DISSOLUTION OF A PARTNERSHIP FIRM - gcaofficial.org · continues, only the partnership relation is reconstituted, but in case of dissolution of firm, ... Where the partnership deed

CHAPTER 5

DISSOLUTION OF A PARTNERSHIP FIRM

The word Dissolution implies “theundoing or breaking of a bond tie”. Inother words, dissolution implies that theexisting state of arrangement is doneaway with. Suppose, certain colour is putinto the water, the colour dissolves intothe water because the solid state of thecolour disintegrates through the processof breaking of bond of chemicals that wasthe basis of that solid state. In life,anything dissolves only by losing itscurrent state, so is true in the case ofthe partnership as well. An existingpartnership dissolves whenever thereconstitution of the existing firm iscaused by admission, retirement ordeath of a partner. However, thedissolution of partnership does not leadto the dissolution of the firm since thetwo situations are different. In case ofdissolution of partnership, the firmcontinues, only the partnership relationis reconstituted, but in case ofdissolution of firm, not only partnershipis dissolved but the firm also loses itsexistence, implying thereby that the firm

LEARNING OBJECTIVES

After studying this chapter youwill be able to :

� State the meaning ofdissolution of firm;

� Differentiate betweendissolution of firm anddissolution of partnership;

� Prepare realization account;

� Settle the claims against thefirm;

� Record transactions forclosure of the books andsettlement of partners’accounts.

DISSOLUTION OF A PARTNERSHIP FIRM 207207

ceases to operate as a partnership firm (Section 39 of the Partnership Act,1932). After dissolution of firm, the firm does not remain in business. The onlybusiness to be carried out is akin to its funeral ceremony, i.e., closing ceremonyof all existing activities.

5.1 Dissolution of a Partnership

The relation of partnership among different partners is changed withoutchanging the partnership firm. Thus, in case of dissolution of partnership, theeconomic basis of relationship of partners is reconstituted without affectingthe entity of the firm which continues to remain in business as ever before. Apartnership is dissolved by change of mutual contract in the following cases :

� Change in profit sharing ratio among partners;

� Admission of a new partner;

� Retirement of a partner, where at least two persons remain as partners;

� Death of a partner (Section 42);

� Adjudication of a partner as an insolvent;

� Completion of a venture if partnership is formed for that;

� Expiry of the period of partnership if partnership is for a pre-determinedperiod;

� Merger of one partnership firm into another.

5.2 Dissolution of a Firm

Dissolution of a firm takes place in the following cases :

(1) Dissolution by agreement : A firm is dissolved in case :

(a) All the partners give consent to it, or(b) As per the terms of partnership agreement.

(2) Compulsory dissolution : A firm is dissolved compulsorily in the followingcases :

(a) Where all the partners or all except one partner, become insolvent orinsane rendering them incompetent to sign a contract;

(b) Where the business becomes illegal;

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(c) Where all the partners except one decide to retire from the firm;

(d) Where all the partners or all except one partner dies;

(e) Where the partnership deed includes any provision regarding thehappening of the following :

(i) Expiry of the period for which the partnership was formed;

(ii) Completion of the specific venture or project for which the firm was formed.

(3) Dissolution by notice : In case of partnership at will, the firm may bedissolved if any of the partners gives a notice in writing to the other partnerssignifying his intention of seeking dissolution of the firm.

(4) Dissolution by court : A court, may order a partnership firm to be dissolved(under Section 44), in case of a suit by a partner in the following situations :

(a) A partner becomes insane;

(b) A partner becomes permanently incapable of performing his dutiesas a partner;

(c) A partner deliberately and consistently commits breach of agreementsrelating to the management of the firm;

(d) A partner’s conduct is likely to adversely affect the business of the firm;

(e) The partner transfers whole of his interest in the firm to a third party;

(f) The business of the firm cannot be carried on, except at a loss;

(g) The court, on any ground, regards dissolution to be just andequitable.


5.3 Distinction between Dissolution of Partnership and Dissolution of Firm

Basis Dissolution of Partnership Dissolution of Firm

5.4 Settlement of Accounts

In case of dissolution of firm, the firm ceases to conduct business and has tosettle its accounts. For this purpose, it disposes off all its assets for makingpayment to all the claimants against it.

Section 48 of the Partnership Act provides the following rules for thesettlement of accounts between the partners :

(1) Loss to be paid first out of profits, next out of capital and lastly by thepartners individually in the proportion in which they were entitled to sharethe profits. In other words, losses are to be shared by the partners intheir profit sharing ratio;

(2) Assets of the firm are first to be applied in paying off the debts of the firmto the third parties, next in paying off to each partner proportionatelywhat is due to him from the firm for advances as distinguished from

1. Termination ofbusiness

2. Settlement of as-sets and liabilities

3. Court’sIntervention

4. Economic Relation-ship

5. Closure of books

No, the business is notterminated.

Assets and liabilities arerevalued and new balancesheet is drawn.

Court does not intervenebecause partnership isdissolved by mutual agreementand through the process ofreconstitution.

Economic relationship mayremain and changes.

Does not require because thebusiness is not terminated.

The business of the firm isclosed.

Assets are sold and realizedand liabilities are paid off.

A firm can be dissolved bythe court’s order.

Economic relationshipbetween the partners comesto an end.

All books of accounts areclosed.

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capital; and the residue to be divided among the partners in the proportionin which they were entitled to share profits. In simple words, following isthe order of payment from the proceeds of the sale of the firm :

� Expenses of realization;

� Payment to outside creditors. It is to be noted that secured creditorsare to be paid off first out of the proceeds of secured assets beforeanything is paid to unsecured creditors;

� Loans and advances made by partners’ spouse;

� Loans and advances made by a partner apart form his capital; and

� Final claims of the partners on their capital account.

5.4.1 Debts of firm verses personal debts of partners

If assets of the firm are not sufficient to pay off the firm’s creditors, the partnersmay be required to make contributions because of the unlimited nature of theliability of the partner. In such a case, the partner will have the right to applyhis personal assets in paying off his personal debts first. Thereafter, theremaining surplus of personal assets will be used for making his contributionto satisfy the unsettled portion of outside creditors. It is to be further notedthat personal assets of the partner are individually owned assets excludingthe personal property of wife (Streedhan).

Accordingly the following steps are taken :

1. All assets would be disposed off and cash has to be realized;

2. With the available funds, claims are satisfied in the following order—

(a) Payment of expenses for realizing the assets and collection of debts;

(b) Payment of outside liabilities of the firm, i.e. creditors, loans, bankoverdrafts, bills payable, advances from partners’ relatives;

(c) Loans and advances made by a partner;

(d) Repayment of advances extended by the partners;

(e) Repayment of capital contribution to the partner;

(f) Any surplus left, is distributed among all partners in their profitsharing ratio.


