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Chapter 11 Partnership Dissolution (合夥解散) 11.2 Reasons for dissolution and actions required (合夥解散的原因及所需的行動) Reasons (原因): 1 The partnership has been making substantial losses (合夥持續錄得重大虧損).

2 One of the partners is leaving due to ill health or has died (某合夥人因病退出合夥或去世).

3 There are serious conflicts among the partners (合夥人之間出現嚴重分歧).

4 The partnership is converted into a limited company (合夥改組為有限公司).

5 The partnership is taken over by another business (合夥被另一企業收購).

Actions (行動): 1 The assets are to be disposed of (變賣資產): they may be sold to external parties (企業以外的人士), or taken over (接收) by

existing partners (現有合夥人) at agreed values (按議定價值).

2 The liabilities (債務) are to be repaid (償還) to external parties.

3 The partners are to be repaid their loans (償還合夥人的貸款) and advances.

4 The partners are to be repaid the final balances in their capital accounts (歸還合夥人資本帳戶的餘額).

A profit or loss may arise in the disposal of assets and repayment of liabilities (變賣資產和償還債務可能會為合夥帶來損益),

and this should be shared by (攤分) all the partners in their agreed profit and loss sharing ratio (按協定的損益分配比率).

11.3 Accounting entries for dissolution (解散所需的會計分錄) A realisation account (變產帳戶) would be opened to record the transactions arising on dissolution. Example 1 Chan and Lee were partners, sharing profits and losses in the ratio of 2 : 1. The following is the balance sheet of the partnership as at 31 December 2010:

Chan and Lee Balance Sheet as at 31 December 2010

$ $ $ Accumulated Non Current assets Cost depreciation Net book value Office equipment 75,000 35,000 40,000 Motor vehicles 54,000 29,000 25,000

129,000 64,000 65,000

Current assets Inventory 21,000 Accounts receivable 24,000 Less Allowance for doubtful accounts (1,600) 22,400

Bank 10,600

54,000 Less Current Liabilities Accounts payable (23,000)

Net Current assets 31,000

96,000

Financed by: Capital : Chan 30,000 Lee 20,000 50,000

Current: Chan 26,000 Lee 20,000 46,000

96,000

On 1 January 2011, Chan and Lee dissolved the partnership on the following terms:

1 The office equipment and inventory were sold for $48,000 and $27,000, respectively.

2 Receipts from debtors amounted to $20,400.

3 The motor vehicles were taken over by Lee at an agreed value of $22,000, without paying cash for them.

4 Payments to creditors amounted to $21,000 and the discount received is $2,000.

5 Dissolution costs (e.g., legal fees) amounted to $2,600

Name : _________________ Serial No: _____

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1 Transfer the net book value of all the assets (except bank and cash) to the realisation account (把所有資

產(銀行存款和現金除外)的帳面淨值轉到變產帳戶): Dr Realisation account Cr Asset account

Realisation 2011 $ 2011 $ Jan 1 Office equipment (1) 40,000

“ 1 Motor vehicles (1) 25,000

“ 1 Inventory (1) 21,000

“ 1 Accounts receivable (1) 22,400

Office equipment

2011 $ 2011 $ Jan 1 Balance b/f 40,000 Jan 1 Realisation Office equipment (1) 40,000

Motor vehicles

2011 $ 2011 $ Jan 1 Balance b/f 25,000 Jan 1 Realisation Motor vehicles (1) 25,000

Inventory

2011 $ 2011 $ Jan 1 Balance b/f 21,000 Jan 1 Realisation Inventory (1) 21,000

Accounts receivable

2011 $ 2011 $ Jan 1 Balance b/f 22,400 Jan 1 Realisation Accounts receivable (1) 22,400

2 Record the amounts received from the sale of assets or collected from account receivable (記錄出售資

產所得的款項或收回的應收帳款): Dr Cash/Bank account Cr Realisation account

Realisation 2011 $ 2011 $ Jan 1 Office equipment (1) 40,000 Jan 1 Bank Office equipment (2) 48,000

“ 1 Motor vehicles (1) 25,000 “ 1 Bank Inventory (2) 27,000 “ 1 Inventory (1) 21,000 “ 1 Bank Accounts receivable (2) 20,400 “ 1 Accounts receivable (1) 22,400

Bank

2011 $ 2011 $ Jan 1 Balance b/f 10,600

“ 1 Realisation Office equipment (2) 48,000

“ 1 Realisation Inventory (2) 27,000

“ 1 Realisation Accounts receivable (2) 20,400

3 Record the value of assets taken over by partners without immediate payment (記錄由合夥人接收的資

產的議定價值(不用即時付款)): Dr Partners’ capital accounts Cr Realisation account

Realisation 2011 $ 2011 $

Jan 1 Office equipment (1) 40,000 Jan 1 Bank Office equipment (2) 48,000

“ 1 Motor vehicles (1) 25,000 “ 1 Bank Inventory (2) 27,000

“ 1 Inventory (1) 21,000 “ 1 Bank Accounts receivable (2) 20,400

“ 1 Accounts receivable (1) 22,400 “ 1 Capital: Lee - Motor vehicles taken over (3) 22,000

Capital: Lee

2011 $ 2011 $

Jan 1 Realisation Motor vehicles taken over (3) 22,000 Jan 1 Balance b/f 20,000

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4 Record the amounts paid to creditors with discounts received (if any) (記錄償還給債權人的金額及購貨

折扣(如適用)): Dr Creditors’ accounts Cr Cash/Bank account (with the amount of payment) Cr Realisation account (with the amount of discounts received, if any)

Realisation 2011 $ 2011 $ Jan 1 Office equipment (1) 40,000 Jan 1 Bank Office equipment (2) 48,000

