Maharashtra Board Class 12 Commerce BK Chapter 6 Dissolution of Partnership Firm Solutions

1. Objective Questions.

A. Select The Most Appropriate Answer From The Alternatives Given Below And Rewrite The Sentences.

Question 1. In case of dissolution assets and liabilities are transferred to __________ Account.
(a) Bank Account
(b) Partner's Capital Account
(c) Realisation Account
(d) Partner's Current Account
Answer: (c) Realisation Account
In simple words: When a firm is dissolved, all assets and liabilities are first transferred to the Realisation Account to calculate profit or loss from the sale of assets and payment of liabilities.

🎯 Exam Tip: Understanding the primary account for asset and liability transfer during dissolution is fundamental to accounting for partnership firms.

Question 2. Dissolution expenses are credited to __________ Account.
(a) Realisation Account
(b) Cash/Bank Account
(c) Partner's Capital Account
(d) Partner's Loan Account
Answer: (b) Cash/Bank Account
In simple words: Dissolution expenses are paid in cash, so the Cash or Bank Account is credited, and the Realisation Account is debited as it's an expense of winding up the firm.

🎯 Exam Tip: Remember that dissolution expenses reduce the firm's cash balance, hence the credit to Cash/Bank Account.

Question 3. Deficiency of insolvent partner will be suffered by solvent partners in their __________ ratio.
(a) capital ratio
(b) profit sharing ratio
(c) sale ratio
(d) liquidity ratio
Answer: (b) profit sharing ratio
In simple words: When a partner is insolvent, their capital deficiency is borne by the solvent partners in their profit sharing ratio, unless the partnership deed specifies the capital ratio (as per Garner v. Murray rule).

🎯 Exam Tip: The Garner v. Murray rule dictates how insolvent partners' deficiencies are handled; this is a common point of confusion.

Question 4. If any asset is taken over by partner from firm his Capital Account will be __________.
(a) credited
(b) debited
(c) added
(d) divided
Answer: (b) debited
In simple words: When a partner takes over an asset, their Capital Account is debited because it reduces the amount the firm owes them or increases the amount they owe the firm.

🎯 Exam Tip: Taking over an asset is like a personal drawing for the partner, which always debits their capital account.

Question 5. If any unrecorded liability is paid on dissolution of the firm __________ account is debited.
(a) Cash/Bank Account
(b) Realisation Account
(c) Partner's Capital Account
Answer: (b) Realisation Account
In simple words: All unrecorded liabilities, when paid during dissolution, are debited to the Realisation Account as part of the winding-up process.

🎯 Exam Tip: Even unrecorded items affect the realization profit or loss, so they pass through the Realisation Account.

Question 6. Partnership is completely dissolved when the partners of the firm become __________.
(a) solvent
(b) insolvent
(c) creditor
(d) debtors
Answer: (b) insolvent
In simple words: A firm can be dissolved if all or some partners become insolvent, making it impossible to carry on the business.

🎯 Exam Tip: Insolvency of partners is a common ground for compulsory dissolution of a partnership firm.

Question 7. Assets and liabilities are transferred to Realisation Account at their __________ values.
(a) market
(b) purchase
(c) sale
(d) book
Answer: (d) book
In simple words: Assets and liabilities are transferred to the Realisation Account at their book values from the balance sheet to properly record their disposal.

🎯 Exam Tip: The book value ensures that the initial accounting record is properly closed off before actual realization values are considered.

Question 8. If the number of partners in a firm falls below two, the firm stands __________.
(a) dissolved
(b) established
(c) realisation
(d) restructured
Answer: (a) dissolved
In simple words: A partnership legally requires at least two partners; if the number drops below this minimum, the firm is automatically dissolved.

🎯 Exam Tip: This is a statutory requirement for partnership firms, emphasizing the minimum number of members.

Question 9. Realisation Account is __________ on realisation of asset.
(a) debited
(b) credited
(c) deducted
(d) closed
Answer: (b) credited
In simple words: When assets are realized (sold for cash), the cash account is debited, and the Realisation Account is credited because it's an income from the winding-up process.

🎯 Exam Tip: The Realisation Account tracks all proceeds from assets and payments for liabilities during dissolution.

Question 10. All activities of partnership firm ceases on __________ of firm.
(a) dissolution
(b) admission
(c) retirement
(d) death
Answer: (a) dissolution
In simple words: Dissolution marks the end of a partnership firm's existence, leading to the cessation of all its business activities.

🎯 Exam Tip: Dissolution is the ultimate event that brings the firm's operations to a complete halt.

B. Write A Word/Phrase/Term Which Can Substitute Each Of The Following Statements.

Question 1. Debit balance of Realisation Account.
Answer: Realization Loss
In simple words: A debit balance in the Realisation Account means that the expenses and losses incurred during the winding-up process exceeded the gains from asset realization.

🎯 Exam Tip: A debit balance is a loss, while a credit balance signifies a profit in the Realisation Account.

Question 2. Winding up of partnership business.
Answer: Dissolution of Partnership
In simple words: Winding up refers to the process of liquidating a business's assets, paying its debts, and distributing any remaining assets to the owners, which is essentially the dissolution of the partnership.

