GSEB Class 12 Accounts Solutions Chapter 7 Dissolution of a Partnership Firm

GSEB Class 12 Accounts Dissolution Of Partnership Firm Text Book Questions And Answers

 

Question 1. Select the correct answer for each question:
(1) How many methods are there for dissolution of a partnership firm ?
(A) One
(B) Three
(C) Two
(D) Four
Answer: (C) Two
In simple words: A partnership firm can be dissolved through two primary methods.

🎯 Exam Tip: Understanding the fundamental methods of firm dissolution is crucial for theoretical questions.

 

Question 1. Select the correct answer for each question:
(2) Which of the following account is opened to incorporate the accounting effect of assets and liabilities of the partnership firm at the time of dissolution ?
(A) Profit and loss account
(B) Profit and loss appropriation account
(C) Revaluation account
(D) Realisation account
Answer: (D) Realisation account
In simple words: When a partnership firm is dissolved, the Realisation Account is used to record the financial impact of disposing of assets and settling liabilities.

🎯 Exam Tip: Identify the specific account used for winding up operations during dissolution, as it's a core concept.

 

Question 1. Select the correct answer for each question:
(3) What is the type of realisation account ?
(A) Balance sheet
(B) Personal
(C) Real
(D) Nominal
Answer: (C) Real
In simple words: The Realisation Account is categorized as a Real Account.

🎯 Exam Tip: Remember the classification of accounts, especially for unique accounts like the Realisation Account, for quick recall in MCQs.

 

Question 1. Select the correct answer for each question:
(4) Which is the first payment made from the realisation of assets, at the time of the dissolution of a firm :
(A) Dissolution expense
(B) Loan of partner's wife
(C) Liabilities towards third parties
(D) Partner's loan
Answer: (A) Dissolution expense
In simple words: Upon the dissolution of a firm, the initial payment made from the proceeds of asset realization is for dissolution expenses.

🎯 Exam Tip: Understanding the hierarchy of payments during dissolution is vital for both theoretical and practical problems.

 

Question 1. Select the correct answer for each question:
(5) Which of the following amount will be written at the credit side of realisation account, when there is balance of debtors Rs. 24,500 and bad debt reserve of Rs. 2,500 in the balance sheet at the time of the dissolution of a firm ?
(A) Rs. 24,500
(B) Rs. 2,500
(C) Rs. 22,500
(D) Rs. 27,000
Answer: (B) Rs. 2,500
In simple words: When a firm dissolves and the balance sheet shows debtors of Rs. 24,500 and a bad debt reserve of Rs. 2,500, the amount to be credited to the Realisation Account will be Rs. 2,500 (the bad debt reserve).

🎯 Exam Tip: Pay close attention to how provisions like bad debt reserve are treated in the Realisation Account during dissolution, as they represent a liability adjustment.

 

Question 1. Select the correct answer for each question:
(6) To which account credit balance of general reserve, workmen accident compensation fund, - credit balance of profit and loss account is transferred at the time of the dissolution of a firm ?
(A) Realisation A/c
(B) Profit and loss appropriation account
(C) Profit and loss A/c
(D) Partners' capital A/c
Answer: (D) Partners' capital A/c
In simple words: At the time of a firm's dissolution, the credit balances of the general reserve, workmen accident compensation fund, and profit and loss account are transferred to the Partners' Capital Account.

🎯 Exam Tip: Always remember that accumulated profits and reserves are distributed among partners by transferring them to their capital accounts upon dissolution.

 

Question 2. Answer the following questions in one sentence :
(1) Explain the meaning of dissolution of partnership.
Answer: Dissolution of partnership occurs when the business continues despite a partner's retirement, death, insolvency, or other reasons, meaning the firm itself does not cease operations.
In simple words: Partnership dissolution happens when a partner leaves, but the business keeps running with the remaining partners.

🎯 Exam Tip: Distinguish between "dissolution of partnership" and "dissolution of firm" as they have different implications.

 

Question 2. Answer the following questions in one sentence :
(2) What is the dissolution of a partnership firm ?
Answer: As per section-39 of the Indian Partnership Act, the dissolution of a partnership firm signifies the complete termination of the partnership relationship among all partners, thereby bringing the firm's operations to an end.
In simple words: Under the Indian Partnership Act, dissolving a firm means the entire business stops and the partnership ends for everyone.

🎯 Exam Tip: Understand that dissolution of a firm means the complete cessation of business, unlike dissolution of partnership where the business may continue.

 

Question 2. Answer the following questions in one sentence :
(3) What is voluntary dissolution ?
Answer: Voluntary dissolution occurs when all partners collectively decide to terminate the partnership firm's operations at any given moment.
In simple words: Voluntary dissolution is when all partners agree to close the business whenever they want.

🎯 Exam Tip: Note that mutual agreement among all partners is the defining characteristic of voluntary dissolution.

 

Question 2. Answer the following questions in one sentence :
(4) Who has to bear dissolution expense, at the time of dissolution of a firm ?
Answer: Typically, the dissolution expenses of a firm are borne by the firm itself; however, in most situations, a specific partner is designated to cover these costs.
In simple words: Usually, the firm pays for dissolution costs, but often a partner takes on this responsibility.

🎯 Exam Tip: The rule for bearing dissolution expenses is a common point of confusion; clarify if the firm or a partner is responsible.

 

Question 2. Answer the following questions in one sentence :
(5) How would you deal with the provident fund balance shown in the balance sheet at the time of dissolutions ?
Answer: During dissolution, the Provident Fund balance appearing in the balance sheet will be transferred to the credit side of the Realisation Account.
In simple words: The Provident Fund amount from the balance sheet goes to the credit side of the Realisation Account when the firm dissolves.

🎯 Exam Tip: Treat Provident Fund as an external liability, hence it is transferred to the credit side of the Realisation Account.

 

Question 2. Answer the following questions in one sentence :
(6) How would you deal with bad debts return, which is written off earlier ?
Answer: At the time of dissolution, any bad debts previously written off that are subsequently recovered would be recorded on the credit side of the Realisation Account.
In simple words: If bad debts previously written off are recovered during dissolution, they are recorded on the credit side of the Realisation Account.

🎯 Exam Tip: Any unexpected income or recovery from previously written-off items is credited to the Realisation Account.

 

Question 2. Answer the following questions in one sentence :
(7) Explain the meaning of Realisation Account.
Answer: The Realisation Account is an account prepared at the time of dissolution to give accounting treatments for disposing of assets and settling liabilities.
In simple words: It's an account made when a business closes to record selling assets and paying off debts.

🎯 Exam Tip: Focus on the dual purpose of the Realisation Account: liquidating assets and settling liabilities.

 

Question 2. Answer the following questions in one sentence :
(8) Describe the methods of dissolution of a Partnership Firm.
Answer: As per the Indian Partnership Act-1932, there are two methods for dissolution of a partnership firm:
(i) Normal dissolution or dissolution without interference of court.
(ii) Dissolution by the court.
In simple words: Partnership firms can end either voluntarily without a court, or by a court order, as per the 1932 Indian Partnership Act.

🎯 Exam Tip: Clearly differentiate between court-involved and non-court-involved dissolution methods, as stipulated by the Indian Partnership Act.

 

Question 2. Answer the following questions in one sentence :
(9) Where will you record the payment of bills payable under the second method of realisation account ?
Answer: Under the second method of preparing the Realisation Account, payment of bills payable is credited to the Cash/Bank Account, and the resulting difference amount is then transferred to the Realisation Account.
In simple words: In the second realisation method, paying bills payable means crediting Cash/Bank and moving the remaining amount to the Realisation Account.

🎯 Exam Tip: Note that under the second method, direct payments for liabilities are routed through the Cash/Bank Account first, with the net effect transferred to Realisation.

 

Question 3. Answer the following questions in brief :
(1) Which accounts are prepared to close the books at the time of dissolution of a partnership firm ? Describe it.
Answer: Upon the dissolution of a firm, all assets are sold, liabilities settled, and any surplus capital is redeemed, leading to the closure of accounting books. The following accounts are prepared for this process:
(1) Realisation Account: All asset accounts, which typically show debit balances, are closed by crediting them and transferring their balances to the debit side of the Realisation Account. Similarly, liabilities, which have credit balances, are debited to close them and are transferred to the credit side of the Realisation Account.
(2) Partners' Loan Account: If a partner has provided a loan to the firm, a separate Loan Account is opened for that partner. This account is then closed by repaying the loan amount.
(3) Partners' Capital/Current Accounts: After the Loan Account is closed, the balance from the Current Account (if maintained) is transferred to the Partners' Capital Account. Any resulting deficit is then adjusted with the Cash Account, and finally, the Capital Accounts are closed.
(4) Cash/Bank Account: Once the Capital and Current Accounts are closed, their balances are transferred to the Cash Account. At this point, the total of the Cash Account from both sides should match, leading to the automatic closure of the firm's account.
In simple words: When a firm dissolves, assets are sold, debts paid, and accounts like Realisation, Partners' Loan, Capital/Current, and Cash/Bank are prepared to close the books.

🎯 Exam Tip: Remember the four main accounts prepared during dissolution and their specific roles in the winding-up process.

 

Question 3. Answer the following questions in brief :
(2) In which circumstances court can pass the order for dissolution of a firm ? Explain
Answer: A court can issue an order for the dissolution of a firm if a partner files a suit under any of the following circumstances:
- When any partner becomes insolvent.
- When any partner becomes of unsound mind.
- When a partner willfully and persistently breaches the partnership agreement.
- When a partner undertakes misconduct against the partnership firm or against the business of the firm.
- When a partner becomes permanently incapable of performing his duties as a partner.
- When a firm continuously incurs losses and is unable to run a business due to such losses.
- When a partner transfers his whole interest in the partnership to a third party without the consent of other partners.
- When the court finds any other ground to be just and equitable for the dissolution of the firm.
In simple words: A court can order a firm's dissolution if a partner requests it due to issues like insolvency, unsound mind, breach of agreement, misconduct, permanent incapacity, continuous losses, unauthorized transfer of interest, or other just and equitable grounds.

🎯 Exam Tip: Be aware of the various legal grounds on which a court can intervene and mandate the dissolution of a partnership firm.

 

Question 3. Answer the following questions in brief :
(3) Write short note: Realisation Account.
Answer: The Realisation Account is an account prepared to incorporate accounting treatments for the disposal of liabilities and assets of the firm.
- On the debit side of this account, the balances of all assets are transferred, and on the credit side, all liabilities are transferred.
- The liabilities that are paid off sequentially are recorded on the debit side of the Realisation Account. If the account shows a credit balance, it indicates a profit, which is then credited to the partners' capital accounts in their profit and loss sharing ratio.
- The Realisation Account's final balance will represent either a profit or a loss. This difference is allocated among the partners according to their profit sharing ratio, with profit credited to their capital accounts and loss debited to their capital accounts.
In simple words: The Realisation Account is used during firm dissolution to record asset disposal and liability payments, calculating the final profit or loss to be shared among partners.

🎯 Exam Tip: Understand the dual role of the Realisation Account in recording the transfer of assets/liabilities and the subsequent profit/loss from their disposal.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(i) General Reserve
Answer: General Reserve: The balance of the general reserve account is credited to the partners' capital or current account in their profit and loss sharing ratio.

	Particulars	Dr.
	General Reserve A/c
	To Partners' Capital / Current A/c.

In simple words: The General Reserve is distributed among partners in their profit-sharing ratio and credited to their capital accounts during dissolution.

🎯 Exam Tip: Always remember that General Reserve is an accumulated profit, distributed among partners, not transferred to the Realisation Account.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(ii) Investment Fluctuation Fund
Answer: Investment Fluctuation Fund: This fund is a provision against assets, and its balance will be shown under the heading of provision on the credit side of the Realisation Account.

	Particulars	Dr.
	Investment Fluctuation Fund A/c
	To Realisation A/c.

In simple words: The Investment Fluctuation Fund, being a provision, is transferred to the credit side of the Realisation Account during dissolution.

🎯 Exam Tip: Treat Investment Fluctuation Fund as a provision for asset value changes, thus it's typically transferred to the Realisation Account.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(iii) Workmen Accident Compensation Fund
Answer: Workmen Accident Compensation Fund: This fund is an accumulated profit that will be credited to all partners' capital/current accounts in their profit-loss sharing ratio.

	Particulars	Dr.
	Workmen accident compensation fund A/c
	To Partners' Capital / Current A/c.

In simple words: The Workmen Accident Compensation Fund is considered an accumulated profit and is distributed among partners in their profit-loss sharing ratio during dissolution.

🎯 Exam Tip: Similar to General Reserve, this fund, if no liability exists against it, is treated as distributable profit and transferred to partners' capital accounts.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(iv) Provident Fund
Answer: Provident Fund: The Provident Fund represents a liability (debt) that will be shown under the heading of Sundry Liability on the credit side of the Realisation Account.

	Particulars	Dr.
	Providend Fund A/c
	To Realisation A/c.

In simple words: The Provident Fund, being a liability, is transferred to the credit side of the Realisation Account during the dissolution process.

🎯 Exam Tip: Recognize Provident Fund as a specific external liability to be settled and therefore transferred to the credit of the Realisation Account.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(v) Debit Balance of Profit and Loss A/c
Answer: Debit Balance of Profit and Loss A/c: A debit balance in the profit and loss account represents an accumulated loss, which will be debited to the partners' capital accounts in their profit and loss sharing ratio.

	Particulars	Dr.
	Partners' Capital / Current A/c
	To Profit - Loss A/c

In simple words: An accumulated loss (debit balance in P&L A/c) is charged to the partners' capital accounts in their profit-loss sharing ratio during dissolution.

🎯 Exam Tip: Accumulated losses are debited to partners' capital accounts, reducing their balances, unlike accumulated profits which are credited.

 

Question 3. Answer the following questions in brief :
(4) How would you deal with the following balances disclosed in the balance sheet at the time of the dissolution of a partnership firm ? Explain.
(vi) Depreciation Fund
Answer: Depreciation Fund: The Depreciation Fund is a provision against assets, and its balance will be shown under the heading of provision on the credit side of the Realisation Account.

	Particulars	Dr.
	Depreciation A/c
	To Realisation A/c.

In simple words: The Depreciation Fund, being a provision, is transferred to the credit side of the Realisation Account when the firm dissolves.

🎯 Exam Tip: Treat Depreciation Fund as a provision, transferring it to the credit of the Realisation Account, similar to other provisions against assets.

 

Question 3. Answer the following questions in brief :
(5) Describe the legal provisions pertaining to loss of dissolution of a partnership firm.
Answer: According to the Indian Partnership Act, the losses arising from a firm's dissolution, including any capital deficits, are handled in the following sequence:
(a) Firstly, the loss will be written off against the profits of the firm.
(b) If the firm's profits are insufficient, the loss will then be covered from the partners' capital.
(c) Should the partners' capital also be insufficient, all partners must cover this loss from their personal assets, contributing in their profit-loss sharing ratio as required.
In simple words: As per law, dissolution losses are first covered by firm profits, then partners' capital, and finally by partners' personal assets based on their profit-loss ratio.

🎯 Exam Tip: Understand the clear order of priority for absorbing dissolution losses to correctly apply legal provisions.

 

Question 3. Answer the following questions in brief :
(6) Explain the normal procedure of partnership firm dissolution.
Answer: The standard process for dissolving a partnership firm involves several steps:
(i) Initially, all expenses related to the firm's dissolution are settled.
(ii) Following this, liabilities owed to third parties are paid. A loan from a partner's wife is treated as a third-party liability.
(iii) Subsequently, any loans provided by the partners to the firm are repaid from the remaining amount.
(iv) Finally, the balances in the partners' capital and current accounts are settled.
(v) If any surplus funds remain after all payments, that amount is distributed among the partners according to their profit-loss sharing ratio.
In simple words: Normal firm dissolution involves paying off dissolution expenses, then third-party liabilities, followed by partners' loans, then partners' capital accounts, and finally distributing any remaining surplus based on profit-loss ratio.

🎯 Exam Tip: Memorize the step-by-step procedure for asset realization and liability settlement during normal dissolution for comprehensive understanding.

