TS Grewal Solution Class 12 Chapter 8 Dissolution of a Partnership Firm

About this chapter: TS Grewal Class 12 Chapter 8 Dissolution of a Partnership Firm explains the accounting concepts relating to selling of assets, paying off liabilities, distribution of remaining amount among the partners in their profit sharing ratio, payment to creditors and finally closing the books. Students will also understand that the dissolution can take place in different ways, such as by mutual consent, by insolvency, by court order, and by the expiration of a partnership. You will be able to understand all concepts relating to accounting treatment of these different types of dissolution of a partnership firm.

You will be able to learn the accounting entries to be posted in the books of accounts while going through the process of dissolution of partnership firm. As there are lot of numerical problems also given in the chapter. The students will be able to solve the questions and practice for the Class 12 Board Exams. We have also provided detailed step by step solutions for all questions given in the chapter which will help you in upcoming exams

Solutions for TS Grewal's Double Entry Book Keeping:
Accounting for Not for Profit Organizations and Partnership Firms (Vol.1)
Textbook for CBSE Class 12
TS Grewal Solutions Class 12 Accountancy
Chapter 8
Dissolution of a Partnership Firm

Question 3. Distinguish between Dissolution of Partnership and Dissolution of Partnership Firm on the basis of closure of books.

 

 

Question 4. Distinguish between 'Dissolution of Partnership' and 'Dissolution of Partnership Firm' on the basis of Court’s intervention.

Question 8. Give any one difference between reconstitution of a firm and dissolution of a firm.

Question 10. All the partners want to dissolve the firm. Y, a partner, demands that his loan of 2,00,000 be paid before payment of capitals of the partners. But X, another partner, demands that capitals be paid before payment of Y’s loan. Who is correct?

X is correct. According to Section 48 of the Indian Partnership Act, 1932, outside party’s debts are paid before payment of partner’s loan.

 

Question 11. A and B are partners in a firm sharing profits in the ratio of 3:2. Mrs. A has given a loan of 20,000 to the firm and the firm also obtained a loan of 10,000 from B. The firm was dissolved and its assets were red J. State the order of payment of Mrs. A's loan and B's loan with reason, if there were no creditors of the firm.

According to the Section 48 of the Indian Partnership Act, 1932, Mrs. A’s loan of Rs. 20,000, being outside party’s debt will be paid before payment of B’s loan. B will be paid up to the available cash, i.e. Rs. 5,000.

 

Question 12. Give the Journal entry for the treatment of partner’s loan appearing on the asset side of the Balance Sheet, on dissolution of partnership firm.

Partner’s loan is paid after outside liabilities have been paid bit before payment of capital.

Partner’s Loan A/c………………………. Dr.

      To Bank/ Cash A/c

 

Question 13. What is Realisation Account?

Realisation Account is opened on the dissolution of a firm. The object of preparing this account is to close the books of account of the dissolved firm and to determine gain (profit) or loss on the realisation of assets and payment of liabilities.

 

Question 14. Give any two objects of preparing Realisation Account in the dissolution of a firm.

(I) transferring all assets except Cash or Bank Account to the debit side of the account

(ii) transferring all liabilities except Partner’s Loan Account and Partners’ Capital Accounts to the credit of the account.

 

Question 15. State the ratio in which the partners share gain (profit) or loss on realisation of various assets and payment of various liabilities.

Balance in the Realisation account is either gain or loss, which is transferred to the Capital Accounts of the Partners in their profit-sharing ratio.

 

Question 16. State any one occasion for the dissolution of the firm on court’s orders.

Court may pass order for the dissolution of the firm when a partner becomes a person of unsound mind.

 

Question 17. List any two grounds on which a court may dissolve a firm.

Court may pass order for the dissolution of the firm when:

(a)  A partner becomes permanently incapable of preforming his duties as a partner.

(b)  A partner is found guilty of misconduct, which is likely to adversely affect the business of the firm.

 

Question 18. What Journal entry is passed when an asset is given to any of the firm’s creditors towards partial payment of dues?

No entry is passed.

 

Question 19. What Journal entry is passed when a partner agrees to pay the realisation expenses on behalf of the firm?

