15 Bbfa2103 T11

Topic  Comprehensive
11 Cases
(Dissolution of
a Partnership)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the reasons for the dissolution of a partnership;
2. Apply the principles in disposal of assets and settlement of
liabilities;
3. Prepare accounts, including realisation account and partnersÊ
capital accounts;
4. Apply the principle of Garner versus Murray in the event of a
dissolution; and
5. Calculate cash distribution to partners in the disposal of assets.
 INTRODUCTION
Consider yourself involved in a partnership. To make a business decision, all
partners must come to an agreement. What difficulties do you anticipate when
partners are facing a situation similar to that in Figure 11.1?
Copyright © Open University Malaysia (OUM)

TOPIC 11 COMPREHENSIVE CASES (DISSOLUTION OF A PARTNERSHIP)  277
Figure 11.1: Partnership and decision-making

Source: www.valdosta.edu/spec/20020214/opinion.shtml
In the previous topic, we discussed changes in ownership of a partnership. In this

topic, we will learn about the circumstances where all the partners leave the
partnership in a cessation of business operations. In this case, all the assets and
liabilities of the partnership will be disposed of and settled in full. The
accounting treatments in this situation are discussed in the following sections.
11.1 REASONS FOR DISSOLUTION OF A

PARTNERSHIP
A partnership agreement is a vital document in ensuring the smooth running of
the business. All partners should agree to run the business indefinitely as long as
the operation is profitable. However, due to personal reasons or unprofitable
trading conditions, a partnership may be terminated.
There are many factors that can bring about the dissolution of a partnership, as
shown in Figure 11.2.

278  TOPIC 11 COMPREHENSIVE CASES (DISSOLUTION OF A PARTNERSHIP)
Figure 11.2: Reasons for dissolution of a partnership
SELF-CHECK 11.1
List at least five reasons for the dissolution of a partnership.

Apart from the mentioned reasons, certain provisions in the Partnership Act can
be applied in court by the partners to wind up the partnership, as illustrated in
Figure 11.3.
Figure 11.3: Provisions in the Partnership Act which can be applied to dissolve a
partnership
When a partnership is dissolved, all its assets and liabilities should be fully
disposed of and settled. Unlike the admission or retirement of partners, the
dissolution of a partnership means the business will no longer exist and therefore
no new partnership agreement is needed.
ACTIVITY 11.1
Find out other reasons for the dissolution of a partnership, apart from
those given earlier. You may refer to a book or to the Internet.
Present your findings in the classroom.

11.2 DISPOSAL OF ASSETS AND SETTLEMENT

OF LIABILITIES
When a partnership is to be closed down, partners have to look for buyers of
their business assets. They are also required to pay off the liabilities of the
partnership by using the proceeds or money generated from the disposal of
assets, plus the cash available in the partnership. Once this is done, partners can
determine the final settlement of their capital and current accounts.
Under normal circumstances, the disposal of the business assets will result in
either a profit or loss. Such profit or loss is to be shared among the partners based
on their profit-sharing ratio.
ACTIVITY 11.2
Imagine you want to wind up your business. Based on your basic
business knowledge, list out at least three things you need to do.
The basic accounting entries for the dissolution of partnerships are relatively
simple. When the dissolution of a partnership takes place, a realisation account is
created (refer to Figure 11.4).
Figure 11.4: Items in a realisation account
Upon the full settlement of the liabilities in the partnership, the available cash in
hand can then be used in paying the partnersÊ capital accounts. The following,
Example 11.1, aims to explain the proper accounting entries upon the dissolution
of a partnership.

