Partnership

Dissolution

1
Introduction
Dissolution of Partnership firm is a process
of ceasing to operate as a partnership firms
by realizing its assets and discharging its
liabilities. When partnership firm is
dissolved the books of accounts are also
closed parallel to realizaton of its assets
and setllement of its liabilities

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3
Different Ways of Dissolution
Section 32 Dissolution by Expiration or Notice
The expiry of the term for which the firm was formed
The completion of the venture for which the firm was formed.
When any one of the partners gives a notice in writing to other
partners in case of partnership at will.

Section 33 Dissolution by Bankruptcy death or charge

When death or bankruptcy of any partner
When any partners share of assets to be charge for his separate
debts.

Section 34 Dissolution by illegality of Partnership

When partnership become illegal.
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Different Ways of Dissolution
Section 35 Dissolution by Court
A partner becomes insane;
A partner becomes permanently incapable of performing his
duties as a partner;
A partner deliberately and consistently commits breach of
agreements relating to the management of the firm;
A partners conduct is likely to adversely affect the business of
the firm;
The partner transfers whole of his interest in the firm to a third
party;
The business of the firm cannot be carried on, except at a loss;
The court, on any ground, regards dissolution to be just and
equitable.

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Section 44 Rule for distribution of assets on
final settlement of accounts
All assets would be disposed off and cash has to be realized;
With the available funds, claims are satisfied in the following order
Payment of expenses for realizing the assets and collection of
debts;
Payment of outside liabilities of the firm, i.e. creditors, loans,
bank overdrafts, bills payable, advances from partners relatives;
Loans and advances made by a partner;
Repayment of advances extended by the partners;
Repayment of capital contribution to the partner;
Any surplus left, is distributed among all partners in their profit
sharing ratio.

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Realization Account
In the partnership dissolution, an account
named as Realization Account will be
opened to compute the profit or loss from
realization which should be shared among
the partners according to the profit or loss
sharing ratio

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Nature of partnership dissolution

En-Block Dissolution/ Stock Dissolution

Piecemeal Dissolution

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En-Block Dissolution/
Stock Dissolution

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Procedures of Dissolution
1. All assets will be sold to other persons or
taken over by partners
2. Settle the liabilities of the partnership to
outsider or partners
3. Transfer any profit or loss on realization to
each partners capital accounts in
profit/loss sharing ratio
4. Merge the balances in the partners current
accounts to their capital accounts
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5. Any credit balance in each partners
capital account represents the amount
which can be withdrawn from the
partnership to each partner; any debit
balance in a partners capital account
represents additional cash to be injected
by that partners

11
Transactions Accounting entries
Close all asset accounts with Dr Realization
net book value to the Cr Assets
realization account (except
cash and bank because
these assets need not be
disposed of)
Cost of dissolution or any Dr Realization
losses or expenses incurred Cr Bank
on realization
Proceeds from the disposal Dr Bank
of assets Cr Realization

Assets taken over by a Dr Capital

partner without payment Cr Realization
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Transactions Accounting entries
Asset taken over by partners No entries required
as a gift

Creditors taken over by a Dr Creditors

partner Cr Capitals

Payment to creditors with Dr Creditors

discounts received Cr Realization discount
Cr Bank
Profit or loss on realization to Dr Realization profit
be shared among the Cr Capitals
partners according to the or
profit-sharing ratio
Dr Capital
Cr Realization - loss
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Transactions Accounting entries
Repayment of loan to an Dr Loan from partner
partner Cr Bank

Repayment of loan to an Dr Loan from outsider

outsider ( creditors) Cr Bank

Transfer any balances in Dr Current (for credit balance)

partners current accounts Cr Capitals
Or
Dr Capital
Cr Current (for debit balance)
Repayment of remaining Dr Capital
capital to partners Cr Bank
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Example 1

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John, Peter and Tom were partners sharing profits and losses in the
ratio 1:1:3.
The balance sheet as at 31 December 2013 was as follows:
Balance Sheet as at 31 December 2013
Fixed Assets Cost Dep NBV
Premises 180000 10000 170000
Motor Vehicles 27500 5500 22000
207500 15500 192000
Current assets
Stock 68250
Debtors 172500
Less: provision for bad debt 1265 171235
Bank 26065
265550
Less: Current Liabilities
Creditors 60000
Working Capital 205550
397550

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Capital: John 100000
Peter 40000
Tom 160000 300000
Current: John 30000
Peter (10000)
Tom 70000 90000
Long term liabilities
Loan from Tom 7550
397550

Assets and liabilities were disposed of as follows:

1. The premises were sold at $ 200000 and legal charges from the
sale amount to $10000
2. Tom took over the stock and motor vehicles at book value
3. Except for $2500, all debts were collected
4. The creditors were discharged for $56000
5. Realization expenses of $10000 were paid

Required:
Prepare the realization, Bank, Capital and Current account for the dissolution
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of partnership
 Realization
Premises 170000