5.4.2 Accounting Treatment

The books of accounts are closed and profit or loss on realizing the assets anddischarge of liabilities has to be computed in the event of dissolution of thefirm. For this purpose, a realization account is prepared for recording therealization of assets and payment of liabilities. Sale of assets is recorded at therealized value and payment to creditors is recorded at the settlement value.After recording of all transactions with respect to sale, transfer or takeover ofassets and payment of all external liabilities, the realization account wouldhave a balance that will either be profit or loss. Profit arises when assets arerealized at more than the book value and/or liabilities are settled at less thanbook value. In an otherwise situation there is loss. The profit or loss on realizationis transferred to partners’ capital accounts in their profit sharing ratio.

Journal Entries

1. For transferring the assets

Transfer to the debit of realization account at their gross book values of allaccounts of assets excluding cash, bank and the fictitious assets.

Realization a/c Dr.

Assets a/c(individually)

It is to be noted that debit balance such as accumulated losses deferredexpenses are not transferred to the realization account. These aretransferred to the partners’ capital account in their profit sharing ratio byrecording the following entry :

Partners’ capital a/c Dr.

Fictititous assets a/c

2. For transferring the liabilities

All external liability accounts including provisions, if any, in respect of assetswhich have been transferred to the realization account are closed bytransferring them to the credit of realization account at their book values.

External liabilities a/c(Individually) Dr.

Realization a/c

Partners’ capital account and loan account of the partner are preparedseparately and are not transferred to realization account.

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3. For sale of assets

Bank a/c(realized price) Dr.

Realization a/c

4. For an asset taken over by a partner

Partner’s capital a/c Dr.

Realization a/c(Agreed price)

5. For payment to creditors

Any amount paid in cash to creditors, realisation account is debited andcash/bank account is credited.

Realization a/c Dr.

Bank a/c

6. Settlement with the creditors through transfer of asset

When a creditor accepts an asset in part payment no entry is recorded. It isbecause the liability due to the creditors has already been transferred tothe credit of realization account and the asset taken over by the creditor isappearing on the debit side of the realization account. Thus, the debit of theasset cancels the credit of the corresponding liability in the realizationaccount. Sometimes, a creditor may accept part of his payment in cash andpart of his payment by taking over an asset. In this case, the entry will berecorded for cash payment only. For example, a creditor to whom Rs. 10,000was due accepted office equipment worth Rs. 8,000. He will be paidRs. 2,000 in cash by recording the following entry :

Realization a/c Dr. Rs. 2,000

Bank a/c Rs. 2,000

Whenever a creditor takes over an asset, there may be two situations :

(a) When a creditor accepts an asset whose value is more than the amountdue to him, he will pay cash. It is recorded as :

Bank a/c Dr.

Realization a/c

(b) When a creditor accepts an asset as full and final settlement, no journalentry is recorded.


7. Expenses of realization

(a) When realization expenses are paid by the firm

Realization a/c Dr.

Bank a/c

(b) When firm has agreed to pay partner a fixed amount towardsrealization expenses irrespective of the actual realization expenses

Realization a/c Dr.

Partners’ capital a/c

(c) When the actual expenses are paid by the firm on behalf of a partner,the following entry will be recorded :


Bank a/c

(d) However, if a partner himself pays and agreed not to get themreimbursed, no journal entry is recorded.

(e) When the partner agrees to pay the expenses on behalf of the firm,the entry to be recorded :

Realization a/c Dr.


8. When liabilities are paid off

Realization a/c Dr.

Bank a/c

9. When partner discharges a liability

The liability account is transferred from realization account to partner’scapital account by recording the following entry :

Realization a/c Dr.


10. For realization of any unrecorded assets

Bank a/c Dr.

Realization a/c

11. Unrecorded asset taken over by a partner


Realization a/c

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12. For settlement of any unrecorded liability

Realization a/c Dr.

Bank a/c

13. Unrecorded liability taken over by a partner

Realization a/c Dr.Partners’ Capital a/c

14. When the profit (loss) on realization is transferred to partners’ capital accountin their respective profit sharing ratio :

(a) In case of profit on realization

Realization a/c Dr.

Partners’ Capitals a/c(individually)

(b) In case of loss on realization

Partners’ Capitals a/c (individually) Dr.

Realization a/c

15. For transferring accumulated profits and reserve

All accumulated profits and reserves are transferred to the partners’ capitalaccount in their respective profit sharing ratio :

Accumulated profit/reserves Dr.

Partners’ capitals a/c (Individually)

16. Transfer of fictititous assets

All accumulated losses and fictitious assets are debited to the partners’capital accounts in their profit sharing ratio :

Partners’ capitals a/c (Individually) Dr.

Accumulated losses/Fictitious Assets a/c

17. Payment of loans

Any loans due to partners are paid off :

Partner’s loan a/c Dr.

Bank a/c


18. Settlement of capital accounts

(a) If the partner’s capital account shows debit balance, he is to bring inthe necessary cash :Bank a/c Dr.


(b) In case of partners whose accounts show credit balance, the same ispaid off :Partners’ capitals a/c Dr.

Bank a/c

It may be noted that the aggregate amount finally payable to the partnersmust equal to the amount available in the bank and cash accounts. Thus, allaccounts of a firm are closed in case of dissolution.

At times, the Balance Sheet of the firm may not be available on dissolution ofpartnership firm. In such a situation, first of all, all the relevant ledger balancesare worked out and then Balance Sheet of the firm on the date of its dissolutionis prepared. Thereafter, the process of dissolution is undertaken in the same

manner as discussed above.

Illustration 1(Ascertaining the value of assets)

Ram and Shyam share the profits equally. They decided to dissolve their firm.Their liabilities were : Ram’s Capital Rs. 25,000; Shyam’s Capital Rs. 30,000;Creditors Rs. 12,500; Bills payable Rs.7,500; Assets of the firm realizedRs.1,00,000. Prepare a Realization Account.

Solution

Books of Ram and ShyamRealization Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount(Rs.) (Rs.)

Sundry assets 75,0001 Bank 1,00,000Bank: Creditors 12,500

Creditors 12,500 Bills payble 7,500Bills payable 7,500

Capital Accounts:Ram 12,500Shyam 12,500 25,000

Total 1,20,000 Total 1,20,000

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Notes to the Solution

Capital + Liabilities = Assets

Capital + Creditors + Bills payable = Assets

Rs. 25,000 + 30,000 + 12,500 + 7,500 = Rs. 75,0001

Illustration 2(When balance sheet at the time of dissolution is not given)

Kumar, Yash and Zakir commenced business on January 1, 2001 with capitalsof Rs. 1,00,000, Rs. 80,000 and Rs. 60,000 respectively. Profits are shared inthe ratio 4:3:3. Capitals carried interest at 5% p.a. During 2001 and 2002they made profits of Rs. 40,000 and Rs. 50,000 (before allowing interest oncapitals). Drawings of each partner were Rs. 10,000 per year.

On December 31, 2002 the firm was dissolved. Creditors on that datewere Rs. 24,000. The assets realized Rs. 2,60,000 net. Prepare the necessary

accounts to close the books of the firm.

Solution

Books of Kumar, Yash and ZakirPartners’ Capital Accounts

Dr. Cr.

Date Particulars J.F. Kumar Yash Zakir Date Particulars J.F. Kumar Yash JakirRs. Rs. Rs. Rs. Rs. Rs.

