Sale of Partnership Firm to a Limited Company - Partnership Accounts, Advanced Corporate Accounting | Accounting for CA Foundation PDF Download

Partnership Firm Conversion to Company

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.

Practical Steps to Close the Books of the Firm

Entries in the books of converting firm/vendor firm

Step 1: Transfer all recorded assets and liabilities

• 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.

For transferring recorded assets:

• Realization A/C..................Dr.
• To sundry assets

For transferring recorded liabilities:

• Sundry liabilities..................Dr.
• To Realization A/C

Step 2: Make purchase consideration (price) due

• Purchasing company...........Dr.
• To Realization A/C

Step 3: If there remain any assets not taken over

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

• Bank A/C..................Dr.
• To realization A/C

Such assets taken over by any one of the partners:

• Partner's capital A/C...............Dr.
• To Realization A/C

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 may be discharged

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

For payment of realization expenses:

• Realization A/C.............Dr.
• To Bank

Step 6: Close the realization account

For profit on realization account:

• Realization A/C..............Dr.
• To Partners' capital A/C (profit sharing ratio)

For loss on realization account:

• Partners' capital A/C............Dr.
• To realization A/C

Step 7: On the receipt of purchase consideration (price)

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

For accumulated reserves, profits:

• Reserve A/C.................Dr.
• Profit and loss A/C.......Dr.
• To partners' capital A/C

For accumulated losses:

• Partners' capital A/C.............Dr.
• To profit and loss A/C

Step 9: Transfer the current account

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

For the payment of partner's loan account:

• Partner's loan A/C ..............Dr.
• To bank A/C

Step 11: Make final settlement

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.