Premises
Bal b/f 180000 Prov. for depreciation 10000
Realization 170000
180000 180000
Provision for depreciation
Premises 10000 Bal b/f 10000

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 Realization
Premises 170000
Motor Vehicles 22000

Motor Vehicles
Bal b/f 27500 Prov. for depreciation 5500
Realization 22000
27500 27500
Provision for depreciation
Motor Vehicles 5500 Bal b/f 5500

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 Realization
Premises 170000
Motor Vehicles 22000
Debtors 171235

Debtors
Bal b/f 172500 Prov. for bad debts 1265
Realization 171235
172500 172500
Provision for Bad Debts
Motor Vehicles 1265 Bal b/f 1265

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 Realization
Premises 170000
Motor Vehicles 22000
Debtors 171235
Stock 68250

Stock
Bal b/f 68250 Realization 68250

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 Realization
Premises 170000 Bank premises (200000-10000) 190000
Motor Vehicles 22000 - Debtors (172500-2500) 170000
Debtors 171235 Creditors discount received 4000
Stock 68250
Bank- realization expenses 10000

Loan from Tom

Bank 7550 Bal b/f 7550

Bank
Bal b/f 26065 Realization - expenses 10000
Realization premises 190000 Creditors 56000
- debtors 170000 Loan from Tom 7550

Creditors
Bank 56000 Bal b/f 60000
Realization discount received 4000
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60000 60000
 Realization
Premises 170000 Bank premises (200000-10000) 190000
Motor Vehicles 22000 - Debtors (172500-2500) 170000
Debtors 171235 Creditors discount received 4000
Stock 68250
Tom stock 68250
Bank- realization expenses 10000
- MV 22000
Gain on realization:
John 1/5 2553
Peter 1/5 2553
Tom 3/5 7659 12765
454250 454250

Capital
John Peter Tom John Peter Tom
Realization: Bal b/f 100000 40000 160000
Stock 68250 Gain on realizaiton 2553 2553 7659
MV 22000

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 Capital
John Peter Tom John Peter Tom
Realization: Bal b/f 100000 40000 160000
Stock 68250 Gain on realizaiton 2553 2553 7659
MV 22000 Current 30000 70000
Current 10000
Bank 132553 32553 147409
132553 32553 147409 132553 32553 147409
Current
John Peter Tom John Peter Tom
Bal b/f 10000 Bal b/f 30000 - 70000
Capital 30000 70000 Capital 10000
30000 10000 70000 30000 10000 70000
Bank
Bal b/f 26065 Realization - expenses 10000
Realization premises 190000 Creditors 56000
- debtors 170000 Loan from Tom 7550
Capital: John 132553
Peter 32553
Tom 147409
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386065 386065
Piecemeal
Dissolution

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Piecemeal Dissolution
Cash is distributed as it becomes available, instead
of waiting for all the assets to be realized first
Assets are sold piecemeal, and then outstanding
debts are paid and the remaining cash is finally
distributed to the partners as soon as possible
This situation occurs because some assets can be
sold quickly, and some assets take longer time to
be sold (i.e. less liquid)

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Assumed Loss/Notional Loss
Method
This is possible loss by assuming that the
remaining assets do not have any scrap
value
Any unsold assets will be assumed loss in
each distribution

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Steps on Piecemeal Dissolution
1. Find out the maximum possible loss
Maximum possible loss
= NBV of assets to be realized - Total
proceeds form disposal
OR
Maximum possible loss
= Total capital balances - Total cash to be
distributed to partners( i.e. cash available)

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2. The maximum possible loss is shared by the
partners according to the profit-sharing ratio
3. Apply the Garner vs. Murray rule if there is
any capital deficiency
4. Distribute any available cash to the partners
according to their remaining capital
balances
5. Repeat the process until all assets have
been realized

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Example 3

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Au, Chow and Lee were partners sharing profits and losses in the ratio 2:2:1.
The balance sheet as at 31 December 2013 was as follows:
Balance Sheet as at 31 December 2013
Fixed Assets Cost Dep NBV
Goodwill 100000 100000
Land 150000 150000
Plant & Machinery 133000 55800 77200
Fixture & Fittings 30000 13000 17000
Motor Vehicles 32000 24000 8000
445000 92800 352200
Current assets
Stock 64000
Debtors 65000
Less: provision for bad debt 6000 59000
Cash 160
123160
Less: Current Liabilities
Creditors 57000
Bank Overdraft 128360
Working Capital 62200
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Capital: Au 120000
Chow 80000
Lee 30000 230000
Current: Au 20000
Chow 20000 40000
Long term liabilities
Bank loan 20000
290000

On 31 December 2013 the partners agreed to dissolve the partnership

due to a disagreement between the partners. Assets were to be realized,
outstanding debts to be paid and the remainder to be shared by the
partners in an equitable manner.
Distributions of cash were to be made as soon as possible.

