Revaluation of partnership assets

Learning objectives
After you have studied this chapter, you should
be able to:
• Explain why there may be a need for
revaluation of assets in a partnership
• Calculate the amount of asset revaluation gain
or loss attributable to each partner
• Make the necessary entries to the ledger
accounts when assets are revalued
 The revaluation of assets
• The sale price of an asset is likely to differ from its
book value and so there will be a profit or loss on
the sale.
• This will be shared by the partners in their profit
sharing ratios.
• This will happen when the partnership is sold, when
a partner is admitted or leaves the firm or when
partners change the profit sharing ratios.
• The gains or losses need to be recorded.
 Profit or loss on revaluation
• If the new valuation of assets is more than the
old valuation, there is a gain on revaluation.

• If the new valuation of assets is less than the

old valuation, there is a loss on revaluation.
 Accounting for revaluation
• To record an asset showing a gain on revaluation:
Debit the asset’s account with the gain
Credit the revaluation account

• To record an asset showing a loss on revaluation

Debit the revaluation account
Credit the asset’s account with the loss
 Accounting for revaluation (Continued)
• To record an increase in the total valuation of assets
Debit the profit to the revaluation account
Credit the old partners’ capital accounts in the
old profit sharing ratios

• To record a decrease in the total valuation of assets

Debit the old partners’ capital accounts in the
old profit sharing ratios
Credit the loss to the revaluation account
Tang, Wong and Fong were in partnership, sharing profits
and losses equally. On 1 April 2014, tang decided to retire
from the business and Lee joined as a new partner. The
new profit-sharing ratio among Wong, Fong and Lee
became 2:2:1 respectively. No entry has been made for
the change of partnership.

Balance sheet as at 1 April 1996

Fixed assets Capital: Tang 1000000
Premises 2400000 Wong 600000
Furniture & fitting 200000 Fong 800000
Motor vehicles 400000 Current:Tang 200000
Current assets Wong 100000
Stock 650000 Fong 100000
Debtors 450000 Liabilities
Cash 300000 1400000 Creditors 1600000
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4400000 4400000
Additional information:
1. Goodwill is to be revalued at 60000
2. The assets are revalued as follows:
Premises 2600000
Furniture 191000
Motor vehicles 350000
Provision for bad debts 10% of
debtors
3. Tang took out cash 500000 and left the
balance to the business as a loan
4. Lee introduced 600000 cash and a
vehicle of 200000 into the business
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 Revaluation
Furniture 9000 Premises 200000
Motor vehicles 50000
Provision for bad debts 45000 Goodwill 60000

Tang 52000
Wong 52000
Fong 52000 156000
260000 260000
Goodwill
Revaluation 60000 Bal c/f 60000

Capital
Tang Wong Fong Lee Tang Wong Fong Lee
Cash 500000 Bal b/f 1000000 600000 800000
Loan 752000 Revaluation 52000 52000 52000
Bal c/f 652000 852000 800000 Current 200000
Cash 600000
Vehicle 200000
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1252000 652000 852000 800000 1252000 652000 852000 800000
 Wong, Fong and Lee
Balance sheet as at 1 April 1996
Fixed assets
Goodwill 60000
Premises 2600000
Furniture New values 191000
Motor vehicles (350000+200000) 550000
3401000
Current assets
Stock 650000
Debtors 450000
Less provision for bad debts 45000 405000
Cash (300000+600000-500000) 400000
1455000
Less: Current liabilities
Creditors 1600000

(145000)
3256000

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Capital: Wong 652000
Fong 852000
Lee 800000

Current: Wong 100000

Fong 100000

Long term liabilities

Loans from Tang 752000
3256000

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Partnership dissolution
 Learning objectives
After you have studied this chapter, you should
be able to:

• Explain what happens upon dissolution of a

partnership
• Record the entries relating to the dissolution
of a partnership
 Learning objectives (Continued)
• Explain the differences between recording a
partnership dissolution and making the entries
when one partner leaves a partnership
• Explain the Partnership Act 1890 rules relating
to partnership dissolution
• Explain the Garner v Murray rule
 The need for dissolution
A partnership is dissolved when:
• The partnership is no longer profitable or
there is no reason to carry on trading.
• The partners cannot agree on how to operate
the partnership and so decide to finish the
partnership.
• Factors such as ill-health or old age bring
about the close of the partnership.
 What happens upon dissolution
In accordance with the Partnership Act 1890:
• The assets are disposed of
• The liabilities of the firm are paid
• The partners are repaid their advances
• The partners are paid the final amounts due to them
on their capital accounts. Any profits are shared in
the profit sharing ratios but any losses would reduce
the capitals payable. A deficit on a capital account
means the partner owes the partnership
 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
• Dissolution where the assets are sold
separately
• Dissolution where partnership is sold as a
whole

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Dissolution where Assets are
sold separately

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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 partner’s 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 partner’s capital
account represents the amount which can
be withdrawn from the partnership to each
partner; any debit balance in a partner’s
capital account represents additional cash to
be injected by that partners

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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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Dissolution where partnership is
sold as a whole

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 Purchase consideration

• The purchase consideration is to be discharged

by the limited company (buyer) to
partners(seller) to take over the business
• Goodwill = Purchase consideration – (
assets at take-over value – liabilities at
take-over value)

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Transactions Accounting entries
For dissolution of Old partnership (seller)
Close all asset accounts with Dr Realization
net book value to the Cr Assets
realization account (Bank
and cash may be taken over)
Cost of dissolution or any Dr Realization
losses or expenses incurred Cr Bank
on realization
Proceeds from sale of the Dr Vendee (buyer)
business (purchase Cr Realization
consideration)

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Transactions
Liabilities taken over by the
buyer
The purchase consideration
settled by cheque, shares
and debentures
Repayment of remaining
capital to partners
Accounting entries
Dr Liabilities
Cr Realization
Dr Bank/ Shares/ debentures
in purchaser’s company
Cr Bank
Dr capital
Cr Bank/ shares/ debentures
in purchaser’s company
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Transactions Accounting entries
For opening entries of New Company (buyer)
Assets taken over Dr Assets
Cr Business Purchase

Liabilities taken over Dr Business Purchase

Cr Liabilities

The purchase consideration Dr Business Purchase

offered Cr Vendor (seller)

The purchase consideration Dr Vendor (seller)

settled by cheques, shares Cr Bank/Shares/Debentures
and debentures
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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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 The Garner v Murray rule
• If a partner’s capital account has a debit
balance, the partner usually pays in money to
clear his debt.
• A partnership agreement can overrule this
• The rule does not apply in Scotland.