Worksheet Solutions: Dissolution of a Partnership Firm

Q1: Match the following

Choose the correct option from below
(a) a(iii), b(ii), c(i)
(b) a(i), b(iii), c(ii)
(c) a(ii), b(iii), c(i)
(d) a(i), b(ii), c(iii)
Ans: (b)
Situation 1 : When assets are sold for cash (Bank A/c Dr. and Realisation A/c Cr.)
Situation 2 : When asset is taken over by a partner (Partner's Capital A/c Dr. and Realisation A/c Cr.)
Situation 3 : When the assets are given to any of the creditors towards the payment of his dues (No Entry in such case).
Explanation: Option (b) is correct because:
• Situation 1 corresponds to sale for cash - this is recorded by debiting Bank and crediting Realisation (so it matches (i)).
• Situation 2 describes an asset taken over by a partner - the partner's capital is debited and Realisation is credited (so it matches (iii)).
• Situation 3 is an asset handed over to a creditor in settlement - this requires no separate entry other than the closing adjustments in Realisation (so it matches (ii)).
Q2: Name the Account which is prepared for finding the profit or loss on getting amount from selling of all assets and paying amount of liabilities.
(a) Dr. side of Realisation Account
(b) Dr. side of Revaluation Account
(c) Realisation Account
(d) Cr. Side of Revaluation Account
Ans: (c)
Realisation account is nominal account. assets sold are recorded on the credit side and liabilities paid off are recorded on the debit side. if credit side is more it is profit and if the debit side is more it is loss.
Explanation: The Realisation Account is prepared at dissolution to record the sale of assets and the payment of liabilities. All assets transferred to Realisation are later credited when realised, and liabilities transferred to Realisation are debited when paid. A net credit balance on Realisation shows a profit on realisation; a net debit balance shows a loss.

Q3: What should be the journal entry when A takes over loan payable to Mrs. A ₹20000
(a) 

(b)
(c) 
(d) 
Ans: (a)

Explanation: When a partner takes over a firm's liability, the firm does not pay cash; instead, the liability settlement is treated through the Realisation account. The correct entry is:
Realisation A/c Dr.
To A's Capital A/c
This entry shows that the liability is discharged (Realisation debited) and the partner's capital is reduced (credited) for the amount he has taken over. Hence do not use Cash/Bank for such settlement.

Q4: Bank Loan ₹29,000 was paid at the time of dissolution. What journal entry will be recorded for the same?
(a)

(b)

(c)

(d) 
Ans: (b)

 
Repayment of bank loan will take place in debit side of realization account. This transaction will effect only two accounts i.e. Realisation Account and Bank Account.
Explanation: On payment of a liability like a bank loan, the entry made is:
Realisation A/c Dr.
To Bank A/c
This debits Realisation because liabilities transferred to Realisation are being settled, and credits Bank because cash is paid out.

Q5: As per which section of the Indian Partnership Act, 1932, at the suit of a partner, the Court may dissolve a firm?
(a) Section 04
(b) Section 44
(c) Section 48
(d) Section 31
Ans: (b) Section 44 of the Indian Partnership Act, 1932 states that at the suit of a partner, the Court may dissolve a firm.
Explanation: Section 44 lists cases in which a partner may apply to the court for dissolution - for example when a partner is of unsound mind, becomes permanently incapable of performing his duties, or when all partners (or all except one) become insolvent. Thus Section 44 provides judicial grounds for dissolution.

Q6: At the time of the dissolution of the firm, how undistributed profits such as General Reserve, Credit Balance of P&L A/C are dealing with?
Ans: Undistributed profits are distributed among all partners in their profit-sharing ratio in the Cr side of respective partner's capital account.
Explanation: Undistributed reserves and the credit balance of Profit & Loss Account are transferred to the partners' capital accounts in their agreed profit-sharing ratio. This increases each partner's capital (shown on the credit side) before final settlement or realisation of the firm's affairs.

Q7: The firm of Ravi and Mohan was dissolved on 1.3.2013. According to the agreement Ravi had agreed to undertake the dissolution work for an agreed remuneration of Rs.2,000 and bear all realisation expenses. Dissolution expenses were Rs. 1,500 and the same were paid by the firm. Pass necessary journal entry for the payment of dissolution expenses.
Ans: Journal

Note: As Ravi is supposed to bear the Realisation Expenses so if these are paid by the firm; the firm has right to recover it from Ravi. Hence, Ravi's account has been debited and Bank account has been credited.
Enhancement / Explanation: Since Ravi agreed to bear the realisation expenses, but the firm paid Rs.1,500, the firm should recover this amount from Ravi. The entries are:
• On payment of expenses by firm:
Realisation A/c Dr.
To Bank A/c
• To recover the amount from Ravi (and to allow his remuneration):
Ravi's Capital A/c Dr.
To Realisation A/c
Finally, to record Ravi's agreed remuneration of Rs.2,000 (if not already adjusted):
Realisation A/c Dr.
To Ravi's Capital A/c
This set of entries ensures the firm recovers Rs.1,500 from Ravi and allows his Rs.2,000 remuneration.