Example 11.1
Baba and Nyonya have been partners in the floor tiles business for the past 40
years. Despite the wide difference that exists in the partnershipÊs initial capital
contribution, they agree to share profit and loss on a 1:1 basis. As at 30 June
2013, their assets and liabilities were as follows:
Baba and Nyonya

Balance Sheet as at 30 June 2013
RM RM
Fixed asset:
72,800
Equipment
Current assets:
Stock 39,200
Debtors 128,800
Cash at bank 11,200
179,200
Less:
Current liabilities
Creditors 56,000
Loan – Baba 28,000
84,000
168,000
Capital accounts:
Baba 156,800
Nyonya 11,200
168,000
Over the years, the partners have been arguing a lot over certain business
practices. On 30 June 2013, they decided to dissolve the partnership.
Baba agreed to take over the stock at a valuation of RM28,000. They managed
to sell the equipment for RM56,000. They only received RM112,000 from
debtors but agreed to treat the amount as final and full settlement. The
realisation expenses were RM11,200. The liabilities had to be paid in full.
Nyonya would pay the amount she owed the firm. The dissolution was
completed by 31 July 2013.

Required
Prepare all relevant accounts, including the realisation account and partnersÊ
capital accounts for the purpose of the dissolution.
Solution
Realisation Account
2013 RM 2013 RM
31 Jul Equipment 72,800 31 Jul Cash (Equipment) 56,000
Debtors 128,800 Cash (Debtors) 112,000
Stock 39,200 Baba – stock 28,000
Cash – realisation exp 11,200 Loss on realisation:
– Baba 28,000
– Nyonya 28,000
252,000 252,000
Creditors
2013 RM 2013 RM
31 Jul Cash 56,000 1 Jul Balance b/f 56,000
Equipment
2013 RM 2013 RM
1 Jul Balance b/f 72,800 31 Jul Realisation 72,800
Debtors
2013 RM 2013 RM
1 Jul Balance b/f 128,800 31 Jul Realisation 128,800
Loan – Baba
2013 RM 2013 RM
31 Jul Cash 28,000 1 Jul Balance b/f 28,000
Cash Account
2013 RM 2013 RM
1 Jul Balance b/f 11,200 31 Jul Realisation exp 11,200
31 Jul Realisation: Equipment 56,000 Creditors 56,000
Realisation: Debtors 112,000 Loan – Baba 28,000
Capital – Nyonya 16,800 Capital – Baba 100,800
196,000 196,000

Capital Account – Baba

2013 RM 2013 RM
31 Jul Realisation: Stock 28,000 1 Jul Balance b/f 156,800
Loss on realisation 28,000
Cash 100,800
156,800 156,800
Capital Account – Nyonya

2013 RM 2013 RM
31 Jul Loss on realisation 28,000 1 Jul Balance b/f 11,200
31 Jul Cash 16,800
28,000 28,000
ACTIVITY 11.3
Do you agree that the incidence of partnership dissolution among
newly-developed companies is higher compared to that in partnerships
among well-established companies? If yes, state your reasons. Share
your thoughts with your coursemates in the myINSPIRE forum.
11.3 THE GARNER VERSUS MURRAY RULE

The rule of Garner versus Murray is applicable in the case where one partner is
unable to repay his debts in the event of dissolution. When the partnerÊs capital
account is in debit, this means that the partner owes the firm. He may not be able
to repay his debts to the partnership due to lack of funds or bankruptcy. This rule
is universally accepted in such a situation.
Garner versus Murray stipulates that in the event of a dissolution, where there
are three or more partners and one of the partners fails to repay his debts to
the partnership, then the solvent partners must take over such debts in the
ratio of their capital contributions at the start of the dissolution.

The following example illustrates the application of the rule of Garner versus
Murray:
Example 11.2
Wilson, Beh and Tee have been in partnership selling toys at Midvalley since
2005. They are sharing profit and loss in the ratio of 3:2:1. Despite its location
in a busy mall, business has not been good. Moreover, Tee has been
withdrawing goods from the business, leaving a debit balance in his capital
account.
On 31 December 2013, the partners decided to dissolve the partnership and

the following is the balance on that date:
WBT Partners
Balance Sheet as at 31 December 2013
RM RM
Fixed asset:
Furniture 216,000
Current assets:
Stock 162,000
Debtors 54,000
Bank 14,400
230,400
Less:
Current liability:
Creditors 72,000
158,400
Capital:
Tee 57,600
432,000
Capital:
Wilson 288,000
Beh 144,000
432,000
Tee was unable to contribute anything towards the debit in his capital
account. Wilson and Beh agreed to absorb his share in the ratio of their
capitals. Upon the dissolution, they incurred RM7,200 for the realisation of
assets. They managed to dispose of all their assets (other than cash) for
RM396,000.

