Partnership Business Conversion & Sale Accounts -

Last Updated on: 5th July 2024, 01:43 pm

Partnership Business Conversion & Sale Accounts

Sale or Conversion of Partnership Firm into Joint Stock Company

An existing partnership firm may sell its whole business to an existing Joint Stock Company (referred as Absorption of Partnership Firm) or can be converted into a Joint Stock Company (referred as conversion into Company).

Separate Set of Books on Dissolution

When a partnership firm is converted into a company or business of firm is sold to an existing company, the Partnership firm is dissolved and books of firm have to be closed and the accounting process of dissolution is to be carried out. The following process are to be carried out, in such types of dissolution:

If company takes over cash and bank balance also, these will be transferred to Realisation Account.
If company taken over partners’ loans, this will also be transferred to Realisation Account.
The journal entry for purchase consideration will be:

Purchasing Company	Dr.
To Realisation A/c

The amount of purchase consideration may be given in lump sum or calculated on the basis of assets and liabilities taken over. The purchase price will be total agreed value of assets less agreed value of liabilities taken over.
Purchase consideration may be paid partly in form of shares and debentures and partly in cash. In absence of agreement, these may be distributed either in profit sharing ratio or ratio of final capital or claim.
If there is some valueless asset in the books of the firm and if this has to be divided among the partners, it should be divided in the profit-sharing ratio so that any ultimate profit or loss may correspond to the ratio in which profits are shared.

Same Set of Books on Dissolution

On conversion of firm into a Company, if it is decided to continue the same set of books, books of firm will not be closed. Instead of Realisation Account, a Revaluation Account will be opened. The following accounting procedure will be carried out.:

Revaluation of Assets and Liabilities

The book values of assets and liabilities may differ from the values at which these are being taken over by Company. Such difference will be transferred to Revaluation account. Thus assets and liabilities will be brought at the value at which these are being taken over by the Company.

If any asset or liability has not been taken over by Company this will either be taken over by a partner or asset will be sold and liabilities paid off. In this case any difference between book value and take over value or sale value will be transferred to Revaluation Account.

Further, any unrecorded asset or liability should be brought into accounts through revaluation account. Journal entries for this will be:

(1) For unrecorded assets: ‘

Assets Alc Dr.

To Revaluation Alc .

(2) For unrecorded liabilities:

Revaluation Alc Dr.

To liabilities Alc .

Transfer of Reserves or P/L A/c

Any balance in Reserve Account or P/L A/c at the time of conversion will be transferred to Capital Accounts of partners in their profit sharing ratio.

Disposal of Assets and Liabilities not taken by Company

If Asset is sold:

Bank Alc Dr.

To Assets A/c .

If Asset is taken by a partner:

Partner’s Capital Alc Dr.

To Assets A/c .

The difference between book value and sale value or take over value will be transferred to Revaluation Account.

If a particular asset has not been taken by all the partners, such asset will be transferred to accounts of all the partners. While deciding the ratio in which such asset will be transferred to capital accounts ofpartners, on the following basis:

If asset has not been revalued, it should be transferred in profit sharing ratio,
If asset has been revalued, it should be transferred in the ratio of final capital or final claim.

Same treatment will be given to liabilities not taken by company.

Valuation of Goodwill or Capital Reserve

When same set of books is continued, goodwill or capital reserve may be required to be valued. If purchase consideration exceeds the amount of net assets, the difference will be treated as goodwill. Similarly, if value of net assets exceeds the amount of purchase consideration, the difference will be treated as capital reserve. Accounting entries for goodwill and capital reserve will be as under:

For Goodwill:

Goodwill Account Dr. (in profit sharing ratio)

To Partners Capital Accounts .

For Capital Reserve:

Partners Capital Accounts Dr. (in profit sharing ratio)

To Capital Reserve .

The amount of goodwill or capital reserve as calculated above will appear in the balance sheet of the company.

Settlement of Partners

Balances of capital accounts of partners will be settled, by paying cash or partly through shares and partly through cash. Shares received from the company should be distributed among partners in the ratio of amount due (unless there is an agreement otherwise). Alternatively shares may be distributed in profit sharing ratio.

Conversion and Sale of a partnership firm – Journal entries

The journal entries are shown at a place for ready reference.

Accounting Entry in the books of firm

For closing different assets of the firm

Realisation A/c Dr.

To Sundry Assets A/c (individually) (at book value)

(If company has taken over cash and balance also along-with other assets. This is also be transferred along with other assets)

For closing various liabilities

Sundry liability A/c Dr.

To Realisation A/c

(3) For Purchase consideration due from purchasing company

Purchasing Company A/c Dr.

To Realisation A/c

(4) For assets taken over by the partners

Partners Capital A/c Dr.(agreed Value)

To Realisation A/c

(5) For sale of assets not taken over by the purchasing company

Bank A/c Dr.

To Realisation A/c

(6) For payment of liabilities not taken

Realisation A/c Dr.

To bank A/c

(7) For liabilities taken over by the partners

Realisation A/c Dr.

To Partners capital A/c (Agreed Value)

(8) For payment of realisation expenses

Realisation A/c Dr.

To Bank A/c

(9) For closing Realisation account

(a) In case of profit on realisation

Realisation A/c

To Partners Capital A/c (Profit Sharing Ratio)

(b) In case of Loss on realisation

Partners Capital A/c Dr. (Profit Sharing Ratio)

ToRealisation A/c

(10) For closing reserves or P/L A/c

Reserve A/c Dr.

Profit and Loss A/c Dr.

To Partners capital A/c (Profit Sharing Ratio)

(11) For Accumulated Loss

Partners capital A/c Dr.

To P & L A/c

(12) For closing partners current accounts

Partners Current A/c Dr,

To Partners Capital A/c

(In case of partners current A/c having Dr. balance, reverse entry will be passed)

(13) For closing Purchasing Company A/c

Share in Purchasing Company A/c Dr.

Debenture in Purchasing Company A/c Dr.

Cash A/c Dr.

To Purchasing company

(14) For closing Partners Capital A/c

Partners Capital A/c

To Share in Purchasing Company A/c Dr.

To Debenture in Purchasing Company A/c

To Cash A/c

Accounting Entries in the book of the Purchasing Company

For amount due to partners of dissolved firm:

(1) Business Purchase A/c Dr.

To Partners A/c (with their shared in purchase consideration)

(2) For assets and liabilities taken over

Sundry Assets A/c Dr.(Agreed Value)

Goodwill A/c Dr.(Balancing Figure)

To Sundry Liabilities A/c (Agreed Value)

To Business Purchase A/c (Purchase consideration)

There may be capital reserve (instead of goodwill) if net assets taken over are more than purchase consideration.

