2.1 Accounting for Consignment. | unit 2 accounting for consignment and joint venture

UNIT II

2.1 Accounting for Consignment.

MEANING:

To consign means TO SEND

Consignment is an AGREEMENT between two parties i.e., Consignor and Consignee, whereby Consignor agrees to send goods to consignee on regular basis for the purpose of sale in exchange of commission and reimbursement of expenses to be paid by consignor to consignee.

The party who sends the goods is called CONSIGNOR (Principal).

The party to whom the goods are sent is called CONSIGNEE (Agent).

The ownership of the goods i.e., Property in goods remain with consignor. Agent does not become the owner. It means the POSSESSION of the goods is transferred but not OWNERSHIP. On sale, the buyer will become the owner.

Principal does not send invoice to agent he only sends PROFORMA INVOICE which looks like invoice. The object of proforma invoice is to convey information to agent regarding particulars of goods sent.

Goods are sold by consignee on behalf of consignor AT THE RISK OF CONSIGNOR. Consignee gets commission for the goods sold and he is not responsible for any Bad Debts that may arise.

If the agent has to be made responsible for any BAD DEBTS that may arise, he is to be paid additional commission called DEL-CREDERE COMMISSION. Such commission is calculated on total sales, not only on credit sales until and unless agreed.

Agent sends periodical statement to principal called ACCOUNT SALES. It includes information about sales made by agent, expenses incurred on behalf of principal, commission charged by agent and balance due to principal.

ACCOUNT SALES:

An Account sale is the periodical summary sent by consignee to consignor.

It contains:

a) Sales made.

b) Expenses by consignee on behalf of consignor.

c) Commission earned.

d) Unsold inventory left with consignee.

e) Advance payments if any.

f) Balance payment due or remitted

ADVANCE TO CONSIGNEE	SECURITY AGAINST CONSIGNMENT
Advance is paid by consignee at the time of delivery of goods which is adjusted in full against amount due.	Deposit is in the form of security against goods. In case if unsold inventories are left with consignee, only proportionate security on respect of sold goods is adjusted against amount due and balance security in respect of goods unsold is carried forward. Full amount of security is not adjusted against amount due

DIFFERENCE BETWEEN CONSIGNMENT & SALE:

CONSIGNMENT	SALE
Ownership of the goods remains with the consignor.	Ownership of the goods transfer to buyer.
Consignee can return unsold goods.	Goods sold can be returned only if seller agrees.
Consignor bears the loss of goods held with consignee.	Buyer have to bear the loss if any after delivery of goods.
Relationship between CONSIGNOR and CONSIGNEE is that of PRINCIPAL and AGENT.	Relationship between buyer and seller is that of Creditor and Debtor
Expenses incurred by consignee to keep goods safely are borne by consignor.	Expenses by buyer to keep goods safely is borne by buyer.

CALCULATION OF STOCK ON CONSIGNMENT

VALUE OF STOCK ON CONSIGNMENT

= Proportionate Cost of Goods + Proportionate Consignor’s Exp + Proportionate Consignee’s Non-Selling Exp.

CONSIGNEE’S EXPENSE

 NON-SELLING EXPENSES (Incurred by consignee before goods reaches at consignee’s place)

Packing, Freight, Carriage inward, Cartage, Octroi, Transit insurance.

 SELLING EXPENSES (Incurred by consignee after goods reaches at consignee’s place)

Godown rent, Godown insurance, Delivery charges, Advertisement & Other selling exp.

VALUE OF GOODS IN TRANSIT

= Proportionate Cost + Proportionate consignors Exp.

COMMISSION

NORMAL COMMISSION	OVER-RIDING COMMISSION	DEL-CREDERE COMMISSION
Given to agent as a reward for his services.	Given to agent for selling goods over and above a targeted price. This type of commission includes agent to sell at higher selling price.	Given to agent for shifting responsibility of collection and risk too. In case if Del-Credere Commission is given, agent bears the loss of Bad Debts (if any)

NORMAL & ABNORMAL LOSS

NORMAL LOSS

 A loss which is unavoidable and essential.

 A loss which can be anticipated well in advance

 Such loss would be spread over entire consignment. It means good units will bear the normal loss.

ABNORMAL LOSS

 A loss which is incurred over and above the normal loss.

 A loss which is avoidable.

 Such loss would not be spread over entire consignment. It means good units will not bear the abnormal loss.

ABNORMAL LOSS IN TRANSIT does not include consignee’s non-recurring exp.

ABNORMAL LOSS AT CONSIGNEES GODOWN include consignee’s non-recurring expenses.

GOODS RETURNED BT CONSIGNEE does not include consignee’s expenses.To return the goods.

JOURNAL ENTRIES IN THE BOOKS OF CONSIGNOR

GOODS SENT ON CONSIGNMENT.

Consignment A/c. Dr To GSOC A/C.

EXPENSES PAID BY CONSIGNOR

Consignment A/c. Dr

To Cash/Bank A/c.

EXPENSES PAID BY CONSIGNEE

Consignment A/c. Dr

To Consignee A/c

SALES BY CONSIGNEE

Consignee A/c. Dr

To Consignment A/c

EXPENSES & COMMISSION BY CONSIGNEE.

Consignment A/c. Dr

To Consignee A/c

FINAL REMITANCE RECEIVED

Cash/Bank A/c. Dr

To Consignee A/c

TRANSFER OF GSOC

GSOC A/c. Dr

To Trading A/c.

GOODS RETURNED BY CONSIGNEE

GSOC A/c. Dr

To Consignment A/c

ADV. RECEIVED FROM CONSIGNEE

Cash/Bank/BR A/c. Dr

To Consignee A/c.

BR DISCOUNTED

Bank A/c. Dr

Discount A/c. Dr

To BR A/c.

DISCOUNT CHARGED/TRF.TO CONSIGNMENT A/c.

Consignment A/c. Dr

To Discount A/c.

NORMAL LOSS

NO ENTRY

Cost of normal units will be shifted to other Good units and finally borne by customer.

ABNORMAL LOSS

P&L A/c. Dr.

To Consignment A/c

This loss is not shifted to good units but shifted to P&L A/c. It means it is borne by businessman

In case if insurance Claim is admitted, entry for abnormal loss will appear as follows

Insurance claim. Dr

P&L A/c. Dr.

To Consignment A/c

GOODS SENT ON CONSIGNMENT AT INVOICE PRICE

Dr. CONSIGNMENT A/c Cr.

Particulars	Amount	Particulars	Amount
To Opening stock	Invoice Price	By Opening Stock Reserve	LOADING
To GSOC(Goods sent)	Invoice Price	By GSOC(Goods sent)	LOADING
TO GSOC(Goods returned)	LOADING	BY GSOC(Goods returned)	Invoice Price
To Closing Stock Reserve	LOADING	By Closing Stock	Invoice Price

GOODS SENT ON CONSIGNMENT AT INVOICE PRICE Consignment A/c. Dr To GSOC A/c.	GOODS RETURNED FROM CONSIGNMENT AT INVOICE PRICE GSOC A/c. Dr To Consignment A/c.
LOADING ON GOODS SENT ON CONSIGNMENT AT INVOICE PRICE GSOC A/c. Dr To Consignment A/c.	LOADING ON GOODS RETURNED FROM CONSIGNMENT AT INVOICE PRICE Consignment A/c. Dr To GSOC A/c.

JOURNAL OF CONSIGNEE

GOODS RECEIVED ON CONSIGNMENT.

NO ENTRY

EXPENSE PAID BY CONSIGNOR

NO ENTRY

EXPENSES PAID BY CONSIGNEE.

Consignor A/c. Dr

To Cash/Bank A/c.

CASH SALES MADE BY CONSIGNEE.

Cash/Bank A/c. Dr

To Consignor A/c.

CREDIT SALES MADE BY CONSIGNEE.

Consignment Debtor A/c. Dr

To Consignor A/c.

COLLECTION FROM CONSIGNMENT DEBTOR.

Cash/Bank A/c. Dr

To Consignment Debtors A/c.

COMMISSION CHARGED.

Consignor A/c. Dr

To Commission / Del-credere commission A/c

AMOUNT PAID TO CONSIGNOR.

(advance or final remittance)

Consignor A/c. Dr

To Cash / Bank / BP A/c

BAD DEBTS

(a) If Del-Credere Commission is charged

Del-Credere A/c. Dr.

To Consignment Debtors A/c

(b) If Del-Credere Commission is NOT charged

Consignor A/c. Dr.

To Consignment Debtors A/c.

2.4. SOLVED EXAMPLES:

Q.1. RAWAL RATAN SINGH of Chittorgarh consigned 1000 units of 100 each to RANI PADMAVATI of SINGHAL. Expense made by RAWAL RATAN SINGH in such consignment are Rs. 20,000.

RANI PADMAVATI paid unloading charges Rs. 5,000 and Rs.2 P.U. selling expenses.

She sold all the goods at Rs.140 each and deducted 5% as commission and remitted draft for the balance. Prepare Ledger accounts in the books of Consignor.

SOLUTION: -

Ledger of Rawal Ratan Singh(Consignor)

Dr. CONSIGNMENT A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Goods sent on Consignment (1000 X 100)	1,00,000	By Padmavati (Sales-1000 X 140)	1,40,000
T0 Cash (1000 X 20)	20,000
To Padmavati Non selling exp (1,000 X 5) Selling exp (1,000 X 2)	5,000 2,000
To Padmavati (Comm-1,40,000 X 5%)	7,000
To P&L (Bal.Fig)	6,000

TOTAL	1,40,000	TOTAL	1,40,000

Dr. PADMAVATI A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment	1,40,000	By Consignment	6,600
		By Consignment	5,600
		By Bank (Bal.Fig)	1,27,800

TOTAL	1,40,000	TOTAL	1,40,000

Dr. Goods Sent On Consignment A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
		By Consignment	1,00,000
To Trading (transfer)	1,00,000
TOTAL	1,00,000	TOTAL	1,00,000

Q.2. On 15 Jan, 2013 J&K Co. of Mumbai sent to Muku & Co. of Kolkata 400 bicycle at an invoice price of Rs.100 per bicycle to be sold on commission. Freight and insurance were Rs.600.

Accounts sale was received from consignee as follow: -

15 March - 100 per bicycle were sold @ Rs.145 on which 5%. Commission and Rs.375 for expenses were deducted.

10 April - 150 per bicycle were sold @ Rs.140 on which 5%. Commission and Rs.290 for expenses were deducted.

From the above information prepare Consignment A/c in the books of J&K Co. and close it on 30 April, 2013 keeping in mind that no salves were made afterwards. Also show accounts in the books of Muku & Co.

Solution: -

Ledger of J&K CO. (Consignor)

Dr. CONSIGNMENT A/c Cr.

DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
2013			2013
Jan 15	To GSOC	40,000	Mar. 15	By Muku (sales)	14,500
Jan 15	To Cash/Bank (J&K exp.)	600	Apr. 10	By Muku (sales)	21,000
Mar. 15	To Muku (exp.)	375	Apr. 30	By Stock on Consignment	15,225
Mar. 15	To Muku (commission)	725
Apr. 10	To Muku (exp.)	290
Apr. 10	To Muku (commission)	1,050
Apr. 30	To P&L (Bal. Fig.)	7,685

	TOTAL	50,725		TOTAL	50,725

Dr. MUKU’s A/c (Consignee) Cr.

DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
2013			2013
Mar. 15	To Consignment (Sales)	14,500	Mar. 15	By Consignment (expense)	375
Apr. 10	To Consignment (Sales)	21,000	Mar. 15	By Consignment (Commission)	725
			Apr. 10	By Consignment (expense)	290
			Apr. 10	By Consignment (Commission)	1,050
			Apr. 30	By Balance c/d	33,060
	TOTAL	35,500		TOTAL	35,500

Dr. Goods sent on Consignment A/c Cr.

DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
2013				2013
Apr. 30	To Trading A/c (transfer)	40,000	Jan. 15	By Consignment	40,000

	TOTAL	40,000		TOTAL	40,000

LEDGER OF MUKU & CO. (Consignee)

Dr. J&K Co. A/c Cr.

DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
2013			2013
Mar. 15	To Cash/Bank (expense)	375	Mar. 15	By Cash/Bank (Sales)	14,500
Mar.15	To Commission	725	Apr. 10	By Cash/Bank (Sales)	21,000
Apr. 10	To Cash /Bank (expense)	290
Apr. 10	To Commission	1,050
Apr. 30	To Balance c/d	33,060

	TOTAL	34,500		TOTAL	34,500

Dr. COMMISSION A /c Cr.

DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
2013			2013
Apr. 30	To P&L (Bal.Tfd.)	1,775	Mar.15	By J&K (14,500 X 5%)	725
			Apr. 10	By J&K (21,000 X 5%)	1,050

	TOTAL	34,500		TOTAL	34,500

Working note: -

Closing Stock

Cost of Goods Sent.

 Quantity sent 400

Cost of Goods (400 X 100) 40,000

Add: - J&K Co. Expense 600

b) Total Cost 40,600

c) Quantity Sold 250

d) Quantity in stock 150

e) Closing Stock - Cost

= Total Cost X Quantity in Stock / Quantity Sent

= 40,600 X 150/400

= 15,225

Note: - It is assumed that the consignee's expenses are incurred after the goods have reached their godown and hence not included in valuation of stock.

Q.3. On 1st November,2015, A of Calcutta sends goods costing Rs.1,00,000 to B of Delhi on Consignment basis. A paid Rs. 5,000 as freight and Rs. 2,000 as insurance.

On 31st December,2015, an Account Sales was received from B disclosing that the entire quantity of goods were sold for Rs.1,50,000 out of which Rs. 30,000 was sold on credit A customer who purchased goods for Rs. 5,000 failed to pay and the debt proved bad. All other debts were collected by B in full. As per the agreement, B is allowed a commission @ 10% on sales. B sends the amount due to A by cheque.

Prepare necessary Ledger accounts in the books of A & B.

Solution: -

LEDGER OF A

Dr. CONSIGNMENT A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Goods sent on Consignment	1,00,000	By B’s (Cash sales)	1,20,000
To Cash/Bank Freight. 5,000 Insurance. 2000	7,000	By B’s (Cr. Sales)	30,000
To B's (commission) (10% of 1,50,000)	15,000
To B's A/c (Bad debt)	5,000
To P&L A/c (bal.fig.)	23,000

TOTAL	1,50,000	TOTAL	1,50,000

Dr. B's A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment (Cash sales)	1,20,000	By Consignment (commission)	15,000
To Consignment (Cr. Sales)	30,000	By Consignment (bad debts)	5,000
		By Bank A/c (Remittance)	1,30,000

TOTAL	1,50,000	TOTAL	1,50,000

Dr. Goods sent on Consignment A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Trading A/c (transfer)	1,00,000	By Consignment A/c	1,00,000
TOTAL	1,00,000	TOTAL	1,00,000

LEDGER OF B

Dr. A's A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Commission	15,000	By Cash/ Bank (Sales)	1,20,000
To Consignment Debtors (Bad debts- no del credere comm)	5,000	By Consignment Debtors (Cr. Sales)	30,000
To Cash/Bank (Remittance)	1,30,000
TOTAL	1,50,000	TOTAL	1,50,000

Dr. CONSIGNMENT DEBTORS A/c Cr.

PARTICULAR	AMOUNT	PARTICULAR	AMOUNT
To A's	30,000	By Cash/Bank (collection)	25,000
		By A's (Bad debts no del cr. commission)	5,000
TOTAL	30,000	TOTAL	30,000

Q.4 Refer to question 3. Prepare the necessary ledger account, if in the above question the consignee is given a del credere commission of 5% on sales (In addition to ordinary commission)—other things remaining the same.

SOLUTION: -

LEDGER OF A

Dr. CONSIGNMENT A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To GSOC	1,00,000	By B’s (Cash sales)	1,20,000
To Cash/Bank Freight. 5,000 Insurance 2000	7,000	By B's (Cr. Sales)	30,000
To B's (commission) (10% of 1,50,000)	15,000
To B's (Del-Credere Commission)	7,500
To P&L (bal.fig.)	23,000
TOTAL	1,50,000	TOTAL	1,50,000

Dr. B's A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment (Cash sales)	1,20,000	By Consignment (commission)	15,000
To Consignment (Cr. Sales)	30,000	By Consignment (Del-cr. commission)	7,500
		By Cash/Bank(Remittance)	1,27,500
TOTAL	1,50,000	TOTAL	1,50,000

Dr. Goods sent on Consignment A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Trading A/c (transfer)	1,00,000	By Consignment A/c	1,00,000
TOTAL	1,00,000	TOTAL	1,00,000

LEDGER OF B

Dr. A's A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To commission	15,000	By Cash/ Bank (Sales)	1,20,000
To Del credere commission	7,500	By Consignment Debtors (Cr. Sales)	30,000
To Cash/Bank (Remittance)	1,27,500
TOTAL	1,50,000	TOTAL	1,50,000

Dr. CONSIGNMENT DEBTORS A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To A's	30,000	By Cash/Bank (collection)	25,000
		By A's (Bad debts Adjusted)	5,000
TOTAL	30,000	TOTAL	30,000

Dr. Del Credere Commission A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment Debtors (Bad Debts)	5,000	By A's	7,500
To P&L (Bal. Fig)	2,500
TOTAL	7,500	TOTAL	7,500

Dr. COMMISSION A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To P&L (Bal. Fig)	15,000	By A's	15,000
TOTAL	15,000	TOTAL	15,000

Dr. PROFIT & LOSS ACCOUNT Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Profit c/d to B/S	17,500	By Commission	15,000
		By Del Credere Commission (Net trfd.)	2,500
TOTAL	17,500	TOTAL	17,500

Q.5. Amit of Mumbai consigned 100 sewing machines to Sanjay of Surat to be sold on his risk. The cost of one machine was Rs.150, but the invoice price was Rs.200. Amit paid freight Rs. 600 and insurance in transit Rs.200

Sanjay sent a draft to Amit for Rs. 10,000 as advance and later sent an account sales showing that 80 machine were sold at Rs.220 each. Expenses incurred by Sanjay were carriage inward Rs. 25, Octroi Rs.75, godown rent Rs.500 and advertisement Rs.300. Sanjay is entitled to a commission of 5% on sales.

Journalise the above transaction in the books of Amit and Sanjay.

SOLUTION: -

LEDGER OF AMIT

Dr. CONSIGNMENT A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To GSOC	20,000	By Sanjay (Sales)	17,600
To Cash/Bank (Amit expenses)	800	By Stock on Consignment	4,180
To Sanjay (Expenses)	900	By GSOC (Load)	5,000
To Sanjay (Commission)	880
To Stock Reserve c/d	1,000
To P&L(bal.fig.)	3,200
TOTAL	26,780	TOTAL	26,780

Dr. SANJAY A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment (Cash Sales)	17,600	By Cash/ Bank (Advance)	10,000
		By Consignment (Expenses)	900
		By Consignment (Commission)	880
		By Balance c/d	5,820
TOTAL	17,600	TOTAL	17,600

Dr. Goods sent on Consignment A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment	5,000	By Consignment A/c	20,000
To Trading A/c (transfer)	15,000
TOTAL	20,000	TOTAL	20,000

LEDGER OF SANJAY

Dr. AMIT A/c Cr.

PARTICULAR	AMOUNT	PARTICULAR	AMOUNT
To Cash/ Bank (Advance)	10,000	By Cash/ Bank	17,600
To Cash/ Bank (Expenses)	900
To Commission	880
To Balance c/d	5,820
TOTAL	17,600	TOTAL	17,600

Q.6. On 1st July,2016, Rustom House of Ahmedabad consigned 100 keyboards to TCS of Mumbai. The cost of each keyboard was Rs.450 but the pro forma invoice price was Rs.600. Rustom House paid Rs.3000 for freight and insurance. On 7th July,2016, TCS accepted a 3 months’ bill drawn upon them by Rustom House for Rs. 30,000. TCS paid Rs. 1,200 as rent and Rs.750 for advertisement and up to 31st December,2016(On which Rustom House closes their books) they sold 80 keyboards @ 615 each. TCS were entitled to a commission of 5% on sales.

Show the ledger accounts recording the above transaction in the books of Rustom House and TCS

SOLUTION: -

LEDGER OF Rustom House

Dr. CONSIGNMENT A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To GSOC	60,000	By TCS (Sales)	49,200
To Cash/Bank (Rustom House expenses)	3,000	By Stock on Consignment	12,600
To TCS (Expenses)	1,950	By GSOC (Load)	15,000
To TCS (Commission) (49,200 X 5%)	2,460
To Stock Reserve (Load)	3,000
To P&L(bal.fig.)	6,390
TOTAL	17,600	TOTAL	17,600

Dr. TCS A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Consignment (Cash Sales)	49,200	By Bills Receivable (Advance)	30,000
		By Consignment (Expenses)	1,950
		By Consignment (Commission)	2,460
		By Balance c/d	14,790
TOTAL	49,200	TOTAL	49,200

Dr. Goods sent on Consignment A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Trading A/c (transfer)	45,000	By Consignment A/c	60,000
To Consignment	15,000
TOTAL	60,000	TOTAL	60,000

LEDGER OF TCS

Dr. Rustom House A/c Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Bills Payable (Advance)	30,000	By Cash/ Bank(Sales)	49,200
To Cash/ Bank (Expenses)	1,950
To Commission	2,460
To Balance c/d	14,790
TOTAL	49,200	TOTAL	49,200

Q.7. D. Dogra of Delhi sent to his agent, M. Monga of Madras, 500 articles costing Rs.15/- per article at an invoice price of Rs.20 per article. The following payments were made by D. Dogra in this connection: freight and carriage Rs. 450, miscellaneous exp. Rs. 50. M. Monga sent a bank draft for Rs. 3,000 as an advance against the Consignment M. Monga sold 300 articles at a flat rate of Rs.28 per article and sent an Account Sales showing deduction for storage charges Rs.550 insurance Rs.550 and his Commission of 3% plus 2% Del Credere on gross sale proceeds, and remitted the amount due on consignment. M. Monga also informed D. Dogra that 50 articles were damaged in transit and thus they were valued at Rs.550. Journalize the above transactions in the books of the consignor and consignee.

