Chapter 14

Dissolution of Partnership

INTRODUCTION

Dissolution means breaking of relationship among the partners. As per Section 39 of the Indian Partnership Act 1932, the dissolution of firm implies that not only partnership is dissolved but the firm loses its existence, i.e. after dissolution the firm does not remain in business.

The only business to be carried out, after dissolution, is that all the assets are disposed off and liabilities are paid off and only the balance left out is to be paid to partners in settlement of their accounts. At this stage, one has to understand the basic salient features of Dissolution of Partnership and Dissolution of Firm.

OBJECTIVE 1: DISSOLUTION OF PARTNERSHIP

A partner’s change, without affecting the continuity of business, may be said as dissolution of partnership. When a partnership may be dissolved? A partnership is dissolved in any one of the following cases:

1.1 When May a partnership may be dissolved?

1. Change in profit sharing ratio among partners
2. Admission of a new partner
3. Retirement of a partner
4. Death of a partner
5. Expiry of the period of partnership
6. Completion of firm’s venture
7. Insolvency of a partner
8. Merger of one partnership firm into another

1.2 Dissolution of a Firm

Dissolution of a firm occurs in the following cases:

1. Dissolution by agreement:
   1. All the partners agree to dissolve the firm.
   2. As per the terms of partnership agreement.
2. Compulsory dissolution: Firm is dissolved compulsorily:
   1. In case, all the partners or all except one partner become insolvent or insane.
   2. If the business becomes illegal.
   3. Where all the partners except one decide to retire from the firm.
   4. Where all the partners except one die.

1.3 Dissolution by Notice

In case of partnership at capital, notice by one partner, seeking dissolution of the firm.

1.4 Dissolution by Court

A court may order for dissolution if a suit is filed by a partner, as per Section 44 of Indian Partnership Act, 1932 situations:

1. A partner becomes insane
2. A partner commits breach of agreement willfully
3. If a partner’s conduct affects the business
4. If a partner transfers his interest to a third party
5. If the business cannot be continued
6. If a partner becomes incapable of doing business
7. If a court thinks dissolution to be just and equitable on any ground

After studying the features of dissolution of partnership and dissolution of firm, one can easily distinguish between dissolution of partnership and dissolution of firms which is depicted in the tabular form below:

OBJECTIVE 2: DISTINCTION BETWEEN DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF FIRM

Basis of Difference	Dissolution of Partnership	Dissolution of Firm
1. Discontinuance of business	It does not affect the continuation of business	It affects the business. Firm is closed
2. Assets and liabilities	Assets and liabilities are revalued. New Balance Sheet is prepared	Assets are sold and realised. Liabilities are paid off
3. Closure of books	No need to close account books, as the business continues to operate	All the books of accounts are closed
4. Intervention by court	Court does not intervene	Court has inherent powers to intervene. By its order, a firm can be dissolved
5. Economic relationship	Economic relationship among partners may remain or change	Economic relationship among partners comes to an end

OBJECTIVE 3: TREATMENT OF SOME ACCOUNTS AT THE TIME OF DISSOLUTION

3.1 Treatment of Loss: Section 48 (a)

Losses should be treated in the following order. Losses should be paid

1. out of profit of the business, then
2. out of capital, then and finally
3. by partners in their sharing ratio

3.2 Treatment of Assets: Section 48 (b)

The assets of the firm shall be applied in the following order:

1. Payment of firm’s debts to third parties
2. Payment of partner’s advances (loans)
3. Payment to each partner’s capital
4. Any amount left out after these, is to be divided among the partners in their sharing ratio

3.3 Treatment of Firm’s Debts and Private Debts

Following are the provisions as per Section (49):

1. A business property is to be used first to settle firm’s debt and then only to his private debt
2. A private property is to be used first to settle private debts and then only to firm’s debt

Now, one has to understand the difference between firm’s debt and private debt. They are as follows:

Basis of Difference	Firm’s Debt	Private Debt
1. Meaning	Debts owed by a firm to outsiders	Debt owed by a partner to any other person
2. Liability	All the partners are liable jointly and severally to firm’s debt	Only the concerned partner is held liable
3. Application of firm’s property	Firm’s debts will be applied first	Excess, if any, will be applied to private debts
4. Application of private property	Last priority, i.e. after the disposal of private debts	First priority to individual, i.e. private debts

OBJECTIVE 4: ACCOUNTING TREATMENT

In the event of dissolution of firms, books of accounts are to be closed.

4.1 Preparation of Realisation Account

The account, which has to be prepared to determine profit of loss on realising the assets and discharge of liabilities, is referred to as “Realisation Account.”

4.2 Meaning and Features of Realisation Account

Features of Realisation Account:

1. In Realisation Account, sale of assets is recorded at its realised value.
2. Payment to creditors is recorded at the settlement value.
3. After all the transactions have been recorded, there will be balance –which may be profit or loss.
4. Profit arises when
   1. assets are realised at more than their Book Value
   2. liabilities are settled at less than their Book Value
5. If the two conditions are vice versa, the net result will be loss.
6. The net profit or loss on realisation is to be transferred to partner’s Capital Accounts in their ratio.

Distribution between Revaluation Account and Realisation Account

Basis of Distinction	Revaluation Account	Realisation Account
1. Meaning	It records the effect of revaluation of assets and liabilities	It records the actual realization of assets and settlement of all liabilities
2. Time of preparation	It is prepared at the time of admission, retirement or death of a partner	It is prepared at the time of dissolution of a firm
3. Items to be recorded	In this account only the items that cause change in the value of change of assets and liabilities are recorded	In this account, all the items – all assets and liabilities are recorded
4. Aim or object	Its main aim of preparation is to make necessary adjustments and liabilities	Its main aim of preparation is to determine the net profit/loss on realisation of assets and settlement of liabilities
5. Number of times	This may be prepared on a number of occasions during the life time of the firm	This is prepared only once, i.e. at the time of dissolution of the firm

4.3 Procedure to record entries for various items and preparation of Realisation Account

Step 1:     Account of all assets has to be closed. To close the accounts of assets, entry is:

 

	Realisation Account	Dr.
	To All Assets A/c
	(Closure of all assets accounts by transferring to Realisation A/c)

Note:

1. Cash in hand/at bank shall not be transferred here.
2. Only gross value will have to be transferred
3. Factious assets are not transferred to Realisation A/c

For example, accumulated loss and deferred revenue expenses are not transferred to Realisation Account. They have to be transferred to their Capital Accounts separately in their sharing ratio.

Step 2:     Accounts of all liabilities/credits have to be closed.

 

	Sundry Creditors A/c	Dr.
	Bills Payable A/c	Dr.
	To Realisation A/c
	(Liabilities accounts are closed by transferring to Realisation A/c)

Note: Accumulated profits, reserves, loan should not be transferred to Realisation Account.

Step 3:     For realisation of assets:

The amount actually received (realised) is to be debited to Cash/Bank A/c and Realisation A/c is credited with the amount realised (received).

	Cash/Bank A/c	Dr.
	To Realisation A/c
	(Amount realised on assets)

Step 3a:     At times, a partner may take an asset. In such case, instead of Cash/Bank Account, his Capital Account has to be debited.

 

	Partner’s Capital A/c	Dr.
	To Realisation A/c
	(Asset taken over by the partner)

Step 4:     For payment of liabilities:

 

	Realisation A/c	Dr.
	To Cash A/c
	(Payment of liabilities)

Step 4a:     At times, a partner may take over a liability

 

	Realisation A/c	Dr.
	To Partner’s Capital A/c (partner discharged a liability)

Step 5:     For expenses on realisation:

 

	Case 1: Expenses met by the firm
	Realisation A/c	Dr
	To Cash A/c
	(Realisation expenses)
	Case 2: Partners bear the expenses
	Realisation A/c	Dr.
	To partner’s Capital A/c
	(Expenses met by the partner)
	Case 2A: Sometimes (case 2) is treated as drawing’s by the partners
	Partner’s Capital A/c	Dr.
	To Bank A/c
	(Expenses treated as partner’s drawings)

Step 6:     For closing of Realisation Account:

After making all the entries closing balance, i.e. profit or loss on realisation, is transferred to Capital Accounts of the partners in their profit sharing ratio.

Step 6a:     Profit on realisation:

 

	Realisation A/c	Dr.
	To partner’s Capital A/c or Current A/c
	(profit on realisation transferred to partner’s Capital Account)

Step 6b:     Loss on realisation:

 

	Partner’s Capital A/c	Dr.
	To Realisation A/c
	(Loss on realisation transferred to Partner’s Capital Account)

Illustration: 1

R and S are partners sharing profits equally and they have decided to dissolve the firm. Their liabilities are bills payable Rs 10,000; creditors Rs 20,000. Their capitals are Rs 50,000 and Rs 30,000, respectively. All the assets of the firm are realised at Rs 1,50,000. You area required to pass necessary journal entries and prepare Realisation Account.

Solution

Students must take into account all the six steps discussed. After passing entries, Realisation Account is prepared.

Step 1: Value of assets is not given in the question. So it has to be determined first. Value of Sundry Assets may be determined by preparing “Memorandum Balance Sheet.” It is prepared as:

 

or

The same can be determined by applying the equation

 

	Assets	=	Capital + Liabilities
		=	{Rs 50,000 + Rs 30,000} + {Rs 10,000 + Rs 20,000}
			(R)    (S)    (Bills Payable)    (Creditors)
			(Given)    (Given)    (Given)    (Given)
		=	Rs 80,000 + 30,000
		=	Rs 1,10,000

Step 2: Journal entries to be recorded in the order as

For closing the asset (values):

Here, value of Sundry Assets as determined in Step 1 is Rs 1,10,000

 

		Rs	Rs
Realisation Account	Dr.	1,10,000
To All Assets A/c			1,10,000
(Closure of all assets accounts by transferring to Realisation A/c)

Step 3: For closing of accounts of all liabilities:

 

Sundry Creditor A/c	Dr.	20,000
Bills Payable A/c	Dr.	10,000
To Realisation A/c			30,000
(Liabilities accounts are closed by transferring to Realisation A/c)

Step 4: For assets realised (actual amount):

 

Cash/Bank Account	Dr.	1,50,000
To Realisation A/c			1,50,000
(Realised value of accounts)

Step 5: For payment of liabilities

 

Realisation A/c	Dr.	30,000
To Cash/Bank A/c
To Bills Payable A/c			10,000
Creditors			20,000
(All liabilities are paid off)

Step 6: After having entered all entries, the net result, i.e. profit or loss on realization, has to be recorded (refer the next step). Here it is profit. This amount Rs 40,000 has to be apportioned in the profit sharing ratio among the partners. Here Rs 40,000 has to be divided equally (given in the question), i.e. for R: Rs 20,000 and for S: Rs 20,000. This amount is transferred to their Capital Accounts finally.

 

	Realisation Account	Dr.	40,000
	To Partner’s Capital A/c
	R’s Capital A/c			20,000
	*S’s Capital A/c			20,000

(Net profit on realisation transferred to the Capital Accounts of the partners)

Step 7: Preparation of Realisation Account

 

Illustration: 2

X, Y and Z are partners sharing profit in the ratio (5:3:2). They decided to dissolve the firm. On Dec 31, 2009 the Balance Sheet of the firm was as follows:

Additional Information: X took over the building at the value of Rs 80,000; cash realised: Investments Rs 4,500; Book Details Rs 1,500; Stock Rs 11,000, Z agreed to take over the creditor at 20% discount. Realisation expenses amounted to Rs 1,000. You are required to pass necessary normal entries and prepare Realisation Account.

Solution

Step 1: All assets accounts have to be closed. For this refer the assets in the Balance Sheet. Transfer one after one and the total value of all assets to be debited with the Realisation Account (except cash).

 

		Rs	Rs
Realisation Account	Dr.	89,000
To Building A/c			70,000
To Investment A/c			5,000
To Sundry Debtors A/c			2,000
To Stock A/c			12,000
(All assets except cash are transferred to Realisation A/c)

Step 2:     For closing of liabilities:

 

Sundry Creditors A/c	Dr.	5,000
To Realisation A/c			5,000
(Liabilities transferred to Realisation A/c)

Step 3:    Amount actually realised on assets:

 

Cash/Bank A/c	Dr.	17,000
To Realisation A/c			17,000
[Investments — Rs 4,500; Debtors Rs 500 Stock Rs 11,000 — Realisation of Assets]

Step 3a: For assets taken over by a partner:

 

X’s Capital A/c	Dr.	80,000
To Realisation A/c			80,000
(Value of Asset taken by X)

Step 4:     Discharge of liabilities:

(Z – a partner agreed to battle the creditors at 20% discount)

Step 4a:

 

Realisation A/c	Dr.	4,000
To Z’s Capital A/c			4,000
(Z agreed to discharge the liability Rs 5,000 − 20% of Rs 5,000, i.e. 1,000 = Rs 4,000)

Step 5:     For realisation expenses

 

Realisation A/c	Dr.	1,000
To Cash/Bank A/c			1,000
(Realisation expenses entered)

Step 6:     For profit/loss in Realisation Account

 

Realisation A/c	Dr.	8,000
To X’s Capital A/c			4,000
To Y’s Capital A/c			2,000
To Z’s Capital A/c			1,600
(Profit is realisation transferred to Capital Accounts of partners in the ratio 5:3:2)

Step 7:     Preparation of Realisation Account.

 

So far, we have discussed the important six steps for recording Journal Entries to compute “Realisation Account.” Now, we have to discuss three more important items to be considered for treatment of accounts at the time of dissolution of firm.

Case(1): Partner’s Loan Amount

Entries for Partner’s Loan, Partner’s Capital Account, Bank and Cash Account, Goodwill and Unrecorded Assets and Liabilities.

Step 7:

• A loan to firm by a partner is credited in this account
• Then this loan is paid off after payment of liabilities to outsiders Entry is:

  Partner’s Loan A/c Dr.

  To Cash/Bank A/c

  (Payment of Partner’s Loan)

Case (2): Partner’s Capital Account

• Balances of Capital Accounts and Current Accounts are recorded here
• In case, if partners take over firm’s assets, these items are recorded on the Debit side of their Capital Account
• If the partners take over firm’s liabilities, these items are recorded on the Credit side of their Capital Accounts

Step 8a:     Entry for undistributed profit or reserve:

 

	Profit and Loss A/c	Dr.
	Reserve Fund A/c	Dr.
	To Partner’s Capital A/c

Step 8b:     Cash brought by partners for deficiency in capital:

 

	Cash/Bank A/c	Dr.
	To Partner’s Capital A/c

Step 8c:     Payment to partners or to close partners Capital Accounts:

 

	Partner’s Capital A/c	Dr.
	To Cash/Bank A/c

Case 3:     Bank and Cash Account:

 

If both cash and bank balances are given, for convenience a single account is opened for both cash and bank transactions.

Other miscellaneous item:

Case 4     Goodwill

Step 9b:     Goodwill appears in books:

 

	Realisation A/c	Dr.
	To Goodwill A/c
	(Goodwill is transferred to Realisation A/c)

Step 9b:     Amount is realised on goodwill:

 

	Realisation Account	Dr.
	To Realisation A/c

Step 9c:     Partner purchases goodwill:

 

	Partner’s Capital A/c	Dr.
	To Realisation A/c

Case 5     Unrecorded assets and liabilities:

Step 10a: Cash realised from unrecorded assets:

 

	Cash/Bank A/c	Dr.
	To Realisation A/c

Step 10b: Payment of unrecorded liability:

 

	Realisation A/c	Dr.
	To Cash/Bank A/c

Step 10c: A partner takes over unrecorded assets:

 

	Partner’s Capital A/c	Dr.
	To Realisation A/c

Step 10d: A partner takes over unrecorded liabilities:

 

	Realisation A/c	Dr.
	To Partner’s Capital A/c

Illustration: 3

X and Y were partners sharing profits and losses equally. They mutually dissolved the firm in 2006. The Balance Sheet on that date was as follows:

The firm was dissolved on the given date and the following transactions took place:

1. X took over 40% of the stock at a discount of 25%.
2. Remaining stock was disposed off at a profit of 40%.
3. Rs 10,000 of the book debts proved bad.
4. Y undertook to pay Mrs. Y’s loan.
5. Land and building was realised at Rs 2,00,000.
6. Bills payable were paid in full.
7. 50% of trade creditors accepted plant and machinery at 20% less than the book value and cash of Rs 6,000 in full settlement of their claims.
8. Remaining trade creditors were discharged at 20% discount.
9. Realisation expenses were Rs 3,000.
10. The Joint Life Policy was surrendered for Rs 15,000.
11. A customer’s liability (not provided for) of Rs 2,000 was discharged.
12. An old customer, whose account was written off as bad in the last year, paid Rs 1,000, which is not stated in the above stated books. Give necessary journal entries and ledger accounts.

