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Conversion From A Partnership To A Limited Company

When a partnership is taken over by a limited company, the partnership is considered as dissolved and the business is sold as a going concern to the limited company. Accounting entries in the Purchaser’s book ( limited company) is similar to the sole trader’s business.

As for the seller or the partnership, it will show a Realization Account, a Purchaser’s Account and a Partners Capital Account. The discharge of purchase consideration by the limited company will close the partnership book.

Refer below:-

Entries in the Partnership’s or Seller’s Book
Transactions Debit Credit
1. Assets transferred at book value Realization A/c Assets A/c
2. Liabilities assumed by purchaser Liabilities A/c Realization A/c
3. Liabilities paid off Liabilities A/c Cash A/c
4. Purchase consideration Purchaser’s A/c Realization A/c
5. Expenses of realization Realization A/c Cash A/c
6. Profit on realization Realization A/c Capital A/c
7. Payments to partners to close the book Capital A/c (a) Shares A/c(b) Debentures A/c(c) Cash A/c
Illustration:Question:

Mr A, Mr B & Mr C are partners who share profits and losses in the ratio of 3:2:1. They have agreed to convert the partnership into a limited company called Aumno Ltd

Balance Sheet of Partnership $
Freehold premises 30,000
Plant & machinery 30,000
Stock 40,000
Bank 20,000
Total Assets 150,000
$
Capital – Mr A 80,000
Capital – Mr B 20,000
Capital – Mr C 20,000
120,000
Trade Payables 30,000
150,000

Other details as follows:

(i) Total purchase consideration is $180,000, payable as follows:

$90,000 in ordinary shares of $1 each fully paid,

$30,000 in 6% preference shares of $1 each fully paid,

$10,000 in 5% debentures and the balance in cash

Questions:

(a) Show the ledger accounts closing the partnership’s book

(b) Show the opening journal entries in Aumno Ltd/ Purchaser’s book

 Answer:

(a) Ledger Accounts in the Partnership’s Book:

                                                                   Realization Account

$

 $
Freehold premises 30,000 Trade Payables 30,000
Plant & machinery 30,000 Aumno Ltd- Purchase consideration 180,000
Stock 40,000
Debtors 30,000
Bank 20,000
Profit on realization:
Capital – Mr A (1/2) 30,000
Capital – Mr B (1/3) 20,000
Capital – Mr C (1/6) 10,000
210,000 210,000

                                 

                                 Purchaser/Aumno Ltd’s Account

$

$
Realization Account 180,000 Ordinary Share 90,000
6% Preference Share 30,000
5% Debenture 10,000
Cash 50,000
180,000 180,000

                                             

                                          Ordinary Share in Aumno Ltd

$ $
Aumno Ltd 90,000 Capital A/c- Mr. A (110/180) 55,000
Capital A/c- Mr. B (40/180) 20,000
Capital A/c- Mr. C (30/180) 15,000
90,000 90,000

                                 

                                         6% Preference Shares in Aumno Ltd

$ $
Aumno Ltd 30,000 Capital A/c- Mr. A (110/180) 18,333
Capital A/c- Mr. B (40/180) 6,667
Capital A/c- Mr. C (30/180) 5,000
30,000 30,000

                                                5% Debenture In Aumno Ltd

$ $
Aumno Ltd 10,000 Capital A/c- Mr. A (110/180) 6,112
Capital A/c- Mr. B (40/180) 2,222
Capital A/c- Mr. C (30/180) 1,666
10,000 10,000

                                                         Cash Account

$ $
Aumno Ltd 50,000 Capital A/c- Mr. A (110/180) 30,555
Capital A/c- Mr. B (40/180) 11,111
Capital A/c- Mr. C (30/180) 8,334
50,000 50,000

                                                        Partners Capital Account

Mr.A Mr. B Mr.C Mr.A Mr. B Mr.C
Ordinary Share          55,000 20,000 15,000 Balance b/f 80,000 20,000 20,000
6% Preference Shares 18,333 6,667 5,000 Realization A/c 30,000 20,000 10,000
5% Debentures 6,112 2,222 1,666
Cash 30,555 11,111 8,334
110,000 40,000 30,000 110,000 40,000 30,000

                                                                                                   (110/180) (40/180) (30/180)

Answer:- (b) Journal Entries in Aumno Limited Company’s Book
JOURNAL Debit Credit
Freehold premises 30,000
Plant and machinery 30,000
Stock 40,000
Debtors 30,000
Bank 20,000
Goodwill 60,000
Trade Payables 30,000
Purchase of Business Account 180,000
210,000 210,000
Being Assets & Liabilities Taken Over From the Partnership of Mr. A, Mr. B & Mr. C
Purchase of Business Account 180,000
Ordinary Share Capital 90,000
6% Preference Share Capital 30,000
5% Debentures 10,000
Cash 50,000
180,000 180,000
Being discharge of Purchase Consideration

This entry was posted on Monday, October 22nd, 2007 at 6:32 pm and is filed under Business Conversion. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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