Chapter

Dissolution of
4
Partnership Firms

Learning Objectives
After studying this chapter, you should be able to:
✓ differentiate between dissolution of partnership and dissolution of firm;
✓ state the modes of dissolution of firm;
✓ enumerate the rules regarding settlement of accounts of a dissolved firm;
✓ make appropriate accounting entries regarding dissolution of a firm; and
✓ explain the meaning of certain key terms.

DISTINCTION BETWEEN DISSOLUTION OF PARTNERSHIPs AND DISSOLUTION OF FIRMs

Dissolution of partnership is different from dissolution of firm.
Dissolution of partnership Any change in the relations of the partners is called dissolution of partnership.
Thus, in all those cases where a partnership is reconstituted (as discussed in Chapters 2 and 3), there is a
dissolution of the partnership. For example, in case there exists a partnership between X & Y, and if a new
partner Z is admitted, the partnership between X and Y comes to an end and a new partnership between X, Y
and Z comes into existence. Hence, in dissolution of partnership, the firm continues in a reconstituted form.
Dissolution of firm The dissolution of partnership between or among all the partners of a firm is called
the dissolution of the firm. In the case of dissolution of a firm, the business of the firm is closed down and its
affairs are wound up. The assets are realised and the liabilities are paid off.
The dissolution of a partnership may or may not result in the dissolution of a firm but the dissolution of a
firm will necessarily result in the dissolution of the partnership. For example, if there are three partners A, B
and C in a business and if C becomes insolvent, in the absence of any contract to the contrary, the firm will
stand dissolved on this event. This will automatically result in the dissolution of partnership. However, A and
B may agree to continue the business of the firm. In such a case, the firm continues though in a reconstituted
form and, therefore, there is only the dissolution of the partnership.

MODES OF DISSOLUTION OF A FIRM

A partnership firm may be dissolved with or without the intervention of the court.

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 3.170 Partnership Accounts

1. Dissolution Without the Intervention of the Court

A partnership firm may be dissolved without the intervention of the court in any of the following ways:
(a) Dissolution by agreement A partnership firm comes into existence by mutual agreement and,
therefore, it can also be dissolved by the mutual consent of all the partners.
(b) Compulsory dissolution In the following cases, a partnership firm will have to be compulsorily
dissolved
(i) by the adjudication of all the partners or of all the partners but one as insolvent, or
(ii) by the business of firm becoming unlawful due to the happening of any such event.
(c) Dissolution on the happening of certain contingencies In the absence of any contract to the
contrary, a firm will be dissolved on the happening of any of the following contingencies:
(i) on the expiry of the fixed period for which the firm was constituted;
(ii) on the completion of the adventure or undertaking for the carrying out of which the firm was
constituted;
(iii) on the death of a partner; and
(iv) on the adjudication of a partner as insolvent.
(d) Dissolution by notice When a partnership is at will, the firm may be dissolved by any partner giving
a notice in writing to all the other partners of his intention to dissolve the firm.
The firm will stand dissolved from the date as specified in the notice, or if no date is mentioned, from the
date of the communication of the notice to the last partner.
2. Dissolution by the Court
Following are the cases when a court, on a suit by a partner, will intervene and may order for the dissolution
of the firm.
(a) Insanity When a partner has become of unsound mind. Lunacy of a partner does not of itself dissolve
the partnership but it will be a ground for dissolution at the instance of other partners.
(b) Permanent incapacity When a partner, other than the partner suing, has become, in any way,
permanently incapable of performing his duties as a partner.
(c) Misconduct When a partner, other than the partner suing, is guilty of misconduct which may
prejudicially affect the carrying on of the business. It is not necessary that the conduct complained
of, should be directly connected with the business, e.g., conviction of a partner for travelling on the
railway without ticket with intention to defraud.
(d) Breach of agreement When a partner, other than the partner suing, wilfully or persistently commits
breach of agreement regarding the conduct of business or the management of the affairs of the firm or
when he conducts himself in matters relating to the business in such a manner that other partners cannot
reasonably carry on business in partnership with him. Court will interfere only when the misconduct
is of such a nature as will destroy the mutual confidence between the partners.
(e) Transfer of interest When a partner, other than the partner suing, has transferred the whole of his
interest in the firm to a third party or has allowed his share to be charged or sold by the court.
(f) Loss in business When the business of the firm cannot be carried on except at a loss.
(g) Just and equitable When the court considers any other ground to be just and equitable for the
dissolution of the firm, e.g., deadlock in the management, bad internal relations, disappearance of the
substratum of the business, etc.
Liabilities of a Partner after Dissolution of the Firm
Partners shall continue to be liable as such to third parties for any act done by any of them before the
dissolution, till they give a public notice of the dissolution of the firm. But a deceased or an insolvent or a

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 Dissolution of Partnership Firms 3.171

dormant partner shall not be liable for acts done after he has ceased to be a partner. In such case a public
notice of dissolution need not be given.