🎯 Exam Tip: "Winding up" and "dissolution" are often used interchangeably in the context of closing a firm.

Question 3. An account is opened to find out the profit or loss on sale of assets and settlement of liabilities.
Answer: Realization A/c
In simple words: The Realisation Account is specifically prepared during dissolution to consolidate all gains and losses from selling assets and paying off liabilities to determine the overall profit or loss from the closure.

🎯 Exam Tip: This account is crucial for determining the final financial outcome of the dissolution process.

Question 4. Debit balance of an Insolvent Partner's Capital Account.
Answer: Capital Deficiency
In simple words: A debit balance in an insolvent partner's capital account indicates that the partner owes the firm money and cannot cover this amount from their private assets, leading to a capital deficiency.

🎯 Exam Tip: Capital deficiency is a critical issue in partnership dissolution, often leading to application of the Garner v. Murray rule.

Question 5. The credit balance of the Realisation Account.
Answer: Realization Profit
In simple words: A credit balance in the Realisation Account means that the proceeds from selling assets exceeded the amounts paid for liabilities and dissolution expenses, resulting in a profit from the firm's closure.

🎯 Exam Tip: A credit balance indicates a successful winding up in terms of asset realization exceeding liabilities.

Question 6. Conversion of asset into cash on the dissolution of the firm.
Answer: Realisation
In simple words: Realisation is the process of converting the firm's non-cash assets into cash during dissolution, typically through sale, to settle liabilities and distribute funds to partners.

🎯 Exam Tip: This step is fundamental to liquidating the firm and making funds available for distribution.

Question 7. Liability is likely to arise in the future on the happening of certain events.
Answer: Contingent Liabilities
In simple words: Contingent liabilities are potential obligations that depend on the outcome of future events, and they must be considered during dissolution if they become actual liabilities.

🎯 Exam Tip: Proper treatment of contingent liabilities is essential to avoid future claims against partners after dissolution.

Question 8. Assets that are not recorded in the books of accounts.
Answer: Unrecorded Assets
In simple words: Unrecorded assets are valuable items owned by the firm but not reflected in the balance sheet, which, if discovered, are realized during dissolution.

🎯 Exam Tip: Realization of unrecorded assets increases the cash available for distribution and adds to the realization profit/reduces loss.

Question 9. The account shows the realization of assets and discharge of liabilities.
Answer: Realization A/c
In simple words: The Realisation Account acts as a summary for all transactions related to the selling of assets and settling of liabilities during the firm's dissolution.

🎯 Exam Tip: It is the central account for determining the ultimate financial outcome of the dissolution.

Question 10. Expenses incurred on the dissolution of the firm.
Answer: Dissolution/Realisation Expenses
In simple words: These are the costs directly associated with the process of winding up the firm, such as legal fees, advertising for asset sales, and liquidator's fees.

🎯 Exam Tip: Dissolution expenses are debited to the Realisation Account as a cost of closing the business.

C. State Whether The Following Statements Are True Or False With Reasons.

Question 1. The firm must be dissolved on the retirement of a partner.
Answer: This statement is False.
On the retirement of a partner, if the partnership agreement allows, then the remaining partner can continue the business activities. It means the firm is not to dissolve.
In simple words: A firm doesn't necessarily dissolve when a partner retires; the remaining partners can choose to continue the business if their agreement permits.

🎯 Exam Tip: Distinction between "dissolution of partnership" and "dissolution of firm" is crucial. Retirement causes dissolution of partnership, not necessarily the firm.

Question 2. On dissolution Cash/Bank Account is closed automatically.
Answer: This statement is True.
As the firm is dissolved, there is no question of any business activities to be carried out further and so Cash/Bank Account is also not necessary. Therefore on dissolution Cash/Bank Account is closed automatically.
In simple words: Yes, the Cash/Bank Account is closed automatically because all financial transactions related to the winding up are settled through it, and there's no ongoing business.

🎯 Exam Tip: A zero balance in the Cash/Bank Account at the end of dissolution confirms that all cash has been accounted for and distributed.

Question 3. On dissolution, Bank overdraft is transferred to Realisation Account.
Answer: This statement is True.
As a sundry liability of the business, bank overdraft is a liability of a firm and hence, it is transferred to Realisation Account at the time of dissolution and paid a third party Liability.
In simple words: Bank overdraft is a liability, so it is transferred to the Realisation Account like other liabilities to be settled during dissolution.

🎯 Exam Tip: All external liabilities are generally routed through the Realisation Account for settlement.

Question 4. A solvent partner having a debit balance to his Capital Account does not share the deficiency of insolvent partner Capital Account.
Answer: This statement is False.
In the partnership, the partner's liability is unlimited so, a solvent partner having a debit balance to his Capital Account should share the deficiency of the insolvent partner capital account.
In simple words: A solvent partner, even with a debit capital balance, still shares the insolvent partner's deficiency because their liability is unlimited, meaning they must contribute to cover firm losses.

