RBSE Solutions Class 12 Accountancy Chapter 4 Dissolution of Firm

Rajasthan Board RBSE Class 12 Accountancy Chapter 4 Dissolution of Firm

RBSE Class 12 Accountancy Chapter 4 Textbook Questions

RBSE Class 12 Accountancy Chapter 4 Multiple Choice Questions

Question 1. At the time of dissolution of the firm balance of bad debts account is transferred to :
(a) debtors account
(b) bad debts account
(c) realization account
(d) capital account
Answer: (c) realization account
In simple words: When a firm closes down, any money owed that cannot be collected (bad debts) is moved to the realization account to help figure out the final profit or loss from closing the business.

🎯 Exam Tip: Remember that during dissolution, all assets and liabilities are closed through the Realization Account to determine the overall gain or loss on the winding up of the firm.

Question 3. On the dissolution of firm, to close goodwill account, it is transferred to :
(a) revaluation's account
(b) partners' capital account
(c) realization account
(d) profit and loss account
Answer: (c) realization account
In simple words: When a business partnership ends, the value of the firm's good name (goodwill) is moved to the realization account, just like other assets, to determine the final profit or loss.

🎯 Exam Tip: Goodwill, being an intangible asset, is also transferred to the debit side of the Realization Account at the time of dissolution, similar to other tangible assets.

Question 4. In which ratio, capital deficiency of an insolvent partner is distributed among solvent partners, when Garner Vs. Murray applies?
(a) Profit-Loss ratio
(b) Opening capital ratio
(c) Capital ratio before charging dissolution profit and loss
(d) Equal ratio
Answer: (c) Capital ratio before charging dissolution profit and loss
In simple words: When one partner cannot pay their share, the other partners cover the missing amount. They do this based on how much capital each had put into the business before any dissolution profits or losses were calculated.

🎯 Exam Tip: The Garner Vs. Murray rule is crucial for insolvency cases in partnerships; always use the capital ratio *before* adjusting for dissolution profit/loss, as specified in the case.

Question 5. When Garner Vs. Murray law applies, realization loss will bear by the partners' in :
(a) equal ratio
(b) profit and loss ratio
(c) capital ratio
(d) None of the options
Answer: (b) profit and loss ratio
In simple words: If the Garner Vs. Murray rule is used, any losses from selling assets and paying off debts (realization loss) are shared among all partners according to their normal profit and loss sharing agreement.

🎯 Exam Tip: Distinguish between the distribution of an insolvent partner's capital deficiency (capital ratio) and the realization loss itself (profit/loss ratio) under Garner Vs. Murray.

RBSE Class 12 Accountancy Chapter 4 Very Short Answer Questions

Question 2. What is the name of insolvent partner in Garner vs. Murray case, in which ratio his loss is distributed?
Answer: In the Garner Vs. Murray case, the insolvent partner was Willkins. His capital deficiency (loss) was shared among the solvent partners in their capital ratio.
In simple words: Willkins was the partner who couldn't pay his debts in the Garner Vs. Murray case, and his losses were split by the other partners based on their capital.

🎯 Exam Tip: Clearly state the insolvent partner's name and the ratio used for distributing their loss as per the Garner Vs. Murray rule.

Question 3. What is Realization Account?
Answer: A Realization Account is created when a firm is dissolved. Its purpose is to figure out the profit or loss from selling all the firm's assets and settling all its liabilities.
In simple words: It's an account made when a business closes to see how much money was gained or lost by selling everything and paying all debts.

🎯 Exam Tip: Define the Realization Account by its purpose: to ascertain profit or loss on the realization of assets and discharge of liabilities during dissolution.

Question 4. What is the dissolution of firm?
Answer: Dissolution of a firm happens when the partnership between all partners ends, and they decide to close or sell the entire business operations of the firm. This means the business stops existing.
In simple words: Dissolution of a firm means the business closes down and the partnership between all owners ends.

🎯 Exam Tip: Emphasize that dissolution of a firm means the complete cessation of business operations, unlike dissolution of partnership which may not lead to the firm's closure.