January
Provision was made for dissolution expenses of $2400
Land was sold for $200000
The cash available was utilized to settle in full the bank overdraft, the
bank overdraft, the bank loan and all creditors after receiving discounts
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March
Stock which had originally costed $40000 was sold for $32000
$15000 was received form debtors

April
Plant & Machinery were sold for $51000
Fixtures and fittings were sold for $12000

May
All the outstanding debtors, with the exception of a customer who owed
$4000 settled their accounts
Motor vehicles were sold for $25000
The remaining stock was sold for $22000
Dissolution expenses amounted to $2100

Prepare distribution statement of cash at each stage

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 Distribution Statement
Total Au Chow Lee
$ $ $ $
Capital accounts 230000 120000 80000 30000
Current accounts 40000 20000 20000
270000 140000 100000 30000
1st Distribution:
Cash available (w1) ( 47000)
Maximum possible loss (2:2:1) 223000 89200 89200 44600
50800 10800 (14600)
Lees capital deficiency shared by Au
And Chow in the last agreed capital ratio
(120000:80000) (8760) (5840) 14600
Cash distributed 42040 4960 0
2nd Distribution:
Capital balance 223000 97960 95040 30000
Cash available (51000+12000) (63000)
Maximum possible loss (2:2:1) 160000 64000 64000 32000
140000-42040 33960 31040 (2000)
Lees capital deficiency shared by Au
And Chow in the last agreed capital ratio
(120000:80000) (1200) (800) 2000
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Cash distributed 32760 30240 0
3rd Distribution:
Capital balance 160000 65200 64800 30000
Cash available (W2) (93300)
Maximum possible loss (2:2:1) 66700 26680 26680 13340
Cash distributed 38520 38120 16660

97960-32760

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 W1 Cash available for 1st distribution:
January Opening balance 160
Receipt from land 200000
200160
Less: Payment
Assumed dissolution expenses 2400
Settle in full means (i.e. not actual expenses)
no more payment will be Bank overdraft 128360
paid. => the difference
Bank loan 20000
between 57000 and 49400
is discount received Creditors (Bal. Fig.) 49400 200160
0
=> no cash distribution to partners on January
March Receipts:
Stock 32000
Debtors 15000
First cash distributed to partners 47000

Back
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Notes:
Veryoften no cash is distributed to partners at first or second month
since outstanding debts must be repaid first and then the remaining
cash can then be distributed to partners.

Eventhough the questions have not mentioned to repay outstanding

debts, you should make sure to keep some cash to prepare to repay debts
and could not be distributed it to partners

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W3 Cash available for 3rd distribution:
May Receipts
Surplus in dissolution expenses(2400-2100) 300
Collection remaining debtors balance
(65000-15000-400) 46000
Receipts from MV 25000
Receipts from remaining stock 22000
93300

Back
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 Realization

Goodwill 100000 Cash:

Land 150000 Land 200000
Plant & Machinery 77200 Stock (32000+22000) 54000
Fixtures & fittings 17000 Debtors (15000+46000) 61000
Motor Vehicles 8000 Plant & machinery 51000
Stock 64000 Fixture & fittings 12000
Debtors 59000 Motor vehicles 25000
Cash - dissolution expenses 2100 Creditors discount rececived
(57000-49400) 7600
Capital:
Au (2/5) 26680
Chow (2/5) 26680
Lee (1/5) 13340 66700
477300 477300

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 Capital
Au Chow Lee Au Chow Lee
Cash Bal b/f 120000 80000 30000
in March 40240 4960 Current 20000 20000
In April 32760 30240
in May 38520 38120 16660
Realization
-loss 26680 26680 26680

140000 100000 30000 140000 100000 30000

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Cash distribution
among partners

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Cash Distribution Among Partners

With the application of the Garner vs.

Murray rule

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With the application of
Garner vs. Murray
rule

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With the application of Garner vs.
Murray rule
Any CREDIT balance in each partners capital
account represents the amount which can be
withdrawn from the partnership to each partner
Any DEBIT balance in a partners capital account
represents additional cash to be injected by that
partner. If he is insolvency to repay the amount, the
solvency partners will be shared the amount in:
Profit
& loss sharing ratio
Any agreed ratio given in the examination question
GARNER vs. MURRAY rule may be applied

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What is Garner vs.
Murray rule?

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Garner vs. Murray rule
Under the rule, a partner is required to
contribute cash to eliminate the debit
balance in his capital account
In the court case of Garner vs. Murray
(1904), it was held that subject to any
agreement to the contrary, such a debit
balance deficiency was to be shared by
the other partner not in their profit and loss
sharing ratio but the ratio of their last
agreed capitals
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 If one partner is insolvent, his capital
deficiency will be shared by other partners
according to the last agreed capital ratio
(the ratio of the balances in the capital
accounts before the dissolution, in the
absence of any agreement to the contrary

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