Mada za sehemu hiiPartnership AccountingMada 7
- Valuation of goodwill when admitting a new partner
- Methods of computing and accounting for goodwill
- Revaluation of partnership assets
- Dissolution of partnership
- The Gurner Vs Murray's case and Insolvency of partner in partnership dissolution
- Accounting for amalgamation of partneship
- Accounting for Retirement of Partnership
When a partnership dissolves, the partners must settle accounts, and if one partner becomes insolvent, it affects the distribution of assets and liabilities.
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Insolvent partner: An insolvent partner is unable to meet their financial obligations, including their share of the partnership debts.
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Liabilities and assets distribution: In such cases, the insolvent partner's share of the liabilities is typically written off, and the remaining partners might have to bear the full responsibility. If the partnership is unable to pay off debts, the assets are liquidated to pay creditors.
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Effect on profit and loss sharing: If one partner is insolvent, the other partners usually have to absorb the insolvent partner's share of the loss, depending on the partnership agreement.
This case set a significant precedent in partnership law regarding the dissolution and treatment of an insolvent partner. The key principles from this case are:
Gurner v. Murray (1848): It dealt with the rights of partners upon the insolvency of one of them during the dissolution of a partnership. The case ruled that if a partner becomes insolvent, the remaining solvent partners should bear the insolvent partner's share of the debts, based on the agreement in the partnership contract.
Key takeaways:
- The insolvent partner's share of losses must be absorbed by the remaining partners, unless stated otherwise in the partnership agreement.
- If the partnership is dissolved and the insolvent partner has no assets, creditors may pursue the solvent partners for payment.
- The court upheld the principle that a partnership dissolution involves equitable treatment of all partners, ensuring that debts are settled fairly.
In Tanzania, the partnership dissolution procedure follows similar principles as in other common law jurisdictions. The following steps are typically followed:
- Notice of dissolution: The partners issue a notice of dissolution, which includes informing creditors and finalising any ongoing business.
- Settlement of debts: Any outstanding debts of the partnership are paid using the partnership's assets.
- Distribution of remaining assets: After paying off liabilities, any remaining assets are distributed according to the partnership agreement, or in the absence of one, equally among the partners.
A, B and C who shared profits equally have traded in partnership for many years. The business was declining and they decided to dissolve it on 31st December, 2021. The closing statement of financial position at that date was as follows:
Statement of Financial Position as at 31st December, 2021
| Details | TZS |
|---|---|
| Non-current assets | |
| Land and buildings | 40,000,000 |
| Plant and machinery | 10,000,000 |
| Current assets | |
| Inventory | 11,000,000 |
| Receivables | 18,000,000 |
| Total assets | 79,000,000 |
| Capital accounts | |
| A | 50,000,000 |
| B | 29,000,000 |
| C | 40,000,000 |
| Non-current liabilities | |
| Mortgage loan from TMRC | 12,000,000 |
| Current liabilities | |
| Payables | 7,000,000 |
| Bank overdraft | 20,000,000 |
| Total capital and liabilities | 79,000,000 |
Plant and machinery and inventory were sold by auction and realised TZS 5,150,000 and TZS 2,000,000 respectively. To facilitate prompt payment to account payable, the bank agreed to increase the existing overdraft temporarily and the firm was able to settle account payable on time as a result the firm obtained a discount of TZS 300,000 and allowances of TZS 1,700,000 on settlement which was effected by 15th January, 2022. The bank however, charged TZS 250,000 interest on overdrafts made, the account receivables realised TZS 15,600,000. The land and buildings were taken over by A (subject to existing mortgage loan) and valued at TZS 30,000,000. Legal cost and accountants fees amounted to TZS 1,000,000 which was paid by the firm.
Required
Prepare ledger accounts to effect the dissolution, assuming that 'C' was unable to contribute more than TZS 3,200,000 of the deficiency. Amount due to partners was paid on 31st January, 2022.
Realisation Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 1st Jan., 2022 | Land and building | 40,000,000 | 1st Jan., 2022 | Plant and machinery | 5,150,000 |
| Plant and machinery | 10,000,000 | Inventory | 2,000,000 | ||
| Account receivable | 18,000,000 | Realisation - (receivables) | 15,600,000 | ||
| Inventory | 11,000,000 | Capital account: A | 30,000,000 | ||
| Dissolution expense | 1,000,000 | Capital accounts: B | 8,500,000 | ||
| Bank interest on O/D | 250,000 | Capital accounts: C | 8,500,000 | ||
| Total | 80,250,000 | Total | 80,250,000 |
Bank Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 1st Jan., 2022 | Plant and machinery | 5,150,000 | 1st Jan., 2022 | Balance b/d | 7,000,000 |
| Inventory | 2,000,000 | Account payable | 10,000,000 | ||
| Realisation – (receivables) | 15,600,000 | Realisation-bank interest | 250,000 | ||
| Total | 25,950,000 | Realisation expenses | 1,000,000 | ||
| Total | 25,950,000 |
Partners' Capital Accounts
| Details | A '000' | B '000' | C '000' | Details | A '000' | B '000' | C '000' |
|---|---|---|---|---|---|---|---|
| Realisation (Land and building) | 30,000 | 8,500 | 1,080 | Realisation (loss) | 2,320 | 41,900 | - |
| Bank | 8,500 | 8,500 | 8,500 | From A & B | 5,380 | 14,600 | - |
| Balance b/d | 21,900 | 20,000 | - | Mortgage | - | - | - |
| 14,600 | 3,500 | 3,200 | Bank | - | - | - | |
| 1,800 | 8,500 | Total | 41,900 | 14,600 | 8,500 |
Land and Building Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | Balance b/d | 40,000,000 | 31st Dec., 2021 | Realisation | 40,000,000 |
Plant and Machinery Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | Balance b/d | 10,000,000 | 31st Dec., 2021 | Realisation | 10,000,000 |
Receivables Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | Balance b/d | 18,000,000 | 31st Dec., 2021 | Realisation | 18,000,000 |
Inventory Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | Balance b/d | 11,000,000 | 31st Dec., 2021 | Realisation | 11,000,000 |
Payables Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | Realisation (discount) | 300,000 | 31st Dec., 2021 | Balance b/d | 12,000,000 |
| Realisation (allowance on payables) | 1,700,000 | Bank | 10,000,000 | ||
| Total | 12,000,000 | Total | 12,000,000 |
Mortgage Loan from TMRC Account
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31st Dec., 2021 | A's capital | 20,000,000 | 31st Dec., 2021 | Balance b/d | 20,000,000 |
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