Solution

Step 1: All assets (excluding cash and deferred revenue advertising expenditure) are credited with their book value one after one and total of these are debited to Realisation A/c:

	Rs	Rs
Realisation A/c Dr.	2,72,000
To Stock		70,000
To Book Debts		55,000
To Plant and Machinery		30,000
To Land and Buildings		80,000
To Joint Life Policy		15,000
To Goodwill		20,000
To Prepaid Insurance(expense)		2,000

(Being the transfer of all assets to Realisation A/c)

Note:

1. Cash in Hand
2. Cash at Bank and
3. Deferred Revenue Advertisement Expenditure. These three items are not taken into account. Students should further note that Book Debts Value (without considering provision for Doubtful Debts) is taken as it is without adjustment. Students should once again refer the problem and make clear which assets are taken into account and at what value.

Step 2: Transfer of liabilities to Realisation A/c:
All liabilities (each item one after one) are debited and their total is credited to Realisation A/c (Joint Life Policy Resource, Credited Reserve and Profit and Loss A/c items are excluded in this Step).

	Rs	Rs
Provision for Doubtful Debts      Dr.	5,000
Trade Creditors                          Dr.	60,000
Bills Payable                               Dr.	30,000
Mrs Y’s Loan                             Dr.	20,000
To Realisation A/c		1,15,000
(Being transfer of liabilities to Realisation A/c)

Note: Provision for doubtful debts (appearing on assets side) is to be transferred here as it is a liability.

Step 3: For realisation of assets:

When assets are realised, Cash or Bank A/c credited with actual amount realised. Here, each item need not be shown separately.

 

Bank A/c	Dr.	3,18,000
To Realisation A/c			3,18,000

(Being Stock, Debtors, Joint Life Policy, Land and Building realised)

Workings:

 

(i)	Stock: Remaining Stock = 60%	Rs
	60% of Rs 70,000	42,000
	Add: 60% was disposed at a profit of 40%	16,800
		58,800
(ii)	Book Debts	55,000
	Less: Bad Debts	10,000
	(refer further information)	45,000
(iii)	Land and Building (refer Information)	2,00,000
(iv)	Joint Life Policy (Surrendered value)	15,000
	Total Value of Assets Realised	58,800
		45,000
		2,00,000
		15,000
		3,18,800

Step 4:     For taking over of an asset by a partner:

 

X’s Capital A/c Dr.	21,000
To Realisation A/c		21,000
(Being 40% of stock taken over by X @ 25% discount)
[Workings: 40% of stock = 40/100 of Rs 70,000]

 

		Rs
		28,000
	Less: 25% of Discount	7,000
		21,000

Note: If an asset is taken over by a partner (after adjustment) it has to be debited to the partner’s Capital Account instead of Cash A/c (as in Step 3).

The difference is that instead of cash the concerned partner’s Capital Account is debited.

Step 5:     For expenses realisation

 

Realisation A/c	Dr.	3,000
To Bank A/c			3,000
(Being realisation expenses paid)

Note: Suppose realisation expenses are borne by a partner, then partner’s Capital A/c has to be credited instead of Bank A/c

Step 6:     For payment of liabilities:

 

 

Realisation A/c	Dr.	60,000
To Cash/Bank A/c			60,000
(Being payment made to credits and bills payable holders) (Rs 30,000 + Rs 30,000)

Step 7:     For closing partner’s Loan A/c:

 

Realisation A/c	Dr.	20,000
To Y’s Capital A/c			20,000
(Being payment of Mrs. Y’s loan by Y)

Step 8:     For debt, previously written off, recovered)

 

Bank A/c	Dr.	1,000
To Realisation A/c			1,000
(Being a debt, previously written off, recovered)

Step 9:     For contingent liability discharged:

 

Realisation A/c	Dr.	2,000
To Bank A/c			2,000
(Being a contingent liability discharged)

Step 10: For transfer of profit on realisation

 

Realisation A/c	Dr.	98,800
To X’s Capital A/c			49,400
To Y’s Capital A/c			49,400
(Being transfer of profit on realisation)

Step 11: For transfer of accumulated profit.

 

General Reserve A/c	Dr.	45,800
Joint Life Policy Reserve A/c	Dr.	15,400
Profit and Loss A/c	Dr.	25,400
To X’s Capital A/c			42,500
To Y’s Capital A/c			42,500
(Being accumulated profit transferred)

Note: General Reserve J.L.P. Reserve. Profit and Loss added and distributed among partner’s ratio and credited to their Capital Accounts.

Step 12: For transfer of accumulated loss:

 

X’s Capital A/c	Dr.	25,00
Y’s Capital A/c	Dr.	25,00
To Deferred Reserve Expenditure A/c			5,000
(Being transfer of accumulated losses)

Note: Deferred revenue expenditure is accumulated loss. It has to be divided in the partner’s profit sharing ratio and debited to their Capital Accounts.

Step 13: For final payment made to partners:

 

X’s Capital A/c	Dr.	1,59,400
Y’s Capital A/c	Dr.	1,28,400
To Bank A/c			2,87,8000
(Being final payment made to partners)

 

Note: Students may transfer entries from Journal to this Ledger A/c. But if straightaway ledger accounts are to be recorded they should be able to remember various items to be recorded on debit and credit side. So they are numbered serially and entries are recorded.

 

 

OBJECTIVE 5: ACCOUNTING TREATMENT ON DISSOLUTION

• Our dissolution of a firm, forms and books (accounts of various items) will have to be closed.
• The following accounts have to be opened for this purpose.

5.1 Account Treatment on Distortion of a Firm

1. Realisation Account
2. Bank/Cash Account
3. Partner’s Loan Account
4. Partner’s Capital Account

5.2 Realisation Account

The net effect on realisation of assets and reassessment of liabilities is shown in this account. To find the net effect (profit/loss on realisation), the following steps have to be adhered.

Step 1:     For closing assets accounts:

First, all assets (except cash, fictitious assets, debt balances of capital and current account as partner) are transferred to Realisation A/c as their book values:

	Realisation A/c	Dr.
	To Various Assets A/c

Effect:     This entry will close the accounts of various assets.

Step 2:     For closing outside creditors accounts:

All liabilities (except loan from partners, reserve) are transferred to the Realisation A/c

	Various Liabilities A/c	Dr.
	To Realisation A/c

Effect:     This will close the accounts of liabilities.

Step 3:     For realisation of assets:

Cash/Bank A/c will be debited and Realisation A/c credited with actual amount realised on assets.

	Cash A/c	Dr.
	To Realisation A/c

Step 4:     When a partner takes over a new asset.

 

	Partner’s Capital A/c	Dr.
	To Realisation A/c

Effect:     Partner’s share, other than cash, is ascertained.

Step 5:     For expenses on realisation:

Expenses will incur and each expense have to be debited to Realisation A/c and credited to Cash A/c

	Realisation A/c	Dr.
	To Cash A/c

Step 5a: If realisation expenses are borne by partner

 

	Realisation A/c	Dr.
	To Partner’s Capital A/c

Step 6:     For payment of liabilities:

On payment of liabilities, actual account paid will be debited to Realisation A/c and credited to Cash A/c

	Realisation A/c	Dr.
	To Cash A/c

Step 6a: When a partner takes over a liability:

 

	Realisation A/c	Dr.
	To Partner’s Capital A/c

Step 7:     For closing partner’s Loan A/c:

 

	Partner’s Loan A/c	Dr.
	To Cash A/c

Step 8:     For closing reserve and undistributed profit A/c

 

	Reserve fund A/c	Dr.
	or	Dr.
	Profit and Loss A/c Dr.	Dr.
	To Partner’s Capital or Current A/c

Step 9:     For closing Realisation Account:

This is the stage at which this Realisation A/c will reveal profit or loss

[Profit if credit side is higher

Loss if debt side is higher]

	If Profit: Realisation A/c	Dr.
	To Partner’s Capital A/c
	If Loss: Partner’s Capital A/c
	To Realisation A/c

Step 10: Accumulated loss (Debit balance in Profit and Loss A/c)

 

	Partner’s Capital or Current A/c	Dr.
	To Accumulated Losses A/c

Step 11:For bringing cash equal to debit balance in his Capital Account by a partner

 

	Cash A/c	Dr.
	To Partner’s Capital A/c

Step 12: For closing partner’s Capital Accounts:

 

	Partner’s Capital A/c	Dr.
	To Cash A/c

Usually, all the accounts related to dissolution are closed with these entries, so transferring them to the respective ledger accounts.

5.3 Cash or Bank Account (Ledger)

Opening balance of cash (both cash in hand and cash at Bank)

1. Amount received on sale of assets (realised)
2. Amount brought by partners, etc. are to be recorded on the debt side of this account
3. Payment of various expenses
4. Payment to discharge various liabilities
5. Amount paid to partners is to be recorded on the credit side of this account

Note: Student at this level should take care to record transactions relating to cash and bank, it is desirable to record either as Cash A/c or as Bank A/c and not both accounts separately and has to be treated under one head only, either Cash or Bank A/c.

5.4 Partner’s Capital Account

1. Assets taken over by the partners are recorded on the debit side of this account
2. Liabilities taken over by the partners are entered on the credit side of the account
3. Balances of partner’s capital accounts are entered
4. In addition, Entry No. 11 and No. 12 discussed above finds place in this account
5. For transfer of balance in Current A/c of partners:
   1. For debit balance:

      Partner’s Capital A/c                 Dr.

      To Partner’s Current A/c

   2. For credit balance:

      Partner’s Current A/c

      To Partner’s Capital A/c

5.5 Partners Loan Account: (Loan by Partner)

    Partners Loan A/c                     Dr.

To Cash A/c

OBJECTIVE 6: GOODWILL

6.1 Accounting Treatment

Dissolution of firm and goodwill:

1. If goodwill appears in the balance sheet, it is transferred to Realisation A/c at book value, like other assets.

    

   Realisation A/c	Dr.
   To Goodwill A/c

    

2. If goodwill does not appear in Balance Sheet, no entry for transfer.
3. If anything is realised for goodwill

    

   Cash/Bank A/c	Dr.
   To Realisation A/c

    

4. If goodwill is purchased by one of the partners

    

   Partner’s Capital A/c	Dr.
   To Realisation A/c

6.2 Unrecorded Assets and Liabilities

At the time of dissolution of the firm, some assets and liabilities may not appear in the books.

6.2.1 Unrecorded Assets:

1. Cash received from unrecorded assets:

    

   Cash A/c	Dr.
   To Realisation A/c

   (Being cash realised on unrecorded assets)

2. When a partner takes over unrecorded assets:

    

   Partner’s Capital A/c	Dr.
   To Realisation A/c

   (Being the partner took over unrecorded assets)

6.2.2 Unrecorded Liabilities:

1. For payment of unrecorded liability

    

   Realisation A/c	Dr.
   To Cash A/c

   (Being unrecorded liability discharged)

2. When a partner takes over unrecorded liability

    

   Realisation A/c	Dr.
   To Partner’s Capital A/c

   (Being a partner took over unrecorded liability)

6.3 Memorandum Balance Sheet

1. At times, value of sundry assets is not given in the problem.
2. Only partner’s capitals and other liabilities are given but not the total value of sundry assets.
3. Realised value on assets is given.
4. In such cases, total amount of assets is ascertained by preparing a Balance Sheet which is called as Memorandum Balance Sheet.

Illustration: 4

A and B are partners in a firm. Their capitals are Rs 2,20,000 and Rs 1,80,000, respectively. The creditors are Rs 1,00,000. The assets of the firm realised Rs 5,60,000. You are required to prepare Realisation A/c, Partner’s Capital A/c and Bank Account.

Solution

1. The amount of total Sundry Assets is not given.
2. So it has to be calculated by preparing Memorandum Balance Sheet.

Note: Creditors and Capitals are added and this total is transferred to assets side of the Balance Sheet (Balancing figure), to ascertain the value of Sundry Assets.

 

 

 

Illustration: 5

The following is the Balance Sheet of Kashyap and Verma as on Dec 31, 2006.

The firm was dissolved on Dec 31, 2006 and the following were agreed upon:

1. Kashyap agreed to pay off Mrs. Kashyap’s loan
2. Kashyap took away the stock at Rs 8,000
3. Verma took 50% of the investment at a discount of 10%
4. Debtors were realised at Rs 25,000
5. Creditors and bills payable were discharged at a discount of Rs 200 and Rs 100, respectively

6.  

   Other assets realised at	Rs
   Plant and Machinery	40,000
   Land and Buildings	80,000
   Goodwill	20,000
   Investments (balance)	9,000

    

7. There was an old computer which had been written off completely in the books, which is nonestimated to realise Rs 3,000. It was taken away by Verma at the estimated price.
8. Realisation expenses amounted to Rs 2,000, you are required to
   1. pass necessary journal entries and
   2. prepare the necessary ledger accounts

 

 

 

 

Note: Accounting treatment differs only in the case of goodwill not appearing in the Books for transfer to Realisation A/c.

OBJECTIVE 7: PREPARATION OF BALANCE SHEET AS ON THE DATE OF DISSOLUTION

Need to prepare:

To ascertain the missing information (e.g. value of any asset or liability) on the date of dissolution of a firm, Balance Sheet as on that date has to be prepared.

Method of drawing Balance Sheet.

Care should be taken to record.

7.1 Preparation of Balance Sheet as on the Date of Dissolution

1. Balances in the given Balance Sheet and
2. Transactions that took place between the date of the given Balance Sheet and the date of dissolution

Illustration: 6

You are required to draw the Balance Sheet of the firm as at Mar 31, 2009 being the date of dissolution of loss incurring in firm from the following particulars:

Solution

Note:

1. Generally, any one of the following items may be found missing:
   1. Sundry Assets
   2. Sundry Liabilities
   3. Profit and Loss
   4. Cash and Bank Balance
2. Study the particulars. Ascertain what item is missing
3. Classify the items into assets and liabilities and transfer them to the respective side in the Balance Sheet.
4. The balancing figure is the needed figure relating to that missing item.

Illustration: 7

On Apr 1, 2007, A, B and C commenced business in partnership sharing the profits and losses in the ratio of 5:3:2, respectively with capitals of Rs 50,000, Rs 30,000 and Rs 20,000, respectively. During 2007–2008 and 2008–2009 they made profits of Rs 50,000 and Rs 80,000 (before allowing interest on capital @ 10%). Drawings of each partner were Rs 1,000 p.m. The creditors stood at Rs 20,000 as on Mar 31, 2009. Draw a Balance Sheet as on Dec 31, 2009.

Solution

In this problem,

1. Interest on capital
2. Drawings
3. Profit

were given. So Capital Account for each partner has to be prepared first and only then the Balance Sheet has to be drawn up.

