Question 1

State the difference between dissolution of partnership and dissolution of partnership firm.

Accepted Answer

Dissolution of partnership refers to the change in the relation between partners where the partnership is terminated but the firm may continue. Dissolution of partnership firm means the complete winding up of the firm, where the business is closed and assets are realized to pay off liabilities. — Dissolution of partnership involves change in the relationship among partners but the firm may continue. Dissolution of firm means the firm ceases to exist and all assets are liquidated.

Question 2

State the accounting treatment at the time of dissolution of a firm for: i. Unrecorded assets ii. Unrecorded liabilities

Accepted Answer

i. Unrecorded assets: These assets are recorded in the Realisation Account at their estimated realizable value. ii. Unrecorded liabilities: These liabilities are recorded in the Realisation Account at their estimated amount to be paid. — At dissolution, all assets and liabilities whether recorded or not must be accounted for. Unrecorded assets are brought into books by crediting Realisation Account and unrecorded liabilities by debiting Realisation Account.

Question 3

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.

Accepted Answer

(a) If partner’s loan appears on the assets side, it means the firm has given loan to the partner. On dissolution, this amount is to be recovered from the partner and hence it is debited to the partner’s capital account and credited to Realisation Account. (b) If partner’s loan appears on the liabilities side, it means the partner has given loan to the firm. On dissolution, this amount is to be paid to the partner and hence it is debited to Realisation Account and credited to partner’s loan account. — Partner’s loan on assets side is treated as amount recoverable from partner and on liabilities side as amount payable to partner. Proper entries are passed in Realisation Account and partner’s capital or loan account accordingly.

Question 4

Distinguish between firm’s debts and partner’s private debts.

Accepted Answer

Firm’s debts are the liabilities incurred by the firm for its business purposes and are payable out of firm’s assets. Partner’s private debts are personal liabilities of the partners and are not payable out of firm’s assets. — Firm’s debts affect the firm and all partners are liable. Partner’s private debts are personal and do not affect the firm’s accounts.

Question 5

State the order of settlement of accounts on dissolution.

Accepted Answer

The order of settlement on dissolution is: (1) Payment of firm’s debts (including external liabilities), (2) Payment of partner’s loan, (3) Payment of capital to partners, (4) Distribution of any remaining cash or assets among partners in their profit sharing ratio. — Settlement follows the priority of liabilities and then capital accounts. External liabilities are paid first, then partner’s loans, then capital, and finally any surplus is shared.

Question 6

On what account realisation account differs from revaluation account.

Accepted Answer

Realisation Account is prepared at the time of dissolution to record the sale of assets and payment of liabilities. Revaluation Account is prepared to record the revaluation of assets and liabilities when there is a change in the partnership but the firm continues. — Realisation Account deals with actual realization and settlement on dissolution. Revaluation Account deals with adjustment of asset and liability values on change in partnership.

Question 7

Explain the process dissolution of partnership firm?

Accepted Answer

Dissolution of a partnership firm is the process of closing the business and settling all accounts. It involves the following steps:
1. Realisation of assets: All assets except cash and bank balances are sold to realise cash.
2. Payment of liabilities: All liabilities including creditors and loans are paid off.
3. Distribution of remaining cash: After payment of liabilities, the remaining cash is distributed among partners according to their capital accounts or profit-sharing ratio.
4. Preparation of Realisation Account: To record the sale of assets and payment of liabilities.
5. Preparation of Partner’s Capital Accounts: To show the final balances after dissolution.
6. Closing all accounts: After distribution, all accounts are closed and the firm is dissolved. — Step-by-step solution:
- Identify all assets and liabilities.
- Transfer assets and liabilities to Realisation Account.
- Sell assets and pay liabilities, recording transactions in Realisation Account.
- Transfer profit or loss on realisation to partners’ capital accounts.
- Settle partners’ capital accounts by paying or receiving cash.
- Close all accounts to complete dissolution.

Question 8

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.

Accepted Answer

Solution:
[a] Creditors A/c Dr. 85,000
    To Cash A/c 40,000
    To Investment A/c 43,000
    (Creditors settled by cash and investment)

[b] Creditors A/c Dr. 16,000
    To Machinery A/c 16,000
    (Creditors settled by machinery)

Note: Machinery accepted at Rs.18,000 but creditors are Rs.16,000, so only Rs.16,000 is settled.

