Dissolution of Partnership FirmClass 12 Accountancy Part 1 NCERT Solutions
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Q1Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. For closure of assets accounts.
Solution
Journal Entry for closure of asset accounts:
Realisation A/c Dr.
To Sundry Assets A/c (Individually)
(Being various assets transferred to Realisation Account at their book values)
Q2Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 2. For closure of liabilities accounts.
Solution
Journal Entry for closure of liabilities accounts:
Sundry Liabilities A/c (Individually) Dr.
To Realisation A/c
(Being various external liabilities transferred to Realisation Account at their book values)
Q3Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 3. For sale of assets.
Solution
Journal Entry for sale of assets:
Bank/Cash A/c Dr.
To Realisation A/c
(Being assets realised for cash)
Q4Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 4. For settlement of a creditor by transfer of fixed assets to him.
Solution
Journal Entry for settlement of a creditor by transfer of fixed assets:
No journal entry is recorded when a creditor accepts a fixed asset in full and final settlement of his account.
Q5Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 5. For expenses of realisation when actual expenses are paid by the partner on behalf of the firm.
Solution
Journal Entry for realisation expenses paid by a partner on behalf of the firm:
Realisation A/c Dr.
To Partner's Capital A/c
(Being realisation expenses paid by a partner on behalf of the firm)
Q6Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 6. When a partner discharges the liability of the firm.
Solution
Journal Entry when a partner discharges a firm's liability:
Realisation A/c Dr.
To Partner's Capital A/c
(Being a firm's liability discharged by a partner)
Q7Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 7. For payment of partner's loan.
Solution
Journal Entry for payment of partner's loan:
Partner's Loan A/c Dr.
To Bank/Cash A/c
(Being partner's loan paid off)
Q8Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 8. For settlement of capital accounts.
Solution
Journal Entry for settlement of capital accounts:
(i) When a partner has a credit balance (final amount is paid to the partner):
Partner's Capital A/c Dr.
To Bank/Cash A/c
(Being final payment made to the partner on settlement of account)
(ii) When a partner has a debit balance (cash is brought in by the partner):
Bank/Cash A/c Dr.
To Partner's Capital A/c
(Being cash brought in by the partner to settle his debit balance)
Q1Questions for Practice - Long Answer Questions
Explain the process dissolution of partnership firm?
Solution
The dissolution of a partnership firm is the process of winding up the business of the firm. This brings an end to the existence of the firm, and no business is transacted after dissolution except the activities related to closing the firm. The process involves the following steps:
-
Cessation of Business Operations: The first step is to stop all normal business activities. The firm ceases to enter into any new transactions, except those necessary for the winding-up process.
-
Preparation of Realisation Account: A new account called the 'Realisation Account' is opened to ascertain the profit or loss on the sale of assets and settlement of liabilities.
- All assets (except cash, bank, and fictitious assets) are transferred to the debit side of the Realisation Account at their book values.
- All external liabilities are transferred to the credit side of the Realisation Account at their book values.
-
Realisation of Assets: All the assets of the firm are sold in the open market for cash, or they may be taken over by one or more partners at an agreed value. The proceeds from the sale or the value at which assets are taken over are credited to the Realisation Account.
-
Settlement of Liabilities: The cash realised from the sale of assets is used to pay off the firm's liabilities in a specific order:
- First, realisation expenses are paid.
- Second, debts owed to third parties (external liabilities) like creditors, bank loans, etc., are paid.
- Third, loans and advances made by partners to the firm are paid.
-
Settlement of Partners' Accounts: After paying all outside liabilities and partners' loans, the final balance of the Realisation Account (profit or loss) is transferred to the partners' capital accounts in their profit-sharing ratio. Any accumulated profits or reserves are also transferred to their capital accounts.
-
Final Payment to Partners: The partners' capital accounts are finally settled.
- If a partner's capital account shows a credit balance, the amount is paid to him.
- If it shows a debit balance, the partner must bring in cash to clear his dues.
-
Closure of Books: The final settlement with partners is made through the Cash or Bank account. After all transactions are recorded, the Cash/Bank account will automatically balance, signifying the completion of the dissolution process and the closure of all books of account.
Q2Questions for Practice - Long Answer Questions
What is a Realisation Account?
Solution
A Realisation Account is a nominal account prepared at the time of the dissolution of a partnership firm. Its primary purpose is to close the books of accounts of the dissolved firm and to determine the net profit or loss arising from the process of realising the assets and settling the liabilities.
When a firm is dissolved, all its assets need to be sold (realised), and all its liabilities must be paid off. The Realisation Account facilitates this process by consolidating all transactions related to the disposal of assets and the payment of liabilities into a single account.
The key features and steps in preparing a Realisation Account are:
-
Transfer of Assets: All assets of the firm, except for cash, bank balances, and fictitious assets (like debit balance of Profit & Loss A/c), are transferred to the debit side of the Realisation Account at their book values.
-
Transfer of Liabilities: All external liabilities (liabilities owed to third parties), such as creditors, bills payable, and bank loans, are transferred to the credit side of the Realisation Account at their book values. Internal liabilities like partners' capital and loans are not transferred.
-
Recording Realisation of Assets: The amounts received from the sale of assets are recorded on the credit side. If an asset is taken over by a partner, the partner's capital account is debited, and the Realisation Account is credited with the agreed value.
-
Recording Payment of Liabilities: The amounts paid to settle the liabilities are recorded on the debit side. If a liability is undertaken by a partner, the partner's capital account is credited, and the Realisation Account is debited.
-
Recording Realisation Expenses: Any expenses incurred during the dissolution process are also debited to the Realisation Account.
-
Ascertaining Profit or Loss: Finally, the account is balanced. A credit balance indicates a profit on realisation, while a debit balance indicates a loss. This profit or loss is then transferred to the partners' capital accounts in their profit-sharing ratio.
Q3Questions for Practice - Long Answer Questions
Reproduce the format of Realisation Account.
Solution
Format of Realisation Account
Dr. Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Sundry Assets A/c (Transferred at book value): | By Sundry Liabilities A/c (Transferred at book value): | ||
| Land and Building | xxx | Sundry Creditors | xxx |
| Plant and Machinery | xxx | Bills Payable | xxx |
| Furniture and Fittings | xxx | Bank Overdraft | xxx |
| Investments | xxx | Outstanding Expenses | xxx |
| Sundry Debtors (Gross) | xxx | By Provision for Doubtful Debts A/c | xxx |
| Bills Receivable | xxx | By Investment Fluctuation Fund A/c | xxx |
| To Bank/Cash A/c (Liabilities Paid) | xxx | By Bank/Cash A/c (Assets Realised) | xxx |
| To Bank/Cash A/c (Unrecorded Liabilities Paid) | xxx | By Partner's Capital A/c (Asset taken over) | xxx |
| To Bank/Cash A/c (Realisation Expenses Paid) | xxx | By Loss transferred to Partners' Capital A/cs (if any) | xxx |
| To Partner's Capital A/c (Liability assumed by partner) | xxx | ||
| To Partner's Capital A/c (Remuneration to partner) | xxx | ||
| To Profit transferred to Partners' Capital A/cs (if any) | xxx | ||
| Total | xxxxx | Total | xxxxx |
Q4Questions for Practice - Long Answer Questions
How deficiency of crditors is paid off at the time of dissolution of firm.
Solution
The question likely refers to how creditors are paid off, especially when there is a deficiency of firm assets. The payment to creditors and handling of any deficiency at the time of dissolution follows the rules laid down in Sections 48 and 49 of the Partnership Act, 1932.
The process is as follows:
-
Application of Firm's Assets: The assets of the firm are first realised (sold) to generate cash. This cash, along with any existing cash and bank balances, is applied first to pay off the debts of the firm to third parties, which include creditors.
-
Contribution from Partners: If the firm's assets are insufficient to pay off the creditors and other external liabilities in full, the partners must contribute to the deficiency from their personal assets. This is because the liability of partners in a partnership firm is unlimited. They are individually and jointly responsible for all the debts of the firm.
-
Order of Contribution: The partners contribute to this deficiency in their profit-sharing ratio. The amount is first paid out of their capital, and if the capital is insufficient, they must bring in cash from their private property.
-
Application of Partner's Private Property (Section 49):
- A partner's private property is first used to pay off his/her private debts.
- Any surplus remaining after paying private debts is then made available to pay the firm's debts (i.e., to pay the creditors).
In summary, if the firm's assets are not enough to pay the creditors, the partners must personally contribute the shortfall in their profit-sharing ratio. The private property of partners can be utilized for this purpose after their personal liabilities have been cleared.
Q1Questions for Practice - Numerical Questions
Journalise the following transactions regarding realisation expenses : [a] Realisation expenses amounted to Rs.2,500. [b] Realisation expenses amounting to Rs. 3,000 were paid by Ashok, one of the partners. [c] Realisation expenses Rs.2,300 borne by Tarun, personally. [d] Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000. The actual amount of realisation expenses amounted to Rs.3,000.