 

Question 4. Answer the following questions to the point:
(1) Distinguish between : First and Second method of disposal of realisation account.
Answer: The key differences between the first and second methods for disposing of the Realisation Account are as follows:

Points	First Method	Second Method
1. Realisation Account	After closing the assets and liabilities accounts, they are transferred to Realisation account.	In the Realisation Account, assets and liabilities accounts are not transferred.
2. Accounts	Liabilities and Assets accounts are closed.	Accounts of Liabilities are closed. Assets are not closed.
3. Realisation of Assets	On the credit side of the Realisation Account, the realized value from the sale of assets is recorded.	The realized value of assets is credited to asset accounts, and the balance is transferred to Realisation Account.
4. Payment of Liability	On the debit side of the Realisation Account, payment for the liability is shown.	If a liability is debited to that liability A/c, the amount paid towards it is transferred to Realisation Account.
5. Circumstances	If the liabilities are paid immediately and the assets are realized immediately on dissolution, then this method is suitable.	If the payment of liability and the realization of assets are made in instalments on dissolution, then this method is suitable.

In simple words: The first method of Realisation Account involves transferring all assets and liabilities to it, while the second method focuses on recording only the realized amounts and payments without initial transfer of all items.

🎯 Exam Tip: Understand which method is appropriate for different dissolution scenarios (e.g., immediate vs. installment realization) and how they differ in account transfers.

 

Question 4. Answer the following questions to the point:
(2) How would you undertake accounting disposal of realisation of asset and payment of liability which are not recorded in the balance sheet at the time of the dissolution of a firm?
Answer: Accounting disposal of the realization of assets and payment of liabilities which are not recorded in the balance sheet at the time of dissolution of a firm is as under :
(1) When unrecorded assets is paid:

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Cash A/c	Dr.	.........
	To Realisation A/c			.........
	(Being amount realised on unrecorded assets)

In simple words: When an asset not previously recorded in the books is sold during dissolution, the cash received is debited and the Realisation Account is credited.

🎯 Exam Tip: Remember to record the realization of unrecorded assets by crediting the Realisation Account, as it represents a gain from the dissolution process.

 

Question 4. Answer the following questions to the point:
(2) How would you undertake accounting disposal of realisation of asset and payment of liability which are not recorded in the balance sheet at the time of the dissolution of a firm?
Answer: Accounting disposal of the realization of assets and payment of liabilities which are not recorded in the balance sheet at the time of dissolution of a firm is as under :
(2) When unrecorded assets are given to recorded creditor for his due:

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Realisation A/c	Dr.	.........
	To Bank/Cash A/c			.........
	(Being creditors are paid)

In simple words: If an unrecorded asset is used to settle a recorded creditor's claim, no journal entry is typically passed, or a nominal entry may be made if there's a cash component. The provided entry shows the payment to creditors, which would happen if the unrecorded asset was converted to cash first.

🎯 Exam Tip: When an unrecorded asset settles a recorded liability, often no cash transaction occurs; hence, the net effect might be zero or involve Realisation if a specific value is assigned.

 

Question 4. Answer the following questions to the point:
(2) How would you undertake accounting disposal of realisation of asset and payment of liability which are not recorded in the balance sheet at the time of the dissolution of a firm?
Answer: Accounting disposal of the realization of assets and payment of liabilities which are not recorded in the balance sheet at the time of dissolution of a firm is as under :
(3) When unrecorded liability is paid:

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Realisation A/c	Dr.	.........
	To Cash/Bank A/c			.........
	(Being unrecorded liability is paid)

In simple words: When a liability not previously recorded in the books is paid, the Realisation Account is debited and the Cash/Bank Account is credited.

🎯 Exam Tip: The payment of any unrecorded liability is treated as an expense of dissolution, hence debited to the Realisation Account.

 

Question 4. Answer the following questions to the point:
(2) How would you undertake accounting disposal of realisation of asset and payment of liability which are not recorded in the balance sheet at the time of the dissolution of a firm?
Answer: Accounting disposal of the realization of assets and payment of liabilities which are not recorded in the balance sheet at the time of dissolution of a firm is as under :
(4) When payment is made for unrecorded liability through unrecorded asset:

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Realisation A/c	Dr.	.........
	To Bank A/c			.........
	(Being amount is paid for unrecorded liability)

In simple words: When an unrecorded asset is used to settle an unrecorded liability, no cash transaction typically occurs, so no journal entry is usually required. The provided entry depicts a cash payment for an unrecorded liability.

🎯 Exam Tip: If an unrecorded asset completely settles an unrecorded liability without cash involvement, no entry in the Realisation Account is typically needed.

 

Question 4. Answer the following questions to the point:
(3) Give accounting treatments for goodwill of different circumstances when firm goes for dissolution.
Answer: During a firm's dissolution, goodwill is accounted for in various ways depending on the specific circumstances:
(1) If the value of goodwill is shown in the balance sheet, then like other assets, it will be shown on the debit side of the Realisation Account.
(2) The amount realized from the sale of goodwill will be shown on the credit side of the Realisation Account.
(3) If no information regarding the realization of goodwill is provided, it is assumed that nothing is realized.
(4) If goodwill is not shown in the books of account at the time of dissolution, but an amount is realized from it, this realized amount will be treated as profit and credited to the Realisation Account.
(5) When any partner purchases the entire business (including goodwill), then (i) the Capital Account of the partner purchasing the business is debited by the amount of goodwill, and (ii) the Realisation Account is credited by the amount of goodwill.
In simple words: Goodwill treatment during dissolution varies: if on the balance sheet, it's debited to Realisation and sold; if unrecorded but realized, it's profit; if a partner takes the business, their capital is debited and Realisation credited.

🎯 Exam Tip: Pay attention to whether goodwill is recorded in the balance sheet or unrecorded, and whether it is sold, taken over by a partner, or not realized, as each scenario has distinct accounting implications.

 

Question 4. Answer the following questions to the point:
(4) Explain in brief, legal provisions of accounting settlement for partnership firm dissolution.
Answer: The primary legal stipulations regarding the accounting settlement during the dissolution of partnership firms are as follows:
(1) Legal provision for loss of firm: Firstly, losses are covered from the firm's profits. If profits are insufficient, the loss is written off against the partners' capital. If capitals are also insufficient, partners must bear the loss in their profit and loss ratio by selling their personal assets.
(2) Legal provision for the payment of liabilities of the firm and partners: Partners have unlimited liabilities. Firm's liabilities are initially paid from its assets. If firm assets are insufficient, partners' personal assets must be used to settle the remaining liabilities.
(3) Payment of loan to the firm by the partners: First, liabilities of the firm are paid by realizing its assets. After external liabilities, partners' loans to the firm are repaid. If multiple partners have given loans and they cannot cover deficits, loans are repaid proportionally.
(4) Payment of loan given by the partners' wife: A partner's wife's loan is treated as a third-party liability and repaid promptly. However, if the wife's loan originated from her husband's funds, it is treated as a loan from that partner.
(5) Payment of liabilities of a partner: Partners' liabilities are unlimited. If any partner is declared insolvent during dissolution, the solvent partners are obligated to cover the firm's liabilities, as the insolvent partner(s) cannot meet their share.
(6) Legal provision for distribution of the realized assets of the firm: The payment for liabilities from the realization of assets will be made in the following order:
(i) First, dissolution expenses are paid.
(ii) Then, third-party liabilities are paid.
(iii) Next, loans from partners are repaid.
(iv) Finally, payments are made towards partners' capital and current accounts.
(v) If any surplus remains, it is distributed among the partners in their profit-loss sharing ratio.
In simple words: Legal provisions for dissolution settlement cover how losses are absorbed (profits, then capital, then personal assets), the order of liability payments (firm assets, then personal assets), how partners' loans are repaid, dealing with a partner's wife's loan, solvent partners' responsibility for insolvent partners' shares, and the distribution hierarchy of realized assets.

🎯 Exam Tip: Understand the specific hierarchy for settling liabilities and distributing assets during dissolution, as mandated by legal provisions, for accurate problem-solving.