Stage I

 

Stage II

 

7.1.1 Model

When all partners agree to dissolve the firm:

Illustration: 8

X, Y and Z sharing in the ratio of 2:2:1 agreed upon dissolution of their partnership on Dec 31, 2008 on which date their Balance Sheet was as follows:

Investments were taken over by X at Rs 9,000; Creditors of Rs 15,000 were taken over by Y who agreed to settle account with them at Rs 14,850; Remaining Creditors were paid at Rs 11,250; Joint Life Policy was surrendered and fixed assets realised Rs 1,05,000; Stock and debtors realised Rs 10,5000 and Rs 13,500, respectively. One customer whose account was written as bad, now paid Rs 1,200 which is included in Rs 15,000 above. There was an unrecorded asset of Rs 4,500 half of which was handed over to settle half of an unrecorded liability of Rs 7,500 and the balance of the unrecorded asset was sold in the market which realised Rs 1,950; Y took over the responsibility of completing dissolution and he is granted salary of Rs 600 per month. Actual realisation expenses amounted to Rs 1,650. Dissolution was completed and final payments were made on Apr 30, 2009. Prepare necessary ledger accounts in the books of the firm.

 

[B. Com (Hons.) – Delhi]

Solution

Stage I

 

Stage II

 

Stage III: Finally Bank Account has to be prepared.

 

7.1.2 Model

Dissolution on death of a partner.

Illustration: 9

X, Y and Z are partners of a firm whose balance sheet as on Mar 31, 2009 was as follows:

The value of Joint Life Policy shown in the Balance Sheet represents the surrender value of the policy taken by the firm of Rs 1,50,000 to enable the settlement of accounts with a partner’s legal execute in case of death of a partner during the continuance of the firm. X died on Apr 10, 2009.

The remaining partners could not arrive at any understanding with the legal representative of X with the result the firm was dissolved immediately subject to the following adjustments afterwards:

1. Plant and Machinery realised only 70% of the book value
2. Furniture and Fittings were taken over by Z at a market value of Rs 9,360
3. Bills Receivable and Sundry Debtors had to be discounted at 4%
4. Stock in Trade comprised
   1. easily marketable items – 70% of the inventory which realised in its full value
   2. obsolete items – 10% of the total items which has to be discarded
   3. the rest of the items which realised 50% of their book value
   4. a liability of Rs 10,640 had to be paid in addition to the given above.

Draw up the necessary accounts to close the books of the firm.

Solution

Stage I: Preparation of Current Account of Partners

 

 

 

 

Note: Fraction of 0.50 was rounded off in the Current Account of Partners.

7.1.3 Model

Dissolved firm (assets and liabilities) taken over by some partners or only one partner.

7.2 Accounting Procedure

In general, accounting procedure for this case is similar to other cases of dissolution that we have discussed so far.

In addition, the following should also be followed.

7.3 Assets and Liabilities taken over by Partner(s) Accounting Procedure

1. For taking over of assets:

    

   Joint Account of Partners (concerned) A/c	Dr.
   To Realisation A/c

    

2. For taking over of liabilities:

    

   Realisation A/c	Dr.
   To Joint Account of Partners.

Note:

1. In case if only the partners take over the firm then such a partner’s personal account is opened instead of joint account of partners.
2. Partners who are going to shoulder the responsibility of taking over the firm must bring in cash in the ratio in which they decide to purchase it.
3. The capital accounts of partners taking over the business should be transferred to the joint account of the partners or the Partners Personal Account depending on the case whether single partner or more than one partner.

Illustration: 10

A, B and C who were sharing profits and losses in the ratio of 2:2:1 decided to dissolve the partnership on Mar 31, 2009 on which date their Balance Sheet was as follows:

B and C continued the business, agreeing to purchase A’s share in the capital of the firm in the proportion in which they shared profits and losses. Mrs. A agreed to allow her loan to remain in the business. B and C utilised the available bank balance to pay A and contributed the balance. Assets were valued as follows:

Fixed Assets Rs 54,600; Stocks Rs 27,000; Debtors as in the Balance Sheet, subject to Rs 3,300 as Provision for Doubtful Debts and an allowance of 5% for discounts. The liability of creditors is taken over by B and C subject to an allowance of Rs 600 for discount. B and C continue to share profits and losses in the same proportion as before.

You are required to prepare

1. Realisation A/c
2. Bank A/c
3. Partner’s Capital Account
4. Opening Balance Sheet

Solution

Step 1: First, Net Debtors has to be computed

 

		Rs
	(i) As per Balance Sheet	42,000
	(ii) Less: Provision for Doubtful Debts	3,300
	(iii) Good Debts (i–ii)	______ 38,700
	(iv) Less: 5% Allowance for Discount	1,935
	(v) Net Debtors (iii–iv)	______ 36,765 ______

Step 2: Preparation of Realisation Account

 

Step 3: Preparation of capital accounts of partners

 

Step 4: Preparation of B and C Joint A/c

 

 

OBJECTIVE 8: RETURN OF PREMIUM (GOODWILL) (SECTION 51)

The Indian Partnership Act 1932 (Section 51) stipulates that where a partner has been admitted to the partnership and that the firm would be for a fixed period, then such partner will be eligible to claim refund of such amount of premium. But this refund is subject to:

• Terms of admission
• Length of the period agreed
• Expiry of the agreed period

Such refundable claim is also debited to other partners in their profit sharing ratio (the agreement should not be contrary).

No refund claim can be possible when

• the dissolution of firm occurs due to the death of a partner
• the dissolution is due to misconduct of the partners claiming the refund
• the dissolution in confirmity with agreement

Illustration: 11

P, Q and R were in partnership sharing profits and losses in the ratio of 6:3:1. R was admitted to the firm on Apr 1, 2004 paying Rs 30,000 as premium (share of goodwill) with the stipulation that the term for the newly constituted firm will be 10 years. But this newly constituted firm had to be dissolved on Apr 1, 2009. R demands the refund of his premium.

How will you deal with the claim of R in each of the following alternative cases?

1. The dissolution is due to the death of P
2. The dissolution is on account of mutual agreement by the partners themselves without any reference to such claim
3. The dissolution is an account of continuous misconduct of R
4. The dissolution is due to insolvency of Q on Mar 31, 2009
5. The dissolution is due to persistent negligence of P
6. The dissolution is by mutual consent with the clear stipulation as to the refund of premium

The account has to be closed on Mar 31 every year.

Solution

Step 1

Under Section 51 of Indian Partnership Act 1932, no claim can be made for the cases (i), (ii) and (iii). For the other cases (iv), (v) and (vi), the amount of refund is calculated by applying the formula:

Return of Premium = Total Premium Paid × Unexpired Term/Total Term

 

	Here Total premium paid	Rs 30,000
	Unexpired Term from Apr 1, 2009 to Apr 1, 2014
	Apr 1, 2009 to Apr 1, 2014	60 months
	Total Term	120 months
	i.e. from = Apr 1, 2004 to 10 years, i.e. Apr 1, 2001
	Hence return of premium = Rs 30,000 × 60/120 = Rs 15,000

Step 2: Accounting Entry

This claim, i.e. Rs 15,000 has to be apportioned in the ratio of 6:3 and distributed among others and transferred into their respective capital.

Accounts	Rs	Rs
P’s Capital A/c              Dr.	10,000
Q’s Capital A/c              Dr.	5,000
To R s Capital A/c		15,000
(Being the refund of Premium become by P&Q in the ratio of 6:3)

8.1 Gift of Firm – Asset to Partners

At times, some asset of the firm may be gifted to partner(s) in recognition of service, when a firm is dissolved.

There are two cases:

Case 1: Gift by the firm:

In this case, no accounting entry is made because the firm as a whole bears it (loss).

Case 2: Gift by one or more than one partner:

In case if the gift is given by one partner, his account will be debited and Realisation Account will be credited.

The Journal Entry is

Concerned Partner’s Capital A/c        Dr.

    To Realisation A/c

In case, if there are three partners and two of them give gift, the accounts of the partners giving the gift will be debited in their profit sharing ratio and Realisation Account will be credited with the total value of the asset.

8.2 Gift to a Partner

Illustration: 12

A, B and C were partners in a firm sharing profit and losses in the ratio of 5:3:2, respectively. Their Balance Sheet as on Dec 31, 2008 was as follows:

The firm has a fully depreciated computer that can fetch Rs 2,500. In addition, there is a liability for bonus payable to employees amounting to Rs 15,000.

The firm was dissolved on the above date due to disagreement among the partners. It was found that goods amounting to Rs 5,000 were purchased in Oct 2008 and has been received in Dec but were not recorded in the books.

Some of the fixed assets realised Rs 1,25,000, stock Rs 50,039 and debtors 5% less. The creditors allowed discount at 3% on an average.

Fixed assets included two scooters one of which was taken over by C for Rs 7,500 and the other was gifted by A and C to B in recognition of his services to the firm. The market value of this gifted scooter was Rs 10,500. A agreed to take over his wife’s loan. B is entitled to a commission on the amount collected from debtors. Overall expenses on realisation amounted to Rs 4,225.

You are required to prepare necessary accounts to close the books of the firm.

Solution

Step 1: Preparation of Realisation Account

 

Step 2: Preparation of Current Account of Partners

 

Step 3: Preparation of Capital Account of Partners

 

 

Step 4: Preparation of Bank Account

 

OBJECTIVE 9: INSOLVENCY OF PARTNER(S)

9.1 Meaning of Insolvency

1. The capital account of a partner may show debit balance (after all adjustments). That means such a partner is a debtor to the firm.
2. Such a partner has to bring in cash needed to make up the deficiency (i.e., debit balance) in his capital account.
3. In case, if such a partner is unable to bring in the needed amount, he is said to be insolvent.
4. In such insolvent situation, this amount (debit balance irrecoverable) must be borne by the other solvent partners, in addition to the loss on realisation. Why this additional burden? This is due to the statutory provisions as stipulated in the Indian Partnership Act 1932, whereby liability of partners is unlimited.
5. Then arises the important question, in what ratio (proportion) this deficiency will have to be apportioned among the solvent partners?
6. The Indian Partnership Act 1932 is silent on this matter. There is no specific provision on this matter.
7. Here comes the role of Partnership Deed. A separate clause may be inserted clearly stating the way in which such deficiency may be divided among the solvent partners. Such agreement will be binding on the partners and the same will be upheld in court of law.
8. The real difficulty arises when there is no specific provision existing in the Partnership Deed. In such a situation, we have to rely on English laws.

9.2 Garner vs. Murray Rule

An important landmark case relating to this matter came up in the Court of England called as Garner vs. Murray (1903). The decision of the court in this case is a guiding principle followed in our country till date.

9.2.1 Decision of the Court in Garner vs. Murray

The deficiency on the insolvent partner’s capital account must be borne by the other solvent partners, in proportion to their capitals, after each solvent partner has brought in cash to the extent of his own share of loss on realisation.

9.2.2 Important ingredients of Garner vs. Murray decision

1. First, the solvent partners must bring in cash equal to the loss on realisation debited to their respective capital accounts (status: capital accounts prior to dissolution).
2. Then the deficiency on the Capital Account of the insolvent partner must be divided between solvent partners in proportion to their capitals.

9.2.3 To apply Garner vs. Murray decision, the following criteria are to be fulfilled

1. In a partnership firm, on the date of dissolution there must be two or more than two solvent partners, of course, with credit balances.
2. One or more partners are insolvent (i.e., with debit balances in their capital accounts).
3. The capitals are not in profit sharing ratio.
4. There should not be any agreement relating to this aspect among the partners.

9.3 Students Should Remember These Criteria

When they should apply Garner vs. Murray decision in solving problems in partnership?

Implications of Garner vs. Murray decision: This decision puts much emphasis on “last agreed capital.” What does it mean really?

So necessity arises to know exactly the quantum of “last agreed capital.” It means or indicates the capitals of partners just before dissolution took place. As it relates to capitals of partners, the partners may be maintaining under Fixed Capital System or Fluctuating Capital System. As such accounting treatment will also vary depending on the nature of partner’s capital “Fixed” or “Fluctuating.”

9.4 Accounting Procedure When Capitals are Fixed

The accounting entries are:

1. Transfer of accumulated profits: in profit sharing ratio

    

   Profit and Loss A/c	Dr.
   Reserve Fund Account	Dr.
   Any other Fund Account	Dr.
   To Partner’s Current A/c

    

2. Profit on realisation:

    

   Realisation A/c	Dr.
   To Partner’s Current A/c Dr.

   Note (Reserve for loss on Realisation)

3. For bringing in cash by other solvent partners:

    

   Bank A/c	Dr.
   To Solvent Partner’s Current A/c

    

4. Transfer of current account balance of the insolvent partners:
   1. For Debit Current Account balance:

      Insolvent Partner’s Current Account	Dr.
      To Insolvent Partner’s Capital Account

   2. For Credit Current Account Dr.

      Insolvent Partner’s Current Account	Dr.
      To Insolvent Partner’s Capital A/c

5. Deficiency; Distribution:

    

   Solvent Partner’s Respective Current Account	Dr.
   To Insolvent Partner’s Capital Account

6. Finally, the current accounts of the solvent partners will be transferred to their respective capital accounts and then closed (on that basis, each partner will be paid, i.e. the due amount to each partner).

9.5 Accounting Procedure When Capitals are Fluctuating or Floating

1. In this case, capital of each partner is determined by adjustment of items (reserve fund, profit/loss account balance, etc.) straightly.
2. Loss/gain on realisation is adjusted straight on the capital account of the partners.
3. To maintain the level of original capital balance unaffected, it is presumed that each such partner brings in the needed cash, in case of loss on realisation.
4. In case of gain on realisation, the share of each partner is credited to his respective capital account.
5. Care should be taken to see that the basis for apportioning the insolvent partner’s deficiency should be the balance on capital account of each solvent partner existing just prior to this adjustment.

To put in a nutshell:

1. When Capitals are Fixed: The given capital on the date of dissolution will constitute the capital ratios.
2. When Capitals are Fluctuating: Capital ratios will be arrived at after making adjustments to the existing capitals on the date of dissolution.

Students are advised to follow these principles while solving problems in applying Garner vs. Murray decision.

9.5.1 Insolvency – Comprehensive

(Garner vs. Murray – Application)

Illustration: 13

X, Y and Z were equal partners in a firm. They decided to dissolve the firm on Mar 31, 2009 due to financial difficulties. Their Balance Sheet as on that date was as follows:

At the time of dissolution, it was found that Z was insolvent and the creditors agreed to allow a discount of Rs 2,000. Assuming that Z could not bring in anything towards his capital deficiency. Prepare the necessary ledger account when

1. Garner vs. Murray rule is not applied
2. Garner vs. Murray rule is applied
3. Capitals are fixed
4. Capitals are fluctuating

(B. Com. Bangalore – Modified)

Important Notes

1. In this problem, Realisation Account on the Assets side of the Balance Sheet as on that date of dissolution is given as Rs 92,000. As such, in the Realisation Account (assets have been realized already), it has to be shown as ‘balance b/d.’
2. Under both the cases i.e., when Garner vs. Murray rule is applied and when it is not applied, preparation of Creditors Account and Realisation Account will be the same. As such, these two accounts are to be prepared first.
3. When capitals are fixed, loss on realization and debit balance in P & L A/c are to be transferred to Current Accounts of the partners.
4. When capitals are fluctuating, loss on realization and debit balance in P & L A/c are to be transferred to Capital Accounts of the partners.
5. In this problem, capital ratio will be 1:1:1, as it was mentioned – equal partners in the firm – they share equally.
6. But while apportioning the deficiency, the ratio will be on the basis of capital (after all adjustments) which stood just before to dissolution.

Solution

First Creditors Account and then Realisation Account will have to be prepared, as these two accounts form the basis for other accounts.

Step 1: Preparation of Creditors Account

 

Step 2: Preparation of Realisation Account

 

Step 3

Now we have to workout, when Garner vs. Murray rule is not applicable: Capital Account of Partners is to be prepared

 

In this case Garner vs. Murray rule is not applied. As such deficiency in Z’s Capital Account, i.e. Rs 12,000 is shared by solvent partners, here X and Y in their profit sharing ratio, i.e. equally (1:1)

Step 4

When Garner vs. Murray rule is applied when capitals are fixed: When capitals are fixed, first current accounts of partner’s have to be prepared and then capital account of partners have to be computed. First, necessary adjustments have to be carried out in the current account and the end result is to be transferred to capital accounts of the partners.

 

Step 5: Preparation of Capital Accounts

 

Important Notes

1. As per Garner vs. Murray rule, realisation loss has brought in cash by solvent partners X and Y. It should be noted that in practice it need not be entered.
2. Capital deficiency of the insolvent partner (Rs 12,000 – Z) is divided in the Capital Ratio of solvent partners X and Y, 8:4 or 4:2 (or) i.e. X: Rs 8,000 Y: Rs 4,000.

Step 6: Preparation of Cash Account

 

Step 7: When capitals are fluctuating

In this case, no need to prepare current accounts and capital accounts will have to be prepared straight.

 

Step 8: Preparation of Cash Account

 

Important Notes

Capital deficiency of the insolvent partner Z is shared by the solvent partners X and Y in their capital ratio 156:76 (or) 78:38 (or) 39:19. This is based on capitals on the date of dissolution. Debit balance of Profit and Loss Account is adjusted.

As it is stated in the problem: equal partners, all the partners share profit and losses equally, i.e. 1:1:1. This is the profit sharing ratio.

9.5.2 Pre-dissolution Adjustments

Illustration: 14

Amar, Akbar and Antony are partners sharing profits and losses in the proportion of 3:2:1. The partnership was dissolved on Mar 31, 2009, on which date the Balance Sheet of the firm was as follows:

The lives of partners were insured severally for Amar Rs 2,00,000, Akbar Rs 1,00,000 and Antony Rs1,20,000. The premium was treated as business expenses. On the date of dissolution, the surrender value of each of the policies was 30% of the sum assured. Amar took over his policies but the policies of Akbar and Antony were surrendered.

In the course of dissolution, it was found

1. that a liability of Rs 30,000 for purchase of goods in the year 2008–2009 had been omitted from the Balance Sheet and that goods had been included in the stock.
2. that bills receivable amounting to Rs 70,000 were discounted by the firm and were dishonored and proved to be worthless.
3. Amar agreed to take over the goodwill of the firm at Rs 50,000. The bills receivable were retired by the acceptor for Rs 48,000 and the remaining assets realised Rs 1,87,980. The expenses on realization amounted to Rs 10,000.
4. Antony is insolvent but his estate pays Rs 41,000.

You are required to prepare the necessary accounts to close the books of the firm

 

[B.Com (Hons) – Modified]

Solution

Note: This problem is solved by applying Garner vs. Murray rule

• Capitals are fluctuating. As such, the undisclosed (unrecorded) assets and liabilities have to be recorded by debiting or crediting the capital accounts, to ascertain the capitals on the date of dissolution.
• As some items are not recorded in the books, they have to be brought into records and adjustments have to be made before dissolution.
• Capitals of Amar and Akbar are to be adjusted, and only on the adjusted capital, ratio in which deficiency of Antony to be borne has to be computed. This is done as follows:

	Amar Rs	Amar Rs
Capital as per Balance Sheet	1,56,000	1,44,000
Add: Reserves (Rs 72,000 in 3:2:1)	36,000	24,000
Life Policies:	63,000	42,000
(Amar = ⅓ of 30% of Rs 2,10,000           = 63,000
Akbar = ⅓ of 30% of Rs 2,10,000           = 42,000)
	——	——
	2,55,000	2,10,000
Less: Creditors omitted in the Balance Sheet	15,000	10,000
Adjusted Capital:	2,40,000	2,00,000
Therefore, Ratio = 2,40,000:2,00,000
24:20
12:5

Deficiency of Antony’s capital will have to be borne by Amar and Akbar in this ratio, i.e. 12:5. Now, the needed accounts are to be prepared in the sequence as follows:

 

 

 

 

 

9.5.3 Model

Partner’s Debit balance in the Capital Account on the date of dissolution.

Illustration: 15

P, Q, R and S were partners sharing profits and losses in the ratio of 3:3:2:2, respectively. Their Balance Sheet on Dec 31, 2008 was as follows:

It was decided to dissolve the firm with effect from Dec 31, 2008 and Q was appointed to liquidate the assets and pay the creditors. He was entitled to receive 5% commission on the amounts finally paid to other partners including loans, if any. He was to bear the expenses of realisation that amounted to Rs 1,500. The assets realised Rs 1,62,000. Creditors were paid in full. In addition a sum of Rs 15,000 was also paid to staff on retrenchment in full settlement of their claims. S was insolvent and the partners accepted Rs 22,200 from his estate in settlement. Applying the rule in Garner vs. Murray, prepare necessary ledger accounts.

Commission payable to Q is note to be treated as firm’s expense.

 

(B.Com (Delhi) – Adapted and Modified)

Solution

Here, students have to note one more information.

• In the Balance Sheet, in addition to the insolvent partner (S), the other partner R also has a debit balance.
• In such cases, such partners need not take the burden of shouldering the deficiency in the Capital Account of S.
• Only P and Q have to share the deficiency of S in the ratio of their capital Rs 1,20,000:90,000, i.e. 4:3.
• R has paid his own deficiency because he is not insolvent.
• Now Realisation Account has to be prepared. Here, actual expenses on realisation paid by Q may not be taken into account, assuming it was met by him personally.
• Further, cash representing loss on realisation brought by solvent partners has to be recorded in partner’s capital accounts. Hence it is ignored in the preparation of Realisation Account.

 

 

 

 

 

Working Notes:

 

Calculation of Commission Payable to Q	Rs
Amount Due before Charging Commission	1,29,600
Less: Cash brought before Realisation Loss	21,600
	1,08,000

Commission = 1,08,000 × 5/105 = Rs 5,142 (rounded off)

Illustration: 16

The following Balance Sheet is presented to you

The partners shared profit and losses in the ratio of 2:3:3:2.

The position of partners was as follows:

	Private Estate Rs	Private Liability Rs
A	1,00,000	1,50,000
B	2,00,000	60,000
C	50,000	40,000
D	80,000	90,000

The assets realised was Rs 2,60,000 and expenses of realisation was Rs 10,000. Prepare ledger accounts giving effect to the dissolution.

 

B. Com (Hons) Delhi
B. Com (pass) Madras
Adapted and Modified

Solution

 

 

 

 

 

 

 

Working Notes:

1. There are deficits in capital accounts of partners B, C and D resulting in three insolvent partners. In such a case, Garner vs. Murray rule cannot be applied because there must be at least two solvent partners. Here only one partner, i.e. A is solvent.
2. B’s capital account shows a deficit of Rs 20,000. But he has surplus from his private estate. He brings in Rs 20,000 and settles his account.
3. C’s Capital Account shows a deficit of Rs 20,000 (Rs 45,000 +Rs 15,000 +Rs 20,000 – Rs 60,000). He has a surplus of Rs 10,000 from his private estate. His deficit of Rs 10,000 has been transferred to A’s Capital A/c.
4. D’s deficit is Rs 10,000 (Rs 30,000 +Rs 10,000 – Rs 30,000). No surplus from his private estate. This deficit is also borne by A as he is the only solvent partner.
5. A’s Capital Account has a surplus of Rs 60,000 (Rs 1,00,000 – Rs 30,000 – Rs 10,000). A can bear the deficit of all the other partners up to Rs 60,000. Here the deficit of C is Rs 10,000 and the deficit of D is Rs 10,000 (total Rs 20,000). After meeting these deficits, final payment due to him from the firm will be only Rs 40,000.

OBJECTIVE 10: ALL PARTNERS ARE INSOLVENT

At times, situations may arise for a firm which will not be in a position to meet the claims of its creditors in full due to insufficiency of firm’s assets as well as private estates of partners. In such a situation, all the partners are said to be insolvent. Even we can call it as insolvency of the firm.

10.1 Acconting Treatment

1. The realisation account is to be prepared without transferring liabilities.
2. Loss on realisation is to be debited to capital accounts of partners in the profit sharing ratio.
3. The capital accounts of the partners are closed by transferring the debit balance or credit balance to a newly opened account – Deficiency Account.

Illustration: 17

The Balance Sheet of X, Y and Z who are sharing profits in the ratio of 2:2:1 was as follows on Mar 31, 2009, the date of dissolution.

Stock realised Rs 26,000, and other assets were sold for Rs 45,000, Expenses on realisation amounted to Rs 1,500. Assuming that all the partners are insolvent, prepare the necessary ledger accounts to close the books of the firm.

 

[B.Com (Hons) – Delhi Modified]

Solution

• As all the partners are insolvent, given in the question, a new account Deficiency Account has to be prepared, after preparing capital account of partners.
• Liabilities need not be transferred while preparing Realisation Account.

 

 

 

 

 

10.2 Use of Algebraic Equation

Under the following circumstances, we have to see the help of algebraic equation to compute the amount recoverable from the insolvent partners.

1. The firm is not in a position (not enough cash) to pay its outside liabilities completely.
2. The amount of contribution from the private estate of the insolvent partners is not shown explicitly.
3. Notwithstanding the fact that the firm is not in a position (not enough cash) to meet its outside liabilities in full, problems will require the realisation of assets and payment of liabilities through Realisation Account.

This can be best illustrated as follows.

Illustration: 18

P, Q and R were in partnership sharing profits and losses in the ratio of 2:3:5. They prepared the following Balance Sheet on Mar 31, 2009, when they decided to dissolve.

 

Plant and Machinery realised Rs 1,75,000; debtors Rs 15,000 and stock Rs 20,000. P has a private estate, valued at Rs 50,000 and his liabilities amounted to Rs 20,000. The private estate realised only Rs 30,000. Q is insolvent. R can pay only 50 paise in the rupee of what is payable on his own account to the firm. Prepare the necessary ledger accounts, assuming that the loss on realisation is to be determined after considering the amount ultimately paid to all the creditors.

 

[B. Com (Hons) – Modified]

Solution

Study the problem – The sentence “R can pay only 50 paise in the rupee of what is payable on his own account to the firm” – indicates the use of algebraic equation to compute the amount recoverable from the insolvent partner.

So, before applying the equation, provisional accounts have to be prepared for Realisation Account, Bank Account and R’s Capital A/c.

Important Note: Let the amount payable by R be taken as X (assumption)

Step 1:

 

Step 2

 

Step 3

 

Now R’s Capital Account is to be completed for this value of X is to be ascertained.

Calculation of the amount to be brought in by R:

R will bring cash X (assumed)

Then his Capital Account (refer Provisional Capital A/c of R) is credited with Rs 30,000 and Rs 20,000. and

Debited with Rs 37,000 and ½ of ×+17,500

Net position is:

30,000 + 20,000 − (37,500 + X/2 + 17,500)     (1)

(All Credit Items)—(All Debit Items)

(1)     is rearranged as:

Rs 37,000 + X/2 + 17,500 − Rs 30,000 − Rs 20,000

This will be equal to cash + X/2 (Debit Balance)

Hence 37,500 + X/2 + 17,500 − Rs 30,000 − Rs 20,000 = Rs 5,000 + X/2

R’s contribution is 50 paise in the rupee which means 50% of what is payable on his own account (given in the question).

∴R will contribute 50% of (Rs 5,000 + X/2)

This will be equal to the R’s contribution to capital, i.e. × (assumed already)

∴ 50% of (5,000 + X/2) = X

(50/5,000) × 1/2 (5,000 + X/2) = X

5,000/2 + X/4 = X

2,500 + X/4 = X              (2)

Now, we have to substitute this value 3,333 in the place of X and prepare the completed form of Realisation Account, Bank Account and R’s Capital Account and other accounts in the usual manner.

 

 

 

 

 

Illustration: 19

L, M and N are partners in a firm sharing profit/loss in the ratio of 5:3:2. The Balance Sheet of the firm as at Mar 31, 2009 was as follows:

The bank loan was secured by charge on buildings. Assets realised as under:

 

		Rs
	Buildings	1,20,000
	Furniture	12,000
	Investment	42,000

M’s private estate realised Rs 36,000 and his private liabilities are Rs 30, 000. N was insolvent and L could just contribute one-third of what was finally due from him on his own account. Show the ledger accounts closing the books of the firm.

 

[B.Com (Hons) – Adapted and Modified]

Solution

Study the problem: The sentence “L could contribute one-third of what was finally due from him on his own account.” Such version also indicates the use of algebraic equation to compute the amount recoverable from the insolvent partners.

So here also provisional accounts have to be prepared, algebraic equation is to be applied and then only Realisation Account, Bank Account and Capital Account of Partners can be computed.

Let L’s contribution be taken as X (assumption).

 

 

Total deficiency in L’s capital account is 3,000 +X/2. As per instructions given in the question, L is expected to contribute 1/3 of his deficiency, i.e. 1/3 of (3,000 +X/2)

 

	Then his contribution is (3,000/3 + X/6)
	Our assumption on his contribution = X
	∴ 3,000/3 + X/6	=	X
	6,000 + X/6	=	X
	6,000 + X	=	6X
	6,000	=	6X – X
	5X	=	6,000
	X	=	6,000/5 = 1,200

Substituting the value of X, main accounts have to be prepared.

 

 

 

 

 

Note: Deficiency in the Capital Account of L and N is also to be transferred to M’s Capital Account.

Illustration: 20

A, B and C shared profits and losses in the ratio of 5:3:2. On Mar 31, 2009, their balance sheet was as follows:

The bank had a charge on all the assets. Furniture realised Rs 12,000 while the entire stock was sold for Rs 1,00,000, B’s private estate realised Rs 24,000; his private creditors were Rs 20,000. C was unable to contribute anything. A paid one-third of what was finally due from him (taking the payment also into account) except on account of other partners. Prepare Realisation Account, Cash Account and Partner’s Capital Accounts, passing all matters relating to realisation of assets and payments of liabilities through the Realisation Account. Clearly show your calculation regarding cash brought in by A.

 

(B.Com – Modified)

Solution

• First note whether there is any specific catch word in the problem. One can note “A paid one third of what was finally due from him….” in the problem.
• Then we have to use algebraic equation. Before that Realisation Account and A’s Capital Account has to be prepared provisionally.
• Let the amount paid by A (one-third of what was finally due form him) be taken as X (assumed).

Total cash available is computed as:

Assets realised	Rs
Furniture	12,000
Stock	1,00,000
Total	1,12,000
Add Cash	4,000
	1,16,000
Add: From B’s Private estate	4,000 (24,000 – 20,000)
Total Cash available	1,20,000

[A’s Share =½(84,000 +X) = 42,000 +X/2]

 

    Debit Balance in A’s Capital Account = 2,000 +X/2

    A has to pay ⅓of total deficiency (i.e.)

    ⅓ of (2,000 +X/2)

    2,200/3 +X/6 = X

    2,000/3 +*X/6 = X

    4,000 +X = 6X

    4,000 = 5X

    X = 4,000/5 = 800

    A has to contribute Rs 800

    *Creditors will be able to get = 80,800 (80,000 +X)

 

 

 

 

 

OBJECTIVE 11: MINOR AND PARTNERSHIP DISSOLUTION

In general, as per statutory provisions, a minor (i.e., who has not completed 18 years of age) is not competent to enter into any contract. So, a minor is not eligible to act as a full fledged partner in a firm. But Section 30 of the Indian Partnership Act 1932 stipulates that a minor may be admitted (to enjoy the benefits only) as a partner in a firm with the consent of all the other partners.

11.1 Minor’s status in Partnership Dissolution

However, in case of dissolution of partnership firms, a minor

1. will not share the loss on realisation of assets and payment of liabilities, and
2. will not share any accumulated loss on dissolution. But he is entitled to claim his share in profit on realisation account, accumulated profit existing on the date of dissolution.