Solution
Journal Entries
[a] Realisation expenses amounted to Rs.2,500.
(This implies the firm incurred and paid the expenses.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 2,500 | |||
| To Bank/Cash A/c | 2,500 | |||
| (Being realisation expenses paid by the firm) |
[b] Realisation expenses amounting to Rs. 3,000 were paid by Ashok, one of the partners.
(This implies the firm was liable, but the partner paid on its behalf.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 3,000 | |||
| To Ashok's Capital A/c | 3,000 | |||
| (Being realisation expenses paid by partner Ashok on behalf of the firm) |
[c] Realisation expenses Rs.2,300 borne by Tarun, personally.
(This implies the partner had to bear and also paid the expenses himself. It is a personal transaction of the partner, not the firm.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| No Entry | ||||
| (Being realisation expenses borne and paid by the partner personally, no entry required in the firm's books) |
[d] Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000. The actual amount of realisation expenses amounted to Rs.3,000.
(The firm pays a fixed remuneration of Rs. 4,000 to Amit for handling the dissolution. The actual expenses are Amit's personal concern.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 4,000 | |||
| To Amit's Capital A/c | 4,000 | |||
| (Being remuneration allowed to Amit for realisation work) |
Q2Questions for Practice - Numerical Questions
Record necessary journal entries in the following cases: [a] Creditors worth Rs.85,000 accepted Rs.40,000 as cash and Investment worth Rs. 43,000 , in full settlement of their claim. [b] Creditors were Rs.16,000. They accepted Machinery valued at Rs.18,000 in settlement of their claim. [c] Creditors were Rs.90,000. They accepted Buildings valued Rs.1,20,000 and paid cash to the firm Rs.30,000.
Solution
Journal Entries
(Assuming Assets and Liabilities have already been transferred to Realisation Account)
[a] Creditors worth Rs.85,000 accepted Rs.40,000 as cash and Investment worth Rs. 43,000, in full settlement of their claim.
(The transfer of investment worth Rs. 43,000 to settle a claim of Rs. 45,000 (85,000 - 40,000) will not be recorded. Only the cash payment will be recorded.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 40,000 | |||
| To Bank/Cash A/c | 40,000 | |||
| (Being cash paid to creditors in part settlement of their claim) |
[b] Creditors were Rs.16,000. They accepted Machinery valued at Rs.18,000 in settlement of their claim.
(When a creditor accepts an asset in settlement, no entry is passed for the settlement itself. Since the asset value is more than the liability and nothing is mentioned about the difference, it is assumed to be a full settlement with no cash exchange.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| No Entry | ||||
| (Being machinery given to creditors in full settlement of their claim) |
[c] Creditors were Rs.90,000. They accepted Buildings valued Rs.1,20,000 and paid cash to the firm Rs.30,000.
(The settlement of creditors against the building will not be recorded. However, the cash received from the creditors for the excess value will be recorded as a realisation of an asset.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 30,000 | |||
| To Realisation A/c | 30,000 | |||
| (Being cash received from creditors for the difference in value of asset taken over) |
Q3Questions for Practice - Numerical Questions
There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. Journalise the transaction when the firm has been dissolved.
Solution
Journal Entry
(An old computer written-off is an unrecorded asset. When it is taken over by a partner, it is treated as a gain on realisation.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Nitin's Capital A/c Dr. | 3,000 | |||
| To Realisation A/c | 3,000 | |||
| (Being unrecorded computer taken over by partner Nitin) |
Q4Questions for Practice - Numerical Questions
What journal entries will be recorded for the following transactions on the dissolution of a firm: [a] Payment of unrecorded liabilities of Rs.3,200. [b] Stock worth Rs.7,500 is taken over by a partner Rohit. [c] Profit on Realisation amounting to Rs. 18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7. [d] An unrecorded asset realised Rs.5,500.
Solution
Journal Entries
[a] Payment of unrecorded liabilities of Rs.3,200.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 3,200 | |||
| To Bank/Cash A/c | 3,200 | |||
| (Being unrecorded liability paid) |
[b] Stock worth Rs.7,500 is taken over by a partner Rohit.
(Assuming Stock A/c is already transferred to Realisation A/c)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Rohit's Capital A/c Dr. | 7,500 | |||
| To Realisation A/c | 7,500 | |||
| (Being stock taken over by partner Rohit) |
[c] Profit on Realisation amounting to Rs. 18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7.
Ashish's Share = 18,000 * (5/12) = Rs. 7,500
Tarun's Share = 18,000 * (7/12) = Rs. 10,500
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 18,000 | |||
| To Ashish's Capital A/c | 7,500 | |||
| To Tarun's Capital A/c | 10,500 | |||
| (Being profit on realisation transferred to partners' capital accounts) |
[d] An unrecorded asset realised Rs.5,500.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 5,500 | |||
| To Realisation A/c | 5,500 | |||
| (Being unrecorded asset sold) |
Q5Questions for Practice - Numerical Questions
Give journal entries for the following transactions : To record the realisation of various assets and liabilities, A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount of 20%, Remaining Stock was sold at a profit of 30% on cost, Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through a broker who charged 2%, commission on the deal, Plant and Machinery (book value Rs. 60,000 ) was handed over to a Creditor at an agreed valuation of 10% less than the book value, Investment whose face value was Rs. 4,000 was realised at 50%.
Solution
Journal Entries
(Assuming Assets and Liabilities are already transferred to Realisation Account)
1. To record the realisation of various assets and liabilities,
This is a general statement, the specific entries are below.
2. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount of 20%.
Value of stock taken over = 50% of 1,60,000 = Rs. 80,000
Discount = 20% of 80,000 = Rs. 16,000
Value at which Aziz took over = 80,000 - 16,000 = Rs. 64,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Aziz's Capital A/c Dr. | 64,000 | |||
| To Realisation A/c | 64,000 | |||
| (Being 50% of stock taken over by Aziz at a 20% discount) |
3. Remaining Stock was sold at a profit of 30% on cost.
Value of remaining stock = 50% of 1,60,000 = Rs. 80,000
Profit = 30% of 80,000 = Rs. 24,000
Sale value = 80,000 + 24,000 = Rs. 1,04,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 1,04,000 | |||
| To Realisation A/c | 1,04,000 | |||
| (Being remaining stock sold at a 30% profit) |
4. Land and Building (book value Rs. 1,60,000) sold for Rs. 3,00,000 through a broker who charged 2% commission on the deal.
Commission = 2% of 3,00,000 = Rs. 6,000
Net amount received = 3,00,000 - 6,000 = Rs. 2,94,000
(Alternatively, commission can be shown as a separate realisation expense. Recording the net amount is more common.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 2,94,000 | |||
| To Realisation A/c | 2,94,000 | |||
| (Being Land and Building sold and commission paid) |
5. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value.
Valuation of Plant & Machinery = 60,000 - (10% of 60,000) = Rs. 54,000
(When an asset is given to a creditor in settlement, no entry is passed for that transaction, assuming it is in full or part settlement. The question is silent on the creditor's amount, so we assume it settled a claim of Rs. 54,000.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| No Entry | ||||
| (Being Plant and Machinery handed over to a creditor) |
6. Investment whose face value was Rs. 4,000 was realised at 50%.
Amount realised = 50% of 4,000 = Rs. 2,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 2,000 | |||
| To Realisation A/c | 2,000 | |||
| (Being investment realised at 50% of face value) |
Q6Questions for Practice - Numerical Questions
How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases: Realisation expenses amount to Rs. 1,00,000, Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner. Realisation expenses are to be borne by Rashim and he will be paid Rs. 70,000 as remuneration for completing the dissolution process. The actual expenses incurred by Rashim were Rs. 1,20,000.
Solution
Journal Entries for Realisation Expenses
1. Realisation expenses amount to Rs. 1,00,000.
(It is assumed that the firm paid these expenses.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 1,00,000 | |||
| To Bank/Cash A/c | 1,00,000 | |||
| (Being realisation expenses paid by the firm) |
2. Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner.
(It is assumed the expenses were to be borne by the firm but were paid by the partner.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 30,000 | |||
| To Rashim's Capital A/c | 30,000 | |||
| (Being realisation expenses paid by Rashim on behalf of the firm) |
3. Realisation expenses are to be borne by Rashim and he will be paid Rs. 70,000 as remuneration for completing the dissolution process. The actual expenses incurred by Rashim were Rs. 1,20,000.
(The firm is only concerned with paying the remuneration of Rs. 70,000 to Rashim. The actual expenses of Rs. 1,20,000 are Rashim's personal matter and will not be recorded in the firm's books.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 70,000 | |||
| To Rashim's Capital A/c | 70,000 | |||
| (Being remuneration due to Rashim for bearing realisation expenses) |
Q7Questions for Practice - Numerical Questions
The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised nothing and remaining assets are handed over to a Creditor, in full settlement of his claim. You are required to record the journal entries for realisation of assets.
