Shri J. H.

Bhaldoia Women’s College – Rajkot

B.Com. Sem. – II
Financial Accounting – 2
Conversion of Partnership Firm into Company
Dr. Kamlesh S. Dave

Introduction : As per Act of partnership firm, the membership of the firm is

limited. Minimum 2 and maximum 20 persons can start a business in partnership
firm. In case of banking business, this limit is minimum 2 and maximum 10. The
liability of partners of partnership firm is unlimited. To remove and solve the
limitation of partnership firm like numbers of members, capital investment, risk of
insolvency, scarcity of capital, the firm establishes a company of it’s own existing
business or sells the current business to new company or existing company and
both the parties follow the legal procedure. It’s called a conversion of
partnership firm into a company.

Purchase consideration (PC) means the price which is paid by the purchaser to the
vendor. In the case of conversion of the firm into a company or sale of the firm’s
business, Purchaser is the purchasing company and vender is the firm.
PC is calculated through any one of the following method :
[A] Net Asset Method [Net Assets = Total Assets – Total Liabilities] and
[B] Purchase Consideration Method

According to this method purchasing company agrees to take over those assets
whose total price is taken. From this purchasing company agrees to pay off. The
liabilities total will be deducted and the amount that remains is called net assets
and it is to be consideration, “Purchase Consideration of Business”.

Purchase Consideration = Agreed price of assets by purchasing company –

Agreed price of liabilities by purchasing company

When purchasing company agrees to pay purchase consideration more than

net assets of the firm, this excess amount is called “Goodwill.”.

[Good Will = Purchase consideration – Net Assets]

But when purchasing company agrees to pay purchase consideration less

than the net assets, this amount is called “Capital Reserve.” This amount is a
capital gain for the company. So it is recorded as capital reserve in its book.

[Capital Reserve = Net Assets – Purchase Consideration]

Purchasing Company purchases the assets & liabilities of firm’s business and in
exchange of which is liable to pay is known as purchase price. For this the accepted
consideration by both the parties and its financial value is called purchase
consideration, these included the shares and debentures, cash and bank etc. of the
company.

For the calculation of the purchase price under this method, it is required to make
the total of each individual consideration.
Purchase price = Shares given by company + Debentures given
by company + Cash and bank given by company

Necessary Accounts in the books of the firm

1) Realisation Account
2) Partner’s Capital Account
3) Cash/Bank Account
4) New Company Account
5) New Co.’s Equity Shares Account
6) New Co.’s Preference Account
7) New Co.’s Debentures Account

Steps to solve Practical Problems as per Conversion Process

in the books of Partnership Firm.

1) Calculate purchase price according to calculating method or instruction given in

the question.
2) Open required accounts for closing firm’s books.
3) Transfer the balance of assets and liabilities from B/s, to Realisation account.
4) Distribute owners reserve, general reserves and credit balance of Profit and Loss
account of partners in their profit sharing ratio.
5) Transfer the credit and debit balance of current accounts to partner’s capital
accounts.
6) If separate information is given to pay partner’s loan, open partner’s loan
account and show balance on credit side.
7) If company has not taken bank/cash then open bank/cash account by showing
its balance on debit side.
8) Debit the amount of PC on purchasing company (New Co’s) account and credit
realisation account.
9) Assets not taken over by the company are sold out and amount realized is to be
debited to cash/bank account and credited to realisation account. If any assets
are taken over by partners, debit partners account and credit realisation
account.
 10) If the firm has paid off any my liabilities which is not taken by the company, debit
it to realisation account and credit to cash/bank account, otherwise in the case of
any partner being paid off the same amount, debit it to realisation account but
credit it to partner’s capital account.
11) Pass the entry for dissolution expense as per given instruction.
12) Record profit or loss realized from sale of Share received as purchase
consideration, to realisation account.
13) Distribute shares, debentures received from purchasing company as per
instruction, otherwise distribute among partners in their closing capital balance
ratio.
14) Close the partner’s capital account. If there is difference of any balance, then
transfer it to cash account.
15) Finally cash/bank account will be tallied.