Q8: When an asset is taken over by a partner, why is his capital account debited?
Ans: It is debited because the partner's claim over the firm is decreased by the amount of asset taken over by him, thus his capital account is decreased.
Explanation: When a partner takes an asset of the firm, the partner receives value from the firm. This reduces the partner's net claim on the firm, so the partner's capital account is debited (reduced) and Realisation Account is credited for the asset taken over.

Q9: What is the dissolution of partnership?
Ans: Dissolution of partnership refers to the change in the existing relations of the partners. The firm continues its business.As one or more than one can partner take over the overall business of the firm.
Improved Answer: Dissolution of partnership means a change in the existing relationship between the partners such that at least one partner ceases to be associated with the business. This change may lead to the winding up of the firm (dissolution of the firm) or may simply alter the partnership arrangement while the business continues under new terms.

Q10: Identify a situation, under which court may order for dissolution of a partnership firm.
Ans: A court may order for dissolution of a partnership firm on insolvency of all the partners or all the partners except one become insolvent.
Explanation: One of the recognised grounds for a court-ordered dissolution is when all the partners, or all except one, become insolvent. In such cases the court may consider it just and reasonable to dissolve the firm and wind up its affairs.

Q11: Pass Journal entries in the following cases-
(i) Expenses of Realisation Rs. 1,500
(ii) Expenses of Realisation Rs. 600, but paid by Mohan, a partner,
(iii) 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.
(iv) Motor car of book value 50,000 taken over by creditors of the book value of Rs. 40,000 in final settlement.
Ans: Journal

Explanation / Notes:
• (i) When the firm pays realisation expenses: Realisation A/c Dr. To Bank A/c.
• (ii) When a partner (Mohan) pays expenses personally: Realisation A/c Dr. To Mohan's Capital A/c (since the firm will recover expenses from Mohan).
• (iii) To record commission allowed to Mohan: Realisation A/c Dr. To Mohan's Capital A/c (remuneration reduces the firm's net realisation).
• (iv) When motor car is handed to creditors in full settlement of Rs.40,000: Transfer the asset and settle the creditors:
Creditors A/c Dr. To Motor Car A/c (or Realisation A/c) - depending on working practice, and adjust any difference through Realisation. The journal in the provided image shows the precise treatment used in these books.

Q12: A and B share profits and losses in the ration of 5:2. They have decided to dissolve the firm. Assets and external liabilities have been transferred to Realisation A/c. Pass the Journal Entries to affect the following:

• Bank Loan of Rs. 12,000 is paid off.
• A was to bear all expenses of Realisation for which he is given to commission of Rs. 400.
• Deferred Advertisement Expenditure A/c appeared in the book at Rs. 28,000.
• Stock worth Rs. 1,600 was taken over by B at Rs. 1,200.
• As unrecorded Computer realized Rs. 7,000.
• There was an outstanding bill for repairs for Rs. 2,000. Which was paid off.

Ans: Journal

Explanation / Brief workings:
• Bank loan paid: Realisation A/c Dr. To Bank A/c Rs.12,000.
• A to bear all realisation expenses but is given commission Rs.400: If firm paid expenses, recover from A and then allow commission - net effect adjusted through Realisation and A's capital as shown in the journal images.
• Deferred advertisement: Being a prepaid/unused asset, it will be transferred to Realisation and then written off or adjusted as per realisation entries shown.
• Stock taken over by B at Rs.1,200: B's Capital A/c Dr. To Realisation A/c Rs.1,200 (difference between book value and realisation treated via Realisation).
• Unrecorded computer realised Rs.7,000: Bank A/c Dr. To Realisation A/c Rs.7,000.
• Outstanding bill paid Rs.2,000: Realisation A/c Dr. To Bank A/c Rs.2,000.
The exact ledger treatment and totals are shown in the provided journal-image entries.

Q13: The amount of sundry assets transferred to Realisation Account was Rs 80,000. 60% of them have been sold at a profit of Rs. 2,000. 20% of the remaining were sold at a discount of 30% and remaining were taken over by Ramlal (a partner) at book value. Journalise.
Ans: JOURNAL

Working Notes :

• Calculation of amount realised from assets
  
  
  
  Total amount realised from assets Rs. 50,000 + Rs. 4,480 = Rs. 54,480
• Calculation of value of assets taken off by Ramlal
  
  

Explanation: The working notes calculate:
• 60% of Rs.80,000 = Rs.48,000 realised with a profit of Rs.2,000 - so realised amount for that portion is Rs.50,000.
• Remaining after 60% = 40% of Rs.80,000 = Rs.32,000. Of this 20% of the remaining (i.e. 20% of Rs.32,000 = Rs.6,400) was sold at a discount of 30% → realised = Rs.6,400 × 0.70 = Rs.4,480.
• Balance taken over by Ramlal at book value = Rs.32,000 - Rs.6,400 = Rs.25,600 (transferred to Ramlal's capital / Realisation accordingly).
The journal entries in the images record these transfers and realisations, with the totals matching Rs.54,480 realised in cash and the assets taken over by the partner recorded at book value.