“ 1 Motor vehicles (1) 25,000 “ 1 Bank Inventory (2) 27,000 “ 1 Inventory (1) 21,000 “ 1 Bank Accounts receivable (2) 20,400 “ 1 Accounts receivable (1) 22,400 “ 1 Capital: Lee - Motor vehicles taken over (3) 22,000 “ 1 Accounts payable – Discounts received (4) 2,000

Accounts payable

2011 $ 2011 $ Jan 1 Realisation Discounts received (4) 2,000 Jan 1 Balance b/f 23,000

“ 1 Bank (4) 21,000 23,000 23,000

Bank

2011 $ 2011 $ Jan 1 Balance b/f 10,600 Jan 1 Accounts payable (4) 21,000

“ 1 Realisation Office equipment (2) 48,000 “ 1 Realisation Inventory (2) 27,000 “ 1 Realisation Accounts receivable (2) 20,400

5 Record the payment of dissolution costs (realisation expense) (記錄支付解散費用的金額): Dr Realisation accounts Cr Cash/Bank account

Realisation 2011 $ 2011 $ Jan 1 Office equipment (1) 40,000 Jan 1 Bank Office equipment (2) 48,000

“ 1 Motor vehicles (1) 25,000 “ 1 Bank Inventory (2) 27,000 “ 1 Inventory (1) 21,000 “ 1 Bank Accounts receivable (2) 20,400 “ 1 Accounts receivable (1) 22,400 “ 1 Capital: Lee - Motor vehicles taken over (3) 22,000 “ 1 Bank – Dissolution costs (5) 2,600 “ 1 Accounts payable – Discounts received (4) 2,000

Bank

2011 $ 2011 $ Jan 1 Balance b/f 10,600 Jan 1 Accounts payable (4) 21,000

“ 1 Realisation Office equipment (2) 48,000 “ 1 Realisation Dissolution costs (5) 2,600 “ 1 Realisation Inventory (2) 27,000 “ 1 Realisation Accounts receivable (2) 20,400

6 Share the profit or loss on realization among the partners in the profit and loss sharing ratio (按損益分

配比率攤分變產損益給合夥人): (i) When there is a profit on realisation Dr Realisation accounts Cr Partners’ capital accounts (with their share of the profit on realization) (ii) When there is a loss on realisation Dr Partners’ capital accounts (with their share of the loss on realization) Cr Realisation accounts

Realisation 2011 $ $ 2011 $ Jan 1 Office equipment (1) 40,000 Jan 1 Bank Office equipment (2) 48,000

“ 1 Motor vehicles (1) 25,000 “ 1 Bank Inventory (2) 27,000 “ 1 Inventory (1) 21,000 “ 1 Bank Accounts receivable (2) 20,400 “ 1 Accounts receivable (1) 22,400 “ 1 Capital: Lee - Motor vehicles taken over (3) 22,000 “ 1 Bank – Dissolution costs (5) 2,600 “ 1 Accounts payable – Discounts received (4) 2,000 “ 1 Profit on realization – (6) Capital: Chan (2/3) 5,600

Capital: Lee (1/3) 2,800 8,400 119,400 119,400

Capital: Chan

$ 2011 $ Jan 1 Balance b/f 30,000 “ 1 Realisation Share of profit (6) 5,600

Capital: Lee

2011 $ 2011 $ Jan 1 Realisation Motor vehicles taken over (3) 22,000 Jan 1 Balance b/f 20,000 “ 1 Realisation Share of profit (6) 2,800

Usually, the creditors will be settled by the company’s bank account and the double entries should be: Creditors

$ $ Bank 10,000 Balance b/f 12,000 Discounts received 2,000

Bank

$ $ Creditors 10,000

Sometime, one of partners may pay the creditors (whole of partly) by himself. In this case, some or all the amount of

creditors paid by partners will be treated as discounts received (revenue). Realisation

$ $ Accounts payable – Taken over by Paul (21,000x1/2) 10,500 – Discounts received (21,000x1/2x10%) 1,050

Creditors

$ $ Realisation

– Taken over by Paul (21,000x1/2) 10,500 – Discounts received (21,000x1/2x10%) 1,050

However, if the partner pays the creditors on behalf of the company through his bank, We will first debit the creditors

account and credit the capital account. Creditors

$ $ Capital: Ko 6,000

Capital

Lee Ko Ma Lee Ko Ma

$ $ $ $ $ $

Accounts payable 6,000

We will first credit the capital account of the partner to compensate the amount of his paying.

Then debit the realisatiion account to record the payment of creditors.

Finally we need to credit the realization account with the amount of

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7 Transfer the partners’ current account balances to their capital accounts (把合夥人的往來帳戶的餘額

轉到其資本帳戶): (i) For credit balances in current accounts Dr Partners’ current accounts Cr Partners’ capital accounts (with the credit balances in current accounts) (ii) For debit balances in current accounts Dr Partners’ capital accounts (with the debit balances in current accounts) Cr Partners’ current accounts

Current: Chan 2011 $ 2011 $ Jan 1 Capital: Chan (7) 26,000 Jan 1 Balance b/f 26,000

Capital: Chan

2011 $ 2011 $ Jan 1 Balance b/f 30,000 “ 1 Realisation Share of profit (6) 5,600 “ 1 Current: Chan (7) 26,000

Current: Lee

2011 $ 2011 $ Jan 1 Capital: Lee (7) 20,000 Jan 1 Balance b/f 20,000

Capital: Lee

2011 $ 2011 $ Jan 1 Realisation Motor vehicles taken over (3) 22,000 Jan 1 Balance b/f 20,000 “ 1 Realisation Share of profit (6) 2,800 “ 1 Current: Lee (7) 20,000

8 Settle the final balances in the partners’ capital accounts (結算合夥人的資本帳戶的最後餘額): (i) For credit balances in capital accounts Dr Partners’ capital accounts Cr Cash/Bank account (with the credit balances in capital accounts) (ii) For debit balances in capital accounts Dr Cash/Bank account (with the debit balances in capital accounts) Cr Partners’ capital accounts

