Test: Dissolution Of Partnership - 1 - Commerce MCQ

→ At the time of dissolution, Goodwill is treated as a regular asset.
→ It is recorded in the Realisation Account along with other assets of the firm.
→ The firm sells Goodwill to realize its value, and the proceeds are used to:
Pay liabilities.
Settle outstanding amounts with partners.
→ This ensures Goodwill is accounted for properly during the closure of the partnership firm.

→ At the time of dissolution of a partnership firm, capital profit (surplus) is shared among partners according to their profit-sharing ratio unless specified otherwise in a contract.
→ As per Section 48 of the Indian Partnership Act, 1932:
Losses, including capital deficiencies, are settled first out of profits, then capital, and lastly by partners in their profit-sharing ratio.
Surplus or capital profit (if any) remaining after paying all liabilities, advances, and capital contributions is divided among partners in their profit-sharing ratio.
Identify which account is prepared at last in the process of firm’s dissolution:
Option A: Realization Account
Option B: Partner’s Capital Accounts
Option C: Cash Account
Option D: More than one of the above
Answer: Option C: Cash Account

At the time of dissolution of a partnership firm, all assets (except cash and bank) are transferred to the Realization Account at their Book Value. The Realization Account is a nominal account prepared to record the realization (sale) of assets and payment of liabilities. Assets are debited to the Realization Account at their book value, and the actual proceeds from the sale of these assets are credited. The resulting balance, which is the profit or loss on realization, is transferred to the Partners' Capital Accounts in their profit-sharing ratio.

In the event of the dissolution of a partnership firm, capital profit (surplus) is shared among the partners in their profit-sharing ratio unless stated otherwise in a partnership agreement. According to Section 48 of the Indian Partnership Act, 1932, the surplus remaining after settling liabilities, advances, and capital contributions is distributed among the partners in their agreed profit-sharing ratio. If no agreement exists, the default rule is to use the profit-sharing ratio.

After the dissolution of a partnership firm, the rights of the partners are mainly related to the settlement of the firm's affairs, repayment of debts, and distribution of any surplus assets. Partners also have the right to restrain other partners from misusing the firm’s name or property and the right to receive the return of the premium if the dissolution is premature.
However, the right to be consulted ceases to exist after the dissolution because the partnership no longer operates as a business entity. The main focus shifts to the settlement of accounts and winding up the firm’s affairs. Therefore, the right to be consulted is not available to a partner after the dissolution of the firm.

At the time of dissolution of a partnership firm, the assets are applied in the following order:
- In paying the debts of the firm to third parties (C).
- In paying each partner rateably for their advances as distinguished from capital (A).
- In paying each partner rateably what is due to them on account of capital (B).
- The remaining surplus, if any, is divided among the partners in their profit-sharing ratio (D).

At the time of dissolution, if a partner takes over an unrecorded asset, the Realization Account is credited with the value of the asset. The Realization Account is a nominal account used to close the firm's books, record the sale of assets, payment of liabilities, and transfer of unrecorded assets. The partner’s capital account is then adjusted accordingly.

When a partner has given a loan to the firm, this loan is treated as a liability of the firm at the time of dissolution. The loan amount is settled by paying it through the Bank Account. Thus, Rohan's loan to the firm will be credited to the Bank Account when the loan is repaid.

Section 41 of the Indian Partnership Act, 1932, deals with compulsory dissolution of a partnership firm. A firm is dissolved compulsorily in the following circumstances:
- When all the partners, or all but one, become insolvent, making them incapable of signing a contract.
- When the firm's business becomes illegal due to changes in law.
- When an event occurs that makes it illegal for partners to continue the business, such as one partner becoming an alien enemy due to war with their country.
This dissolution under Section 41 is termed compulsory dissolution as it arises due to legal or unavoidable conditions.

At the time of dissolution, if a partner's capital account balance appears on the assets side of the balance sheet, it indicates that the partner owes the firm. This balance is transferred to the debit side of the Partner's Capital Account to adjust for the outstanding amount.
The Realization Account is used to close the books of accounts by transferring assets and liabilities, but the balance owed by a partner is adjusted through the Partner’s Capital Account. Hence, the correct treatment is to transfer it to the debit of the Partner's Capital Account.