🎯 Exam Tip: The Garner v. Murray rule applies to solvent partners, even if their capital account shows a debit balance; they must bring in cash to cover their own deficit before contributing to an insolvent partner's deficit.

Question 5. At the time of dissolution of the partnership, all assets should be transferred to Realisation Account.
Answer: This statement is False.
At the time of dissolution of the partnership, the cash account and Bank A/c are not transferred to Realisation A/c. Similarly, if an asset is taken over by a partner or by any creditor then that asset is transferred to the concerned person's account and not to the Realisation Account.
In simple words: Not all assets are transferred to the Realisation Account; cash and bank balances are directly used for payments, and assets taken over by partners or creditors are adjusted in their respective accounts.

🎯 Exam Tip: The Realisation Account primarily deals with assets and liabilities that need to be sold or settled with third parties.

Question 6. The debit balance of an insolvent partner's Capital Account is known as a capital deficiency.
Answer: This statement is True.
Debit balance of Partners' Capital Account means the excess of drawings than the capital credit balance. In the case of an insolvent partner, the debit balance of the Capital Account means liabilities which he cannot pay. It means capital deficiency.
In simple words: A debit balance in an insolvent partner's Capital Account signifies that their share of losses and drawings exceeds their capital contribution, resulting in a capital deficiency.

🎯 Exam Tip: Capital deficiency is a critical concept, indicating the amount an insolvent partner owes the firm but cannot pay.

Question 7. At the time of dissolution, a loan from a partner will be transferred to Realisation Account.
Answer: This statement is False.
At the time of dissolution, a loan from a partner will be paid after the payment of liabilities of third parties to the firm. It is not transferred to Realisation Account. Partner's Loan A/c is separately opened and paid accordingly.
In simple words: A partner's loan is a separate liability and is not transferred to the Realisation Account; it's paid off after external liabilities but before partners' capital.

🎯 Exam Tip: The order of payment of liabilities is crucial: external creditors first, then partner's loan, then partner's capital.

Question 8. Dissolution takes place when the relationship among the partners comes to an end.
Answer: This statement is True.
As per definition, Dissolution means to wind up or to close down, and it is possible only when relations among the partners in a partnership firm come to an end.
In simple words: The ending of the mutual relationship between all partners signifies the dissolution of the entire partnership firm.

🎯 Exam Tip: This statement highlights the core essence of dissolution, which is the termination of the partnership itself.

Question 9. The insolvency loss at the time of dissolution of the firm is shared by the solvent partners in their profit sharing ratio.
Answer: This statement is True.
In the partnership, partners' liability is unlimited and in case of insolvency loss, legally solvent partners are ultimately liable and are suppose to bear the loss of an insolvent partner in their profit sharing ratio.
In simple words: According to the Garner v. Murray rule, the deficiency of an insolvent partner is a capital loss, and this loss is shared by the solvent partners in their profit sharing ratio.

🎯 Exam Tip: This is a key application of the Garner v. Murray rule regarding the distribution of an insolvent partner's deficit.

Question 10. Realization loss is not transferred to insolvent partner's Capital Account.
Answer: This statement is False.
All partners of the firm are responsible for Loss on realization and hence loss on realization is supposed to be transferred to all Partners' Capital Account, without any discrimination of solvent or insolvent.
In simple words: Realisation loss is transferred to all partners' Capital Accounts, including an insolvent partner, because it's a firm loss that affects everyone's capital.

🎯 Exam Tip: Realisation loss is a firm loss and is distributed to all partners according to their profit-sharing ratio, irrespective of their solvency status.

D. Calculate The Following:

Question 1. Vinod, Vijay, and Vishal are partners in a firm sharing profit and losses in the ratio of 3 : 2 : 1. Vishal becomes insolvent and his capital deficiency is Rs. 6000. Distribute the capital deficiency among the solvent partner.
Answer:
Here, capital deficiency of Rs. 6000 is to be distributed among continuing partners in their profit and loss sharing ratio, i.e. 3 : 2
Share of deficiency for Vinod = \( 6,000 \times \frac{3}{5} \) = Rs. 3,600
Share of deficiency for Vijay = \( 6,000 \times \frac{2}{5} \) = Rs. 2,400
Vinod and Vijay will bear Rs. 3,600 and Rs. 2,400 of Vishal's capital deficiency.
In simple words: Vishal's Rs. 6,000 capital deficiency is shared by Vinod and Vijay in their profit-sharing ratio of 3:2, resulting in Vinod bearing Rs. 3,600 and Vijay bearing Rs. 2,400.

🎯 Exam Tip: Ensure that the remaining partners' profit-sharing ratio is used for distributing the insolvent partner's deficiency.

Question 2. Creditors 30,000, Bills Payable 20,000, and Bank Loan Rs. 10,000. Available Bank balance 40,000. What will be the amount that creditors will get in case of all partner's insolvency?
Answer:
Ratio of creditors, Bills payable and Bank Loan = 30,000 : 20,000 : 10,000 i.e., 3 : 2 : 1
Amount received by creditors = \( \frac{3}{3+2+1} \times 40,000 \)
= \( \frac{3}{6} \times 40,000 \)
= Rs. 20,000.
In simple words: With only Rs. 40,000 available and total liabilities of Rs. 60,000, the creditors will receive Rs. 20,000 based on their proportional share of total liabilities (3/6 of available funds).