Realisation A/c ……………………….. Dr.

           To Partner’s Capital A/c

(Being the remuneration due to partner)

 

Question 20. What Journal entry is passed when the firm pays realisation expenses on behalf of a partner who has to bear the expenses?

Concerned Partner’s Capital A/c ……………………….  Dr.

           To Cash/Bank A/c

(Being realisation expenses paid on behalf of the partner)

 

Question 21. If a loan from a partner appears on the liabilities side of the Balance Sheet of the firm and the Capital Account of such partner shows a debit balance, how is loan dealt with?

Debit Balance in Partner’s Capital Account is less than the loan given by him. Hence, the amount of capital is transferred from his loan account to his capita account.

 

Question 22. Does the loan from an outside have priority over the loan from a partner as to repayment?

Yes, the loan from an outside have priority over the loan from a partner as to repayment.

 

Short Answer Type Questions........................

Question 1. Explain the provisions of Section 48 of Partnership Act, 1932 dealing with the settlement of accounts at the time of dissolution of firm. 

Answer: 

Section 48 of the Indian Partnership Act, 1932 deals with the settlement of accounts when the firm is dissolved. It is discussed below:

 

Treatment of losses: Loss, including deficiencies of capital, is paid first out of profit, then out of capital and lastly, if necessary, by the partners individually in the proportion in which they share profits.

Application of Assets: Assets of the firm, including amount contributed by the partners to make up deficiencies of capital, are applied in the following order: 

(a)  In paying firm’s debts to the third parties,

(b)  In paying to each partner rateably what is due to him an account of loans or advances; 

(c)  In paying to each other rateably what is due to him on account of capital; 

(d)  The residue, if any, is distributed among the partners in their profit- sharing ratio. 

 

Question 2. Distinguish between dissolution of Partnership and dissolution of partnership firm. 

Answer:

 

Question 3. Distinguish between firm’s debts and private debts.

Answer:

 

Question 4. Give two points of distinction between Revaluation Account and Realisation Account.

Answer:

 

Question 5. State any six situations in which the court may order to dissolve a partnership firm.

Answer:

Court may pass order for the dissolution of the firm when:

(a)  A partner becomes a person of unsound mind;

(b)  A partner becomes permanently incapable of preforming his duties as a partner.

(c)  A partner is found guilty of misconduct, which is likely to adversely affect the business of the firm.

(d)  Partnership agreement is breached persistently by a partner or partners;

(e)  Court finds dissolution of the firm justified;

(f)   When the business of the firm cannot be carried on except at a loss.

 

Question 6. Explain dissolution of a firm by (i) Agreement and (ii) Notice.

Answer:

The modes by which a firm may be dissolved are:

1.)   Agreement:- a firm may be dissolved when all the partners agree for its dissolution. A partnership firm is set up by an agreement, similarly, it can be dissolved by an agreement.

2.)   Notice:- In case partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

 

EXERCISE ::------->

 

Question 1:  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. Journalise the transaction, at the time of dissolution of the firm.

Answer   1:

Working Note:-

Calculation of Commission:- 3,00,000 × 2 % = 6,000

Value of Land and Building = 3,00,000 – 6,000 = 2,94,000

Point of Knowledge:-

For Closing the Asset Accounts: All the recorded assets (including goodwill), except fictious assets, Cash in Hand or Bank Current Account (Dr. Balance)/Capital Account (Debit Balance) of partner, are transferred to the Realisation Account at their book value. Since assets have debit Balance, Asset Account will be closed by crediting them.

Realisation A/c ………………………………………Dr.

           To Various Assets A/c

 

Question 2:  What journal entries would you pass in the following cases?

(a) Expenses of realisation Rs 1,500.
(b) Expenses of realisation Rs 600 but paid by Mohan, a partner.
(c) Mohan, one of the partners of the firm, was asked to look into the dissolution of the firm for which he was allowed a commission of Rs 2,000.
(d) Motor car of book value Rs 50,000 taken over by creditors of the book value of Rs 40,000 in full settlement. 

Answer 2:

 

Point of Knowledge:-

I)             Transferring all assets except Cash and Bank Account to the debit side of the account.