Capital: Chan 2011 $ 2011 $ Jan 1 Bank – Final settlement (8) 61,600 Jan 1 Balance b/f 30,000 “ 1 Realisation Share of profit (6) 5,600 “ 1 Current: Chan (7) 26,000 61,600 61,600

Capital: Lee 2011 $ 2011 $ Jan 1 Realisation Motor vehicles taken over (3) 22,000 Jan 1 Balance b/f 20,000 Jan 1 Bank – Final settlement (8) 20,800 “ 1 Realisation Share of profit (6) 2,800 “ 1 Current: Lee (7) 20,000 42,800 42,800

Bank 2011 $ 2011 $ Jan 1 Balance b/f 10,600 Jan 1 Accounts payable (4) 21,000

“ 1 Realisation Office equipment (2) 48,000 “ 1 Realisation Dissolution costs (5) 2,600 “ 1 Realisation Inventory (2) 27,000 “ 1 Capital: Chan – Final settlement (8) 61,600 “ 1 Realisation Accounts receivable (2) 20,400 “ 1 Capital: Lee – Final settlement (8) 20,800 106,000 106,000

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Class work 1

1. Bai and Ng were partners, sharing profits and losses in the ratio of 2 : 1. They decided to dissolve their partnership on 31 December 2010. Their final balance sheet as at 31 December 2010 was as follows:

Bai and Ng

Balance Sheet as at 31 December 2010 $ Fixtures (net) 124,000 Office equipment (net) 66,000 Inventory 98,500 Accounts receivable 24,500 Bank 5,000

318,000 Less Accounts payable (27,000)

291,000

Capital: Bai 173,000 Ng 118,000

291,000

The fixtures and the office equipment were sold for $196,000 and $59,000, respectively. Inventory was disposed of for $82,200

and receipts from accounts receivable amounted to0 $23,100. Accounts payable, net of discounts received of $600, were paid off. The cost of dissolution were $6,500.

(a) Name two types of dissolution costs. (b) Draw up the Realisation, Capital and Bank accounts. (a) Legal fees Accountants’ fees Employee severance payments (b)

Realisation $ $ $

Fixtures 124,000 Bank —Fixtures 196,000

Office equipment 66,000 Office equipment 59,000

Inventory 98,500 Inventory 82,200

Accounts receivable 24,500 Accounts receivable 23,100

Bank — Dissolution expenses 6,500 Accounts payable — Discounts received 600 Profit on realization – Capital: Bai (2/3) 27,600

Capital: Ng (1/3) 13,800 41,400

360,900 360,900

Capital

Bai Ng Bai Ng

$ $ $ $

Bank—Final settlement 200,600 131,800 Balances b/d 173,000 118,000

Realisation—Share of profit 27,600 13,800

200,600 131,800 200,600 131,800

Bank

$ $

Balance b/f 5,000 Accounts payable (27,000 – 600) 26,400

Realisation —Fixtures 196,000 Realisation—Dissolution expenses 6,500

Office equipment 59,000 Capital – Final settlement

Inventory 82,200 Bai 200,600

Accounts receivable 23,100 Ng 131,800

365,300 365,300

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2. Kwan and Wong were partners, sharing profits and losses equally. They decided to dissolve their partnership on 31 March 2009. Their final balance sheet as at that date was as follows:

Kwan and Wong

Balance Sheet as at 31 March 2009

$ $ Equipment (net) 80,000 Capital account: Kwan 200,000 Furniture and fixtures (net) 85,000 Wong 150,000

Accounts receivable 280,000 350,000 Cash 180,000 Accounts payable 275,000

625,000 625,000

The accounts receivable were realized for $270,000. The equipment and the furniture and fixtures were sold for $40,000 and

$95,000, respectively. The costs of dissolution were $10,000 and discounts totaling $20,000 were received on the settlement of accounts payable.

(a) Suggest two possible reasons for the dissolution of a partnership. (b) Prepare the Realisation, Capital and Cash accounts. (a) The partnership has been making substantial losses One of the partners is leaving due to ill health or has died. (b)

Realisation $ $ $ $

Equipment 80,000 Cash —Equipment 40,000

Furniture and fixtures 85,000 Furniture and fixtures 95,000

Accounts receivable 280,000 Accounts receivable 270,000

Cash — Dissolution costs 10,000 Accounts payable — Discounts received 20,000 Loss on realization – Capital: Kwan (1/2) 15,000

Capital: Wong (1/2) 15,000 30,000

455,000 455,000

Capital

Kwan Wong Kwan Wong

$ $ $ $

Realisation—Share of loss 15,000 15,000 Balances b/d 200,000 150,000

Cash—Final settlement 185,000 135,000

200,000 150,000 200,000 150,000

Cash

$ $

Balance b/f 180,000 Accounts payable (275,000 – 20,000) 255,000

Realisation —Equipment 40,000 Realisation—Dissolution costs 10,000

Furniture and fixtures 95,000 Capital: Kwan (settlement) 185,000

Accounts receivable 270,000 Wong (settlement) 135,000

585,000 585,000

Test 3

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3. Daisy, Ellen and Faye were in partnership. Their balance sheet as at 31 March 2009 was as follows:

Daisy, Ellen and Faye Balance Sheet as at 31 March 2009

$ $ Premises 240,000 Capital: Daisy 160,000 Furniture 26,240 Ellen 80,000 Inventory 64,000 Faye 80,000

Accounts receivable 16,960 320,000 Accounts payable 22,000 Bank overdraft 5,200

347,200 347,200

Daisy, Ellen and Faye shared profits and losses in proportion to their capital balances. The partnership was dissolved on 31 March 2009. Ellen took over the inventory at a valuation of $72,000, the furniture at $22,000 and the accounts receivable at $16,400. Ellen also took over the premises for $420,000. She borrowed a mortgage loan of $320,000 and deposited a cheque for this

amount into the partnership bank account. Daisy reached an agreement with Ellen whereby Daisy would settle for Ellen the balance she owed to the partnership. This payment was to be treated as a personal loan from Daisy.