2001 2001Dec. 31 Drawings 10,000 10,000 10,000 Jan. 1 Bank 1,00,000 80,000 60,000

Bal. c/f 1,06,200 82,400 61,400 Int. on Capital 5,000 4,000 3,000Dec. 31 Net profit 11,200 8,400 8,400

1,16,200 92,400 71,400 1,16,200 92,400 71,400

2002 2002Dec. 31 Drawings 10,000 10,000 10,000 Jan. 1 Bal. b/f 1,06,200 82,400 61,400

Bal. c/f 1,16,510 87,770 65,720 Int. on capital 5,310 4,120 3,070Net Profit 15,000 11,250 11,250

1,26,510 97,770 75,720 1,26,510 97,770 75,720

Dec. 31 Realization a/c 13,600 10,200 10,200 Jan. 1 Balance b/f 1,16,510 87,770 65,720Bank 102,910 77,570 55,520

Total 1,16,510 87,770 65,720 Total 1,16,510 87,770 65,720


Balance Sheetas at December 31, 2002

Liabilities Amount Assets Amount(Rs.) (Rs.)

Capital : Assets Assets(balancing figure) 2,94,000Kumar 1,16,510Yash 87,770Zakir 65,720 2,70,000Creditors 24,000

Total 2,94,000 Total 2,94,000

Realization AccountDr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount2002 (Rs.) 2002 (Rs.)

Dec31 Assets 2,94,000 Dec31 Bank (Assets) 2,60,000Bank (Creditors) 24,000 Creditors 24,000

Loss transferred to:Kumar’s Capital 13,600Yash’s Capital 10,200Zakir’s Capital 10,200

Total 3,18,000 Total 3,18,000

Bank Account

Dr. Cr.


Dec31 Realization 2,60,000 Dec 31 Realization 24,000(assets) (Creditors)

Capital :Kumar 1,02,910Yash 77,570Zakir 55,520

Total 2,60,000 Total 2,60,000

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Illustration 3(Preparation of Realization Account)

The following is the Balance Sheet of Anju and Manju sharing profits in theratio of 3:2 as on December 31, 2003 :

Balance Sheet as at December 31, 2003


Creditors 19,000 Plant and Machinery 14,000

Loan by Anju’s brother 5,000 Furniture and Fixtures 2,000Loan by Manju 7,500 Investment 5,000General Reserve 1,250 Stock 3,000Capitals : Debtors 10,000 Anju 5,000 Less: provision 500 9,500 Manju 4,000 9,000 Bank 5,750

Profit and Loss 2,500

Total 41,750 Total 41,750

The firm was dissolved on March 31, 2003. As a result,

(a) Anju took over investments at an agreed value of Rs. 4,000 and agreed topay loan taken from her brother

(b) Realization of assets is as follows : Stock Rs. 2,500, Debtors Rs. 9,250,Furniture and Fixture Rs. 2,250, Plant and Machinery Rs. 12,500

(c) Expenses of realization were Rs. 300

(d) Creditors allowed 2.5% discount in full settlement. Record necessaryjournal entries and close the books of the firm.


SolutionBooks of Anju and Manju

Journal

Date Particulars L.F. Debit Credit2003 Amount Amount

(Rs.) (Rs.)

Dec 31 Realization a/c Dr. 34,000Stock 3,000Debtors 10,000Furniture and Fixtures 2,000Plant and Machinery 14,000Investments 5,000

(Transfer of Sundry assets to realization account)

Loan by Anju’s brother a/c Dr. 5,000Sundry creditors a/c Dr. 19,000Provision for doubtful debts a/c Dr. 500

Realization a/c 24,500(Transfer to Sundry Liabilities toRealization Account)

Bank a/c Dr. 26,500Realization a/c 26,500

(Value of assets realized)

Realization a/c Dr. 5,000Anju’s capital a/c 5,000

(For adjustment of liabilities taken over by Anju)

Anju’s capital a/c Dr. 4,000Realization a/c 4,000

(Ajustment of investment taken over by Anju)

Realization a/c Dr. 18,525Bank a/c 18,525

(Payment to creditors at a discount of 2.5%)

Anju’s capital a/c Dr. 1,695Manju’s capital a/c Dr. 1,130

Realization a/c 2,825(Transfer of loss on realization)


Profit and Loss a/c 2,500(Transfer of accumulated loss to capitalaccounts)

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General Reserve a/c Dr. 1,250Anju’s capital a/c 750Manju’ s capital a/c 500

(Transfer of General Reserve toCapital Account)

Manju’s loan a/c Dr. 7,500Bank a/c 7,500

(Loan paid off)


Bank 5,925(Final payment to partners)



Dec31 Stock 3,000 Dec31 Sundry Creditors 19,000Debtors 10,000 Provision for 500Furniture and Fixture 2,000 doubtful debtsPlant and Machinery 14,000 Loan by Anju’s brother 5,000Investments 5,000 Bank (assets realized) 26,500Anju’s Capital 5,000 Anju’s capital 4,000(Anju brother’s loan) (Investment)Bank (Expenses) 300 Capitals (loss onBank (Creditors) 18,525 realization)

Anju 1,695Manju 1,130 2,825


Anju’s Capital AccountDr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

20.03 (Rs.) 2003 (Rs.)

Dec 31 Realization (loss) 1,695 Dec 31 Balance b/f 5,000Realization 4,000 Realization 5,000(Investment) (Anju brother’s loan)Profit and Loss 1,500 General Reserve 750Bank 3,555



Manju’s Capital AccountDr. Cr.


Dec31 Realization (loss) 1,130 Dec 31 Balance b/f 4,000Profit and Loss 1,000 General Reserve 500Bank 2,370


Manju’s Loan AccountDr. Cr.


Dec 31 Bank 7,500 Dec 31 Balance b/f 7,500

Bank Account

Dr. Cr.


Dec31 Balance b/f 5,750 Dec 31 Realization :Realization a/c 26,500 Creditors 18,525(assets realized) Expenses 300

Manju’s Loan 7,500Manju’s Capital 2,370Anju’s Capital 3,555


Illustration 4 (Preparation of Balance Sheet at the time of Dissolution)

X and Y are partners in a firm with a profit sharing ratio of 3:2 respectively.They decided to dissolve the partnership on June 1, 2001. On that date theircapitals stood as Rs. 20,000 and Rs. 10,000, respectively. Amount owed by Yto the firm was Rs. 6,400 and there was a loan by X for Rs. 8,000; Creditorswere Rs. 50,000 and cash Rs. 5,400. The remaining assets other than loan toY and cash, realized Rs. 59,200. Realization expenses amounted to Rs. 2,000.

Prepare the Balance Sheet of the firm as on June 1, 2001 and necessaryledger accounts to close the books of the firm.

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Solution

Books of X and YBalance Sheet as at June 1, 2001


Sundry Creditors 50,000 Cash 5,400X’s Loan 8,000 Y’s Loan 6,400Capitals: Other Assets 76,200

X 20,000 (Balancing figure)Y 10,000 30,000




June Sundry Assets 76,200 June Creditors 50,0001 Cash (expenses) 2,000 1 Cash (Assets

Cash (Creditors) 50,000 realised) 59,200Capitals:Loss onrealisation :X 11,400Y 7,600 19,000

Total 1,28,200 Total 1,28,200

Cash AccountDr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount 2001 (Rs.) 2001 (Rs.)

June Balance b/f 5,400 June Realization 2,0001 Realization 59,200 1 (expenses)

(Assets) Realization 50,000Y’s capital 4,000 (Creditors)

X Loan’s 8,000X’s capital 8,600



X’s Loan AccountDr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

2001 (Rs.) 2001 (Rs.)

June 1 Cash 8,000 June 1 Balance b/f 8,000

Capital AccountsDr. Cr.

Date Particulars J.F. X Y Date Particulars L.F. X Y2001 Rs. Rs. 2001 Rs. Rs.

Loan to Y - 6,400 Balance b/d 20,000 10,000Realization Cash - 4,000(Loss) 11,400 7,600Cash 8,600 -

Total 20,000 14,000 Total 20,000 14,000

Illustration 5 (Realization of Assets by a partner)

Dinesh, Ramesh and Satish were partners in a firm sharing-profits in the ratioof 5:3:2. They agreed to dissolve their partnership firm on March 31, 2002.Dinesh was asked to realize the assets and pay off liabilities. He had to bearthe realization expenses for which he was promised a lump sum amount ofRs. 2,000. Their financial position on that date was as follows :

Balance Sheet as at March 31, 2002


Creditors 27,500 Plant and Equipment 60,000Invst. Fluctuation fund 9,000 Investment 30,000Capitals: Stock 11,000 Dinesh 75,000 Debtors 14,200 Ramesh 30,000 Less Provision for

Doubtful debts 900 13,300Cash 11,200Satish’s Capital 16,000

Total 1,41,500 Total 1,41,500

Dinesh agreed to purchase investments at Rs. 25,000. Ramesh took overstock at Rs. 10,500 and Debtors at Rs. 11,800. Plant and Equipment was soldfor Rs. 45,000. Unrecorded assets realized cash of Rs. 3,000. Actual realization

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expenses amounted to Rs. 1,800. Prepare necessary ledger accounts on thedissolution of firm.

SolutionBooks of Dinesh, Ramesh and Satish

Realization Account

Dr. Cr.


Mar. Plant and Equip. 60,000 Mar. Creditors 27,500

31 Stock 11,000 31 Provision for 900Investment 30,000 doubtful debts

Debtors 14,200 Investment 9,000Dinesh’s Capital 2,000 fluctuation fund(expenses) Dinesh’s Capital 25,000Cash (Payment to 27,500 (Investments)

Creditors) Ramesh’s Capital 10,500(Stock)

Ramesh’s Capital 11,800(Debtors)

Cash (Plant and 45,000Equipment)

Cash (Unrecorded 3,000assets)

Capitals :

(Loss on realization)

Dinesh 6,000

Ramesh 3,600

Satish 2,400 12,000

Total 1,44,700 Total 1,44,700

Cash AccountDr. Cr.


Balance b/f 11,200 Realization (Creditors) 27,500Equipment 45,000 Dinesh’s Capital 46,000Realization 3,000 Ramesh’s Capital 4,100(Unrecorded asset)Satish’s Capital 18,400Total 77,600 Total 77,600


Partner’s Capital

Dr. Cr.

Date Particulars J.F. Dinesh Ramesh Satish Date Particulars J.F. Dinesh Ramesh Satish

Rs. Rs. Rs. Rs. Rs. Rs.

Balance b/f - - 16,000 Balance c/d 75,000 30,000 -Realization 6,000 3,600 2,400 Cash - - 18,400(Loss) Realization 2,000Realization 25,000 - - (Expenses)(Investments)Realization - 10,500 -(Stock)Realization - 11,800 -(Debtors)Cash 46,000 4,100 -

Total 77,000 30,000 18,400 Total 77,000 30,000 18,400

Illustration 6 (Preparation of ledger accounts)

A, B and C are running a hardware shop sharing profits equally. Their financialposition is as under :

Balance Sheet as at March 31, 2003


Accounts Payable 20,000 Land and Buildings 50,000

Bank Loan 7,000 Office Equipment 5,000

B’s Loan 20,000 Stock 40,000

Joint Life Policy Accounts Receivable 30,000Reserve 18,000 Joint Life Policy 18,000

Capitals : Bank 6,000 A Rs. 27,000 B Rs. 34,000 C Rs. 23,000 84,000

Total 1,49,000 Total 1,49,000

Partners agreed to dissolve the firm on that date. You are given the followinginformation regarding dissolution :

1. The Joint Life Policy was surrendered to the insurance company. Thecompany paid a sum of Rs. 11,500 after deducting an amount ofRs. 6,500 towards loan and interest thereon by B against the policy.

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2. Office equipment was accepted by a Accounts Payable for Rs. 7,000 atRs. 3,500 and the balance was paid to him by cheque.

3. Bankers accepted stock worth Rs. 5,000 and the balance in cash.

4. The firm purchased 200 convertible debentures of a leasing company in2001. After sometime the investment was treated as bad and was writtenoff. These debentures were found to be having a market value of Rs. 8,000and were accepted by a creditor at this value.

5. Assets realized in the following manner :

Land and Buildings Rs. 2,00,000

Stock Rs. 30,000

Accounts Receivable Rs. 20,000

6. All the liabilities were paid off. Accounts Payable allowed a discount ofRs. 200.

7. Realization expenses amounted to Rs. 1,800.

You are required to prepare the realization account, bank account andcapital accounts of the partners.

Solution

Books of A, B and C


Date Particulars J.F. Amount Date Particulars J.F. Amount 2003 (Rs.) 2003 (Rs.)

Mar31 Land and Buildings 50,000 Mar31 Accounts payable 20,000Office equipments 5,000 Bank Loan 7,000Stock 40,000 Joint Life Policy 18,000Accounts Receivable 30,000 ReserveJoint Life Policy 18,000 Bank :Bank 20,000 Joint Life 11,500(Accounts PolicyPayable) Land 2,00,000Less: andOffice Equip. 7,000 BuildingDebentures 8,000 Stock 30,000Discount 200 Accounts 20,000 2,61,500

15,200 4,800 Receivable

Total c/f 1,47,800 Total c/f 306,500


Total b/f 1,47,800 Total b/f 306,500Bank 7,000 B’s Capital 6,500(Bank Joint Life PolicyOverdraft)Less: Stock 5,000 2,000Bank (Realization 1,800Expenses)Capitals-Gain onRealization

A Rs. 53,800B Rs. 53,800C Rs. 53,800 1,61,400

Total 3,13,000 Total 3,13,000

Bank Account

Dr. Cr.


Mar Balance b/f 6,000 Mar Realization 4,80031 Realization : 31 (Accounts

Joint Life Policy 11,500 Payable)Land and Buildings 2,00,000 Realization 2,000Stock 30,000 (BankAccounts 20,000 Overdraft)Receivables Realization 1,800Realization (Expenses)Accounts B’s Loan 20,000Receivable Capital :

A 80,800B 81,300C 76,800 2,38,900

Total 2,67,500 Total 2,67,500

A’s Capital AccountDr. Cr.