11.2 Minor and Insolvency

Illustration: 21

P, Q and R were partners and S, a minor was admitted in a partnership firm. S was given 20% share. P, Q and R share the profits in the ratio of 2:1:1. The Balance Sheet as on Dec 31, 2008 was as follows:

On the date R become insolvent, it was decided to dissolve the firm. The assets realised Rs 6,90,000. Creditors were settled for 3,90,000. Expenses of realisation amounted to Rs 6,000. A dividend of 40 in a rupee was received from R’s estate. Close the books of the firm.

Solution

• R is stated as a minor.
• Provision of the Partnership Act safeguards the minors (in a partnership firm), as such S will not be required to bear the losses.
• In this case, R another partner is insolvent. His deficiency is borne by other solvent partners only.
• S, the minor’s capital will not be affected by
  1. deficiency of Capital Account of R
  2. Advertising Suspense Account
• The above features should be kept in mind while preparing the necessary accounts to close the books of the firm on dissolution.

 

 

 

 

 

11.3 Garner vs. Murray Rule in Case of Commission to a Partner as Expense of the Business

Illustration: 22

K, L and M are partners in a firm sharing profits and losses in the ratio of 2:2:1. They decided to dissolve the firm and appoint one to realise the assets and distribute the proceeds for which he is to receive 10% commission on the amounts ultimately paid to K and M. The realisation expenses will be borne by the firm. The Balance Sheet of the firm on the date of dissolution was as follows:

L informs the following realisation: Debtors Rs 1,70,000; Stock 1,25,000; Furniture and Fittings Rs 20,000 and Goodwill Rs 41,000. There was unrecorded liability of Rs 2,500 which has now been paid. Realisation expenses amounted to 16,000.

M is able to contribute Rs 2,500 only. Commission payable to L is to be treated as firm’s expense. Close the books of the firm.

 

(B.Com – Madras Adapted and Modified)

Solution

Realisation Account, M’s Capital Account (to complete deficiency) and K’s Capital Account (amount payable to K) – all have to be prepared provisionally. Commission payable to L has to be ascertained by using algebraic equation.

 

Commission Payable to L is to be computed as:

Let the commission payable to L be X (assumed)

Then realisation loss after commission = 45,000 +X

K’s share of loss = 18,000 +2/5 X

L’s share of loss = 18,000 +2/5 X

M’s share of loss = 9,000 +1/5 X

(Loss in 2:2:1 ratio, as given in the problem)

M’s deficiency has to be borne by K and L in their capitals ratio – (Garner vs. Murray rule) (i.e.)

2,02,500: 1,35,000 (OR) – 3:2

Now, deficiency of M is ascertained as:

 

This deficiency will have to be borne by K and L in 3:2 ratio.

So K will have to bear 3/5 of (14,000 +X/5) = 8,400 +3X/25

L will have to bear 2/5 of (14,000 +X/5) = 5,600 +2X/25

Now, amount payable to K is to be computed as:

 

Coming back,

Commission Payable to L:

1/10 (1,76,100 − 13/25X) = X

1,76,100 – 13/25X = 10X

44,02,500 = 250X +13X

263X = 44,02,500

X = 44,02,500/1,263 = 16,740

Now, final main accounts for realisation, capital account of partners and cash/bank will have to be calculated.

 

 

 

 

 

OBJECTIVE 12: SALE OF PARTNERSHIP FIRM TO A LIMITED COMPANY

12.1 Meaning

Conversion of a firm to limited company

1. At times, a partnership of a firm may deserve to expand its business. Hence necessity drives then to convert its structural level from a firm into a company.
2. Sometimes, the business of firms may be acquired by an already existing company.
3. In both these cases, the firm is dissolved.
4. This kind of dissolution of firm is technically known as “Sale of a firm to a company.”
5. Although the firm is dissolved in the same manner as discussed so far, accounting treatment differs to a certain extent as this type of dissolution has its own unique features.

12.2 Salient Features

1. Generally, partnership firms are sold as a going concern. As such, all assets and outside liabilities (it is immaterial whether it is taken over by the purchasing company or not) are to be transferred to Realisation Account at their book values. Cash and book balances also may be transferred at the discretion of purchasing company. Otherwise, they should not be transferred to Realisation Account.

   The disposal of assets not taken over by the purchasing company is to be recorded through Realisation Account as well as the payment to outside liabilities (not taken over by the purchasing company) is to be recorded through the Realisation Account.

2. Purchase Consideration: The price paid by the purchasing company is known as “purchase consideration.”

   But from the point of view of the firm, it is known as “Sale Price.”

   Accounting Entry:

   This item (agreed purchase consideration or sale price) is to be recorded as:

   Purchasing Company’s Account	Dr.
   To Realisation Account

Calculation

The purchase consideration may be provided in either of the two following forms:

12.3 Meaning and Computation of “Purchase Consideration”

1. Lump sum figure
2. Not specified as lump sum figure

If lump sum figure is given, no need arises for further calculation. The lump sum figure itself will be the value of purchase consideration.

In case of the lump sum figure is not specified as a lump sum figure, purchase consideration will be calculated by either of the two methods:

1. Net Assets Method
2. Net Payment Method

12.3.1 Net Assets Method

Purchase Consideration = Total Value of Assets – Total Value of Liabilities

Important Notes

Here, value represents the agreed value between the firm and the purchasing company. It should never be calculated at their book value.

12.3.2 Net Payment Method

The purchase price may be paid partly in cash and partly by allotment of its own shares and debentures. Then purchase consideration value will be the aggregate amount of cash, issue price of shares – preference shares and issue price of debentures issued.

Here arises an important question – if the purchase consideration is exclusively cash, then no problem arises. But in case, purchase consideration is carried out by issuing shares and debentures. The most important and controversial subject is the basis of distribution of shares and debentures among the partners. There are two different schools of thought:

1. Shares and debentures are valued independently, and the profit or loss arising on such valuation is transferred to partner’s capital accounts. In the absence of any information, shares and debentures are taken at their book value.
2. Shares and debentures will be apportioned among the partners in the ratio of their final claims. In such case, ratio of capital will be adjusted by profit or loss on realisation and other accumulated losses and profits. To put it in a nutshell, shares and debentures will be distributed among the partners only in the ratio of their final claims and not in their profit sharing ratio. This method is in conformity with Section 49 (b)(iii) of the Partnership Act by which the assets of the firm must be used in paying each partner rateably what is due to him on account of capital.

12.4 Procedure

The author does not want to enter into controversy, as his main aim is to present the subject matter in a lucid manner to the students. As such students are asked to follow the procedure as mentioned below.

Generally, problems in the examination papers will provide some requirements or directions on how the shares, debentures, etc. are to be distributed among the partners. If there are no indications, then they are advised to put a note and proceed in line with Section 48(b)(ii) of the Partnership Act. (This procedure is followed in the forthcoming illustrations in this section: sale of a firm to a company – partnership dissolution.)

12.5 Accounting Entries

Sale of Firm to a Company

Item of Transaction	Account to be
	Debited	Credited
1. Transfer of Assets	Realisation	Assets (concerned)
2. Transfer of Liabilities	Liabilities (concerned)	Realisation
3. Purchase Price	(Purchasing Company)	Realisation
4. Assets sold (not taken over by the purchasing company)	Cash or Bank	Realisation
5. Assets not sold (taken over by the purchasing company)	Cash or Bank	Realisation
6. Payment of Liabilities	Realisation	Cash or Bank
7. Realisation Expenses	Realisation	Cash
8. Receipts to Purchase Consideration (Cash, Shares, Preference Shares, Debentures, etc. form the purchasing company)	(Concerned) Assets	Purchasing Company
9. Distribution of Cash among the Partners	Capital	Cash
10. Distribution of Shares/Debentures among the Partners	Capital	Shares/Debentures
11. Realisation Account: Profit	Realisation	Capital A/c (or) Current A/c
12. Realisation Account: Loss	Capital A/c or Current A/c	Realisation A/c

12.6 Purchase Consideration

Illustration: 23

The Himalya Company Limited was formed to acquire the business of X and Y who hare profits on the ratio of 3:2, respectively. The Balance Sheet of X and Y on Mar 31, 2009 was as follows:

It was agreed by the company to take over the assets at book value with the exception of land and buildings and stock which are taken over at Rs 40,000 and Rs 20,000, respectively. The investments were retained by them and sold for Rs 2,000. They also discharged the loan of No. X. The company took over the remaining liabilities. The value of goodwill is fixed at Rs 30,000.

    The purchase consideration is discharged as follows:

    10,000 ordinary shares of Rs 10 each and the balance in cash.

You are required to

1. Compute purchase consideration
2. Pass the necessary Journal entries
3. Prepare the necessary accounts to close the books of the firm

Solution

While computing the value of purchase consideration, care should be taken for the following items:

1. See whether cash and bank should be included in the assets or not. Here it is given “…company was formed to acquire the business.” Business includes all assets and liabilities. So it is included in purchase consideration.
2. See, whether there is any specific agreement or instruction in the problem. Here, it is shown as “Investment were retained and sold by the firm.” So investment is also not included.
3. Further the loan of Mrs. X was discharged by the (firm) partners. So that item is also excluded in the calculation of purchase consideration.

Step 1

 

Computation of Purchase Consideration

		Rs
Assets: (at agreed price)
Land and Building		40,000
Stock		20,000
Machinery		20,000
Debtors		20,000
Bills Receivable		4,500
Cash or Bank		5,000
Goodwill		30,000
(A) Total Value of Assets (at agreed price)		1,39,500
Liabilities: (Taken over)
Bill Payable	7,500
Sundry Creditors	18,000
(B) Total Value of Liabilities	25,500	25,500
(C) = A – B: Purchase Consideration		1,14,000

Step 2

Journal Entries

	Rs	Rs
1. For Transfer of Assets
Realisation Account:           Dr.	1,07,500
To Land and Buildings		30,000
To Stock		23,000
To Machinery		20,000
To Debtors		20,000
To Bills Receivable		4,500
To Cash at Bank		5,000
To Goodwill		5,000
(Being the transfer of assets of realisation account at their Book Value—assets being taken over by the company)
(Note: Investments omitted)
2. For transfer of Liabilities:
Bills Payable Account           Dr.	7,500
Sundry Creditors Account           Dr.	18,000
To Realisation Account 25,500
(Being the transfer of liabilities to realisation account at Book Value – Liabilities to be discharged by the Company)
3. For Purchase Price:
The Himalaya Company Ltd           Dr.	1,14,000
To Realisation A/c		1,14,000
(Being the Purchase Consideration, refer Step 1)
4. For Assets sold (not taken over by company)
Bank A/c           Dr.	2,000
Realisation A/c           Dr.	500
To Investment A/c		2,500
(Being the sale of investments not taken over by the company)
5. For receipts to Purchase Consideration:
Shares in The Himalaya Co Ltd           Dr.	1,00,000
Bank A/c           Dr.	14,000
To The Himalaya Co Ltd		1,14,000
(Being receipt to Purchase Consideration 10,000 shares @ Rs 10 each, and the balance Rs 14,000 in cash)
6. For distribution of Cash and Shares:
(a) For X:
X’s Capital A/c           Dr.	68,900
To shares in Himalaya Co Ltd		61,794
To Bank A/c		7,1064
(Being payment to X)
(b) For Y:
Y’s Capital A/c           Dr	42,600
To Shares in Himalaya Co Ltd		38,206
To Bank A/c		4,394
(Being payment to Y)
7. For transfer of Profi t on Realisation:
Realisation Account           Dr.	31,500
To X’s Capital Account		18,900
To Y’s Capital Account		12,600
(Being the profi t of realisation transferred to Capital Accounts of Partners)

Important Note: Shares have been distributed in the ratio of final claims of X and Y:

68,900: 42,600

689: 426

 

 

 

 

Illustration: 24

X and Y were equal partners. On Mar 31, 2009 their balance sheet was as follows:

On that date, the partners dissolved the firm. Fixed assets were sold to Alfa Co Ltd for Rs 2,00,000, payable in the form of 20,000 shares of Rs 10 each. X look over the Joint Life Policy at an agreed valuation of Rs 10,000. Stock and debtors realised Rs 47,400. Expenses came to Rs 600. X and Y agreed to distribute shares in Alfa Co Ltd among themselves in the ratio of their final claims. Sundry Creditors were paid at book value.

Show the necessary ledger accounts.

 

[B. Com (Delhi) Adapted and Modified]

Solution

 

 

 

Note: In this account, no need arises to establish the ratio of final claim because the one and only asset available for closing the capital accounts shares in the Alfa Co Ltd.

 

 

 

 

12.6.1 Model

Dealing with assets not taken over by such assets are dealt through Realisation Account.

Illustration: 25

A and B were partners sharing profits and losses in the ratio of 3:2, respectively. Their Balance Sheet as on Mar 31, 2009 was as follows:

Vas Ltd was formed with an authorised capital of Rs 15,00,000 divided with 75,000 equity shares of Rs 10 each and 75,000 preference shares of Rs 10 each to acquire the going concern of A and B on the following terms:

1. Vas Ltd took over all the assets except investments.
2. It valued the stock and plant and machinery @ 10% less than the book value and the freehold premises @ 20% more than the book value.
3. The liabilities were to be discharged by the company.
4. The goodwill of the firm was to be valued at two years purchase of the average profits of three years. The firm had made profits of Rs 45,000 in 2006–2007; Rs 54,000 in 2007–2008 and Rs 63,000 in 2008–2009 after setting aside of Rs 15,000 every year to reserve fund.
5. The purchase price was agreed upon to be paid Rs 1,59,000 in fully paid equity shares, Rs 1,50,000 in fully paid preference shares, Rs 90,000 in debentures and balance in cash.
6. The partners sold the investments and realised Rs 12,300.

You are required to prepare in the books of the firm X and Y

1. Realisation Account
2. Capital Accounts of the Partners
3. Cash Account

assuming that the shares and debentures are to be distributed in profit sharing ratio, the final settlement being made in cash.

 

(B.Com Madras University – Adapted and Modified)

Solution

• Ratio of final claims need not be calculated as it is clearly stated … distributed in profit sharing ratio in the problem. As such, it has to be distributed on 3:2 ratio.
• Investments not taken over by the company. It is dealt through Realisation Account.
• Computation of Goodwill:

  = 2/3 × (45,000 +115,000) +(54,000 +15,000) +(63,000 +15,000)

  = 2/3 (60,000 +69,000 +78,000)

  = 2/3 × 2,07,000 = 1,38,000

Step 1: Purchase Consideration

 

Assets	Rs
Goodwill	1,38,000
Cash	13,500
Book Debts	22,500
Stock	83,700
Plant and Machinery	1,35,000
Freehold Premises	1,62,000
(A)    Total of All Assets	5,54,000

 

Liabilities	Rs
Bills Payable	10,500
Sundry Creditors	19,200
(B)    Total of All liabilities	(29,700)	29,700
(C) = (A)—(B) = Purchase consideration		5,25,000

Step 2

 

 

 

Illustration: 26

X, Y and Z were partners in business sharing profits and losses in the ratio 2:1:1. Their Balance Sheet as at Mar 31, 2009 was as follows:

 

On Apr 1, 2009 it is agreed among the partners that Dev. Ltd a newly formed company with Y and Z having each taken up 50 shares of Rs 10 each will take over the firm as a going concern including goodwill but excluding cash and bank balance. The following points are also agreed upon:

1. Goodwill will be valued at three years purchase of super profits.
2. The actual profit for the purpose of goodwill valuation will be Rs 50,000.
3. Normal rate of return will be 15% on fixed capital.
4. All the other assets and liabilities will be taken over at book values.
5. The purchase consideration will be payable partly in shares of Rs 10 each and partly in cash. Payment in cash being to meet the requirement to discharge X, who has agreed to retire.
6. Y and Z are to acquire equal interest in the new company.
7. Expenses of liquidation Rs 20,000.