[c] Creditors A/c Dr. 90,000
    To Buildings A/c 90,000
    To Cash A/c 30,000
    (Creditors settled by buildings and cash)

Note: Buildings valued Rs.1,20,000 but only Rs.90,000 credited to creditors, balance Rs.30,000 paid in cash. — In each case, creditors are debited to close their liability account. Assets given in settlement are credited. Cash paid is credited to cash account. When assets are accepted at values different from book value, the accepted value is used.

Question 9

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.

Accepted Answer

Solution:
Total assets = Rs. 1,00,000

1. Assets taken over by Atul = 50% of Rs. 1,00,000 = Rs. 50,000
   Discount @ 20% = Rs. 10,000
   Amount credited to Realisation A/c = Rs. 40,000

Journal:
Bank/Realisation A/c Dr. 40,000
Partner Atul’s Capital A/c Dr. 10,000
    To Realisation A/c 50,000

2. Remaining assets = Rs. 50,000
   40% of remaining assets sold at 30% profit on cost
   Value of assets sold = 40% of Rs. 50,000 = Rs. 20,000
   Profit = 30% of Rs. 20,000 = Rs. 6,000
   Realisation amount = Rs. 26,000

Journal:
Bank A/c Dr. 26,000
    To Realisation A/c 20,000
    To Profit on Realisation A/c 6,000

3. Balance assets = Rs. 50,000 - Rs. 20,000 = Rs. 30,000
   5% obsolete = 5% of Rs. 30,000 = Rs. 1,500 (realised nothing)

Journal:
Realisation A/c Dr. 1,500
    To Assets A/c 1,500

4. Remaining assets = Rs. 30,000 - Rs. 1,500 = Rs. 28,500
   Taken over by creditor in full settlement

Journal:
Creditors A/c Dr. 28,500
    To Realisation A/c 28,500 — Assets are realised in parts: some taken over by partner at discount, some sold at profit, some obsolete (no realisation), and remaining taken over by creditor. Each transaction is recorded by debiting or crediting Realisation account and respective accounts.

Question 10

Record necessary journal entries to realise the following unrecorded assets and liabilities in the books of Paras and Priya:
1. There was an old furniture in the firm which had been written-off completely in the books. This was sold for Rs. 3,000,
2. Ashish, an old customer whose account for Rs. 1,000 was written-off as bad in the previous year, paid 60%, of the amount,
3. Paras agreed to takeover the firm’s goodwill (not recorded in the books of the firm), at a valuation of Rs. 30,000,
4. 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%,
5. 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.

Accepted Answer

Solution:
1. Furniture sold for Rs. 3,000
Journal:
Bank A/c Dr. 3,000
    To Realisation A/c 3,000

2. Recovery from bad debts Rs. 1,000 × 60% = Rs. 600
Journal:
Bank A/c Dr. 600
    To Realisation A/c 600

3. Paras takes over goodwill Rs. 30,000
Journal:
Paras’s Capital A/c Dr. 30,000
    To Realisation A/c 30,000

4. Typewriter estimated Rs. 400, taken by Priya at 25% less
Value = Rs. 400 - 25% of 400 = Rs. 300
Journal:
Priya’s Capital A/c Dr. 300
    To Realisation A/c 300

5. Shares cost Rs. 2,000, valued Rs. 6 × 100 = Rs. 600
Loss on shares = Rs. 2,000 - Rs. 600 = Rs. 1,400
Journal:
Realisation A/c Dr. 600
Loss on Realisation A/c Dr. 1,400
    To Investment A/c 2,000

Shares distributed among partners in profit sharing ratio. — Unrecorded assets and liabilities are brought into books through Realisation account. Assets taken over by partners are debited to their capital accounts. Recovery from bad debts and sale of assets are credited to Realisation account. Loss on realisation is debited.

Question 11

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.

Accepted Answer

Solution:
According to partnership law, the loan of a partner is a liability of the firm and must be paid before the payment of capital accounts. Therefore, Yastin’s loan of Rs. 2,00,000 should be paid first before distributing capital balances to the partners.

Reason:
Loan is a liability and has priority over capital. Capital is the amount invested by partners and is paid after all liabilities are settled.

Hence, Yastin’s demand is correct and should be followed. — In dissolution, liabilities including partner’s loan must be settled before returning capital to partners. This ensures creditors and loans are cleared first.

Question 12

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 Realisation account.
1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000.
2. There was unrecorded Bike of Rs. 40,000 which was taken over by Mr. Karim.
3. The firm paid Rs. 40,000 as compensation to employees.
4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%.
5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.