Q14: 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 then Cash and Bank) and the third party liability have been transferred to Realisation Account:

• Kunal agreed to pay off his wife's loan of Rs. 6,000.
• 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%.
• Rohit had given a loan of Rs. 70,000 to the firm which was duly paid.
• 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.
• The firm had a debit balance of Rs. 15,000 in the Profit and Loss Account on the date of dissolution.
• 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.

Ans: Journal Entries

Explanation / Highlights:
• Kunal pays his wife's loan: Realisation A/c Dr. To Kunal's Capital A/c (or Creditors A/c depending on transfer stage) - the net effect is to reduce Kunal's capital for payment made on behalf of the firm.
• Creditors settlement: For creditors of Rs.10,000 given furniture costing Rs.8,000 - record transfer of furniture and settle creditor for Rs.10,000 but asset taken over recorded at its book/cost value. Remaining creditors of Rs.30,000 allowed 10% discount → paid Rs.27,000; discount of Rs.3,000 passed through Realisation.
• Payment to Rohit for his loan: Bank A/c Dr. To Rohit's Loan A/c (or Realisation adjustments as shown).
• Unrecorded machine taken by Kunal at Rs.3,000 (expected Rs.5,000) - the difference affects Realisation and Kunal's capital.
• Debit balance of P&L Rs.15,000 is treated as loss and debited to partner capitals in profit-sharing ratio.
• Sarthak paid realisation expenses Rs.16,000 but was to bear expenses and receive remuneration Rs.15,000. Therefore firm will credit Sarthak's capital for Rs.16,000 (reimbursement) and debit Realisation for Rs.15,000 as his remuneration; net effect adjusted in Sarthak's capital account as shown in the image entries.

Q15: Kumar, Shy am and Ratan were partners in a firm sharing profits in the ratio of 5: 3 : 2 respectively. They decided to dissolve the firm with effect from 1st April, 2013. On that date, the balance sheet of the firm was as follows Balance Sheet as at 1st April, 2013

The dissolution resulted in the following

• Plant of Rs. 40,000 was taken over by Kumar at an agreed value of Rs. 45,000 and remaining plant realised Rs. 50,000.
• Furniture realised Rs. 40,000.
• Motor van was taken over by Shyam for Rs. 30,000.
• Debtors realised Rs. 1,000 less.
• Creditors for Rs. 20,000 were untraceable and the remaining creditors were paid in full.
• Realisation expenses amounted to Rs. 5,000.

Prepare the realisation account, capital accounts of partners and bank account of the firm.
Ans:

NOTE : In the absence of any information of realisation of an asset, it has been assumed that nothing is realised from that asset (e.g. stock in this case).


working notes:
1. Loss on Realisation = 1,000
Loss on Realisation transferred to Kumar's capital account = 1,000×5/10 = 500
Loss on Realisation transferred to Shyam's capital account = 1,000 × 3/10 = 300
Loss on Realisation transferred to Ratan's capital account=1,000 × 2 = 200
2. Creditors = 1,20,000
Out of which 20,000 were untraceable
So the creditors were paid in full settlement amounting 1,20,000 - 20,000 = 1,00,000.

Corrections and Explanation to Working Notes:
• The total loss on realisation is Rs.1,000. This loss is shared in the profit-sharing ratio 5:3:2 (total 10 parts):
- Kumar's share = 1,000 × 5/10 = Rs.500.
- Shyam's share = 1,000 × 3/10 = Rs.300.
- Ratan's share = 1,000 × 2/10 = Rs.200.
• Creditors total Rs.1,20,000 of which Rs.20,000 were untraceable. Therefore creditors actually paid = Rs.1,20,000 - Rs.20,000 = Rs.1,00,000. The entries in the Realisation and Bank accounts reflect these payments and the treatment of untraceable creditors as losses in Realisation.
Final Note: All the journal, realisation and capital account entries are shown in the provided images. The explanations above clarify the principles used: transfer of assets/liabilities to Realisation, recording actual receipts/payments, treatment when partners or creditors take over assets, allocation of undistributed reserves and realisation profit or loss in the partners' profit-sharing ratio, and adjustment of partners' capitals for payments made personally by partners or for their remuneration.