03/1998 was as follows.
Debit balance Rs Credit balance Rs
Machinery at cost 100000 Sundry creditors 64700
Stock 68700 Bills payable 20000
Sundry debtors 62000 Capital account
Drawings A 68000
A 25000 B 45000
B 23000 C 23000
C 17000 Depreciation on machinery 40000
Cash at bank 89300 Profit for the year ended 31/03/1998 124300
Interest on capital at 10% p.a. on the balance at beginning of the year was not provided before preparing the above trial
balance. On 1/4/1998 they formed a private company with an authorized capital of Rs 200000 in shares of Rs 10 each to be
divided in different class to take over the partnership business. You are informed as under:
[1] Machinery is to be transferred at Rs 70000
[2] shares in company are to be issued to the partners at par, in such a number and class as will give the partners by reason
of their share holdings alone, the same rights as regards interest on capital and the sharing of profit and loss as they had in
partnership.
[3] before transferring the business to the company the partners decided to draw cash to bring the bank balance to Rs
50000. for this purpose sufficient profit of the year is to be retained in the profit sharing ratio.
[4] all assets and liabilities except machinery and bank balance are to be transferred at book value
Prepare capital account to show the adjustments of dissolution statement showing the numbers and class of share
to be issued to the partners and a statement of additional drawings in cash, the balance sheet of the company immediately
after amalgamation.
Solution:
Profit and loss appropriation account
To interest on capital By Net profit b/d 124300
A—Rs 6800; B—Rs 4500; C—Rs 2300 13600
To share of profit
A—Rs 55350; B—Rs 33210; C—Rs 22140 110700
Statement showing the amount of additional drawings

Particulars Rs
Amount already drawn 65000
Add: to be withdrawn (89300- 50000)= 39300 in 5:3:2 39300
Less: drawings against interest on capital 13600
Maximum amount to be drawn (5:3:2) 90700
Statement showing the amount of drawings in cash

Particulars A B C
Maximum amount to be drawn (5:3:2) 45350 27210 18140
Add: drawings against interest on capital 6800 4500 2300
Total allowable drawings against profit and interest 52150 31710 20440
Less amount already drawn 25000 23000 17000
Additional drawings to be made 27150 8710 3440
Statement showing the distribution of number and class of shares

Particulars Rs Rs
Total assets taken over
Machinery 70000
Stock 68700
Debtors 62000
Bank 50000 250700
Less: liabilities assumed
Creditors 64700
Net assets taken over or purchase consideration 166000
Refer note first
10% preference shares to be issued (136000) 136000
A—Rs 68000; B—Rs 45000; C—Rs 23000 30000
Balance in equity share in 5:3:2 ratio (30000) 166000
A—Rs 15000; B—Rs 9000; C—Rs 6000
Note:
The above consideration should be distributed in such a way that the partners should get the same amount of
interest as they were getting in the firm including interest on capital. Therefore 10% preference shares are to be issued to
cover the capital so as to give the same amount of interest on capital and capital in the firm and the balance is to be issued
as equity shares in profit sharing ratio.
Realization account
To machinery 100000 By provision for depreciation 40000
To stock 68700 By sundry creditors 64700
To debtors 62000 By bills payable 20000
To bank 50000 By new company account 166000
A 5000
B 3000
C 2000

Particulars A B C Particulars A B C
To drawings 25000 23000 17000 By balance b/d 68000 45000 23000
To additional drawings 27150 8710 3440 By interest on capital 6800 4500 2300
To 10% preference shares 68000 45000 23000 By balance of profit 55350 33210 22140
To equity share capital 15000 9000 6000 By realization account 5000 3000 2000
Balance sheet of the new company as on 31/03/1998

