Theory question 107
Partnership Admission, Retirement and DissolutionKalu and Musa decided to dissolve their partnership on 31st December 2022. They shared profit or loss in the ratio of 2:3 respectively. The balance sheet before dissolution was as follows:
Balance sheet as at 31st December 2022
Capital Account: Kalu ₦750,000; Musa ₦675,000 — ₦1,425,000
Current Account: Kalu ₦360,000; Musa ₦195,000 — ₦555,000
Current Liabilities: Creditors ₦300,000; Bank overdraft ₦120,000 — ₦420,000
Total ₦2,400,000
Fixed Assets: Motor vehicle ₦720,000; Machinery ₦450,000; Premises ₦330,000 — ₦1,500,000
Current Assets: Stock ₦600,000; Debtors ₦300,000 — ₦900,000
Total ₦2,400,000
Additional information:
(i) The following assets were realized: Motor vehicle ₦630,000; Machinery ₦600,000; Stock ₦300,000; Debtors ₦225,000
(ii) Kalu and Musa took over the premises for ₦150,000 and ₦135,000 respectively. (iii) The creditors were discharged for ₦240,000 (iv) Dissolution cost amounted to ₦90,000.
You are required to prepare: (a) Realization Account (b) Partners' Capital Account; (c) Bank Account.
Show the model answer
(a) Realization Account (₦):
Dr: Motor vehicle 720,000; Machinery 450,000; Premises 330,000; Stock 600,000; Debtors 300,000; Bank (dissolution cost) 90,000 = 2,490,000
Cr: Bank – motor vehicle 630,000, machinery 600,000, stock 300,000, debtors 225,000 (1,755,000); Kalu's capital (premises) 150,000; Musa's capital (premises) 135,000; Creditors (discount 300,000 − 240,000) 60,000; Loss on realization 390,000 (Kalu 2/5 = 156,000; Musa 3/5 = 234,000) = 2,490,000
(b) Partners' Capital Accounts (₦) — Kalu | Musa:
Cr: Balance b/d 750,000 | 675,000; Current account transferred 360,000 | 195,000 = 1,110,000 | 870,000
Dr: Realization (premises) 150,000 | 135,000; Realization (loss) 156,000 | 234,000; Bank (final payment) 804,000 | 501,000 = 1,110,000 | 870,000
(c) Bank Account (₦):
Dr: Realization (assets sold) 1,755,000
Cr: Balance b/d (overdraft) 120,000; Creditors 240,000; Realization expenses 90,000; Kalu 804,000; Musa 501,000 = 1,755,000
The loss on realization is shared 2:3, then each partner's closing capital is paid out of the bank.