Insolvency of a Partner - Partnership Accounts, Advanced Corporate Accounting | Advanced Corporate Accounting - B Com PDF Download

Insolvency of a Partner—Garner vs. Murray Decision

Before the decision in Garner vs. Murray, any loss, arising from insolvency of any partner, was borne by the solvent partners in the same proportion as they had shared profits and losses of the business. But after the decision of justice Juice in the case of garner vs. Murray, the loss arising by default of an insolvent partner is to be borne by the solvent partners in proportion to their respective capitals instead of their Profit sharing ratio. It should be noted that this rule is applied only where there is no agreement on this point.

The Realisation account is prepared as usual whether this rule is to be applied or not. The insolvent partner asked to pay whether he can, towards his debit balance. The final balance in the solvent partners in the ratio of their capital as they stood before dissolution. The application of ruling of Garner vs. Murray may be the excluded by the expressed agreement among the partners.

Fixed and Fluctuating Capitals : In Garner vs. Murray the ratio of capital prior to dissolution formed the basis for writing off the deficiencies of insolvent partner. In this connection it is important to note when the capital accounts are fixed; the original capitals form the ratio to distribute the loss caused by the default of an insolvent partner. But if the capitals are fluctuating, first of all relevant adjustment regarding Reserve and business profit and losses are made; capitals, thus but without any adjustment for realisation loss or profit or taken over of an assets or liability by a partner form the basis for distribution of loss due to the insolvency of a partners

Illustration : 3

P, Q and R are partners sharing profits and losses as 4 : 3 : 2. Thier Balance Sheet on 31st December, 2002 and as follows :

Liabilities Rs. Assets Rs.

Sundry Creditors 7,200 Cash 3,200

Capitals : Sundry Debtors 2,000

P 8,000 Stock 4,000

Q 4,000 Plant and Machinery 11,000

R 1,000

20,200 20,200

On that date partners agree to dissolve the firm. Mr. Q takes over the stock for Rs.3,000 and debtors for Rs.1,400 The Plat and Machinery are sold for Rs.3,000

Prepare necessary ledger accounts to close the books of the firm Mr. R is insolvent and cannot contribute anything towards his deficiency.

Solution

Ledger Realisation Account

Rs. Rs.

To Sundry Acts 17,000 By Sundry Creditors 7,200

To bank (Crs.) 7,200 By Q's Capital A/c 4,400

By Bank (assets sold) 5,400

By Loss transferred:—

P 3,200

Q 2,400

24,200 R 1,600 7,200

24,200

P's Capital A/c

Rs. Rs.

To Realisation A/c (Loss) 3,200 By Balance b/d 8,000

To R's Capital A/c 400

To Bank A/c 4,400

8,000 8,000

Q's Capital A/c

Rs. Rs.

To Realisation (Loss) 2,400 By Balance b/d 4,000

To R's Capital 200 By Bank A/c 3,000

To Realisation A/c

(assets taken over) 4,400

7,000 7,000

R's Capital A/c

Rs. Rs.

To Realisation (Loss) 1,600 By Balance b/d 1,000

By P's Capital (8/12) 400

By P's Capital (8/12) 200

1,600 1,600

Bank Account

Rs. Rs.

To Balance b/d 3,200 By Realisation A/c 7,200

To Realisation 5,400 By P's Capital A/c 4,400

To Q's Capital 3,000

11,600 11,600

Illustration-4

White, Red and Black are partners sharing profits and losses equally. On 31st December, 2002 they decided to dissolve the firm, when their Balance Sheet was as under :

Rs. Rs.

Sundry Creditors 10,000 Cash 3,000

White's Capital 12,500 Stock in Trade 10,000

Red's Capital 7,500 Book Debts 10,000

Reserve Fund 7,500 Plant and Machinery 10,000

Black's Capital (over drawn) 4,500

37,500 37,500

Book debts realised 7,250. Stock was sold for Rs.8,000 and Plant & Machinery for Rs.7,000 The expenses of realisation amounted to Rs.1,250. Black is declared insolvent and only Rs.1,000 were obtained from his estate.

Solution

Ledger Realisation Account

Rs. Rs.

To Sundry Assets 30,000 By Creditors 10,000

To Cash (Expenses) 1,250 By bank A/c (Assets realised) 22,250

To bank (Creditors) 10,000 By Loss on Realisation

transferred to Capital

Accounts : White 3,000

Red 3,000

Black 3,000

41,250 41,250

White's Capital A/c

Rs. Rs.

To Realisation A/c (Loss) 3,000 By Balance b/d 12,500

To Black's Capital A/c 2,500 By Reserve Fund 2,500

To Bank A/c 9,500

15,000 15,000

Red's Capital Account

Rs. Rs.

To Realisation A/c (Loss) 3,000 By Balance b/d 7,500

To Black's Capital A/c 1,500 By Reserve Fund 2,500

To Bank A/c 5,500

10,000 10,000

Black's Capital Account

Rs. Rs.

To Balance b/d 4,500 By Reserve Fund 2,500

To Realisation (Loss) 3,000 By Bank 1,000

By White's Capital A/c 2,500

By Red's Capital 1,500

7,500 7,500

Bank Account

Rs. Rs.

To Balance b/d 3,000 By Realisation A/c (Exp.) 1,250

To Realisation A/c 22,250 By Realisation 9Crs.) 10,000

To Black's Capital 1,000 By White's Capital 9,500

By Red's Capital 5,500

26,250 26,250

Note:— Assuming the Capitals are fixed, Black's deficiency is borne by White and Red in the ratio of their original capital i.e.; 12,500 and 7,500 respectively

Loan from wife of a partner— A loan from wife if assumed to be given by her from her personal propertyStridhan, her position is like that of a creditor. If it is proved that the loan given by the wife out of money given to her husband then her position is not at par with the creditors. The amount contributed in such a case is taken as the Capital of the proprietor.

Insolvency of all the Partners

When a firm is unable to pay its debts, all its partners are said to have become involvement. Under such cases, creditors do not get back their money fully. The creditors get the money which is available after selling its assets and provided by partners and paying of its expenses of selling assets.

The creditors are not transferred to Realisation A/c. Creditors accounts is closed by transferring to Profit and Loss Account or Deficiency A/c. The deficiency of partners is also transferred to this Profit and Loss Account or Deficiency Account.

Illustration : 8

The following is the Balance Sheet of X & Y.

Liabilities Rs. Assets Rs.

X's Capital 1,200 Machinery 2,950

Creditors 7,800 Furniture 800

Debtors 1,000

Stock 1,250

Cash 600

Y's Capital 2,400

9,000 9,000

The assets realised as follows :

Furniture Rs.350, Stock Rs.350, Debtors Rs.1,000; Machinery Rs.3,000 The realisation expenses amounted to Rs.550 X cannot pay anything from his private estate whereas Y can bring only Rs.550 from his private estate. Prepare the necessary accounts.

Solution :

Realisation account

Rs. Rs.

To machinery 2,950 By Cash (Sale proceeds of assets) 3,500

To Furniture 800 By Loss on Realisation

To Debtors 1,000 transferred to—

To Stock 1,250 X's Capital 1,400

To Cash (Real. Exp.) 300 Y's Capital 1,400 2,800

6,300 6,300

Cash Account

Rs. Rs.

To Balance b/f 600 By Realisation (Exp.) 300

To Realisation (assets realised) 3,500 By Creditors 3,900

To Y's Capital 100

4,200 4,200

Creditors Account

Rs. Rs.

To Cash 3,900 By Balance b/c 7,800

To Deficiency a/c 3,900

7,800 7,800

X's Capital

Rs. Rs.

To Realisation (Loss) 1,400 By Balance b/f 1,200

By Deficiency A/c 200

1,400 1,400

Y's Capital

Rs. Rs.

To Balance b/f 2,400 By Cash 100

To Realisation 1,400 By Deficiency A/c 3,700

3,800 3,800

Deficiency A/c

Rs. Rs.

To X's Capital 200 By Creditors 3,900

To Y's Capital 3,700

3,900 3,900