Share capital Fixed assets
Authorized: Machinery 70000
20000 shares of Rs 10 each 200000
Issued and subscribed Investments
10% preference of Rs 10 each 136000 Nil Nil
3000 equity shares of Rs 10 each 30000
Current assets and loans and advances
Reserves and surplus Stock 68700
Nil Nil Debtors 62000
Bank 50000
Current liabilities and provisions
Creditors 64700
Bills payable 20000
Illustration: Ram: Rahim: Rogers= 5:3:2. on 31/12/1997 they decided to float a private company to take over the business.
On this date their balance sheet was as follows:
Creditors 50000 Cash 6000
Capital account Bank 14000
Ram 101000 Debtors (less: provision 2000) 58000
Rahim 151000 Stock 42000
Rogers 133000 Fixed assets at WDV 300000
Expenditure in Relation to R Pvt. Ltd.
Formation expenses 12000
Bank account (note:1) 3000
Note 1: in the name of R Pvt. Ltd. Deposit of par value of 300 shares of Rs 10 each subscribed equally by the partners as
subscribers to the MOA and AOA.
On that date R Pvt. Ltd. Took over the business for the total consideration of Rs 500000 (excluding 300 shares as
subscribers of MOA and AOA). The purchase consideration is to be discharged by the issue of the equity shares at par of
Rs10 each in the profit sharing ratio and 15% debentures of Rs 100 each for surplus capital. The directors of R Pvt. Ltd
revalued the fixed assets at Rs 400000. prepare a statement showing the number of shares and debentures issued by R Pvt.
Ltd to Ram, Rahim and Rogers and journal entries in the books of R Pvt. Ltd to show the take over of the business.
Solution:
Statement showing the distribution of shares and debentures
Particulars Ram Rahim Roger
Capital balance 101000 151000 133000
Add: realization profit 59000 35400 23600
Total capital balance [A] 160000 186400 156600
Profit sharing ratio 5 3 2
Base capital (being minimum) 32000 62133 78300
Adjusted capital [B] 160000 96000 64000
Less: Initial allotment of 300 shares of Rs 10 each 1000 1000 1000
Additional allotment shares of Rs 10 each 159000 95000 63000
Debentures [A-B] of Rs 100 each - 90400 92600
Realization account
To cash 6000 By creditors 50000
To bank account 14000 By provision for debtors 2000
To stock 42000 By new firm account 500000
To debtors 60000
To fixed assets 300000
To formation expenses 12000
Ram 59000
Rahim 35400
Roger 23600
Journal entries in the books of R Pvt. Ltd

Particulars Rs Rs
Bank account Dr 3000
To equity share capital account 3000
Goodwill account Dr (balancing figure) 18000

Fixed assets account Dr 400000
Preliminary expenses account Dr 14000
Bank account Dr 6000
To provision for debtors account 2000
To creditors account 50000
To equity share capital account 318000
To 15% debentures account 182000

Partnership Formation and Firm Amalgamation

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Partnership Formation and Firm Amalgamation

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PATNERSHIP—AMALGAMATION OF FIRMS AND CONVERSION / SALE TO A COMPANY

[A] WHEN TWO OR MORE PROPRIETORS FORM A NEW PARTNERSHIP:

Accounting entries in the books of the amalgamating sole proprietors

[1] For transferring different assets to realization account

[2] for transferring different liabilities to realization account

[3] for purchase consideration

[4] for assets taken over by the proprietor

[6] for recording unrecorded assets

[7] for realization of unrecorded assets

[8] for payment of liabilities not taken over

[9] for recording unrecorded liabilities

[12] for realization expenses

[13] for profit on realization

[14] for loss on realization

[15] for accumulated profit or reserves

[16] for accumulated loss

[17] for settlement of purchase consideration by the new firm

[18] for final adjustment

Accounting entries in the books of the new firm

Sundry creditors account Dr 110000

New firm account Dr 118987

Realization account Dr 750

Capital account Dr 34763

Capital in the new firm account Dr 118987

Capital account Dr 118987

Journal in the books of B

Sundry creditors account Dr 47000

New firm account Dr 101750

Realization account Dr 4250

Capital in the new firm account Dr 101750

Capital account Dr 101750

Balance sheet of the firm A and B as on 1/1/1998

[2] Cash at bank account (in the books of the firm)

[a] each partner shall have a fixed capital of Rs 10000

Balance sheet of Mr. Fall

Journal entries in the books of M/s. Water & Co.

Capital account Dr 430

The following important points are to be noted

In the books of partners X and Y

Revaluation account Dr 1000

Revaluation account Dr 14000

Goodwill account Dr 10000

Balance sheet of the new firm after absorption

PQ absorbed RS in the following terms

Partner’s capital account

Revaluation account Dr 800

Revaluation account Dr 31200

Bank loan account Dr 10000

Goodwill account Dr 16000

Goodwill account Dr 12000

ACCOUNTING ENTRIES IN THE BOOKS OF THE AMALGAMATING FIRM

[2] for transferring different liabilities to realization account

[3] for purchase consideration

[4] for assets taken over by the proprietor

[6] for recording unrecorded assets

[7] for realization of unrecorded assets

[8] for payment of liabilities not taken over

[9] for recording unrecorded liabilities

[11] For liabilities assumed by the partners

[12] For realization expenses

[13] for profit on realization

[14] for loss on realization