Mar Bank 80,800 Mar Balance b/f 27,00031 31 Realization (Gain) 53,800


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B’s Capital AccountDr. Cr.


Mar Realization (JLP) 6,500 Mar Balance b/f 34,00031 Bank 81,300 31 Realization (Gain) 53,800


C’s Capital Account

Dr. Cr.


Mar Bank 76,800 Mar Balance b/f 53,80031 31 Realization (Gain) 23,000


Illustration 7 ( Preparation of ledger accounts)

R and K are equal partners. They decided to dissolve their firm as on December31, 2000. Their Balance Sheet on that day stood as under :

Balance Sheet of R and K as at December 31, 2000


Sundry Creditors 10,000 Land and Buildings 20,000Bills Payables 20,000 Furniture and Fittings 14,000Capitals : Lorry 10,000

Ram 15,000 Stock 5,000Krishan 15,000 30,000 Debtors 6,000

Cash 5,000


They decided to take up liabilities : R : Sundry Creditors and K : BillsPayable. Assets realized – Debtors Rs. 4,000; Furniture – Rs. 10,000; StockRs. 4,000; Lorry Rs.15,000 and Land and Buildings Rs. 35,000. Expenses onrealization amounted to Rs. 500.


Record necessary journal entries for the above transactions and preparerealization account, cash account and capital accounts of partners.

Solution

Books of R and K

Journal

Date Particulars L.F. Debit CreditAmount Amount

2000 (Rs.) (Rs.)

Dec 31 Realization a/c Dr. 55,000 Debtors 6,000 Furniture and Fittings 14,000 Stock 5,000 Lorry 10,000 Land and Building 20,000(Asset Accounts Closed)

Sundry Creditors Dr. 10,000Bills Payable Dr. 20,000 Realization a/c 30,000(Transfer of Liability)

Cash a/c Dr. 68,000Realization a/c 68,000

(Assets realised)

Realisation a/c Dr. 500Cash a/c 500

(Expense on Realization paid off)

Realization a/c Dr. 30,000R 10,000K 20,000

(Liabilities taken over by partnersR – Sundry creditors, K –Bills payable)

Realization a/c Dr. 12,500R 6,250K 6,250

(Profit credited)

R Dr. 31,250K Dr. 41,250

Cash a/c 72,500

(Final payment to partners)

ACCOUNTANCY230



Mar31 Sundry Debtors 6,000 Mar31 Sundry creditors 10,000Furniture 14,000 Bills Payable 20,000and Fittings Cash : Assets 68,000Stock 5,000 RealizedLorry 10,000Land and 20,000BuildingsR (Creditors) 10,000K (Bills 20,000Payable)Cash – (Expenses 500on Realization)Capital – (Gain onRealization):R 6,250K 6,250 12,500


Cash AccountDr. Cr.


Dec31 Balance b/f 5,000 Dec31 Realisation – 500Realization - 68,000 ExpensesAssets Capitals –

R 31,250K 41,250 72,500


R’s Capital AccountDr. Cr.


Dec31 Balance c/f 31,250 Dec31 Balance b/f 15,000Realization 10,000CreditorsRealization(Gain) 6,250



Krishan’s Capital AccountDr. Cr.


Dec31 Balance c/f 41,250 Dec31 Balance b/f 15,000

Realization 20,000(Bills Payable)

Realization– Profit 6,250


Illustration 8 (Unrecorded assets and liabilities)

Lata, Geeta and Neeta were partners sharing profits in the ratio of 5:3:1. Theydecided to dissolve the partnership on March 31, 2001 and their balance sheetwas as under.

Balance Sheet Lata, Geeta and Neeta as at March 31, 2001


Sundry creditors 16,600 Plant and Machinery 40,000

Bills payable 3,400 Stock 10,000

Mortgage loan 15,000 Debtors 25,000General reserve 4,500 Less : provision 5,000 20,000

Capital accounts : Cash at bank 19,500 Lata 22,000 Geeta 18,000 Neeta 10,000 50,000


There was a typewriter written off which realised Rs. 500. They had a jointlife policy of Rs. 20,000 which was surrendered for Rs. 5,000. Goodwill wassold for Rs. 5,000. Other assets realized – stock Rs. 6,700; debtors 50%; plantand machinery 10% less than its book value. Creditors were paid Rs. 16,000.But an outstanding bill of Rs. 400 for repairs was to be paid off. Expenses onrealization amounted to Rs. 620.

Give journal entries to record the above transactions and also preparenecessary ledger accounts.

ACCOUNTANCY232

Solution

Books of Lata, Geeta and NeetaJournal

Date Particulars L.F. Debit CreditAmount Amount

2001 (Rs.) (Rs.)Mar 31 Realization a/c Dr. 70,000

Stock 10,000 Sundry Debtors 20,000 Plant and Machinery 40,000( All assets transferred to realization account)Sundry Creditors a/c Dr. 16,600Bills Payable a/c Dr. 3,400Mortgage loan a/c Dr. 15,000 Realization a/c 35,000( All external liabilities transferredrealization account)Realisation a/c Dr. 16,000 Bank a/c 16,000( Payment made to creditors)Realization a/c Dr. 400 Bank a/c 400(Outstanding bill of repairs paid off)Bank a/c Dr. 5,500

Realization a/c 5,500(Unrecorded assets – a typewriter andJ.L.P Surrender value realized Rs. 500 andRs. 5,000 respectively)Bank a/c Dr. 52,700 Realization a/c 52,700(Assets realized at the time of dissolution)Realization a/c Dr. 15,400 Bank a/c 15,400( Bills payable and mortgage paid off)Realization a/c Dr. 620 Bank a/c 620(Realization expenses paid off)Lata’s capital a/c Dr. 5,400Geeta’s capital a/c Dr. 3,240Neeta’s capital a/c Dr. 1,080 Realization a/c 9,720(Transfer of loss to partner’s capital account)General Reserve a/c Dr. 4,500 Lata’s capital a/c 2,500

Geeta’s capital a/c 1,500Neeta’s Capital a/c 500

(General reserve distributed among partners)Lata’s Capital a/c Dr. 19,100Geeta’s Capital a/c Dr. 16,260Neeta’s Capital a/c Dr. 9,420 Bank a/c 44,780(Final payment to partners after dissolution)


Bills Payable Account

Dr. Cr.


Mar31 Realization 3,400 Mar31 Balance b/f 3,400

Mortgage Loan Account

Dr. Cr.


Mar31 Realisation 15,000 Mar31 Balance b/f 15,000

General Reserve Account

Dr. Cr.


Mar31 Capitals : Mar31 Balance b/f 4,500 Lata 2,500 Geeta 1,500 Neeta 500


Stock Account

Dr. Cr.


Mar31 Balance b/f 10,000 Mar31 Realization 10,000

Debtors AccountDr. Cr.



Provision for Bad and Doubtful Debts AccountDr. Cr.


Mar31 Realization 5,000 Mar31 Balance b/f 5,000

ACCOUNTANCY234

Creditors AccountDr. Cr.