SOLUTION: -

Books of Dogra (Consignor)

Journal

				Dr.	Cr.
				Rs.	Rs.
(1)	Consignment to madras A/c Dr			7,500
	To Goods sent on Consignment A/c				7,500
(500 articles sent to M. Monga, Agent, Cost being Rs.15 per article).
(2)	Consignment to Madras A/c Dr			500
	To Bank Account				500
(Expenses incurred on the Consignment)
	Freight & Carriage	Rs.	450
	Miscellaneous Exp.	Rs.	50
			500
(3)	Bank Account Dr			3,000
	To M. Monga				3,000
(Advance received from the Agent in the form of Bank Draft.)
(4)	M. Monga Dr			8,400
	To Consignment to Madras A/c				8,400
(Sales affected by M. Monga as per Account Sales.)
(5)	Consignment to Madras A/c Dr			570
	To M. Monga				570
(Expenses incurred by M. Monga Rs.150 and Commission due to him, Rs.550 (5% of Rs. 8,400).
(6)	Bank Account Dr			4,830
	To M. Monga				4,830
(Amount due from the consignee received.)
(7)	P & Loss A/c Dr			350
	To Consignment to Madras A/c				350
(Abnormal Loss on 50 damaged Articles)
(8)	Stock on Consignment A/c Dr			2,850
	To Consignment to Madras A/c				2,850
	(Value of stock unsold at Madras)		Rs.
	150, goods articles, @ Rs.20		2,250
	Add: Expenses Rs.150		150
	50 damaged articles		450
			2,850
(9)	Consignment to Madras A/c Dr			3,030
	To Profit & Loss Account				3,030
(Profit on consignment transferred to Profit & Loss Account)
(10)	Goods sent on Consignment A/c			7,500
	To Trading A/c				7,500
(Goods sent on consignment A/c closed by transfer to trading Account)

Books of M. Monga (Consignee)

Journal

			Dr.	Cr.
			Rs.	Rs.
(1)	D.Dogra A/c Dr		3,000
	To Bank A/c			3,000
(Advance sent to the Consignor against consignment)
(2)	D. Dogra A/c Dr		150
	To Bank A/c			150
(Expenses incurred on the Consignment on behalf of D. Dogra
	Storage	50
	Insurance	100
		150
(3)	Bank A/c Dr		8,400
	To D. Dogra A/c			8,400
(Sale of 300 articles @ Rs.28 each out of the Consignment.)
(4)	D. Dogra A/c Dr		420
	To Commission A/c			420
(5% Commission on Sales made on half of D. Dogra; 3% Commission + 2% Del Credere)
(5)	D. Dogra A/c Dr		4,830
	To Bank A/c			4,830
(Amount due to D. Dogra remitted).

Q.8. Philips Radio of Calcutta dispatched 1,000 transistors at Rs.700 each to Mohan Bros. of Delhi, the consignors paid freight Rs.7,500, cartage Rs.500 and insurance Rs.2,500 Mohan Bros. received only 900 sets and incurred he following expenses.

Rs.

Octroi and other Expenses 1,00,000

Cartage 5,000

Sales expenses 6,000

The consignee sold 600 sets only. You are required to calculate the value of closing stock.

SOLUTION: -

Calculation of value of unsold stock

Particulars	Units
Sets Received	900
Sets Sold	300
Unsold Stock	600

Particulars	Rs.
Cost of Unsold Stock (300 x 700)	2,10,000
Add: Proportionate expenses of Consignor (7500 + 500 + 2500) x 300/1000	3,150
Add: Proportionate expenses of Consignee (Octroi & Cartage) (1,00,000 + 5000) x 300/900	35,000
	2,48,150

Q.9. Deepak sold goods on behalf of Geep Sales Corporation on consignment basis. On 1 January 2002 he had with him a stock of Rs.20,000 on consignment. During the year he received goods worth Rs.2,00,000.

Deepak had instructions to sell goods at cost plus 25% and was entitled to a commission of 4% on sales in addition to 1% del credere commission.

During the year ended 31 December 2002 cash sales were Rs.1,20,000; credit sales Rs.1,05,000; Deepak’s expenses relating to consignment Rs.3,000 being salaries and insurance bad debts amounted to Rs.3,000.

Prepare necessary accounts in the books of Geep Sales Corporation.

SOLUTION: -

Solution :
In the books of Geep Sales Corporation
Consignment Account
Dr.			Cr.
	Rs.		Rs.
To Consignment Stock b/d	20,000	By Deepak
To Goods sent on Consignment Account	2,00,000	Cash Sales 1,20,000
To Deepak (Commission)	9,000	Credit Sales 1,05,000	2,25,000
To Deepak (Commission)	2,250	By Consignment Stock c/d	40,000
To Deepak (expenses)	3,000
To Profit & Loss Account
(Profit)	30,750
	2,65,000		2,65,000
Deepak’s Account
Dr.			Cr.
	Rs.		Rs.
To Consignment account (Sales)	2,25,000	By Consignment account
		(Commission)	9,000
		By Consignment Account
		(Commission)	2,250
		By Consignment Account
		(Exp.)	3,000
		By Balance c/d	2,10,750
	2,25,000		2,25,000

Working Notes:

(1) Calculation of Consignment Stock Sale Price = 100 + 25 = 125

Cost of Sales = Sales × 100/125

= 2,25,000 × 100/125

= Rs.1,80,000

Cost of the goods available for sale = Rs. 20,000 + Rs. 2,00,000 = Rs.2,20,000. Hence stock at the end = Rs. 2,20,000 - Rs. 1,80,000 = Rs. 40,000

(2) Since Deepak is paid del-credere commission, bad debts of Rs. 3,000 would be borne by him.

Q.10. S of Bombay consigned 10,000 kg. of oil to D of Calcutta. The cost of oil was Rs.2 per kg. S paid Rs. 5,000 as freight and insurance. During transit 250 kg were accidentally destroyed for which the insurers paid directly to the consignors Rs.450 if full settlement of the claim.

D reported that 7,500 kg were sold @ Rs.3 per kg. The expenses being on godown rent Rs. 200 on advertisement Rs. 1,000 and on salesman salary Rs. 2,000 D. is entitled to a commission of 3% plus 1.5% del credere. D reported a loss of 100 kg. due to leakage. D. settled the accounts by bank draft. Prepare the accounts is the books of S.

SOLUTION: -

Consignment to Calcutta A/c
Dr.				Cr.
		Rs.		Rs.
To Goods on Consignment A/c		20,000	By Bank (Ins. Co.)	450
To Bank—Freight & Insurance		5,000	By P & L A/c (abnormal loss	175
To D—Expenses		3,200	By D— (Sale proceeds)	22,500
To D—Commission
Ordinary 3%	675		By Consignment Stock A/c	5,431
Del Credere 1.5%	338	1,013	By P & L A/c—Loss	657


		29,213		29,213
Goods Sent on Consignment A/c
Dr.				Cr.
		Rs.		Rs.
To Trading A/c		20,000	By Consignment to Calcutta A/c	20,000
Consignment Stock A/c
Dr.				Cr.
		Rs.		Rs.
To Consignment Calcutta A/c		5,431	By Balance c/d	5,431
D’s A/c
Dr.				Cr.
		Rs.		Rs.
To Consignment to Calcutta A/c			By Consignment to Calcutta A/c
—(sale proceeds)		22,500	(Exp.)	3,200
			By Consignment to Calcutta A/c
			(commission)	1,013
			By Bank	18,287
		22,500		22,500
Working Notes:
(A) Cost of Goods destroyed			Rs.
Cost of 10,000 kg.@Rs.2			20,000
Freight			5,000
Total cost of 10,000 kg.			25,000

(B) Value of Stock still unsold
Quantity received by D (Excluding accidental loss)			9,750
Less: Normal Leakage			(100)
			9,650
Cost of 9,650 kgs (25,000-625)			Rs. 24,375
Cost of 2,150 kgs (24,375 / 9650 x 2150)			Rs. 5,431

Key takeaways:

The party who sends the goods is called CONSIGNOR (Principal).

The party to whom the goods are sent is called CONSIGNEE (Agent).

Principal does not send invoice to agent he only sends PROFORMA INVOICE which looks like invoice. The object of proforma invoice is to convey information to agent regarding particulars of goods sent.

Goods are sold by consignee on behalf of consignor AT THE RISK OF CONSIGNOR. Consignee gets commission for the goods sold and he is not responsible for any Bad Debts that may arise.

2.2 Accounting for Joint Venture.

The accounting for the joint venture depends on the level of control exercised on the joint venture. If a significant amount of control is made, the equity method should be used. This article describes the concept of significant impact and how to use the equity method to account for investments in joint ventures.

Impact of significant impact

A key factor in deciding whether to use the equity method is the degree of impact investors have on the joint venture. The basic rules for managing the presence of significant influence are:

Voting rights - If the investor and its subsidiary hold at least 20% of the voting rights in the joint venture, it is estimated that there will be a significant impact. When considering this item, consider the impact of potential voting rights currently exercisable, such as warrants, stock options and convertible bonds. This is the highest priority rule for managing the presence of significant influence.

2. Board sheet -Investors manage the seats on the board of directors of the joint venture personnel. Administrators are shared between entities.

3. Policy decision- Investors participate in the policy-making process of the joint venture. For example, investors can influence decisions about distribution to shareholders.

4. Technical guidance- Important technical information is provided by one party to the other transaction. There are important transactions between entities.

5. Unless there is clear evidence that there is no significant impact, these rules should be followed. Conversely, if voting rights are less than 20%, significant impacts can only exist if they are clearly indicated.

Despite the presence of one or more of the factors mentioned above, investors can lose significant control over the joint venture. For example, governments, regulators, or bankruptcy courts can effectively manage joint ventures, thereby eliminating what was previously a significant investor influence.

Equity method

If there is a significant impact, investors will need to account for their investment in the joint venture using the equity method. In essence, the equity method requires that the initial investment be recorded at cost, after which the investment is adjusted to the actual performance of the joint venture. The following calculation shows how the equity method works.

+ Initial investment recorded at cost

Investor share of joint venture profit or loss

-Distribution received from joint venture

= End investment in joint venture

The investor's share of the joint venture's profit and loss is recorded in the investor's income statement. In addition, if the joint venture records changes in other comprehensive income, investors must also record their share of these items in other comprehensive income.