(3) For the payment of purchase consideration

Purchase A/c Dr. (with their share in purchase consideration)

To Share Capital A/c

To Debenture A/c

To Bank A/c

To Securities Premium A/c

Maintenance of Status Quo

Sometimes it is decided that partners should be given appropriate such number of shares of class so as to maintain their position in the company, what they had in the firm with respect to interest on capital, profit sharing ratio and refund of capital. In such a case, equity shares should be allotted in profit sharing ratio and preference shares should be allotted for excess capital. In this way, partners will preference dividend out of profits in priority and the balance of profit will be available to equity share- holders. Since equity shares have been allotted in profit sharing ratio, equity dividend will also be received by partners in profit sharing ratio. Similarly, preference dividend will replace payment of interest on capital, because partners get advantage of interest on capital. In case of dissolution of firm, first excess capital is paid and then capital is refunded in profit sharing ratio. In case of winding up of company, first preference shares will be paid, then only equity shares will be paid. ,

Examples:

A, B and C are three partners sharing in the ratio of 5:3:2. They are allowed interest on capital @ 15%

p.a. Partners decide to transfer their business to a company. It is decided to allot shares to partners in such number and of such class that partners’ rights with regard to interest on capital, profit sharing ratio and refund of capital are maintained in the company as they have in the firm. After all adjustments balances of capital accounts are: A-Rs.40,000, B-Rs.60,000 and C-Rs. 20,000. Show distribution of shares among the partners.

Solution:

Total capital of the partners is Rs.1, 20,000. Therefore, they will receive shares worth Rs.1,20,000. To decide the amount and class (preference and equity) excess capital of partners will be calculated as under:

	A	B	C
	Rs	Rs	Rs
Balances as given	40,000	60,000	20,000
Capitals of partners in the ratio of 5:3:2, taking A’s capital as base	40,000	24,000	16,000
	–	36,000	4,000

Thus, B and C will receive 15% preference shares for Rs.36,000 and Rs.4,000 respectively and A, B and C will receive equity shares for Rs.40,000, Rs.24,000 and Rs.16,000 respectively.

Example

A, Band C share pro fits and losses in the ratio 3:2:1 after allowing interest on capital @ 9% p.a. Their capitals were: A Rs.50,000, B Rs.. 30,000 and C Rs. 20,000. The business was then converted into a limited company and was valued at Rs.1, 30,000. A scheme of capitalisation, whereby the mutual interest of partners may remain intact as far as possible is suggested below:

The total capital being Rs.1.00.000 and the value placed on the business being Rs.1,30,000 there is goodwill of Rs.30,000 to be shared by the partners in the ratio of 3 : 2 : 1 or A, Rs. 15.000,B Rs.10.000 and C Rs.5.000. The capital will now be: A Rs. 65,000, B Rs.40,000 and C Rs.25,000.

Taking B’s capital as the basis, A’s capital should be Rs.60, 000, i.e. 40,000 x 3/2andC’scapital should be Rs. 20,000. Both A and C have Rs. 5,000 excess. Since interest on capital is meant to compensate those whose capital is in excess of proportionate limits and since in the case of partners it is an appropriation of profit, it will be proper to give 9% preference shares to A & C for Rs. 5.000 each and the remaining amount of Rs. 1, 20,000 can be in the from of equity, shares to be divided among A, B and C in the ratio of 3: 2: I. They will then share the company’s profit in the ratio of 3:2:1 after allowing preference dividend.

Partnership Conversion & sale – Practical Problems -1

(Creation of Partnership Capital and Cash Account on Conversion of a partnership firm into a company)

Riu, Inu and Sinu were running Partnership business sharing Profits and Losses in 2: 2: 1 ratio. Their Balance Sheet as on 31^st March, 2024 stood as follows:

Balance Sheet as on 31^st March, 2024 (Figures in Rs’000)

On 01.04.2003, they agreed to form a new company RIS (P) Ltd. with Inu and Sinu each taking up 200 shares of Rs.10 each, which shall take over the firm as a going concern including Goodwill, but excluding Cash and Bank Balances. The following are also agreed upon:

Goodwill will be valued at 3 year’s purchase of super profit.
The actual profit for the purpose of Goodwill valuation will be Rs.2,00,000.
The normal rate of return will be 18% per annum on Fixed Capital.
All other Assets and Liabilities will be taken over at book values.
The Purchase Consideration will be payable partly in Shares of Rs.10 each and partly in cash. Payment in cash being to meet requirement to discharge Riu, who has agreed to retire.
Inu, and Sinu are to acquire interest in the new company at the ratio 3 : 2.
Realisation expenses amounted to Rs.51,000.

You are required to prepare Realisation Account, Cash and Bank Account, RIS (P) Limited Account and Capital Account of Partners.

Solution:

Steps Involved in solving the above problem-

Step-1 Calculation of Goodwill.

Step-2 Calculation of Purchase Consideration.

Step-3 Preparing Realisation A/c.

Step-4 Preparing Cash and Bank A/c.

Step-5 Preparing RIS (P) Ltd A/c.

Step-6 Preparing Partners Capital A/c.

Working Details:

Calculation of Goodwill

	Rs.
Actual profits	2,00,000
Less: Normal Rate of Return @ 18% of fixed capital worth Rs.6,00,000	1,08,000
Super Profits	92,000
Goodwill valued at 3 years’ purchase (Rs.92,000 x 3)	2,76,000

Calculation of Purchase Consideration

	Rs.
Total value of assets as per Balance Sheet	9,50,000
Less: Cash and Bank Balance	1,25,000
	8,25,000
Add: Goodwill	2,76,000
	11,01,000
Less: Liabilities taken over Unsecured Loan Current Liabilities	(1,00,000) (1,50,000)
Purchase Consideration	8,51,000

Note: Equity shares of RIS (P) Ltd. have been given to Inu and Sinu will be shared between them in the ratio 3 : 2.

Realisation Account

(4) Cash and Bank Account

(5) RIS (P) Ltd.

(6) Partner’s Capital Accounts

Partnership Conversion & sale – Practical Problems -2

(Profit/Loss Adjustment A/c and statement sharing number and classes of shares and Balance Sheet after taking over)

Avinash, Rohit and Madwesh were carrying on business in partnership sharing Profits and Losses in the ratio of 5:4:3 respectively. The Trial Balance of the firm as on 31^st March, 2024 was following:

Particulars	Dr.(Rs.)	Cr.(Rs.)
Plant and Machinery at cost	1,05,000	–
Stock	60,200	–
Sundry Debtors	85,000	–
Sundry Creditors	–	1,05,200
Capital A/cs:
Avinash	–	70,000
Rohit	–	50,000
Madwesh	–	30,000
Drawings A/cs:
Avinash	30,000	–
Rohit	25,000	–
Madwesh	20,000	–
Depreciation on Plant and Machinery	–	35,000
Trading Profit for the Year	–	1,29,800
Cash at Bank	94,800	–
	4,20,000	4,20,000

Additional Information:

Interest on Capital Accounts at 10% on the amount standing to the credit of partners’ capital accounts at the beginning of the year was not provided before preparing the above Trial Balance.
On 31^st March, 2024 they formed a Private Ltd. Company Anagha (P) Ltd. to take over the partnership business.
You are further informed as under:
Plant and Machinery is to be transferred at Rs.80,000.
Equity Shares of Rs.10 each of the company are to be issued to the partners at par in such numbers to ensure that by reason of their share holdings alone, they will have the same rights of sharing Profits and Losses as they had in the partnership. Balance, if any, in their capital Accounts, will be settled by giving 7 ½% Preference Share at par.
Before transferring the business, the partners withdrew by cash from partnership the following amounts over and above the drawings as shown in the Trial Balance:

(a) Avinash Rs. 20,000

(b) Rohit Rs. 10,600

All Assets and Liabilities except Plant and Machinery and the Bank Balance are to be transferred at their value in the books of the partnership as at 31^st March, 2024.
You are required to prepare:
- Profit and Loss Adjustment Account for the year ending 31^st March,2024
- Capital Accounts showing all the adjustments required to dissolve the partnership.
- A statement showing the number of shares of each class to be issued by the company to each of the partners to settle their accounts.
- Prepare Balance Sheet of the company Anagha (P) Ltd. as on 31.03.2024 after take over of the business.

