Partnership Partnership Dissolution Dissolution Chapter Chapter 13 13 Best viewed with Office 2010
Introduction Partnership dissolution refers to the termination of a partnership. When a partnership ceases to exist legally, it is said to be dissolved. This chapter will discuss why a partnership may be dissolved, and how the dissolution should be recorded in the books of a partnership.
Reasons for dissolution and actions required There could be many reasons why a partnership is dissolved, such as the following: 1. The partnership has been making substantial losses. 2. One or more of the partners are leaving due to retirement, ill health or have died. 3. There are serious conflicts among the partners. 4. The partnership is converted into a limited company. 5. The partnership is taken over by another business.
Reasons for dissolution and actions required The following actions have to be taken upon the dissolution of a partnership: 1. The assets are to be disposed of: they may be sold to external parties, or taken over by existing partners at agreed values . 2. The liabilities are to be repaid to external parties. 3. The partners are to be repaid their loans and advances. 4. The partners are to be repaid the final balances in their capital accounts. A profit or loss may arise in the disposal of assets and repayment of liabilities, and this should be shared by all the partners in their agreed profit and loss sharing ratio.
Accounting entries for dissolution A realisation account would be opened to record the transactions arising on dissolution.
Exhibit 13.1 Accounting entries for dissolution Chan and Lee were partners, sharing profits and losses in the ratio of 2 : 1. The following is the statement of financial position of the partnership as at 31 December 2015:
Exhibit 13.1 Accounting entries for dissolution Chan and Lee Statement of Financial Position as at 31 December 2015 Non-current assets $ Cost $ Accumulat ed depreciati on $ Net book value Office equipment Motor vehicles 750,000 540,000 1,290,000 350,000 290,000 640,000 400,000 250,000 650,000 Current assets Inventory Accounts receivables Less Allowance for doubtful accounts 240,000 16,000 210,000 224,000 Bank 106,000 540,000 Less Current liabilities: Accounts payable Net current assets 230,000 310,000 960,000
Chan and Lee Statement of Financial Position as at 31 December 2015 $ $ $ Exhibit 13.1 Accounting entries for dissolution Financed by: Capital: Chan Lee 300,000 200,000 500,000 Current: Chan Lee 260,000 200,000 460,000 960,000
Exhibit 13.1 Accounting entries for dissolution On 1 January 2016, Chan and Lee dissolved the partnership on the following terms: 1.The office equipment and inventory were sold for $480,000 and $270,000, respectively. 2.Receipts from debtors amounted to $204,000. 3.The motor vehicles were taken over by Lee at an agreed value of $220,000, without making payment for them. 4.Payments to creditors amounted to $210,000. 5.Dissolution costs amounted to $26,000.
Accounting entries for dissolution The required accounting entries for the dissolution of a partnership are as follows: 1. Transfer the net book values of all the assets (except bank and cash) to the realisation account Dr Realisation account Cr Asset accounts 2.
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