Solution
Working Notes:
- Total Assets = Rs. 1,00,000
- Assets taken over by Atul (50%): Book Value = Rs. 50,000. Taken at 20% discount = 50,000 - (20% of 50,000) = Rs. 40,000.
- Remaining Assets = 1,00,000 - 50,000 = Rs. 50,000.
- Assets sold for profit (40% of remaining): Book Value = 40% of 50,000 = Rs. 20,000. Sold at 30% profit = 20,000 + (30% of 20,000) = Rs. 26,000.
- Balance Assets = 50,000 - 20,000 = Rs. 30,000.
- Obsolete Assets (5% of balance): Book Value = 5% of 30,000 = Rs. 1,500. Realised = Rs. 0.
- Assets given to Creditor (Remaining): Book Value = 30,000 - 1,500 = Rs. 28,500. Handed over to a creditor in full settlement.
Journal Entries
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| (i) | Atul's Capital A/c Dr. | 40,000 | ||
| To Realisation A/c | 40,000 | |||
| (Being 50% of assets taken over by Atul at a 20% discount) | ||||
| (ii) | Bank/Cash A/c Dr. | 26,000 | ||
| To Realisation A/c | 26,000 | |||
| (Being 40% of remaining assets sold at a 30% profit) | ||||
| (iii) | No Entry | |||
| (For obsolete assets realising nothing) | ||||
| (iv) | No Entry | |||
| (Being remaining assets handed over to a creditor in full settlement of his claim) |
Q8Questions for Practice - Numerical Questions
Record necessary journal entries to realise the following unrecorded assets and liabilities in the books of Paras and Priya: There was an old furniture in the firm which had been written-off completely in the books. This was sold for Rs. 3,000, Ashish, an old customer whose account for Rs. 1,000 was written-off as bad in the previous year, paid 60%, of the amount, Paras agreed to takeover the firm's goodwill (not recorded in the books of the firm), at a valuation of Rs. 30,000 , There was an old typewriter which had been written-off completely from the books. It was estimated to realise Rs. 400. It was taken away by Priya at an estimated price less 25%, There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of Rs. 2,000 which had been written-off completely from the books. These shares are valued @ Rs. 6 each and divided among the partners in their profit sharing ratio.
Solution
Journal Entries
(Assuming profit sharing ratio between Paras and Priya is equal, i.e., 1:1, as it is not given)
1. Sale of old written-off furniture for Rs. 3,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 3,000 | |||
| To Realisation A/c | 3,000 | |||
| (Being unrecorded furniture sold) |
2. Bad debts recovered from Ashish
Amount recovered = 60% of 1,000 = Rs. 600
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank/Cash A/c Dr. | 600 | |||
| To Realisation A/c | 600 | |||
| (Being bad debts previously written off, now recovered) |
3. Paras took over unrecorded goodwill for Rs. 30,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Paras's Capital A/c Dr. | 30,000 | |||
| To Realisation A/c | 30,000 | |||
| (Being unrecorded goodwill taken over by Paras) |
4. Priya took over an old written-off typewriter
Estimated price = Rs. 400
Value taken over by Priya = 400 - (25% of 400) = Rs. 300
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Priya's Capital A/c Dr. | 300 | |||
| To Realisation A/c | 300 | |||
| (Being unrecorded typewriter taken over by Priya) |
5. Unrecorded shares divided among partners
Total value of shares = 100 shares * Rs. 6/share = Rs. 600
This is equivalent to partners taking over an unrecorded asset. The Realisation A/c will be credited, and partners' capital accounts will be debited in their profit-sharing ratio.
Paras's share = 600 * (1/2) = Rs. 300
Priya's share = 600 * (1/2) = Rs. 300
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Paras's Capital A/c Dr. | 300 | |||
| Priya's Capital A/c Dr. | 300 | |||
| To Realisation A/c | 600 | |||
| (Being unrecorded shares taken over by partners in their profit sharing ratio) |
Q9Questions for Practice - Numerical Questions
All partners wish to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin's loan. You are required to settle the conflict giving reasons.
Solution
The conflict between Yastin and Amart should be settled in favor of Yastin.
Reasoning:
The settlement of accounts on the dissolution of a partnership firm is governed by Section 48 of the Indian Partnership Act, 1932. This section clearly specifies the order in which the firm's assets are to be applied for paying off liabilities.
The prescribed order is as follows:
- Payment of debts to third parties (external liabilities).
- Payment of loans and advances from partners.
- Payment of partners' capital balances.
- Distribution of any remaining surplus among partners in their profit-sharing ratio.
According to this legal provision, a partner's loan (like Yastin's loan of Rs. 2,00,000) has priority over the repayment of partners' capital. Amart's desire to have capitals paid before the loan is incorrect and contrary to the law.
Conclusion:
Yastin's loan of Rs. 2,00,000 must be paid off after all external liabilities of the firm have been settled, but before any amount is paid to any partner on account of their capital. Therefore, Yastin's claim is correct.
Q10Questions for Practice - Numerical Questions
What journal entries would be recorded for the following transactions on the dissolution of a firm of Arti and Karim after various assets (other than cash) on the third party liabilities have been transferred to Reliasation account. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000 . There was unrecorded Bike of Rs. 40,000 which was taken over by Mr. Karim. The firm paid Rs. 40,000 as compensation to employees. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.
Solution
Journal Entries
1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Arti's Capital A/c Dr. | 68,000 | |||
| To Realisation A/c | 68,000 | |||
| (Being stock taken over by Arti) |
2. There was unrecorded Bike of Rs. 40,000 which was taken over by Mr. Karim.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Karim's Capital A/c Dr. | 40,000 | |||
| To Realisation A/c | 40,000 | |||
| (Being unrecorded bike taken over by Karim) |
3. The firm paid Rs. 40,000 as compensation to employees.
(This is treated as an unrecorded liability being paid off.)
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 40,000 | |||
| To Bank/Cash A/c | 40,000 | |||
| (Being compensation paid to employees) |
4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%.
Discount = 15% of 36,000 = Rs. 5,400
Amount paid = 36,000 - 5,400 = Rs. 30,600
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Realisation A/c Dr. | 30,600 | |||
| To Bank/Cash A/c | 30,600 | |||
| (Being sundry creditors paid at a 15% discount) |
5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.
Arti's Share of Loss = 42,000 * (3/7) = Rs. 18,000
Karim's Share of Loss = 42,000 * (4/7) = Rs. 24,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Arti's Capital A/c Dr. | 18,000 | |||
| Karim's Capital A/c Dr. | 24,000 | |||
| To Realisation A/c | 42,000 | |||
| (Being loss on realisation transferred to partners' capital accounts) |
Q11Questions for Practice - Numerical Questions
Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.) Creditors 40,000 Cash 16,000 Lily's loan 32,000 Debtors 76,400 Profit and Loss 50,000 Inventory 1,09,600 Lily 1,60,000 Bills receivable 40,000 Rose 2,40,000 Buildings 2,80,000 5,22,000 5,22,000
Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivables) realised Rs. 4,84,000. Creditors agreed to take Rs. 38,000. Cost of realisation was Rs. 2,400. There was a Motor Cycle in the firm which was bought out of the firm's money, was not shown in the books of the firm. It was now sold for Rs. 10,000. There was a contingent liability in respect of outstanding electric bill of Rs. 5,000 which was paid Bill Receivable taken over by Rose at Rs. 33,000.
Show Realisation Account, Partners Capital Acount, Loan Account and Cash Account.
Solution
Solution
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Debtors A/c | 76,400 | By Creditors A/c | 40,000 |
| To Inventory A/c | 1,09,600 | By Cash A/c (Assets realised) | 4,84,000 |
| To Bills Receivable A/c | 40,000 | By Cash A/c (Motorcycle) | 10,000 |
| To Buildings A/c | 2,80,000 | By Rose's Capital A/c (Bills Rec.) | 33,000 |
| To Cash A/c (Creditors paid) | 38,000 | ||
| To Cash A/c (Realisation Exp.) | 2,400 | ||
| To Cash A/c (Electric bill) | 5,000 | ||
| To Profit transferred to: | |||
| Rose's Capital (2/5) | 6,240 | ||
| Lily's Capital (3/5) | 9,360 | 15,600 | |
| Total | 5,67,000 | Total | 5,67,000 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Rose (Rs.) | Lily (Rs.) | Particulars | Rose (Rs.) | Lily (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Bills Rec.) | 33,000 | - | By Balance b/d | 2,40,000 | 1,60,000 |
| To Cash A/c (Final Payment) | 2,33,240 | 1,99,360 | By Profit and Loss A/c | 20,000 | 30,000 |
| By Realisation A/c (Profit) | 6,240 | 9,360 | |||
| Total | 2,66,240 | 1,99,360 | Total | 2,66,240 | 1,99,360 |
Dr. Lily's Loan Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Cash A/c | 32,000 | By Balance b/d | 32,000 |
| Total | 32,000 | Total | 32,000 |
Dr. Cash Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 16,000 | By Realisation A/c (Creditors) | 38,000 |
| To Realisation A/c (Assets) | 4,84,000 | By Realisation A/c (Expenses) | 2,400 |
| To Realisation A/c (Motorcycle) | 10,000 | By Realisation A/c (Electric bill) | 5,000 |
| By Lily's Loan A/c | 32,000 | ||
| By Rose's Capital A/c | 2,33,240 | ||
| By Lily's Capital A/c | 1,99,360 | ||
| Total | 5,10,000 | Total | 5,10,000 |
Q12Questions for Practice - Numerical Questions
Shilpa, Meena and Nanda decided to dissolve their partnership on March 31,2017 . Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under:
Liabilities Amount (Rs.) Assets Amount (Rs.) Capitals: Land 81,000 Shilpa 80,000 Stock 56,760 Meena 40,000 Debtors 18,600 Bank loan 20,000 Nanda's capital 23,000 Creditors 37,000 Cash 10,840 Provision for doubtful debts 1,200 General reserve 12,000 1,90,200 1,90,200
The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 and debtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The remaining debtors realised 50% at their book value. Cost of realisation amounted to Rs. 1,200. There was a typewriter not recorded in the books worth Rs. 6,000 which were taken over by one of the Creditors at this value. Prepare Realisation Account.