The accounts payable of the partnership were paid in full. Show the necessary entries in the Realisation, Capital and Cash accounts. Answer:

Realisation $ $ $ $

Premises 240,000 Capital: Ellen (assets taken over) —

Furniture 26,240 Furniture 22,000

Inventory 64,000 Inventory 72,000

Accounts receivable 16,960 Accounts receivable 16,400 Profit on realization – Premises 420,000 Capital: Daisy (1/2) 91,600

Ellen (1/4) 45,800

Faye (1/4) 45,800 183,200

530,400 530,400

Capital Daisy Ellen Faye Daisy Ellen Faye

$ $ $ $ $ $

Realisation (assets taken over) Balances b/d 160,000 80,000 80,000

Furniture — 22,000 — Bank (mortgage loan) — 320,000 —

Inventory — 72,000 — Realisation—Share of profit 91,600 45,800 45,800

Accounts receivable — 16,400 — Capital—Daisy (personal loan) — 84,600 —

Premises — 420,000 —

Capital—Ellen (personal loan) 84,600 — —

Bank—Final settlement 167,000 — 125,800

251,600 530,400 125,800 251,600 530,400 125,800

Bank

$ $

Capital: Ellen (mortgage loan) 320,000 Balance b/f 5,200

Accounts payable 22,000

Capital: Daisy (settlement) 167,000

Faye (settlement) 125,800

320,000 320,000

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4. Paul, Martin and Raymond were partners, sharing profit and losses in the ratio of 3 : 2 : 1. The following is the balance sheet of the partnership as at 31 March 2010:

Paul, Martain and Raymond

Balance Sheet as at 31 March 2010 $ $ $

Accumulated Non Current assets Cost depreciation Net book value Machinery 64,000 38,000 26,000 Office equipment 30,000 15,000 15,000 94,000 53,000 41,000 Goodwill 10,000 51,000 Current assets Inventory 8,600 Accounts receivable 17,000 Less Allowance for doubtful accounts (1,400) 15,600 Cash 1,200 25,400 Less Current Liabilities Accounts payable 21,000 Bank overdraft 8,200 (29,200) Net Current liabilities 3,800 47,200 Less Non-current liabilities Loan from Raymond (10,000) 37,200 Financed by: Capital : Paul 10,000 Martin 10,000 Raymond 10,000 30,000 Current: Paul 8,400 Martin (9,400) Raymond 8,200 7,200

37,200

On 1 April 2010, Paul, Martin and Raymond dissolved the partnership on the following terms: 1 The machinery and office equipment were sold at 80% and 70% of their net book value, respectively. 2 Paul took over the inventory at 60% of its book value, but he was also personally responsible for paying off half of the accounts

payable. (As Paul was personally responsible for paying off these accounts payable, the amount paid should not be credited to his capital account. Instead, it should be treated as a gain on realization and credited to the realization account.)

3 The remaining accounts payable were settled by the partnership and a discount of 10% was received. 4 Raymond was responsible for collecting the accounts receivable. He as entitled to a commission of 5% on all sums received.

Consequently, cash discounts of $1,200 were allowed and bad debts of $2,000 were incurred. 5 Dissolution costs amounted to $2,420. Make the following entries in the realization account, bank account, current account and capital accounts (in columnar form). Answer:

Realisation $ $ $ Machinery 26,000 Bank Office equipment 15,000 Machinery (26,000x80%) 20,800 Goodwill 10,000 Office equipment (15,000x70%) 10,500 Inventory 8,600 Debtors (17,000 – 1,200 – 2,000) 13,800 Accounts receivable 15,600 Capital: Paul Capital: Raymond –Inventory taken over (8,600x60%) 5,160 – Commission ($17,800 $1,200 $2,000) x 5% 690 Accounts payable Bank – Dissolution costs 2,420 – Taken over by Paul (21,000x1/2) 10,500 – Discounts received (21,000x1/2x10%) 1,050 Loss on realisation – Capital: Paul (3/6) 8,250 Capital: Martin (2/6) 5,500 Capital: Raymond (1/6) 2,750 16,500

78,310 78,310

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Current

Paul Martin Raymond Paul Martin Raymond

$ $ $ $ $ $

Balances b/d — 9,400 — Balances b/d 8,400 — 8,200

Capital: Paul 8,400 — — Capital : Martin — 9,400 —

Raymond — — 8,200

8,400 9,400 8,200 8,400 9,400 8,200

Capital

Paul Martin Raymond Paul Martin Raymond

$ $ $ $ $ $

Realisation Inventory 5,160 — — Balances b/d 10,000 10,000 10,000

Realisation Share of loss 8,250 5,500 2,750 Realisation Commission — — 690

Current : Martin — 9,400 — Current: Paul 8,400 — —

Bank–Final settlement 4,990 — 26,140 Raymond — — 8,200

Loan: Raymond — — 10,000

Bank –Final settlement — 4,900 —

18,400 14,900 28,890 18,400 14,900 28,890

Bank

$ $

Cash 1,200 Balance b/f 8,200

Realisation Machinery 20,800 Accounts payable (21,000x1/2 – 1,050) 9,450 Office equipment 10,500 Realisation Dissolution costs 2,420 Debtors 13,800 Capital – Final settlement