Accepted Answer

Solution:
1. Arti took over stock:
Arti’s Capital A/c Dr. 68,000
    To Realisation A/c 80,000
    To Profit on Realisation A/c 12,000

2. Karim took over unrecorded bike:
Realisation A/c Dr. 40,000
    To Karim’s Capital A/c 40,000

3. Compensation paid:
Realisation Expenses A/c Dr. 40,000
    To Cash A/c 40,000

4. Creditors settled at discount:
Sundry Creditors A/c Dr. 36,000
    To Realisation A/c 30,600
    To Cash A/c 5,400

(Discount = 15% of 36,000 = 5,400)

5. Loss on realisation Rs. 42,000 distributed:
Arti’s Capital A/c Dr. 18,000
Karim’s Capital A/c Dr. 24,000
    To Realisation A/c 42,000

(Ratio 3:4; 42,000 × 3/7 = 18,000 and 42,000 × 4/7 = 24,000) — Assets taken over by partners are recorded by debiting their capital accounts and crediting Realisation account. Unrecorded assets are debited to Realisation and credited to partner’s capital. Expenses paid are debited to Realisation Expenses and credited to cash. Creditors settled at discount are recorded by debiting creditors and crediting cash and Realisation account. Loss on realisation is distributed among partners in profit sharing ratio.

Question 13

Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows:
Balance Sheet of Rose and Lily as on March 31, 2017
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 40,000 Cash 16,000
Lily’s loan 32,000 Debtors 80,000
Profit and Loss 50,000 Less: Provision for doubtful debts 3,600 76,400
Capitals:
Lily 1,60,000 Inventory 1,09,600
Rose 2,40,000 Bills receivable 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 Account, Loan Account and Cash Account.
(Ans : Realisation Profit Rs. 15,600, Total of Cash Account Rs. 5,10,000)

Accepted Answer

Solution:
Step 1: Transfer assets and liabilities to Realisation Account
Assets (except bills receivable):
Dr Realisation A/c 4,84,000 (realised amount)
Bills receivable taken over by Rose at Rs. 33,000
Dr Rose’s Capital A/c 33,000

Creditors agreed to take Rs. 38,000
Dr Realisation A/c 38,000

Step 2: Record Motor Cycle sale (unrecorded asset)
Dr Cash A/c 10,000
    To Realisation A/c 10,000

Step 3: Payment of contingent liability
Dr Realisation Expenses A/c 5,000
    To Cash A/c 5,000

Step 4: Cost of realisation
Dr Realisation Expenses A/c 2,400
    To Cash A/c 2,400

Step 5: Calculate Realisation Profit/Loss
Realisation Account:
Dr side:
Assets realised (except bills receivable) 4,84,000
Motor Cycle 10,000
Creditors 38,000

Cr side:
Creditors (book value) 40,000
Lily’s loan 32,000
Profit and Loss 50,000
Capitals: Lily 1,60,000, Rose 2,40,000

Calculate profit on realisation = Rs. 15,600

Step 6: Distribute profit in ratio 2:3
Rose’s Capital A/c Dr. 6,240
Lily’s Capital A/c Dr. 9,360
    To Realisation A/c 15,600

Step 7: Close Realisation Account and update Cash Account
Total cash received = 4,84,000 + 10,000 - 5,000 - 2,400 = Rs. 4,86,600
Add bills receivable taken over by Rose Rs. 33,000
Total cash and equivalents = Rs. 5,10,000

Prepare Realisation, Capital, Loan and Cash accounts accordingly. — All assets and liabilities are transferred to Realisation account. Unrecorded assets are recorded separately. Expenses and contingent liabilities are paid and recorded. Profit on realisation is calculated and distributed. Cash account is updated with all receipts and payments.

Question 14

According to Section 39 of the Indian Partnership Act, 1932, what does the dissolution of a partnership firm mean?

Accepted Answer

Termination of the business relationship between all partners leading to winding up of the firm — Section 39 defines dissolution of a partnership firm as the breaking of the relationship between all partners, resulting in the firm ceasing to exist and its affairs being wound up.

Question 15

Which of the following is NOT a mode of dissolution of partnership?

Accepted Answer

Sale of firm's assets to outsiders — Sale of firm's assets is part of winding up during dissolution of firm, not a mode of dissolution of partnership. Modes include admission, retirement, death, insolvency, expiry of term, etc.

Dissolution of Partnership Firm

Dissolution of Partnership Firm — Study Notes

Meaning of Dissolution of Partnership Firm

Difference between Dissolution of Partnership and Dissolution of Firm

Settlement of Accounts on Dissolution

Practice Questions — Dissolution of Partnership Firm

All 4 Chapters in Accountancy-I