Accounting for amalgamation of partneship

Amalgamation in partnership accounting is primarily done for the following reasons:

1. Growth and Expansion: Partners may merge to increase their combined market share, resources, and operational capacity.
2. Efficiency: Combining forces to streamline operations, reduce costs, or gain better bargaining power.
3. Risk Diversification: Merging allows partners to reduce the overall risk by combining their business operations.
4. Strategic Reasons: Partners may amalgamate to create a more competitive entity in the market.
5. Access to Capital: The new amalgamated partnership may have better access to capital or financing.

When partnerships amalgamate, various accounting entries are made to reflect the changes in the partnership's structure, assets, liabilities, and capital. Below are the key accounting entries:

a. Assets and liabilities of merged partnerships

1. Recording the Transfer of Assets: Each partnership transfers its assets to the new amalgamated partnership. The assets are typically transferred at their book values (except in some cases where adjustments may be required to reflect fair value).

   Entry:

   • Debit: All individual asset accounts (e.g., Cash, Accounts Receivable, Equipment, etc.) for the amount of the asset.
   • Credit: Partner's capital accounts or a new combined capital account for the total value of assets.

   Example:

   • If Partnership A transfers its land valued at 100,000 and machinery valued at 50,000:
     • Debit Land 100,000
     • Debit Machinery 50,000
     • Credit Partner's Capital (A) 150,000

2. Recording the Transfer of Liabilities: Liabilities (such as loans, accounts payable, etc.) of the amalgamating partnerships are also transferred to the new partnership.

   Entry:

   • Debit: Liabilities (e.g., Bank Loan, Accounts Payable, etc.).
   • Credit: Partner's Capital accounts or a new combined capital account.

   Example:

   • If Partnership B has a bank loan of 80,000:
     • Debit Bank Loan 80,000
     • Credit Partner's Capital (B) 80,000

b. Determining the new partner's capital

After transferring the assets and liabilities, the next step is to determine the amount of capital contributed by each partner in the new amalgamated partnership. The total value of assets and liabilities will determine the new capital structure.

1. Calculation of the New Capital: The new capital of the amalgamated partnership will be based on the total assets less liabilities.

   Formula:

   $\text{New Capital} = \text{Total Assets} - \text{Total Liabilities}$

2. Entries for Contribution to New Capital: The partners contribute their capital to the new partnership in proportion to the agreed terms.

   Entry:

   • Debit: New Capital Accounts (for each partner).
   • Credit: Old Capital Accounts (if they are dissolving).

   Example:

   • If the total capital of the new partnership is 200,000, and Partner A is entitled to 60% and Partner B to 40%:
     • Debit New Capital Account (A) 120,000
     • Debit New Capital Account (B) 80,000
     • Credit Old Capital Accounts for A and B accordingly.

c. Treatment of goodwill

In some cases, goodwill may arise due to the amalgamation of the partnerships. If goodwill is recognized, an entry is made to reflect the intangible asset.

Entry (if goodwill is created):

• Debit: Goodwill (with the agreed value of goodwill).
• Credit: Capital Accounts of the partners, based on their agreed share.

Example:

• If the goodwill is valued at 50,000 and shared between Partner A and Partner B:
  • Debit Goodwill 50,000
  • Credit Partner's Capital (A) 30,000
  • Credit Partner's Capital (B) 20,000

d. Settlement of retiring partners

In cases where one partner leaves and the other continues or the partnership is dissolved entirely, the retiring partner must be paid their share of the capital and goodwill (if any).

Entry for Payment to Retiring Partner:

• Debit: Retiring Partner's Capital Account.
• Credit: Bank or Cash (if a cash payment is made).

After recording all the necessary entries, the new partnership will have a balance sheet reflecting the combined assets, liabilities, and capital of the merged entities.

Example

The following are the statement of financial positions of Mariam and Neema who shared profits and losses equally and of Queen and Jamal who shared profits and losses in 3:2 respectively.