If the joint venture reports a large loss or a series of losses, recording the investor's share of these losses can significantly reduce the investor's recorded investment in the joint venture. In that case, the investor will stop using the equity method when the investment reaches zero. If the investor's investment in the joint venture has been reduced to zero, but there are other investments in the joint venture (such as loans), the investor will continue to recognize the share of the loss in the additional joint venture and other losses. Must be offset with. In the order of investments, priorities of those investments (first at offset to the most junior items). If the joint venture later begins to report profits again, investors will use the equity method until a share of the joint venture's profits offsets all losses of the joint venture that were not recognized during the period of use of the equity method. Will not resume. It was interrupted.

How to maintain a joint venture account

Method 1: If another set of books is maintained

Joint venture account

Joint bank account

Method 2: If another set of books is not maintained

Case 1: When each co-venture records all transactions

Joint venture account

Coventurer account

Case 2: When each co-venture records only its own transactions

Memorandum of Understanding Joint Venture Account

Joint venture with joint venture account

METHOD 1 :

WHEN SEPARATE SET OF BOOKS ARE MAINTAINED

JOURNAL ENTREIS

SL. NO	PARTICULAR’S	ENTRIE’S
1.	When the contribution made by the co- venture’s	Joint bank account Dr. To co-ventures’ account
2.	When the expenses paid through joint bank account	Joint venture account Dr. To joint bank account
3.	When the expenses paid or materials supplied by the co-ventures from private account	Joint venture account Dr. To co-venture account
4.	When the sales proceeds or collections	Joint bank account Dr. To joint venture account
5.	When the collections received by co- ventures	Co-ventures account Dr. To joint venture account
6.	When the assets taken over by the co- venture’s	Co-ventures account Dr. To joint venture account
7.	When the liabilities taken over by the	Joint venture account Dr.

	co-ventures	To co-venture account
8.	When there is profit on joint venture	Joint venture account Dr. To co-venture account
9.	When there is loss on joint venture	Co-venture account Dr. To joint venture account
10	When the final settlement made to co- venture’s	Co-venture account Dr. To joint bank account

METHOD - 2

WHEN SEPARATE SET OF BOOKS ARE NOT MAINTAINED WHEN EACH CO-VENTURER KEEP RECORD OF ALL TRANSACTIONS

JOURNAL ENTRIES

SL.NO	PARTICULARS	ENTRIES
1	When goods supplied to joint venture form own business stock	Joint venture account Dr. To purchase account
2	When joint venture expenses paid	Joint venture account Dr. To cash/bank account
3	When the material supplied to or expenses paid for joint venture by other co-ventures	Joint venture account Dr. To co-venture’s account
4	When the sales made	Cash/bank account Dr. To joint venture account
5	When the sales made by other co- ventures	Co-venture ‘s account Dr. To joint venture account
6	When the venture profit	Joint venture account Dr. To profit and loss account (own share) To co-venture’s account
7	When the ventures loss	Profit and loss account (own share) Dr. Co-venture’s account Dr. To joint venture account
8	When the final settlement to co-ventures
A	When amount is paid to co-ventures	Co-ventures account Dr. To cash/bank account
B	When amount is received from co- ventures	Cash/bank account Dr. To co-venture’s account

METHOD 3

WHEN EACH C0-VENTURER KEEP RECORD OF OWN TRANSACTIONS ONLY MEMORANDUM JOINT VENTURE ACCOUNT

JORNAL ENTRIES

SL. NO	PARTICULARS	ENTRIES
1	Goods supplied to joint venture form business stock	Joint venture account Dr. To purchase account
2	When joint venture expenses paid	Joint venture account Dr. To cash/bank account
3	When the sales made	Cash/bank account Dr. To joint venture account
4	When own share in the joint venture profit	Joint venture account Dr. Profit and loss account
5	When own share in the joint venture loss	Profit and loss account Dr. To joint venture account
6	When cash received from other co-venture	Cash/bank account Dr. To joint venture account
7	When cash remitted to other co- venture	Joint venture account Dr. To cash/bank account
8	When the final settlement
9	When amount is paid to co- ventures	Joint venturers account Dr. To cash/bank account
10	When amount is received from co-ventures	Cash/bank account Dr. To joint venture account

Key takeaways:

1) A JV is a business agreement in which two or more parties agree to pool resources for the purpose of performing a particular task.

2) They are colloquially partnerships, but they can take any legal structure.

3) A common use for JVs is to partner with local companies to enter foreign markets.

4) A strategic joint venture is a business agreement that actively involves two companies that make collaborative decisions to work together to achieve a particular set of goals.

5) Joint ventures help companies establish a foreign presence and gain a competitive advantage in a particular market.

6) The joint venture has helped many companies achieve access to emerging markets that are otherwise difficult to enter.

2.3 Accounting for Dissolution of Partnership Firm; Insolvency of Partners (excluding Sale to a Company) and Piecemeal Distribution.

Definition of Dissolution:

According to Section 39 of the Indian Partnership Act of 1932, the dissolution of a partnership between all partners of a company is called the dissolution of the company. The dissolution of the company is a complete collapse of the partnership and the partners will not continue the company.

Dissolution of a partnership means the restructuring of the company due to the retirement of a partner, and the remaining partners will provide the survival of the company in accordance with an explicit or implied agreement to that effect. When the company dissolves, the company is closed, so the company's assets are realized and the debt is exempted.

On the other hand, when the partnership is dissolved, the share of the seconded partner will be confirmed and the company will not be closed. Modes of Dissolution of a Company: Sections 40-44 of the Indian Partnership Act of 1932 deal with various methods by which a company may dissolve.

The company can be dissolved in any of the following ways:

Dissolution by agreement: If all partners agree to dissolve, the company will dissolve. Partnerships are the creation of contracts. Similarly, the company can be dissolved by agreement.

Dissolution of the Unforeseen Event: Unless the opposite contract is between partners, the company will dissolve in one of the following ways:

by the expiration of the company's lifetime.

By the completion of the adventure in which the company was formed.

By the death of a partner.

By the ruling of a bankrupt partner.

Dissolution by the will of the partnership: If the partnership is willing, the company may be dissolved at any time by a partner who informs all other partners in writing of their intention to dissolve the company.

Forced dissolution or dissolution due to the operation of the law: The company will be forced to dissolve in one of the following ways:

If all partners go bankrupt except.

When all partners go bankrupt.

When the business becomes illegal.

When the number of partners exceeds 20 in the case of regular business and 10 in the case of banking business.

Dissolution by Court: In a partner proceeding, the court may order the dissolution of the company in any of the following ways:

When a partner becomes unhealthy.

When a partner suffers from permanent incompetence and is unable to perform his or her duties as a partner.

If a partner is found guilty of an illegal act that affects the business of the company.

When a partner commits a deliberate or permanent breach of agreement.

When a member transfers all of the company's interests to a third party, or when the shares are transferred in accordance with the law, or when they are sold in the course of the law.

When the business of the company cannot be continued except for the loss.

Dissolve the company when the court is satisfied with the reason for making it fair and impartial.

Realization and Revaluation Accounts Created to realize a company's assets, the realized amount is used to pay the company's liabilities as required by law.

If there are costs incurred by the company to realize the company's assets (called realization costs), they are debited to this account. The difference between the two aspects of this account is that it discloses either realization gains or losses and is transferred to the partner capital account at a profit-sharing rate.

Realized accounts are different from revaluation accounts.

Criterion:

Time factor Asset recording Purpose Cost-effectiveness Realization account: Created when the company dissolves. Record the book value and realized value of assets and liabilities. Its main purpose is to realize the company's assets and use this amount to pay the company's liabilities to distribute the profits or losses from this effect to all partners. Contains an entry for dissolution costs. Record the impact of realization of various assets and payment of liabilities. After opening this account, all accounts in your ledger will be closed. That is, it will be liquidated.

Revaluation account:

Created at the time of deposit, partner's death, etc.

Its main purpose is to revalue the company's assets and liabilities upon joining, leaving, or dying a partner so that the partner does not benefit or suffer from a partnership change.

It does not include entries for expenses incurred in revaluing assets and liabilities.

Record the impact of revaluation of assets and liabilities. The company will continue after opening this account.

Bankruptcy Definition: If a partner's capital account shows a debit balance at the time of the company's dissolution, he is supposed to pay the company a debit balance to settle this account.

However, if such a partner goes bankrupt, that is, if he cannot meet his debt to the company, according to Garner vs. Murray's decision, his shortage that he cannot bring will be borne by other solvent partners.

In this case, it was decided that the company would have to bear the shortage of the bankrupt partner's capital account unless there was an opposite agreement.

The effect of this ruling is to distinguish between the normal loss of trading or realization of an asset and the loss of a partner's bankruptcy.

The loss in case of bankruptcy is a capital loss and must be borne by another solvency partner with that capital. This ruling was given to return the solvent partner's capital account to the value before the transfer of the loss of realization.

Fixed and variable capital: When determining the capital ratio of solvent partners, it is necessary to distinguish between fixed and variable capital.

If it is agreed that the partner's capital will be fixed, no adjustments such as cumulative profit or loss, interest on capital, drawings, etc. will be required, and the bankruptcy partner shortage will be payable in proportion to the agreed fixed capital

The partner will pay for it if the capital account is maintained on a variable basis, the capital account is adjusted for reserves, profit or loss, interest on capital, drawings, and unrecorded assets and liabilities on the date of the balance sheet immediately before the firm dissolves need to do it.

Date / Senior Number Details LF Debit Credit Solvent Partners Current a / c Dr. To Insolvent Partners Capital a / c (Transfer the insolvent partner's shortfall to the Solvent Partner's checking account in proportion to the agreed fixed capital. ) Date / Senior Number Details LF Debit Credit Solvent Partners Capital a / c Dr. To Insolvent Partners Capital a / c (Transfer the shortfall of Solvent Partners to the Solvent Partners Capital Account)

If all partners go bankrupt: If all partners go bankrupt and cannot bring the amount to be paid, the full amount cannot be paid to the creditors of the company. Second, there are two ways to close a company's books.

(A) If the external liability cannot be transferred to the realized account: Follow these steps:

Miscellaneous assets (excluding cash and bank balances) will be debited to the realized account as usual.

Realization accounts are credited when the asset is realized.

For realized costs, the realized account is debited and the cash account is credited.

If the liability is secured, the liability will be paid preferentially within the realization of the asset held as collateral.

The amount the partner brings in from private land is credited to the capital account and debited to the cash account.

A cash account is provided to calculate the amount available for payment to unsecured external liabilities.

The balance of the unsecured external liabilities account represents the amount not paid to these creditors and is closed by the transfer to the shortfall account.

The capital account (after all entries) is closed by transferring the balance to the shortage account. The shortfall account, if prepared, will be aggregated.

(B) If the effects of realization of all assets and liabilities pass through the realization account:

(A) In this case, the external liabilities are also transferred to the realization account. External liabilities are paid in the amount available for unsecured external liabilities that can be identified by creating a cash account.

(B) Secured creditors (within collateral mitigation) are always paid preferentially over unsecured creditors.

(D) The balance of the capital account is transferred to the shortage account.

(E) Shortage accounts are aggregated when prepared

Sale to Company Definition: Partnership conversion means changing the status of a partnership company to a joint-stock company. A new company was established to take over the business of the company. A conversion is like selling a partnership business to a new company.

The need to convert partnerships into companies: Shareholder responsibilities are limited. The company can raise more money to expand its business.

The entity of the company is separated from its members. Membership, death or bankruptcy does not affect the survival of the company.

To take advantage of lower income tax rates.

To enjoy the benefits of large-scale production.

The business unit must survive.

Purchase Consideration: The amount that the purchasing company pays to the vendor company to take over the assets and liabilities.

Calculation method of purchase conditions:

One-time method: The case of making a fixed amount or one-time payment from the purchasing company of the vendor company is called the one-time method.

Net Payment Method: In this method, the purchase consideration is the sum of all payments made by the company to the vendor company, in the form of stocks, bonds, and cash.

Net worth method: This method calculates the total assets inherited at the value agreed by the company and deducts the agreed value of the liabilities assumed.

Gradual Realization and Gradual Distribution of Assets: In tiered asset realization, realized cash is distributed in the following order to avoid overpayment to partners:

Realization costs are paid first because they take precedence over unsecured. a creditor.

Second, the company's debt to third parties must be paid in full before the partner pays any amount of the loan and capital.

Secured creditors should take precedence over unsecured creditors. After the creditor is repaid, you must pay the amount you should pay to your partner as a loan.

If the loan is from multiple partners, the available cash must be paid properly. After payment of external debt and loans to the member, the member's capital is paid in two ways:

Proportional capital method

Maximum loss method

(i)Proportional capital method: If a member's capital is in a ratio, their profit-sharing arrangements, and each of them is paid according to his capital ratio in each distribution. If the partner's capital is not in the profit-sharing ratio, the first cash that can be distributed between the partners must be paid to the partner whose capital is greater than the profit-sharing ratio to bring the capital to the profit-sharing level. Cash that can be distributed between partners cannot be distributed according to the profit and loss distribution ratio unless the partner's capital is in the profit and loss distribution ratio. This is because the outstanding balance of the capital account does not remain in the profit and loss distribution. Partner ratio.

(ii) Maximum Loss Method: Another way to distribute cash in small increments between partners is to calculate the maximum loss possible for all realizations after the external debt and partner loan have been paid. The amount distributable between partners is compared to the amount of capital paid to the partners to ensure the maximum possible loss, assuming no future assets realize any amount. The maximum loss thus identified is deducted from the partner's capital at the profit and loss distribution ratio, and the balance left in the capital account after deducting the maximum possible loss is the amount paid to the partner. However, if the share of the partner with the greatest potential loss is greater than the amount standing in the credit of his capital account, he is treated as bankrupt and his shortage is the ratio of the capital of the other partner. Should be debited to the capital account of the other partner in, as stated in the case of Garner vs. Murray, stood on the day of dissolution.

Key takeaways:

A partnership is an arrangement between two or more people to oversee the operation of a business and share its interests and debts.

In a partnership, all members share both profits and liabilities.

Professionals such as doctors and lawyers often form limited liability partnerships.

Partnerships may have tax incentives compared to companies.

The liquidating company will cease business as usual.

Its sole purpose is to sell the assets, pay the creditors and distribute the remaining assets.

Liquidation of a business is not the same as bankruptcy, but it is usually the end result of bankruptcy.

A partnership is a business consisting of two or more partners, each sharing a business debt, liability, and asset.

Partners have unlimited liability and personal property may be seized if the partnership goes bankrupt.

Partners must create a written partnership agreement.

Partnerships are less expensive to form than companies.

Example 1

Kumar, Shy am and Ratan were partners of companies that each shared profit in a 5: 3: 2 ratios. We have decided to dissolve the company from April 1, 2013. On the day, the company's balance sheet is as follows on As of April 1, 2013.

Liabilities	Amount	Assets	Amount
Creditors	1,20,000	Plant	80,000
Capital A / cs Kumar 68,000 Siamese 50,000 Rattan 27,000	1,45,000 ________ 2,65,000	Stock Motor van furniture Debtor Cash	30,000 25,000 45,000 71,000 14,000 _______ 2,65,000

The following results were obtained due to the dissolution

Rs 40,00 for plant. It was taken over by Kumar with an agreed value of 40,000 rupees. 45,000 and the rest of the plants achieved Rs. 50,000.

Furniture has realized Rs. 40,000.

The motor van was taken over by Siam. 30,000.

The debtor has realized Rs. Less than 1,000.

Rupee creditor. 20,000 were untraceable and the remaining creditors were paid in full.

The realization cost has reached rupees. 5,000.

Prepare realization accounts, partner capital accounts, and company bank accounts.

		Realisation Account			Cr
Particulars		Amount	Particulars		Amount
To miscellaneous goods assets A / c Plant Furniture Motor van Inventory Debtor To Cash A / c (Creditor WN2) To Cash A/c Expenses	80,000 45,000 25,000 30,000 71,000 _______	2,51,000 1,00,000 5,000 _______ 3,56,000	By Miscellaneous goods liabilities A / c(creditors) By Kumar ’s Capital A / c (taken over by the plant) By Shyam ’s Capital A / c (taken over by motor van) By Cash A/c Plants Furniture Debtor (71,000 – 1,000) By realized loss transferred to (WN1) to cash A / c (cost) Kumar's capital A / c Siamese capital A / c Rattan Capital A / c	50,000 40,000 70,000 500 300 200	1,20,000 45,000 30,000 1.60,000 ________ 1,000 _______ 3,56,000

Note: If there is no information about the realization of an asset, it is assumed that nothing will be realized from that asset (such as a stock in this case).

Dr	Partners’ Capital Account							Cr
Particulars	Kumar Rs	Shyam Rs	Ratan Rs	Particulars	Kumar Rs	Shyam Rs	Ratan Rs
To realization A / c (inherited asset	45,000	30,000	-----	By balance b / d	68,000	50,000	27,000
To Realization A / c (Loss of Realization	500	300	200
To Cash A / c (final payment)	22,500	19,700	26,800
	68,000	50,000	27,000		68,000	50,000	27,000

Dr		Cash Account			Cr
Particulars	Amount		Particulars	Amount
To balance b / d	14,000		By Realized A / c (creditors	1,00,000
To Realization A / c (realization of plants, furniture, debtors)	1,60,000		By Realization A / c (cost)	5,000
			Kumar's capital A / c (final payment) Shyam ’s Capital A / c (final payment) Ratan ’s Capital A / c (final payment)	22,500 19,700 26,800
	1,74,000			1,74,000

Working Note:

1. Realized loss = 1,000

Realized loss transferred to Kumar's capital account = 1,000 x 5/10 = 500

Realized loss transferred to Shyam's capital account = 1,000 x 3/10 = 300

Realized loss transferred to Rattan's capital account = 1,000 × 2 = 200

2. Creditor = 1,20,000

20,000 of them were untraceable

Therefore, the creditor was paid in full payment of 1,20,000 – 20,000 = 1,00,000.

Example 2

The Ravi and Mohan companies were dissolved on January 3, 2013. According to the agreement, Rabbi agreed to carry out the dissolution work with the agreed reward of 2,000 rupees and to bear all the realization costs. The dissolution cost was rupees. The same as 1,500 was paid by the company. Pass the journals required to pay the dissolution fee.

Solution:

Realization A / c …… .. Dr 1,500

to cash A / c 1,500

(The cost of realization will be paid.)

ii. Realization A / c …… .. Dr. 600

To Mohan's capital A / c 600

(The cost of realization will be borne by the partner.)

iii. Realization account …… .. Dr 2,000

To the capital of Mohan, A / c 2,000

(The cost of realization will be paid to Mohan.)

no entry

Example 3

How are undistributed profits such as general reserves and income statement credit balances treated when the company is dissolved?

Solution

The court may order the dissolution of a partnership company in the event of bankruptcy of all partners or all but one partner.

Example 5

What is a partnership breakup?

Solution

Example 6

Identify situations in which the court may order the dissolution of the partnership company.

Pass the journal if:

Realization cost Rs. 1,500

Realization cost Rs. 600, but paid by partner Mohan,

Mohan, one of the company's partners, was asked to investigate the dissolution of the company he was allowed to charge for Rs. 2,000.

A car with a book value of 50,000 taken over by a creditor with a book value of Rs. 40,000 for final payment.

Solution

iv. Realization A / c …… .. Dr 1,500

to cash A / c 1,500

(The cost of realization will be paid.)

v. Realization A / c …… .. Dr. 600

To Mohan's capital A / c 600

(The cost of realization will be borne by the partner.)

vi. Realization account …… .. Dr 2,000

To the capital of Mohan, A / c 2,000

(The cost of realization will be paid to Mohan.)

vii. no entry

Example 7

A and B share profits and losses in a 5: 2 ratios. They decided to dissolve the company. Assets and external debt have been transferred to Realization A / c. Pass in the journal entries that affect:

Rupee bank loan. 12,000 will pay off.

A was to bear all the costs of the realization he was given to the Rs fee. 400.

The postponed advertising costs A / c appeared in the Rs book. 28,000.

Stock equivalent to Rs. It was taken over by B for 1,600 rupees. 1,200.

Just as an unrecorded computer realized Rs. 7,000.

I had an unpaid invoice for a rupee repair. 2,000. It was rewarded.

Solution

Realization A / c Dr. 12,000

To bank A / c 12,000

(Repaying bank loan) …… 12,000

2. Realization A / c Dr. 400

To A / c, the capital of A 400

(Commission to A credited to A's capital account)

3. Capital of A A / c Dr. 20,000

B ’s Capital A / c Dr. 8,000

To postponed advertising expenses A / c 28,000

(Deleted advertising costs, or profit-sharing ratio, cancelled by debiting the partner's capital account at a ratio of 5: 2). 28,000

4. B's Capital A / c Dr. 1,200

To Realization A / c 1,200

(The shares have been taken over by B for 1,200 rupees at the agreed value)

5. Bank A / c Dr. 7,000

To Realization A / c 7,000

(Unrecorded computer sells for 7,000 rupees)

6. Realization A / c Dr. 2,000

To bank A / c 2,000

(It must be an unpaid invoice paid for repair)

Example 8

A, B, and C operate in partnerships that share profits and losses in proportions of 1/2, 3/8, and 1/8, respectively. On March 31, 2012, they agreed to sell their business to a limited liability company.

Their position on the day was:

	₹		₹
A’s capital	40,000	Machinery	48,000
B’s capital	30,000	Furniture	42,000
C’s capital	26,000	Stock	23,000
Loan on mortgage	16,000	Book debts	15,000
Sundry creditors	18,000	Cash	2,000

	1,30,000		1,30,000

The company took the following assets at the valuation shown below-

	₹
Machinery	61,000
Furniture	31,800
Stock	22,000
Book debts	14,000
Goodwill	10,000

The company also agreed to pay the creditors which was agreed at 17,700. The company paid ₹ 67,000 in fully paid shares of ₹ 10 each and the balance in cash. The expenses amounted to ₹ 1,500.