Capital – Final settlement Paul 4,990

Martin 4,900 Raymond 26,140

51,140 51,140

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HKCEE (2006, 6) Ann, Ben and Joe were partners sharing profits and losses in the ratio of 2 : 2 : 3. The balance sheet as at 30 April 2006 was as follows: The liquidity of the partnership worsened during the past two years and so the partners decided to dissolve the partnership on 1 May 2006. The following information was provided: (i) The office equipment was sold at a price of 30% below (ii) Ann took over the motor vehicle to set off her loan to the partnership. (iii) Most of the furniture was sold at an agreed value of $35,000. The remaining furniture was donated to a charitable

orgainisation and Ben paid $200 on behalf of the partnership for transporting the furniture. (iv) Part of the stock was sold at 90% of its net realizable value of $100,000. The remaining stock was taken over by Ben at an

agreed value of $9,750. (v) A debt of $2,000 was to be written off and a cash discount of 2% was allowed on the remaining debtors. (vi) The creditors were settled and a discount of 5% was received on 50% of the creditors. (vii) Realisation expenses amounted to $2,100. You are required to prepare: (a) the realization account; (a)

Realisation

$ $ $ Office equipment 325,000 Bank Office equipment (325,000 x 70%) 227,500

Furniture 72,900 Furniture 35,000

Motor vehicle 116,800 Stock (100,000 x 90%) 90,000

Stock 126,000 Debtors [(37,000 2,000) x 98%] 34,300

Debtors 37,000 Loan nn: motor vehicle 100,000

Capital Ben: transportation expenses 200 Capital Ben: Stock 9,750

Realisation expenses 2,100 Creditors – discounts received

(86,000 x 50% x 5%) 2,150

Share of loss:

Ann (2/7) 51,800

Ben (2/7) 51,800

Joe (3/7) 77,700 181,300

680,000 680,000

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11.4 Capital deficiency of an insolvent partner (無償債能力的合夥人的資本虧絀) When a partner ends up with a debit balance in his capital account, he is said to have a capital deficiency (資本虧絀). If the

partner is unable to pay (being insolvent (無力還債)), his capital deficiency would have to be shared by the solvent partners (有償

債能力的合夥人承擔). The sharing ratio of capital deficiency should be agreed by all the partners beforehand.

Example 2 The following is the capital account of the partnership as at 31 March 2010:

Capital

Paul Martin Raymond Paul Martin Raymond $ $ $ $ $ $

Realisation Inventory 5,160 — — Balances b/d 10,000 10,000 10,000

Realisation Share of loss 8,250 5,500 2,750 Realisation Commission — — 690 Current : Martin — 9,400 — Current: Paul 8,400 — — Bank–Final settlement 4,990 — 26,140 Raymond — — 8,200 Loan: Raymond — — 10,000 Bank –Final settlement — 4,900 —

18,400 14,900 28,890 18,400 14,900 28,890

The capital account is shown that there is a debit balance in a Martin’s capital account on final settlement (最終結算). Martin is

said has a capital deficiency (資本虧絀). This means that Martin owes (欠) the partnership money and is required to settle (償還)

the debt with the partnership. If Martin can settle (能償還) the amount owed (欠款), the capital account would be shown as

above. However, if Martin is unable (無法) to settle (償還) the capital deficiency (資本虧絀), his capital deficiency would have to be

shared (分擔) by Paul and Raymond. If an agreement (協議) had been drawn up to share the capital deficiency of any insolvent

partner in the existing (現有) profit and loss sharing ratio (Paul 3 : Martin 2 : Raymond 1). If Martin was unable (無法) to pay the

final debt balance in the capital account ($4,900), it would have to be shared by Paul and Raymond in their profit and loss sharing ratio of 3 : 1 Martin’s capital deficiency shared by Paul = $4,900x3/4 = $3,675 Martin’s capital deficiency shared by Raymond = $4,900x1/4 = $1,225 The required entries are: Dr Paul’s capital account $3,675 Cr Martin’s capital account $3,675 Dr Raymond’s capital account $1,225 Cr Raymond’s capital account $1,225 The capital accounts would be settled as follows:

Capital

Paul Martin Raymond Paul Martin Raymond $ $ $ $ $ $

Realisation Inventory 5,160 — — Balances b/d 10,000 10,000 10,000

Realisation Share of loss 8,250 5,500 2,750 Realisation Commission — — 690 Current : Martin — 9,400 — Current: Paul 8,400 — — Share of Martin’s deficiency (3 : 1) 3,675 — 1,225 Raymond — — 8,200 Bank–Final settlement 1,315 — 24,915 Loan: Raymond — — 10,000 Deficiency — 4,900 —

18,400 14,900 28,890 18,400 14,900 28,890

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Class work 2

1. The following balances were extracted from the books of Yam, Fang and Au as at 31 December 2009: $

Store buildings (net) 1,450,000 Fixtures (net) 179,000 Vans (net) 123,700 Inventory 219,100 Accounts receivable 98,000 Cash 7,100 Capital: Yam 692,000 Fang 614,000 Au 269,300 Accounts payable 123,900 Loan from Chow 160,000 Bank overdraft 217,700

The partners shared profits and losses in the ratio of Yam 5 : Fang 3 : Au 2. The partnership was dissolved on 31 December 2009. Yam took over a van valued at $57,000 and Fang took another one valued at $29,000. Au took over part of the inventory for $110,000. Yam also took over the store buildings for $1,950,000. The remaining vans were sold for $28,000, the fixtures for $160,000 and the remaining inventory for $88,500. Accounts receivable were settled, less $1,800 cash discounts. Dissolution expenses of $6,800 were paid. Accounts payable, net of discounts received $1,900, were settled. The loan from Chow was also repaid. Any partner with a capital deficiency was required to settle the amount owed.

Draw up the following accounts: (a) Realisation account (b) Bank account (c) Partners’ capital accounts (a)

Realisation

$ $ $

Store buildings 1,450,000 Capital Yam (van) 57,000

Fixtures 179,000 Capital Fang (van) 29,000

Vans 123,700 Capital Au (inventory) 110,000

Inventory 219,100 Capital Yam (store buildings) 1,950,000

Accounts receivable 98,000 Bank Fixtures 160,000

Bank – Dissolution expenses 6,800 – Vans 28,000

Profit on realization – – Inventory 88,500

Capital: Yam (5/10) 222,000 – Accounts receivable ($98,000 – $1,800) 96,200

Fang (3/10) 133,200 Discounts received 1,900

Au(2/10) 88,800 444,000

2,520,600 2,520,600

(b)

Bank

$ $

Cash 7,100 Balance b/f 217,700

Realisation — Vans 28,000 Accounts payable ($123,900 – $1,900) 122,000

—Fixtures 160,000 Loan from Chow 160,000 —Inventory 88,500 Realisation — Dissolution expenses 6,800

—Accounts receivable 96,200 Capital: Fang (final settlement) 718,200

Capital: Yam (final settlement) 1,093,000 Au (final settlement) 248,100

1,472,800 1,472,800

(c)

Capital

Yam Fang Au Yam Fang Au

$ $ $ $ $ $

Realisation Balances b/f 692,000 614,000 269,300

Vans taken over 57,000 29,000 — Realisation — Share of profit 222,000 133,200 88,800

Inventory taken over — — 110,000 Bank–Final settlement 1,093,000 — —

Store buildings taken over 1,950,000 — —

Bank–Final settlement — 718,200 248,100 2,007,000 747,200 358,100 2,007,000 747,200 358,100

13

2. Au, Mok and Kong were in partnership, sharing profit and losses in the ratio of 5 : 3 : 2. They decided to dissolve the partnership on 31 December 2009. The balance sheet of the partnership as at that date was as follows:

Au, Mok and Kong

Balance Sheet as at 31 December 2009 $ $ $

Non Current assets Premises (net) 500,000 Furniture and fittings (net) 125,000 Vehicle (net) 68,000 693,000 Current assets Inventory 54,000 Accounts receivable 53,000 Bank 21,000 128,000 Less Current Liabilities Accounts payable 48,000 Loan from bank (payable in 2010) 20,000 (68,000) Net Current assets 60,000 753,000 Financed by: Capital : Au 400,000 Mok 300,000 Kong 116,000 816,000 Current: Au 120,000 Mok 120,000 Kong (303,000) (63,000)

753,000 Additional information: 1 The premises were sold for $450,000. The inventory and the accounts receivable were realized for $46,000 and $50,000,

respectively. 2 The furniture and fittings were taken over by Mok at their book value. 3 The vehicle was taken over by Au at an agreed valuation of $50,000 4 The dissolution costs, amounting to $15,000, were paid. 5 The bank loan and accounts payable were paid in full. 6 Kong was insolvent and unable to pay in respect of any debit balance in his capital account. To resolve this, Au and Mok would

share Kong’s capital deficiency equally. (a) Prepare the realisation account (b) Prepare the bank account (c) Prepare Partners’ capital accounts (in columnar form) (a)

Realisation $ $ $ Premises 500,000 Bank Furniture and fittings 125,000 Premises 450,000 Vehicle 68,000 Inventory 46,000 Inventory 54,000 Accounts receivable 50,000 Accounts receivable 53,000 Capital: Bank – Dissolution costs 15,000 Mok – Furniture and fittings 125,000

Au – Vehicle 50,000 Loss on realisation – Capital: Au (5/10) 47,000 Capital: Mok (3/10) 28,200 Capital: Kong (2/10) 18,800 94,000

815,000 815,000 (b)

Bank $ $ Balance b/f 21,000 Accounts payable 48,000 Realisation – Premises 450,000 Loan from bank 20,000

Inventory 46,000 Reali Dissolution costs 15,000 Accounts receivable 50,000 Capital – Au (final settlement) 320,100

Mok (final settlement) 163,900 567,000 567,000

14

(c) Capital

Au Mok Kong Au Mok Kong $ $ $ $ $ $ Current — — 303,000 Balances b/d 400,000 300,000 116,000 Realisation — Current: 120,000 120,000 —

Furniture and fittings — 125,000 — Deficiency — — 205,800 Vehicle 50,000 — — Share of loss 47,000 28,200 18,800

Share of Kong’s deficiency (1 : 1) 102,900 102,900 — Bank–Final settlement 320,100 163,900 — 520,000 420,000 321,800 520,000 420,000 321,800

Test 2

3. Lee, Ko and Ma had been in partnership for many years, sharing profits and losses in the ratio of 5 : 3 : 2. The trial balance as at 30 September 2009 was drafted as follows:

Dr Cr $ $

Non-current assets, at cost 192,000 Accumulated depreciation 70,500 Inventory 27,200 Accounts receivable 21,400 Allowance for doubtful accounts 719 Gross profit for the year 116,300 Operating expenses 92,800 Bank overdraft 7,331 Accounts payable 12,000 Partners’ capital accounts: Lee 90,000 Ko 40,000 Ma 20,000 Partners’ current accounts: Lee 42,000 Ko 31,000 Ma 15,150 Partners’ drawings: Lee 38,000 Ko 27,000 Ma 16,300

429,850 429,850 The following information is also relevant: 1 Inventory as at 30 September 2009 had been overvalued by $2,200. 2 Depreciation was to be charged on the non-current assets at 15% per annum on a reducing-balance basis. 3 An allowance for doubtful accounts was to be made at 4%. 4 An outstanding electricity bill of $2,400 was found underneath the accountant’s desk, and therefore had not been recorded. 5 A sales invoice of $2,800 was recorded twice in the sales journal. Due to unfavourable economic conditions, they decided to dissolve the partnership on 1 October 2009 on the following terms: (i) Lee took over half of the non-current assets for $30,000, and all the accounts receivable at a discount of 5%. Afterwards, Lee

collected all the debts, except for $1,200. (ii) Ko took over the inventory for $19,000. (iii) Ko also took over half of the accounts payable at book value. The balance was settled by the partnership with a discount of

3%. (iv) The remaining non-current assets were sold for $41,400. (v) Other liabilities were paid in full. (vi) Realisation expenses of $3,782 were paid. (vii) Since Ma was insolvent, his capital deficiency were borne by the other partners according to their profit and loss sharing ratio. (a) the income statement for the year ended 30 September 2009; (b) the realisation account; (c) the bank account; and (d) the partners’ capital accounts in columnar form, showing the final settlement upon dissolution. (Calculations to the nearest dollar)

term (iii) means that Ko took over the accounts payable (debts) for the partnership and the compensation for the taking will be

settle in the final payment.