 

Question 4. Answer the following questions to the point:
(5) Explain methods of dissolution without the interference of court.
Answer: There are two general categories for the dissolution of a partnership firm: (I) Normal Dissolution and (II) Dissolution by the court.
(I) Normal Dissolution/Dissolution without interference of Court: This occurs under the following circumstances:
(i) By agreement: A partnership firm can be dissolved at any time if all partners mutually agree to do so. This is known as voluntary dissolution.
(ii) Dissolution on happenings of certain contingencies:
(a) If the partnership was formed for a fixed term, it dissolves upon the expiry of that term.
(b) If the partnership was established to achieve a specific aim, it dissolves upon the completion of that aim.
(iii) Dissolution by notice: In a partnership at will, any partner can dissolve the firm by providing written notice to all other partners of their intention to dissolve the firm.
(iv) Dissolution as per act: Compulsory dissolution occurs by operation of law under the following conditions:
(a) When all partners (or all but one) become insolvent.
(b) When the firm's business becomes illegal (e.g., if a firm trading in tobacco faces a legal ban, it automatically dissolves).
(c) When any partner becomes mentally incapacitated or dies, the partnership ends, and the firm dissolves.
(v) Dissolution as per contract: A partnership firm can also be dissolved based on predetermined terms outlined in the partnership contract between the partners.
In simple words: A firm can dissolve without court involvement through mutual agreement, specific events like term expiry or project completion, notice from a partner, or automatically due to legal acts like insolvency, illegality of business, or a partner's death/incapacity, or as per a contract.

🎯 Exam Tip: Differentiate clearly between the various non-court-ordered methods of dissolution, such as agreement, contingencies, notice, and legal acts, to understand their initiating factors.

 

Question 4. Answer the following questions to the point:
(6) Total assets of firm A and B are Rs. 1,50,000, including cash of Rs. 10,000. Net assets of the firm are Rs. 1,00,000. The ratio of capital and reserve is 4:1. The capital of A is more than that of B by Rs. 20,000. Loss of realisation account is Rs. 20,000. The firm is dissolved. Prepare an opening balance sheet and ascertain the opening capital of A and B.
Answer:
Opening Balance Sheet

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital : A	50,000	Other Assets	1,40,000
B	30,000	Cash Balance	10,000
	80,000
Reserve	20,000
Liabilities	50,000
Total	1,50,000	Total	1,50,000

Note:
(1) Other Assets = Total Assets - Cash
= Rs. 1,50,000 - Rs. 10,000
= Rs. 1,40,000

(2) Net Assets = Total Assets - Total Liabilities
\( \implies \) Rs. 1,00,000 = Rs. 1,50,000 - Total Liabilities
\( \implies \) Total Liabilities = Rs. 1,50,000 - Rs. 1,00,000
= Rs. 50,000

(3) Capital + Reserve + Liabilities = Total Assets
\( \implies \) Capital + Reserve + Rs. 50,000 = Rs. 1,50,000
\( \implies \) Capital + Reserve = Rs. 1,50,000 - Rs. 50,000
= Rs. 1,00,000

(4) Ratio of Capital and Reserve = 4:1
\( \implies \) Capital = Rs. \( 1,00,000 \times \frac{4}{5} \) = Rs. 80,000
\( \implies \) Reserve = Rs. \( 1,00,000 \times \frac{1}{5} \) = Rs. 20,000

(5) Here, capital of A is more than that of B by Rs. 20,000.
Suppose capital of B is x. Capital of A = x + Rs. 20,000
\( \implies \) Total Capital = x + x + Rs. 20,000 = Rs. 80,000
\( \implies \) 2x = Rs. 80,000 - Rs. 20,000
\( \implies \) 2x = Rs. 60,000
\( \implies \) x = Rs. 30,000 \( \implies \) Capital of B = Rs. 30,000
Now, Capital of A = x + Rs. 20,000 = Rs. 30,000 + Rs. 20,000 = Rs. 50,000
In simple words: This problem requires constructing an opening balance sheet and calculating partners' initial capital amounts (A and B) based on given total assets, cash, net assets, capital-to-reserve ratio, and their capital difference, following the firm's dissolution.

🎯 Exam Tip: When preparing an opening balance sheet from partial information, work backward from total assets and net assets to determine liabilities and then allocate capital and reserves using given ratios and relationships.

 

Question 4. Answer the following questions to the point:
(7) Prepare realisation account from Question No. 6.
Answer:
Realisation Account

Dr.	Particulars	Amt. (Rs.)	Cr.	Particulars	Amt. (Rs.)
	To Sundry Assets A/c :	1,40,000		By Sundry Liabilities A/c	50,000
	To Cash A/c Liabilities	50,000		By Cash A/c : Sundry Assets	1,20,000
				By Loss : Partner's capital A/c
				A	10,000
				B	10,000
		1,90,000			20,000
					1,90,000

In simple words: Based on the figures provided in Question 4(6), this section outlines the preparation of the Realisation Account to process assets, liabilities, and determine the dissolution profit or loss.

🎯 Exam Tip: Ensure all assets and liabilities (except cash/bank and partners' capital/loan) are transferred to the Realisation Account at their book values, and any loss is correctly distributed to partners' capital accounts.

 

Question 4. Answer the following questions to the point:
(8) Total Assets of firm at the time of dissolution is Rs. 2,00,000. Out of which 40% are current assets (including cash Rs. 10,000). 120% realised for fixed assets. While 80% are realised of current asset. Pass journal entries.
Answer:
Explanation:
Total Assets = Rs. 2,00,000
Current Assets (40%) = Rs. 80,000 (including cash Rs. 10,000).
Other Current Assets = Rs. 80,000 - Rs. 10,000 = Rs. 70,000.
Fixed Assets = Rs. 2,00,000 - Rs. 80,000 = Rs. 1,20,000.

Realisation of Fixed Assets = 120% of Rs. 1,20,000 = Rs. 1,44,000.
Realisation of Current Assets = 80% of Rs. 70,000 = Rs. 56,000.
Total Realised = Rs. 1,44,000 + Rs. 56,000 = Rs. 2,00,000.

Journal Entries

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Realisation A/c	Dr.	1,90,000
	To Fixed Assets A/c			1,20,000
	To Current Assets A/c			70,000
	(Being assets accounts are closed and transferred to Realisation account)
2.	Cash/Bank A/c	Dr.	2,00,000
	To Realisation A/c			2,00,000
	(Being assets and Rs. 56,000 realised from current assets)

In simple words: This problem involves calculating the realized amounts from fixed and current assets (including cash) during dissolution and then passing the appropriate journal entries for asset disposal and realization.

🎯 Exam Tip: Carefully calculate the book value and realized value of each asset category (fixed, current, and cash) before passing journal entries to avoid errors in transfer and realization amounts.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(1) At the time of dissolution the book value of goodwill is Rs. 56,000. No amount is realised.
Answer:
Journal Entries of Firm

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1. (i)	Realisation A/c	Dr.	56,000
	To Goodwill A/c			56,000
	(Being firm is dissolved and goodwill account transferred to realisation account)
(ii)	No Entry

In simple words: When goodwill appears in the books but is not realized upon dissolution, it is first transferred to the debit of the Realisation Account, and since no amount is recovered, no further entry is made for its realization.

🎯 Exam Tip: Remember that if an asset is transferred to Realisation but yields no realization amount, only the transfer entry is required.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(2) In the balance sheet land-building Rs. 8,00,000 and investments of Rs. 2,00,000 are disclosed. Respectively Rs. 9,00,000 and Rs. 1,50,000 are realised from them.
Answer:
Journal Entries of Firm

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
2. (i)	Realisation A/c	Dr.	10,00,000
	To Land-Building A/c			8,00,000
	To Investments A/c			2,00,000
	(Being firm is dissolved and assets accounts are transferred to realisation account)
(ii)	Cash /Bank A/c	Dr.	10,50,000
	To Realisation A/c			10,50,000
	(Being Rs. 9,00,000 of land-building and Rs. 1,50,000 of investment are realised)

In simple words: First, existing land-building and investment assets are transferred to the Realisation Account at their book values. Then, the cash received from their sale is debited to Cash/Bank and credited to Realisation.

🎯 Exam Tip: Always pass two distinct entries for assets: one for transferring them to the Realisation Account at book value, and another for recording the actual cash realization.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(3) Total assets of the firm are Rs. 2,00,000 out of which 40% of are current assets (including cash of Rs. 10,000). book value is realised.
Answer:
**Journal Entries of Firm**
(Based on the assumption that "book value is realised" refers to the remaining 60% fixed assets, and the question is similar to Q4(8) regarding structure for current/fixed assets, but only the *transfer* entry is provided here.)