Prepare ledger accounts in the books of the firm.

Solution)

Dr. Realization account Cr.

		₹			₹
2012			2012
March 31	To sundry assets-		March 31	By loan on mortgage
	Machinery 48,000		March 31	By sundry creditors
	Furniture 42,000		March 31	By ltd’s company a/c
	Stock 23,000			Machinery 61,000
	Book debts 15,000	1,28,000		Furniture 31,800
March 31	To cash - expenses	1,500		Stock 22,000
March 31	To cash – loan paid	16,000		Book debts 14,000
March 31	To profits transferred to:			Goodwill 10,000
	A’s capital 4,800			1,38,800
	B’s capital 3,600			Less – creditors 17,700
	C’s capital 1,200	9,600			1,21,100

		1,55,100			1,55,100

Dr. Limited company’s account Cr.

		₹			₹
2012			2012
March 31	To realisation a/c		March 31	By shares in ltd.	67,000
	-consideration	1,21,100	March 31	By cash	54,100
		1,21,100			1,21,100

Dr. Cash account Cr.

		₹			₹
2012			2012
March 31	To balance b/d	2,000	March 31	By realisation a/c
March 31	To ltd. company	54,100		Expenses	1,500
				Loan	16,000
			March 31	By capital a/c
				A 16,380
				B 12,280
				C 9,940	38,600
		56,100			56,100

Dr. Share in Ltd. Company a/c Cr.

		₹			₹
2012			2012
March 31	To ltd. company	67,000	March 31	By A’s capital a/c	28,420
			March 31	By B’s capital a/c	21,320
			March 31	By C’s capital a/c	17,360

		67,000			67,000

Capital Acc

Particulars	A	B	C	Particulars	A	B	C
	₹	₹	₹		₹	₹	₹
To shares in ltd. company	28,420	21,320	17,360	By balance b/d	40,000	30,000	26,000
To cash settlement, balancing figure	16,380	12,280	9,940	By realisation a/c - profits	4,800	3,600	1,200


	44,800	33,600	27,200		44,800	33,600	27,200

Note – total number of shares received from the limited company is 6,700. These have been divided among A, B and C in the ratio 448,336 and 272 or 28, 21 and 17 respectively. Namely, in the ratio of the amount finally due to them. Hence

A gets or 2,842 shares of ₹ 28,420 ;

B gets or 2,132 shares of ₹ 21,320 ; and

C gets or 1,736 shares of ₹ 17,360 ;

Example 9

Mr. B and Mr. E are partners who share profits and losses in a 3: 2 ratio, respectively. On September 30, 2010, they recognized Mr. C as a partner and the new profit-sharing ratio is 2: 2: 1. C brings in equipment Rs 3,000 and cash Rs 10,000, and goodwill is (i) B and E Rs 20,000 and (ii) C Rs 10,000, but neither number is on the books.

On March 31, 2011, the partnership was dissolved, B retired, and the other two partners were EC (Pvt.) Ltd with equal capital. Formed a company called, taking over all the remaining assets and liabilities, goodwill agreed at Rs 40,000, the company's book. B agrees to take over the scooter for Rs 3,700. A machine with a book value of 4,000 rupees was sold for 3,000 rupees, exceeding the requirement.

It was agreed that the profits for the last two years were 17,200 rupees and 19,000 rupees, respectively, and the net profit for the half year ending September 30, 2010 would be equal to the average for the last two years and the current year.

When C was entered, no entry was made except for the cash received. EC (Pvt.,) Company Ltd., B has agreed to lend the company a loan of 50,000 rupees secured by 10% corporate bonds.

The trial balance as of March 31 is as follows. 2011:

	Debit (₹)	Credit (₹)
Capital accounts
B		35,000
E		20,000
C		10,000
Drawing accounts
B	6,000
E	5,000
C	2,800
Debtors and creditors	31,000	12,000
Machines	23,000
Fixtures	7,000
Scooter	2,700
Stock as on 31st march 2011	13,000
Bank	16,300
Profit and loss account for the year		29,800
	1,06,800	1,06,800

Prepare :

(i) Goodwill Adjustment Account

(ii) Capital accounts of the partners

(iii) Profit and Loss Appropriation Account

(iv) Balance Sheet of EC (Pvt.) Ltd. as on 318 March, 2011.

Solution)

Dr. Goodwill adjustment account Cr.

2011		₹	2011		₹
March 31	To partner’s capital account (to raise goodwill of all partners as on 30th September 2010)		March 31	By partner’s capital account (to write off total goodwill as on 30th September 2010)
	B (3/5 of ₹ 20,000)	12,000		B (2/5 of ₹ 30,000)	12,000
	E (2/5 of ₹ 20,000)	8,000		E (2/5 of ₹ 30,000)	12,000
	C	10,000		C (2/5 of ₹ 30,000)	6,000
March 31	To partner’s capital account (firm’s goodwill as on 31st March 2011):		March 31	By goodwill account (account closed by transfer to goodwill account as the amount appear in the books of the company)	40,000
	B (2/5 of ₹ 40,000)	16,000
	E (2/5 of ₹ 40,000)	16,000
	C (2/5 of ₹ 40,000)	8,000
		70,000			70,000

Dr. Capital account Cr.

2011 March 31	B	E	C	2011 March 31	B	E	C
	₹	₹	₹		₹	₹	₹
To Drawings	6,000	5,000	2,800	By balance b/d	35,000	20,000	10,000
To Goodwill Adjustment Account—written off	12,000	12,000	6,000	To Goodwill Adjustment Account— raised	12,000	8,000	10,000
To scooter	3,700	400	200	To Goodwill Adjustment Account—raised	16,000	16,000	8,000
To machines – loss on sale	400			By fixtures – not recorded earlier			3,000
To loan from account*	50,000			By profit and loss - Appropriation account - Profit up to 30th September, 2008		13,200	8,800
To bank – settlement	7,620			By profit and loss Appropriation account - Profit of the new firm	3,120	3,120	1,560
To bank – to make capital equal		7,580		By scooter – profit on takeover	400	400	200
To share capital account - transfer		31,340	31,340	By bank – to make capitals equal			7,580

	79,720	56,320	40,340		79,720	56,320	40,340

Profit and loss appropriation account for the year ended on 31 march 2011

	₹		₹
To partner’s capital accounts (distribution of profit upto 30th september 2010)		By profit and loss account – net profit for the year b/d	29,800
B (3/5 of ₹ 22,000)	13,200
E (2/5 of ₹ 22,000)	8,800
To partner’s capital account (distribution of profits pertaining to new firm):
B (2/5 of ₹ 7,800)	3,120
E (2/5 of ₹ 7,800)	3,120
C (1/5 of ₹ 7,800)	1,560
	29,800		29,800

Dr. Balance sheet of EC (pvt.) ltd. Cr.

As on 31st March, 2011

Liabilities	₹	Assets	₹
Share capital:		Fixed assets
Authorised	?	Goodwill	40,000
Issued and subscribed	62,680	Machines	19,000
(all the shares have been allotted as fully paid up personant to a contract without payments being received in cash)		Fixtures	10,000
Secured loans:		Current assets , loans and advances
Loan from B	50,000	(A) Current assets
10% debentures 50,000		Stocks	13,000
Less: debentures suspense account (50,000)	NIL	Debtors	31,000
		Cash at bank	11,680
		(B) Loans and advances	NIL
Current liabilities and provisions:
A) Current liabilities
Creditors	12,000
B) Provisions	NIL
	1,24,680		1,24,680

Working Notes :

(i) Break-up of total net profit for the year : ₹

Profits for the preceding two years = ₹ (17,200 + 19,000) 36,200

Add ; Current year’s profit 29,800

Total profit for the three years 66,000

Average =

Profit upto 30th September, 2010 = ₹ 22,000

Profit for the remaining six months i.e., profit pertaining to the new firm

= ₹ 29,800 - ₹ 22,000 = ₹ 7,800.

(ii) Scooter account

	₹		₹
To balance b/d	2,700	By B’s capital account – scooter taken over by B	3,700
To partner’s capital account (transfer of profit on take-over)
B (2/5 of ₹ 1,000)	400
E (2/5 of ₹ 1,000)	400
C (1/5 of ₹ 1,000)	200

	3,700		3,700

(iii) Machines account

	₹		₹
To balance b/d	23,000	By bank (sale, book value ₹ 4,000)	3,000
		By partner’s capital account (transfer of loss on sale)
		B (2/5 of ₹ 1,000)	400
		E (2/5 of ₹ 1,000)	400
		C (1/5 of ₹ 1,000)	200
		By balance c/d	19,000
	23,000		23,000

Alternatively, a realization account may be opened to transfer the profits from the scooter takeover and the losses from the sale of the machine. There is no transfer to the capital account because the realized account does not show profit or loss.

(iv) Adjustments to be made in the capitals of E and C : ₹

E's capital before adjustment 38,920

C's capital before adjustment 23,760

Total 62,680

E and C are to have equal capital.

Thus, each must have a capital of ₹ 31,340

C will being in ₹ (31,340-23,760) or ₹ 7,580 to make his capital equal to ₹ 31,340.

E will withdraw ₹ (38,920-31,340) or ₹ 7,580 to leave a balance of ₹ 31,340 in his capital account.

(v) Cash Book (Bank Columns)

	₹		₹
To balance b/d	16,300	By B’s capital - settlement	7,620
To machines a/c – sale	3,000	By E’s capital – amount withdrawn	7,580
To C’s capital a/c – amount brought in	7,580
		By balance c/d	11,680
	26,880		26,880

Example 10

W, S and T have partnered to share profits and losses in a 3: 2: 1 ratio, respectively. They split the approved equity capital of Rs. 6,00.000 into 45,000 shares of Rs. 10 and Rs. 15,000, respectively, a privately held company T & Co. , Ltd. Decided to establish.

The company was incorporated and took over the partnership's business, goodwill, and certain assets on March 31, 2012. The company's balance sheet for this date is as follows:

	₹		₹
Capital accounts		Fixed assets at cost less depreciation:
W 1,50,000		Machinery	65,000
S 1,00,000		Scooters	18,000
T 60,000	3,10,000	Furniture and fittings	6,000
Current accounts		Current assets:
W 29,250		Stock in trade	1,80,000
T 20,750		Debtors	52,000
50,000		Bank	86,000
Less: S overdrawn 21,000	29,000
W’s loan account	40,000
Creditors	28,000
	4,07,000		4,07,000

T owned free land that he had granted to the partnership and agreed to sell to the company for Rs 1,00,000. The consideration was issued to him for 10,000 rupees, 10% of the cumulative preferred stock of 10 rupees each.

Retired W was presented with one of the scooters by his partner and was valued at 6,000 rupees in the book. The remaining scooters were taken over by the company for 10,000 rupees. W also received certain furniture for which he was charged Rs 1,500. All debtors were considered good and were taken over by W, who agreed to repay the creditors.

