Professor Vipin 2014
Conversion of Partnership into Company
Meaning
For various reasons, an existing partnership may sell its entire business to an existing Joint Stock
Company. It can also convert itself into a Joint Stock Company. The former case is the absorption of a
partnership firm by a Joint Stock Company but the latter case is the flotation of a new Company to take
over the business of the partnership.
In either of the above cases, the existing partnership firm is dissolved and all the books of account are
closed. Broadly, the procedure of liquidation of the partnership business is same as what has already
been explained in “Amalgamation of Partnership”
Some important points:
1. The Purchase Consideration is satisfied by the Company either in the form of cash or shares or
debentures or a combination of two or more of these. The shares may be equity or preference
shares. The shares may be issued at par, at a premium or at a discount. For the partnership, the
issue price is relevant which may form a part of the purchase consideration.
2. In the absence of any agreement, share received from purchasing company should be
distributed among the partners in the same ratio as profits and losses are shared.
Accounting Entries In The Books Of Selling Firms
Sl No
Particulars
Amount
Amount
For transferring assets to realization
1 account
Realization a/c
To Sundry assets a/c
(Assets transferred to realization a/c to
their book values)
For transferring different liabilities to
2 Realization A/c
Liabilities a/c
To Realization a/c
(Liabilities transferred to realization a/c
to their book values)
3 For purchase consideration due
Purchasing Co a/c
To Realization a/c
(Purchase consideration due from the
new firm)
4 For assets taken over by the proprietor
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Capital a/c
To Realization a/c
(Assets taken over by the proprietor)
For realization of assets not taken over
5 by the company
Bank a//c
To Realization a/c
6
7
8
9
10
(realization of assets not taken over by
the new firm)
For recording unrecorded assets
Assets a/c
To Capital a/c
(Unrecorded assets recorded)
For realization of unrecorded assets
Bank a//c
To Assets a/c
For payment of liabilities not taken
over
Realization a/c
To Bank a/c
(Payment of liabilities not taken over
by the new firm)
For recording unrecorded liabilities
Capital A/c
To Liabilities A/c
(Being the unrecorded liabilities
recorded)
For payment of unrecorded liabilities
Liabilities A/c
To Bank A/c
(Payment of unrecorded liabilities)
For liabilities taken over by the
11 proprietor
Realization A/c
To Capital A/c
(Being liabilities assumed by the
proprietor)
12 For realization expenses
Realization A/c
To Bank A/c
(Realization expenses paid)
13 For profit on realization
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Realization A/c
To Capital A/c
(Profit on realization transferred to
Capital Account)
14 For loss on realization
Capital A/c
To Realization A/c
(Loss on realization transferred to
Capital Account)
15 For accumulated profits / reserves
Reserves A/c
Profit and Loss A/c
To Capital A/c
(Undrawn profits transferred to Capital
Account)
16 For Loss: Reverse entry of 15.
For transferring partners’ current
accounts (Credit balances) to capital
17 accounts
Partners’ Current A/c
To Partners’ Capital A/c
For Settlement of purchase
18 consideration by the company
Shares in Purchasing Co
Debentures in Purchasing Co
Cash A/c
To Purchasing Company
19 For final adjustment
Partners’ Capital A/c
To Shares in Purchasing Co.
To Debenture in Purchasing Co.
To Cash A/c
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Accounting Entries in the Books of the Purchasing Company
The purchasing company will record all the assets and liabilities at agreed values.
Sl No
Particulars
Amount
Amount
For assets and liabilities taken over.
(When net assets taken over is less
1 than the Purchase consideration)
Goodwill A/c Dr. (Balancing figure)
To Liabilities A/c (Agreed Value)
To Firm A/c (Purchase Consideration)
(Being different assets and liabilities
taken over)
When net assets taken over is more
2 than the Purchase consideration
Assets A/c Dr. (Agreed Value)
To Liabilities A/c (Agreed Value)
To Firm A/c (Purchase Consideration)
To Capital Reserve A/c (Balancing
Figure)
(Being different assets and liabilities
taken over)
For discharge of Purchase
3 Consideration:
Firm A/c (P.C)
To Share Capital A/c (Face value of
shares issued)
To Securities Premium A/c (if any)
To Debentures A/c
To Bank A/c
Example 1
X and Y were in partnership in XY & Co. sharing profits in the proportions 3:2. On 31st March
2008, they accepted an offer from P. Ltd. to acquire at that date their fixed assets and stock at an agreed
price of Rs 720000. Debtors, creditors and bank overdraft would be collected and discharged by the
partnership firm.