Mar31 Realization a/c 16,600 Mar31 Balance b/f 16,600

Plant and Machinery AccountDr. Cr.



Realization AccountDr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount2001 (Rs.) 2001 (Rs.)

Mar31 Stock 10,000 Mar31 Provision for 5,000Debtors 25,000 bad debtsPlant and Machine 40,000 Sundry creditors 16,600Bank : Bills payable 3,400

Sundry Mortgage loan 15,000creditors 16,000 Bank – assetsBills realized :payable 3,400 Stock 6,700Mortgage 15,000 34,400 Debtors 12,500loan Plant and 36,000Bank : (repairs 400 Machinery 55,200outstanding) Bank – unrecordedRealization 620 assets realised –expenses Goodwill 2,500

Typewriter 500Jointlife policy 2,500 5,500Partner Capitals –Loss :

Lata : 5,400Geeta : 3,240Neeta : 1,080 9,720

Total 1,10,420 Total 1,10,420

Capital Account

Dr. Cr.Date Particulars J.F. Lata Geeta Neeta Date Particulars J.F. Lata Geeta Neeta

2001 Rs. Rs. Rs. 2001 Rs. Rs. Rs.

Mar31 Realization 5,400 3,240 1,080 Mar31Balance b/f 22,000 18,000 10,000

(Loss) General

Bank 19,100 16,260 9,420 Reserve 2,500 1,500 500

Total 24,500 19,500 10,500 Total 24,500 19,50010,500


Bank AccountDr. Cr.


Mar31 Balance b/f 19,500 Mar31 Realization 34,400Realization (liabilities)(Assets Realization 400Realized) 55,200 (unrecordedRealization 5,500 liabilities)(Unrecorded Realization 620assets) (Expenses)

Capitals :Lata 19,100Geeta 16,260Neeta 9,420 44,780


Illustration 9(Preparation of ledger accounts)

Following is the Balance Sheet of Raman and Ramesh on June 30, 2002.


Sundry creditors 20,000 Goodwill 10,000Bills payable 20,000 Building 25,000Bank overdraft 10,000 Plant and fittings 25,000Mrs. Raman’s loan 20,000 Investment 15,300Ramesh’s loan 10,000 Stock 8,700Investment fluctuation 2,800 Debtors 17,000fund Less provisionEmployee’s provident 1,200 for bad debts 2,000 15,000fund Bills receivable 10,000General reserve 2,000 Cash at bank 13,000Raman’s capital 20,000 Profit and loss 4,000Ramesh’s capital 20,000

Total 1,26,000 Total 1,26,000

The firm was dissolved on June 30, 2002 and following was the position :

1. Raman agreed to pay off his wife’s loan.2. Debtors realized Rs. 12,000.3. Ramesh took away all the investments at Rs. 12,000.4. Other assets realized as follows :

ACCOUNTANCY236

Plant and Fittings 20,000Building 50,000Goodwill 6,000

5. Sundry creditors and Bills payable were settled at 5% discount.6. Raman accepted stock at Rs 8,000 and Ramesh took over bills receivable

at 20% discount.7. Realization expenses amounted to Rs. 2,000.

Record journal entries and also prepare various ledger accounts.

Solution

Books of Raman and RameshJournal

Date Particulars L.F. Debit Credit2002 Amount Amount

(Rs.) (Rs.)

June 30 Realization a/c Dr. 1,11,000Investments 15,300

Stock 8,700 Bills receivable 10,000 Debtors 17,000 Plant and fittings 25,000 Buildings 25,000 Goodwill 10,000(Sundry asset accounts closed bytransferring to Realization accounts)

‘’ Provision for bad and doubtful debts a/c Dr. 2,000Sundry creditors Dr. 20,000Bills payable Dr. 20,000Bank overdraft Dr. 10,000Mrs. Raman’s loan Dr. 20,000Employees provident Dr. 1,200Investment fluctuation fund Dr. 2,800 Realization a/c 76,000(Sundry external liabilities transferred toRealization account)

‘’ Realization a/c Dr. 38,000 Bank a/c 38,000(Payment to creditors and bills payable)


Realization a/c Dr. 11,200 Bank a/c 11,200(Payment of bank overdraft andemployees’ provident fund)

Realization a/c Dr. 2,000 Bank a/c 2,000(Payment of realization expenses)

Realization a/c Dr. 20,000 Raman’s Capital a/c 20,000(Mrs. Raman’s loan paid off by Raman)

Bank a/c Dr. 88,000 Realization a/c 88,000(Assets realized)

Ramesh’s Capital a/c Dr. 20,000Raman’s Capital a/c Dr. 8,000 Realization a/c 28,000(Bills receivable taken over by Rameshand investments and stock taken overby Raman)

Realization a/c Dr. 9,800 Ramesh’s Capital a/c 4,900 Raman’s Capital a/c 4,900(Profit on realization)

Ramesh’s loan a/c Dr. 10,000 Ramesh’s Capital a/c 10,000(Ramesh’s loan transferred to his capital)

General Reserve a/c Dr. 2,000 Ramesh’s Capital a/c 1,000 Raman’s Capital a/c 1,000(General reserve distributed)

Raman’s Capital a/c Dr. 2,000Ramesh’s Capital a/c Dr. 2,000 Proft and Loss a/c 4,000(Transfer of loss to partners’ capitalaccounts)

Raman’s Capital a/c Dr. 35,900Ramesh’s Capital a/c Dr. 13,900 Bank a/c 49,800(Final payment to partners)

ACCOUNTANCY238

Realization Account

Dr. Cr.Date Particulars J.F. Amount Date Particulars J.F. Amount2002 (Rs.) 2002 (Rs.)

June Investments 15,300 June Provision for bad 2,00030 Stock 8,700 30 and Doubtful

Bills receivable 10,000 debtsDebtors 17,000 Sundry creditors 20,000Plant and fittings 25,000 Bills payable 20,000Buildings 25,000 Bank overdraft 10,000Goodwill 10,000 Mrs. Raman’s loan 20,000Bank – Employees’ P.F. 1,200Creditors 19,000 38,000 InvestmentBills Payable19,000 Fluctuation 2,800Bank – Bank 10,000 FundOverdraft Bank –Employee’s P.F. 1,200 Debtors 12,000Bank (Realization 2,000 Plant and 20,000Expenses) FittingsRaman’s Capital : 20,000 Building 50,000(Mrs. Roman’s loan) Goodwill 6,000 88,000Capital Account: Ramesh’s capital– Raman 4,900 Bills Receivable 8,000

Ramesh 4,900 9,800 Raman’s Capital–Stock 8,000Ramesh’s Capital-Investment 12,000

Total 1,92,000 Total 1,92,000

Bank AccountDr. Cr.

Date Particulars J. Amount Date Particulars J. Amount2002 F. (Rs.) 2002 F. (Rs.)