The company took over the remaining furniture and accessories at a price of Rs 3,000, the machinery at its book value, the shares at an agreed price of Rs 1,66,000, and the bank's balance. The value of the partnership goodwill was agreed at Rs 40,000 for the purpose of the acquisition.

The company has agreed to repay W's loan for 3,000 rupees, 10% cumulative preferred stock, 10 rupees each and 10,000 rupees in cash.

The balance of consideration is to be issued by the company by issuing 30,000 shares of 10 rupees to the partner in proportion to the final balance of the total capital and checking account, and the balance is in cash. Will be paid. .. Calculate the consideration and show how it is discharged. Prepare the accounts needed to close the company's books.

Dr. Realisation account Cr.

2012		₹	2012		₹
March 31	To sundry assets:		March 31	By W’s capital a/c:
	Machinery 65,000			Furniture 1,500
	Scooters 18,000			Debtors 52,000	53,500
	Furniture etc. 6,000			By S’s capital a/c 4,000
	Stock in trade 1,80,000			By T’s capital a/c 2,000
	Debtors 52,000			(car presented to W by S and T)	6,000
	Bank 86,000	4,07,000		By T and Co. ltd – assets taken over	3,70,000
	To profit transferred to:
	W’s capital a/c (3/6) = 1,250
	S’s capital a/c (2/6) = 7,500
	T’s capital a/c (1/6) = 3,750	22,500
		4,29,500			4,29,500

Dr. T and co. ltd. Cr.

		₹			₹
2012			2012
March 31	To realisation a/c	3,70,000	March 31	By bank	40,000
				By equity shares in T and co. ltd.	3,00,000
				By 10% preference shares in T and co. ltd.	30,000

		3,70,000			3,70,000

Dr. Cash account Cr.

		₹			₹
2012			2012
March 31	To balance b/d	86,000	March 31	By realisation a/c	86,000
	To T and co. ltd	40,000		By W’s loan a/c	10,000
				By W’s capital a/c	15,000
				By S’s capital a/c	7,500
				By T’s capital a/c	7,500
		40,000			40,000

Dr. Sundry creditors account Cr.

		₹			₹
2012			2012
March 31	To W’s capital a/c – transfer	28,000	March 31	By balance b/d	28,000

		28,000			28,000

Dr. Equity shares in T and co. ltd Cr.

		₹			₹
2012			2012
March 31	To T’s and co. ltd	3,00,000	March 31	By W’s capital a/c	1,50,000
				By S’s capital a/c	75,000
				By T’s capital a/c	75,000
		3,00,000			3,00,000

Dr. 10% Cumulative preference shares in T and co. ltd. Cr.

		₹			₹
2012			2012
March 31	To T and co. ltd.	30,000	March 31	By W’s loan	30,000

		30,000			30,000

Dr. W’s loan account Cr.

		₹			₹
2012			2012
March 31	To 10% cum. Pref. shares in T and co. ltd.	30,000	March 31	By balance b/d	40,000
	To bank	10,000
		40,000			40,000

Dr. Capital account Cr.

Particulars	W	S	T	Particulars	W	S	T
	₹	₹	₹		₹	₹	₹
To current a/c balance	21,000			By balance b/d	1,50,000	1,00,000	60,000
To realisation a/c				By current a/c (balances)	29,250		20,750
Furniture 1,500 Debtors 52,000	53,500			By sundry creditors (taken over)	28,000
To realisation a/c – scooter presented to W		4,000	2,000	By realisation a/c (profit)	11,250	7,500	3,750
To balance b/d	1,65,000	82,500	82,500

	2,18,500	1,07,500	84,500		2,18,500	1,07,500	84,500

To equity				By balance b/d	1,65,000	82,500	82,500
Shares in T and co. ltd (in the ratio of final claims)	1,50,000	75,000	75,000
To bank	15,000	7,500	7,500

	1,65,000	82,500	82,500		1,65,000	82,500	82,500

Example 11

The equal partner sheets A and M as of March 31, 2011 are as follows:

Liabilities	₹	Assets	₹
Sundry creditors	55,500	Book debts	60,000
Bank overdraft	28,500	Stock in trade	42,000
Bills payable	10,500	Joint life policy – surrender value	7,500
A’s capital	33,000	Office furniture	1,500
M’s capital	52,500	Machinery and plant	18,000
		Leasehold property	22,500
		A’s drawing	9,000
		M’s drawings	3,000
		Profit and loss account	16,500

	1,80,000		1,80,000

The business continued until September 30, 2011, at which point a net profit of Rs 12,300 was obtained in half a year after the annual depreciation of 10% was amortized from the leasehold. On the other hand, general merchandise creditors were reduced by 12,000 rupees, bills payable by 2,925 rupees, and overdrafts by 3,000 rupees. Each partner's 6-month lottery reached 3,000 rupees. As of March 31, 2011, stock trading on September 30 was Rs 45,300, books and debt was Rs 46,200, and other assets that needed adjustments.

In December, the company took over the shares at a 5% discount and recorded debt at a 2.5% discount as of September 30th, based on G Ltd. I agree to sell my business to. The company pays 7,500 rupees. Profit for the period until December 31st, subject to a lottery of A for 2,000 rupees and M for 1,000 rupees for the three months until December 31st. The company does not take over joint life insurance. The company will take over all other assets and liabilities and pay 37,500 rupees for goodwill. The consideration is paid by paying 60,000 rupees in cash and the rest in preferred stock of 10 rupees each. Prepare an account to close the books.

Solution

Liabilities	₹	Assets	₹
Sundry creditors	43,500	Book debts	46,200
Bank overdraft	25,500	Stock in trade	45,300
Bills payable	7,575	Joint life policy – surrender value	7,500
A’s capital		Office furniture	1,500
Balance on April 1, 2009 33,000		Machinery and plant	18,000
Less: drawings 12,000		Leasehold property 22,500
= 21,000		Less: 10% depreciation For 6 months 1,125	21,375
Less: loss up to 30th September (1/2) 2,100	18,900
M’s capital
Balance on April 1, 2009 52,500
Less: drawings 6,000
= 46,500
Less: loss up to 30th September (1/2) 2,100	44,400
	1,39,875		1,39,875

Assets taken over -	₹
- Book debts - ₹46,200 less 2 ½ %	45,045
- Stock - ₹ 45,300 less 5%	43,035
- Office furniture	1,500
- Machinery and plant	18,000
- Leasehold property	21,375
- Goodwill	37,500
- Miscellaneous assets for profit up to 31st December Less: drawings (7,500 – 2,000 – 1,000)	4,500
	1,70,955
Less: liabilities taken over:
- Sundry creditors	43,500
- Bank overdraft	25,500
- Bills payable	5,575
	76,575
Net assets to be paid for	94,380

G Ltd. will pay ₹ 60,000 in cash and ₹ 34,380 in preference shares of ₹ 10 each, the number of shares being 3,438

Dr. Realisation account Cr.

2011		₹	2011		₹
Dec. 31	To sundry assets:		Dec. 31	By sundry creditors	43,500
	Stock 65,000			By bank overdraft	25,500
	Machinery 18,000			By bills payable	7,575
	Furniture 6,000			By G. ltd. – consideration	94,380
	Book debts 1,80,000			By bank (joint life policy realised)	7,500
	Joint life policy 52,000
	Leasehold property 86,000
	Misc. Assets 4,500	1,44,375
	To profit transferred to:
	A’s capital a/c 17,040
	M’s capital a/c 17,040	34,080
		1,78,455			1,78,455

Dr. Cash account Cr.

		₹			₹
2011			2011
Dec 31	To realisation a/c - transfer	3,70,000	Sept 31	By balance b/d	25,500
	To realisation a/c - joint life policy realised	7,500	Dec 31	By A’s capital	24,970
	To G ltd. – cash received	60,000		By M’s capital	42,530

		93,000			93,000

Dr. Preference shares in G ltd. account Cr.

		₹			₹
2011			2011
Dec 31	To G ltd.	34,380	Dec 31	By A’s capital	12,720
				By M’s capital	21,660

		34,380			34,380

Dr. G ltd. account Cr.

		₹			₹
2011			2011
Dec 31	To realisation a/c – net assets taken over	94,380	Dec 31	By bank	60,000
				By preference shares in G ltd.	34,380

		94,380			94,380

Date	Particulars	A	M	Date	Particulars	A	M
2011		₹	₹	2011		₹	₹
April 1	To drawings	9,000	3,000	Apr 1	By balance b/d	33,000	52,500
April 1	To P/L account	8,250	8,250	Sept 30	By P/L account	6,150	6,150
Sept 30	To drawings	3,000	3,000	Dec 31	By profit for 3 months up to Dec. 31	3,750	3,750
Dec 31	To drawings	2,000	1,000	Dec 31	By realisation a/c – profit	17,040	17,040
Dec 31	To balance b/d	37,690	64,190

		59,940	79,440			59,940	79,440

Dec 31	To preference shares in G ltd	12,720	21,660	Dec 31	By balance b/d	37,690	64,190
Dec 31	To bank	24,970	42,530

		37,690	64,190			37,690	64,190

Dr. Capital account Cr.

Notes: (1) The student should note the treatment of profit arising after September 30 and also of drawings. The entries to be made are:

Miscellaneous Assets* . Dr. 7,500

(for profits)

To A's Capital Account 3,750

To B's Capital Account 3,750

(The assets arising out of profits after September, 30;

profits being credited to A and M.)

__________________________________________________________________________

A's Capital Account Dr. 2,000

M's Capital Account Dr. 1,000

To Miscellaneous Assets 3,000

(Drawings made by partners after September, 30, which

reduce the assets arising out of profits.)

__________________________________________________________________________

* The Miscellaneous Assets’ balance, ₹ 4,500, is then transferred to Realisation Account along with other assets.

(2) The preference shares, 3,438 in number, have been divided between 4 and M in the ratio of their final claims.

viz., A ₹ 37,690 and M ₹ 64,190. The calculations are—

A = or 1,272 shares of & 10 each amounting to ₹ 12,720

M = or 2,166 shares of 2 10 each amounting to ₹ 21,660

The balances due to A and M have been paid in cash.

2.4 Royalty Accounts

Royalty is the consideration received by an entity or individual who sells and uses the work to a third party. Loyalty is usually considered synonymous with rent, but its concept and use are completely different.

However, the user of the property pays the owner for the use of the owner's property, both when acquiring a rental property or a book for publication. However, the usage fee is different from the rent paid by the user.

When rent is paid to use tangible assets such as buildings and machines, royalties are paid to use intangible assets or to take advantage of special rights such as patents, copyrights and mines.

In addition, the amount of rent paid by the user is fixed. On the other hand, the royalties that users pay to their owners depend on the quantity of goods produced or sold.

This article describes loyalty accounting, key terms related to royalties in final accounts, the treatment of loyalty accounting, and the types of royalties in accounting.

