PARTNERSHIP DISSOLUTION ILLUSTRATED 1. Adjustment of affairs upon retirement of a adjustments necessary upon the re tirement of a partner are well illustrated in a case stated by Mr. Leo Greendlinger, C. P. A.
A, B, C and D were partners, having a partner ship agreement in writing which contained the follow ing special provisions :— (1) The capital $100,000 is to be contributed by: A one-half, B one-fourth, C one-fifth and D one-twentieth.
(2) Interest at 6 per cent per annum is allowed on any amount contributed by a member in excess of the required investment and charged on any deficiencies.
(3) Withdrawals are not to be made beyond the salary allowances.
(4) Each partner is allowed a yearly salary, to be drawn monthly or otherwise: namely, A $3,500, B $2,500, C $2,000 and D $1,000. Such salary allowance is to be credited at the end of the year to the drawing account of each partner —an offset against his monthly withdrawals of such salary.
(5) All adjustments among the partners for interest on capital, drawings, etc., are to be made at the end of each year after the trial balance of the ledger accounts has been taken.
(6) On the retirement of a member of the firm, he is to be entitled, in addition to the amount appearing on the credit side of his ledger account, to good-will. The valuation of the good-will is to be one-half the sum of the last two years' net profits of the business for each retiring member.
(7) Profits and losses are to be divided as follows: A, 50 per cent ; B, per cent ; C, 15 per cent ; D, 10 per cent.
2. Preparation of necessary statements for adjust December 31, after the partnership has existed for four years, A wishes to retire. A list of the ledger accounts as well as all the facts and no tations necessary for the adjustment in accordance with the partnership agreement is prepared and gives the following information: The net profits for the previous three years were $8,500, $9,300, $6,700 respectively.
The semi-annual interest on the mortgage is pay able in January and July.
Of the premium paid on insurance of buildings and plant, and stock and fixtures there is unexpired in surance amounting to $200 and $100 respectively.
The inventories are as follows: It is agreed that the depreciation of various assets at the present should be at the following percentages, on the net balance shown on the respective ledger ac counts, after deducting the deprecfation of former years as shown by the various depreciation accounts.: It is also agreed that a reserve of 5 per cent is to be provided for bad and doubtful accounts on the notes and accounts receivable outstanding.
In the first year of the enterprise the partners con tributed capital as follows: A, $60,000; B, $20, 000; C, $14,000; D, $6,000. As no interest adjust ments were made at the time, the partners agree that such an adjustment is to be made now. The items shown as drawings to B's and C's accounts are not all to be considered as overdrafts on salary. On the contrary, an abstract shows that B and C have not taken out all their salaries, and that there is due to each, after deducting the withdrawals of $500, another $500 on account of salary not withdrawn, while A and D have each overdrawn $500.
After completing the foregoing transaction, the partners decide in accordance with the partnership agreement (clauses 5 and 6) that A is to get in cash one-half of the sum due him and the other half in four notes of equal amounts, payable within two years' time; one note every six months.
The problem, then, is (a) to determine the re sult of the year's operations; (b) make the proper adjustment entries consistent with the intentions of the partners; (c) prepare a final balance sheet, and (d) show the partners' respective capital accounts.
3. Trial balance and first step is to find out if the books are in equilibrium and in order to do this we prepare the trial balance given on page 95. In accordance with the best practice the accounts are grouped so as to facilitate the preparation of financial statements.