II)            Amount realised on sale of assets is credited to the account.

 

Question 3:  Pass journal entries for the following:

(a) Realisation expenses of Rs 15,000 were to be met by Rahul, a partner, but were paid by the firm. 
(b) Ramesh, a partner, was paid remuneration of Rs 25,000 and he was to meet all expenses.
(c) Anuj, a partner, was paid remuneration of Rs 20,000 and he was to meet all expenses. Firm paid an expense of Rs 5,000. 

Answer 3:

 

Question 4:  Pass journal entries for the following:

(a) Realisation expenses amounted to Rs 10,000 were paid by the firm on behalf of Alok, a partner, with whom it was agreed at Rs 7,500.
(b) Realisation expenses amounted to Rs 5,000. It was agreed that the firm will pay Rs 2,000 and balance by Ravinder, a partner.
(c) Dissolution expenses amounted to Rs 10,000 were paid by Amit, a partner, on behalf of the firm. 

Answer 4:

 

Question 5:  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 Building valued at Rs 1,20,000 and paid cash to the firm Rs 30,000 

Answer 5:

 

Question 6:  Pass journal entries for the following at the time of dissolution of a firm:

(a) Sale of Assets——Rs 50,000.
(b) Payment of Liabilities——Rs 10,000.
(c) A commission of 5% allowed to Mr . X , a partner, on sale of assets.
(d) Realisation expenses amounted to Rs 15,000 . The firm had agreed with Amrit , a partner, to reimburse him up to Rs 10,000.
(e) Z, an old customer , whose account for Rs 6,000 was written off as bad in the previous year , paid 60% f the amount written off.
(f) Investment (Book Value Rs 10,000) realised at 150%  

Answer 6:

 

Point of Knowledge:-

I)  Transferring all assets except Cash and Bank Account to the debit side of the account.

II) Amount realised on sale of assets is credited to the account. 

 

Question 7:  Pass journal entries for the following transactions at the time of dissolution of the firm :

(a) Loan of Rs 10,000 advanced by a partner to the firm was refunded.
(b) X, a partner, takes over an unrecorded asset (Typewriter) at Rs 300.
(c) Undistributed balance (Debit) of Profit and Loss Account Rs 30,000 . The firm has three partners X, Y and Z.
(d) Assets of the firm realised Rs 1,25,000.
(e) Y who undertakes to carry out the dissolution proceedings is paid Rs 2,000 for the same.
(f) Creditors are paid Rs 28,000 in full settlement of their account of Rs 30,000. 

Answer 7:

 

Question 8:  Pass necessary journal entries for the following transactions on the dissolution of the firm P and Q after the various assets (other than cash)  and outside liabilities have been transferred to Realisation Account :

(a) Bank Loan Rs 12,000 was paid.
(b) Stock worth Rs 16,000 was taken over by partner Q.
(c) Partner P paid a creditor Rs 4,000.
(d) An asset not appearing in the books of accounts realised Rs 1,200.
(e) Expenses of realisation Rs 2,000 were paid by partner Q.
(f) Profit on realisation Rs 36,000 was distributed between P and Q in 5 : 4 ratio.

Answer 8:

 

Question 9:  X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1 respectively. The firm was dissolved on 1st March, 2013. After transferring assets (other than cash) and third party liabilities to the 'Realisation Account' you are provided with the following information:

(a) There was a balance of Rs 18,000 in the firm's Profit and Loss Account.

(b) There was an unrecorded bike of Rs 50,000 which was taken over by X.

(c) Creditors of Rs 5,000 were paid Rs 4,000 in full settlement of accounts. Pass necessary journal entries for the above at the time of dissolution of firm. 

Answer 9:

 

Question 10:  Pass necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya: (a) There was an old furniture in the firm which had been written off completely in the books. This was sold for Rs 3,000.

(b) Ashish, an old customer whose account for Rs 1,000 was written off as bad in the previous year, paid 60%, of the amount.

(c) Paras agreed to take over the firm's goodwill (not recorded in the books of the firm), at a valuation of Rs 30,000.

