X, Y and Z have been in partnership for several years, sharing profits and losses in the ratio 3:2:1. Their last statement of financial position which was prepared on 31 October 2016 is as follows:

Despite making good profits during recent years they had become increasingly dependent on one credit customer, Smithson, and in order to retain his custom they had gradually increased his credit limit until he owed the partnership £18,000. It has now been discovered that Smithson is insolvent and that he is unlikely to repay any of the money owed by him to the partnership. Reluctantly X, Y and Z have agreed to dissolve the partnership on the following terms:
(1) The inventory is to be sold to Nelson Ltd for £4,000.
(2) The non-current assets will be sold for £8,000 except for certain items with a book value of £5,000 which will be taken over by X at an agreed valuation of £7,000.
(3) The debtors, except for Smithson, are expected to pay their accounts in full.
(4) The costs of dissolution will be £800 and discounts received from creditors will be £500. Z is unable to meet his liability to the partnership out of his personal funds.

Required:

(a) the realization account;

(b) the capital accounts to the partners recording the dissolution of the partnership.

Transcribed Image Text:

Statement of Financial Position of X, Y and Z as at 31 October 2016 Non-current assets At cost Less Depreciation 20,000 (6,000) 14,000 Current assets Inventory Accounts receivable Total assets 5,000 21,000 26,000 40,000 Current liabilities Bank 13,000 Accounts payable 17,000 Total liabilities (30,000) Net assets 10,000 Capital 4,000 Y 4,000 Z 2,000 Total capital 10,000