Solution
Solution
Working Notes:
- Creditors: Total creditors are Rs. 37,000. A creditor took over an unrecorded typewriter worth Rs. 6,000. So, the remaining creditors to be paid in cash are Rs. 37,000 - Rs. 6,000 = Rs. 31,000.
- Stock: Total stock is Rs. 56,760. Stock taken by Shilpa is Rs. 41,660 (book value). Remaining stock = 56,760 - 41,660 = Rs. 15,100. This was sold for Rs. 14,000.
- Debtors: Total debtors are Rs. 18,600. Debtors of Rs. 10,000 realised Rs. 8,000. Remaining debtors = 18,600 - 10,000 = Rs. 8,600. They realised 50% = 50% of 8,600 = Rs. 4,300. Total realisation from debtors = 8,000 + 4,300 = Rs. 12,300.
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Land A/c | 81,000 | By Bank Loan A/c | 20,000 |
| To Stock A/c | 56,760 | By Creditors A/c | 37,000 |
| To Debtors A/c | 18,600 | By Provision for Doubtful Debts A/c | 1,200 |
| To Shilpa's Capital A/c (Bank Loan) | 20,000 | By Shilpa's Capital A/c (Stock) | 35,000 |
| To Cash A/c (Creditors Paid) | 31,000 | By Cash A/c (Assets Realised): | |
| To Cash A/c (Realisation Exp.) | 1,200 | Remaining Stock | 14,000 |
| To Profit transferred to: | Debtors | 12,300 | |
| Shilpa's Capital (3/6) | 10,470 | Land | 1,10,000 |
| Meena's Capital (2/6) | 6,980 | ||
| Nanda's Capital (1/6) | 3,490 | 20,940 | |
| Total | 2,29,500 | Total | 2,29,500 |
Q13Questions for Practice - Numerical Questions
Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance Sheet as on March 31, 2017 is as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.) Creditors 38,000 Bank 11,500 Mrs. Surjit loan 10,000 Stock 6,000 Reserve 15,000 Debtors 19,000 Rahi's loan 5,000 Furniture 4,000 Capital's: Plant 28,000 Surjit 10,000 Investment 10,000 Rahi 8,000 Profit and Loss 7,500 86,000 86,000
The firm was dissolved on March 31, 2017 on the following terms:
Surjit agreed to take the investments at Rs. 8,000 and to pay Mrs. Surojit's loan.
Other assets were realised as follows:
Stock Rs. 5,000
Debtors Rs. 18,500
Furniture Rs. 4,500
Plant Rs. 25,000
Expenses on realisation amounted to Rs. 1,600.
Creditors agreed to accept Rs. 37,000 as a final settlement.
You are required to prepare Realisation account, Partner's Capital account and Bank account.
Solution
Solution
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Stock A/c | 6,000 | By Creditors A/c | 38,000 |
| To Debtors A/c | 19,000 | By Mrs. Surjit's Loan A/c | 10,000 |
| To Furniture A/c | 4,000 | By Surjit's Capital A/c (Investments) | 8,000 |
| To Plant A/c | 28,000 | By Bank A/c (Assets Realised): | |
| To Investment A/c | 10,000 | Stock | 5,000 |
| To Surjit's Capital A/c (Mrs. Loan) | 10,000 | Debtors | 18,500 |
| To Bank A/c (Creditors paid) | 37,000 | Furniture | 4,500 |
| To Bank A/c (Realisation Exp.) | 1,600 | Plant | 25,000 |
| By Loss transferred to: | |||
| Surjit's Capital (3/5) | 3,960 | ||
| Rahi's Capital (2/5) | 2,640 | ||
| Total | 1,15,600 | Total | 1,15,600 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Surjit (Rs.) | Rahi (Rs.) | Particulars | Surjit (Rs.) | Rahi (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Investments) | 8,000 | - | By Balance b/d | 10,000 | 8,000 |
| To Profit and Loss A/c | 4,500 | 3,000 | By Reserve | 9,000 | 6,000 |
| To Realisation A/c (Loss) | 3,960 | 2,640 | By Realisation A/c (Mrs. Loan) | 10,000 | - |
| To Bank A/c (Final Payment) | 12,540 | 8,360 | |||
| Total | 29,000 | 14,000 | Total | 29,000 | 14,000 |
Dr. Bank Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 11,500 | By Realisation A/c (Creditors) | 37,000 |
| To Realisation A/c (Assets) | 53,000 | By Realisation A/c (Expenses) | 1,600 |
| By Rahi's Loan A/c | 5,000 | ||
| By Surjit's Capital A/c | 12,540 | ||
| By Rahi's Capital A/c | 8,360 | ||
| Total | 64,500 | Total | 64,500 |
Q14Questions for Practice - Numerical Questions
Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the ratio of 3:2:1. On March 31, 2017 their balance sheet was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.) Capitals: Cash 22,500 Rita 80,000 Debtors 52,300 Geeta 50,000 Stock 36,000 Ashish 30,000 Investments 69,000 Creditors 65,000 Plant 91,200 Bills payable 26,000 General reserve 20,000 2,71,000 2,71,000
On the date of above mentioned date the firm was dissolved:
Rita was appointed to realise the assets. Rita was to receive 5% commission on the sale of assets (except cash) and was to bear all expenses of realisation,
Assets were realised as follows: Debtors Rs. 30,000, Stock Rs. 26,000, Plant Rs. 42,750
Investments were realised at 85% of the book value,
Expenses of realisation amounted to Rs. 4,100,
Firm had to pay Rs. 7,200 for outstanding salary not provided for earlier,
Contingent liability in respect of bills discounted with the bank was also materialised and paid off Rs. 9,800,
Prepare Realisation account, Capital Accounts of Partner's and Cash Account.
Solution
Solution
Working Notes:
- Total Asset Realisation:
- Debtors: Rs. 30,000
- Stock: Rs. 26,000
- Plant: Rs. 42,750
- Investments (85% of 69,000): Rs. 58,650
- Total = Rs. 1,57,400
- Rita's Commission: 5% on assets realised = 5% of 1,57,400 = Rs. 7,870
- Realisation Expenses: Since Rita was to bear all expenses, the actual expense of Rs. 4,100 is her personal expense and will not be recorded in the firm's books.
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Debtors A/c | 52,300 | By Creditors A/c | 65,000 |
| To Stock A/c | 36,000 | By Bills Payable A/c | 26,000 |
| To Investments A/c | 69,000 | By Cash A/c (Assets Realised) | 1,57,400 |
| To Plant A/c | 91,200 | By Loss transferred to: | |
| To Rita's Capital A/c (Commission) | 7,870 | Rita's Capital (3/6) | 57,985 |
| To Cash A/c (Creditors & B/P) | 91,000 | Geeta's Capital (2/6) | 38,657 |
| To Cash A/c (Salary) | 7,200 | Ashish's Capital (1/6) | 19,328 |
| To Cash A/c (Contingent Liab.) | 9,800 | ||
| Total | 3,64,370 | Total | 3,64,370 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Rita (Rs.) | Geeta (Rs.) | Ashish (Rs.) | Particulars | Rita (Rs.) | Geeta (Rs.) | Ashish (Rs.) |
|---|---|---|---|---|---|---|---|
| To Realisation A/c (Loss) | 57,985 | 38,657 | 19,328 | By Balance b/d | 80,000 | 50,000 | 30,000 |
| To Cash A/c (Final Payment) | 39,885 | 18,010 | 14,005 | By General Reserve | 10,000 | 6,667 | 3,333 |
| By Realisation A/c (Comm.) | 7,870 | - | - | ||||
| Total | 97,870 | 56,667 | 33,333 | Total | 97,870 | 56,667 | 33,333 |
Dr. Cash Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 22,500 | By Realisation A/c (Liabilities) | 91,000 |
| To Realisation A/c (Assets) | 1,57,400 | By Realisation A/c (Salary) | 7,200 |
| By Realisation A/c (Cont. Liab.) | 9,800 | ||
| By Rita's Capital A/c | 39,885 | ||
| By Geeta's Capital A/c | 18,010 | ||
| By Ashish's Capital A/c | 14,005 | ||
| Total | 1,79,900 | Total | 1,79,900 |
Q15Questions for Practice - Numerical Questions
Anup and Sumit are equal partners in a firm. They decided to dissolve the parntership on March 31, 2017. When the balance sheet is as under:
Liabilities Amount (Rs.) Assets Amount (Rs.) Sundry Creditors 27,000 Cash at bank 11,000 General Reserve 10,000 Sundry Debtors 12,000 Loan 40,000 Plants 47,000 Capital Stock 42,000 Anup 60,000 Lease hold land 60,000 Sumit 60,000 Furniture 25,000 1,97,000 1,97,000
The Assets were realised as follows:
Lease hold land Rs 72,000
Furniture Rs 22,500
Stock Rs 40,500
Plant Rs 48,000
Sundry Debtors Rs 10,500
The Creditors were paid Rs. 25,500 in full settlement. Expenses of realisation amount to Rs. 2,500.
Prepare Realisation Account, Bank Account, Partners Capital Accounts to close the books of the firm.
Solution
Solution
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Sundry Debtors A/c | 12,000 | By Sundry Creditors A/c | 27,000 |
| To Plants A/c | 47,000 | By Loan A/c | 40,000 |
| To Stock A/c | 42,000 | By Bank A/c (Assets Realised): | |
| To Lease hold land A/c | 60,000 | Lease hold land | 72,000 |
| To Furniture A/c | 25,000 | Furniture | 22,500 |
| To Bank A/c (Creditors) | 25,500 | Stock | 40,500 |
| To Bank A/c (Loan) | 40,000 | Plant | 48,000 |
| To Bank A/c (Expenses) | 2,500 | Sundry Debtors | 10,500 |
| To Profit transferred to: | |||
| Anup's Capital (1/2) | 3,250 | ||
| Sumit's Capital (1/2) | 3,250 | 6,500 | |
| Total | 2,60,500 | Total | 2,60,500 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Anup (Rs.) | Sumit (Rs.) | Particulars | Anup (Rs.) | Sumit (Rs.) |
|---|---|---|---|---|---|
| To Bank A/c (Final Payment) | 68,250 | 68,250 | By Balance b/d | 60,000 | 60,000 |
| By General Reserve | 5,000 | 5,000 | |||
| By Realisation A/c (Profit) | 3,250 | 3,250 | |||
| Total | 68,250 | 68,250 | Total | 68,250 | 68,250 |
Dr. Bank Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 11,000 | By Realisation A/c (Creditors) | 25,500 |
| To Realisation A/c (Assets) | 1,93,500 | By Realisation A/c (Loan) | 40,000 |
| By Realisation A/c (Expenses) | 2,500 | ||
| By Anup's Capital A/c | 68,250 | ||
| By Sumit's Capital A/c | 68,250 | ||
| Total | 2,04,500 | Total | 2,04,500 |
Q16Questions for Practice - Numerical Questions
Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on March 31, 2017. Their balance sheet on the above date was:
Liabilities Amount (Rs.) Assets Amount (Rs.) Capitals: Building 80,000 Ashu 1,08,000 Machinery 70,000 Harish 54,000 Furniture 14,000 Creditors 88,000 Stock 20,000 Bank overdraft 50,000 Investments 60,000 Debtors 48,000 Cash in hand 8,000 3,00,000 3,00,000
Ashu is to take over the building at Rs. 95,000 and Machinery and Furniture is take over by Harish at value of Rs. 80,000. Ashu agreed to pay Creditor and Harish agreed to meet Bank overdraft. Stock and Investments are taken by both partner in profit sharing ratio. Debtors realised for Rs. 46,000, expenses of realisation amounted to Rs. 3,000. Prepare necessary ledger account.
Solution
Solution
Working Notes:
- Stock & Investments taken over by partners:
- Total Book Value = 20,000 (Stock) + 60,000 (Investments) = Rs. 80,000
- Taken over in profit sharing ratio (3:2).
- Ashu's Share = 80,000 * (3/5) = Rs. 48,000
- Harish's Share = 80,000 * (2/5) = Rs. 32,000
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Building A/c | 80,000 | By Creditors A/c | 88,000 |
| To Machinery A/c | 70,000 | By Bank Overdraft A/c | 50,000 |
| To Furniture A/c | 14,000 | By Ashu's Capital A/c (Building) | 95,000 |
| To Stock A/c | 20,000 | By Harish's Capital A/c (Machinery & Furn.) | 80,000 |
| To Investments A/c | 60,000 | By Ashu's Capital A/c (Stock & Inv.) | 48,000 |
| To Debtors A/c | 48,000 | By Harish's Capital A/c (Stock & Inv.) | 32,000 |
| To Ashu's Capital A/c (Creditors) | 88,000 | By Cash A/c (Debtors) | 46,000 |
| To Harish's Capital A/c (Bank O/D) | 50,000 | ||
| To Cash A/c (Expenses) | 3,000 | ||
| To Profit transferred to: | |||
| Ashu's Capital (3/5) | 3,600 | ||
| Harish's Capital (2/5) | 2,400 | 6,000 | |
| Total | 4,39,000 | Total | 4,39,000 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Ashu (Rs.) | Harish (Rs.) | Particulars | Ashu (Rs.) | Harish (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Building) | 95,000 | - | By Balance b/d | 1,08,000 | 54,000 |
| To Realisation A/c (Stock & Inv) | 48,000 | 32,000 | By Realisation A/c (Creditors) | 88,000 | - |
| To Realisation A/c (Mach & Furn) | - | 80,000 | By Realisation A/c (Bank O/D) | - | 50,000 |
| To Cash A/c (Final Payment) | 56,600 | 5,600 | By Realisation A/c (Profit) | 3,600 | 2,400 |
| Total | 1,99,600 | 1,17,600 | Total | 1,99,600 | 1,17,600 |
Dr. Cash Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 8,000 | By Realisation A/c (Expenses) | 3,000 |
| To Realisation A/c (Debtors) | 46,000 | By Ashu's Capital A/c | 56,600 |
| To Harish's Capital A/c (Deficit) | 5,600 | ||
| Total | 59,600 | Total | 59,600 |
Q17Questions for Practice - Numerical Questions
Sanjay, Tarun and Vineet shared profit in the ratio of 3:2:1. On march 31, 2017 their balance sheet was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.) Capitals: Plant 90,000 Sanjay 1,00,000 Debtors 60,000 Tarun 1,00,000 Furniture 32,000 Vineet 70,000 Stock 60,000 Creditors 80,000 Investments 70,000 Bills payable 30,000 Bills receivable 36,000 Cash in hand 32,000 3,80,000 3,80,000
On this date the firm was dissolved. Sanjay was appointed to realise the assets. Sanjay was to receive 6% commission on the sale of assets (except cash) and was to bear all expenses of realisation.
Sanjay realised the assets as follows : Plant Rs. 72,000, Debtors Rs. 54,000, Furniture Rs. 18,000, Stock 90% of the book value, Investments Rs. 76,000 and Bills receivable Rs.31,000. Expenses of realisation amounted to Rs.4,500. Prepare Realisation Account, Capital Accounts and Cash Account
Solution
Solution
Working Notes:
- Total Asset Realisation:
- Plant: Rs. 72,000
- Debtors: Rs. 54,000
- Furniture: Rs. 18,000
- Stock (90% of 60,000): Rs. 54,000
- Investments: Rs. 76,000
- Bills Receivable: Rs. 31,000
- Total = Rs. 3,05,000
- Sanjay's Commission: 6% on assets realised = 6% of 3,05,000 = Rs. 18,300
- Realisation Expenses: Since Sanjay was to bear all expenses, the actual expense of Rs. 4,500 is his personal expense and will not be recorded in the firm's books.