🎯 Exam Tip: When funds are insufficient to pay all liabilities, they are paid proportionately based on their respective amounts.

Question 3. Insolvent Partner Capital A/c debit side total is Rs. 10,000 and credit side total is Rs. 6,000. Calculate deficiency.
Answer:
Deficiency of insolvent partner = Debit side total - Credit side total
= 10,000 - 6,000
= Rs. 4,000.
In simple words: The capital deficiency for the insolvent partner is Rs. 4,000, calculated as the difference between the total debits (what they owe) and total credits (what they contributed).

🎯 Exam Tip: Capital deficiency is simply the net debit balance in the capital account after all transfers and adjustments.

Question 4. Insolvent Partners Capital A/c debit side is Rs. 15,000 and insolvent partner brought cash Rs. 6,000. Calculate the amount of insolvency loss to be distributed among the solvent partners.
Answer:
Rs. 9,000 (15,000 - 6,000) is the amount of insolvency loss to be distributed among the solvent partners.
In simple words: The insolvent partner's total deficit was Rs. 15,000, but they brought Rs. 6,000 cash, leaving a net insolvency loss of Rs. 9,000 to be borne by the solvent partners.

🎯 Exam Tip: The actual deficiency to be shared by solvent partners is the net amount after the insolvent partner's personal contribution.

Question 5. The realization profit of a firm is 6,000, partners share profit and loss in the ratio of 3: 2: 1. Calculate the amount of realization profit to be credited to Partners' Capital A/c.
Answer:
Distribution of Rs. 6,000 in 3:2:1 ratio
\( 6,000 \times \frac{3}{6} \) = Rs. 3,000
\( 6,000 \times \frac{2}{6} \) = Rs. 2,000
\( 6,000 \times \frac{1}{6} \) = Rs. 1,000
Amount of realisation profit Rs. 3,000, Rs. 2,000 and Rs. 1,000 is to be credited to Partner's Capital A/c respectively.
In simple words: The Rs. 6,000 realization profit is distributed among partners as Rs. 3,000, Rs. 2,000, and Rs. 1,000, according to their 3:2:1 profit-sharing ratio.

🎯 Exam Tip: Realisation profit or loss is always distributed to partners' capital accounts in their agreed profit-sharing ratio.

E. Answer In One Sentence Only.

Question 1. What is the dissolution of the partnership firm?
Answer: Dissolution of the partnership firm means complete closure of business activities and stoppage of partnership relations among all the partners.
In simple words: Dissolution of a firm is the permanent cessation of all business operations and the legal relationship among its partners.

🎯 Exam Tip: Understand that firm dissolution implies ending the entire business, unlike partnership dissolution which might mean a reconstitution.

Question 2. When is Realisation Account opened?
Answer: Realisation Account is opened at the time of dissolution of the partnership firm.
In simple words: The Realisation Account is opened only when a partnership firm is dissolved to process its winding-up.

🎯 Exam Tip: This account is specific to the dissolution process and is not used in ongoing business operations.

Question 3. Which accounts are not transferred to Realisation Account?
Answer: Cash/Bank balance, Reserve funds, Profit and Loss A/c balance, Partners' Loan accounts, etc. are not transferred to Realisation Account.
In simple words: Cash/Bank, reserves, P&L balances, and partners' loans are not transferred to the Realisation Account but are settled separately.

🎯 Exam Tip: These accounts are either directly settled or distributed among partners, not converted to cash or paid off via the realization process.

Question 4. Who is called an insolvent person?
Answer: Whose capital A/c shows debit balance and who is not in a position to meet his capital deficiency even from his private property is called an insolvent person.
In simple words: An insolvent person is a partner whose capital account has a debit balance and who cannot cover this deficit from their personal assets.

🎯 Exam Tip: The inability to pay off their capital deficit from private assets is the defining characteristic of an insolvent partner.

Question 5. What is capital deficiency?
Answer: The debit balance of the insolvent partner's Capital Account which the insolvent partner cannot pay is called a capital deficiency.
In simple words: Capital deficiency is the amount an insolvent partner owes the firm, representing a debit balance in their capital account that cannot be repaid.

🎯 Exam Tip: This deficiency becomes a loss to be borne by the solvent partners.

Question 6. In what proportion is the balance on Realisation Account transferred to Partners Capital/Current Accounts?
Answer: The balance on the Realisation Account is transferred to Partners Capital/Current Accounts in their profit sharing ratio.
In simple words: Any profit or loss from the Realisation Account is transferred to partners' capital or current accounts in their agreed profit-sharing ratio.

🎯 Exam Tip: This ensures that the final profit or loss from winding up is equitably distributed among partners.

Question 7. Who should bear the capital deficiency of insolvent partners?
Answer: The capital deficiency of insolvent partners should be borne by the solvent partners.
In simple words: The solvent partners are responsible for covering the capital deficiency of an insolvent partner.

