Lecture 5 28th Nov

1
ACT 3121Intermediate Financial Accounting 1G -
2

• Lecture 5 (28th Nov)
• 1 hrs

2
(A) Dissolution of partnership

• Simply means
• The cessation of trading
• The disposal of the partnership assets
• The division of the remaining cash between the
  partners
• 3 main points to remember
• All ASSETS must be sold or otherwise disposed of
• All CREDITORS must be paid in full
• AMOUNT DUE to each partner must be paid

3
Partnership Act 1961

• Dissolution by expiration or notice sect. 34
• Dissolution by bankruptcy, death or charge sect.
  35
• Dissolution by illegality of partnership sect.
  36
• Dissolution by the court sect.37
• subject to Partnership Agreement

4
The Accounting Procedure

• Dispose of ALL assets total vs. balance
  method (Realisation a/c)
• Settle ALL liabilities / pay ALL creditors
• Close Realisation a/c
• Close partners Current a/c
• Close partners Capital a/c ? payment to partners

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(1) Disposal of assets

• Sell
• total method close EACH asset a/c and
  transfer to the Realisation a/c before recording
  any sales of assets
• Cr. Asset a/c , Dt. Realisation a/c
• Dt. Bank a/c , Cr. Realisation a/c
• balance method record sales of assets in
  individual asset a/c before transferring the
  balance to the Realisation a/c
• Dt. Bank a/c , Cr. Asset a/c
• Profit ? Cr. Asset a/c , Dt. Realisation a/c
• Loss ? Dt. Asset a/c , Cr. Realisation a/c

6
Illustration 1

• A and B are partners. On dissolution, the firm
  assets and the realised values show
• Vans 200 250
• Fixtures 300 240
• Total Dt. Realisation a/c 500
• Cr. Vans a/c 200
• Fixtures a/c 300
• Dt. Bank a/c (vans, fixtures) 490
• Cr. Realisation a/c 490

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• Balance
• Dt. Bank a/c 490
• Cr. Vans a/c 250
• Fixtures a/c 240
• Dt. Vans a/c 50
• Cr. Realisation a/c (profit) 50
• Dt. Realisation a/c (loss) 60
• Cr. Fixtures a/c 60
• total loss of 10

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(1) Disposal of assets

• (b) Assets taken over by partners at an agreed
  value in part settlement of whatever amount due
  to him
• either Cr. Asset a/c , Dt. Realisation a/c
• Dt. Partners Capital a/c , Cr. Realisation
• Or Dt. Partners Capital a/c , Cr. Asset
  a/c
• Profit ? Dt. Asset a/c , Cr. Realisation a/c
• Loss ? Dt. Realisation a/c , Cr. Asset a/c

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• Discount allowed / Bad debts on dissolution (
  Debtors a/c )
• Taken as loss on dissolution
• E.g Debtors - 100 , only receive 50 (either
  due to discount given or debt become bad )
• Dt. Bank 50 , Cr. Debtors 50
• Dt. Realisation a/c (loss) , Cr. Debtors 50
• - no need to open any bad debts or discount
  allowed a/cs

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(2) Settling all liabilities

• Creditors for goods or loans
• NEVER a subject to the Realisation a/c
• Entries Dt. Creditors a/c , Cr. Bank a/c
• Note Discounts on payment (the difference)
• Dt. Creditors a/c , Cr. Realisation a/c
• Provision for doubtful debt
• Dt. PFDD a/c , Cr. Realisation a/c
• ( Provision no longer required )

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Illustration 2

• On dissolution, the followings occur
• Creditors 500 - discount received 30
• Provision for doubtful debt 130 no longer
  needed
• Dt. Creditors a/c 500
• Cr. Bank a/c 470
• Realisation a/c 30 (discount)
• Dt. PFDD a/c 130
• Cr. Realisation a/c 130 (no longer needed)

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(3) Closing Realisation a/c

• Are making loss or profit on dissolution?
• Transfer to partners Capital a/c ratio
• Profit Dt. Realisation a/c , Cr. Capital a/c
• Loss Cr. Realisation a/c , Dt. Capital a/c
• Any costs on dissolution should be
• Cr. Bank a/c , Dt. Realisation a/c

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(4) Closing Current a/c

• Transfer all balances to capital a/c

(5) Closing Capital a/c

• Capital a/c balances should equal to what left in
  Bank a/c
• Dt. Partners Capital a/c , Cr. Bank a/c

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Garner vs. Murray

• where a dissolution takes place and where the
  capital account of one of the partners is in
  debit, i.e. he owes money to the firm, and in
  addition the partner is insolvent and thus unable
  to make any payment towards his debt, the amount
  which he owes to the firm must be shared by the
  solvent partners in the ratio of their last
  agreed capitals.