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Plant A/c | 90,000 | By Creditors A/c | 80,000 |
| To Debtors A/c | 60,000 | By Bills Payable A/c | 30,000 |
| To Furniture A/c | 32,000 | By Cash A/c (Assets Realised) | 3,05,000 |
| To Stock A/c | 60,000 | By Loss transferred to: | |
| To Investments A/c | 70,000 | Sanjay's Capital (3/6) | 30,650 |
| To Bills Receivable A/c | 36,000 | Tarun's Capital (2/6) | 20,433 |
| To Cash A/c (Liabilities Paid) | 1,10,000 | Vineet's Capital (1/6) | 10,217 |
| To Sanjay's Capital A/c (Comm.) | 18,300 | ||
| Total | 4,76,300 | Total | 4,76,300 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Sanjay (Rs.) | Tarun (Rs.) | Vineet (Rs.) | Particulars | Sanjay (Rs.) | Tarun (Rs.) | Vineet (Rs.) |
|---|---|---|---|---|---|---|---|
| To Realisation A/c (Loss) | 30,650 | 20,433 | 10,217 | By Balance b/d | 1,00,000 | 1,00,000 | 70,000 |
| To Cash A/c (Final Payment) | 87,650 | 79,567 | 59,783 | By Realisation A/c (Comm.) | 18,300 | - | - |
| Total | 1,18,300 | 1,00,000 | 70,000 | Total | 1,18,300 | 1,00,000 | 70,000 |
Dr. Cash Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 32,000 | By Realisation A/c (Liabilities) | 1,10,000 |
| To Realisation A/c (Assets) | 3,05,000 | By Sanjay's Capital A/c | 87,650 |
| By Tarun's Capital A/c | 79,567 | ||
| By Vineet's Capital A/c | 59,783 | ||
| Total | 3,37,000 | Total | 3,37,000 |
Q18Questions for Practice - Numerical Questions
The following is the Balance Sheet of Gupta and Sharma as on March 31,2017: | Liabilities | Amount (Rs.) | Assets | Amount (Rs.) | | :--- | :--- | :--- | :--- | | Sundry Creditors | 38,000 | Cash at bank | 12,500 | | Mrs.Gupta's loan | 20,000 | Sundry Debtors | 55,000 | | Mrs.Sharma's loan | 30,000 | Stock | 44,000 | | General Reserve | 6,000 | Bills receivable | 19,000 | | Provision of doubtful debts | 4,000 | Machinery | 52,000 | | Capital | | Investment | 38,500 | | Gupta | 90,000 | Fixtures | 27,000 | | Sharma | 60,000 | | | | | 2,48,000 | | 2,48,000 | The firm was dissolved on December 31, 2017 and asset realised and settlements of liabilities as follows:
(a)
The realisation of the assets were as follows: Sundry Debtors 52,000, Stock 42,000, Bills receivable 16,000, Machinery 49,000, Fixtures 20,000
(b)
Investment was taken over by Gupta at agreed value of Rs.36,000 and agreed to pay of Mrs. Gupta's loan.
(c)
The Sundry Creditors were paid off less 3% discount.
(d)
The realisation expenses incurred amounted to Rs.1,200.
Journalise the entries to be made on the dissolution and prepare Realisation Account, Bank Account and Partners Capital Accounts.
Solution
Solution
(Profit sharing ratio is not given, so it is assumed to be equal, i.e., 1:1)
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Sundry Debtors A/c | 55,000 | By Sundry Creditors A/c | 38,000 |
| To Stock A/c | 44,000 | By Mrs. Gupta's Loan A/c | 20,000 |
| To Bills Receivable A/c | 19,000 | By Mrs. Sharma's Loan A/c | 30,000 |
| To Machinery A/c | 52,000 | By Provision for Doubtful Debts | 4,000 |
| To Investment A/c | 38,500 | By Bank A/c (Assets Realised): | |
| To Fixtures A/c | 27,000 | Sundry Debtors | 52,000 |
| To Gupta's Capital (Mrs. Gupta's Loan) | 20,000 | Stock | 42,000 |
| To Bank A/c (Mrs. Sharma's Loan) | 30,000 | Bills Receivable | 16,000 |
| To Bank A/c (Creditors Paid) | 36,860 | Machinery | 49,000 |
| To Bank A/c (Expenses) | 1,200 | Fixtures | 20,000 |
| By Gupta's Capital A/c (Investment) | 36,000 | ||
| By Loss transferred to: | |||
| Gupta's Capital (1/2) | 18,280 | ||
| Sharma's Capital (1/2) | 18,280 | ||
| Total | 3,23,560 | Total | 3,23,560 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Gupta (Rs.) | Sharma (Rs.) | Particulars | Gupta (Rs.) | Sharma (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Investment) | 36,000 | - | By Balance b/d | 90,000 | 60,000 |
| To Realisation A/c (Loss) | 18,280 | 18,280 | By General Reserve | 3,000 | 3,000 |
| To Bank A/c (Final Payment) | 58,720 | 44,720 | By Realisation A/c (Mrs. Loan) | 20,000 | - |
| Total | 1,13,000 | 63,000 | Total | 1,13,000 | 63,000 |
Dr. Bank Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 12,500 | By Realisation A/c (Mrs. Sharma's Loan) | 30,000 |
| To Realisation A/c (Assets) | 1,79,000 | By Realisation A/c (Creditors) | 36,860 |
| By Realisation A/c (Expenses) | 1,200 | ||
| By Gupta's Capital A/c | 58,720 | ||
| By Sharma's Capital A/c | 44,720 | ||
| Total | 1,91,500 | Total | 1,91,500 |
Q19Questions for Practice - Numerical Questions
Ashok, Babu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They dissolve the partnership of the December 31, 2017, when the balance sheet of the firm as under:
Liabilities Amount (Rs.) Assets Amount (Rs.) Sundry Creditors 20,000 Bank 7,500 Bills payable 25,500 Sundry Debtors 58,000 Chetan's loan 30,000 Stock 39,500 Capital's : Machinery 48,000 Ashok 70,000 Investment 42,000 Babu 55,000 Freehold property 50,500 Chetan 27,000 Current accounts : Ashok 10,000 Babu 5,000 Chetan 3,000 2,45,500 2,45,500
The machinery was taken over by Babu for Rs. 45,000, Ashok took over the Investment for Rs.40,000 and Freehold property took over by Chetan at Rs.55,000. The remaining Assets realised as follows: Sundry Debtors Rs.56,500 and Stock Rs.36,500. Sundry Creditors were settled at discount of 7%. A Office computer, not shown in the books of accounts realised Rs.9,000. Realisation expenses amounted to Rs.3,000.
Prepare Realisation Account, Partners Capital Account, Bank Account.
Solution
Solution
(Profit Sharing Ratio: Ashok:Babu:Chetan = 1/2 : 1/3 : 1/6 = 3:2:1)
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Sundry Debtors A/c | 58,000 | By Sundry Creditors A/c | 20,000 |
| To Stock A/c | 39,500 | By Bills Payable A/c | 25,500 |
| To Machinery A/c | 48,000 | By Babu's Capital A/c (Machinery) | 45,000 |
| To Investment A/c | 42,000 | By Ashok's Capital A/c (Investment) | 40,000 |
| To Freehold Property A/c | 50,500 | By Chetan's Capital A/c (Property) | 55,000 |
| To Bank A/c (Creditors Paid) | 18,600 | By Bank A/c (Assets Realised): | |
| To Bank A/c (Bills Payable Paid) | 25,500 | Debtors | 56,500 |
| To Bank A/c (Expenses) | 3,000 | Stock | 36,500 |
| To Profit transferred to: | By Bank A/c (Computer) | 9,000 | |
| Ashok's Capital (3/6) | 1,200 | ||
| Babu's Capital (2/6) | 800 | ||
| Chetan's Capital (1/6) | 400 | 2,400 | |
| Total | 2,87,500 | Total | 2,87,500 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Ashok (Rs.) | Babu (Rs.) | Chetan (Rs.) | Particulars | Ashok (Rs.) | Babu (Rs.) | Chetan (Rs.) |
|---|---|---|---|---|---|---|---|
| To Realisation A/c (Investment) | 40,000 | - | - | By Balance b/d (Capital) | 70,000 | 55,000 | 27,000 |
| To Realisation A/c (Machinery) | - | 45,000 | - | By Balance b/d (Current) | 10,000 | 5,000 | 3,000 |
| To Realisation A/c (Property) | - | - | 55,000 | By Realisation A/c (Profit) | 1,200 | 800 | 400 |
| To Bank A/c (Final Payment) | 41,200 | 15,800 | - | By Bank A/c (Deficit) | - | - | 24,600 |
| Total | 81,200 | 60,800 | 55,000 | Total | 81,200 | 60,800 | 55,000 |
Dr. Bank Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 7,500 | By Realisation A/c (Creditors) | 18,600 |
| To Realisation A/c (Assets) | 93,000 | By Realisation A/c (B/P) | 25,500 |
| To Realisation A/c (Computer) | 9,000 | By Realisation A/c (Expenses) | 3,000 |
| To Chetan's Capital A/c (Deficit) | 24,600 | By Chetan's Loan A/c | 30,000 |
| By Ashok's Capital A/c | 41,200 | ||
| By Babu's Capital A/c | 15,800 | ||
| Total | 1,34,100 | Total | 1,34,100 |
Q20Questions for Practice - Numerical Questions
The following is the Balance sheet of Tanu and Manu, who shares profit and losses in the ratio of 5:3, On March 31, 2017:
Liabilities Amount (Rs.) Assets Amount (Rs.) Sundry Creditors 62,000 Cash at bank 16,000 Bills payable 32,000 Sundry Debtors 55,000 Bank loan 50,000 Stock 75,000 General Reserve 16,000 Motor car 90,000 Capital Machinery 45,000 Tanu 1,00,000 Investment 70,000 Manu 1,00,000 Fixtures 9,000 3,60,000 3,60,000
On the above date the firm is dissolved and the following agreement was made: Tanu agree to pay the bank loan and took away the sundry debtors. Sundry creditors accepts stock and paid Rs.10,000 to the firm. Machinery is taken over by Manu for Rs.40,000 and agreed to pay of bills payable at a discount of 5%. Motor car was taken over by Tanu for Rs.60,000. Investment realised Rs.76,000 and fixtures Rs.4,000. The expenses of dissolution amounted to Rs.2,200.
