Sale of Partnership Firm to a Limited Company - Partnership Accounts, Advanced Corporate Accounting B Com Notes | EduRev

Advanced Corporate Accounting

B Com : Sale of Partnership Firm to a Limited Company - Partnership Accounts, Advanced Corporate Accounting B Com Notes | EduRev

The document Sale of Partnership Firm to a Limited Company - Partnership Accounts, Advanced Corporate Accounting B Com Notes | EduRev is a part of the B Com Course Advanced Corporate Accounting.
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Chiefly with the objective of limiting the personal liabilities of the partners, an existing partnership firm may sell its entire business to an existing limited company, or may convert itself into a limited company. The former is the case of absorption of a partnership firm by the joint stock company whereas, the latter is the case of flotation of a new joint stock company so as to take over the business of the partnership firm.

In both of these cases, the existing partnership firm is dissolved and all the books of accounts are closed. Thus when a partnership firm is sold or converted into a company, the same accounting procedure is followed as for simple dissolution of a firm.

The purchase consideration (price) in between the vendor (dissolving) firm and the purchasing company is fixed as mutually agreed upon. It may or may not be specified in a lump sum figure. When it is not specified in a lump sum figure, the difference of agreed values of acquired assets over agreed amount of liabilities are undertaken.

The purchase price is discharged by the purchasing company either in the form of cash or shares (equity or preference) or debentures or a combination of two or more of these. The shares or debentures may be issued by the purchasing company, at par, at a premium or at a discount.

In the absence of any agreement, the shares received from the purchasing company is distributed among partners in the ratio of their final claim i.e. in the ratio of their capital standing after all the adjustments.

When a partnership firm is sold or converted into a company, the practical steps to close the books of the firm are given below:

Entries in the books of converting firm/vendor firm

Step 1: Transfer all recorded assets and liabilities(whether or not taken over by the purchasing company) to the Realization account, except cash and bank balance if not taken over by the purchasing company.

1.1 For transferring recorded assets:

Realization A/C..................Dr.

To sundry assets

1.2 For transferring recorded liabilities

Sundry liabilities..................Dr.

To Realization A/C

Step 2: Make purchase consideration(price) due.

2.1 For purchase price due:

Purchasing company...........Dr.

To Realization A/C

Step 3: If, there remain any assets(whether or not recorded) not taken over by the purchasing company, it may be sold, or may be taken by one of the partners or may be shared among the partners.

3.1 On sale of assets not taken over by the purchasing company:

Bank A/C..................Dr.

To realization A/C

3.2 Such assets taken over by any one of the partners:

Partner's capital A/C...............Dr.

To Realization A/C

3.3 On sharing such assets among the partners:

Partners' capital A/C(capital ratio)............Dr.

To realization A/C

Note: If such unsold assets are considered worthless, they should be shared among the partners in profit sharing ratio.

Step 4: The liabilities (whether or not recorded) by the purchasing company may be discharged or may be assumed by any one of the partners, or must be shared by the partners in their capital ratio.

4.1 On discharge of any liability not taken over by the purchasing company:

Realization A/C .............Dr.

To Bank A/C

If such liability assumed by one of the partners:

Realization A/C...............Dr.

To Partner's capital A/C

If such liability has to be assumed by all partners:

Realization A/C................Dr.

To Partners' capital A/C(capital ratio)

Step 5: When the realization expenses is paid, Realization account is debited.

5.1 For payment of realization expenses:

Realization A/C.............Dr.

To Bank

Step 6: Close the realization account by transferring the balance(profit or loss) to the capital of the partners in profit sharing ratio.

6.1 For profit on realization account:

Realization A/C..............Dr.

To Partners' capital A/C(profit sharing ratio)

6.2 For loss on realization account:

Partners' capital A/C............Dr.

To realization A/C

Step 7: On the receipt of purchase consideration(price), cash/bank account, equity shares in purchasing company or preference shares in purchasing company at their issue prices are debited and purchasing purchasing company's account is credited.

7.1 For the receipt of purchase price:

Cash/bank A/C....................................Dr.

Equity share in purchasing Co...........Dr.

Preference share in purchasing Co....Dr.

Debentures share in purchasing Co...Dr.

To purchasing Co.

Step 8: Transfer all accumulated reserves/profits/losses to the capital accounts of partners in profit sharing ratio.

8.1 For accumulated reserves, profits:

Reserve A/C.................Dr.

Profit and loss A/C.......Dr.

To partners' capital A/C

8.2 For accumulated losses:

Partners' capital A/C.............Dr.

To profit and loss A/C

Step 9: Transfer the current account, if any, in the books, to the capital accounts of the partners.

9.1 For transferring current account to the capital account:

Partners' current Account................Dr.

To partners' capital Account

Step 10: Pay off the partner's loan if any.

10.1 For the payment of partner's loan account:

Partner's loan A/C ..............Dr.

To bank A/C

Step 11: Make final settlement by paying off balances in capital accounts. In the absence of an agreement as to the division of shares(from purchasing company) among partners, such shares are distributed in the ratio of their final claims(i.e. in the ratio of capitals after all the adjustments).

11.1 For final settlement:

Partners' capital A/C ...........Dr.

To equity shares in purchasing Co.

To preference shares in purchasing Co.

To bank A/C

Entries in the books of purchasing company

Assets Account...........................Dr.

Goodwill Account........................Dr.

To liabilities

To share capital

To share premium

(Being assets and liabilities taken over)

Note: In case debit higher than credit, capital reserve is credited.

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