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
3. (i)	Realisation A/c	Dr.	1,90,000
	To Fixed Assets A/c			1,20,000
	To Current Assets A/c			70,000
	(Being firm is dissolved and assets account are transferred to realisation account)

In simple words: All assets, excluding cash, are transferred to the debit side of the Realisation Account at their book values when the firm is dissolved.

🎯 Exam Tip: Always remember to exclude cash balance from total assets when transferring to the Realisation Account, as cash is already in liquid form.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(4) Goodwill is not disclosed in the book. But Rs. 50,000 realised during dissolution.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
4.	Cash/Bank A/c	Dr.	50,000
	To Realisation A/c			50,000
	(Being amount realised of undisclosed goodwill at the time of dissolution)

In simple words: If goodwill was not recorded but generates cash during dissolution, the Cash/Bank Account is debited and the Realisation Account is credited, treating the realization as a profit.

🎯 Exam Tip: Realization of an unrecorded asset is a gain during dissolution and should be credited directly to the Realisation Account.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(5) The value of laptop is Rs. 35,000. One partner has taken [laptop for Rs. 25,000]. (Reconstructed from page 13 & 15 where only "taken" was visible)
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
5. (i)	Realisation A/c	Dr.	35,000
	To Laptop A/c			35,000
	(Being firm is dissolved and laptop account transferred to realisation account)
(ii)	Partners' capital/current A/c	Dr.	25,000
	To Realisation A/c			25,000
	(Being firm is dissolved and one partner taken laptop for Rs. 25,000)

In simple words: First, the laptop asset is transferred to the Realisation Account at its book value. Then, when a partner takes it for a specific amount, their capital/current account is debited, and the Realisation Account is credited with that amount.

🎯 Exam Tip: When a partner takes over an asset, their capital account is debited at the agreed-upon value, and the Realisation Account is credited for the same amount.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(6) A partner has accepted to pay loan of his Smt. Rs. 40,000, which was given to the firm.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
6.	Smt.'s Loan A/c	Dr.	40,000
	To Partners' capital/current A/c			40,000
	(Being firm is dissolved and one partner accepted to pay the loan given by Smt. to the firm)

In simple words: When a partner agrees to pay their spouse's loan to the firm during dissolution, the spouse's loan account is debited and the partner's capital/current account is credited.

🎯 Exam Tip: A partner's wife's loan is generally treated as an external liability. If a partner assumes responsibility for it, their capital account is credited.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(7) Income tax liability is now payable Rs. 30,000 it is not recorded in the book.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
7.	Realisation A/c	Dr.	30,000
	To Cash/Bank A/c			30,000
	(Being firm is dissolved and unrecorded income tax is paid)

In simple words: An unrecorded income tax liability, when paid during dissolution, is debited to the Realisation Account and credited to the Cash/Bank Account.

🎯 Exam Tip: Payment of any unrecorded liability, including taxes, is an expense of dissolution and is debited to the Realisation Account.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(8) After making payment of all liabilities and loan of partners of firm, surplus of assets is Rs. 1,20,000. The profit and loss sharing ratio of partners A, B and C are 5 : 3 : 2.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
8.	Realisation A/c	Dr.	1,20,000
	To A's Capital/current A/c			60,000
	To B's Capital/current A/c			36,000
	To C's Capital/current A/c			24,000
	(Being surplus of assets is distributed to partners' capital/current A/c in the ratio of 5:3:2)

In simple words: Any surplus from asset realization after settling all liabilities and partners' loans is treated as a Realisation profit and distributed among partners' capital accounts in their agreed profit-sharing ratio.

🎯 Exam Tip: A surplus from asset realization, if it's the final amount left after all payments, implies a Realisation Profit which is distributed among partners in their profit-sharing ratio.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(9) Machine is disclosed in the book at the time of dissolution for 2,00,000. Book value is realised.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
9. (i)	Realisation A/c	Dr.	2,00,000
	To Machine A/c			2,00,000
	(Being firm is dissolved and machinery account transferred to realisation account)
(ii)	Cash/Bank A/c	Dr.	2,00,000
	To Realisation A/c			2,00,000
	(Being book value of machine is realised)

In simple words: The machine is first transferred to the Realisation Account at its book value. Since its full book value is realized, the Cash/Bank Account is debited, and the Realisation Account is credited for that amount.

🎯 Exam Tip: When an asset is realized at its book value, the realization amount directly matches the transfer amount in the Realisation Account.

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(10) One partner has accepted responsibility to undertake dissolution procedure. In the return of it, decided to pay remuneration of Rs. 20,000. On account of expense firm has paid him Rs. 12,000.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
10. (i)	Realisation A/c	Dr.	20,000
	To Respective Partners' capital A/c			20,000
	(Being remuneration is paid to partner for performance of dissolution procedure)
(ii)	Respective Partners' capital A/c	Dr.	12,000
	To Cash/Bank A/c			12,000
	(Being amount paid to partner by a firm)

In simple words: When a partner is given remuneration for undertaking dissolution, the Realisation Account is debited and the partner's capital is credited. If the firm later pays the expenses on the partner's behalf, the partner's capital is debited, and cash is credited.

🎯 Exam Tip: Differentiate between remuneration payable to a partner for dissolution (debited to Realisation) and actual expenses paid by the firm on behalf of the partner (debited to partner's capital).

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(11) There are debtors of Rs. 1,20,000 and creditors of Rs. 60,000 at the time of dissolution of firm. One partner has taken debtors at 20% less than book value and accepted to pay creditors.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
11. (i)	Realisation A/c	Dr.	1,20,000
	To debtors A/c			1,20,000
	(Being debtors are transferred to realisation account)
(ii)	Creditors A/c	Dr.	60,000
	To Realisation A/c			60,000
	(Being creditors are transferred to realisation account)
(iii)	Partners' capital/current A/c	Dr.	96,000
	To Realisation A/c			96,000
	(Being partner has accepted debtors at 20% less than book value)
(iv)	Realisation A/c	Dr.	60,000
	To Partners' capital/current A/c			60,000
	(Being partner has paid to creditors)

In simple words: Debtors are transferred to Realisation. Creditors are also transferred to Realisation. When a partner takes over debtors at a reduced value, their capital account is debited, and Realisation is credited. If the same partner agrees to pay creditors, Realisation is debited, and the partner's capital account is credited.

🎯 Exam Tip: When a partner assumes both an asset and a liability, two separate entries are required: one for the asset taken (debit partner's capital, credit Realisation) and another for the liability assumed (debit Realisation, credit partner's capital).

 

Question 5. Pass journal entries for the following of firm in the case of firm's dissolution :
(12) The profit-loss sharing ratio between partners R, B and I is 3:2:1. Undertake the disposal of the following balances : (i) General reserve 18,000 (ii) Debit balance of profit and loss A/c Rs. 12,000 (iii) Workmen accident compensation fund 18,000.
Answer:
**Journal Entries of Firm**

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
12. (i)	General Reserve A/c	Dr.	18,000
	To R's Capital /current A/c			9,000
	To B's capital/current A/c			6,000
	To I's capital/current A/c			3,000
	(Being amount of general reserve is distributed amongst the partners in the ratio of 3:2:1.)
(ii)	R's capital/current A/c	Dr.	6,000
	B's Capital/current A/c	Dr.	4,000
	I's Capital/current A/c	Dr.	2,000
	To profit and loss A/c			12,000
	(Being debit balance of profit and loss account is distributed amongst the partners in the ratio of 3:2:1)
(iii)	Workmen Accident Compensation Fund A/c	Dr.	18,000
	To R's capital/current A/c			9,000
	To B's Capital/current A/c			6,000
	To I's capital/current A/c			3,000
	(Being amount of workmen accident compensation fund is distributed amongst the partners in the ratio of 3:2:1)

In simple words: General Reserve and Workmen Accident Compensation Fund are distributed to partners' capital accounts in their profit-sharing ratio. A debit balance in the profit and loss account (loss) is also transferred to partners' capital accounts in the same ratio.

🎯 Exam Tip: Always distribute accumulated profits (General Reserve, WACF) as credits and accumulated losses (P&L Debit Balance) as debits to partners' capital accounts in their profit-sharing ratio.

 

Question 5. Pass journal entries for the following scenarios during a firm's dissolution:
(1) The book value of goodwill at dissolution is Rs. 56,000, but no amount is realized.
(2) The balance sheet shows land-building at Rs. 8,00,000 and investments at Rs. 2,00,000. These assets realize Rs. 9,00,000 and Rs. 1,50,000, respectively.
(3) The firm's total assets are Rs. 2,00,000, with 40% being current assets (including Rs. 10,000 cash). The book value of these current assets is realized.
(4) Goodwill is not recorded in the books, but Rs. 50,000 is realized during dissolution.
(5) A laptop valued at Rs. 35,000 is taken over by a partner for Rs. 25,000.
(6) A partner agrees to settle a loan of Rs. 40,000, previously extended to the firm by his wife (Smt.).
(7) An unrecorded income tax liability of Rs. 30,000 is now payable.
(8) After settling all firm liabilities and partner loans, a surplus of Rs. 1,20,000 in assets remains. Partners A, B, and C share profits and losses in a 5:3:2 ratio.
(9) A machine with a book value of Rs. 2,00,000 is recorded at the time of dissolution, and its book value is realized.
(10) One partner assumes responsibility for the dissolution process and is granted a remuneration of Rs. 20,000. The firm pays this partner Rs. 12,000 for actual expenses.
(11) At dissolution, debtors total Rs. 1,20,000 and creditors Rs. 60,000. A partner takes over the debtors at 20% less than their book value and also agrees to pay the creditors.
(12) The profit-loss sharing ratio for partners R, B, and I is 3:2:1. Record the disposal of the following balances: (i) General reserve Rs. 18,000, (ii) Debit balance of profit and loss A/c Rs. 12,000, (iii) Workmen accident compensation fund Rs. 18,000.

Answer:Journal Entries of Firm

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1. (i)	Realisation A/c Dr.		56,000
	To Goodwill A/c			56,000
	(Recording the transfer of goodwill account to realization account upon firm dissolution)
(ii)	No Entry
2. (i)	Realisation A/c Dr.		10,00,000
	To Land-Building A/c			8,00,000
	To Investments A/c			2,00,000
	(Recording the transfer of assets accounts to realization account upon firm dissolution)
(ii)	Cash /Bank A/c Dr.		10,50,000
	To Realisation A/c			10,50,000
	(Recording amounts realized from land-building of Rs. 9,00,000 and investment of Rs. 1,50,000)
3. (i)	Realisation A/c Dr.		1,90,000
	To Fixed Assets A/c			1,20,000
	To Current Assets A/c			70,000
	(Recording transfer of fixed and current assets accounts to realization account)
4.	Cash/Bank A/c Dr.		50,000
	To Realisation A/c			50,000
	(Recording amount realized from undisclosed goodwill at dissolution)
5. (i)	Realisation A/c Dr.		35,000
	To Laptop A/c			35,000
	(Recording the transfer of the laptop account to realization account upon firm dissolution)
(ii)	Partners' capital/current A/c Dr.		25,000
	To Realisation A/c			25,000
	(Recording a partner taking over the laptop for Rs. 25,000 upon firm dissolution)
6.	Smt.'s Loan A/c Dr.		40,000
	To Partners' capital/current A/c			40,000
	(Recording a partner accepting to settle his wife's loan to the firm upon dissolution)
7.	Realisation A/c Dr.		30,000
	To Cash/Bank A/c			30,000
	(Recording payment of unrecorded income tax liability upon firm dissolution)
8.	Realisation A/c Dr.		1,20,000
	To A's Capital/current A/c			60,000
	To B's Capital/current A/c			36,000
	To C's Capital/current A/c			24,000
	(Recording the distribution of asset surplus to partners' capital/current accounts in their 5:3:2 profit sharing ratio)
9. (i)	Realisation A/c Dr.		2,00,000
	To Machine A/c			2,00,000
	(Recording the transfer of the machine account to realization account upon firm dissolution)
(ii)	Cash/Bank A/c Dr.		2,00,000
	To Realisation A/c			2,00,000
	(Recording the realization of the machine's book value)
10. (i)	Realisation A/c Dr.		20,000
	To Respective Partners' capital A/c			20,000
	(Recording remuneration paid to a partner for handling dissolution procedures)
(ii)	Respective Partners' capital A/c Dr.		12,000
	To Cash/Bank A/c			12,000
	(Recording the amount paid by the firm to a partner for dissolution expenses)
11. (i)	Realisation A/c Dr.		1,20,000
	To Debtors A/c			1,20,000
	(Recording the transfer of debtors to the realization account)
(ii)	Creditors A/c Dr.		60,000
	To Realisation A/c			60,000
	(Recording the transfer of creditors to the realization account)
(iii)	Partners' capital/current A/c Dr.		96,000
	To Realisation A/c			96,000
	(Recording a partner taking over debtors at a 20% discount from book value)
(iv)	Realisation A/c Dr.		60,000
	To Partners' capital/current A/c			60,000
	(Recording a partner settling creditors on behalf of the firm)
12. (i)	General Reserve A/c Dr.		18,000
	To R's Capital/current A/c			9,000
	To B's Capital/current A/c			6,000
	To I's Capital/current A/c			3,000
	(Recording the distribution of general reserve among partners in the 3:2:1 ratio)
(ii)	R's Capital/current A/c Dr.		6,000
	B's Capital/current A/c Dr.		4,000
	I's Capital/current A/c Dr.		2,000
	To Profit and loss A/c			12,000
	(Recording the distribution of the debit balance of profit and loss account among partners in the 3:2:1 ratio)
(iii)	Workmen Accident Compensation Fund A/c Dr.		18,000
	To R's Capital/current A/c			9,000
	To B's Capital/current A/c			6,000
	To I's Capital/current A/c			3,000
	(Recording the distribution of the workmen accident compensation fund among partners in the 3:2:1 ratio)

In simple words: These journal entries systematically record various transactions during a partnership firm's dissolution, including asset realization, liability payments, partner settlements, and allocation of profits/losses or reserves. Each entry ensures that assets and liabilities are appropriately accounted for and the partners' capital accounts are adjusted correctly.

🎯 Exam Tip: When preparing journal entries for dissolution, ensure to correctly identify if assets/liabilities are recorded or unrecorded, who is taking them over or paying for them, and apply the realization account appropriately for all transfers and settlements. Pay close attention to profit-sharing ratios for distribution of reserves or final surpluses/deficits.

 

Question 6. Pass journal entries for the following transactions when a realization account is prepared:
(1) Machine's book value is Rs. 50,000, taken over by partner Darshan for Rs. 55,000.
(2) Partner Bimal agrees to pay bills payable of Rs. 15,000.
(3) Past bad debts amounting to Rs. 11,000 were written off, from which Rs. 6,000 is now recovered.
(4) Sundry assets, with a book value of Rs. 2,70,000, are realized for Rs. 2,27,000.
(5) Sundry creditors for Rs. 60,000 are paid at a 25% discount.
(6) An unrecorded tax of Rs. 5,000 is paid.
(7) Dissolution expenses of Rs. 5,000 are paid.
(8) Goodwill, not disclosed in the books, is realized for Rs. 20,000 from its sale at dissolution.

Answer:Journal Entries of Firm

Date/No.	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1. (i)	Realisation A/c Dr.		50,000
	To Machine A/c			50,000
	(Recording the transfer of the machine account to the realization account)
(ii)	Darshan's capital/current A/c Dr.		55,000
	To Realisation A/c			55,000
	(Recording partner Darshan taking over the machine)
2. (i)	Bills Payable A/c Dr.		15,000
	To Realisation A/c			15,000
	(Recording the transfer of the bills payable account to the realization account)
(ii)	Realisation A/c Dr.		15,000
	To Bimal's capital/account A/c			15,000
	(Recording partner Bimal's acceptance to settle bills payable)
3.	Cash/Bank A/c Dr.		6,000
	To Realisation A/c			6,000
	(Recording the recovery of Rs. 6,000 from past bad debts previously written off)
4. (i)	Realisation A/c Dr.		2,70,000
	To Sundry Assets A/c			2,70,000
	(Recording the transfer of sundry assets to the realization account)
(ii)	Cash/Bank A/c Dr.		2,27,000
	To Realisation A/c			2,27,000
	(Recording the amount realized from the sale of sundry assets)
5. (i)	Creditor's A/c Dr.		60,000
	To Realisation A/c			60,000
	(Recording the transfer of creditors account to the realization account)
(ii)	Realisation A/c Dr.		45,000
	To Cash/Bank A/c			45,000
	(Recording the payment to creditors at a 25% discount)
6.	Realisation A/c Dr.		5,000
	To Cash/Bank A/c			5,000
	(Recording the payment of unrecorded tax)
7.	Realisation A/c Dr.		5,000
	To Cash/Bank A/c			5,000
	(Recording the payment of dissolution expenses)
8.	Cash/Bank A/c Dr.		20,000
	To Realisation A/c			20,000
	(Recording the amount realized from the sale of goodwill)

In simple words: These journal entries record the process of realizing assets and settling liabilities during the dissolution of a partnership firm. Each entry shows the movement of value to or from the Realisation Account, reflecting the sale of assets, payment of expenses, and settlement of debts.

