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Conversion of Firm Into Company
Conversion of Firm Into Company
Often, a partnership firm converts itself into a joint stock limited company or sells its
business to an existing one. Realisation Account will be opened and assets transferred
to it, so also liabilities (but not if liabilities are not assumed by the company).
Besides the above, the main points to be noted are the following:
(a) Usually, the company takes over all the assets including cash. Therefore, cash should
also be transferred to Realisation Account. If, however, the company does not take over
cash, it will not be transferred.
(b) Usually, the company will discharge the amount due from it in the form of cash,
debentures and shares. Separate accounts will, of course, be opened for debentures and
shares received. Partners will divide the debentures and shares among themselves, in
the absence of an express agreement, in the ratio of their final claims, that is to say, in
the ratio of capitals standing after the loss or profit on realisation and other reserves and
profits have been transferred.
Further, since no fraction of a share or debenture can be allotted, the nearest whole
number of shares or debentures should be given to a partner, the necessary adjustment
being made in cash. If there is an agreement to divide the shares of debentures in a
particular manner, the agreement should be followed.
Some authorities recommend that shares in joint stock companies should be divided
among partners in the profit-sharing ratio. This will enable partners to enjoy any future
profit or loss on shares in the profit-sharing ratio. However, it seems that in the absence
of an agreement, the Partnership Act does not permit this method of distribution.
Profits and losses after dissolution have no bearing on partnership accounts. Shares
cannot be treated differently from other assets, say stock and furniture. It would, of
course, be better if the partnership deed contains a clause regarding this matter. If there
is some valueless asset in the books of the firm and if this has to be divided among the
partners, it should be divided in the profit-sharing ratio so that any ultimate profit or
loss may correspond to the ratio in which profits are shared.
Illustration 1:
A, B and C carry on business in partnership sharing profits and losses in the proportions
of 1/2, 3/8 and 1/8 respectively. On 31st March, 2012, they agreed to sell their business
to a limited company.
Their position on that date was as follows:
Note:
Total number of shares received from the limited company is 6,700. Theses have been
divided among A, B and C in the ratio of 448, 336 and 272 or 28, 21 and 17 respectively,
namely, in the ratio of the amount finally due to them.
Realisation A/c Dr. 128000
To Machinery A/c 48000
To Furniture A/c 42000
To Stock A/c 23000
To Book Debts A/c 15000
5. Realisation A/c
Particular Amt Particular Amt
To Building A/c 40000 By B/P 7200
To Machinery A/c 20000 By Creditors A/c 21600
To Stock A/c 24000 By Mrs. A’s loan A/c 3200
To Debtors A/c 23200 By M ltd A/c 124200
To B/R A/c 6400 By Cash A/c 4000
To Investment A/c 4800 (Investment)
To Goodwill A/c 8000
To Cash A/c 9600
To Cash A/c (Mrs. A’s 3200
Loan)
To Partners’ capital A/c
A 14000
B 7000 21000
160200 160200
78 : 47 = 125
Cash A/c
Particular Amt Particular Amt
To Bal b/d 9600 By Realisation A/c 9600
To Realisation A/c 4000 By Realisation A/c 3200
To M ltd A/c 24200 By A’s Capital A/c 15600
By B’s Capital A/c 9400
37800 37800
8. Realisation A/c
Particular Amt Particular Amt
To Fixed Assets A/c 140000 By Dep on Fixed Assets A/c 45000
To JLI Policy A/c 6300 By Creditors A/c 26800
To Stock A/c 27000 By A’s Loan A/c 10000
To Debtors A/c 15000 By M Ltd A/c 100000
To Cash (Exp) 300 By A’s Capital A/c (JLIP) 5000
To Cash A/c (Cred) 26800 By Cash A/c 23700
To Cash A/c (Loan) 10000 By Partners’ Capital A/c
A 7450
B 7450 14900
225400 225400
M ltd A/c
Particular Amt Particular Amt
To Realisation A/c 100000 By Shares in M ltd A/c 90100
By Cash A/c 9900
100000 10000
Cash A/c
Particular Amt Particular Amt
To Bal B/d 3500 By Realisation A/c 300
To Realisation A/c 23700 By Realisation A/c 26800
To M ltd A/c 9900 By Realisation A/c 10000
37100 37100