(d) There was an old typewriter which had been written off completely from the books. It was estimated to realise Rs 400. It was taken by Priya at an estimated price less 25%.

(e) 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. 

Answer 10:

 

Question 11:  Aman and Harsh were partners in a firm. They decided to dissolve their firm. Pass necessary journal entries for the following after various assets (other than cash and bank) and third party liabilities have been transferred to Realisation Account:

(a) There was furniture worth Rs 50,000. Aman took over 50% of the furniture at 10% discount and the remaining furniture was sold at 30% profit on book value.

(b) Profit and Loss Account was showing a credit balance of Rs 15,000 on the date of dissolution.

(c) Harsh's loan of Rs 6,000 was discharged at Rs 6,200.

(d) The firm paid realisation expenses amounting to Rs 5,000 on behalf of Harsh who had to bear these expenses.

(e) There was a bill for 1,200 under discount. The bill was received from Soham who proved insolvent and a first and final dividend of 25% was received from his estate.

(f) Creditors, to whom the firm owed Rs 6,000, accepted stock of Rs 5,000 at a discount of 5% and the balance in cash. 

Answer 11:

 

Question 12:  Rohit, Kunal and Sarthak are partners in a firm. They decided to dissolve their firm. Pass necessary journal entries for the following after various assets (other than Cash and Bank) and the third party liability have been transferred to Realisation Account: (a) Kunal agreed to pay off his wife's loan of Rs 6,000.

(b) Total Creditors of the firm were Rs 40,000. Creditors worth Rs 10,000 were given a piece of furniture costing Rs 8,000 in full and final settlement. Remaining Creditors allowed a discount of 10%. (c) Rohit had given a loan of Rs 70,000 to the firm which was duly paid.

(d) A machine which was not recorded in the books was taken over by Kunal at Rs 3,000, whereas its expected value was Rs 5,000.

(e) The firm had a debit balance of Rs 15,000 in the Profit and Loss Account on the date of dissolution.

(f) Sarthak paid the realisation expenses of Rs 16,000 out of his private funds, who was to get a remuneration of Rs 15,000 for completing dissolution process and was responsible to bear all the realisation expenses. 

Answer 12:

 

Question 13:  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 f 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. 

Answer 13:

 

Question 14:  Lal and Pal were partners in a firm sharing profits in the ratio of 3 : 7 . On 1st April, 2015 their firm was dissolved. After transferring assets (other than cash) and outsider's liabilities to Realisation Account, you are given the following information:

(a) A creditor of Rs 3,60,000 accepted machinery valued at Rs 5,00,000 and paid to the firm Rs 1,40,000.

(b) A second creditor for Rs 50,000 accepted stock Rs 45,000 in full settlement of his claim. (c) A third creditor amounting to Rs 90,000 accepted Rs 45,000 in cash and investments worth Rs 43,000 in full settlement of his claim.

(d) Loss on dissolution was Rs 15,000.

Pass necessary journal entries for the above transactions in the books of firm assuming that all payments were made by cheque. 

Answer 14:

 

Question 15:  Pass the journal entries for the following transactions on the dissolution of the firm of P and Q after various assets (other than cash) and outside liabilities have been transferred to Realisation Account:

(a) Stock Rs 2,00,000. 'P' took over 50% of stock at a discount of 10%. Remaining stock was sold at a profit of 25% on cost.

(b) Debtors Rs 2,25,000. Provision for Doubtful Debts Rs 25,000. Rs 20,000 of the book debts proved bad.

(c) Land and Building (Book value Rs 12,50,000) sold for Rs 15,00,000 through a broker who changed 2% commission.

(d) Machinery (Book value Rs 6,00,000) was handed over to a creditor at a discount of 10%. (e) Investment (Book value Rs 60,000) realised at 125%.

(f) Goodwill of Rs 75,000 and prepaid fire insurance of Rs 10,000.

(g) There was an old furniture in the firm which had been written off completely in the books. This was sold for Rs 10,000.

(h) 'Z' an old customer whose account for Rs 20,000 was written off as bad in the previous year, paid 60%.

(i) 'P' undertook to pay Mrs. P's loan of Rs 50,000.