The purchase consideration of Rs 720000 consisted of cash Rs 360000, debentures in P Ltd. (at par) Rs.
180000 and 12,000 Equity Shares of Rs 10 each in P. Ltd. A will be employed in P. Ltd. but, since B was
retiring, A agreed to allow him Rs 30000 in compensation, to be adjusted through their Capital Accounts.
B was to receive 1800 shares in P. Ltd. and the balance due to him in cash. The Balance Sheet of the firm
as on 31.03.2008 is in below
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Liabilities
X’s Capital Account
Loan from X
Bank overdraft
Creditors
Amount
120000
210000
150000
180000
660000
Assets
Fixed Assets
Stock
Debtors
Y’s Capital Account
Amount
480000
45000
75000
60000
660000
The sale of the assets to P. Ltd. took place as agreed; the debtors realized Rs 60,000 and creditors were
settled for Rs 171000. The firm then ceased business. You are required to pass necessary Journal entries
and show: (a) Realization Account (b) Bank Account (c) Partners’ Capital Accounts.
Solution 1
In the books of XY & Co
Sl No
Particulars
Mar-08 Realization A/c
To Fixed Assets A/c
To Stock-in-trade A/c
To Sundry Debtors A/c
(Different Assets transferred)
Creditors A/c
To Realization A/c
(Sundry creditors transferred)
P. Ltd A/c
To Realisation A/c
(Purchase consideration due)
Bank A/c
Debentures in P Ltd.
Shares in P Ltd.
To P. Ltd A/c
(Purchase consideration Received)
Bank A/c
To Realisation A/c
(Debtors realized)
Realisation A/c
To Bank A/c
(Payment to Creditors)
Realisation A/c
To X Capital A/c
To Y Capital A/
(Profit on realisation transferred to
Capital Account)
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Amount
Amount
600000
480000
45000
75000
180000
180000
720000
720000
360000
180000
180000
720000
60000
60000
171000
171000
189000
113400
75600
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Loan from X
To X Capital
(Loan Balance transferred)
X Capital A/c
To Y Capital A/c
(adjustment for compensation)
X Capital A/c
To Share in P Ltd
To Debenture in P Ltd.
To Bank A/c
(Final settlement of accounts of X)
Y Capital A/c
To Shares in P Ltd.
To Bank
(Final settlement of accounts of Y)
Particulars
To Fixed Assets A/c
To Stock A/c
To Debtors A/c
To Bank A/c (creditors
payment
To X’s Capital A/c
(profit)
To Y’s Capital A/c
(profit)
Particulars
To Realisation A/c (Drs
realised)
To P Ltd A/c (P.C.)
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210000
210000
30000
30000
413400
153000
180000
80400
45600
27000
18600
Realization Account
Amount Particulars
480000 By Creditors A/c
By Bank A/c (Debtors
45000 realised)
By P Ltd A/c (Purch.
75000 Consid.)
Bank
171000
Debentures in P Ltd
113000
Amount
180000
60000
360000
180000
Shares in P Ltd
75000
180000
960000
960000
Bank Account
Amount Particulars
By Balance b/d
60000
By Realisation A/c (Crs
360000 payment)
By Capital A/c - X
By Capital A/c - Y
42000
Amount
150000
171000
80400
18600
42000
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Partners’ Capital Accounts
Particulars
X
Y
To Balance b/d
To Y Capital A/c
Particulars
60000 By Balance b/d
120000
By Loan from X
210000
30000
To Shares in P Ltd
153000
By Realisation A/c
27000 (profit)
To Debentures in P Ltd
A/c
180000
By X ‘s Capital A/c
To Bank A/c (final
payment)
X
80400
18600
443400
105600
113400
Y
75600
30000
443400
105600
Note:
Total Purchase consideration 720000
Discharged by: In Cash 360000
By Debentures 180000 and 540000
Balance by 12,000 Equity shares of Rs 10/ each 1,80,000
So the cost of each equity share be Rs 1,80,000/ 12000
= Rs 15 /per share.
Thus in the books of P Ltd. Security premium will be Rs 12000 X 5 =Rs 60,000
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