Illustrations of dissolutions, Financial Accounting

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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
	£	£
NON-CURRENT ASSETS
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
CURRENT LIABILITIES
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
NON-CURRENT LIABILITIES
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.

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