Required
Prepare all relevant accounts to close the books for the partnership.
Solution
Realisation Account
2013 RM 2013 RM
31 Dec Furniture 216,000 31 Dec Cash 396,000
Stock 162,000 Loss on realisation:
–
Debtors 54,000 Wilson(3/6) 21,600
Cash – realisation
exp 7,200 – Beh (2/6) 14,400
– Tee (1/6) 7,200
439,200
Creditors
2013 RM 2013 RM
31 Dec Cash 72,000 31 Dec Balance b/f 72,000
Debtors
2013 RM 2013 RM
31 Dec Balance b/f 54,000 31 Dec Realisation 54,000
Stock
2013 RM 2013 RM
31 Dec Balance b/f 162,000 31 Dec Realisation 162,000
Cash Account
2013 RM 2013 RM
Realisation
31 Dec Balance b/f 14,400 31 Dec expenses 7,200
Realisation 396,000 Creditors 72,000
Capital – Wilson 223,200
Capital – Beh 108,000
410,400 410,400
Capital Account – Wong

2013 RM 2013 RM
31 Dec Loss on realisation 21,600 31 Dec Balance b/f 288,000
Capital – Tee (2/3) 43,200
Cash 223,200
288,000 288,000

Capital Account – Beh

2013 RM 2013 RM
31 Dec Loss on realisation 14,400 31 Dec Balance b/f 144,000
Capital – Tee (1/3) 21,600
Cash 108,000
144,000 144,000
Capital Account – Tee

2013 RM 2013 RM
31 Dec Balance b/f 57,600 31 Dec Capital – Wilson 43,200
Loss on realisation 7,200 Capital – Beh 21,600
64,800 64,800
As you can see from the given example, Tee was unable to settle the amount he owed
the partnership. Therefore, Wilson and Beh had to absorb TeeÊs deficit in the ratio of
their capital contributions, that is, RM288,000: RM144,000 (2:1).
TeeÊs deficiency of RM72,000 was shared by Wong and Beh in the ratio of
2:1. Wong was to share 2/3  RM72,000 = RM48,000 whereas, Beh was to share
1/3  RM72,000 = RM24,000.
ACTIVITY 11.4
Do you think the Garner versus Murray rule is important? State your
reasons.
11.4 THE PIECEMEAL REALISATION

To dissolve a partnership, partners may take some time to dispose of all their
assets before profits or losses can be computed and shared among them. Some
partners may want to withdraw cash that is available for distribution among
them rather than wait until the last piece of asset is sold. In this case, proper
accounting records are vital to avoid overpaying the partner before the
dissolution is completed.
In a situation where assets are being disposed of over a period of time, each
disposal of an asset is treated as the last disposal of the partnership assets. Any
profit or loss arising from the disposal is shared among the partners in their
profit and loss sharing ratio. If a partner is unable to meet his financial obligation
after the distribution of profit and loss, the Garner versus Murray rule is to be

applied. The remaining partners have to share the deficit in the ratio of their
capital.
SELF-CHECK 11.2
Answer the following questions:
(a) How long can partnership dissolutions take?
(b) What are the factors that contribute to the delay of the dissolution
process?
The following illustrates the computation mechanism when assets are disposed
of over a period of time.
Example 11.3
Ahmad, John and Silva are childhood friends. Upon graduation, they enter
into a partnership selling nasi lemak in KLSS. They share profit and loss in the
ratio of 3:3:2 respectively. Due to some disagreements among them, the
partnership is dissolved. The following is the balance sheet as at the date of
dissolution:
AJS Partners
RM RM
Fixed assets:
Furniture 64,000
Office equipment 48,000
Current asset:
Stock 80,000
Less: Current liability:

Creditors (28,800)
51,200
163,200
Capital:
Ahmad 64,000
John 96,000
Silva 3,200
163,200

On 1 January 2014, the partners managed to sell some assets for RM60,800.
The creditors and the dissolution cost them RM3,200. The balance of
RM28,800 was left for distribution. On 1 March 2014, John sold more assets
for RM70,400 and this amount was available for distribution. The last group
of assets was sold for RM51,200 on 1 May 2014.
Required
Compute the cash distribution to the partners upon each disposal.
Third and Final Distribution RM RM RM RM

Loss if no further assets sold
Assets 192,000
Proceeds 205,200
Loss of disposal 9,600
Dissolution expenses 3,200
Loss to be shared 12,800 (4,800) (4,800) 3,200
Cash paid to partners (RM64,000) 24,320 26,880 –
• The dissolution of a partnership happens when there are issues such as

disagreements among partners or the business is no longer profitable.
• In the event of dissolution, all assets and liabilities of the partnership are to be
disposed of and settled in full.
• The capital contributions of partners are to be repaid at the end of the

realisation process.
• If a partner is insolvent and unable to contribute further financial resources,

the rule of Garner versus Murray is applied.
• The Garner versus Murray rule stipulates that the deficiency of the insolvent
partner must be shared by the solvent partners based on their capital
contributions ratio.

Assets realisation Insolvent partner

Dissolution Realisation account
Garner versus Murray rule
1. Tip, Top and Ted have been in partnership since 2003. Due to TipÊs poor
health, they decided to dissolve their partnership as at 31 December 2013.
Upon realisation of the business assets, they made a profit of RM4,480.
They were sharing profits and losses in the ratio of 4:3:1. The following
information was extracted from the books of the partnership as at 31
December 2013:
RM
Capital – Tip 14,000
– Top 11,200
– Ted 8,400
Cash at bank 42,280
Sundry creditors 4,200
Required
Prepare the accounts to close the books of the partnership.
2. Alfa and Beta run a florist and shared profit and loss on a 1:1 basis. Due to
the economic downturn and unprofitable trading conditions, they decided
to sell off their business as at 31 March 2014 to a local businessman. Their
balance sheet as at 31 March 2014 was as follows:

AB Florist & Co.

Balance Sheet as at 31 March 2014
RM RM
Fixed assets:
Equipment 81,000
Furniture 10,800
91,800
Current assets:
Stock 5,400
Debtors 22,950
Bank 37,800
66,150
Less:
Current liability:
Creditors (76,950)
(10,800)
81,000
Capital:
Alfa 54,000
Beta 27,000
81,000
The expenses of dissolution were RM3,240. Alfa was to take the stock at a
valuation of RM1,350. They sold the assets as follows:
(a) Debtors – RM20,250;
(b) Equipment – RM108,000; and
(c) Furniture – RM2,700.
Beta managed to get RM4,050 in discount from the creditors.
Required
Prepare the necessary accounts to show the results of the dissolution of the
partnership.
3. May, June and Steven were partners in a catering business in Kajang. In

view of poor management, the partners decided to dissolve their
partnership on 31 December 2013. They made a profit on assets realisation
of RM11,040. The liabilities of the business included sundry creditors of
RM3,840. Cash at bank was RM161,600 after taking into account the
proceeds from the disposal of assets. The capital accounts of the partners
are May – RM64,000 (CR), June – RM96,000 (CR) and Steven – RM13,280
(DR).

Upon the dissolution, Steven claimed that he had no further financial

resources to repay the partnership even though the partners were supposed
to share profits and losses equally.
Required
Draw up the final accounts to close the books of the partnership.
1. Fernandez, Tengku and Ramli were partners selling hand phone gadgets at
a shop in Johor Bahru. They were sharing profits and losses on a 1:1:1 basis.
Tengku was declared bankrupt recently and wanted to withdraw from the
partnership. Fernandez and Ramli felt they would not be able to cope with
the workload and decided to dissolve the partnership on 31 December 2013.
The balance sheet as at the date of dissolution was as follows:
Fernandez, Tengku and Ramli

RM RM
Fixed assets:
Land and building 144,000
Motor vehicles 48,000
192,000
Current assets:
Stock 2,400
Debtors 4,800
Bank 7,200
14,400
Less:
Current liability:
Creditors 19,200
(4,800)
Long-term liabilities:
Mortgage loan (48,000)
Capital
Tengku 4,800
144,000
Capital:
Fernandez 96,000
Ramli 48,000
144,000

They realised their assets at the following valuations:

(i) Land and building – RM120,000;
(ii) Motor vehicles – RM36,000 (taken by Fernandez);
(iii) Stock – RM1,200 (taken by Fernandez); and
(iv) Debtors – RM2,400.
The mortgage loan on the land and building was duly discharged and
creditors were settled in full for RM18,000. The costs of dissolution
amounted to RM1,200.
Required
Prepare the following accounts
(a) The realisation account;
(b) The cash account; and
(c) The partnersÊ capital accounts.
2. Anson, Henry and Chris ran a pharmacy in Penang. They were sharing
profits and losses on a 1:1:1 basis. As Henry and Chris wanted to do a
MasterÊs course in Canada, they decided to dissolve the partnership. After
several rounds of negotiations, the partners managed to sell their outlet to a
leading pharmaceutical chain in Malaysia at a goodwill of RM52,800. The
company would pay the partners RM180,000 (excluding goodwill) in order
to take over all their assets and liabilities except cash at bank. The balance
sheet as at 31 December 2013, before the buyover was as follows:

AHC Pharmacy
RM RM
Fixed assets:
Equipment 53,700
Motor vehicles 50,400
Computer 33,480
137,580
Current assets:
Stock 59,220
Bank 48,000
107,220
Less:
Current liability:
Creditors (28,800)
78,420
216,000
Capital:
Anson 72,000
Henry 72,000
Chris 72,000
216,000
Required
Prepare the following accounts to reflect the dissolution as at 31 December
2013:
(a) Realisation account;
(b) Cash account; and
(c) PartnersÊ capital accounts.

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Topic  Comprehensive

Copyright © Open University Malaysia (OUM)

Figure 11.1: Partnership and decision-making

In the previous topic, we discussed changes in ownership of a partnership. In this

11.1 REASONS FOR DISSOLUTION OF A

Copyright © Open University Malaysia (OUM)

Figure 11.2: Reasons for dissolution of a partnership

List at least five reasons for the dissolution of a partnership.

Copyright © Open University Malaysia (OUM)

Present your findings in the classroom.

Copyright © Open University Malaysia (OUM)

11.2 DISPOSAL OF ASSETS AND SETTLEMENT

Figure 11.4: Items in a realisation account

Copyright © Open University Malaysia (OUM)

Baba and Nyonya

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Capital Account – Baba

Capital Account – Nyonya

11.3 THE GARNER VERSUS MURRAY RULE

Copyright © Open University Malaysia (OUM)

On 31 December 2013, the partners decided to dissolve the partnership and

Copyright © Open University Malaysia (OUM)

Capital Account – Wong

Copyright © Open University Malaysia (OUM)

Capital Account – Beh

Capital Account – Tee

11.4 THE PIECEMEAL REALISATION

Copyright © Open University Malaysia (OUM)

Less: Current liability:

Copyright © Open University Malaysia (OUM)

Third and Final Distribution RM RM RM RM

• The dissolution of a partnership happens when there are issues such as

• The capital contributions of partners are to be repaid at the end of the

• If a partner is insolvent and unable to contribute further financial resources,

Copyright © Open University Malaysia (OUM)

Assets realisation Insolvent partner

Copyright © Open University Malaysia (OUM)

AB Florist & Co.

Beta managed to get RM4,050 in discount from the creditors.

3. May, June and Steven were partners in a catering business in Kajang. In

Copyright © Open University Malaysia (OUM)

Upon the dissolution, Steven claimed that he had no further financial

Fernandez, Tengku and Ramli

Copyright © Open University Malaysia (OUM)

They realised their assets at the following valuations:

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

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