SETTLEMENT OF ACCOUNTS
The Partnership Act incorporates various Sections (viz., 48 and 55) laying down the following rules for
the settlement of accounts and division of profits and losses after dissolution. However, these rules may be
changed by and are subject to an agreement entered into by the partners.
1. In settling the accounts of a firm after its dissolution, the goodwill shall be included in the assets and
may be sold either separately or along with other property of the firm. A partner may this make an
agreement with the buyer of the goodwill that he will not carry on any business similar to that of the
firm for a specified period of time or within specified local limits. However, such an agreement is valid
if the restrictions imposed are reasonable (Sec. 55).
2. Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital, and lastly,
if necessary by the partners individually in the proportion in which they were entitled to share profits
[Sec. 48(a)].
Example A and B were partners in a firm sharing profits and losses equally. A dies. The partnership accounts
show that he contributed ` 1,929 to the capital of the firm while B’s contribution was only ` 29. The assets
amounted to ` 1,400. It was held that the deficiency of ` 558 (i.e., 1,958 – 1,400) must be shared equally by
B and the estate of A.
3. The assets of the firm, including any sums of money contributed by the partners to make up deficiencies
of capital, shall be applied in the following order:
(a) In paying the debts of the firm to third parties.
(b) In paying to each partner rateably, what is due to him from the firm for advances as distinguished
from capital.
(c) In paying to each partner rateably what is due to him on account of capital.
(d) The residue, if any, shall be divided among the partners in the proportion in which they were
entitled to share profits [Sec. 48(b)].
Example A, B and C were partners in a business sharing profits and losses equally. The accounts show that
their contributions to the firm’s capital were ` 10,000, ` 5,000 and ` 1,000 respectively. The assets of the
firm after satisfying the outside liabilities are only ` 7,000. The deficiency is, therefore, a sum of ` 9,000. A,
B and C must contribute ` 3,000 each. This will make the assets ` 16,000. The distribution of these assets to
partners will result in a net loss of ` 3,000 each partner. In actual practice only C would be required to bring
a sum of ` 2,000 in cash. Out of the assets of ` 9,000 (` 7,000 + ` 2,000) A and B will be paid ` 7,000 and
` 2,000 respectively.
Payment of Firm’s Debts and of Separate Debts
When there are joint debts due from the partnership and also any separate debts due from any partner,
firm’s property must be first applied in the payment of the debt of the firm and, if there is any surplus,
then in payment of his separate debts or paid to him, if he has no debts. So also the separate property
of any partner must be first applied in payment of his separate debts, and then the surplus, if any, in the
payment of the debts of the firm. Where partnership assets are insufficient to meet out the liabilities of
the partnership, the creditors of the firm can resort to the partners’ personal property outside the firm
provided their personal and private creditors have already been paid out of it.

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 3.172 Partnership Accounts

ACCOUNTING ENTRIES
In the event of dissolution of a firm, all its assets are sold away and liabilities are paid off. A Realisation
Account is opened in order to find out any profit or loss on realisation of assets and making payment of
liabilities. The journal entries will be as follows:
1. For transfer of assets:
Realisation A/c Dr.
To Sundry Assets A/c
(Each asset will be credited individually at its books value. Cash and bank balances will not be
transferred unless the business has been taken over by a new firm or company. This will close all
accounts of the assets transferred.)
It is to be noted that when an asset is transferred to the Realisation Account, its corresponding provision
or reserve appearing on the liabilities side of the balance sheet will also be transferred to the Realisation
Account. For example, Investments and Joint Life Insurance Policy appear on the assets side of the balance
sheet while Investments Fluctuation Fund and Joint Life Insurance Policy Reserve appear on the Liabilities
side of the balance sheet. The accounting entries in the event of dissolution of the firm would be as follows:
(i) Realisation A/c Dr.
To Investments A/c
To Joint Life Insurance Policy A/c
(ii) Investments Fluctuation Fund A/c Dr.
Joint Life Insurance Policy Reserve A/c Dr.
To Realisation A/c
2. For transfer of liabilities:
Liabilities A/c Dr.
To Realisation A/c
(All liabilities excluding partners’ loans will be transferred at book values. Each liability should be
debited individually. This will close accounts of all liabilities transferred.)
3. For realisation of assets:
Cash/Bank A/c Dr.
To Realisation A/c
4. For payment of liabilities:
Realisation A/c Dr.
To Bank/Cash A/c
5. In case a partner takes an asset:
Partner’s Capital A/c Dr.
To Realisation A/c
6. In case a partner agrees to meet a liability:
Realisation A/c Dr.
To Partner’s Capital A/c
7. For expenses on realisation:
Realisation A/c Dr.
To Bank/Cash A/c
8. For profit on realisation:
Realisation A/c Dr.
To Partners’Capital A/cs
(In the profit sharing ratio.)
In case of loss the entry will be reversed.