You are required to prepare the necessary ledger accounts

 

[C. A. (Inter) Modified]

Solution

 

Calculation of Goodwill:	Rs
Capital employed on Mar 31, 2009 (Fixed Capital)	2,00,000
Actual Profits	50,000
Less: Normal profits @ 15% of Rs 2,00,000	30,000
Super Profits	20,000
Goodwill at 3 years’ purchase 20,000 × 3	60,000
Calculation of Purchase Consideration

Assets:
Assets (Total) as per Balance Sheet	3,30,000
Deduct Cash and Bank Balances (as per instructions in the question)	75,000
	2,55,000
Add: Goodwill	60,000
(A) Total Assets	3,15,000
(B) Total Liabilities:
Unsecured Loans 1,00,000	(1,00,000)
(C) = (A) – (B): Purchase Consideration	2,15,000

 

 

 

 

Ratio Y:Z = 1:1

No. of Shares 13,000/2 = 6,500 shares each

 

OBJECTIVE 13: PIECEMEAL DISTRIBUTION

Accounting procedure for dissolution of partnership was based on the assumption that all assets are treated as sold on the same date of dissolution as well as liabilities are cleared off and partner’s accounts are closed or shown as settled. But in reality, it cannot be possible to dispose of everything on a single date.

13.1 Meaning of Piecemeal Distribution

In situations, the net proceeds are then and there distributed to partners, immediately after realisation. This procedure is termed as interim distribution of cash. But such a practice may result in overpayment to one or more partners. If such overpayment takes place, at times, the solvent partner will be taxed further and further.

To avoid this danger of overpayment, the cash realised may be distributed to the partners in such a way as to reduce the balances on the capital accounts to the profit sharing ratio. If it is done so, the unpaid balance of the capital of each partner is retained in the profit sharing ratio.

The process of realising the assets, selling piece by piece over a period of dissolution and the periodical distribution of cash in such a way that the unpaid balance of the capital of each partner is retained in the profit sharing ratio is termed as “Piecemeal Distribution.”

13.1.1 Order of disbursement of cash

On piecemeal (on realisation of assets over a period) cash realised will be disbursed in the order as mentioned below:

1. Payment for realisation expenses.
2. Payment to external liabilities – paid pro rata.
3. Payment to a partner’s loan. In case, if there are loans due to more than one partner, it has to be paid pro rata.
4. After the settlement of external liabilities and loans of partners, the amounts owing to the partners (sum of capital and current accounts) may be met.

   On payment to partners, the following criteria should be complied with:

   1. Interim payment must not result in overpayment to any partner.
   2. Such distribution among the partners should be in the profit sharing ratio.

13.1.2 Methods of Distribution of Cash among the Partners

1. Proportionate or Surplus Capital Method
2. Maximum Possible Loss Method

13.2 Proportionate or Surplus Capital Method

It is emphasised that the gradual realisation of cash has to be disbursed among the partners in such a way so as to ensure that unpaid balance of partners is retained in the profit sharing ratio. No problem arises as long as the payments are made in profit sharing ratio. If some other basis is in operation (e.g. capital ratio), then the real problem arises. This can be illustrated as follows:

Illustration: 27

At the time of dissolution of a firm, its partners X and Y have outstanding capital balances at Rs 1,00,000 and Rs 60,000, respectively. Profit sharing ratio is 3:2. After making all payments to outside liabilities and partner’s loans, the following realisations are made:

1. Rs 75,000
2. Rs 50,000

Show the net final result if

1. The realisations are distributed in profit sharing ratio.
2. The distribution is in the ratio of their capitals.

Solution

Case (a) : Distribution in profit Sharing Ratio:

Profit sharing ratio 3:2

 

	X	Y
	Rs	Rs
Capitals	1,00,000	60,000
I. Realisation: Rs 75,000 divided in the ratio 3:2	(45,000)	(30,000)
Balance after I Realisation	55,000	30,000
II. Realisation: Rs 50,000 divided in the ratio 3:2	(30,000)	(20,000)
Unpaid Balance (or) Loss	25,000	10,000
Unpaid balance for X = 25,000
Unpaid balance for Y = 10,000
Ratio: 25,000:10,000
5:2

Profit sharing ratio given in the question is 3:2

After realisation, unpaid balance ratio is 5:2

Note, even in this case, if the result is not in conformity with the profit sharing ratio. It differs

case (b): Distribution in the Capital Ratio:

 

	X	Y
	Rs	Rs
Capitals	1,00,000	60,000
Capital Ratio = 1,00,000:60,000
= 5:3
I. Realisation: Rs 75,000 is divided in the ratio of 5:3	(46,875)	(28,125)
Balance after I Realisation	53,125	31,875
II. Realisation: Rs 50,000 is divided in the ratio 5:3	(31,250)	(18,750)
Unpaid Balance (or) Loss	21,875	13,125
Unpaid Balance is 21,875:13,125
875:525
35:21

Again it is not the same as that of profit sharing ratio.

To solve this problem to a certain extent, proportionate method is applied. To use this surplus method, the following procedure has to be adopted:

1. In case, when the capitals are in the profit sharing ratio, realisations have to be distributed in the same proportion.
2. In case if the capitals are not in the profit sharing ratio, the capital accounts of the partners have to be brought in line with the ratio in which profits are shared. As it is not possible to achieve this in a single calculation, it has to be repeated till the desired results are obtained.

Illustration: 28

The following is the Balance Sheet of P, Q and R (whose profit sharing ratio is 4:3:1) as on Mar 31, 2009, on which date they dissolve partnership. The capitals are to be repaid as and when assets are realised.

 

The assets were realised as follows

 

		Rs
	I Realisation	20,000
	II Realisation	15,000
	III Realisation	25,000
	IV Realisation	40,000
	V Realisation	65,000

No further sums could be realised.

You are required to prepare a statement showing the distribution on the basis of Proportionate Capital Method (Surplus Capital Method)

Solution

 

Realisation III, IV and V is to be distributed among the partners as follows:

1. R will be paid Rs 32,500 first of all.
2. Then the cash will be distributed between P & R in the ratio of 4:1 till P is paid further Rs 30,000 and R, Rs 7,500.
3. When P has been paid Rs 30,000 and R Rs 40,000 (Rs 32,500 +7,500) the capital balances due will be P:Q:R 40,000:30,000:10,000.

Finally, cash would be disbursed among all the partners in the ratio of 4:3:1.

The underlying notion behind such procedure as described above is none of the partners paid more than what is due to them and none paid less.

In the same way, the following items:

General reserve, any liability, loan from partners profit/loss on assets realised can be dealt with.

In each and every stage of realisation, adjustments (distribution process) have to be worked out keeping in mind the above principle and distribution has to be carried out appropriately and judiciously.

Illustration: 29

Rose, Jasmine and Lilly had the following Balance Sheet as at Dec 31, 2008:

The partners decided to dissolve the firm. They shared profits in the ratio 2:2:1. Show the distribution of assets among the partners as and when realised applying the Surplus Capital Method. Close the books of account.

The proceeds of realisation were:

 

			Rs
	I	Jan 14, 2009	25,000
	II	Feb 14, 2009	49,000
	III	Mar 14, 2009	50,000

 

[B. Com (Madras). Modified]

Solution

 

Next, the statement showing piecemeal distribution has to be prepared. Study the problem:

First, outside liability, here – Sundry Creditors – has to be settled.

Second, partner’s advances – both Rose and Jasmine – in the ratio of their advances 20,000:16,000, i.e. 5:4 have to be distributed.

Third, Absolute Surplus Capital of Lilly has to be dealt with.

Fourth, for the surplus of capital: Rose and Lilly in their ratio, i.e. 2:1 has to be distributed.

Finally, the balance to all the partners in 2:2:1 ratio has to be distributed and books are closed thereby

13.3 Maximum Possible Loss Method

13.3.1 Cash Disbursement

In this method too, cash disbursement on each stage of realisation will be in the following order, as discussed in the Surplus Capital Method, i.e.

1. Outside Liabilities
2. Partner’s Advances
3. Partner’s Capitals

Only difference here is that at every stage of realisation, it is presumed that the unrealised assets are worthless.

The cash realised is deducted from the total amount outstanding on partner’s capitals and the difference is referred to as Maximum Possible Loss.

This is apportioned among the partners in the Profit Sharing Ratio.

At the stage of next realisation, partner’s capital accounts are to be opened with the balance, i.e. the balance due at previous realisation reduced by the part payment made in that realisation.

13.3.2 Rule of Garner vs. Murray

This rule may be applied in piecemeal realisations also. A partner with debit balance (or negative) in his Capital Account is presumed to be insolvent. His deficiency is to be distributed to the capital accounts of other partners in proportions to their capitals last agreed.

13.3.3 Presumptions Under Maximum Loss Method

Under Maximum Loss Method, it is presumed that

1. At each stage of realisation, the unrealised assets are to be treated worthless.
2. In a case, when a Partner’s Capital Account shows a debit (negative) balance, such a partner is said to be insolvent.
3. The deficiency in the capital account is apportioned as per Garner vs. Murray rule.

13.3.4 Advantages of this Method

1. The principle adopted in this method is in accordance with the Partnership Act.
2. Overpayment does not arise.
3. As payment is disbursed after taking into consideration of all possible losses, this method may satisfy the concerned partners also psychologically.

Illustration: 30

A, B, C and D were partners in a firm. The capital of the firm consisted of Rs 2,00,000 contributed originally in the proportion of 4:3:2:1. The profits and losses were also shared in the same proportion. The firm was dissolved on Mar 31, 2009. The Balance Sheet as on that date was as follows:

It was decided on Apr 10 that the net realisations should be distributed on the first day of each month in the appropriate order. The realisations and expenses at the end of each month were as follows:

The stock was disposed off completely. It was further agreed that B should take over the remaining debts or Rs 12,500. Show how the cash was distributed.

 

[B. Com (Hons) – Delhi – Adapted and Modified]

Solution

[As it is not specifically mentioned in the question as to which method has to be adopted, students are in a position to choose the method, i.e. either Surplus Capital Method or Maximum Loss Method. But they are advised to put a note in the beginning itself, the method to be used in solving the problem.

But if the following keywords appear, i.e. show the piecemeal distribution in a safe manner or as safe as possible, any partner is shown as having debit balance, any partner is declared insolvent, then the students have to follow Maximum Possible Loss Method only.] Here, Maximum Possible Loss Method is followed.

 

Illustration: 31

X, Y and Z are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were 5:3:2. Their capitals were Rs 48,000s Rs 30,000 ads Rs 42,000, respectively. After paying creditors, the liabilities and assets of the firm were as follows

The assets realised full in the order in which they are listed above. Y is insolvent.

You are required to prepare a statement showing the distribution of cash as and when available, applying Maximum Loss Procedure.

Solution

 

 

Illustration: 32

Ram, Robert and Rahim are partners sharing profits in the ratio of 3:2:1, respectively. Their Balance Sheet as on Mar 31, 2009 was as follows:

 

The partnership is dissolved and the assets are realised as follows:

 

		Rs
	First instalment	20,000
	Second instalment	30,000
	Third instalment	50,000

You are required to prepare a statement showing how the distribution would be made applying Garner vs. Murray principle.

Solution

Note: Keyword “Garner vs. Murray” is found in the question. As such Maximum Loss Possible Method is used in piecemeal distribution of cash.

 

• Dissolution means breaking of relationship among the partners, not only partnership is dissolved but the firm loses its existence.
• A partnership is dissolved in case (i) if there is a change in profit sharing ratio, (ii) a new partner is admitted, (iii) a partner is retired, (iv) a partner dies, (v) period of partnership expires, (vi) a partner becomes insolvent and (vii) merger with other firms.
• Dissolution of firm occurs by (i) agreement, (ii) compulsory dissolution, (iii) by notice and (iv) by court.
• Realisation Account is the account prepared to ascertain profit or loss on realising the assets and discharge of liabilities.
• Accounting entries to Prepare Realisation Account: refer the text.
• The method of closing firm’s books (accounts of various items) on dissolution of a firm. (refer the text).
• Preparation of Balance Sheet as on date of dissolution and preparation of necessary ledger accounts in the books of the firm.
• Return of Premium (Goodwill): Section 51 stipulates that a partner is eligible to claim refund of premium subject to certain conditions. Methods of dealing with claim of partner for refund of premium is explained in Illustration no. 11.
• Some assets of the firm may be gifted to partner(s) in recognition of service. (1) Gift by the firm and (2) Gift of one or more than one partner. For type (1) no entry is needed. For type (2), entry is (Concerned) Partner’ Capital A/c Dr. – To Realisation A/c.
• Insolvency of Partner(s): If a partner is unable to bring the needed amount to make up the deficiency (i.e., debit balance) in his Capital Account, such partner is said to be insolvent.
• Garner vs. Murray decision: (i) The solvent partners must bring in cash equal to the loss on realization debited to their Capital Account partner must be divided between solvent partners in proportion to their capitals. Accounting procedure varied depending of capital, fixed or floating.
• Use of algebraic equation to compute the amount recoverable from the insolvent partners (refer Illustration no. 18–20).
• A minor may be admitted as a partner to enjoy the benefits only. In case of dissolution of firms, a minor will not share any loss on realization of assets and payment of liabilities. He will not share any accumulated loss on dissolution. But he is entitled to claim his share in profit on realization account, accumulated profit exist on date of dissolution.
• Sale of partnership firm to a limited company: Conversion of structural level of entities from a firm into a company and acquisition of firms by an existing company – both are technically termed as sale of a firm to a company.
• Purchase consideration is the price paid by the purchasing company. It may be calculated by Net Assets Method or Net Payment Method.
• Accounting entries to be passed for various items of transaction and calculation of purchase consideration are explained in Illustration no. 23–26.
• Piecemeal Distribution is “the process of realizing the assets, selling piece by piece over a period of dissolution and the periodical distribution of cash in such a way that the unpaid balance of the capital of each partner is retained in the profit sharing ratio.”
• Proportionate or Surplus Capital Method and Maximum Possible Loss Method are explained to distribute cash among partners in Illustrations 27–32.

Firm Debt: Debts owed by a firm to outsiders.

Garner vs. Murray: It is the decision of case – Garner vs. Murray – in court of England (1903). As per this decision, the deficiency on the insolvent partner’s capital account must be borne by the other partners in proportion to their capitals, after each such partner has brought in cash to the extent of his own share or loss on realisation.

Insolvent: When a partner attains the status of debtor to the firm, such a person has to bring in needed debit balance in his capital account. If he is unable to make up such deficiency, such a partner is said to be insolvent.

Surplus Capital Method: It is a method of gradual realisation of cash disbursement to partners in such a way as to ensure unpaid balance of partners is retained in profit sharing ratio.

Maximum Possible Loss Method: It is a method of cash disbursement on each stage of realisation. The difference between cash realised deducted from total amount and Partner’s Capital Account is maximum possible loss. It is presumed that at every stage of realisation, unrealised assets are worthless.

Minor: A person who has not completed 18 years of age.

Memorandum Balance Sheet: To ascertain the value of Sundry Assets – the missing figure – the Balance Sheet to be prepared is called Memorandum Balance sheet.

Partnership: A business owned by two or more persons who agree to share profits and losses and other obligations of business.

Partnership Deed: A document settling out the agreement of the partners on running the business including profit and loss sharing ratio.

Partnership Dissolution: A partner’s change without affecting the continuity of the business may be said as dissolution of partnership.

Piecemeal Distribution: The process of realizing assets, selling piece by piece over a period of dissolution and the periodical distribution of cash in such a way that the unpaid balance of the capital of each partner is retained in the profit sharing ratio.

Private Debt: Debts owed by a partner to any other person.

Realisation Account: The account which has to be prepared to determine profit or loss on realising assets and discharging liabilities in the event of dissolution of firm.

 

Anthony R. N and J. S. Reece, “Accounting Principles,” Richard D. Irwin Inc.