🎯 Exam Tip: For dissolution journal entries, always remember to first transfer assets and liabilities to the Realisation Account. Then, record their actual realization or settlement. Unrecorded assets/liabilities are directly accounted for when they are realized or paid, without a prior transfer to the Realisation Account.

 

Question 7.
Naresh and Shaivil are partners sharing profits and losses in the proportion of 2 : 3. On September 30, 2016, they decided to dissolve the firm. On this date, their capital was Rs. 6,00,000 and Rs. 4,00,000 respectively. The firm's total liabilities amounted to Rs. 6,00,000. The accumulated debit balance of the profit and loss account was Rs. 1,00,000, and the cash balance was Rs. 1,00,000. 50% of the firm's assets are realized. Dissolution expenses are Rs. 1,00,000. Prepare the necessary accounts to close the firm's books.

Answer:Since the balance sheet before dissolution is not provided, we first prepare it, then proceed with the dissolution accounts.

Balance Sheet of Partnership Firm as on 30-9-2016

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital:		Sundry Assets (?)	14,00,000
Naresh	6,00,000	Cash Balance	1,00,000
Shaivil	4,00,000	Profit & Loss account (Debit balance)	1,00,000
Total liabilities	6,00,000
	16,00,000		16,00,000

Realisation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Sundry Assets A/c	14,00,000	By Total Liabilities	6,00,000
To Cash A/c (Payment):		By Cash A/c (realized assets)	7,00,000
Dissolution Exp.	1,00,000	By Capital A/c: (loss)
Total Liabilities	6,00,000	Naresh	3,20,000
		Shaivil	4,80,000
	21,00,000		21,00,000

Partners' Capital Account

Dr. Particulars	Naresh (Rs.)	Shaivil (Rs.)	Cr. Particulars	Naresh (Rs.)	Shaivil (Rs.)
To Profit & loss A/c	40,000	60,000	By Balance b/d	6,00,000	4,00,000
To Realisation A/c (loss)	3,20,000	4,80,000	By Cash A/c		1,40,000
To Cash A/c	2,40,000	-
	6,00,000	5,40,000		6,00,000	5,40,000

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	1,00,000	By Realisation A/c (Payment):
To Realisation A/c (realized assets)	7,00,000	Dissolution Exp.	1,00,000
To Shaivil's Capital A/c	1,40,000	Total liabilities	6,00,000
		By Naresh's Capital A/c	2,40,000
	9,40,000		9,40,000

Note: (i) By preparing the opening balance sheet of the partnership firm, the difference amount on the assets side, Rs. 1,40,000, is considered sundry assets. (ii) As there is no specific information provided, the entire liability amount is assumed to be paid. (iii) 50% of the sundry assets of the firm, amounting to Rs. 70,000, are realized.
In simple words: This solution first reconstructs the firm's balance sheet based on given capital, liabilities, and existing cash and profit/loss balances. Then, it prepares the Realisation Account to systematically record the disposal of assets and settlement of liabilities, culminating in a loss that is transferred to the Partners' Capital Accounts. Finally, the Cash Account is reconciled, showing all cash inflows from asset realization and outflows for liabilities and partner settlements.

🎯 Exam Tip: When accounts are not provided, always start by constructing the opening balance sheet to determine the missing asset or liability figures. Ensure that all assets are transferred to the debit side of the Realisation Account and all external liabilities to its credit side. Losses/gains on realization are distributed to partners' capital accounts in their profit-sharing ratio, and final cash settlements complete the dissolution process.

 

Question 8.
On January 1, 2015, Tarakbhai, Jethalal, and Popatlal commenced a partnership firm, sharing profits and losses in the proportion of 5:3:2. Their initial capital on that date was Rs. 5,00,000, Rs. 3,00,000, and Rs. 2,00,000 respectively. On December 31, 2016, they decided to dissolve the firm. The firm's status on this dissolution date was as follows:
Building Rs. 5,00,000
Debtors Rs. 4,00,000
Stock Rs. 2,00,000
Machinery Rs. 3,00,000
Bills receivable Rs. 1,00,000
Creditors Rs. 6,00,000
Bills payable Rs. 1,00,000
Cash balance Rs. 1,00,000
Debit balance of profit and loss A/c Rs. 1,00,000
Since the firm was incurring losses, it was dissolved, and the assets and liabilities were disposed of as follows:
(1) Tarakbhai took over the building at 20% more than its book value and agreed to pay the creditors.
(2) Jethalal took the machinery at 10% less than its book value and the stock at 10% more than its book value. He also accepted to pay the bills payable.
(3) Popatlal took the debtors at 20% less than their book value.
Note: (1) Bills receivable became valueless. (2) Outstanding government tax paid Rs. 80,000. (3) Dissolution expense of the firm Rs. 30,000.
You are asked to prepare the realization account, partners' capital accounts, and cash account.

Answer:

Balance Sheet (31-12-2016) of the Firm before Dissolution

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital:		Building	5,00,000
Tarakbhai	5,00,000	Machinery	3,00,000
Jethalal	3,00,000	Debtors	4,00,000
Popatlal	2,00,000	10,00,000	Bills receivable	1,00,000
Bills payable	1,00,000	Stock	2,00,000
Creditors	6,00,000	Cash balance	1,00,000
		Profit & loss A/c	1,00,000
	17,00,000		17,00,000

Realisation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Sundry Assets A/c:		By Sundry Liabilities A/c:
Building	5,00,000	Bills payable	1,00,000
Machinery	3,00,000	Creditors	6,00,000
Debtors	4,00,000	7,00,000	By Tarakbhai's capital A/c:
Bills receivable	1,00,000	(Building)	6,00,000
Stock	2,00,000	15,00,000	By Jethalal's capital A/c:
To Cash A/c: (Payment)		Machinery	2,70,000
Dissolution Exp.	30,000	Stock	2,20,000
Govt. tax	80,000	1,10,000	4,90,000	By Popatlal's Capital A/c:
To Tarakbhai's capital A/c:		(Debtors)	3,20,000
(Creditors)	6,00,000	By Capital A/c: (loss)
To Jethalal's Capital A/c:		Tarakbhai	1,00,000
(Bills payable)	1,00,000	Jethalal	60,000
		Popatlal	40,000
	23,10,000		23,10,000

Partners Capital Account

Dr. Particulars	Tarakbhai (Rs.)	Jethalal (Rs.)	Popatlal (Rs.)	Cr. Particulars	Tarakbhai (Rs.)	Jethalal (Rs.)	Popatlal (Rs.)
To P & L A/c	50,000	30,000	20,000	By Balance b/d	5,00,000	3,00,000	2,00,000
To Realisation A/c (building)	6,00,000			By Realisation A/c (creditors)			6,00,000
To Realisation A/c (debtors)			3,20,000	By Realisation A/c (bills payable)		1,00,000
To Realisation A/c (Stock machinery)		4,90,000		By Cash A/c	1,80,000	1,80,000
To Realisation A/c (loss)	1,00,000	60,000	40,000
To Cash A/c	3,50,000
	11,00,000	5,80,000	3,80,000		11,00,000	5,80,000	3,80,000

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	1,00,000	By Realisation A/c (Payment):
To Capital A/c of Jethalal	1,80,000	Dissolution Exp.	30,000
To Capital A/c of Popatlal	1,80,000	Govt. Tax	80,000
		1,10,000	By Capital A/c of Tarakbhai	3,50,000
	4,60,000		4,60,000

In simple words: This solution guides through the complete dissolution accounting process, starting with the firm's balance sheet to establish initial financial positions. It then meticulously details the Realisation Account, where assets are disposed of and liabilities are settled. The Partners' Capital Accounts are adjusted to reflect individual transactions and the final profit/loss from realization. Finally, the Cash Account summarizes all cash movements, ensuring all accounts are closed out at dissolution.

