To ask for help with this accounting question?

[MagicLlama]

I thought I knew what I was doing having asked about it on Friday but I obviously don't and haven't understood what I've been told to do. I am supposed to hand the answer in for tomorrow having already had an extension to ask about it on Friday! I've googled all weekend but I can't even find the right terms to google.

I need to dispose of some assets from a partnership. Two of the partners (brothers) are gifting their shares to their respective children (cousins). The cousins are then each taking some assets from this partnership into new businesses they have set up.

I am supposed to be calculating the disposal journal of the assets and I don't understand how to do so as they have only paid for some of the assets (e.g some machinery) but not others (like a block of flats). Do I ignore that and just post all the difference to loss on disposal or does it go split to the individual partner accounts?

So normally if the amount paid was less than NVB I would post

Cr Cost of Assets £500,000
Dr Prov for Depreciation £100,000
Dr Bank £300,000
Dr Loss of sale £100,000

However since they haven't paid any money over, what the heck do I do? Just post the who difference to loss? That doesn't seem right? There surely should be some accounting for it somewhere and not as something to offset profits?

Eh?

I think you would need to dispose at market value, with the cash coming in and the rest reducing their capital accounts:

cr fixed asset cost (with original cost)
Dr fixed asset depreciation (with accumulated depreciation amount)
Dr profit loss on disposal (with net book value)

Cr net book value (with market value)
Dr bank (with amount actually received)
Cr partner's capital account (with the effective discount they took on the purchase)

@MagicLlama You'd be better off asking @MNHQ to move this Higher Ed/Academia, or Money Matters.

*to

What is:

a) the original cost of the asset
b) TOTAL depreciation of the asset to date
c) the amount being paid for it (if anything)

Sorry - the second part should be

Cr profit/ loss on disposal (with market value)
Dr bank (with amount actually received)
Cr partner's capital account (with the effective discount they took on the purchase)

And are they an LLP?

I think you need to ask Nadhim Zahawi.

😂😂😂

This MAY help but it depends on many factors (obviously)

library.croneri.co.uk/cch_uk/btr/286-450

I’m an accountant and a reasonably competent one but I’d go to my auditor to check on the correct treatment.

I would want to know the fair value. Because it’s going to owners I’d expect you to have a dividend in specie so you’d need to account for that.

I think (although I’d be looking this up if it were my problem) that you need:
fair value goods/property etc XX
NBV YY
Amount paid ZZ

Think of it in steps

1. Raise the NBV to FV
   Dr NBV XX-YY
   Cr gain on disposal (XX-YY)

2. Cash in and disposal
   Dr cash ZZ
   Cr NBV (which is now YY because of step 1) (YY)
   Dr loss on disposal YY-ZZ

3. Treat net loss on disposal as a dividend
   Cr loss (YY-ZZ)
   Dr dividend YY-ZZ

May be some tax implications too?!

@CohenTree Lol exactly!!

@123ZYX I am sure I was told on Friday to use NBV as the valuation, but tbh I am now in such a confusion with it I genuinely can't remember. Does that mean I need to work out what each partner had and account for them all individually. Some of the assets they have charged at Market value and raised invoices for. Some of the assets apparently don't even exist anymore and so are being written off so they would just go to loss as normal I guess? I am shadowing someone here as I want to get back into the workplace after lots some time away and am supposed to be working this out and I guess coming to the same answer but I think it might all just be beyond me :(

@Merryoldgoat No they aren't a LLP. Flats £750,000 cost. No depreciation. No money. Plant £340,000. Depreciation £100,000. Paid £250,000.

Oh heh I thought it was an assignment for some kind of qual!! Ignore me.

I don't think you can just give the businesses assets away to a related party and then record it as a business loss, otherwise no one would pay any tax. You'd just give your profits as a gift to your husband and record it as a business expense...

Obviously you CAN do that, but I guess what I mean is I don't think the tax treatment of that would be to treat it as a loss.

@Augend23 Exactly which is why Its got to come somewhere. I just aren't sure where and how I calculate the how much which tells me I am probably in over my head!

I can't see any reason that you wouldn't recognise the profit on the assets in the partnership, but I'm not a tax expert and I normally work on companies which may work differently. I know there are (or maybe we're) rules about transferring assets at net book value when a partnership is incorporated, but I can't see why that would apply if they're being given to the partners personally.

For ones sold at market value, treat as normal:
Cr asset cost
Dr accumulated depreciation
Dr Bank
dr or Cr profit/ loss on sale

For scrapped assets, the same but the Dr to the bank will be nil

For the ones given away to partners, there is an amount owed to the business by the partner and the partner is using the money owed to them by the business (accumulated profits) to pay for it. These would need to be treated separately for each partner

If I were you, I'd write down each step as a list of journals with a note about how you've treated each category (sold, scrapped, given to partners) - maybe prepare T accounts or and ETB to show the final result. That way, the person you're shadowing can see which particular part you've struggled with and that you understand the majority

Ooh. Studying accountancy and following to see if I can actually understand all of this 😬 so far not 😂

Ok if they’re not a company or LLP then their tax affairs are personal, not via company tax law. In which case the assets should be considered belonging to the brothers, they can give whatever they want to whomever so yes, NBV to be used.

CR land and buildings 750000
DR loss on disposals 750000

CR machinery 340000
DR accumulated depreciation 100000
DR Bank 250000
CR gain on disposals 10000

Sorry - is what I would prepare and check with my audit partner.

NOT advice or instruction

The tax treatment will be different to the accounting treatment, as the disposal of plant & machinery will fall within the capital allowances rules whereas the disposal of property will fall within capital gains tax legislation.

The machinery:
Dr Acc depn 100,000
Cr Cost 340,000
Dr Bank 250,000
Cr Profit on disposal 10,000

Scrapped machinery:

Dr Acc Depn (from fixed asset register)
Cr Cost (from the fixed asset register)
Dr Loss on disposal (NBV of scrapped assets)

Property:
Dr Drawings 750,000
Cr Cost 750,000

The fair values will be needed for the tax treatment, but it doesn't sound as though that is your problem.

@HewasH2O

thank fuck for that - I worry I don’t know what I think I do sometimes 🤣

I can’t believe a thread about accountancy has so few posts 🤣

@Merryoldgoat Ha but its such an interesting topic.

I can't thank you all enough for the help :)