Monga J. R., “Financial Accounting: Concepts and Applications,” Mayoor Paper Backs, New Delhi, 2007–08.

Gupta R. L. and M. Radhasamy, “Advanced Financial Accounts,” Sultan Chand and Sons, New Delhi, 2008.

Shukla M. C., T. S. Grewal and S. C. Gupta, “Advanced Accounts,” Chand & Co., New Delhi, 2008.

 

I State whether the following statements are True or False

1. Under the Indian Partnership Act, the dissolution may be either of partnership or of a firm.
2. Dissolution of partnership refers to the change in the existing relations of the partners.
3. Dissolution of firm does not affect the existing relations of the partners.
4. The dissolution of the firm necessarily means the dissolution of partnership.
5. In case of dissolution of firm, the firm may continue its business.
6. For firm’s debts, all partners are jointly and severally liable.
7. Realisation Account and Revaluation Account – both are one and the same.
8. Realisation Account is prepared only once during the lifetime of a firm.
9. Provision/Reserve against a liability is a separate account and it should be transferred to Realisation Account like other assets.
10. An asset/liability against which a provision has been created should be transferred at its Net figure.
11. General Reserve/Contingency Reserve is never transferred to Realisation Accounts.
12. Joint Life Policy Reserve is always transferred directly to Capital Accounts of partners.
13. Partner’s loan is transferred to Realisation Account.
14. The Profit and Loss (or balance) is not to be transferred to Realisation Account.
15. Cash in hand is not to be transferred to Realisation Account.
16. Goodwill is not to be transferred to Realisation Account.
17. Any amount realised from the sale of an unrecorded asset is debited to Realisation Account.
18. The liability of partners are limited as per Partnership Act.
19. Unrecorded liability is never transferred to Realisation Account.
20. Minor may be admitted in a partnership firm.
21. On dissolution of partnership, a minor shall not share the loss on realization.
22. A partner is eligible to claim the refund of premium.
23. When a partner is not able to bring in necessary cash for the deficiency in his capital account, such a partner is said to be insolvent.
24. Garner vs. Murray rule is applicable if there is any agreement among the partners.
25. Preparation of Realisation Account would be the same under both the circumstances – when Garner vs. Murray rule is applied and not applied.
26. Solvent Partners should bring cash equivalent to the share of realisation loss.
27. The rule in Garner vs. Murray can be applied even if there is only one solvent partner.
28. When all the partners are insolvent, solvency of such firm remains strong.
29. Shares/debentures, in the process of dissolution are issued in fraction.
30. Under Maximum Possible Loss method, at each realisation the unrealised assets are considered worthless.

Answers

 

1. True	2. True	3. False	4. True	5. False
6. True	7. False	8. True	9. True	10. False
11. True	12. False	13. False	14. True	15. True
16. False	17. False	18. False	19. True	20. True
21. True	22. True	23. True	24. False	25. True
26. False	27. False	28. False	29. False	30. True

 

II Fill in the blanks with suitable words

1. The Indian Partnership Act was enacted in the year _______.
2. When partnership is at _______, any partner can give a notice in writing to all the other partners of his intention to dissolve the firm.
3. A firm is compulsorily dissolved if all the partners or all the partners except one are _______.
4. Realisation Account is a _______ Account.
5. Loan given to a firm by a partner’s wife is a _______ to third party.
6. Profit/loss on dissolution is to be distributed among partners in the _______ ratio.
7. A minor partner is not entitled to bear realization _______.
8. Unrecorded asset will _______ be transferred to Realisation Account.
9. ________ liability will never be transferred to Realisation Account.
10. When Goodwill account does not appear in the balance sheet, the same is ________ to Realisation Account.
11. Liabilities +Capital – Given Assets = _______.
12. A partner with debit balance in his capital account and unable to bring in necessary cash, he is said to be _______.
13. Rule of Garner vs. Murray is applied if there is no specific _______ among partners.
14. When capitals are fixed, any losses left unadjusted in the balance sheet will have to be adjusted directly on the ________.
15. When capitals are fixed, the capitals on the date of dissolution constitute ______.
16. When capitals are fluctuating, capital ratios will be arrived at after making _______.
17. Solvent partners need not bring ________ to their share of loss on realisation.
18. Loss on realisation/debit balance in profit and loss A/c are transferred to ________ when capitals are fixed and to _______ when capitals are fluctuating.
19. The rule Garner vs. Murray may be applied only if there are at least _______ solvent partners in a firm.
20. When all the partners are insolvent, it will result in insolvency of _______.
21. Unless the available cash is sufficient to pay creditors in full, we have to prepare _______ Realisation Account.
22. A minor is admitted to the _______ of the firm only.
23. All assets and outside liabilities are to be transferred at their _______ values to Realisation Account, when sale of a firm to a company takes place.
24. Cash and Bank represent assets. So they are ________ in the purchase consideration.
25. Assets and liabilities not taken over by the purchasing company may be dealt through _______ Account.
26. On piecemeal distribution, two methods are adopted, 1 _______, 2 ________ to apportion cash realised among the partners.
27. Interview payments should not result in _______.
28. In the end, after all realisation have been made, final deficit balances must be in _______ ratio.
29. On gradual realisation of assets, first priority for distribution of realised cash will be for payments of ________.
30. Under Maximum Possible Loss Method it is presumed that the unrealised assets are _______.

Answers

1. 1932
2. will
3. insolvent
4. Nominal
5. liability
6. Profit sharing
7. loss
8. Not/Never
9. Unrecorded
10. not transferred
11. Sundry Assets
12. insolvent
13. agreement
14. current A/c
15. capital ratios
16. adjustments
17. Cash equivalents
18. Current; capital
19. Two
20. a firm
21. Provisional
22. benefits
23. Book
24. included
25. Realisation
26. 1. Surplus Method;
    2. Maximum Possible Loss Method
27. Over Payment
28. profit sharing
29. realisation expenses
30. worthless

1. Define “Dissolution of Partnership.”
2. What do you mean by “Dissolution of a firm”?
3. Distinguish between dissolution of partnership and dissolution of firm.
4. Distinguish between firm’s debts and private debts.
5. Explain the salient features of Realisation Account.
6. Explain the circumstances under which a partnership is dissolved.
7. Enumerate any four circumstances under which a firm will be dissolved.
8. Distinguish between Revaluation Account and Realisation Account.
9. Enumerate the items that are not transferred to Realisation Account.
10. Enlist the order in which the assets of the firm applied on dissolution process.
11. Explain how will you treat the following: (i) Joint Life Policy Reserve and (ii) Reserves.
12. Explain the treatment of goodwill in case of dissolution.
13. Enlist the steps involved in the preparation of Balance Sheet as on date of dissolution.
14. Explain the treatment of return of premium in case of dissolution under Section 51 of Indian Partnership Act.
15. Explain the accounting treatment of unrecorded assets and liabilities at the time of dissolution of firm.
16. Explain the treatment of realisation expenses in case of dissolution of a firm.
17. Explain the decision in Garner vs. Murray case.
18. Enlist the salient features of Garner vs. Murray rule in the Indian Context.
19. “Last agreed Capital,” explain with special reference to insolvency.
20. Elucidate how credits may be transferred to Realisation Account in case of insolvency of a firm.
21. Enlist the order of payment (actual realisation) of assets realised gradually in case of piecemeal distribution.
22. Explain the steps involved in piecemeal distribution under Surplus Capital Method.
23. Explain the important steps to be followed in case of Maximum Possible Loss Method.
24. Elucidate the salient features in the process of sale of a firm to a company with emphasis on computation of purchase consideration.
25. Distinguish between the Proportional Capital Method and Maximum Possible Loss Method of Piecemeal Distribution.

 

Note: All questions are taken from reputed university question papers. But certain modifications have been made over such questions.

1. P, Q and R sharing profit in the ratio of 3:1:1 decided to dissolve their firm on Mar 31, 2010, their position was as follows:

It is agreed that:

1. P is to take over all the furniture at Rs 2,000 and debtors amounting to Rs 40,000 at Rs 36,000. P also agrees to pay the creditors.
2. Q is to take over all the stock at book value and some of the sundry assets Rs 14,400 (being book value less 10%).
3. R is to take over the remaining sundry assets at 90% of the book value and assume responsibility for the discharge of the loan.
4. The remaining debtors were taken by a debt collecting agency at 80% of the book value.
5. The expenses of dissolution amounted to Rs 400. You are required to prepare Realisation Account, Bank Account and Capital Accounts of the Partners.

Answer: Realisation Account: Loss: Rs 8,400; Capital Accounts of Partners: P gets Rs 23,960; Q and R contribute Rs 10,680 and Rs 280.

2. Anil, Sunil and Vinyl are partners of a firm sharing profits and losses at 20%, 40% and 40%, respectively. Their summarised Balance Sheet on Dec 31, 2009, when they decided to dissolve the firm, was as follows:

Additional Information

1. Capital and current accounts are in proportion of profit sharing ratio.
2. Debtors realised two-thirds of its gross value while stock and machinery realised Rs 55,000 and Rs 1,00,000, respectively.
3. Investments written off in the past were taken over by Anil for Rs 1,15,000.
4. Suppliers allowed discounts of Rs 7,500 in full settlement.
5. Realisation expenses of Rs 12,500 were paid by Sunil and Vinyl in ratio of their capital account.
6. An old machinery fully written off was sold for Rs 10,500 while an extra payment of Rs 500 is made to bank for a discounted bill being dishonoured.

You are required to prepare:

Realisation Account

Cash and Bank Account

Capital Accounts of the partners

Answer: (1) Realisation Account – Loss Rs 50,000, (2) Capital Accounts: (i) Receive from Anil Rs 61,500 and (ii) Pay Rs 1,13,250 each to Sunil and vinyl]

3. A, B and C were partners sharing profits and losses in the ratio of 3:2:1 on Mar 31, 2010 their balance sheet was as follows:

The firm was dissolved on Apr 1, 2010. Joint Life Policy was taken over by A at 125%. Stock realised 1/11^th less. Debtors realised 90% furniture fetched 26% less while machinery was sold for 105%. In addition, one bill for Rs 10,000 under discount was dishonoured and had to be taken up by the firm. Expenses of realization amounted to Rs 3,970.

You are required to provide the necessary ledger accounts to close the books of the firm.

Answer:

 

Realisation Account:	Loss Rs 17,400
Capital Account:	A receives Rs 33,300
	B receives Rs 34,100 and
	C receives Rs 17,100

4. X, Y and Z were partners sharing profit and losses in the ratio of 2:2:1 dissolved the firm on Dec 31, 2009, whose Balance Sheet on that date was as follows:

Note: There is a bill for Rs 10,000 under discount. The bill was received from “A.”

The assets except Cash at Bank and Joint Life Policy were sold to a company which paid Rs 1,74,000 in cash. The Joint Life Policy was surrendered @ 110%. “A” proved insolvent and a dividend of 50% was received from his estate. Sundry Creditors were paid 95% in full settlement. The realisation expenses amounted to Rs 8,030.

You are required to prepare the Realisation Account, Cash Book and Partner’s Capital accounts.

Answer: Realisation Account: Profit – Rs 29,600

Capital Account: X Receives Rs 69,840; Y Receives Rs 49,840; Z Receives Rs 35,920]

5. P, Q and R, who shared profits and losses equally, were in partnership for many years. As their business was declining they decided to dissolve the partnership on Dec 31. The closing Balance Sheet as on that date was as follows:

The plant and machinery and the stock were sold by auction and realised Rs 25,000 and Rs 10,750. The firm was able to obtain discount of Rs 1,500 and allowances of Rs 8,500 on settlement of creditors. The bank charged Rs 1,250 for bank charges and interest debtors realised Rs 78,000. The freehold property was taken over by P (subject to the existing mortgage) and was revalued at Rs 1,50,000. The legal costs and consultant’s fees amounted to Rs 5,000 which was paid by the firm.

Prepare accounts showing the results of the dissolution, assuming that R was unable to contribute more than Rs 12,500 to his share of any deficiency of assets, and that the remaining amount due was shared by other partners equally.

Answer: Realisation loss – Rs 1,27,500

Payments to P – Rs 10,750

Payments to Q – Rs 24,250]

6. The following is the Trial Balance of the firm of A, B and C on Mar 31, 2010.

	Dr. (Rs)	Cr. (Rs)
Freehold Property (Chennai)	90,000	–
Leasehold Property (Delhi)	30,000	–
Leasehold Property (Lucknow)	24,000	–
Investments	12,000	–
Office Furniture	2,000	–
Stock (Chennai)	36,000	–
Stock (Delhi)	32,000	–
Stock (Lucknow)	28,000	–
Sundry Debtors	25,000	–
Sundry Creditors	–	37,000
Capital: A	–	1,00,000
B	–	90,000
C	–	60,000
Cash at Bank	8,000	–
	2,87,000	2,87,000

They agreed to dissolve the firm with immediate effect on the following terms:

1. The freehold property was sold and realised Rs 2,00,000; the investments realised Rs 15,000; debtors Rs 23,000 and office furniture Rs 1,200.
2. A retired from the business.
3. B took over the Delhi business and the assets in connection there with at book values; the goodwill there of being valued at Rs 20,000.
4. C took over the Lucknow business and the corresponding assets at book values; goodwill for this purpose being valued at Rs 10,000.
5. The expenses of realisation amounted to Rs 2,400. Creditors were paid Rs 14,000 on full settlement.
6. The Chennai stock was taken over by B and C equally at book value.
7. The partners shared profits in the proportion of 4:3:3.

Pass entries necessary to close the books of the firm. Also show realisation account and capital accounts of the partners.

Answer: Realisation Profit – Rs 1,40,800

Payments to A – Rs 1,56,320

Payments to B – Rs 32,240

Payments to C – Rs 22,240]

7. P, Q, R and S were in partnership sharing profits at 4:3:2:1. Their position on Dec 31, 2009 was as follows:

They decided to dissolve the firm on this date. The assets realised Rs 81,000. P and Q are both insolvent. Q’s private assets amount to Rs 24,000 and his private liabilities Rs 21,000. S’s private assets are Rs 18,000 and his private liabilities are Rs 3,000. Show the relevant accounts assuming that all the transactions are put through on Mar 31 and that Q’s estate realised only Rs 12,000 and S’s estate realised Rs 15,000.

Answer: Loss on Realisation – Rs 15,000

Capital deficiency of P and Q, i.e. Rs 3,000 and Rs 6,000, respectively, shared by R and S in the ratio of 2:1

8. The following is the Balance Sheet as on Mar 31, 2010 of a firm:

Capitals of the partners are fixed by the deed, profits and losses are shared equally. The business is closed due to loss. The assets, except the bank balance, realised net Rs 1,15,000. R is insolvent and realization expenses amounted to Rs 1,560. Show the final realisation and division amongst the partners. Apply Garner vs. Murray rule.

Answer: Loss on realisation – Rs 22,890; P receives Rs 39,040 and Q receives Rs 20,210 in addition to loan due]

9. Amar, Akbar and Antony are partners sharing profits and losses in the ratio of 2:1:1. On Mar 31, 20 –, their Balance Sheet was as follows:

On that day there were three devastating incidents:

A customer who owed Rs 1,20,000 became insolvent and nothing could be recovered from his estate. The ship was caught in a storm and it sunk with the entire cargo. The stock was not insured.

The godown caught fire. The stock that could be saved was only worth Rs 6,000. This stock was also not insured.

The partners decided to dissolve the firm. Fixed assets realised Rs 2,000; remaining debtors realized Rs 19,000; stock was sold for Rs 5,000. The creditors claiming payment totaled Rs 84,000. The partners did not have any private assets. Realisation expenses amounted to Rs 1,000.

You are required to pass journal entities to close the books of the firm. Also, show Realisation Account; Cash and Bank A/c and partner’s Capital Accounts.