Mariam and Neema's Statement of Financial Position as at 31st December, 2018

Details	TZS	Details	TZS
Non-current assets		Capital and liabilities
Plant and machinery	2,000,000	Capital accounts:
Furniture and fixture	1,000,000	- Mariam	5,000,000
Current assets		- Neema	3,000,000
Stock in trade	2,000,000	Liabilities
Sundry debtors	2,000,000	Current liabilities
Cash in hand	1,000,000	Creditors	3,000,000
Total assets	8,000,000	Total capital and liabilities	8,000,000

Details	TZS	Details	TZS
Non-current assets		Capital and liabilities
Investments	2,000,000	Capital accounts:
Furniture and fixture	1,600,000	- Queen	5,000,000
Patents	3,400,000	- Jamal	4,800,000
Current assets		Reserves	5,000,000
Stock in trade	2,400,000	Current liabilities
Sundry debtors	1,400,000	Creditors	5,000,000
Cash in hand	1,000,000	Total capital and liabilities	10,000,000
Total assets	7,000,000	Total assets	11,800,000

Both firms decided to amalgamate themselves with effect from 1st January, 2019, and the new firm was named as MNQJ Supplies. They agreed to revalue their assets and liabilities as follows

Details	Mariam and Neema	Queen and Jamal
Plant and machinery	1,600,000	2,200,000
Stock	1,800,000	1,200,000
Sundry debtors	1,680,000	3,000,000
Patents	-	1,400,000
Furniture and fixture	-	1,000,000
Goodwill	1,200,000	-

The new profits or losses sharing ratio between Mariam, Neema, Queen and Jamal are 3:3:2:2 respectively.

You are required to prepare:

1. Journal entries in the books of Mariam and Neema necessary to adjust firm's books prior to amalgamation;
2. Journal entries in the books of Queen and Jamal necessary to adjust firm's books prior to amalgamation;
3. Revaluation account in the book of Mariam and Neema;
4. Capital accounts of Mariam and Neema;
5. Revaluation account in the books of Queen and Jamal;
6. Capital accounts of Queen and Jamal; and
7. Statement of financial position of the new firm of MNQJ supplies.

Dr. Revaluation Account Cr.

Details	TZS	Details	TZS
Plant and machinery	400,000	Capital accounts:
Stock	200,000	- Mariam	1,200,000
Sundry debtors	320,000	- Neema	140,000
Goodwill	1,200,000
Total	2,120,000	Total	1,340,000

Dr. Partners' Capital Accounts Cr.

Details	Mariam	Neema	Details	Mariam	Neema
Balance b/d	3,000,000	2,000,000	Balance c/d (Transfer to new firm)	3,140,000	2,140,000
Revaluation	140,000	140,000
Total	3,140,000	2,140,000	Total	3,140,000	2,140,000

Dr. Revaluation Account Cr.

Details	TZS	Details	TZS
Furniture and fixtures	200,000	Goodwill	1,000,000
Sundry debtors	200,000
Stock	200,000	Total	1,000,000
Patents	400,000
Total	1,000,000	Total	1,000,000

Dr. Partners' Capital Accounts Cr.

Details	Queen	Jamal	Details	Queen	Jamal
Balance b/d	3,000,000	2,000,000	Balance c/d (Transfer to new firm)	5,000,000	5,000,000
Reserves	2,000,000	3,000,000
Total	5,000,000	5,000,000	Total	5,000,000	5,000,000

Statement of Financial Position as at 1st January, 2019

Details	TZS	Details	TZS
Non-current assets		Capital and liabilities
Plant and machinery	1,600,000	Capital accounts:
Furniture	2,400,000	- Mariam	3,140,000
Investments	2,000,000	- Neema	2,140,000
Patents	3,000,000	- Queen	5,000,000
Goodwill	2,200,000	- Jamal	5,000,000
Current assets		Liabilities
Stock	4,000,000	Creditors	4,800,000
Debtors	2,880,000	Total capital and liabilities	20,080,000
Cash in hand	2,000,000
Total assets	11,200,000