🎯 Exam Tip: This is a direct consequence of the principle of unlimited liability in partnerships and the Garner v. Murray rule.

Question 8. Which account is debited on repayment of partner's loan?
Answer: Partner's Loan Account is debited on repayment of partner's loan.
In simple words: When a partner's loan is repaid, their loan account is debited to reduce the outstanding liability.

🎯 Exam Tip: Repayment of a partner's loan affects their individual loan account, not the Realisation Account.

Question 9. Which account is debited on payment of dissolution expenses?
Answer: Realisation Account is debited on payment of dissolution expenses.
In simple words: Dissolution expenses are debited to the Realisation Account as part of the overall cost of winding up the firm.

🎯 Exam Tip: All expenses related to the firm's closure flow through the Realisation Account.

F. Complete The Table.

Question 1.

Answer:

In simple words: The table is completed by applying basic accounting equations to find the missing figures. For instance, Realisation Loss is Debit - Credit, Third Party Liabilities are the sum of Creditors and Bills Payable, and Capital Deficiency is calculated as Insolvent Loss minus Cash brought by Insolvent Partner.

🎯 Exam Tip: For table completion, identify the relationship between the given figures (e.g., total, difference, sum) to calculate the missing values accurately.

Practical Problems

(Simple Dissolution)

Question 1. Ganesh and Kartik are partners sharing profits and losses equally. They decided to dissolve the firm on 31st March 2018. Their Balance Sheet was as under:
Balance Sheet as of 31st March 2018

Assets were realised as under:
Building 82,000, Debtors Rs. 22,000, Stock Rs. 20,000. Bills Receivable Rs. 3,200 and Ganesh agreed to take over Furniture for Rs. 10,000. Realisation Expenses amounted to Rs. 2,000.
Show Realisation A/c, Partners' Capital A/c, and Cash A/c.
Solution:
In the books of Ganesh and Kartik

Working Notes:
1. Amount paid to Ganesh and Kartik are Rs. 27,600 and Rs. 77,600 respectively.
2. Loss on Realisation and Reserve fund amounts are equally distributed.
3. Furniture is taken over by Ganesh so his Capital A/c is debited.
In simple words: The firm's assets were realized, liabilities paid, and Ganesh took over some furniture. The Realisation Account showed a loss, which, along with the Reserve Fund, was equally distributed to the partners' capital accounts. Finally, the remaining balances in capital accounts were settled through the Cash Account.

🎯 Exam Tip: Ensure all assets (except cash/bank) and third-party liabilities are first transferred to Realisation A/c at book value before recording their actual realization or payment.

Question 2. Leela, Manda, and Kunda are partners in the firm 'Janki Stores' sharing profits and losses in the ratio of 3 : 2 : 1 respectively. On 31st March 2018, they decided to dissolve the firm when their Balance Sheet was as under:
Balance Sheet as of 31st March 2018

Leela agreed to take over the Building at 1,23,600. Manda took over Goodwill, Stock, and Debtors at book values and agreed to pay Creditors and Bills payable. Motor car and Machinery realized 1,51,080 and 31,680 respectively.
Investments were taken by Kunda at an agreed value of Rs. 55,440. Realisation expenses amounted to Rs. 6,800.
Pass necessary entries in the books of 'Janki Stores'.
Solution:
In the books of 'Janki Stores'
Journal Entries

Question 2. Leela, Manda, and Kunda are partners in the firm 'Janki Stores' sharing profits and losses in the ratio of 3 : 2 : 1 respectively. On 31st March 2018, they decided to dissolve the firm when their Balance Sheet was as under.

Balance Sheet as of 31st March 2018

Leela agreed to take over the Building at Rs. 1,23,600. Manda took over Goodwill, Stock, and Debtors at book values and agreed to pay Creditors and Bills payable.
Motor car and Machinery realized Rs. 1,51,080 and Rs. 31,680 respectively.
Investments were taken by Kunda at an agreed value of Rs. 55,440. Realisation expenses amounted to Rs. 6,800.
Pass necessary entries in the books of 'Janki Stores'.
Answer:
Solution:
In the books of 'Janki Stores'
Journal Entries

Working Notes:
In the books of Leela, Manda, and Kunda

Realisation Account

Partners' Capital Accounts

Bank Account

In simple words: This solution demonstrates the journal entries required to record the dissolution of a partnership firm, followed by the preparation of the Realisation Account, Partners' Capital Accounts, and Bank Account to settle all assets and liabilities and distribute the remaining balances.

🎯 Exam Tip: Remember to correctly classify and transfer all assets and liabilities to the Realisation Account first, and then accurately record the realisation of assets, payment of liabilities, and distribution of any profit or loss among partners.

Question 3. Shailesh and Shashank were partners sharing profits and losses in the ratio of 3 : 2.
Their Balance Sheet as of 31st March 2019 was as follows:

Balance Sheet as of 31st March 2019

The firm was dissolved on the above date and the assets realised as under:
1. Plant Rs. 8,000, Building Rs. 6,000, Stock Rs. 4,000 and Debtors Rs. 12,000.
2. Shailesh agreed to pay off the Bills Payable.
3. Creditors were paid in full.
4. Dissolution expenses were Rs. 1,400.
Prepare Realisation A/c, Partners' Current A/c, Partners' Capital A/c, and Bank A/c.
Answer:
Solution:
In the books of Shailesh and Shashank

Realisation Account

Partners' Current Account

Partners' Capital Account

Bank Account

In simple words: This solution presents the Realisation, Partners' Current, Partners' Capital, and Bank Accounts to record the dissolution of the firm, showing how assets are realized, liabilities are paid, and capital balances are finally settled.

🎯 Exam Tip: Pay close attention to the distinction between Current Accounts and Capital Accounts, transferring balances correctly before final settlement to avoid errors in capital distribution.

Question 4. Asha, Usha, and Nisha were partners sharing profits and losses in the ratio of 2 : 2 : 1. The following is the Balance Sheet as of 31st March 2019.

Balance Sheet as of 31st March 2019

On the above date, the partners decided to dissolve the firm.
1. Assets were realised at: Machinery Rs. 90,000, Stock Rs. 36,000, Investment Rs. 42,000 and Debtors Rs. 90,000.
2. Dissolution expenses were Rs. 6,000.
3. Goodwill of the firm realized Rs. 48,000.
Pass Journal Entries to close the books of the firm.
Answer:
Solution:
In the books of Asha, Usha, and Nisha
Journal Entries

Working Notes:
In the books of Asha, Usha, and Nisha

Realisation Account

Partners' Capital Accounts

Bank Account

In simple words: This solution provides the journal entries and ledger accounts (Realisation, Capital, and Bank Accounts) necessary to record the dissolution of the partnership, including asset realization, liability settlement, and final capital account balances.

🎯 Exam Tip: Accurately identifying and transferring all assets and liabilities to the Realisation Account is crucial. Also, ensure profit and loss distribution from the Realisation Account and General Reserve is done in the correct profit-sharing ratio to the partners' capital accounts.

Question 5. Seeta and Geeta are partners in the firm sharing profits and losses in the ratio of 4 : 1. They decided to dissolve the partnership on 31st March 2020 on which date their Balance Sheet stood as follows:

Balance Sheet as of 31st March 2020

Additional Information:
1. Plant and Stock took over by Seeta at Rs. 78,000 and Rs. 22,000 respectively.
2. Debtors realised 90% of the book value and Trademark at Rs. 5,000 and Goodwill was realised for Rs. 27,000.
3. Unrecorded assets estimated at Rs. 4,500 were sold for Rs. 1,500.
4. Rs. 1,000 Discounts were allowed by creditors while paying their claim.
5. The Realisation expenses amounted to Rs. 3,500.
You are required to prepare Realisation A/c, Cash A/c, and Partners' Capital A/c.
Answer:
Solution:
In the books of Seeta and Geeta

Realisation Account

Partners' Capital Accounts

Cash Account

Working Notes:
1. Bank Loan is an external liability of the firm and therefore it is transferred to Realisation A/c.
2. Amount recovered from Debtors = 90% of Gross Debtors = \(\frac{90}{100} \times 48,000\) = Rs. 43,200.
3. Amount paid to creditors = Value of Creditors – Discount given = 35,000 – 1,000 = Rs. 34,000.
4. Sale of unrecorded assets for Rs. 1,500 is recorded on the credit side of Realisation A/c and debit side of Cash A/c.
5. It is presumed that Furniture realised nothing.
In simple words: This solution details the Realisation, Partners' Capital, and Cash Accounts to close the books of the firm upon dissolution, including asset disposal, liability payments, and the final settlement of partner capital accounts with supporting calculations.

🎯 Exam Tip: Remember to account for all adjustments, such as assets taken over by partners, unrecorded assets/liabilities, and discounts on payments, as these significantly impact the final balances.

Question 6. Sangeeta, Anita, and Smita were in partnership sharing profits and losses in the ratio 2:2:1. Their Balance Sheet as of 31st March 2019 was as under:

Balance Sheet as of 31st March 2019

They decided to dissolve the firm as follows:
1. Assets realised as; Land recovered Rs. 1,80,000; Goodwill for Rs. 75,000; Loans and Advance realised Rs. 12,000; 10% of the Debts proved bad.
2. Sangeeta took Plant at book value.
3. Creditors and Bills payable paid at 5% discount.
4. Sandhya's loan was discharged along with Rs. 6,000 as interest.
5. There was a contingent liability in respect of bills of Rs. 1,00,000 which was under discount. Out of them, a holder of one bill of 20,000 became insolvent.
Show Realisation Account, Partners' Capital Account, and Bank Account.
Answer:
Solution:
In the books of Sangeeta, Anita, and Smita