1. Radha and Shyam were the partners in a firm sharing profits and losses in the ratio
of 2 : 3 respectively. The balance sheet of their firm as on 31/3/2010 was as under:
Balance Sheet
Liabilities Amount Assets Amount
Rs. Rs.
Capital Accounts : Goodwill 25,000
Radha 80,000 Building 1,20,000
Shyam 1,00,000 1,80,000 Machinery 23,000
Profit and Loss Account 10,000 Investment in the Bonds
12 % Gopal’s Loan 50,000 of Narmada Nigam 15,000
Creditors 60,000 Debtors 75,000
-Bad Debts 5,000 70,000
Stock 35,000
Cash-bank balance 12,000
3,00,000 3,00,000
On 1/4/2010 the firm was converted into “Radheshyam Co. Ltd.”. Conditions of
conversion and other information are as under :
1) The company has to take all the assets and creditors of the firm.
2) The goodwill of the firm is to be valued at twice the average profit of last three
years. The total profit of the last three years amounted to Rs. 1,20,000.
3) The building and machinery are to be valued at Rs. 1,50,000 and Rs. 25,000
respectively. The investments are to be valued at Rs. 20,000.
4) Debtors are to be taken subjects to 10 % bad debts reserve.
5) The remaining assets are to be taken as per book value.
6) Against purchase price, the company has to give 10,000 equity shares of Rs. 10
each at a premium of 10 %, Debentures of Rs. 1,00,000 at a discount of 5% and
the remaining amount in cash.
7) Shyam paid up Gopal’s loan, alongwith accrued interest there on for one year.
8) The firm paid dissolution expenses of Rs. 4,000.
 The shares and debentures received from the company are to be shared by the
partners in their profit sharing ratio and the balance payment is to be made in
cash.
From the above information prepare.
a) Resolution A/c
b) Partners’ Capital A/c
c) Cash A/c [Guj. Uni. 1999]

2. Mahendra, Devendra and Ravi were partners sharing profit –loss in the ratio of 3 :
2 : 1. On 31/3/2010 the firm has decided to sell its business to ABC Ltd. Position of
the firm on that date was as follows:
Liabilities Amount Assets Amount
Rs. Rs.
Capital Accounts : Land & Building 20,000
Mahendra 20,000 Machinery 22,000
Devendra 10,000 Debtors 18,000
Ravi 10,000 40,000 Stock 13,000
Creditors 22,000 Cash 7,000
Loan 18,000
80,000 80,000
The company has taken following assets at given price.
Land-Building Rs. 24,000, Machinery Rs. 21,000, Debtors Rs. 17,000, Stock Rs.
13,000 and Goodwill Rs. 4,000.
The company has not accepted the loan, but agreed to pay creditors.
The company issued 3,000 equity shares of Rs. 10 each and paid remaining
amount in cash for purchase price. Dissolution expense amounted to Rs. 1,000.
Partners have distributed shares in their profit and loss ratio. Prepare necessary
accounts in the books of the firm.
[Sau. Uni. 2006 and 2007]
3. Bansari, Murali and Bina are partners and sharing profit and loss in the ratio of 5 :
3 : 2. The balance sheet of firms on 31/3/2010 is as follows :
Liabilities Amount Assets Amount
Rs. Rs.
Capital Accounts : Land & Building 1,28,000
Bansari 75,000 Machinery 60,000
Murali 45,000 Investments 12,000
Bina 65,000 1,85,000 Bills receivable 5,200
Creditors 45,000 Stock 9,000
Bills payable 6,500 Cash-Bank 12,800
Outstanding expenses 500 Advertisement
Reserve Fund 5,000 Campaign 15,000
2,42,000 2,42,000
The business of Firm sold to Rhythm Ltd. on following conditions:
1) Revaluated assets are Machinery – Rs. 80,000, Stock-Rs.12,000 and Land-
Building – Rs. 62800.
 2) Other assets (except cash-bank and investment) and liabilities to be considered
as on book value.
3) The company agreed to pay Rs. 40,000 as goodwill.
4) The company paid 10,000 equity shares of Rs. 10 each for purchase price and
remaining amount was paid in cash.
5) Partners sold investment at Rs. 10,000 and sold 7,000 equity shares at Rs. 12 and
for remaining shares; they took away at their profit and loss ratio.

Prepare : [1] Realisation Account [2] partners’ Capital account [3] Cash-Bank
Account [4] New Co.’s Account and [5] New Co.’s equity shares account . For
preparation of A/c No. (4) and (5).
[Sau. Uni. April-2010 and Bhav. Uni. 2010]

4. Dharti and Shilpa are partners in a firm sharing profits and losses in the ratio of 3 :
1. The Shital Co. Ltd. Was incorporated to purchase business of the firm with
authorized capital of 10,000 equity shares of Rs. 10 each. The balance sheet of the
firm as on 31/3/2010 was as follows:
Balance Sheet
Liabilities Amount Assets Amount
Rs. Rs.
Capital : Land & Building 40,000
Dharti 75,000 Machinery 20,000
Shilpa 25,000 1,00,000 Investments 25,000
General reserve 12,000 Debtors 37,000
Creditors 22,000 -B.D. 3,000 34,000
Bank over draft 10,000 Bills receivable 6,000
Bills payable 9,000 Cash 3,000
1,53,000 1,53,,000
Conditions for selling their business were as follows :
1) Goodwill of the firm to be valued at Rs. 20,000.
2) Land-Building, Stock and Debtors at Rs. 50,000, Rs. 20,000 and Rs. 30,000
respectively and other assets (except cash and machinery) to be taken over at
book value.
3) All the liabilities except Bank overdraft are accepted by the company. Dissolution
expense of the firm will be borne by the company.
4) Purchase consideration is to be paid in 6,000 fully paid up equity shares of Rs. 10
each at 20 % premium, 10 % Debentures of the Co. worth Rs. 40,000 and rest
amount in cash.
5) Partners have distributed share in their profit-loss sharing ratio. Difference ar to
adjusted in cash.
6) The firm sold machinery at Rs. 19,000 and paid off bank overdraft Dissolution
expenses amounted to Rs. 1,000.
Prepare necessary accounts in the books of firm.
[Guj. Uni. April-2005 Same ; Sau. Uni. April-2004]
5. Ravindra, Surendra and Mahendra are the partners sharing Profits-Losses in the
ratio of 3 : 2 : 1. The balance sheet of the firm was as under on 31 st December,2010.
Liabilities Amount Assets Amount
Rs. Rs.
Capital : Goodwill 1,00,000
Ravindrar 2,00,000 Land-Building 2,00,000
Surendera 1,20,000 -Depreciation 20,000 1,80,000
Mahendra 80,000 4,00,000 Machinery 2,00,000
Profit and Loss Account 1,20,000 -Depreciation 20,000 1,80,000
Worker’s Comp. Fund 60,000 Furniture 60,000
Worker’s Profit sharing fund 90,000 Investments 1,00,000
Investment Fluctuation fund 20,000 Stock 90,000
Creditors 1,00,000 Debtors 1,00,000
Bills payable 30,000 -Bad Debts 10,000
Outstanding Expenses 5,000 -BDR 7,000
-Reserve for Disc. 3,000 80,000
Bills receivable 14,000
Bank 15,000
Advt. Suspense A/c 6,000
8,25,000 8,25,000
Harendra Ltd. Purchased all real assets except Bank and all Liabilities except
Bills payable on 1-1-2011 with the following conditions :
1) The company agreed to pay 10 % more for Land & Building and 20 % more for
furniture.
2) Rs. 81,000 is to be paid for stock.
3) Other real assets are to be taken over at book value.
4) The Company took liability at took value.
5) Mahendra accepted to pay bills payable.
The company agreed to pay 3,000 equity shares of Rs. 100 each at 10 %
premium, 1200 debentures of Rs. 200 each of 5 % discount and the rest in bank.
The partners distributed Equity shares and Debentures in profit sharing ratio.
From the above information, prepare :
[1] Realisation A/c, Partners’ Capital A/c and Bank A/c.
[2] Write journal entries for the transactions regarding purchase consideration
and receiving the amount for the same. [S.G.Uni. March-2006]
6. Varsha and Bina were in partnership sharing profits and losses inn ratio of 2 : 1.
The balance sheet of the firm as on 31-3-2010 was as under:
Liabilities Amount Assets Amount
Rs. Rs.
Capital : Fixed Assets 70,000
Varsha 50,000 Current Assets :
Bina 40,000 90,000 Stock 35,000
Current Account : Varsha 20,000 Debtors 65,000
Bina’s Loan 30,000 Bank 15,000 1,15,000
Creditors 55,000 Current Account : Bina 10,000
1,95,000 1,95,000
 The fixed assets included two Motor cars, having book value of Rs. 8,000 and Rs.
6,000 respectively. The firm sold their business to Prakash Textiles Ltd.
Purchasing Company acquires the stock and fixed assets other than the motor
cars.
Purchasing consideration is to be paid by Rs. 56,000 in cash, 900 equity shares of
Rs. 100 each and 400, 5 % preference shares of Rs. 100 each.
Rs. 61,000 were received from debtors. Rs. 51,000 were paid to creditors
partners agreed on the following maner:
1) One car will be taken over by Varsha at Rs. 12,000 and Bina will take over the
other car at Rs. 8,000.
2) Bina to be allotted preference share against her loan the remainder to be allotted
to Varsha.
3) Both partners will be distributed equity share in their fixed capital ratio.
4) Remaining amount to be settled in cash.
Market price of equity shares and preference shares to be considered at the
value of Rs. 80 per share. Prepare necessary accounts in the books of the firm.
[Guj. Uni. April-1995]
7. Balance sheet of the firm of “Abhi” and “Dabbu” as on 1-4-2010 is as under:
Liabilities Amount Assets Amount
Rs. Rs.
Capital : Land & Building 1,12,500
Abhi 75,000 Machinery 30,000
Dabbu 75,000 1,50,000 Furniture 15,000
General Reserve 15,000 Debtors 97,500
Loan from Abhi 75,000 Stock 60,000
Creditors 75,000 Bank 30,000
Bills payable 30,000
3,45,000 3,45,000
Harsh Ltd. Was incorporated for conversion of the firm into a company,
authorized capital of which was 3,000 Equity Shares each of Rs. 100 and 13 %
1500 Preference Shares each of Rs. 100. Conditions for conversion from
partnership firm to company were as under:
1) Harsh Ltd. took over all the assets as under :
Machines Rs. 37,500, Land and Building Rs. 1,80,000, Goodwill Rs. 97,500 and
remaining assets at their book value.
2) Harsh Ltd. also took over all the liabilities other than Abhi’s loan.
3) 12 % Debentures of Harsh Ltd. of Rs. 7,500 (which were later on given to Abhi
for his loan A/c by the firm) and for the balance equity share and preference
shares of Harsh Ltd. were given to the firm in the ratio of 2 : 1 being purchase
consideration of the firm. Prepare accounts in the books of the firm.
4) Prepare necessary accounts in the books of firm:
[1] Realisation A/c [2] Partners Capital A/c [3] Abhi’s Loan A/c [4] Harsh Ltd. ‘s
A/c [5] Harsh Ltd.’s Equity shares A/c [6] Harsh Ltd’s Preference share A/c [7]
Harsh Ltd.’s 12 % Debentures A/c.