Question 5. What is the sequence for payment at time of dissolution of firm?
Answer: When a firm dissolves, all assets, including cash brought in by partners, are used to make payments in a specific order:

• First, to pay all outside debts of the firm, including any loans from partners' wives.
• Next, to pay back the capital contributed by each partner proportionally.
• Finally, if any money is left over, it is distributed among the partners according to their profit-sharing ratio.

🎯 Exam Tip: Knowing the legal order of payments is critical for calculating final balances during dissolution. Always prioritize external liabilities first.

Question 6. What do you mean by dissolution by court?
Answer: Dissolution by court means that the court, upon receiving an application from a partner, orders the partnership firm to be dissolved. This happens when there are specific legal reasons for the court to intervene and close the business.
In simple words: Dissolution by court means a judge decides that a business partnership must end after one of the partners asks them to.

🎯 Exam Tip: When explaining dissolution by court, specify that it is initiated by a partner's application and ordered due to specific legal grounds, not mutual agreement.

RBSE Class 12 Accountancy Chapter 4 Short Answer Questions

Question 1. Explain Garner V/S Murray rule.
Answer: The Garner Vs. Murray rule, established in a famous case, states the following regarding partner insolvency during dissolution:

• If an insolvent partner has a capital deficiency, the solvent (financially stable) partners must cover this deficiency. They share this burden in their capital ratio.
• Solvent partners are also required to bring in cash for their share of any loss incurred from the realization of assets.
• The capital ratio used for distributing the insolvent partner's deficiency is derived from the balance sheet made just before the firm's dissolution, without considering current profits or losses.

🎯 Exam Tip: Clearly distinguish between the two key principles of Garner Vs. Murray: sharing the insolvent partner's capital deficiency in the capital ratio and solvent partners bringing cash for their share of realization loss.

Question 2. "There is a difference between dissolution of partnership and partnership firm." Explain this statement.
Answer: Yes, there is a clear difference between the dissolution of a partnership and the dissolution of a partnership firm. When a partnership dissolves, it simply means the agreement or relationship between some partners has changed or ended, but the business itself might continue with the remaining partners. For example, if one partner retires, the partnership dissolves, but the firm may still operate. However, the dissolution of a partnership firm means that the entire business operation comes to a complete end. All business activities stop, and the firm ceases to exist. This makes it clear that the two terms are distinct, with one referring to a change in agreement and the other to the complete closure of the business.
In simple words: Dissolving a partnership means the partner agreement changes, but the business can keep going. Dissolving a partnership firm means the whole business closes down for good.

🎯 Exam Tip: Emphasize that a dissolution of partnership changes the relationship, while a dissolution of firm ends the business's existence. Use simple examples to illustrate the distinction.

Question 4. Himi and Shreekant are partners, as on 31st March, 2012, there capital Rs 1,00,000 and 50,000 and creditors Rs 30,000. On that date firm dissolved and realization value of assets are Rs 90,000. Prepare Realization Account on dissolution.
Answer:

🎯 Exam Tip: Ensure that all assets (at book value) are transferred to the debit side and all liabilities (at book value) to the credit side. Realization proceeds are credited, and payment of liabilities are debited, with the final balance representing profit or loss on dissolution.

Question 5. In which circumstances compulsory dissolution is happen?
Answer: Compulsory dissolution of a firm can happen under the following circumstances:

• When the firm's business becomes illegal due to a change in law or nature of business.
• If all partners, or all but one partner, are declared insolvent, meaning they cannot pay their debts.
• When all partners become residents of an enemy country, making the partnership unlawful.
• If the number of partners exceeds the legal limit (e.g., more than 50 in a general partnership or more than 20 in a banking business).
• When a court orders the dissolution of the firm due to various reasons, such as a partner's insanity or misconduct.

🎯 Exam Tip: List the specific legal and situational reasons for compulsory dissolution clearly, focusing on illegality, insolvency, and exceeding partner limits.

Question 6. State the mode of dissolution of a partnership firm.
Answer: The modes of dissolution of a partnership firm generally include:

• **Dissolution by Agreement:** When all partners agree to close the firm, either according to their original partnership agreement or by a new mutual decision.
• **Compulsory Dissolution:** This happens in specific situations like when the firm's business becomes illegal or all partners become insolvent.
• **Dissolution by Notice:** In a partnership at will, any partner can give notice to others about their intention to dissolve the firm.
• **Dissolution on the happening of certain events:** This includes events like the death or insolvency of a partner, the expiry of the firm's period, or completion of the venture for which the firm was formed.
• **Dissolution by Court Order:** A court can order dissolution based on various grounds, such as a partner's misconduct, permanent incapacity, or if the business can only be run at a loss.

🎯 Exam Tip: Categorize the modes of dissolution for clarity, distinguishing between voluntary (agreement, notice), automatic (specific events), and judicial (court order) methods.

Question 7. How capital accounts are closed on dissolution of partnership firm?
Answer: On dissolution of a partnership firm, partners' capital accounts are closed after transferring any profit or loss from realization, undistributed profits, and reserves to them. The closing process involves the following steps:
**1. When a partner has a debit balance (owes money to the firm):**
The partner is required to bring in cash to clear this debit balance. The journal entry for this would be:
Cash/Bank A/C Dr.
    To Partners' Capital A/c
(Being required cash brought in by the partner)

**2. When a partner has a credit balance (the firm owes money to the partner):**
The partner is paid the credit balance amount from the firm's available cash or bank funds. The journal entry for this would be:
Partners' Capital A/c Dr.
    To Cash/Bank A/c.
(Being excess cash paid to partner)
In simple words: First, any profits or losses and old savings are added to or subtracted from each partner's capital account. Then, if a partner owes money, they bring cash. If the firm owes them money, they get paid cash.

🎯 Exam Tip: Clearly differentiate between partners bringing in cash for a debit balance and the firm paying out cash for a credit balance in their capital accounts, ensuring correct journal entries are shown.

Question 8. State any two circumstances under which partnership is deemed to be dissolved.
Answer: A partnership is deemed to be dissolved under circumstances such as:

• If one of the partners dies, the partnership typically dissolves unless there's an agreement to continue with the remaining partners.
• If a partner becomes mentally unsound (insane), the partnership may be dissolved as they are no longer capable of fulfilling their duties.

🎯 Exam Tip: Focus on events that legally alter the partnership, such as death or permanent incapacity of a partner, which are common grounds for dissolution.

Question 9. State the rules of preparation of realization account on dissolution of partnership firm.
Answer: The Realization Account is prepared during the dissolution of a firm to find out the profit or loss from selling assets and settling liabilities. The key rules for its preparation are:

• Transfer all assets (except cash and bank balances) to the debit side of the Realization Account at their book values.
• Transfer all external liabilities (except partners' loan accounts and partners' capital accounts) to the credit side of the Realization Account at their book values.
• Credit the Realization Account with the amount realized from the sale of assets.
• Debit the Realization Account with the amounts paid to settle liabilities.
• Debit the Realization Account for any expenses incurred during the dissolution process.
• The final balance of the Realization Account (profit or loss) is transferred to the partners' capital accounts in their profit-sharing ratio.

🎯 Exam Tip: Remember the golden rule: all assets (excluding cash/bank) are debited and all external liabilities are credited to the Realization Account. Expenses and payments are debited, receipts are credited.

Realisation Account : Realisation account is opened on the dissolution of a firm. The object of preparing this account is to determine gain (profit) or loss on the realisation of assets and payment of liabilities. Realisation account is prepared by:

Account Entries Regarding Dissolution

**(i) On Transfer of Assets (Except Bank or Cash Balance)**
Realisation A/C Dr.
    To Sundry Assets A/c
(Being balance of assets transferred)

**(ii) On Transfer of Liabilities (Except Capital Account. Current Account, Reserve, P&L Account, Reserve Fund and Partners' Loan Account)**
Sundry Liabilities A/c Dr.
    To Realisation A/C
(Being balance of sundry liabilities transferred)

**(iii) On Sale of Assets**
Cash/Bank/A/C Dr.
    To Realisation A/C
(Being cash realized from sale of assets)

**(v) On Payment of Transferred Liabilities**
Realisation A/C Dr.
    To Cash/Bank A/C
(Being sundry liabilities paid off)

**(vi) On Taking Responsibility of Payment of Any Liability by a Partner**
Realisation A/C Dr.
    To Partners' Capital A/c
(Being liabilities taken over by the partners')

**(vii) On Payment of Unforeseen Liability or Dissolution Expenses**
Realisation A/c Dr.
    To Cash/Bank A/C
(Being expenses paid)

**(viii) On Transfer of Credit Balance of (Profit) Realisation Account**
Realisation A/C Dr.
    To Partners' Capital A/C
(Being profit transferred to capital Account)

**(ix) Transfer of Debit Balance of (Loss) Realisation Account**
Partners' Capital A/C Dr.
    To Realisation A/c
(Being loss transferred to capital Account)

**(x) Expenses Paid by a Partner**
Realisation A/C Dr.
    To Partners' Capital A/C
(Being expenses paid by partner)

**(xi) On Bearing Any Realisation Expenses by a Partner as Realisation Agent.**
Realisation A/c Dr.
    To Partner's Capital A/c
(Being realization expenses borne by partner)

**(xii) On Payment of Liabilities over and Above the Book Value**
Sundry Liabilities A/c Dr. (by book value)
Realisation A/C Dr. (by difference)
    To Cash/Bank A/C (by amount paid)
(Being liabilities paid off and loss transferred)

**(xiii) On Payment of Liabilities Below the Book Value**
Sundry Liabilities A/c Dr. (by book value)
    To Cash/Bank A/C (by amount paid)
    To Realisation A/C (by difference amount)
(Being sundry liabilities paid off and profit transferred)

**(xiv) On Payment of Partner's Loan**
Partner's Loan A/c Dr. (by amount paid)
    To Cash/Bank A/c
(Being loan paid off)

**(xv) On Distribution of Old Undistributed Profit Dissolution is as follows**
General Reserve A/C Dr.
Reserve Fund A/C Dr.
Profit and Loss A/C Dr.
    To Partners' Capital A/c
(Being undistributed profit transferred)

**(xvi) On Distribution of Old Undistributed Loss**
Partners' Capital A/c Dr. (in profit sharing ratio)
    To Profit and Loss A/C (by undistributed loss)
(Being undistributed loss transferred)

**(xviii) On Payment of Capital Account Balance to Partners**
Partners' Capital A/C Dr. (by amount paid)
    To Cash/Bank A/C
(Being balance of capital account paid)

🎯 Exam Tip: The balance in cash/bank should exactly match the amount to be paid to partners, ensuring all firm accounts close accurately. This is a final check for arithmetical accuracy.

Partners Capital Account: After the transfer of profit or loss on realization, undistributed profit reserves etc. to the capital account of the partners, the balance of capital account are closed in the following manner :

1. When a partner is required to bring in cash to clear off his debit balance. The entry will be
Cash/Bank A/C Dr.
    To Partners' Capital A/C
(Being required cash brought in by the partner)

2. When a partner is paid the credit balance of his account
Partners' Capital A/c Dr.
    To Cash/Bank A/c.
(Being excess cash paid to partner)

Cash or Bank Account: Opening balance of cash and bank and all the receipts are entered on the debit side of this account and all the payments are entered on the credit side of this account. This account must be prepared and closed last of all and the total of both the sides of this account must be equal. In this way this account also helps in the verification of the arithmetical accuracy of the account.

🎯 Exam Tip: If both cash and bank balances are given, prepare only one account (either cash or bank). If cash is prepared, an entry is passed to withdraw the bank balance; if bank is prepared, cash balance is deposited.

Other Required Accounts: On the dissolution of firm, partner's loan Account, partners current account, reserve and undistributed losses accounts are prepared and deficiency account in case of insolvency of all partners is also prepared.

Ramesh, Naresh and Mahesh are partners sharing profits in 3:2:1 ratio. They decided the dissolution of partnership on 31 Dec. 2014. On this date balance sheet was as under:

Following transactions are made on dissolution:
1. Joint life insurance policy surrendered on Rs 15,000.
2. Ramesh takes investment on Rs 17,500 and agreed to pay his wife's loan.
3. Naresh takes stock on Rs 7,500 and debtors Rs 4000 of Rs 5000.
4. Realisation from machine Rs 50,000 and from debtors 50% of their book value.
5. Realisation expenses was Rs 1000.
6. Rs 3000 realized from investment which was not shown in the books.
Make journal entries to close the books and prepare necessary accounts.
Answer:
To solve this, we first record the journal entries for the dissolution, and then prepare the necessary accounts. Here are the journal entries:

Journal Entries

Now, let's prepare the ledger accounts for Realisation, Partners' Capital, and Cash.

Realisation Account

Partner's Capital Account

Cash A/c

In simple words: This problem involved recording how assets were sold, liabilities were paid, and capital accounts were adjusted when a partnership firm dissolved. We showed the transactions in journal entries and then created the ledger accounts to see the final balances.

🎯 Exam Tip: When making journal entries for dissolution, ensure all assets are realized and all liabilities are paid off. Remember to distribute any realization profit or loss among partners in their profit-sharing ratio before closing capital accounts.

Question 2. Gopesh and Rakesh are partners sharing profit equally. They decided to dissolve their partnership business. The Balance Sheet as on 31 December, 2012, was as follows:

Additional Information:
1. Gopesh takes plant & machine and furniture on 10% less on their book value.
2. Rakesh takes stock and goodwill at Rs 35,000.
3. Realized from debtors Rs 37,000.
4. Creditors paid on 5% discount.
Make journal entries to close the books and prepare necessary accounts.
Answer:
Here are the journal entries to close the books and the necessary accounts:

Journal Entries

Realisation A/c

Partners Capital Account

Bank Account

In simple words: This problem involved recording journal entries and preparing ledger accounts for the dissolution of a partnership. We handled asset realizations, liability payments, and the final settlement of partner capital accounts to close the books.

🎯 Exam Tip: When partners take over assets or liabilities, ensure the corresponding capital accounts are debited or credited correctly. Pay close attention to discounts or book value adjustments during asset realization and liability payment.

Here is the Balance Sheet as on 31st March, 2010 for a firm that is undergoing dissolution:

Additional Information:
Amount realized from plant and machine Rs 10,000. From furniture Rs 5000 and from debtors full, from stock Rs 4000. Investment was taken by Z (on book value). Creditors are paid on 10% discount, realisation exp. Rs 100. There was no entry of Rs 550 Assets which X takes in Rs 450. Rs 100 liabilities was not shown in the books.
Close the books of firm and prepare necessary accounts.
Answer:
To close the books and prepare the necessary accounts, we first create the Realisation Account, then the Partner's Current Accounts, Partner's Capital Accounts, and finally the Bank Account.

Realisation Account

Partner's Current Account

Partner's Capital A/c

Bank Account

In simple words: This solution shows how to prepare various accounts during a firm's dissolution, including the Realisation Account, Partners' Current Accounts, Partners' Capital Accounts, and the Bank Account, ensuring all assets are realized and liabilities settled.

🎯 Exam Tip: When dealing with unrecorded assets or liabilities, make sure to include them in the Realisation Account at the time of their realization or payment. Current accounts should be transferred to capital accounts before final settlement.

Question 4. Explain the method of accounting for settlement of accounts at the time of dissolution.
Answer:
At the time of dissolution, accounts are settled in a specific order to ensure all assets are sold and liabilities are paid. Here's the method:
Realisation Account: This account is opened to determine the profit or loss from selling assets and paying off liabilities. It is prepared by:
• Transferring all assets (except cash/bank) to its debit side.
• Transferring all liabilities (except partners' loan and capital) to its credit side.
• Crediting the amount received from selling assets.
• Debiting the liabilities paid.
• Debiting expenses incurred during dissolution. The final balance (profit or loss) is transferred to partners' capital accounts in their profit-sharing ratio.

Account Entries Regarding Dissolution:
(i) On Transfer of Assets (Except Bank or Cash Balance)
Realisation A/c Dr.
To Sundry Assets A/c
(Being balance of assets transferred)

(ii) On Transfer of Liabilities (Except Capital Account. Current Account, Reserve, P&L Account, Reserve Fund and Partners' Loan Account)
Sundry Liabilities A/c Dr.
To Realisation A/C
(Being balance of sundry liabilities transferred)

(iii) On Sale of Assets
Cash/Bank/A/C Dr.
To Realisation A/C
(Being cash realized from sale of assets)

(iv) On Payment of Transferred Liabilities
Realisation A/c Dr.
To Cash/Bank A/C
(Being sundry liabilities paid off)

(v) On Taking Responsibility of Payment of Any Liability by a Partner
Realisation A/C Dr.
To Partners' Capital A/c
(Being liabilities taken over by the partners')

(vi) On Payment of Unforeseen Liability or Dissolution Expenses
Realisation A/c Dr.
To Cash/Bank A/C
(Being expenses paid)

(vii) On Transfer of Credit Balance of (Profit) Realisation Account
Realisation A/c Dr.
To Partners' Capital A/C
(Being profit transferred to capital Account)

(viii) On Transfer of Debit Balance of (Loss) Realisation Account
Partners' Capital A/C Dr.
To Realisation A/c
(Being loss transferred to capital Account)

(ix) Expenses Paid by a Partner
Realisation A/c Dr.
To Partners' Capital A/C
(Being expenses paid by partner)

(x) On Bearing Any Realisation Expenses by a Partner as Realisation Agent.
Realisation A/c Dr.
To Partner's Capital A/c
(Being expenses borne by partner)

(xi) On Payment of Liabilities over and Above the Book Value
Sundry Liabilities A/c Dr. (by book value)
Realisation A/C Dr. (by difference)
To Cash/Bank A/C (by amount paid)
(Being liabilities paid off and loss transferred)

(xii) On Payment of Liabilities Below the Book Value
Sundry Liabilities A/c Dr. (by book value)
To Cash/Bank A/C (by amount paid)
To Realisation A/C (by difference amount)
(Being sundry liabilities paid off and profit transferred)

(xiii) On Payment of Partner's Loan
Partner's Loan A/c Dr. (by amount paid)
To Cash/Bank A/c
(Being loan paid off)

(xiv) On Distribution of Old Undistributed Profit Dissolution is as follows
General Reserve A/C Dr.
Reserve Fund A/C Dr.
Profit and Loss A/C Dr.
To Partners' Capital A/c
(Being undistributed profit transferred)

(xv) On Distribution of Old Undistributed Loss
Partners' Capital A/c Dr. (in profit sharing ratio)
To Profit and Loss A/C (by undistributed loss)
(Being undistributed loss transferred)

(xvi) On Payment of Capital Account Balance to Partners
Partners' Capital A/C Dr. (by amount paid)
To Cash/Bank A/C
(Being balance of capital account paid)

Partners Capital Account: After transferring profit or loss from realisation, undistributed profit reserves, etc., to the capital accounts, the balances are closed as follows:
1. When a partner needs to bring in cash to clear a debit balance: Cash/Bank A/C Dr. To Partners' Capital A/c.
2. When a partner is paid their credit balance: Partners' Capital A/c Dr. To Cash/Bank A/c.

Cash or Bank Account: This account records all cash/bank receipts on the debit side and all payments on the credit side. It is prepared last and must balance, verifying the arithmetic accuracy.
In simple words: When a firm dissolves, all accounts are settled by first making a Realisation Account to find profit/loss from selling assets and paying liabilities. Then, partners' capital accounts are adjusted, and finally, the cash/bank account is balanced to close all books.

🎯 Exam Tip: Remember the order of payments during dissolution: first outside liabilities, then partners' loans, and finally partners' capital. Ensure all assets and liabilities, including unrecorded ones, are accounted for.

Question 2. Under what circumstances a firm may be dissolved?
Answer:
A partnership firm can be dissolved under the following circumstances:
1. Without the Intervention of the Court:
• When all partners agree to dissolve the firm (Section 40).
• Compulsory dissolution (Section 41):
    (a) When all or all but one partner of the firm becomes insolvent.
    (b) When the business of the firm becomes unlawful.
• On the happening of any one of the following incidents (Section 42):
    (a) On the insolvency of a partner.
    (b) On the fulfillment of the objective for which the firm was formed.
    (c) On the expiry of the period for which the firm was formed.

2. By Order of the Court (Section 44):
The court may order the dissolution of a partnership firm if:
• A partner becomes mentally unsound.
• A partner, other than the one filing a suit, becomes permanently unable to perform their duties.
• A partner, other than the one filing a suit, is guilty of misconduct that could harm the partnership.
• A partner, other than the one filing a suit, willfully or repeatedly breaks the partnership agreement.
• A partner, other than the one filing a suit, transfers their entire interest in the firm to a third party.
• The court is convinced the firm cannot operate without incurring losses.
• The court believes dissolution is fair and reasonable due to other reasons.
In simple words: A firm can end if all partners agree, if it becomes illegal, or if a partner becomes insolvent. A court can also order dissolution if partners misbehave, become unable to work, or if the business is clearly losing money.

🎯 Exam Tip: When listing dissolution grounds, distinguish between dissolution by agreement/occurrence and dissolution by court order. Cite the relevant sections of the Partnership Act if applicable.

Here is the Balance Sheet as on 31 March, 2012, for a firm undergoing dissolution:

Additional Information:
Amounts realized from fixtures and other assets were Rs 9,000; from stock Rs 4,520; from debtors Rs 1,800. Creditors were paid off Rs 3,800 in full settlement. Realization expenses were Rs 120.
Prepare necessary accounts to close the books.
Answer:
To close the books, we need to prepare the Realisation Account, Partners' Capital Account, and Cash Account.

Realisation Account

Partners Capital Account

Cash Account

In simple words: This solution demonstrates how to prepare the Realisation, Partners' Capital, and Cash accounts to properly close a firm's books during dissolution, including accounting for asset realizations and liability payments.

🎯 Exam Tip: Ensure that all liabilities, including those not shown in the balance sheet, are recorded and settled. Realization expenses should also be properly accounted for in the Realisation Account.

Question 6. Following Balance Sheet shows the position of Rakesh and Deepak as on 31 December, 2012. They decided the dissolution of their business. The Balance Sheet is as follows:

Additional Information:
Book debts were realized with a 7.5% loss. Stock sold for Rs 3,000. Plant & Machinery sold for Rs 700 and Furniture for Rs 250. Partners divided profit & loss equally.
Make necessary accounts on dissolution.
Answer:
To prepare the necessary accounts for dissolution, we will create the Realisation Account, Partner's Capital Account, and Cash Account.

Realisation Account

Partner's Capital Account

Cash Account

In simple words: This solution shows how to prepare the Realisation Account, Partner's Capital Account, and Cash Account to close a partnership firm's books. It accounts for asset realization, liability payments, and distribution of profits/losses.

🎯 Exam Tip: Remember to calculate book debt realization carefully, considering the specified loss percentage. Also, ensure profit and loss distribution is done as per the agreed ratio (here, equally).

Here is the Balance Sheet for a firm undergoing dissolution:

Additional Information:
Y was appointed to realize assets and distribute the received amount. Y will get 5% of the received amount from stock and debtors as remuneration and will bear all realization expenses. Y reports the following realization results: Stock realized Rs 96,000 and debtors Rs 72,000. Creditors paid off Rs 76,000 in full settlement. Outstanding creditors of Rs 1,000, not entered in the balance sheet, were also paid. Z became insolvent, and Rs 7,720 was realized from Z's assets. Garner Vs Murray rules apply.
Prepare Realisation A/C, Capital A/c and Cash A/C.
Answer:
We need to prepare the Realisation Account, Partners' Capital Account, and Cash Account, applying Garner Vs Murray rules for Z's insolvency.

Realisation Account

Partners's Capital Account

Partners Capital Account

Cash A/c

In simple words: When a firm dissolves, all assets are sold, and liabilities are paid off. The Realisation Account shows the profit or loss from this process. Then, the Partners' Capital Accounts are adjusted for this profit or loss, and any money owed or due to partners. Finally, the Cash Account is balanced to ensure all payments match receipts, closing the firm's books.

🎯 Exam Tip: Always balance the Cash Account at the end of dissolution. If it doesn't tally, check your Realisation Account and Partner's Capital Account entries.

Question 10. The Balance Sheet of Ram, Shyam & Mohan was as under on 31 March, 2014:

Mohan became insolvent, he can pay only Rs 4,000 decided of partnership dissolution. Assets were realised as follows: Sundry Debtors Rs 15,000, Bill receivable Rs 14,000, Stock Rs 32,000, Plant & Machinery Rs 28,000, Realisation expenses Rs 5,000. Prepare necessary accounts to close books.
Answer:

Partners Capital Account

Cash Account

In simple words: When a firm closes down, you first sell all assets and pay off debts using the Realisation Account. Then, you adjust each partner's capital for any profits or losses from selling assets and paying debts, especially if a partner is insolvent. Finally, the Cash Account shows all money coming in and going out, balancing everything to zero at the end.

🎯 Exam Tip: For problems involving insolvent partners, carefully calculate the deficiency and distribute it among solvent partners according to their capital ratio (as per Garner Vs. Murray rules) or profit-sharing ratio if the question specifies.

Question 11. A, B and C are partners. The balance sheet on 31 March, 2012 was as under :

On that date firm dissolved. A became insolvent. Realised from debtors of firm Rs 80,000 from stock. Rs 50,000, creditors were paid off Rs 86,000 in full settlement. Realisation expenses were Rs 4,000. Not any amount can be realised from A. Prepare Realisation A/c, Capital A/c and Cash A/C.
Answer:

Partner's Capital Account

Cash Account

In simple words: When a partnership breaks up and one partner cannot pay their debts (is insolvent), the other partners cover the loss. First, all assets are sold, and liabilities are paid through the Realisation Account. Then, the solvent partners' capital accounts are adjusted for the insolvent partner's deficit, and finally, all cash transactions are balanced in the Cash Account to complete the dissolution.

🎯 Exam Tip: When a partner is insolvent, their capital deficiency must be absorbed by the solvent partners in their capital ratio, not their profit-sharing ratio, as per the Garner Vs. Murray rule.

Question 12. Realised from debtors less 20% of from Book value. Stock can sold in Rs 4,000. There was contingent liabilities of Rs 2,000 which was not shown in the books was paid in Rs 1,600. Bharat became insolvent realised from his only Rs 6,000. Realisation expenses were Rs 4,800. Apply Garner V/s Murray rules prepare necessary accounts.

**Balance Sheet (as on 31st March, 2010)**

Answer:

Working Notes : The capital deficit of Bharat is shared by Vivek and Bhavesh in their capital ratio of 2:1. Kapil's capital has a debit balance, so he will not receive a share in the capital deficiency.
In simple words: When a firm closes, first, a Realisation Account is used to sell assets and pay liabilities. Then, the Cash/Bank Account tracks all cash movements. If a partner cannot pay their share (is insolvent), the other partners cover that loss in their capital ratio.

🎯 Exam Tip: When applying Garner Vs. Murray rules, always remember that solvent partners contribute to an insolvent partner's deficiency in their *capital ratio* (not profit-sharing ratio), and a partner with a debit balance cannot claim a share.