Solution:

Steps involved in solving the above problem:

Step 1- Calculation of Purchase Consideration.

Step 2- Difference between the cost of Plant and Machinery and Machinery transferred value.

Step 3- Calculation of Cash at Bank.

Step 4- Preparing P/L Adjustment Account.

Step 5- Creation of Partner’s Capital A/c.

Step 6- Preparing Statement showing the number and classes of shares issued to the partner’s.

Step 7- Creation of Balance Sheet (After take over of the Business)

Working Details:

1. Calculation of Purchase Consideration

	Rs.
Plant and Machinery	80,000
Stock	60,200
Debtors	85,000
Cash at Bank (94,800 – 44,800)	50,000
	2,75,200
Less: Sundry Creditors	1,05,200
	1,70,000

Difference between the cost of Plant and Machinery and Plant and Machinery transferred value = Rs. (1,05,000-80,000) = Rs.25,000

Depreciation on Plant and Machinery = Rs.35,000

Difference: Rs. (35,000-25,000) = Rs.10,000

Calculation of Cash at Bank:

Rs. [94,800-(20,000+10,600+14,200)]

= Rs.(94,800 – 44,800)

= Rs.50,000

4. In the books of Avinash, Rohit and Madwesh

Profit and Loss Adjustment Account

for the Year ending 31^st March,2024

Particulars	Rs.	Rs. Dr	Particulars	Rs. Cr
Interest on Capital			By Balance b/d	1,29,800
Avinish [70,000 x 10%]	7,000		By Plant and Machinery	10,000
Rohit [50,000 x 10%]	5,000
Madwesh [30,000 x 10%]	3,000	15,000
Capital Accounts
Avinish [1,24,800 x 3/12]	52,000
Rohit [1,24,800 x 4/12]	41,600
Madwesh [1,24,800 x 3/12]	31,200	1,24,800
		1,39,800		1,39,800

5. Dr. Partner’s Capital Account Cr.
Particulars	Avinish Rs.	Rohit Rs.	Madwesh Rs.	Particulars	Avinish Rs.	Rohit Rs.	Madwesh Rs.
To Drawings as per Trial Balance	30,000	25,000	20,000	By Balance b/d By Profit and Loss Adjustment A/c	70,000 52,000	50,000 41,600	30,000 31,200
To Additional Drawings	20,000	10,600	14,200	By Int. on capital	7,000	5,000	3,000
To Balance c/d	79,000	61,000	30,000
	1,29,000	96,600	64,200		1,29,000	96,600	64,200
To Equity Shares	50,000	40,000	30,000	By Balance b/d	79,000	61,000	30,000
To Preference Shares	29,000	21,000	–
	79,000	61,000	30,000		79,000	61,000	30,000

6. Statement showing the number and classes of shares issued to the partners

Particulars	Avinash	Rohit	Madwesh
Closing Capital Balance
(After Adjustment) (W.N.5)	79,000	61,000	30,000
Taking Madwesh’s Capital as base for ensuring same rights of share holding-Equity Shares of Rs.10 each to be issued	50,000	40,000	30,000
Balance to be settled by issue of 7 ½% Preference Shares	29,000	21,000	–

7. Balance Sheet of Anagha (P) Ltd. as on 31^st March, 2024

(After takeover of the business)

Illustration: 3

Partnership Conversion & Sale – Practical Problems -3

(Computation of Fixed Capital Ratio and Discount on Sundry Debtors & Stock)

R, K and C have carried on business as drapers for twenty years as on 30^th June, 2001, their Balance Sheet was as under:

The profits and losses were shared in the ratio of fixed capitals on 30^th June, 2024. The partners agreed that due to old age R would retire from the firm when its goodwill will be valued and proportionate share credited to R. It was also decided that premises appearing in the books at cost would be valued at their market value of Rs.80,000 and allotted to R in satisfaction of his dues. Any excess or deficit would be settled in cash. It was also agreed that stock-in-trade and debtors would be taken at 90% of the book value and an unrecorded liability of bonus of Rs.10,000 to staff brought into books. Goodwill of the firm was to be taken at Rs.70,000.

After R’s retirement, the business was carried on by K and C sharing profits and losses equally and till 30^th September, 2001 the firm had made a net profit of Rs.30,000 after crediting each partner’s capital account with Rs.500 p.m. as salary. No. drawings were made by the partners in the quarter.

K and C now find that they cannot continue the business and decide to sell it to a private limited company as and from 1^st October, 2001. The company is to take over the entire business for a consideration of Rs.90,000 which the vendors agree to take 40% in 14% secured debentures and the balance in cash. To enable the company to pay the vendors and also leave it with a working capital of Rs.20,000, the company makes issue of equity shares of Rs.10 each at par.

Show the Balance Sheet of the company after the take over the business of K and C.

All workings should form part of your answer.

Solution:

Steps involved in solving the above problem-

Step 1- Calculation of discount on Sundry Debtors.

Step 2- Calculation of Discount on Stock.

Step 3- Calculation of Fixed Capital Ratio and R’s share on Goodwill.

Step 4- Preparing of Profit and Loss Adjustment Account.

Step 5- Preparing of R’s Capital Account.

Step 6- Preparing of Revised Balance Sheet (After Retirement of R)

Step 7- Preparing of Balance of R and C

Step 8- Valuation of Goodwill.

Step 9- Treatment of purchase consideration.

Step 10- Calculation of share issue.

Step 11- Creation of Balance Sheet of Private Ltd.

Working Details:

Calculation of Discount on Sundry Debtors:-

Discount = 100% – 90% = 10%

Value of Debtors = Rs.48,000

Discount = Rs.48,000 x 10% = Rs.4,800

Calculation of Discount on Stock:-

Rs.40,000 x 10% = Rs.4,000

Calculation of Fixed capital Ratio and R’s share on Goodwill:

Goodwill Rs.70,000: R’s share Rs.30,000 to be credited to his Capital A/c by debiting Capital Accounts of K and C with Rs.15,000 each.

30,000 : 20,000 : 20,000 = 3 : 2 : 2

(4) Profit and Loss Adjustment A/c

Particulars		Rs.
Particulars		Dr.	Cr.
To Sundry debtors (discount)		4,800
To Stock-in-trade		4,000
To Bonus due to staff		10,000
To Profit on adjustment transferred to Capital Account
R (11,200 x 3/7)	4,800
K (11,200 x 2/7)	3,200
C (11,200 x 2/7)	3,00	11,200
By Premises			30,000
		30,000	30,000

R’s Capital Account

Particulars	Rs.
Particulars	Dr.	Cr.
By Balance b/d		30,000
To Premises	80,000
To Cash	800
By Transfer from Current A/c		16,000
By K’s Capital A/c		15,000
By C’s Capital A/c (for goodwill)		15,000
By Profit on adjustment		4,800
	80,800	80,800

Revised Balance Sheet as at 30^th June, 2024

(After retirement of R)

Balance Sheet of K and C as at 30^th September, 2024

Valuation of Goodwill

	Rs.
Net Purchase consideration paid by the Purchasing Co.	90,000
Value of assets taken over	73,400
Goodwill	16,600

Purchase considerationRs.90,000: to be paid in cash 60% i.e. Rs.54,000 and balance to be discharged by issue of Debentures Rs.36,000.
Cash required Rs.54,000 + working capital of Rs.20,000 = Rs.74,000

Hence, Shares to be issued 7,400 shares of Rs.10 each.

Private Limited

Balance Sheet as at 1^st October, 2024

Capital And Liabilities		Rs.
Share Capital: Issued, subscribed and paid up: 7,400 equity shares of Rs.10 each fully paid-up		74,000
14% Secured Debentures		36,000
		1,10,000
Properties and Assets	Rs.	Rs.
Fixed Assets: Goodwill Plant & Machinery	16,600 32,000	48,600
Net Current assets: Cash Others (net)	20,000 41,400	61,400
		1,10,000

Partnership Conversion & sale – Practical Problems -4

(Preparing Realization A/c, Current A/c and Capital A/c)

A, B and C were partners in business sharing profits and losses in the ratio 2:1:1 respectively. Their Balance Sheet as at 31.3.25 is as follows:

Balance Sheet as at 31.3.1997
(Figures in Rs. ‘000)
Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Fixed Capital:			Fixed Assets		300
A	200		Investments		50
B	100		Current Assets:
C	100	400	Stock	100
Current Accounts:			Debtors	60
A	40		Cash and Bank	150	310
B	20	60
Unsecured Loans		200
		660			660

On 1.4.25, it is agreed among the partners that BC(P) Ltd., a newly formed company with B and C having each taken up 100 shares of Rs. 10 each will take over the firm as a going concern including goodwill but excluding cash and bank balances. The following points are also agreed upon:

Goodwill will be valued at 3 years’ purchase of super profits. However, goodwill account will not be raised in the books of the firm though BC (P) Ltd. will pay for it.
The actual profit for the purpose of goodwill valuation will be Rs.1,00,000.
Normal rate of return will be 15% on fixed capital.
All other assets and liabilities will be taken over at book values.
The consideration will be payable partly in shares of Rs.10 each and partly in cash. Payment in cash being to meet the requirement to discharge A, who has agreed to retire.
B and C are to acquire equal interest in the new company.
Expenses of liquidation Rs.40,000.

You are required to prepare the necessary ledger accounts in the books of the partnership firm.

Solution:

Steps involved in solving the above problem

Step-1 Calculation of Goodwill.

Step-2 Calculation of Purchase Consideration.

Step-3 Preparing Realisation A/c.

Step-4 Preparing Capital A/C.

Step-5 Preparing Cash and Bank A/c.

Step-6 Preparing BC(P) Ltd A/C.

Step-7 Preparing Shares in BC(P) Ltd A/C.

Working Details:

1. Calculation of Goodwill

	(Rs. ‘000)
Weighted average of actual profits	100
Less: Normal profits at 15% of Rs.400 thousands	60
Super profits	40

Goodwill at 3 years’ purchase = Rs. (40 x 3) thousand = Rs.120 thousand

2. Calculation of Purchase Consideration

	(Rs. ‘000)
Total assets as per balance sheet	660
Less: cash and bank balance, not taken over	150
	510
Add: Goodwill, as per W.N.1	120
Assets taken over	630
Less: Unsecured loans	200
Purchase Consideration	430

3. Realisation Account

Particulars		Rs. ‘000
Particulars		Dr.	Cr.
To Other Fixed Assets		300
To Investments		50
To Stock		100
To Debtors		60
To Goodwill (W.N.1)		120
To Bank -Expenses of Liquidation		40
By Unsecured Loans			200
By BC (P) Ltd. Purchase consideration as per W.N.2			430
By Capital A/c:
A (40 x 2/4)	20
B (40 x ¼)	10
C (40 x ¼)	10		40
		670	670

4. Capital Accounts (Rs. ‘000)

Particulars	A		B		C
Particulars	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
By Balance b/d		200		100		100
To Cash & Bank-settlement	280
To C’s Capital Account- adjustment			10
To share in BC (P) Ltd.			130		130
To Realisation Account	20		10		10
By Current Accounts-transfer		40		20
By Goodwill A/c		60		30		30
By B’s Capital Account – adjustment						10
	300	300	150	150	140	140

5. Cash and Bank Account

Particulars	Rs. ‘000
Particulars	Dr.	Cr.
To Balance b/fd	150
To BC (P) Ltd. -Balancing Figure	170
By Realisation Account – Expenses of Liquidation		40
By A’s Capital Account		280
	320	320

6. BC (P) Ltd.

Particulars	Rs. ‘000
Particulars	Dr.	Cr.
To Realisation Account -Purchase Consideration (W.N.2)	430
By Cash and Bank		170
By Shares in BC (P) Ltd. -balancing figure		260
	430	430

7. Shares in BC (P) Ltd.

Particulars	Rs. ‘000
Particulars	Dr.	Cr.
To BC (P) Ltd.	260
By B’s Capital Account -50% of the shares i.e. 50% x Rs.2,60,000		130
By C’s Capital Account -50% of the shares i.e. 50% x Rs.2,60,000		130
	260	260

Therefore, proportion of equity capital of B and C respectively = 1,30,000 : 1,30,000 = 1 : 1.

Partnership Conversion & sale – Practical Problems -5

(Preparing Partners Capital A/c, Current A/c & Balance Sheet)

A, B and C carried on business in Partnership, sharing profits and losses in the ratio of 1:2:3. They decided to form a Private Limited Company, AB(P) Ltd. and C is not interested to take over the shares of AB(P) Ltd. The Authorized Share Capital of the Company is Rs.12,00,000 divided into 12,000 ordinary shares of Rs.100 each.

The Company was incorporated and took over goodwill as valued and certain assets of the Partnership Firm on 31.3.2024. The Balance Sheet of the Partnership Firm on that date was as follows:

Liabilities		Rs.	Assets	Rs.
Capital Accounts:			Fixed Assets
A		1,00,000	Machinery	1,20,000
B		2,00,000	Land	1,74,000
C		3,00,000	Motor cycles	30,000
Current Accounts:			Furniture & Fittings	11,000
A		39,420	Current Assets:
B		60,580	Stock	2,35,000
A’s Loan A/c	28,000		Debtors	43,000
(+) Interest Accrued	2,000	30,000	Cash in hand	87,000
Current liability:			C’s overdrawn	1,00,000
Creditors		70,000
		8,00,000		8,00,000

C who was retired was presented by the other Partners (A and B) with one Motorcycle valued in the books of the Firm Rs.9,000. The remaining Motorcycle were valued sold in the open market for Rs.13,000. C also received certain Furniture for which he was charged Rs.2,000. The Debtors which were all considered good, were taken over by C for Rs.40,000. A and B were charged in their profit sharing ratio for the book value of Motorcycle presented by them to C.

It was agreed that C who is not willing to take the shares in AB (P) Ltd. was discharged first by providing necessary cash. A and B should bring cash, if necessary.

AB(P) Ltd. took over the remaining Furniture and Fittings at a price of Rs.13,000, the Machinery for Rs.1,25,000, the Stock at an agreed value of Rs.2,00,000 and the Land at its book value. The value of the goodwill of the Partnership Firm was agreed at Rs.88,000. The Creditors of the Firm were settled by the Firm for Rs.70,000. A’s Loan account together with interest accrued was transferred to his Capital account.

The purchase consideration was discharged by the Company by the use of issue of equal number of fully paid up Equity shares at par to A and B.

Prepare Realisation A/c, Capital A/cs of the Partners and Cash A/cs. Also draw the Balance Sheet of AB(P) Ltd.

Solution:

Steps involved in solving the above problem-

Step 1- Calculation of value of Furniture taken over.

Step 2- Distribution of Goodwill.

Step 3- Calculation of Purchase Consideration.

Step 4- Preparation of Realisation A/c.

Step 5- Preparation of Partner’s Capital A/c.

Step 6- Preparation of Partner’s Current A/c.

Step 7- Preparation of Cash A/c.

Step 8- Preparation of Balance Sheet AB (P) Ltd.

Working Details:

Calculation of value of Furniture taken over

Particulars	(Rs.)
Book value as on 31.3.2024	11,000
Less: Book value of Furniture transferred to C	2,000
Value of Furniture taken over by AB(P) Ltd.	9,000

Distribution of Goodwill

Particulars	(Rs.)
Value of Goodwill to be credited to the Partner’s Capital A/c in the ratio of 1:2:3	88,000
A’s share	14,667
B’s share	29,333
C’s share	44,000

Calculation of Purchase Consideration

Particulars	Amount (Rs.)
Machinery (at agreed value)	1,25,000
Furniture (at agreed value)	13,000
Stock (at agreed value)	2,00,000
Land (at book value)	1,74,000
Goodwill (at book value)	88,000
Purchase consideration	6,00,000
It will be satisfied by issuing equal no. of equity shares
Purchase Consideration [6,000 Equity shares of.100 each]	6,00,000
A’s share	3,00,000
B’s share	3,00,000

Dr. Realisation A/c Cr.

Particulars	Amount (Rs.)	Particulars		Amount (Rs.)
To Machinery A/c	1,20,000	By AB (P) Ltd. A/c		6,00,000
To Land A/c	1,74,000	By Creditors		70,000
To Furniture A/c	9,000	By Bank A/c		13,000
To Stock A/c	2,35,000	By C’s Capital A/c		40,000
To Debtors A/c	43,000	By Partners’ Capital A/c (Loss)
To Motorcycle A/c (30,000 – 9,000)	21,000		A- 6,167
To Goodwill A/c	88,000		B- 12,333
To Bank A/c	70,000		C- 18,500	37,000
	7,60,000			7,60,000

Dr. Partner’s Capital A/c Cr.

Particulars	A	B	C	Particulars	A	B	C
To Partner’s Current A/c	–	–	1,00,000	By Balance b/d	1,00,000	2,00,000	3,00,000
To Motor Cycle A/c	3,000	6,000	–	By Partner’s Current A/c	39,420	60,580	–
To Furniture A/c			2,000	By Goodwill A/c	14,667	29,333	44,000
To Realisation A/c			40,000	By A’s Loan A/c (inc. accrued interest)	30,000
To Realisation A/c (Loss)	6,167	12,333	18,500	By Bank A/c [Cash brought in]	1,25,080	28,420
To Bank A/c [Final payment]			1,83,500
To AB(P) Ltd. A/c [W.N.3]	3,00,000	3,00,000	–
	3,09,167	3,18,333	3,44,000		3,09,167	3,18,333	3,44,000

Dr. Partner’s Current A/c Cr.

Particulars	A	B	C	Particulars	A	B	C
To Balance b/d	–	–	1,00,000	By Balance b/d	39,420	60,580	–
To Partner’s Capital A/c	39,420	60,580		By Partner’s Capital A/c	–	–	1,00,000
	39,420	60,580	1,00,000		39,420	60,580	1,00,000

Dr. Cash A/c Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/d	87,000	By Creditors A/c	70,000
To Motor Cycle A/c	13,000	By C’s Capital A/c	1,83,500
To A’s Capital A/c	1,25,080
To B’s Capital A/c	28,420
	2,53,500		2,53,500

AB(P) Ltd.

Balance Sheet as at 31.03.2006

Liabilities	Rs.	Assets	Rs.
Authorized Share Capital:		Goodwill	88,000
12,000 Equity shares of Rs.100 each	12,00,000	Machinery	1,25,000
Issued, subscribed & paid up :		Land	1,74,000
6,000 equity shares of Rs.100 each	6,00,000	Furniture	13,000
		Stock	2,00,000
	6,00,000		6,00,000

Partnership Conversion & sale – Practical Problems -6

(Sale to a Company)

X and Y are partners sharing Profits and Losses in the ratio of 3:2. On 30^th September, 2024 they admitted Z as a partner. The new Profit sharing ratio agreed was 2:2:1.

At the time of admission Z brought in a fixture valued at Rs. 6,000 and a machinery worth Rs.24,000. No accounting entry was passed for the fixture brought in by partner Z in the books of the firm.

Also at the time of admission the valuation of goodwill was made. The value of goodwill of X and Y was decided at Rs.40,000 and value of goodwill of partner Z was fixed at Rs.20,000. No effect was given to the goodwill value in the books of the firm.

On 31.3.2025, it was decided the partners X would retire and the other partners viz., Y and Z would continue the business of the firm by converting it into a company called YZ Ltd., with equal shareholding in the Company.

The partners agreed as below:

The goodwill of the firm shall be fixed at Rs.80,000. Necessary effect for goodwill value not recorded earlier shall be given. The present goodwill value being Rs.80,000 shall be reflected in the books of the company.
All the Assets and Liabilities of the firm shall be taken over by the company.
Partner X would take Motor car of the firm at a value of Rs.7,400.
A plant owned by the firm is sold for Rs.6,000.
The Profit of the firm upto 30.9.2006 was Rs.4,000.
Partner X agreed to leave Rs.90,000 as loan with the firm in return for 12% interest per annum.

Following is the Trial Balance of the firm as on 31.3.2025:

	Dr. Rs.	Cr. Rs.
Capital Account:
X	–	80,000
Y	–	50,000
Z	–	24,000
Drawings Account:
X	22,000	–
Y	20,000	–
Z	9,600	–
Sundry Debtors	70,000	–
Sundry Creditors	–	32,000
Plant (Book value of plant sold Rs.8,000)	46,000	–
Fixtures	14,000	–
Stock	24,000	–
Motor Car	5,400	–
Cash at Bank	34,600	–
Profit and Loss A/c (for the year)	–	59,600
	2,45,600	2,45,600

You are required to prepare:

Goodwill Adjustment Account.
Profit and Loss Appropriation Account
Partners Capital Accounts.
Balance Sheet of YZ Ltd. After Conversion.

Solution:

Steps involved in solving the above problem-

Step 1- Computation of old goodwill distribution ratio among X & Y.

Step 2- Computation of new goodwill distribution ratio among X ,Y & Z..

Step 3- Table showing adjustment of goodwill.

Step 4- Calculation of Purchase Consideration.

Step 5- Preparing Realization A/c.

Step 6- Preparing Bank A/c.

Step 7- Preparing Goodwill Adjustment A/c.

Step 8- Preparing Profit and Loss Appropriation A/c.

Step 9- Partners Capital A/c.

Step 10- Preparing Balance Sheet as on 31.3.2025.

Working Details:

The value of goodwill of X and Y decided at Rs.40,000 which is to be shared by them in their old profit sharing ratio (i.e. 3 : 2).
At the time of admission the value of goodwill fixed for Z was Rs.20,000 (i.e. 1/5 of Total goodwill). Hence total value of goodwill will be Rs.1,00,000 (Rs.20,000 x 5), which is to be shared by X, Y and Z in ratio of 2 : 2 : 1.
Table showing adjustment of goodwill

		X (Rs.)	Y (Rs.)	Z (Rs.)
1.	Rs.40,000 shared in the ratio of 3 : 2	24,000	16,000	–
2.	Rs.1,00,000 shared in the ratio of 2 : 2 : 1	40,000	40,000	20,000
		16,000	24,000	20,000
3.	Rs.80,000 shared in the ratio of 2 : 2 : 1	32,000	32,000	16,000
	Now, [(3) – (2)]	(8,000)	(8,000)	(4,000)

Calculation of Purchase Consideration

Dr. Realisation A/c Cr.

Particulars	Rs.	Particulars	Rs.
To Goodwill A/c	80,000	By Sundry Creditor A/c	32,000
To Plant A/c	46,000	By 12% Loan A/c (Mr. X)	90,000
To Fixture A/c	20,000	By Y Z Ltd. A/c	1,10,000
To Motor Car A/c	5,400	By X’s Capital A/c	7,400
To Sundry Debtor	70,000	By Bank A/c	6,000
To Stock	24,000
	2,45,400		2,45,400

Dr. Realisation A/c Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/d	34,600	By X’s Capital A/c	25,240
To Sale of Plant	6,000	By Y’s Capital A/c	30,840
To Z’s Capital A/c	15,480
	56,080		56,080

Books of the firm

Dr. Goodwill Adjustment A/c Cr.

Date	Particulars	Amount (Rs.)	Date	Particulars	Amount (Rs.)
30.9.2006	To X’s Capital A/c (W.N.3)	24,000	30.9.2006	By Balance c/d	40,000
	To Y’s Capital A/c (W.W.3)	16,000
					40,000
		40,000		By Balance c/d (W.N.2)	1,00,000
30.9.2006	To Balance b/d	40,000
	To X’s Capital A/c (W.N.3)	16,000
	To Y’s Capital A/c (W.N.3)	24,000
	To Z’s Capital A/c (W.N.3)	20,000
		1,00,000			1,00,000
31.3.2007	To Balance b/d	1,00,000		By X’s Capital A/c (W.N.3)	8,000
				By Y’s Capital A/c (W.N.3)	8,000
				By Z’s Capital A/c (W.N.3)	4,000
				By Balance c/d	80,000
		1,00,000			1,00,000

Dr. Profit and Loss Appropriation A/c Cr.

Date	Particulars	Amount (Rs.)	Date	Particulars	Amount (Rs.)
30.9.2024	To X’s Capital A/c	26,400	30.9.2024	By Profit & Loss A./c	44,000
	To Y’s Capital A/c	17,600	31.3.2025	By Profit & Loss A/c	15,600
31.3.2025	To Capitals A/c
	X	6,240
	Y	6,240
	Z	3,120
		59,600			59,600

9. Dr. Partners capital A/c Cr.

XY Ltd.

Balance Sheet as on 31.3.2025

Partnership Conversion & Sale – Practical Problems -7

(Preparing Statement of Profit earned)

‘S’ and ‘T’ were carrying on business as equal partner. Their Balance Sheet as on 31st March, 2024 stood as follows:

Liabilities	Rs.	Rs.	Assets	Rs.
Capital Accounts:			Stock	2,70,000
S	6,40,000		Debtors	3,65,000
T	6,60,000	13,00,000	Furniture	75,000
Creditors		3,27,500	Joint Life policy	47,500
Bank Overdraft		1,50,000	Plant	1,72,500
Bills payable		62,500	Building	9,10,000
		18,40,000		18,40,000

The operations of the business were carried on till 30th September, 2024. S and T both withdrew in equal amounts half the amount of profits made during the current period of 6 months after 10% per annum had been written off on Building and Plant and 5% per annum written off on Furniture. During the current period of 6 months, creditors were reduced by Rs. 50,000, Bills payable by Rs.11,500 and Bank overdraft by Rs. 75,000. The Joint Life policy was surrendered for Rs.47,500 on 30th September, 2024. Stock was valued at Rs.3,17,000 and debtors at Rs.3,25,000 on 30th September, 2024. The other items remained the same as on 31st March, 2024.

On 30th June, 2024 the firm sold its business to ST Ltd. The value of goodwill was estimated at Rs.5,40,000 and the remaining assets were valued on the basis of the Balance Sheet as on 30th September, 2024. The ST Ltd. paid the purchase consideration in Equity shares of Rs.10 each.

You are required to prepare a Realization A/c and Capital accounts of the partners.

Solution:

Steps involved here solving the problem-

Step 1 Statement of Profit earned during the year from 31.3.24 – 30.9.24

Step 2 Partners’ Capital Accounts

Step 3 Realization Account

Step 4 Preparation of Balance Sheet

Step 5 Note

Notes: In the above question the business has been carried on till 30th September 2024

and the date of formation of the company has been given as 30th June 2024. There may be an error of date in the question. The date of conversion into a company formation should be taken as 30th September 2024 and not as on 30^th June 2024.

Statement of profit earned during the year from 31.3.24 – 30.9.24 (for 6 months)

Particulars	Rs.	Rs.
Statement of Assets: (A)
Fixed Assets:
Furniture	75,000
Less: Depreciation for 6 months @ 5%	1,875	73,125
Plant	1,72,500
Less: Depreciation for 6 months @ 10%	8,625	1,63,875
Building	9,10,000
Less: Depreciation for 6 months @ 5%	45,500	8,64,500
Stock		3,17,000
Debtors		3,25,000
		17,43,500
Statement of Liabilities: (B)
Bank O/D (1,50,000-75,000)		75,000
Creditors (3,27,500-50,000)		2,77,500
B/P (62,500-11,500)		51,000
		4,03,500
Add: Capital A/c
S	6,40,000
T	6,60,000	13,00,000
		17,03,500
Net Profit during the year [A-B]		40,000

Partners Capital Account

Dr.					Cr.
Particulars	S (Rs.)	T (Rs.)	Particulars	S (Rs.)	T (Rs.)
To Drawings	20,000	20,000	By balance b/d	6,40,000	6,60,000
To Equity Share in ST Ltd.	9,40,000	9,40,000	By Profit and Loss A/c	40,000	40,000
			By Realization A/c	2,44,500	2,44,500
			By Joint Life Policy	23,750	23,750
To Cash A/c (Bal. fig.)		8,250	By Cash A/c (Bal. fig.)	11,750
	9,60,000	9,68,250		9,60,000	9,68,250

3. Realizations Account

Balance Sheet of S & T As on 30.09.08

Liabilities			Rs.	Assets		Rs.
Capital Accounts:				Furniture	75,000
	S	T		Less: Depreciation	1,875	73,125
Opening Capital	6,40,000	6,60,000		Plant	1,72,500
Add: Profit for 6 months	40,000	40,000		Less: Depreciation	8,625	1,63,875
Less: Drawings for 6 months	20,000	20,000		Building	9,10,000
	6,60,000	680,000		Less: Depreciation	45,500	8,64,500
			13,40,000	Debtors		3,25,000
Creditors			2,77,500	Stock		3,17,000
Bank O/d			75,000
B/P			51,000
			17,43,500			17,43,500

Note:
- Total profit earned is Rs.80, 000 since half of the profit was withdrawn.
- It has been assumed that the purchase consideration received in form of equity shares of Rs.18, 80,000 has been divided equally between the partners.

Partnership Conversion & sale – Practical Problems -8

(Takeover by Company)

Mr. B and Mr. E are partners sharing Profits and Losses in the ratio of 3:2. On 30^th September, 2024 they admit Mr. C as a partner, and the new profit ratio is 2:2:1. C brought in Fixtures Rs.3,000 and cash Rs.10,000, the goodwill being (i) B and E Rs.20,000 and (ii) C Rs.10,000 but neither figure is to be brought into the books.

On 31^st March, 2025, the partnership is dissolved, B retiring and the other two partners forming a company called BC Limited with equal capitals, taking over all remaining assets and liabilities, goodwill being agreed at Rs.40,000 and brought into books of the company. B agrees to take over the business car at Rs.3,700: Plant was sold for Rs.3,000 being in excess of requirements. The profit of the two preceding years were Rs.17,200 and Rs.19,000 respectively and it was agreed that for the half year ended 30^th September, 2024 the net profit was to be taken as equal to the average of the two preceding years and the current year.

No entries have been made when C entered, except cash. No new book being opened by BC Company Ltd., B agreed to have Rs.50,000 as loan to the company, secured by 12% Debentures. The following is the Trial Balance as on 31^st March, 2025.

	Debit Rs.	Credit Rs.
Capital Accounts:
B		35,000
E		20,000
C		10,000
Drawing Accounts:
B	6,000
E	5,000
C	2,800
Debtors & Creditors	31,000
Plant (Book value of plant sold Rs.4,000)	23,000
Fixtures	7,000
Motor Car	2,700
Stock on 31^st March, 94	13,000
Bank	16,300
P & L A/c for the year		29,800
	1,06,800	1,06,800

Prepare:

Goodwill Adjustment Account
Capital Accounts of Partner
Profit and Loss Appropriation Account
Balance Sheet of BC Ltd. As on 31^st March, 2025

Solution:

Steps involved in solving the above problem-

Step 1- Calculation of Goodwill Adjustment.

Step 2- Calculation of half yearly profit.

Step 3- Preparing Goodwill Adjustment Account.

Step 4- Preparing Partners’ Capital Accounts.

Step 5- Calculation of Share Capital of BC Ltd.

Step 6- Preparing Profit & Loss Appropriation Account.

Step 7- Preparing Bank Account.

Step 8- Preparing Profit and loss on sale and takeover of assets.

Step 9- Preparing Balance Sheet of BC Ltd..

Working Details:

Calculation of Goodwill Adjustment as on 30^th September, 2024

	Total	B Rs.	E Rs.	C Rs.
Goodwill raised
B and E (3:2)	20,000	12,000	8,000	–
C	10,000			10,000
	30,000
Goodwill written off in the new profit sharing ratio (2:2::1)	30,000	12,000	12,000	6,000

Calculation of half yearly profit

	Rs.
Profit of the preceding two years (Rs.17,200 + Rs.19,000)	36,200
Current Year’s profit	29,800
Total	66,000
Profit for six months ended
30^th September, 1993 (1/3^rd x 66,000)	22,000
Profit for next six months ended
31^st March, 1994 (Rs.29,800 – Rs.22,000)	7,800

Dr. Goodwill Adjustment Account. Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
2024			2024
30^th Sept.	To Partners’ Capital A/c (Goodwill raised)		30^th Sept.	By Partners’ Capital A/c (Goodwill written off) (W.N.1)
	B	12,000		B	12,000
	E	8,000		E	12,000
	C (brought in)	10,000		C	6,000
2025			2025
31^st March	To Partners’ Capital A/cs (goodwill raised on take over)		31^st March	By Goodwill A/c (Goodwill raised in the books transferred)	40,000
	B	16,000
	E	16,000
	C	8,000
		70,000			70,000

4. Dr. Partners Capital Accounts Cr.

Calculation of Share Capital of BC Ltd.

	Rs.	Rs.
Total Capital of the firm before conversion-
E [55,920 – 5,000 (Drawing) – 12,000 (Goodwill Adjustment)]	38,920
C [(10,000 + 3,000 + 1,560 + 10,000 + 8,000) – 2,800 – 6,000]	23,760	62,680
E and C should have equal share in BC Ltd.
C should bring in cash (1/2 x 62,680 23,760)		7,580
E should withdraw cash (38,920 – ½ x 62,680)		7,580

Profit & Loss Appropriation Account

For the year ended 31^st March, 2024

Particulars	Dr	Particulars	Cr
To Partners’ Capital Account (Distribution of Profit)		By Profit & Loss A/c (Net profit transferred)	29,800
B [13,200 + 3,120]	16,320
E [8,800 + 3,120]	11,920
C	1,560
	29,800		29,800

Bank Account

Particulars	Dr	Particulars	Cr
To Balance b/d	16,300	By B’s Capital Account	7,620
To Plant Account (Sale of Plant)	3,000	By E’s Capital (Amount withdrawn)	7,580
To C’s capital A/c (Amount brought in)	7,580	By Balance c/d	11,600
	26,880		26,880

Note:

Profit and loss on sale and takeover of assets:	Rs.
Profit on Motor car taken over (Rs.3,700 – Rs.2,700)	1,000
Loss on sale of plant (Rs.4,000 – Rs.3,000)	1,000
Net effect	Nil

Balance Sheet of BC Ltd.

As on 31^st March, 1994

Liabilities	Rs.	Assets	Rs.
Share Capital	62,680	Fixed Assets:
Secured Loan:		Goodwill	40,000
12% Debentures	50,000	Plant	19,000
Current Liabilities & Provisions:		Fixtures	10,000
Creditors	12,000	Current Assets, Loans & Advances:
		Stock	13,000
		Debtors	31,000
		Cash at bank (W.N.4)	11,680
	1,24,680		1,24,680

Partnership Conversion & ale – Practical Problems -9

(Conversion into Partnership Firm)

Alpha Manufacturing P. Ltd. Is a company manufacturing articles. Beeta marketing P. Ltd. is a company engaged in marketing activities. The two companies enter into a partnership on the following terms:

Alpha Manufacturing P. Ltd. Is to supply goods on credit of two months to the partnership firm. The partnership is to discharge the due to Alpha Manufacturing P. Ltd. Along with interest at 12% per annum regularly on the dates.
Beeta Marketing P. Ltd. Is to sell the goods.
Expenses of sales are to be met out of the partnership funds. Alpha Manufacturing P. Ltd. And Beeta Marketing P. Ltd. Are to introduce capital of Rs. five lakhs each for meeting the above expenses and as working capital. Interest at 15% per annum is payable on partners’ capital – payment being made every month. Accordingly, the capitals are introduced on 1^st April, 2024.
Profits and losses are to be dealt with as follows:
- 10% of the profits if any, are to be credited to reserves for strengthening the working capital base;
- balance profits are to be shared equally by credit to current account;
- losses, if any , are to be borne equally by debit to capital accounts.
The firm name is to be AB Traders.

During the year ended 31^st March, 2025 the following were the transactions:

Purchases Rs.150 lakhs of which Rs.30 lakhs were in the first quarter, Rs. 90 lakhs were in the

next six months; the balance Rs.30 lakhs were in the last quarter. The purchases are evenly spread through the respective periods.

Sales were Rs.200 lakhs.
Sales expenses were Rs.10 lakhs were paid in full.
Discount allowed to customers amounted to Rs.4 lakhs. On 31^st March, 2025, amounts due from customers were Rs.45 lakhs and unsold inventory was worth Rs.15 lakhs.

You are required to prepare final accounts of the firm.

Solution:

Steps involved in solving the above problem-

Step 1- Calculation of Interest to Supplier (Alpha Manufacturing P. Ltd.).

Step 2- Preparing Customers’ Account.

Step 3- Preparing Bank Account.

Step 4- Preparing Partners’ Current Accounts.

Step 5- Preparing Trading and Profit and Loss Account for the year ended on 31^st March, 2025.

Step 6- Preparing Profit and Loss Appropriation Account.

Step 7- Preparing Balance Sheet of AB Traders as at 31^st March, 2025.

Working Details:

Calculation of Interest to Supplier (Alpha Manufacturing P. Ltd.)

It is assumed that purchases are made evenly in the middle of each month of the quarter, the schedule of payment of dues for the purchases of last quarter is given below:

Year 2025	Purchases Rs.Lakhs	Due date of Payment	Period of interest accrual (upto financial year’ end)
Jan. 15	10	15^th March	2 months
Feb. 15	10	15^th April	1 ½ months
March 5	10	15^th May	15 days
			Rs.
Interest on Rs.130 lakhs (30+90+10) for two months			2.60
Interest on Rs.10 lkahs for one and half months			0.15
Interest on Rs.10 lakhs for 15 days			0.05
			2.80
Interest accrued on 31^st March, 2025 = 0.15 + 0.05 = 0.20

Customers’ Account

Particulars	Dr	Particulars	Cr
To Sales A/c	200.00	By Discount A/c	4.00
		By Bank A/c (balancing figure)	151.00
		By Balance c/d	45.00
	200.00		200.00

Bank Account .

Particulars	Dr	Particulars	Cr
To Capital A/cs:		By Sales expenses A/c	10.00
Alpha Manufacturing P. Ltd. Beeta Marketing P. Ltd.	5.00 5.00	By Alpha Manufacturing P. Ltd. (payment for purchases)	130.00
To Customers A/c	151.00	By Interest A/c	2.60
		By Interest on partners’ capitals:
		Alpha Manufacturing P. Ltd.	0.75
		Beeta Marketing P. Ltd.	0.75
		By Balance c/d	16.90
	161.00		161.00

4. Partners’ Current Accounts

5. Books of AB Traders

Trading and Profit and Loss Account

for the year ended on 31^st March, 2025

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2025	To Purchases	150.00	31.3.2025	By Sales	200.00
	To Gross profit c/d	65.00		By Closing stock	15.00
		215.00			215.00
	To Interest to supplier (W.N.1)	2.80		By Gross profit b/d	65.00
	To Sales expenses	10.00
	To Discount	4.00
	To Net profit	48.20
		65.00			65.00

Profit and Loss Appropriation Account

Particulars	Rs.	Particulars	Rs.
To Reserves	4.82	By Net profit	48.20
To Interest on capitals (15% on Rs.10 lakhs)	1.50
To Net profit transferred to capital accounts:
Alpha Manufacturing P. Ltd.	20.94
Beeta Marketing P. Ltd.	20.94
	48.20		48.20

Balance Sheet of AB Traders

as at 31^st March, 2025

Liabilities	Rs.	Assets	Rs.
Capital accounts:		Closing inventory	15.00
Alpha Manufacturing P. Ltd.	5.00	Customers’ dues	45.00
Beeta Marketing P. Ltd.	5.00	Bank balance	16.90
Current accounts:
Alpha Manufacturing P. Ltd.	20.94
Beeta Marketing P. Ltd.	20.94
Reserves	4.82
Liability for goods
(Alpha Manufacturing P. Ltd.)	20.00
Interest Accrued	0.20
	76.90		76.90

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Partnership Business Conversion & Sale Accounts

Sale or Conversion of Partnership Firm into Joint Stock Company

Separate Set of Books on Dissolution

Same Set of Books on Dissolution

Revaluation of Assets and Liabilities

Transfer of Reserves or P/L A/c

Disposal of Assets and Liabilities not taken by Company

Valuation of Goodwill or Capital Reserve

Settlement of Partners

Conversion and Sale of a partnership firm – Journal entries

Accounting Entry in the books of firm

Accounting Entries in the book of the Purchasing Company

Maintenance of Status Quo

Partnership Conversion & sale – Practical Problems -1

Partnership Conversion & sale – Practical Problems -2

Partnership Conversion & Sale – Practical Problems -3

Partnership Conversion & sale – Practical Problems -4

Partnership Conversion & sale – Practical Problems -5

Partnership Conversion & sale – Practical Problems -6

Partnership Conversion & Sale – Practical Problems -7

Partnership Conversion & sale – Practical Problems -8

Partnership Conversion & ale – Practical Problems -9

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