June Balance b/f 13,000 June Realization :30 Realization : 30 Creditors 19,000

Debtors 12,000 Bills Payable 19,000 38,000Plant and 20,000 RealizationFittings : Expense 2,000 Buildings 50,000 Realization – Goodwill 6,000 88,000 Employees’ 1,200

Provident fundRealization – Bank Overdraft 10,000 Raman’s Capital 35,900 Ramesh’s Capital 13,900

Total 1,01,000 Total 1,01,000


Capital Accounts

Dr. Cr.

Date Particulars J.F. Raman Ramesh Date Particulars L.F. Raman Ramesh2002 Rs. Rs. 2002 Rs. Rs.

June Realization – June Balance b/f 20,000 20,00030 Investment 12,000 30 Loan – 10,000

Bills receivable 8,000 Mrs. Raman’s 20,000 –Stock 8,000 loanProfit and Loss 2,000 2,000 General Reserve 1,000 1,000Bank - 35,900 13,900 Realization 4,900 4,900(settlement (Profit)amount)

Total 45,900 35,900 Total 45,900 35,900

Terms introduced in this chapter

� Dissolution of Partnership

� Dissolution of Firms

� Partnership at Will

� Realization account

� Compulsory dissolution

� Dissolution by notice

Summary

1. Dissolution of partnership firm

The dissolution of a firm implies the discontinuance of the partnership business

and separation of economic relation between the partners. In the case of a

dissolution of a firm, the firm closes its business altogether and realizes all its

assets and settles all liabilities. The payment is made to the creditors, first out of

profits and assets realized, next out of the contributions made by the partners in

their profit sharing ratio. When the final payment is made to the partners for their

due share, the books of the firm are closed.

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2. Dissolution of Partnership

A partnership gets terminated in case of admission, retirement and death of a

partner. But the firm continues its business.

3. Realization Account

The Realization Account is prepared to record the transactions relating to sale andrealization of assets and settlement of creditors. Any profit or loss arising out ofthis process is shared by the partners in their profit sharing ratio. Partners arepaid off in the final settlement, if any sum is due to them. At the end Cash/BankAccount is closed by making payment to partners.

Questions and Exercises

1. Objective Type Questions

A. On the dissolution of a firm the cash-on-hand is transferred to :

(i) Realization Account

(ii) Capital Accounts of the partners in profit sharing ratio

(iii) Cash Account

(iv) Creditors’ Account.

B. On dissolution of a partnership, the realization account is debited with

(i) All the liabilities of the firm

(ii) Cash received on the sale of the assets

iii) Any asset taken over by one of the partners

(iv) All assets to be realized.

C. On dissolution of a firm, creditors are paid out of

(i) Profits, realized assets, and contributions by partners

(ii) Contributions by partners, realized assets and profits

(iii) Realized assets, profits, contributions by partners

(iv) None of the above.

2. Short Answer Questions

(i) What is Realization Account?

(ii) List the order of payment to creditors.

(iii) How deficiency of creditors is paid off?


Problems

3. Gurmeet, Harinder and Jagat are in partnership sharing profits and losses inthe ratio of 5:3:2. They were trading in readymade garments for sports persons.They started facing problems due to changes in fashions and therefore, agreedto dissolve the firm on March 31, 2002, when their Balance Sheet stood asfollows :

Gurmeet, Harinder and JagatBalance Sheet as at March 31, 2002


Notes Payable 50,800 Land and building 80,000Sundry Creditors 29,200 Cash 30,000Advance from Harinder 40,000 Marketable securities 20,000Current accounts Sundry debtors 50,000Gurmeet 2,400 Less : Provision forHarinder 1,460 Doubtful debts 11,760 38,240Jagat 1,740 5,600Capitals : Stock 34,360Gurmeet 50,000 Equipment 23,000Harinder 30,000Jagat 20,000 1,00,000Total 2,25,600 Total 2,25,600

They realized as follows :Land and buildings Rs.70,000; Marketable Securities Rs.18,000; SundryDebtors Rs. 47,000; Stock Rs.30,000; Equipment Rs. 22,240.

Close the books of the firm showing the necessary ledger accounts.

4. Deshmukh and Desai started a partnership firm selling tinned food productson April 1, 2000. They are contributed Rs. 30,000 and Rs. 20,000. Profits tobe shared in proportion to their capitals. They conducted the business for aperiod of three years, the business results of which are as follows :

For the 1st year ending on March 31, 2001 – Profit of Rs.30,000For the 2nd year ending on March 31, 2002 – Profit of Rs.22,200For the 3rd year ending on March 31, 2003 – Loss of Rs. 5,380

As the business slumped into making losses, they decided to dissolve the firmon March 31, 2003. The partners were drawing Rs. 4,000 each p.a. Creditorsamounted to Rs. 16,400 on the date of dissolution. Assets of the firm weresold for Rs. 75,000 at an expense of Rs. 550.Close the books of the firm and prepare necessary ledger accounts.

ACCOUNTANCY242

5. Naresh and Munish are equal partners running general stores including somefancy goods. On March, 31, 2000, they decided to dissolve the firm. Theirfinancial position on that day is given below :

Naresh and MunishBalance Sheet as at March 31, 2000


Accounts Payable 1,800 Bank 2,000Capitals : Account Receivable 3,800Naresh 12,000 Stock 10,000Munish 8,000 20,000 Furniture 2,000

Lease 4,000Total 21,800 Total 21,800

Various assets realized as under : Lease Rs. 6,000; Furniture Rs. 2,200; StockRs. 9,200; Debtors Rs. 3,600. Creditors agreed to accept Rs. 1,720 as finalsettlement. Expenses amounting to Rs. 128 were spent for realization. Preparethe required ledger accounts to close the books of the firm. Record necessaryjournal entries.

6. Read the following information :

X, Y and ZBalance Sheet as at 31st March, 2001


Accounts Payable 25,200 Land and Buildings 11,750

Joint Life Policy Reserve 5,000 Cash at Bank 3,250General Reserve 6,000 Stock 8,000Capitals : Accounts Receivable 10,050

X 15,000 Investments 31,300Y 10,000 Office Equipment 1,850Y 5,000 30,000


X, Y and Z were sharing profits in proportion to their capitals. They agreed todissolve the firm on the date. X and Y took over investments and stock atRs. 9,000 and Rs. 8,750, respectively. Office equipment was taken over by Zat book value. Accounts receivable and land and buildings realized Rs. 28,500and Rs. 12,500, respectively. The firm incurred Rs. 225 as realization expense.


A bill receivable discounted by bankers was dishonoured and the firm had topay Rs. 250 to the bankers.

Record journal entries and prepare the ledger accounts to close the books ofthe firm.

7. The following is the Balance Sheet of Arun and Tarun sharing profits 3:2 as onDecember 31, 2001 :


Creditors 40,000 Cash 14,000Mrs. Arun’s Loan 10,000 Stock 8,000Tarun’s Loan 15,000 Debtors 18,000General Reserve 5,000 Less : Provisions 1,000 17,000Capitals : Furniture 4,000Arun 10,000 Plant 30,000Tarun 8,000 18,000 Investments 10,000

Profit and Loss 5,000Total 88,000 Total 88,000

The firm was dissolved on December 31, 2001 and the following was the result:

(a) Arun took over investments at Rs. 8,000 and agreed to pay off the loan ofhis wife.