🎯 Exam Tip: For comprehensive dissolution problems, systematically transfer all assets and external liabilities to the Realisation Account. Carefully account for partners taking over assets or liabilities, and record all cash transactions for realization and payments. Ensure profit/loss on realization and existing reserves/P&L balances are correctly distributed among partners before final cash settlement.

 

Question 9.
Binal, Dharmistha, and Mahesh are partners sharing profits and losses in the ratio of 4:3:2. The firm was dissolved on September 30, 2016. On that day, the firm's status was as follows:

Balance Sheet

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital: Bimal	4,80,000	Sundry assets	14,80,000
Dharmistha	3,60,000	Cash balance	20,000
Mahesh	2,40,000	10,80,000
Creditors	4,20,000
	15,00,000		15,00,000

(1) Sundry assets realized Rs. 13,90,000.
(2) Creditors are paid Rs. 3,70,000 as a final settlement.
(3) Dissolution expenses of Rs. 20,000 are paid.
(4) Rs. 30,000 is paid for unrecorded taxes.
(5) Prepare the necessary accounts.

Answer:

Realisation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Sundry Assets A/c	14,80,000	By Creditors A/c	4,20,000
To Cash A/c (Payment):		By Cash A/c (Realized from assets)	13,90,000
Creditors	3,70,000	By Capital A/c: (Loss)
Dissolution exp.	20,000	Binal	40,000
Taxes	30,000	4,20,000	Dharmistha	30,000
		Mahesh	20,000
	19,00,000		19,00,000

Partners' Capital Account

Dr. Particulars	Binal (Rs.)	Dharmistha (Rs.)	Mahesh (Rs.)	Cr. Particulars	Binal (Rs.)	Dharmistha (Rs.)	Mahesh (Rs.)
To Realisation A/c (loss)	40,000	30,000	20,000	By Balance b/d	4,80,000	3,60,000	2,40,000
To Cash A/c	4,40,000	3,30,000	2,20,000
	4,80,000	3,60,000	2,40,000		4,80,000	3,60,000	2,40,000

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	20,000	By Realisation A/c (Payment):
To Realisation A/c (Realized from Sundry Assets)	13,90,000	Creditors	3,70,000
		Dissolution Exp.	20,000
		Taxes	30,000
		4,20,000	By Capital A/c:
		Binal	4,40,000
		Dharmistha	3,30,000
		Mahesh	2,20,000
	14,10,000		14,10,000

In simple words: This solution demonstrates the dissolution process by first presenting the firm's balance sheet. It then uses the Realisation Account to record the sale of sundry assets and the payment of creditors, dissolution expenses, and unrecorded taxes. The resulting loss from realization is distributed among partners in their profit-sharing ratio, leading to the final settlement of their capital accounts through the Cash Account.

🎯 Exam Tip: When preparing accounts for dissolution, ensure the initial balance sheet is accurate. All assets and external liabilities should be transferred to the Realisation Account. Carefully distinguish between recorded and unrecorded liabilities/assets for proper accounting. The final Cash Account should reconcile, confirming the complete closure of the firm's books.

 

Question 10.
Satyam, Shivam, and Sundaram are partners sharing profits and losses in the proportion of \( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \). The balance sheet of their firm as on 31-12-2016 is as under:

Balance Sheet

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital: Satyam	50,000	Land-building	2,50,000
Shivam	50,000	Machinery	1,50,000
Sundaram	50,000	1,50,000	Investments	1,00,000
General reserve	60,000	Patents	5,000
Investment fluctuation fund	50,000	Goodwill	25,000
Provident fund	1,00,000	Debtors	30,000
Creditors	2,00,000	- Bad debt reserve	5,000
Current Accounts:			25,000
Satyam	5,000	Stock	15,000
Shivam	10,000	15,000	Cash	5,000
	5,75,000		5,75,000

The firm was dissolved on January 1, 2017. Disposal of assets and liabilities was handled as follows:
(1) Land and building were sold for Rs. 4,00,000, machinery for Rs. 1,00,000, investments for Rs. 50,000, and stock for Rs. 5,000.
(2) From debtors, Rs. 15,000 was collected, with the remaining balance written off.
(3) From total creditors, a creditor of 10% was given unrecorded investments of Rs. 10,000, and the remaining amount was paid in cash at a 10% discount.
(4) Unrecorded stationery expenses of Rs. 6,000 were paid to Arihant Stationery Mart.
(5) No amount was realized for goodwill and patents. A remuneration of Rs. 15,000 was approved for Shivam to manage the dissolution. Actual dissolution expenses of Rs. 6,000 were paid by Shivam.
(6) Prepare the necessary accounts to close the firm's books.

Answer:

Realisation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Sundry Assets A/c:		By Sundry Provisions A/c:
Land-building	2,50,000	Investment Fluctuation Fund	50,000
Machinery	1,50,000	Bad debts reserve	5,000
Investments	1,00,000	55,000	By Sundry Liabilities A/c:
Patents	5,000	Provident Fund	1,00,000
Goodwill	25,000	Creditors	2,00,000
Debtors	30,000	3,00,000	By Cash A/c (Realised):
Stock	15,000	5,75,000	Land-building	4,00,000
To Cash A/c (Payment):		Machinery	1,00,000
Creditors	1,72,000	Investments	50,000
Unrecorded stationery Exp.	6,000	Stock	5,000
Provident fund	1,00,000	2,78,000	Debtors	15,000
To Shivam's Current A/c (Unpaid remuneration)	15,000	5,70,000	By Current A/c (Profit):
To Current A/c (Profit):		Satyam	28,500
Satyam	28,500	Shivam	19,000
Shivam	19,000	Sundaram	9,500
Sundaram	9,500	57,000
	9,25,000		9,25,000

Partners' Current Account

Dr. Particulars	Satyam (Rs.)	Shivam (Rs.)	Sundaram (Rs.)	Cr. Particulars	Satyam (Rs.)	Shivam (Rs.)	Sundaram (Rs.)
To Partner's Capital A/c	63,500	64,000	19,500	By Balance b/d	50,000	10,000
				By General Reserve	30,000	20,000	10,000
				By Realisation A/c		15,000
				By Realisation A/c (Profit)	28,500	19,000	9,500
	63,500	64,000	19,500		63,500	64,000	19,500

Partners' Capital Account

Dr. Particulars	Satyam (Rs.)	Shivam (Rs.)	Sundaram (Rs.)	Cr. Particulars	Satyam (Rs.)	Shivam (Rs.)	Sundaram (Rs.)
To Cash A/c	1,13,500	1,14,000	69,500	By Balance b/d	50,000	50,000	50,000
				By Partners' Current A/c	63,500	64,000	19,500
	1,13,500	1,14,000	69,500		1,13,500	1,14,000	69,500

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	5,000	By Realisation A/c:
To Realisation A/c:		Creditors	1,72,000
Land-Building	4,00,000	Unrecorded Stationary Exp.	6,000
Machinery	1,00,000	Providend Fund	1,00,000
Investment	50,000	2,78,000	By Capital A/c:
Stock	5,000	Satyam	1,13,500
Debtors	15,000	5,70,000	Shivam	1,14,000
		Sundaram	69,500
	5,75,000		5,75,000

In simple words: This solution details the complete dissolution of a partnership, starting with the firm's balance sheet and then systematically recording all asset disposals and liability settlements in the Realisation Account. Profits from realization are distributed among partners via the Current Accounts, which then transfer balances to the Capital Accounts. Finally, the Cash Account summarizes all cash transactions, ensuring a complete and accurate closure of the firm's financial records.

🎯 Exam Tip: For complex dissolution problems, always start by ensuring the balance sheet is correctly presented or constructed. Carefully list all assets and liabilities to be transferred to the Realisation Account. Pay close attention to partner-specific transactions (taking assets or settling liabilities) and ensure the profit-sharing ratio is applied correctly for reserves and realization profit/loss. Reconcile all cash flows to confirm final closure.