Practice Activity 12.4 Allocation of shares to the shareholders in a newly converted partnership business
Peter, Stephen and Chukwuka have been trading in partnership as Peter, Stephen, Chukwuka & Co. for several years. The partners share profits and losses in the proportion of 3:2:1 respectively.
In the partnership’s last meeting held on 22 November 2016, the partners resolved to convert the business to a Limited Liability Company named Progress Limited from 1 December 2016. The statement of financial position just before the conversion of Peter, Stephen, Chukwuka & Co. to a Limited Liability Company is shown as follows:
Additional information:
1. But for cash and one vehicle, other assets are to be transferred to Progress Limited.
2. The Company has agreed to settle the obligations due to creditors.
3. One of the two cars is to be taken over by Chukwuka personally at a valuation of ₦2,700.
4. Peter agreed to write off ₦1,000 of the loan. The balance of the loan from Peter is to be settled by the Partnership.
5. The purchase consideration is ₦70,000 (inclusive of the amount used to settle creditors). The company is to issue fully paid 50 kobo ordinary shares at a premium of 5 kobo per share to meet the whole of the purchase consideration, and will be issuing further shares for cash.
6. All the transactions are completed on 1 December 2016.
Required:
i. Show the relevant entries to close the books of the partnership.
ii. Explain how the shares in Progress Limited were allocated to the shareholders.
iii.Show the Statement of financial position as at 1 December 2016 in the books of Progress Limited.
See the suggested solution to practice activity 12.4 here.
Suggested solution to practice activity 12.4
i. Relevant entries to close the books of Peter, Stephen, Chukwuka & Co. by 1 December 2016.
The gross consideration is used in the Realisation account and Accounts payable are credited to Progress account because it forms part of the purchase consideration.
Peter, Stephen and Chukwuka pay in ₦3,270, ₦2,180 and ₦3,790 respectively to close their capital accounts.
ii. The shares in Progress Limited were allocated to the shareholders based on the existing capital and current account balances of the partners.
The ratio of capital and current account balance per partner is computed as follows:
The lowest common multiple of ₦15,000, ₦10,000 and ₦5,000 is 5,000.
Hence, the existing capital and current account balances are in the ratio 3:2:1.
Total capital in Progress Ltd is: ₦67,000
3:2:1 = 3+2+1 = 6
3/6 x 67,000 = ₦33,500
2/6 x 67,000 = ₦22,333
1/6 x 67,000 = ₦11,167
The issue price of the shares (including ₦0.05 premium) is ₦0.55.
Another basis that could have been used to share the capital between the shareholders in Progress Limited is the profit or loss sharing ratio of the partners in their former business (that is, partnership).
iii. The Books of Progress Limited
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