Meaning of royalties in accounting

Royalty is nothing more than a user of an asset paying the owner or creator of such an asset on a regular basis for its use. In other words, the owner / author of an asset such as mine, a patent, a book, a work of art, etc. may allow a third party, such as a licensee, publisher, to use the creation in exchange for consideration. ..

Therefore, such payments made by the user to the owner are known as royalties. In addition, the consideration paid instead of using the owner's assets is determined by the number of items produced or sold.

Royalty accounting parties

Lender

A person who creates or owns an asset and provides a third party with the right to use such asset is called a lessor or landlord. In addition, the lessor receives compensation from a third party for using the right to use his property.

Examples of lenders include mine or quarry owners, book authors, artists in the case of musical works, and so on.

2. Borrower

A lessee is a person who uses the property of the creator or owner instead of the consideration for using such property. Examples of borrowers include publishers, miners, and so on.

3. Account loyalty type

There are the following types of usage fees for accounting. These include:

4. Copyright

Copyright provides the creator or owner of assets such as books, artwork, and musical works with the right to claim royalties from publishers. Therefore, the publisher pays the author a copyright royalty based on the publisher's sales.

5. Patent royalties

The royalties are paid by the user to the owner based on the number of items produced.

6. Mining royalties

For mining royalties, the user or borrower pays royalties to the owner or lessor based on the output generated.

Therefore, in the case of patents or copyrights, the publisher pays royalties to the author based on the number of copies of the book sold. In other words, the patent or copyright owner receives royalties based on the number of items sold by the user.

In the mining industry, on the other hand, royalties are received by the mine owner based on the number of items the user produces.

An important term for Royalty accounting

Minimum rent

As mentioned above, the lessor contacts or agrees with the lessee on the payment of royalties. This royalty is based on the number of merchandises produced or the quantity of merchandise sold.

Currently, the number of products produced or sold may be zero or relatively small. In such cases, the lessor will receive no or little royalty that directly affects the lessor's royalty income. In other words, if there is no or little production or sale, the lessor will suffer a loss because the amount of royalties received from the lessee is no or less. This is despite the lessee using the asset.

To relieve this situation, the lessor requires the minimum amount to be paid by the lessee, regardless of the number of goods the lessee has produced or sold.

That is, the borrower must pay the lender a minimum amount. This is despite the fact that the actual royalty amount calculated based on the items produced or sold is less than the minimum rent paid.

Such a guaranteed minimum amount that the lessor receives is called the minimum rent. The minimum rent is set when the lessor signs a contract with the lessee.

This is the period included in the contract for the benefit of the landlord to guarantee the minimum rent even when sales and production are low. Therefore, the lessee pays the minimum rent or the actual royalty amount, whichever is higher.

The minimum rent paid is fixed and is also known as fixed rent or dead rent. However, this may vary depending on the terms and conditions of the agreement.

Example

For example, mine A produces 4,000 tonnes. The royalty paid by the borrower is 100 rupees per ton and the minimum contract rent is 5 rupees.

The actual royalty paid for each production is 4 rupees. The actual royalty amount is less than the minimum rent, so the lessee must pay the lessor a minimum rent of 5 rupees.

Short work or redeemable dead rent

Short-term work is nothing more than a minimum rent that exceeds actual royalties. In other words, short-term work is the difference between minimum rent and actual royalties.

In the above example, Short Workings would be Rs1 Lakh (5 Lakh – 4 Lakh). It should be noted that short-term work will only be revealed if the minimum rent clause is included in the contract.

Excessive work

Overwork is nothing more than an amount of actual royalties that exceeds the minimum rent.

For example, in the above example, the output produced is 6000 tonnes. Therefore, overwork is Rs 2 Lakhs (6 Lakh – 4 Lakh).

Recovery of short work

Contracts between lessors and lessees under royalty accounting typically provide for provisions. This provision allows you to carry forward a short task to adjust the same thing in the future.

Therefore, in the following year, Short Workings will be adjusted for excess royalties. Such a process of adjusting short-term working capital is known as short-term working capital recovery.

In other words, the royalty contract collection clause provides the borrower with the right to recover any excess payments the borrower has made to the lessor in order to comply with the minimum rent clause of the previous year.

In addition, the contract has a fixed term. Such a period defines the number of years a lessee can recover or recover short-term work. This period may be fixed or variable.

If the lessee fails to recover the short-term work within the specified time, the short-term work will expire and will be debited on the income statement for the period in which the collection has elapsed.

Fixed right

Fixed rights mean that the lessee can recover short-term work from the lessor within a certain period of time from the date of lease of the asset.

For example, according to fixed rights, lessees can recover short-term work within two years of the lease date. If he does not, the recovery will expire or end.

Fluctuating rights

Under variable rights, the lessee can recover short-term work for any period during the subsequent one or more periods. For example, the short work of the previous year can be recovered in the next year.

Strikes and lockouts

Strikes and lockouts may occur during the loyalty contract period. Therefore, loyalty contracts can provide for a proportional reduction in minimum rent in the event of a strike or lockout.

Royalty accounting

There are three types of situations in which both the lender and the borrower need to pass journals. Let's use an example to understand royalty accounting.

Royalty accounting example

Zen is the owner of Minea A in Gujarat. He has a royalty agreement with Kapoor Ltd. According to the contract, the minimum rent is Rs 5,00,000 and the royalty paid is Rs 100 per ton of monthly production. The output for the different years is:

2017 – 4000 tons

2018 – 5000 tons

2019 – 6000 tons

1. Royalty accounting journals in the debt book

Case I: When the minimum rent exceeds the actual royalty amount (2017)

1. Royalty date

Loyalty A / c Dr 4,00,000

Short Working A / c Dr 1,00,000

To Zen A / c 5,00,000

(Zen royalty and short-term work)

2. Entry to make payment

Zen A / c Dr 5,00,000

To cash / bank A / c 5,00,000

(Paid to Zen in cash)

3. Year-end closing entry

P & L A / c Dr 5,00,000

Royalty A / c to 5,000,000

(Royalty transferred to P & L A / c)

Case II: If the minimum rent is equal to the actual royalty amount (2018)

1. Royalty date

Loyalty A / c Dr 5,00,000

To Zen A / c 5,00,000

(Being a Zen royal family)

2. Entry to make payment

Zen A / c Dr 5,00,000

To cash / bank A / c 5,00,000

(Paid to Zen in cash)

3. Year-end closing entry

P & L A / c Dr 5,00,000

Royalty A / c to 5,000,000

(Royalty transferred to P & L A / c)

Case III: When the actual royalty amount exceeds the minimum rent and short-term work is recovered (2019)

1. Royalty date

Loyalty A / c Dr 6,00,000

To Zen A / c 6,00,000

(Being a Zen royal family)

2. Entry to pay and get back work in a short period of time

Zen A / c Dr 6,00,000

To cash / bank A / c 5,00,000

Short-time work A / c To 1,00,000

(Paid to Zen in cash, Short Working Recouped)

3. Close the entry at the end of the year and do not get back to work in a short period of time

P & L A / c Dr 6,00,000

Royalty A / c to 5,000,000

Short-time work A / c To 1,00,000

(Loyalty and short-term work will be transferred to P & L A / c)

According to the terms and conditions, short working can be collected in the year when the actual royalty exceeds the minimum rent. If the lessee fails to recover short-term work for a certain period of time, it will be irrevocable and will be charged to profit or loss in the year the short-term work recovery expires.

On the other hand, recoverable short-term work must be carried forward and displayed as current assets on the balance sheet.

2. Loyalty accounting journals in the lessor's books

Case I: When the minimum rent exceeds the actual royalty amount (2017)

1. Royalty date

Kapoor Ltd 5,00,000

To loyalty A / c4,00,000

Short working A / c 1,00,000

(Royalty received from Kapoor Ltd and short-term work)

2. Entry to make payment

Cash / Bank A / c Dr 5,00,000

To Kapoor Ltd 5,000,000

(Receiving cash from Kapoor Ltd)

3. Year-end closing entry

Royalty A / c Dr 5,00,000

To P & L A / c 5,000,000

(Loyalty credit to P & L A / c)

Case II: If the minimum rent is equal to the actual royalty amount (2018)

1. Royalty date

Kapoor Ltd 5,00,000

To loyalty A / c5,00,000

(Received royalties from Kapoor Ltd)

2. Entry to make payment

Cash / Bank A / c Dr 5,00,000

To Kapoor Ltd 5,000,000

(Receiving cash from Kapoor Ltd)

3. Year-end closing entry

Royalty A / c Dr 5,00,000

To P & L A / c 5,000,000

(Loyalty credit to P & L A / c)

Case III: When the actual royalty amount exceeds the minimum rent and short-term work is recovered (2019)

1. Royalty date

Kapoor Ltd 6,00,000

To loyalty A / c6,00,000

(Received royalties from Kapoor Ltd)

2. Entry to pay and get back work in a short period of time

Cash / Bank A / c Dr 5,00,000

Short time work A / c Dr 1,00,000

To Kapoor Ltd 6,00,000

(Receiving cash from Kapoor Ltd and Short Working Recouped)

3. Close the entry at the end of the year and do not get back to work in a short period of time

Royalty A / c Dr 5,00,000

Short time work A / c Dr 1,00,000

To P & L A / c 6,00,000

(P & L A / c will be granted loyalty credits and Short Working will be transferred)

Key takeaways:

Loyalty is the amount paid by a third party to the owner of a product or patent in order to use the product or patent.

The terms of payment for royalties are set forth in the license agreement.

The royalty rate or royalty amount is usually a percentage based on factors such as monopoly rights, technology, and available alternatives.

Consignment sales are the sale of products by consignment to a third party.

The party selling the consignment product receives a portion of the profit as a flat rate or commission.

Selling under consignment arrangements can be a low-fee, low-time investment method for selling goods and services.

Most consignment dealers and online dealers offer the terms, but some are willing to negotiate.

If you don't have a physical store or online marketplace to sell your products, consignment is a good workaround.

References

https://www.ncert-solutions.com/ts-grewal-accountancy-class-12-solutions-chapter-6/

https://fdocuments.in/document/partnership-accounts-dissolution-insolvency-sale-to-a-company-and-piecemeal.html

https://ncert.nic.in/ncerts/l/leac105.pdf

https://mycbseguide.com/blog/practice-questions-for-class-12-accountancy-dissolution-of-partnership/

Accounting Notes of Delhi University/Mumbai University.

Accountingnotes.com

Accounting Article Library.

https://www.tutorialspoint.com/financial_accounting/financial_accounting_joint_venture.htm#:~:text=Joint%20venture%20account%20is%20credited%20and%20personal%20account%20of%20others,made%20by%20other%20co%2Dventurers.&text=Balance%20in%20the%20joint%20venture,personal%20accounts%20of%20co%2Dventurers.

https://www.yourarticlelibrary.com/accounting/royalty-accounts/royalty-accounts-meaning-and-treatment-with-journal-entries/73025

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