Answer: Realisation Loss – Rs 5,10,000

         Payment to Anwar – Rs 7,334

         Payment to Akbar – Rs 3,666]

10. Kamal, Vimal and Sunil were partners sharing profits and losses in the ratio of 5:3:2, respectively. Their Balance Sheet as on Mar 31, 2010 was as follows:

The firm was dissolved on that date. Assets realised as follows:

Furniture and Fixtures: Rs 10,000; Stock: Rs 1,00,000; Debtors: Rs 1,20,000.

Sundry creditors to the extent of Rs 500 were paid in full. The total payment to sundry creditors was Rs 1,04,500. It was found that there was a liability of Rs 30,500 for damages which had also to be paid.

Winding up expenses amounted to Rs 10,000. Sonal became insolvent and he could pay only 20 paise in a rupee.

Prepare ledger accounts to close the books of the firm following Garner vs. Murray rule.

Answer: Realisation loss – Rs 1,50,000

        Payment to Kamal – Rs 1,22,727.50

        Payment to Vimal – Rs 93,272.50

        Payment to Sunil – NIL]

11. The position of R, S and T as on Mar 31, 2010 was as follows:

Profits and losses are shared R: 18/35; S: 7/35; T: 10/35. The firm was dissolved on the above date. Sundry assets realised 80%. Sundry creditors are paid 90% full settlement. Expenses amount to Rs 2,190. S is insolvent. Assume the capitals are not fixed. Close the books of the firm applying Garner vs. Murray rule.

Answer: Loss on realisation Rs 10,500

R receives Rs 16,401; S receives Rs 8,199 for capital inclusive of amount for making up realisation loss

12. The following was the Balance Sheet of C, D and E on Dec 31, 2009.

The partners shared profit and losses in the ratio 3:2:3. It was decided to dissolve the partnership as on the date of the Balance Sheet. The assets realised are as follows: Freehold Property 30%; Furniture 80% less; Stock 40%; Debtors 50% less.

The realisation expenses amounted to Rs 5,240. The sundry creditors agreed to take 75 paise in the rupee in full satisfaction if D is insolvent. A dividend of 50 paise in the rupee was received from the court receiver.

Prepare Realisation Account, Capital and Current Accounts of partners by applying Garner vs. Murray rule.

Answer: Loss on Realisation – Rs 73,200

         C Receives – Rs 43,218

        E Receives – Rs 25,732]

13. J, K and L were in partnership sharing profits and losses in the ratio of 2:3:5. They prepared the following Balance Sheet on Dec 31, 2009, when they decided to dissolve:

Plant and Machinery, Debtors and stock realised 70%. Prepare the necessary ledger accounts (including loan from Mrs. L Account and Trade Creditors’ Account, after considering the position of partners as follows:

Answer: Loss on realisation – Rs 90,000

       Amount to be brought in by J Rs 61,666

       Amount to be brought in by L Rs 3,334]

14. Ajay, Vijay and Sanjay were in partnership sharing profits and losses in the ratio of 1/5:3/10:1/2. The Balance Sheet as on Dec 31, 2009, when they decided to dissolve, was as follows:

You ascertain that the balance in Profit and Loss Account is prior to charging interest on Sanjay’s loan. Plant and Machinery and Debtors realised 80%. Ajay’s private estate which was valued at Rs 2,10,000 has a liability there on Rs 90,000. The private estate realised only Rs 1,20,000. Vijay is insolvent on his own account to partnership.

You are required to prepare Realisation Account, Cash Account and Partner’s Capital Accounts.

Answer: Loss on Realisation – Rs 98,799

        Amount to be brought in by Ajay – Rs 30,000

        Amount to be brought in by Sanjay – Rs 8,799]

15. X, Y and Z had the following Balance Sheet as on Mar 31, 20 –

The firm was dissolved. Stock realised Rs 40,000; Fixed assets and debtors realised Rs 1,20,000 in all. The private position of the partners was as follows:

	X	Y
	Rs	Rs
Private Estate	40,000	32,000
Private Liabilities	60,000	24,000

Z was able to pay 50 paise in the rupee what was payable on his own account to the partnership. The partners shared profits and losses in the ratio of 4:3:3 for X, Y and Z, respectively. The loss on realisation is to be determined after considering the amount finally paid to the creditors. You are required to close the books of the firm by preparing the necessary ledger accounts.

Answer: Realisation Loss – Rs 1,52,236

           Cash brought in by Z – Rs 20,236]

16. A, B, C and D are partners of a firm. A gets one-fourth share in profits. The other partners shared the balance equally. The following is their Balance Sheet as on Mar 31, 20--.

The partnership was dissolved on the date of Balance Sheet on the following terms:

1. On that day it was found that a liability for purchase of goods of Rs 40,000 had been omitted to be recorded and that the goods had been included in stock.
2. The assets realised as Plant and Machinery Rs 1,20,000; Furniture and Fixtures Rs 36,000; Debtors Rs 42,000 and Stock Rs 60,000.
3. The creditors including the unrecorded creditors were paid in full. There was a contingent liability in respect of bills discounted for Rs 7,000.
4. During the year there were unrecorded assets purchased for Rs 20,000. 50% of the assets were handed over to the vendor of the asset (also unrecorded) in full settlement of his claim. The remaining 50% were sold for Rs 8,000.
5. The realisation expenses amounted to Rs 7,700.
6. B is insolvent and can contribute only Rs 4,700.
7. The contingent liability did not materialise.

Prepare Realisation Account, Cash Account and partner’s Capital Accounts.

Answer: Realisation Loss – Rs 1,20,000

     Deficiency in B’s Account – Rs 15,000]

17. X and Y were carrying on business in partnership sharing profits and losses in the ratio of 3/5 and 2/5. On Mar 31, 20–, they transferred their business to Alpha RT Ltd. The Balance Sheet of X and Y as on Mar 31 was as follows:

The company took the following assets at the following valuation:

Land 50%; Building 125%; Stocks 93.75%; Machinery 20% less; Debtors Rs 42,500; Goodwill Rs 30,000. Creditors were paid 93.75% in full and final settlement. Company paid Rs 25,000 in fully paid 25,000 equity, shares of Rs 10 each and balance in cash. Expenses of transfer amounted to Rs 2,500.

Prepare ledger accounts in the books of the firm and make opening entities in the books of a company.

Answer: Profit on Realisation – Rs 52,500; Cash brought in by Y – Rs 4,000; Cash paid to X – = Rs 31,500]

18. C and D were equal partners. On Dec 31, 20–, their Balance Sheet was as follows:

On that day they dissolved the firm. Fixed Assets were sold to Beta. Co. Ltd for Rs 2,00,000 payable in the form of 20,000 shares of Rs 10 each. C took over Joint Life Policy at an agreed valuation of Rs 10,000. Stock and debtors realised Rs 47,400. Expenses amounted to Rs 600. C and D agreed to distribute shares in Beta Co. Ltd between themselves in the ratio of their final claims. Sundry Creditors were paid at book value. Prepare Realisation Account, Capital Accounts and Cash Book.

Answer: Loss on Realisation – Rs 29,900; C’s Loan to be repaid Rs 200 in cash and Rs 19,800 in shares; C’s Capital is to be paid Rs 1,25,100 in shares and D’s Capital is to be paid in Rs 55,100 in shares]

19. X, Y and Z carry on business in partnership sharing profits and losses in the proportions of ½, 3/8, and 1/8, respectively. On Mar 31, 2010, they agreed to sell their business to Victory Ltd. Their position on that date was as follows:

Victory Ltd took the following assets at the valuation as follows:

Freehold Property 30% more; Machinery 30% less; Book Debts 90%; Stock 10% less; Goodwill Rs 38,220.

The company also agreed to pay the Trade Creditors which were agreed to allow a discount of 2%. The company paid Rs 2,01,000 in fully paid shares of Rs 10 each and the balance in cash. The expenses amounted to Rs 4,500.

You are required to prepare the necessary ledger accounts in the books of the firm.

Answer: Purchase Consideration – Rs 3,63,300;

     Realisation Profit – Rs 28,800

     Distribution of shares: X – 8,526; Y – 6,396; Z – 5,208]

20. Success Ltd was formed to acquire the business of R and S who share profits in the ratio of 2:1, respectively. The Balance Sheet of R and S on Dec 30, 2009 was as follows.

It was agreed by the company to take over the assets at book value with the exception of Land and Buildings and Stock which are taken over at Rs 80,000 and Rs 50,000, respectively. The investments are retained by the firm and sold by the firm for Rs 8,000. They also discharged the loan of Mrs. R. The company takes over the remaining liabilities. The value of goodwill is fixed at Rs 57,600.

The purchase consideration is discharged as follows: 20,000 equity shares of Rs 10 each and the balance in cash. Close the books of the firm.

Answer: Profit on Realisation – Rs 42,000

    R receives Rs 1,24,800 in shares and Rs 31,200 in cash

    S receives Rs 75,200 in shares and Rs 18,800 in cash]

21. L, M and N were partners in a business sharing profits and loses in the ratio of 2:1:1. Their Balance Sheet as at Dec 31, 2009 was as follows:

On Jan 1, it is agreed among the partners that Supriya & Co, Ltd, a newly formed company with M and N having each taken up 50 shares of Rs 10 each will take over the firm as a going concern including goodwill but excluding cash and bank balances.

The following points are also agreed upon:

1. Good will be valued at three years purchase of super profits.
2. The actual profit for the purpose of goodwill valuation will be Rs 50,000.
3. Normal rate of return will be 15% on fixed capital.
4. All other assets and liabilities will be taken over at book values.
5. The purchase consideration will be payable partly in shares of Rs 10 each and party in cash. Payment in cash being to meet the requirement to discharge L who has agreed to retire.
6. M and N are to acquire equal interest in the new company. Prepare necessary ledger accounts.
7. Express of liquidation amount to Rs 20,000. Prepare necessary ledger accounts.

Answer: Loss on realisation – Rs 40.000]

22. Green and Red were in partnership sharing profits in the proportion ¾^th and ¼^th. The following is the Balance Sheet of the firm as at Dec 31, 2009.

Himalaya Ltd agreed to take over stock and fixed assets excluding the value of scooter Rs 20,500 for a consideration of Rs 2,40,000 which is to be satisfied by payment of cash Rs 80,000, allotment of 800 preference shares of Rs 100 each valued as Rs 75 per share and the balance by allotment of 8,000 equity shares of the face value of Rs 10 each.

The debtors realised Rs 96,000 and the creditors were settled for Rs 70,000.

The following were agreed between the partners:

1. The equity shares should be allotted in the ratio of partner’s capital accounts as per Balance Sheet.
2. Green to take over the scooter at an agreed value of Rs 21,000.
3. The preference shares to be allotted to Red to the value of his loan and the remainder to be allotted equal between the partners.
4. Balance remaining to be settled in cash.

You are required to show (i) the Realisation Account, (ii) partner’s Capital Account, (iii) Bank Account and (iv) statement showing distribution of cash.

Answer: Profit on Realisation – Rs 99,600

Green gets: Rs 22,500 in preference shares; Rs 75,000 in equity shares and Rs 97,200 in cash

Red gets: Rs 22,500 in preference shares; Rs 25,000 in equity shares and Rs 27,400 in cash]

23. For partnership dissolved on July 31, balance sheet on the date of dissolution was as follows:

The assets were realised in instalments and payment was made on the proportionate capital basis. Creditors were paid Rs 43,500 in full settlement of their accounts. Expenses on realisation were estimated to be Rs 8,100 but actual amount spent on this was Rs 6,000. This amount was paid on Nov 2. Draw up memorandum of distribution of cash that was realised as follows:

On Aug 10, Rs 37,800

On Sep 15, Rs 90,000

On Nov 2, Rs 1,20,000

The partners shared profits and losses in the ratio of 2:2:1

Answer: Unpaid Amounts: Mohan – 16,200

        Mohamed – 16,200

        Martoni – 8,100]

24. X, Y and Z were in partnership sharing profits and losses in the ratio of 2:1:1, respectively. On Dec 31, they decided to dissolve the partnership where their Balance Sheet stood as follows:

The assets were realised in piecemeal as follows:

Jan 27     Premises: Rs 15,000 (received after meeting in full the liability on the mortgage ban); Sundry debtors – Rs 18,000; Stock – Rs 21,000

Feb 20     Sundry Debtors – Rs 22,500; Stock – Rs 25,500

Mar 25     Sundry Debtors – Rs 60,000; Stock – Rs 69,000

Apr 27     Sundry Debtors – Rs 45,000; Stock – Rs 75,000 and furniture Rs 24,000.

The remaining stock was taken over by Y at an agreed amount of Rs 9,000. The trade creditors were settled for Rs 12,000. The partners distributed cash at the end of every month beginning on Jan 31.

You are required to show the distribution of cash in the form of a statement applying the proportionate capital basis.

Answer: Unpaid amounts:

         X – Rs 16,500

         Y – Rs 8,250

         Z – Rs 8,250]

25. A, B and C were in partnership with a capital of Rs 90,000 originally contributed in the ratio of 3:2:1, respectively, and sharing profits and losses in the same ratio. The partnership was dissolved on Dec 31 on which date the Balance Sheet stood as follows:

It was agreed that the net realisations should be distributed in their due order at the end of each calendar month. The realisations and expenses were as follows:

The stock having been completely disposed of it was agreed that C should take over the remaining debts at Rs 1,800. Show how the cash was distributed by applying Proportionate Capital Method.

Cash Received By

Answer:

26. P, Q and R were in partnership. The following is their Balance Sheet as at Dec 31 on which date they dissolved it:

The partners share profits in the ratio of 5:3:2. It was agreed to repay the amounts due to the partners as and when the assets were realised as Feb 1; Rs 1,20,000; Apr 1, Rs 2,92,000; June 1, Rs 1,88,000. You are required to prepare a statement showing how the distribution should be made applying Maximum Loss Method.

Cash Received By

Answer:

27. R, S and T were partners sharing profits and basses in the proportion ½; 3/10 15 and 1/5 15, respectively. On Dec 31, 2009 they decided to dissolve the partnerships and the Balance Sheet as on that date was as follows:

The firm was dissolved on Jan 1. The assets realised were as follows:

Cash received was paid to the rightful claimants. Show the distribution of cash according to Maximum Loss Method.

Answer: Cash Received By

28. A, B and C have capitals of Rs 96,000; Rs 60,000 and Rs 84,000 and share profits and losses in the ratio of 3:2:1, respectively. After paying creditors, the following sums become available and it was agreed that they shall be distributed as and when determined:

Oct 15 – Sale Proceeds of Machinery – Rs 15,000

Expenses – Rs 3,000

Dec 31 – Realisation from Debtors – Rs 45,000

Expenses – Rs 5,000

B is insolvent. All assets are realised. Show the sums to be paid to the partners out of the amounts available according to Maximum Loss Method.

Answer: Oct 15 – C receives Rs 12,000

        Dec 31 – A receives Rs 580

        C receives Rs 39,420]

29. Ram, Rahim and Robert share profits and losses in the ratio of 4:2:1. They decide to dissolve the partnership and their Balance Sheet as on the date of dissolution was as follows:

The partners also decide that after the creditors have all been paid and providing a sum of Rs 3,600 to meet payable expenses of realisation and dissolution, all cash realised should immediately be divided among them. The assets are realised as follows: first realisation – Rs 46,080; second realisation Rs 55,200; third realisation: 2,89,197; final realisation – Rs 1,68,900. Expenses of realisation and dissolution amount to Rs 3,396. Prepare a statement showing how cash should be distributed among the partners according to Maximum Loss Method.

Answer: Out of the second realisation: Robert is paid Rs 32,040

  Out of third instalment: Rahim receives Rs 1,65,678

  Robert receives Rs 1,23,519

  Out of final instxalment = Ram receives – Rs 83,052

  Rahim receives – Rs 55,848

  Robert receives – Rs 30,204]