Realisation Account

Partners' Capital Accounts

Bank Account

Working Notes:
1. Amount paid towards Sandhya's Loan = Loan amount + Interest due on loan = 1,20,000 + 6,000 = Rs. 1,26,000
2. Amount received from Debtors = Debtors - Bad debts = 1,25,000 – 10% of 1,25,000 = 1,25,000 – 12,500 = Rs. 1,12,500
3. Amount paid to Creditors = Creditor – 5% discount = 1,20,000 – 5% on 1,20,000 = 1,20,000 – 6,000 = Rs. 1,14,000
4. Amount paid towards Bills payable = Bills payable – 5% discount = 20,000 – 5% on 20,000 = 20,000 – 1,000 = Rs. 19,000
5. Bill of Rs. 1,00,000 was discounted with the Bank. On the due date, bank could not recover 20,000 from one bill holder as he was declared insolvent. Therefore, we are required to settle that contingent liability of 20,000.
In simple words: This solution involves preparing the Realisation, Partners' Capital, and Bank Accounts for the dissolution of a partnership, considering various asset realisations, liability settlements (including discounts and contingent liabilities), and partner loan adjustments.

🎯 Exam Tip: When dealing with dissolution, always calculate discounted amounts for creditors and bills payable carefully, and ensure all contingent liabilities are properly accounted for, as these are common areas for errors.

Question 7. Saiesh, Sumit, and Hemant were in partnership sharing Profits and Losses in the ratio 2:2:1. They decided to dissolve their partnership firm on 31st March 2019 and their Balance Sheet on that date stood as;

Balance Sheet as of 31st March 2019

It was agreed that;
1. Sailesh to discharge Loan and to take Debtors at book value.
2. Plant realised Rs. 1,35,000.
3. Stock realised Rs. 72,000.
4. Creditors were paid off at a discount of Rs. 45.
Show Realisation Account, Partners' Capital Account, and Bank Account.
Answer:
Solution:
In the books of Sailesh, Sumit, and Hemant

Realisation Account

Partners' Capital Accounts

Bank Account

In simple words: This solution provides the Realisation Account, Partners' Capital Accounts, and Bank Account to meticulously record the dissolution of a partnership, covering the realization of various assets, settlement of liabilities, and the final distribution of capital balances.

🎯 Exam Tip: Ensure that all assets and liabilities are correctly transferred to the Realisation Account at their book values, and that partners' individual transactions, like taking over assets or discharging liabilities, are reflected in their capital accounts.

Question 8. Sitaram, Gangaram, and Rajaram are partners sharing profits and losses in the ratio of 4: 2: 3. On 1st April 2019 they agreed to dissolve the partnership, their Balance Sheet was as follows:

Balance Sheet as of 31st March 2019

The assets realised: Building Rs. 46,750; Machinery 18,550; Furniture Rs. 9,600; Investment Rs. 10,650; Bill Receivable and Debtors Rs. 20,750. All the liabilities were paid off. The cost of realisation was 800. Rajaram becomes bankrupt and Rs. 1,100 only was recovered from his estate.
Show Realisation Account, Bank Account, and Capital Account of the partners.
Answer:
Solution:
In the books of Sitaram, Gangaram and Rajaram

Realisation Account

Partners' Capital Accounts

Bank Account

Working Notes:
1. Rs. 1,100 is recovered from Rajaram's estate which is recorded on the credit side of Rajaram's Capital Account and on the debit side of Bank A/c.
2. Capital deficiency of Rajaram = Debit total of Capital A/c – Credit total of Capital A/c = 18,000 – 15,900 = Rs. 2,100
The deficit amount of Rajaram A/c 2,100 is distributed among continuing partners' in 2:1 ratio.
In simple words: This solution demonstrates the dissolution process for a partnership where one partner becomes insolvent, involving the realization of assets, payment of liabilities, and the calculation and distribution of the insolvent partner's capital deficiency among solvent partners.

🎯 Exam Tip: In cases of partner insolvency, ensure that the insolvent partner's deficiency is calculated accurately and then distributed among the solvent partners in their profit-sharing ratio, often requiring careful capital account adjustments.

Question 9.
Following is the Balance Sheet of Vaibhav, Sanjay, and Santosh
Balance Sheet as of 31st March 2019

Santosh is declared insolvent so the firm is dissolved and assets realised as follows:
1. Stock and Debtors Rs. 54,000, Goodwill - NIL, Machinery at book value.
2. Creditors allowed a discount of 10%.
3. Santosh could pay only 25 paise in the rupee of the balance due.
4. Profit sharing ratio was 8 : 4:3.
5. A contingent liability against the firm Rs. 9,000 is cleared.
Give Ledger Account to close to books of the firm.
Answer:
In the books of Vaibhav, Sanjay, and Santosh

Dr. Realisation Account Cr.

Dr. Partners' Capital Accounts Cr.

Dr. Bank Account Cr.

Working Notes:
1. Contingent liability paid, so Realisation A/c is debited and Bank A/c is credited.
2. Santosh could pay only 25 paise in a rupee of the balance due i.e.
Balance due from Santosh (Debit side of Partners Capital A/c) = Rs. 10,560
25% of Rs. 10,560 = Rs. 2,640 (Amount recorded on debit side of Bank A/c)
Capital deficiency of Santosh = 10,560 - 2,640 = Rs. 7,920
7,920 to be distributed among continuing partner in their profit-loss ratio = 8 : 4
i.e. 2: 1.
7,920 \( \times \)
\( \frac{2}{4} \) = Rs. 5,280
7,920 \( \times \)
\( \frac{1}{4} \) = Rs. 2,640
In simple words: When a partner is insolvent, their capital deficiency is covered by the solvent partners in their agreed profit-sharing ratio, ensuring all liabilities are accounted for.

