Prepare the seller partnership's realisation and partner accounts
Transfer assets and liabilities to the buyer, calculate the partnership's realisation result and distribute it using the old agreement.
Section 3.3 · Business acquisition and merger
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover the listed merger and acquisition forms, business-versus-assets distinction, goodwill, consideration, journals, ledger accounts, new-entity statements and evaluation. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 and 3.1 skills for identifying assets and liabilities, recording business transfers, preparing financial statements and separating a company's share capital from the former owners' equity.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Assets with book value $75,000 and liabilities $20,000 are transferred for $60,000. What is the simplified realisation result?
What you will learn
- Prepare the main entries in a realisation account
- Calculate and allocate profit or loss on realisation
- Settle partner capital and current accounts after the acquisition
Close the partnership's assets and liabilities through realisation
When a partnership is acquired, the selling partnership closes its books. A realisation account can collect the book values of assets disposed, liabilities transferred, consideration received and any expenses of winding up. The exact debit-credit layout should follow the format requested; cross-check the account against the agreed transfer values.
A simplified pattern is to debit realisation with assets transferred at book value and credit liabilities transferred; record consideration received as a credit to realisation or through the specified account. Compare these amounts to find a gain or loss. Do not put an asset that was not transferred into the account as though the buyer accepted it.
Allocate the result under the old partnership agreement
A gain on realisation is shared among the former partners using the old profit-sharing ratio unless the question says otherwise; a loss is allocated in the same ratio. Then settle partner capital/current accounts, drawings, loans and their agreed share of consideration. The new company's equity accounts are separate from the old partners' accounts.
The final distribution should agree with cash, shares or notes each partner is entitled to receive under the partnership agreement and sale terms. Use a partner settlement schedule so no balance is paid twice or left unresolved.
Pause and explain
Partners share profits 2:1. A $9,000 realisation loss is allocated how?
Worked example
A partnership transfers assets with book value $100,000 and liabilities of $30,000 to a company. The consideration is $82,000. Ignoring expenses, calculate the realisation gain or loss using net book assets and allocate it between partners sharing 3:2.
Show the worked solution
- Net book assets transferred = $100,000 − $30,000 = $70,000.
- Consideration exceeds net book assets by $82,000 − $70,000 = $12,000, so the simplified realisation result is a gain of $12,000.
- Allocate the gain 3:2: partner A receives $7,200 and partner B $4,800 before settling capital and current accounts.
Answer Simplified realisation gain $12,000; allocate $7,200 to A and $4,800 to B under the 3:2 ratio.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A firm transfers assets $180,000 and liabilities $42,000 for consideration $150,000. It has winding-up expenses of $3,000. Calculate the realisation result and allocate it 4:1.
Give me a hint
Compare consideration with net book assets, then deduct expenses from the result.
Compare my reasoning
- Net assets = $180,000 − $42,000 = $138,000.
- Before expenses, gain = $150,000 − $138,000 = $12,000; after $3,000 expenses, gain = $9,000.
- Allocate 4:1: $7,200 to the 4-share partner and $1,800 to the 1-share partner.
Net realisation gain is $9,000; allocate $7,200 and $1,800.
Look for these in your work
- Net assets calculated
- Expense included
- Old ratio applied
A partnership's realisation gain is $25,000. A, B and C share old profits 2:2:1. Calculate each partner's share and state whether this automatically determines their cash receipt.
Give me a hint
Allocate the gain by old ratio, then distinguish profit allocation from capital settlement.
Compare my reasoning
- Total parts = 2 + 2 + 1 = 5.
- A receives $10,000, B $10,000 and C $5,000 of the realisation gain.
- Cash received also depends on each partner's capital/current balances and the consideration distribution under the agreement.
Realisation gain shares are A $10,000, B $10,000 and C $5,000. These are not necessarily the total cash payments to partners.
Look for these in your work
- Ratio parts correct
- Gain allocation correct
- Cash settlement distinguished
The acquiring company pays $210,000 in shares and cash, while the old partnership's realisation account shows a $16,000 gain. A partner claims each partner's payment must be a fraction of $210,000. Explain what other schedules are needed.
Give me a hint
Separate purchase consideration, realisation profit and partner capital/current balances.
Compare my reasoning
- Determine how the partnership agreement and purchase terms allocate consideration among partners.
- Allocate the $16,000 realisation gain using the old profit-sharing ratio.
- Settle capital/current accounts, loans, drawings and any balances retained or paid separately before determining each partner's final entitlement.
The total consideration alone does not determine each partner's payment. Use the sale and partnership agreements, old ratio for the realisation gain and each partner's closing balances to calculate settlement.
Look for these in your work
- Consideration terms checked
- Realisation gain allocated
- Partner balances settled
Common mistakes
- Using the new company share ratio to allocate the seller partnership's result
- Allocating consideration itself as if it were all profit
- Including excluded assets or liabilities in the realisation account
What can you explain now?
Which ratio normally allocates the seller partnership's realisation profit?
Compare with the explanation
The old partnership's profit-sharing ratio
The gain arises in the old partnership and is allocated under its old agreement unless specified otherwise.
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Make it stick
How does the seller partnership's realisation result differ from total purchase consideration?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.