1.

We debit the accounts payable and credit the capital: Ko (transfer the accounts payable amount to the capital: Ko account.)

2 When we balancing off the capital account to make the final settlement, the credit balance of Ko account would be increase

so the amount of Ko taking out for the final settlement would also be increased and the increased amount is the

compensation for the Ko taking over the accounts payable (debts).

When we compare this to the Classwork 1 Q4 “personally responsible”, the account payable will beome the revenue in realisation. So the account payable will be credited in realisation account. However, in this question of term (iii) we won’t make any entries in realization account because the amount for Ko to bear must compensate by the final settlement.

15

(a) Lee, Ko and Ma

Income Statement for the year ended 30 September 2009 (extract)

$ $

Gross profit 116,300

Less Closing inventory overvalued (2,200)

Sales overstated (2,800)

111,300

Less Operating expenses ($92,800 + $2,400) 95,200

Depreciation [($192,000 – $70,500) × 15%] 18,225

Increase in allowance for doubtful accounts {[($21,400 – $2,800) × 4%] – $719} 25 (113,450)

Net loss (2,150)

Shared by: Lee (5/10) 1,075

Ko (3/10) 645

Ma (2/10) 430 (2,150)

(b)

Realisation $ $ $

Non-current assets ($192,000 – $70,500 – $18,225) 103,275 Capital: Lee (non-current assets) 30,000

Inventory ($27,200 – $2,200) 25,000 Capital: Lee (accounts receivable) 16,963

Accounts receivable [($21,400 – $2,800) × 96%] 17,856 Capital: Ko (inventory) 19,000

Bank — Realisation expenses 3,782 Accounts payable — Discounts received 180

Bank — Non-current assets 41,400

Loss on realisation —

Capital: Lee (5/10) 21,185 Capital: Ko (3/10) 12,711 Capital: Ma (2/10) 8,474 42,370

149,913 149,913

(c)

Bank

$ $

Realisation — Non-current assets 41,400 Balance b/f 7,331

Realisation — Realisation expenses 3,782

Accounts payable ($6,000 x 97%) 5,820

Accrued electricity 2,400

Capital: Lee 12,056

Ko 10,011

41,400 41,400

(d)

Capital

Lee Ko Ma Lee Ko Ma

$ $ $ $ $ $

Current 15,150 Balances b/f 90,000 40,000 20,000

Share of loss 1,075 645 430 Current 42,000 31,000 Realisation —Non-current assets 30,000 Accounts payable 6,000

Accounts receivable 16,963 Deficiency 20,354

Inventory 19,000

Realisation — Share of loss 21,185 12,711 8,474

Drawings 38,000 27,000 16,300

Share of deficiency (5 : 3) 12,721 7,633

Bank —Final settlement 12,056 10,011

132,000 77,000 40,354 132,000 77,000 40,354

Test 3

16

HKCEE (2006, 6) Ann, Ben and Joe were partners sharing profits and losses in the ratio of 2 : 2 : 3. The balance sheet as at 30 April 2006 was as follows: The liquidity of the partnership worsened during the past two years and so the partners decided to dissolve the partnership on 1 May 2006. The following information was provided: (i) The office equipment was sold at a price of 30% below (ii) Ann took over the motor vehicle to set off her loan to the partnership. (iii) Most of the furniture was sold at an agreed value of $35,000. The remaining furniture was donated to a charitable

orgainisation and Ben paid $200 on behalf of the partnership for transporting the furniture. (iv) Part of the stock was sold at 90% of its net realizable value of $100,000. The remaining stock was taken over by Ben at an

agreed value of $9,750. (v) A debt of $2,000 was to be written off and a cash discount of 2% was allowed on the remaining debtors. (vi) The creditors were settled and a discount of 5% was received on 50% of the creditors. (vii) Realisation expenses amounted to $2,100. (viii) Joe was unable to meet his liability to the partnership. His deficiency was to be borne by Ann and Ben in their profit and loss

sharing ratio. You are required to prepare: (a) the realization account; (b) the bank account; and (c) the partners’ capital accounts in columnar form, showing the final settlement among them. (a)

Realisation

$ $ $ Office equipment 325,000 Bank Office equipment (325,000 x 70%) 227,500

Furniture 72,900 Furniture 35,000

Motor vehicle 116,800 Stock (100,000 x 90%) 90,000

Stock 126,000 Debtors [(37,000 2,000) x 98%] 34,300

Debtors 37,000 Loan nn: motor vehicle 100,000

Capital Ben: transportation expenses 200 Capital Ben: Stock 9,750

Realisation expenses 2,100 Creditors – discounts received

(86,000 x 50% x 5%) 2,150

Share of loss:

Ann (2/7) 51,800

Ben (2/7) 51,800

Joe (3/7) 77,700 181,300

680,000 680,000

17

(b) Bank

$ $ Realisation Office equipment 227,500 Balance b/f 120,400

Furniture 35,000 Creditors (86,000 – 2,150) 83,850 Stock (100,000 x 90%) 90,000 Realisation expenses 2,100 Debtors [(37,000 2,000) x 98%] 34,300 Capital: Ann 134,150

Ben 46,300

386,800 386,800

(c)