🎯 Exam Tip: Understanding how to calculate and distribute capital deficiency among solvent partners is crucial for scoring well in dissolution problems.

(When Two Partners become Insolvent)

Question 10.
Shweta, Nupur, and Sanika are partners sharing profits and losses in the ratio of 3 :
2: 1. Their Balance Sheet as of 31st March 2019 was as follows:
Balance Sheet as of 31st March 2019

The firm is dissolved on 31st March 2019. Sundry assets realised @ 60% of its book
value. Realisation expenses Rs. 2,000 paid by Shweta. Nupur and Sanika both are
insolvent.
Nupur's private estate has got a surplus of Rs. 3,000 and that of Sanika Rs. 8,000.
Show necessary Ledger Accounts to close the books of the firm.
Answer:
In the books of Shweta, Nupur and Sanika

Dr. Realisation Account Cr.

Dr. Partners' Capital Accounts Cr.

Dr. Bank Account Cr.

In simple words: When a firm dissolves and multiple partners are insolvent, the solvent partner bears the remaining deficiency. If no partner is solvent, external liabilities are paid first from realized assets, and then any remaining funds are distributed among partners based on their private surpluses, with any remaining firm liabilities being a loss.

🎯 Exam Tip: In cases of multiple insolvent partners, carefully track each partner's private estate contribution or deficiency and how the remaining firm liabilities are settled based on the 'Garner v. Murray' rule or partnership agreement.

Question 11.
Following is the Balance Sheet as of 31st March 2019 of a firm having three
partners Priti, Priya, and Prachi.
Balance Sheet as of 31st March 2019

The firm was dissolved due to the insolvency of all the partners. Machinery was
sold for Rs. 18,000, while Furniture fetched Rs. 14,000, Stock realized Rs. 35,000.
Realisation expenses amounted to Rs. 2,000. Nothing could be recovered from Priya
and Prachi, but Rs. 3,400 could be collected from Priti's private estate.
Close the books of accounts of the firm.
Answer:
In the books of Priti, Priya, and Prachi

Dr. Realisation Account Cr.

Dr. Partners' Capital Accounts Cr.

Dr. Trade Creditors A/c Cr.

Dr. Loan A/c Cr.

Dr. Deficiency Account Cr.

Dr. Bank Account Cr.

Working Notes:
1. Amount paid to loan from sale of machinery = Rs. 18,000
Balance of Loan 30,000 - 18,000 = Rs. 12,000
2. Ratio of Trade creditors and Loan = 50,000 : 12,000
= 50: 12
= 25:6
3. Balance of cash available = 10,000 + 67,000 + 3,400 - 18,000 - 2,000
= 80,400 - 20,000
= Rs. 60,400
Amount paid towards loan =
\( \frac{6}{31} \) \( \times \) \( \frac{60,400}{1} \) = Rs. 11,690
Amount paid to Trade creditors =
\( \frac{25}{31} \) \( \times \) 60,400 = Rs. 48,710
Amount paid towards loan = 18,000 + 11,690 = Rs. 29,690.
In simple words: When all partners are insolvent, the available funds from asset realization and partners' private estates are distributed among creditors and loan holders based on a fixed ratio until funds are exhausted, and any remaining balance is a deficiency.

🎯 Exam Tip: For dissolution with all partners insolvent, prioritize external liabilities before distributing any remaining amounts to partners. The distribution of available cash among creditors and loans should be calculated proportionately.

Question 12.
Shashwat and Shiv are equal partners. Their Balance Sheet stood as under:
Balance Sheet as of 31st March 2019

Due to weak financial position, all partners were declared bankrupt.
The Assets were realised as follows:
Stock Rs. 3,500, Furniture Rs. 2,000, Debtors Rs. 5,000 and Machinery Rs. 7,000.
The cost of collection and distributing the estate amounted to Rs. 1,500. Shashwat's
private estate is not sufficient even to pay his private debts, whereas in Shiv's
private estate there is a surplus of Rs. 500.
Prepare necessary Ledger Accounts to close the books of the firm.
Answer:
In the books of Shashwat and Shiv

Dr. Realisation Account Cr.

Dr. Partners' Capital Accounts Cr.

Dr. Creditors Account Cr.

Dr. Deficiency Account Cr.

Dr. Bank Account Cr.

Working Note:
As partners we're not able to pay their loss amount, a difference of amount is
considered as deficiency of partners.
In simple words: When all partners are insolvent, the firm's assets are first used to pay off external creditors. Any remaining balance on the partners' capital accounts after accounting for assets and private surpluses is treated as a deficiency.

🎯 Exam Tip: In cases of universal insolvency, meticulously track the realization of assets, payment of liabilities, and individual partners' private estates to determine the final deficiency distribution among creditors and partners.