Prepare Realisation Account, Bank Account and Partners Capital Accounts.
Solution
Solution
Dr. Realisation Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Sundry Debtors A/c | 55,000 | By Sundry Creditors A/c | 62,000 |
| To Stock A/c | 75,000 | By Bills Payable A/c | 32,000 |
| To Motor Car A/c | 90,000 | By Bank Loan A/c | 50,000 |
| To Machinery A/c | 45,000 | By Tanu's Capital A/c (Debtors) | 55,000 |
| To Investment A/c | 70,000 | By Tanu's Capital A/c (Motor Car) | 60,000 |
| To Fixtures A/c | 9,000 | By Manu's Capital A/c (Machinery) | 40,000 |
| To Tanu's Capital A/c (Bank Loan) | 50,000 | By Bank A/c (from Creditors) | 10,000 |
| To Manu's Capital A/c (Bills Payable) | 30,400 | By Bank A/c (Assets Realised): | |
| To Bank A/c (Expenses) | 2,200 | Investment | 76,000 |
| Fixtures | 4,000 | ||
| By Loss transferred to: | |||
| Tanu's Capital (5/8) | 23,500 | ||
| Manu's Capital (3/8) | 14,100 | ||
| Total | 4,26,600 | Total | 4,26,600 |
Dr. Partners' Capital Accounts Cr.
| Particulars | Tanu (Rs.) | Manu (Rs.) | Particulars | Tanu (Rs.) | Manu (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Debtors) | 55,000 | - | By Balance b/d | 1,00,000 | 1,00,000 |
| To Realisation A/c (Motor Car) | 60,000 | - | By General Reserve | 10,000 | 6,000 |
| To Realisation A/c (Machinery) | - | 40,000 | By Realisation A/c (Bank Loan) | 50,000 | - |
| To Realisation A/c (Loss) | 23,500 | 14,100 | By Realisation A/c (B/P) | - | 30,400 |
| To Bank A/c (Final Payment) | 21,500 | 82,300 | |||
| Total | 1,60,000 | 1,36,400 | Total | 1,60,000 | 1,36,400 |
Dr. Bank Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 16,000 | By Realisation A/c (Expenses) | 2,200 |
| To Realisation A/c (from Creditors) | 10,000 | By Tanu's Capital A/c | 21,500 |
| To Realisation A/c (Assets) | 80,000 | By Manu's Capital A/c | 82,300 |
| Total | 1,06,000 | Total | 1,06,000 |
Q1Questions for Practice - Short Answer Questions
State the difference between dissolution of partnership and dissolution of partnership firm.
Solution
The key differences between dissolution of partnership and dissolution of a partnership firm are as follows:
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Termination of business | The business is not terminated and continues to operate. | The business of the firm is closed down completely. |
| Economic relationship | The economic relationship between the partners continues, although in a changed form. | The economic relationship between the partners comes to an end. |
| Settlement of accounts | Assets and liabilities are revalued to determine the new financial position. A new balance sheet is prepared. | Assets are sold, and liabilities are paid off. The books of account are closed permanently. |
| Court's intervention | The court does not intervene as it usually occurs by mutual agreement (e.g., admission, retirement). | A firm can be dissolved by a court's order on various grounds. |
| Consequence | It does not necessarily lead to the dissolution of the firm. | It necessarily involves the dissolution of the partnership. |
Q2Questions for Practice - Short Answer Questions
State the accounting treatment at the time of dissolution of a firm for: i. Unrecorded assets ii. Unrecorded liabilities
Solution
The accounting treatment for unrecorded assets and liabilities at the time of dissolution is as follows:
i. Unrecorded Assets:
When an unrecorded asset is realised (sold for cash or taken over by a partner), it represents a gain for the firm. Since these assets do not have a book value, they are not transferred to the Realisation Account initially. The amount realised is directly credited to the Realisation Account.
- If sold for cash: Bank A/c Dr. To Realisation A/c
- If taken over by a partner: Partner's Capital A/c Dr. To Realisation A/c
ii. Unrecorded Liabilities:
When an unrecorded liability is paid off, it is a loss for the firm. These liabilities are not transferred to the Realisation Account initially. The amount paid is directly debited to the Realisation Account.
- If paid in cash: Realisation A/c Dr. To Bank A/c
- If a partner agrees to pay: Realisation A/c Dr. To Partner's Capital A/c
Q3Questions for Practice - Short Answer Questions
On dissolution, how will you deal with partner's loan if it appears on the (a) assets side of the balance sheet, (b) liabilities side of balance sheet.
Solution
The treatment of a partner's loan on dissolution depends on whether it is an asset or a liability for the firm.
(a) Partner's loan on the assets side of the balance sheet:
This represents a loan given by the firm to a partner. It is an amount receivable from the partner. This loan account is not transferred to the Realisation Account. Instead, it is closed by transferring the amount to the debit side of that partner's capital account. The journal entry would be:
Partner's Capital A/c Dr.
To Loan to Partner A/c
(b) Partner's loan on the liabilities side of the balance sheet:
This represents a loan given by a partner to the firm. It is an internal liability. According to Section 48 of the Partnership Act, 1932, a partner's loan is paid after all outside liabilities are settled but before the partners' capitals are repaid. This loan is not transferred to the Realisation Account. It is paid directly through the bank.
The journal entry would be:
Partner's Loan A/c Dr.
To Bank/Cash A/c
Q4Questions for Practice - Short Answer Questions
Distinguish between firm's debts and partner's private debts.
Solution
The distinction between a firm's debts and a partner's private debts is crucial for the settlement of accounts upon dissolution, as governed by Section 49 of the Partnership Act, 1932.
| Basis | Firm's Debts | Partner's Private Debts |
|---|---|---|
| Meaning | These are the liabilities that the firm owes to third parties, incurred in the normal course of business. | These are the personal liabilities of a partner, which are not related to the firm's business. |
| Primary Responsibility | The firm is primarily responsible for paying these debts. All partners are jointly and severally liable. | The individual partner is primarily responsible for paying his/her private debts. |
| Application of Property | The firm's property is first used to pay the firm's debts. Any surplus is then distributed among partners and can be used to pay their private debts. | A partner's private property is first used to pay his/her private debts. Any surplus can be used to pay the firm's debts if the firm's assets are insufficient. |
Q5Questions for Practice - Short Answer Questions
State the order of settlement of accounts on dissolution.
Solution
According to Section 48 of the Partnership Act, 1932, the settlement of accounts on the dissolution of a firm follows a specific order for the application of assets. The assets of the firm, including any contributions from partners to make up for capital deficiencies, shall be applied in the following order:
-
Payment of Firm's Debts to Third Parties: This includes paying off all external liabilities such as creditors, bills payable, bank loans, and outstanding expenses. Secured loans have precedence over unsecured loans.
-
Payment of Partners' Loans and Advances: After settling outside debts, any loans or advances made by partners to the firm are repaid. If the available amount is insufficient, partners are paid proportionately.
-
Payment of Partners' Capital: After paying off partners' loans, the remaining amount is used to repay the capital contribution of each partner.
-
Distribution of Residue (Surplus): If any surplus remains after all the above payments, it is distributed among the partners in their profit-sharing ratio.
Q6Questions for Practice - Short Answer Questions
On what account realisation account differs from revaluation account.
Solution
The Realisation Account and Revaluation Account differ on several grounds:
| Basis | Realisation Account | Revaluation Account |
|---|---|---|
| Objective | Its objective is to close the books of accounts of the firm by ascertaining the net profit or loss from the sale of assets and settlement of liabilities. | Its objective is to ascertain the net profit or loss arising from the revaluation of assets and reassessment of liabilities. |
| When Prepared | It is prepared only once in the lifetime of a firm, at the time of its dissolution. | It is prepared at the time of reconstitution of a partnership (e.g., admission, retirement, or death of a partner, or change in profit sharing ratio). |
| Consequence | Preparation of this account is followed by the closure of the firm's business. | After its preparation, the firm's business continues, albeit in a reconstituted form. |
| Content | It records the book value of all assets (except cash/bank) and external liabilities. It also records the amounts realised from assets and paid for liabilities. | It only records the increase or decrease in the value of assets and liabilities. The original book values are not transferred. |
Q1Test your Understanding - I
State giving reasons, which of the following statements are true or false: Dissolution of a partnership is different from dissolution of a firm,
Solution
True. Dissolution of a partnership refers to a change in the existing relationship between partners (due to admission, retirement, etc.), but the firm may continue its business. Dissolution of a firm means the entire business is closed down, assets are sold, and liabilities are paid off.