Capital

Ann Ben Joe Ann Ben Joe

$ $ $ $ $ $

Current account — — 16,000 Balances b/d 160,000 95,000 80,000

Realisation Stock — 9,750 — Current account 32,800 19,500 —

Share of loss: 51,800 51,800 77,700 Realisation transportation — 200 —

Share of Joe’s deficiency (1 : 1) 6,850 6,850 — Deficiency — — 13,700

Bank 134,150 46,300 —

192,800 114,700 93,700 192,800 114,700 93,700

HKCEE (2008, 6) Dave and Eva were in partnership sharing profits and losses in the ratio of 2 : 1 respectively. Their balance sheet as at 31 December 2006 was as follows: $ $ $ $ Fixed Assets Capital Accounts Office equipment (net) 202,000 Dave 300,000 Motor vehicles (net) 156,000 Eva 63,000 363,000 358,000 Current Assets Current Accounts Stock 41,600 Dave 26,600 Debtors 40,000 81,600 Eva (48,000) (21,400) Current Liabilities Bank Overdraft 36,000 Creditors 62,000 98,000 439,600 439,600 On 1 January 2007, Dave invited Fred, the manager, to join the partnership on the following terms: (i) Fred’s initial capital was agreed at $100,000, although he would only bring in $25,000 cash as capital. The difference was

settled by a personal loan from Dave to Fred, through a transfer between the capital accounts. (ii) Goodwill was estimated at $60,000. No goodwill account was to remain in the books of the partnership. Fred would bring in

additional cash for his share of goodwill. (iii) Dave, Eva and Fred were to share profits and losses in the ratio of 2 : 1 : 1 respectively. (iv) Fred was to receive a salary of $5,000 per month. No current accounts were to be maintained for the partners in the new partnership. The existing balances were to be transferred to the partners’ respective capital accounts. REQUIRED: (a) Prepare the capital account of Dave, Eva and Fred in columnar form to record Fred’s admission. (a)

Capital

Dave Eva Fred Dave Eva Fred $ $ $ $ $ $ Goodwill (2:1:1) 30,000 15,000 15,000 Balances b/d 300,000 63,000 — Capital – Fred 75,000 — — Goodwill (2:1) 40,000 20,000 — Current — 48,000 — Capital – Dave — — 75,000 Balances c/d 261,600 20,000 100,000 Cash ($25,000 + $15,000) — — 40,000 Current 26,600 — — 366,600 83,000 115,000 366,600 83,000 115,000

18

During the year ended 31 December 2007, the partnership made a net loss of $88,000 before appropriations. Depreciation of $20,200 and $21,000 had been provided on office equipment and motor vehicles respectively. At 31 December 2007, Fred’s salaries had not been paid for 8 months. The following balances were extracted from the books as at 31 December 2007: $ Stock 42,000 Debtors 57,000 Bank overdraft 124,200 Creditors 18,000 On 31 December 2007, Eva was declared bankrupt and the partnership was dissolved as follows: (i) The office equipment was sold for $200,000 (ii) Dave took over the motor vehicles at 90% of the net book value. (iii) Fred was to take over the stock as a settlement of the salaries owed to him by the partnership. (iv) All debtors settled their accounts and a cash discount of $200 was allowed. (v) The creditors were settled by cash and a 5% discount was received. (vi) Dave paid the realization expense of $2,600 on behalf of the partnership. (vii) The deficiency in Eva’s account was to be shared by Dave and Fred in their profit and loss sharing ratio. REQUIRED: Prepare (b) the realization account; and (c) the capital accounts of Dave, Eva and Fred in columnar form for the year ended 31 December 2007, including the final

distribution to partners upon dissolution. (b)

Realisation

$ $ $

Office equipment ($202,000 $20,200) 181,800 Bank Office equipment 200,000

Motor vehicles ($156,000 $21,000) 135,000 debtors ($57,000 $200) 56,800

Stock 42,000 Capital Dave ($135,000 x 90%) 121,500

Debtors 57,000 Fred ($5,000 x 8) 40,000

Capital Dave (transportation expenses) 2,600 Creditors – discounts received ($18,000 x 5%) 900

Share of profit

Dave (2/4) 400

Eva (1/4) 200

Fred (1/4) 200 800

419,200 419,200

(c)

Capital

Dave Eva Fred Dave Eva Fred

$ $ $ $ $ $

P&L App – net loss 74,000 37,000 37,000 Balances b/d 261,600 20,000 100,000

Realisation – stock — — 40,000 P&L App–partner’s salaries — — 40,000

Realisation – motor vehicles 121,500 — — Realisation expense 2,600 — —

Share of deficiency (2 : 1) 11,200 — 5,600 Realisation profit 400 200 200

Bank 57,900 — 57,600 Deficiency — 16,800 —

264,600 37,000 140,200 264,600 37,000 140,200

Profit and Loss Appropriation

$ $

Profit and loss (net loss) 88,000 Share of loss – Dave (2/4) 74,000

Salary to partner – Capital: Fred ($5,000 x 8) 40,000 Eva (1/4) 37,000

Salary to partner – Bank ($5,000 x 4) 20,000 Fred (1/4) 37,000

148,000 148,000

19

4. The following balances were extracted from the books of Yam, Fang and Au as at 31 December 2009:

$

Store buildings (net) 1,450,000

Fixtures (net) 179,000

Vans (net) 123,700

Inventory 219,100

Accounts receivable 98,000

Cash 7,100

Capital: Yam 692,000

Fang 614,000

Au 269,300

Accounts payable 123,900

Loan from Chow 160,000

Bank overdraft 217,700

The partners shared profits and losses in the ratio of Yam 5 : Fang 3 : Au 2. The partnership was dissolved on 31 December 2009. Yam took over a van valued at $57,000 and Fang took another one valued at $29,000. Au took over part of the inventory for

$110,000. Yam also took over the store buildings for $1,950,000. The remaining vans were sold for $28,000, the fixtures for $160,000 and the remaining inventory for $88,500. Accounts

receivable were settled, less $1,800 cash discounts. Dissolution expenses of $6,800 were paid. Accounts payable, net of discounts received $1,900, were settled. The loan from Chow was also repaid. Any partner with a

capital deficiency was required to settle the amount owed.