Theory question 107
Partnership Admission, Retirement and DissolutionTaiwo, Kehinde and Alaba has been in partnership sharing profits and losses in the ratio 3:5:2 respectively. Their balance sheet as at 31st October, 2020 on which they decided to dissolve the partnership was as follows:
Taiwo, Kehinde and Alaba Balance Sheet as at 31st October, 2020 (₦)
Capital Accounts: Taiwo 5,512,500; Kehinde 9,712,500; Alaba 4,987,500 = 20,212,500
Current Accounts: Taiwo 551,250; Kehinde 656,250; Alaba 918,750 = 2,126,250
Total 22,338,750
Represented by: Fixed Assets (Cost / Accumulated Depreciation / Net Book Value):
Buildings 11,287,500 / 3,780,000 / 7,507,500
Motor Vehicles 15,750,000 / 6,300,000 / 9,450,000
Furniture 5,250,000 / 1,575,000 / 3,675,000
Totals 32,287,500 / 11,656,000 / 20,632,500
Current Assets: Stock 3,150,000; Debtors 3,150,000 = 6,300,000
Current liabilities: Trade creditors 2,490,000; Bank Overdrafts 2,103,750 = (4,593,750)
Working capital 1,706,250; Total 22,338,750
Dissolution conditions were as follows:
(i) Debtors paid ₦1,895,250 in full settlement of their debts. (ii) Trade discounts received was 3% and the dissolution expenses was agreed to be ₦656,250; (iii) Taiwo took over a motor vehicle with a book value of ₦2,835,000 for ₦2,625,000. The remaining motor vehicles were sold for ₦7,408,800; (iv) Other assets realized: Buildings ₦11,812,500; Furniture ₦4,200,000; Stock ₦2,625,000 (total ₦18,637,500).
You are required to prepare the firm's:
(a) Realization Account;
(b) Partners' Capital Accounts in columnar form.
Show the model answer
(a) Realization Account (₦): Dr Buildings 7,507,500; Motor vehicles 9,450,000; Furniture 3,675,000; Stock 3,150,000; Debtors 3,150,000; Bank – dissolution expenses 656,250; Profit on realization 3,052,500 (Taiwo 3/10 915,750; Kehinde 5/10 1,526,250; Alaba 2/10 610,500) = 30,641,250.
Cr Bank – buildings 11,812,500; motor vehicles 7,408,800; furniture 4,200,000; stock 2,625,000; debtors 1,895,250; Taiwo's capital (motor vehicle) 2,625,000; Creditors – discount received (3% × 2,490,000) 74,700 = 30,641,250.
(b) Partners' Capital Accounts (₦) – Taiwo | Kehinde | Alaba:
Cr Balance b/d 5,512,500 | 9,712,500 | 4,987,500; Current accounts 551,250 | 656,250 | 918,750; Realization profit 915,750 | 1,526,250 | 610,500 = 6,979,500 | 11,895,000 | 6,516,750
Dr Realization (motor vehicle taken) 2,625,000 | – | –; Bank (final settlement) 4,354,500 | 11,895,000 | 6,516,750.
(Bank check: receipts 27,941,550 = overdraft 2,103,750 + creditors 2,415,300 + expenses 656,250 + partners 22,766,250.)
The 3% discount on creditors is a realization gain; Taiwo's vehicle is credited to realization at the agreed price.