(b) The asset realized as follows :Stock – Rs. 2,000, Debtors – Rs. 20,500, Furniture Rs. 1,000 more,Plant – Rs. 20,000 less.

(c) Expenses of realization were Rs.1,200.(d) Creditors were paid off less 3% discount.Show ledger accounts to close the books of the firm.

8. Amar, Akbar and Anthony are partners sharing profits in the proportion of1/2:1/3 and 1/6, respectively. The firms’ Balance Sheet of March 31, 2001was as follows :


Sundry Creditors 19,000 Cash at Bank 2,500Bills Payable 5,000 Debtors 16,000Reserve Fund 12,000 Less : Provision 500 15,500Capital Account : Stock 25,000Amar 40,000 Motor Vans 8,000Akbar 30,000 Plant and Machinery 35,000Anthony 25,000 95,000 Factory Buildings 45,000

Total 1,31,000 Total 1,31,000

ACCOUNTANCY244

Assets realized Rs. 1,20,000. Creditors were paid off in full. Expenses ofrealization amounted Rs. 5,000. Close the books of accounts.

9. Ram, Shyam and Abrar were partners sharing profits and losses in the ratio of2:2:1. On January 1, 2002, their Balance Sheet was as follows :


Sundry Creditors 12,000 Cash in Bank 12,200General Reserve 5,000 Debtors 8,000Capital Accounts : Less : Provision 200 7,800

Ram 15,000 Stock 6,000Shyam 12,000 Furniture 2,000Abrar 6,000 33,000 Buildings 22,000


The firm was dissolved on that date, The assets realized as under :

Debtors Rs. 7,000Stock Rs. 5,000Furniture Rs. 1,000Buildings Rs. 25,000

The creditors were settled for Rs. 11,000. It was found, however, that therewas a liability for Rs. 3,000 for damages which had to be paid.The expenses of dissolution amounted to Rs.1,000.

Give the Realization Account, the Capital Accounts of the partners and theBank Account.

10. A, B and C commenced business on January 1, 2000, with capitals ofRs. 50,000, Rs. 40,000 and Rs. 30,000, respectively. Profits were shares inthe ratio of 4:3:3. During 2000 and 2001 they made profits of Rs. 20,000 andRs. 25,000 respectively. Each partner withdrew Rs. 5,000 per year.

On 31st December, 2001, the firm was dissolved. Creditors and cash on thatdate were Rs.12,000 and Rs. 2,000 respectively. The assets realized wereRs. 1,50,000. Creditors were settled for Rs.11,500. Realization expenses wereRs. 500. Prepare the Realization and Cash Accounts.

11. Mohan, Sohan and Rohan were in partnership sharing profits equally. Theydecided to dissolve the partnership.

The assets and liabilities as on December 31, 2003, the date of dissolution,were as follows :


Balance Sheet of Mohan, Sohan and Rohan as at Dec 31, 2003


Sundry Creditors 18,000 Cash 2,000Capital Accounts : Sundry Assets 52,000Mohan 25,000 Rohan’s Capital 1,500Sohan 12,500 37,500

55,500 55,500

It is agreed among partners that Mohan takes over the assets at a value ofRs. 48,000 liabilities at a Value of Rs. 17,000. The partners are required toadjust the account as between themselves on a cash basis.Close the books of the firm.

12. The Balance Sheet of Bora, Singh and Ibrahim sharing profits in the ratio of3:2:1, respectively stood as follows on June 30, 2002.

Balance Sheet of Bora, Singh and Ibrahim as at June 30, 2002


Creditors 50,400 Cash 3,700Joint Life Policy Reserve 10,000 Stock 20,100Reserve Fund 12,000 Debtors 62,600Bora Rs.30,000 Investment 16,000Singh Rs.20,000 Furniture 6,500Ibrahim Rs.10,000 60,000 Buildings 23,500

Total 1,32,400 Total 1,32,400

The firm was dissolved as on that date. For the purpose of dissolution, theinvestment were valued at Rs.18,000 and stock at Rs. 17,500. Bora agreed totake over Investment and Singh to take over stock. Ibrahim took over thefurniture at book value. Debtors and Buildings realized Rs. 57,000 andRs. 25,000 respectively. Expenses of realization amounted to Rs. 450.

In addition, one bill for Rs. 500 under discount was dishonoured and had tobe taken up by the firm.

Prepare the necessary ledger accounts to close the books of the firm.

13. Give the necessary journal entries in each of the following alternative cases :

(i) Realization expenses amounted to Rs. 500

(ii) Realization expenses amounted to Rs. 500 and the partner has to bearrealization expenses.

ACCOUNTANCY246

(iii) ‘A’ one of the partners was to bear all the realisation expenses forwhich he was given a commission of 2 % of net cash realised fromdissolution. Cash realised from assets was Rs 25,000 and cash paidfor liabilities amounted to Rs 5,000.

14. ‘Z’ & ‘Y’ are two partners sharing profits in the ratio of 2 :1 . Give the journalentry at the time of dissolution in the following cases.

(i) Deferred revenue advertising expenditure appeared at Rs 30,000.

(ii) Profit & Loss a/c was appearing on the asset side of balance sheet atRs 60,000.

(iii) An unrecorded investment of Rs 6,000.

Answers

Dissolution

3. Loss on Realization Rs 8,360Amount paid to Gurmeet Rs. 48,220Amount paid to HarminderRs. 28,952Amount paid to Jagat Rs. 20,068

4. Sundry assets before dissolution Rs. 89,220;Less on Realization Rs. 14,770Amount paid to Deshmukh Rs. 37,230.and Desai Rs. 20,820.

5. Profit on Realization Rs. 1,152;Amounts paid to Naresh Rs. 12,576 andMunish Rs. 8,576.

6. Profit on Realization Rs. 2,175Payment to x Rs. 10,088Payment to y Rs. 3,975Payment to z Rs. 4,512.

7. Loss on Realization Rs. 23,500Amount paid by Arun Rs. 2,100Amount paid by Tarun Rs. 1,400

8. Loss on Realization : Rs 3,500Amount paid to Amar : Rs 47,750Amount paid to Akbar : Rs 29,500Amount paid to Anthony : Rs 24,750

9. Loss on Realization : Rs 2,800Amount paid to Ram : Rs 15,880Amount paid to Shyam : Rs 12,880Amount paid to Abrar : Rs 6,440


10. Memorandum B/S (Total) : Rs 1,47,000Profit on Realization : Rs 5,000Amount/Cash paid to A : Rs 60,000Amount/Cash paid to B : Rs 45,000Amount/Cash paid to C : Rs 35,000

11. Loss on Realization : Rs 3,000Amount/Cash paid to Sohan : Rs 11,500Amount/Cash paid by Mohan : Rs 7,000Amount/Cash paid by Rohan : Rs 2,500

12. Loss on Realization : Rs. 5,650.

Documents

DISSOLUTION OF A PARTNERSHIP FIRM - gcaofficial.org · continues, only the partnership relation is reconstituted, but in case of dissolution of firm, ... Where the partnership deed