Dissolution of Firm: Journal Entry for a Bill of Exchange under Discount from an Insolvent Party

Background:
In the process of dissolving a firm, it is common to encounter various financial transactions that need to be recorded accurately in the firm's books. One such scenario involves a bill of exchange received from a party named Derek, who later becomes insolvent. This journal entry aims to illustrate how this situation should be recorded in the firm's books.

Journal Entry:

1. Identify the Transaction:
The first step is to identify the transaction at hand. In this case, the transaction involves a bill of exchange received from Derek, which is currently under discount.

2. Determine the Amount:
Next, we need to determine the exact amount of the bill of exchange. Let's assume that the bill of exchange is valued at $10,000.

3. Record the Transaction:
To record this transaction, we need to debit the relevant account and credit the corresponding account. In this case, the journal entry will be as follows:

Debit: Derek's Account - $10,000
Credit: Discount on Bill Account - $10,000

4. Reasoning:
The reason for debiting Derek's account is to reduce the amount owed to him due to his insolvency. By debiting his account, the firm recognizes the loss incurred as a result of Derek's inability to honor the bill of exchange.

On the other hand, the credit entry to the Discount on Bill account reflects the reduction in value of the bill due to its discount. This account is used to track the discounts received or allowed on bills of exchange.

5. Explanation:
The journal entry debiting Derek's account represents the recognition of a loss on the firm's part. Since Derek has become insolvent, it is unlikely that the firm will be able to recover the full amount of the bill of exchange from him. Therefore, the firm needs to account for this loss in its books.

The credit entry to the Discount on Bill account acknowledges the fact that the bill is currently under discount. This means that the firm has received the bill for a lower amount than its face value. The discount represents the interest earned by the party who discounted the bill.

Conclusion:
Recording the dissolution of a firm accurately is crucial for maintaining proper financial records. In the case of a bill of exchange received from an insolvent party, it is important to recognize the loss incurred and account for any discounts applied to the bill. By following the journal entry outlined above, the firm can properly reflect these transactions in its books during the dissolution process.

Realisation a/c dr
to bank