[Sau. Uni. F.Y.B.Com. April-2001 and April-2009]

8. Balance Sheet of Irfan and Munaf as on 1-4-2010 is as under :
Liabilities Amount Assets Amount
Rs. Rs.
Capital Accounts : Land & Building 2,80,000
Irfan 1,80,000 Machinery 1,40,000
Munaf 1,80,000 3,60,000 Furniture 40,000
General Reserve 40,000 Debtors 1,10,000
Loan from Irfan 1,80,000 Stock 80,000
Creditors 90,000 Bank 50,000
Bills payable 30,000
7,00,000 7,00,000

Patel Ltd. was incorporated for conversion of the firm into a company,
authorized capital of which was 5000 Equity shares each of Rs. 100 and 15 %
2,500, Preference shares each of Rs. 100.

Conditions for conversion from partnership firm to a company were as

under:
1) Patel Ltd. took over all the assets as under :
Land-building Rs. 3,20,000
Machinery Rs. 1,50,000
Goodwill Rs. 1,20,000 (as per new value) and remaining Assets
at their book value.
2) Patel Ltd. also took over all the liabilities other than Irfan’s Loan.
3) 12 % Debentures of Patel Ltd. of Rs. 1,80,000 (which were later on given to
Irfan for his loan by the firm) and for the balance equity and Preference
shares of Patel Ltd. were given to the firm in the ratio of 2 : 1 being
purchased consideration of the frim.

4) Prepare accounts in the books of the firm as under :

a) Realisation A/c
b) Partners’ Capital A/c
c) Patel Ltd. A/c
d) Irfan’s Loan A/c
e) Patel Ltd.’s Equity shares A/c
f) Patel Ltd.’s 15 % Preference shares A/c
g) Patel Ltd.’s 12 % Debenture A/c
Required calculations are to be shown.