(j) Trade creditors Rs 1,60,000. Half of the trade creditors accepted Plant and Machinery at an agreed valuation of Rs 54,000 and cash in full settlement of their claims after allowing a discount of Rs 16,000. 

Remaining trade creditors were paid 90% in final settlement. 

Answer 15:

 

Question 16:   What journal entries would be passed for discharge of following unrecorded liabilities on the dissolution of a firm of partners A and B:

(a) There was a contingent liability in respect of bills discounted but not matured of Rs 18,500. An acceptor of one bill of Rs 2,500 became insolvent and fifty paise in a rupee was recovered. The liability of the firm on account of this bill discounted and dishonoured has not so far been recorded.
(b) There was a contingent liability in respect of a claim from damages for Rs 75,000 , such liability was settled for Rs 50,000 and paid by the partner A .
(c) Firm will have to pay Rs 10,000 as compensation to an injured employee, which was a contingent liability not accepted by the firm .
(d) Rs 5,000 for damages claimed by a customer has been disputed by the firm . It was settled at 70% by a compromise between the customer and the firm. 

Answer 16:

 

Question 17:  Pass necessary journal entries on the dissolution of a firm in the following cases:

(a) Dharam, a partner, was appointed to look after the process of dissolution at a remuneration of Rs 12,000 and he had to bear the dissolution expenses. Dissolution expenses Rs 11,000 were paid by Dharam.

(b) Jay, a partner, was appointed to look after the process of dissolution and was allowed a remuneration of Rs 15,000. Jay agreed to bear dissolution expenses. Actual dissolution expenses Rs 16,000 were paid by Vijay, another partner on behalf of Jay.

(c) Deepa, a partner, was to look after the process of dissolution and for this work she was allowed a remuneration of Rs 7,000. Deepa agreed to bear dissolution expenses. Actual dissolution expenses Rs 6,000 were paid from the firm's bank account.

(d) Dev, a partner, agreed to do the work of dissolution for Rs 7,5000. He took away stock of the same amount as his commission. The stock had already been transferred to Realisation Account.

(e) Jeev, a partner, agreed to do the work of dissolution for which he was allowed a commission of Rs 10,000. He agreed to bear the dissolution expenses. Actual dissolution expenses paid by Jeev were Rs 12,000. These expenses were paid by Jeev by drawing cash from the firm.

(f) A debtor of Rs 8,000 already transferred to Realisation Account agreed to pay the realisation expenses of Rs 7,800 in full settlement of his account. 

Answer 17:

 

Realisation Account

 

Question 18:  Ramesh and Umesh were partners in a firm sharing profits in the ratio of their capitals. On 31st March, 2013, their Balance Sheet was as follows:

On the above date the firm was dissolved.
(a) Ramesh took over 50% of stock at Rs 10,000 less than the book value. The remaining stock was sold at a loss of Rs 15,000. Debtors were realised at a discount of 5%.
(b) Furniture was taken over by Umesh for Rs 50,000 and machinery was sold for Rs 4,50,000.
(c) Creditors were paid in full.
(d) There was an unrecorded bill for repairs for Rs 1,60,000 which was settled at Rs.1,40,000.
Prepare Realisation Account. 

Answer 18:

 

Question 19:  Pradeep and Rajesh were partners in a firm sharing profits and losses in the ratio of 3:2. They decided to dissolve their partnership firm on 31st March, 2018. Pradeep was deputed to realise the assets and to pay off the liabilities. He was paid Rs. 1,000 as commission for his services. The financial position of the firm on 31st March, 2018 was as follows:

Following terms and conditions were agreed upon:
(a) Pradeep agreed to pay off his wife's loan.
(b) Half of the debtors realised Rs. 12,000 and remaining debtors were used to pay off 25% of the creditors.
(c) Investment sold to Rajesh for Rs. 27,000.
(d) Building realised Rs. 1,52,000.
(e) Remaining creditors were to be paid after two months, they were paid immediately at 10% p.a. discount.
(f) Bill receivables were settled at a loss of Rs. 1,400.
(g) Realisation expenses amounted to Rs. 2,500.
Prepare Realisation Account. 

Answer 19: