Short Answer Questions
Question 1. Write the circumstances under which a firm is dissolved.
Solution 1 Below are the circumstances under which a firm is dissolved:-
1.) When a partner has become of unsound mind.
2.) When a partner, other than the partner filing a suit, has become permanently incapable of performing his duties as a partner.
3.) When a partner, other than the partner filing a suit, is guilty of misconduct that may harm the partnership.
4.) When a partner, other than the partner filing a suit, wilfully or persistently commits breach of partnership agreement.
5.) When a partner, other than the partner filing a suit, has transferred the whole of his interests in the firm to a third party.
Question 2. Clarify the difference between dissolution of a firm and dissolution of partnership.
Solution 2
Question 3. What is a Realisation Account?
Solution 3 A ‘Realisation Account’ is opened for disposing of all the assets of the firm and making payment to all the creditors. Realisation account is a nominal account and the object of such an account is to find out the profit or loss on realisation of assets and payment of liabilities.
Question 4. Mention the order in which the proceeds from the sale of Assets are utilised at the time of dissolution of partnership firm.
Solution 4 Amount realised from the sale of the assets of the firm shall be applied in the following manner and order:
1.) First of all, outside debts of the firm will be paid.
2.) Out of the remaining amount, the loans advanced by partners will be paid off.
3.) Thereafter the balance of Partners Capital Account will be returned.
4.) If some amount remains, it will be divided among the partners in their profit sharing ratio.
Question 5. How will you deal with the Realisation expenses at the time of dissolution of a firm?
Solution 5
(i) When expenses are paid by the firm:
Realisation A/c Dr.
To Cash/Bank A/c
(Being Realisation expenses paid in cash)
(ii) When expenses of realisation are paid by a partner on behalf of the firm:
Realisation A/c Dr.
To Partner’s Capital A/c
(Being Remuneration expenses paid by the partner)
(iii) When the firm has agreed to pay a fixed amount to the partner towards realisation expenses and the partner has bear the expenses:
Realisation A/c Dr.
To Partner’s Capital A/c
(Being Remuneration allowed to the partner)
(iv) When realisation expenses are to be borne by the partner and the expenses are paid by the firm:
Partner’s Capital A/c Dr.
To Cash/Bank A/c
(Being Realisation expenses paid on behalf of the partner)
(v) No entry will be passed if the expenses are to be borne and paid by the partner out of his pocket.
Question 6. Explain the accounting treatment at the time of dissolution of a partnership firm of the assets and liabilities not already recorded in the books of the firm.
Solution 6
(i) When assets are sold for cash:
Cash/ Bank A/c Dr.
To Realisation A/c
(Being Assets sold for cash)
(ii) When assets is taken away by one of the partners:
Partner’s Capital A/c Dr.
To Realisation A/c
(Being Assets taken over by partner)
(iii) If an asset is given away to a Creditor in part or full payment of his dues, the agreed amount of the asset is deducted from the claim of the creditor and the balance is paid to him. No entry is passed for the transfer of assets to the creditor.
Question 7. What accounting record is made on dissolution of partnership firm?
Solution 7 The following accounts are opened in the order to dissolution of partnership firm:-
1.) Realisation Account
2.) Partner’s Loan Account
3.) Partner’s Capital Account
4.) Cash or Bank Account
Practical Questions
Question 1. Manoj and Nand were partners sharing profits in the ratio of 3 : 2. Pass journal entries under following situations at the time of dissolution of firm:
(i) Workmen Compensation Reserve stood at Rs.1,00,000 and there was no liability towards Workmen Compensation.
(ii) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it was ascertained at Rs. 75,000.
(iii) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it was ascertained at Rs. 1,20,000.
(iv) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it was ascertained at Rs. 1,00,000.
Solution 1
Question 2.
(i) Expenses of realization Rs. 8,000.
(ii) Expenses of realisation Rs. 10,000 were paid by a partner.
(iii) Realisation expenses of Rs. 12,000 were to be met by Tushar, a partner, but were paid by the firm.
(iv) Suresh, a partner, was paid remuneration of Rs. 10,000 and he was to meet all expenses. (v) Viru, a partner, was paid remuneration of Rs. 15,000 and he was to meet all expenses. Actual Expenses amounted to Rs. 20,000 which were paid by the firm.
(vi) Realisation expenses amounting to Rs. 15,000 were paid by the firm, Rs. 10,000 were to be borne by a partner and the balance by the firm.
(vii) Gauri, a partner, was allowed a remuneration of Rs. 25,000 and he was to meet all expenses. Firm paid an expense of Rs. 5,000.
Solution 2
Question 3. Pass necessary Journal Entries on the dissolution of a partnership firm in the following cases :
(i) L, a partner, was appointed to look after the dissolution process for which he was given a remuneration of Rs. 10,000.
(ii) Dissolution expenses Rs. 8,000 were paid by the partner, M.
(iii) Dissolution expenses were Rs. 5,000.
(iv) P, a partner, was appointed to look after the process of dissolution for which he was allowed a remuneration of Rs. 7,000. P agreed to bear the dissolution expenses. Actual dissolution expenses Rs. 4,000 were paid by P.
(v) N, a partner, was appointed to look after the process of dissolution for which he was allowed a remuneration of Rs. 9,000. N agreed to bear the dissolution expenses. Actual dissolution expenses Rs. 4,000 were paid by the firm.
(vi) Question a partner was appointed to look after the process of dissolution for which he was allowed a remuneration of Rs. 18,000. Question agreed to take over stock worth Rs. 18,000 as his
Remuneration The stock had already been transferred to Realisation Account.
Solution 3
Question 4. The following is the Balance Sheet of A and B as at 31st March, 2018. The profit sharing ratio of the partners are 3 : 2.
The partners decided to dissolve the firm on and from the date of the Balance Sheet Motor Vehicles and Stock were sold for cash at Rs. 16,950 and Rs. 77,600 respectively and all Debtors were realised in full. Land & Buildings were sold at Rs. 43 500. Creditors were paid off subject to discount of Rs. 1,700. Expenses of realisation were Rs. 1,250.
Prepare Realisation Account, Bank Account and Partners' Capital Accounts to close the books of the firm as a result of its dissolution.
Solution 4
Point of Knowledge:-
(i) When expenses are paid by the firm:
Realisation A/c Dr.
To Cash/Bank A/c
(Being Realisation expenses paid in cash)
(ii) When expenses of realisation are paid by a partner on behalf of the firm:
Realisation A/c Dr.
To Partner’s Capital A/c
(Being Remuneration expenses paid by the partner)
Question 5. P, Q and R are partners sharing profits and losses in the ratio of 2:1:1. They decide to dissolve their firm on 31-03-2018, the date on which their Balance Sheet stands as under:
The following additional information is given :
(1) Investments are taken over by P at book value.
(2) Furniture is taken over by Question for Rs. 20,000.
(3) Creditors were paid off at a discount of 5%.
(4) Other assets realised as follows:
- Stock at 80%
- Debtors Rs. 65,000
- Machinery at 30% less.
(5) Expenses of realisation amounted to Rs. 2,000.
Prepare the necessary ledger accounts to close the books of the firm.
Solution 5
Question 6. A and B were partners sharing profits and losses in 2:1. Their Balance Sheet as at 31st March, 2018 was as follows:
Partners decide to dissolve the firm on the above date. Assets and liabilities realised as follows:
(i) Plant & Machinery was taken over by A at 60% of the book value.
(ii) Investments were taken over by B at 120%.
(iii) Sundry Creditors were paid off by giving them stock at 75% of the book value and the balance in cash.
(iv) Debtors realised 20% less of the amount due from them.
(v) A's loan was paid off with interest for six months.
(vi) Realisation expenses amounted to Rs. 1,000.
you are required to prepare:
(a) Realisation Account
(b) A's Loan Account and B's Loan Account
(c) Partner's Capital Accounts, and
(d) Bank Account.
Solution 6
Question 7. A, B and C were in partnership sharing profits in the ratio of 2:1:1. Their Balance Sheet showed the following position on the date of dissolution :
- A agreed to take over furniture at 20% less than the book value.
- Fixed assets realised Rs. 32,000 and stock Rs. 55,000.
- Bad Debts amounted to Rs. 5,000.
- Expenses of realisation were Rs. 3,000. Creditors were paid at a discount of 5%.
- There was a claim of Rs. 6,400 for damages against the firm. It had to be paid.
Prepare necessary accounts.
Solution 7
Question 8. X, Y and Z are in partnership, sharing profits and losses equally. They a to dissolve the partnership on 31st March, 2018, at which date the Balance Sheet of the firm was as follows:
The assets realised as under :
Premises 20% more; Machinery 40% less; Stock Rs. 5,000 more, Sundry Debtors and Bills Receivable at book values. Expenses of realisation amounted to Rs. 2,000 Sundry Creditors agreed to accept Rs. 57,500 in full settlement.
Show necessary ledger accounts to close the books of the firm.
[Ans. Loss on Realisation Rs. 5,700; Final Payments: X Rs. 1,01,100; Y Rs. 62,100 Z Rs. 35,100; Total of Bank A/c Rs. 2,77,800.]
Solution 8
Question 9. The following was the Balance Sheet of X, Y and Z as at 28.2.2017 :
The firm was dissolved on the above date on the following terms:
(1) Debtors realized Rs. 29,000 and creditors and bills payable were paid at a discount of 10%.
(2) Stock was taken over by X for Rs. 17,000 and furniture was sold to K for Rs. 20,000.
(3) Land and Building was sold for Rs. 2,98,000.
(4) G's loan was paid by a cheque of the same amount.
(5) Compensation to workmen paid by the firm amounted to Rs. 15,000.
Prepare Realisation Account, Capital Accounts and Bank Account.
Solution 9
Point of Knowledge:-
(i) When expenses are paid by the firm:
Realisation A/c Dr.
To Cash/Bank A/c
(Being Realisation expenses paid in cash)
(ii) When expenses of realisation are paid by a partner on behalf of the firm:
Realisation A/c Dr.
To Partner’s Capital A/c
(Being Remuneration expenses paid by the partner)
Question 10. (A) Pritam and Naresh decided to dissolve their firm on September 30,2018, when the Balance Sheet stood as follows:
The assets were realized as follows: Stock Rs. 20,000; Bills Receivable Rs. 3,800; Furniture Rs. 5,100; Plant & Machinery Rs. 35,000; Sundry Debtors at 10% less than book value.
Sundry Creditors allowed a discount of 5%. Pritam agreed to pay his wife's loan Naresh agreed to pay outstanding rent. Expenses on dissolution came to Rs. 800.
Pritam and Naresh shared profits and losses in the ratio of their Capitals. Accounts were finally settled. Prepare Journal, Realisation Account, Capital Accounts and Bank Account.
Solution 10 (A)
Question 10. (B) Mrs. Rita Chowdhary and Miss Shobha are partners in a firm, 'Fancy Garments Exports' sharing profits and losses equally. On 1st April, 2018, the Balance Sheet of the firm was as follows: