Illustrations of Dissolutions
X, Y and Z have been trading as partners sharing profits and losses in the ratio of 2:2:1 on the 1st July 2005, they decided to dissolve the partnership and all the assets were sold in a single transaction in the market. The balance sheet as at 1s July 2005 was as follows:
|
X, Y and Z
Balance Sheet as at 1.7.2005
|
|
|
£
|
£
|
|
|
|
|
|
Freehold property
|
|
60,000
|
|
Equipment
|
|
30,000
|
|
|
|
90,000
|
|
CURRENT ASSETS
|
|
|
|
Inventory
|
16,000
|
|
|
Account receivables
|
9,000
|
|
|
Cash at bank
|
4,200
|
|
|
|
29,200
|
|
|
|
|
|
|
Account payables
|
(6,000)
|
|
|
Net current assets
|
|
23,200
|
|
NET ASSETS
|
|
113,200
|
|
|
|
|
|
FIANCNED BY:
|
|
|
|
Capital accounts X
|
|
78,000
|
|
Y
|
|
26,000
|
|
Z
|
|
4,000
|
|
|
|
108,000
|
|
|
|
|
|
Current accounts X
|
1,400
|
|
|
Y
|
(600)
|
|
|
Z
|
400
|
1,200
|
|
|
|
109,200
|
|
|
|
|
|
Loan from bank
|
3,000
|
|
|
Loan from Y
|
1,000
|
4,000
|
|
|
|
113,200
|
The current assets sold on the market fetched the following assets:
|
|
£
|
|
Freehold property
|
62,000
|
|
Equipment
|
9,600
|
|
Inventory
|
5,800
|
The receivables paid their amounts in full while payables gave discounts of £200. The dissolution amounts to £1600.
Required:
Prepare the relevant accounts to record the dissolution.
Solution
|
Realization account
|
|
|
£
|
|
£
|
|
Freehold property
|
60,000
|
Cash book equipment
|
9,600
|
|
Equipment
|
30,000
|
Property
|
6,200
|
|
Inventory
|
16,000
|
Inventory
|
8,800
|
|
Debtors
|
9,000
|
Debtors
|
9,000
|
|
Cash book dissolution expenditure
|
1,600
|
A/c payables discounts
|
200
|
|
|
|
Loss on dissolution X
|
12,000
|
|
|
|
Y
|
12,000
|
|
|
______
|
Z
|
6,000
|
|
|
116,600
|
|
116,600
|
|
Cash book account
|
|
|
£
|
|
£
|
|
Balance b/d
|
4,200
|
Realizable dissolution expense
|
1,600
|
|
Realisation – equipment
|
9,600
|
Accounts payables
|
5,800
|
|
Freehold property
|
62,000
|
Loan from bank
|
3,000
|
|
Inventory
|
5,800
|
Loan from Y
|
7,000
|
|
Accounts receivables
|
9,000
|
Capital X
|
67,400
|
|
Capital account Z
|
1,600
|
Y
|
13,400
|
|
|
92,200
|
|
92,200
|
|
Capital account
|
|
|
X
|
Y
|
Z
|
|
X
|
Y
|
Z
|
|
|
£
|
£
|
£
|
|
£
|
£
|
£
|
|
Realisation account – loss
|
12,000
|
12,000
|
6,000
|
Bal b/d
|
78,000
|
26,000
|
4,000
|
|
Current account
|
|
600
|
-
|
Current account
|
1,400
|
-
|
400
|
|
Cash book (bal. Fig)
|
67,400
|
13,400
|
_____
|
Cash book (Bal. Fig)
|
_____
|
_____
|
1,600
|
|
|
79,400
|
26,000
|
6,000
|
|
79,400
|
26,000
|
6,000
|
In the current example, we have assumed that partner Z is solvent and therefore he is in a position to bring in the cash required from him so that full distribution is made to the other partners.
However, in certain situations, a partner/some partners may not be able contribute the additional cash required and thus they are said to be insolvent.