Q2Test your Understanding - I
State giving reasons, which of the following statements are true or false: 2. A partnership is dissolved when there is a death of a partner,
Solution
True. The death of a partner leads to the dissolution of the partnership as the original agreement among the partners comes to an end. However, the firm may continue to operate under a new partnership agreement among the remaining partners.
Q3Test your Understanding - I
State giving reasons, which of the following statements are true or false: 3. A firm is dissolved when all partners give consent to it.
Solution
True. According to the modes of dissolution, a firm can be dissolved by agreement, which involves the consent of all the partners.
Q4Test your Understanding - I
State giving reasons, which of the following statements are true or false: 4. A firm is compulsorily dissolved when a partner decide to retire.
Solution
False. The retirement of a partner leads to the dissolution of the partnership, not the compulsory dissolution of the firm. The firm can be reconstituted and continue its business with the remaining partners.
Q5Test your Understanding - I
State giving reasons, which of the following statements are true or false: 5. Dissolution of a firm necessarily involves dissolution of partnership.
Solution
True. When a firm is dissolved, the business relationship between all the partners comes to an end. Therefore, the dissolution of the partnership is an integral part of the dissolution of the firm.
Q6Test your Understanding - I
State giving reasons, which of the following statements are true or false: 6. A firm is compulsorily dissolved when all partners or when all except one partner become involvent.
Solution
True. This is a condition for compulsory dissolution. When all partners or all but one become insolvent, they are incompetent to contract, leading to the compulsory dissolution of the firm.
Q7Test your Understanding - I
State giving reasons, which of the following statements are true or false: 7. Court can order a firm to be dissolved when a partner becomes insane.
Solution
True. The insanity of a partner is one of the grounds on which a court can order the dissolution of a partnership firm at the suit of another partner.
Q8Test your Understanding - I
State giving reasons, which of the following statements are true or false: 8. Dissolution of partnership can not take place without intervention of the court.
Solution
False. Dissolution of partnership happens by mutual agreement in cases like admission, retirement, or change in profit sharing ratio, which do not require court intervention. Court intervention is a specific mode for the dissolution of a firm, not necessarily for the dissolution of a partnership.
Q1Test your Understanding - II
Tick ( ✓ ) the Correct Answer 1. On dissolution of a firm, bank overdraft is transferred to :
(a)
Cash Account
(b)
Bank Account
(c)
Realisation Aaccount
(d)
Partner's capital Account.
Solution
(c) Realisation Account.
Bank overdraft is an external liability of the firm. At the time of dissolution, all external liabilities are transferred to the credit side of the Realisation Account for settlement.
Q2Test your Understanding - II
Tick ( ✓ ) the Correct Answer 2. On dissolution of a firm, partner's loan account is transferred to:
(a)
Realisation Account
(b)
Partner's Capital Account
(c)
Partner's Current Account
(d)
None of the above.
Solution
(d) None of the above.
A partner's loan is an internal liability and is not transferred to the Realisation Account. It is paid off separately after settling all external liabilities but before the final settlement of partners' capital accounts. It is paid through the Bank/Cash Account.
Q3Test your Understanding - II
Tick ( ✓ ) the Correct Answer 3. After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of any information regarding their payment, such liabilities are treated as:
(a)
Never paid
(b)
Fully paid
(c)
Partly paid
(d)
None of the above.
Solution
(b) Fully paid.
It is an accounting convention that if there is no information about the payment of an external liability that has been transferred to the Realisation Account, it is assumed to have been paid in full at its book value.
Q4Test your Understanding - II
Tick ( ✓ ) the Correct Answer 4. When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to:
(a)
Realisation Account
(b)
Partner's Capital Account
(c)
Partner's Loan Account
(d)
None of the above.
Solution
(b) Partner's Capital Account.
When a partner has agreed to bear the realisation expenses but the firm pays them on his behalf, it is treated as a drawing by the partner. Therefore, the concerned Partner's Capital Account is debited.
Q5Test your Understanding - II
Tick ( ✓ ) the Correct Answer 5. Unrecorded assets when taken over by a partner are shown in :
(a)
Debit of Realisation Account
(b)
Debit of Bank Account
(c)
Credit of Realisation Account
(d)
Credit of Bank Account.
Solution
(c) Credit of Realisation Account.
The realisation of any asset, whether recorded or unrecorded, is a gain for the firm during dissolution. When a partner takes over such an asset, it is treated as if the asset was sold to the partner. The Realisation Account is credited, and the Partner's Capital Account is debited.
Q6Test your Understanding - II
Tick ( ✓ ) the Correct Answer 6. Unrecorded liabilities when paid are shown in:
(a)
Debit of Realisation Account
(b)
Debit of Bank Account
(c)
Credit of Realisation Account
(d)
Credit of Bank Account.
Solution
(a) Debit of Realisation Account.
The payment of any liability, whether recorded or unrecorded, is a loss or expense for the firm during dissolution. Therefore, the Realisation Account is debited when an unrecorded liability is paid.
Q7Test your Understanding - II
Tick ( ✓ ) the Correct Answer 7. The accumulated profits and reserves are transferred to :
(a)
Realisation Account
(b)
Partners' Capital Accounts
(c)
Bank Account
(d)
None of the above.
Solution
(b) Partners' Capital Accounts.
Accumulated profits and reserves belong to the partners. They are internal items and are not transferred to the Realisation Account. Instead, they are directly distributed among the partners by crediting their capital accounts in their profit-sharing ratio.
Q8Test your Understanding - II
Tick ( ✓ ) the Correct Answer 8. On dissolution of the firm, partner's capital accounts are closed through:
(a)
Realisation Account
(b)
Drawings Account
(c)
Bank Account
(d)
Loan Account.
Solution
(c) Bank Account.
After all adjustments related to realisation profit/loss, reserves, and assets/liabilities taken over are made, the final balance in a partner's capital account is settled. A credit balance is paid off, and a debit balance is recovered in cash. This final settlement is done through the Bank Account.
Q1Test your Understanding - III
Fill in the Correct Word(s): All assets (except cash/bank and fictitious assets) are transferred to the _____ (Debit/Credit) side of _____ Account (Realisation/Capital).
Solution
All assets (except cash/bank and fictitious assets) are transferred to the Debit side of Realisation Account.
Q2Test your Understanding - III
Fill in the Correct Word(s): 2. All _____ (internal/external) liabilities are transferred to the _____ (Debit/Credit) side of _____ acccount (Bank/Realisation).
Solution
All external liabilities are transferred to the Credit side of Realisation acccount.
Q3Test your Understanding - III
Fill in the Correct Word(s): 3. Accumulated losses are transferred to _____ (Realisation/Capital Accounts) in _____ (equal ratio/profit sharing ratio).
Solution
Accumulated losses are transferred to Capital Accounts in profit sharing ratio.
Q4Test your Understanding - III
Fill in the Correct Word(s): 4. If a liability is assumed by a partner, such Partner's Capital Account is _____ (debited/credited).
Solution
If a liability is assumed by a partner, such Partner's Capital Account is credited.
Q5Test your Understanding - III
Fill in the Correct Word(s): 5. If a partner takes over an asset, such (Partner's Capital Account) is _____ (debited/credited).
Solution
If a partner takes over an asset, such (Partner's Capital Account) is debited.
Q6Test your Understanding - III
Fill in the Correct Word(s): 6. No entry is required when a _____ (partner/creditor) accepts a fixed asset in full payment of his dues.
Solution
No entry is required when a creditor accepts a fixed asset in full payment of his dues.
Q7Test your Understanding - III
Fill in the Correct Word(s): 7. When creditor accepts an asset whose value is much more than the amount due to him, he will _____ (pay/not pay) the excess amount which will be credited to _____ Account.
Solution
When creditor accepts an asset whose value is much more than the amount due to him, he will pay the excess amount which will be credited to Realisation Account.
Q8Test your Understanding - III
Fill in the Correct Word(s): 8. When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to _____ (Realisation/Capital) Account and Credited to _____ (Capital/Bank) Account.
Solution
When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to Realisation Account and Credited to Capital Account.
Q9Test your Understanding - III
Fill in the Correct Word(s): 9. Partner's loan is _____ (transfered/not transfered) in the (Realisation Account).
Solution
Partner's loan is not transfered in the (Realisation Account).
Q10Test your Understanding - III
Fill in the Correct Word(s): 10. Partner's current accounts are transferred to respective _____ Partners' (Loan/Capital) Accounts.
Solution
Partner's current accounts are transferred to respective Partners' Capital Accounts.