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9. For paying off partner’s loan:

Partner’s Loan A/c Dr.
To Bank/Cash A/c
10. For distribution of Reserves, undistributed Profit etc.:
P & L A/c Dr.
Reserves A/c Dr.
To Partners’ Capital A/cs
11. For cash brought in by a partner on Account of his ‘Account’ showing a debit balance:
Cash/Bank A/c Dr.
To Partner’s Capital A/c
12. The credit balance in a partner’s capital account will be paid off:
Partner’s Capital A/c Dr.
To Bank/Cash A/c
Thus, all accounts in the firm will be closed.
When a Partner is Made Incharge of Realisation
The partners by mutual agreement may decide that one of them will be responsible for realisation of firm’s
assets and making payment of firm’s liabilities. The partner so appointed may be given remuneration for such
work. Such remuneration may form a certain percentage of the assets realised or liabilities paid or both. It
may be in the form of a lump sum also. The partner made ‘incharge’ of the realisation may also agree to bear
all costs of realisation.
Besides the usual accounting entries, as discussed above, the following entries for remuneration etc. due
to the partner ‘incharge’ of realisation will be made:
1. For remuneration due:
Realisation Account Dr.
To Partner’s Capital A/c
2. For realisation expenses incurred by the partner:
Realisation Account Dr.
To Partner’s Capital A/c
In case the partner has agreed to bear all expenses on realisation in consideration of the remuneration to
be received by him on realisation work, no entry will be required in the firm’s books for realisation expenses
incurred by the partner incharge of realisation. However, if in such a case, the firm has paid the realisation
expenses on behalf of the partner incharge, the following entry will be passed in the firm’s books:
Partner’s Capital A/c Dr.
To Bank/Cash A/c
The accounts of the partners will be settled in the usual manner.
Illustration 4.1 A, B and C were three partners in a business sharing Profits and Losses in the ratio of 2:2:1.
The following was their balance sheet as on 31st Dec., 2015:

Liabilities ` Assets `
Creditors 30,000 Bank 20,000
Capital A/cs: Current Assets 30,000
A40,000 Fixed Assets 70,000
B30,000
C20,000 90,000
1,20,000 1,20,000

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It was decided to dissolve the firm w.e.f. 31st Dec., 2015 and C was appointed as incharge of realisation.
He was to receive 5% commission on the amounts realised from fixed and current assets. He was also to bear
all expenses of realisation.
The fixed assets realised ` 80,000 and the current assets ` 20,000. The realisation expenses amounted to
` 2,000.
You are required to prepare the necessary ledger accounts and close the books of the firm.
Solution
Realisation Account

Particulars ` Particulars `
To Fixed Assets A/c 70,000 By Creditors A/c 30,000
To Current Assets A/c 30,000 By Bank A/c (assets released) 1,00,000
To Bank A/c (Creditors) 30,000 By Realisation Loss:
To C’s Capital A/c (Commission) 5,000 A’s Capital A/c 2,000
B’s Capital A/c 2,000
C’s Capital A/c 1,000 5,000
1,35,000 1,35,000

Bank Account

Particulars ` Particulars `
To Balance b/d 20,000 By Realisation A/c (Creditors) 30,000
To Realisation A/c 1,00,000 By C’s Capital A/c (realisation expenses) 2,000
(Assets realised) By A’s Capital A/c 38,000
By B’s Capital A/c 28,000
By C’s Capital A/c 22,000
1,20,000 1,20,000

Capital Accounts of Partners

Particulars A` B` C` Particulars A` B` C`
To Realisation A/c By Balance b/d 40,000 30,000 20,000
(Loss) 2,000 2,000 1,000 By Realisation
To Bank A/c (Expenses) — — 2,000 Account — — 5,000
To Bank A/c 38,000 28,000 22,000
40,000 30,000 25,000 40,000 30,000 25,000

Treatment of Unrecorded Assets and Liabilities

In case certain assets or liabilities have not been recorded in the books of the partnership firm at all and on
dissolution of the partnership firm they were realised and accounted for, the following entries will be passed:
(i) On realisation of an unrecorded asset:
Bank A/c Dr.
To Realisation A/c
(ii) On payment of an unrecorded liability:
Realisation A/c Dr.
To Bank A/c

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(iii) In case a partner agrees to take an unrecorded asset:

Partner’s Capital A/c Dr.
To Realisation A/c
(iv) In case a partner agrees to take an unrecorded liability:
Realisation A/c Dr.
To Partner’s Capital A/c
(v) In case a creditor agrees to take an unrecorded asset. For example, a creditor of ` 10,000 agrees to
take an unrecorded asset of ` 6,000 and the balance to that creditor is paid in cash. The following
journals’ entries will be passed.

Journal Entries

Particulars Dr. ` Cr. `

(a) Creditor’s A/c Dr. 10,000
Realisation A/c 10,000
(For transfer of the creditor to Realisation A/c)
(b) Realisation A/c Dr. 4,000
To Bank A/c 4,000
(Payment to the creditor net ` 10,000 – ` 6,000)

Illustration 4.2 A and B, who were in partnership sharing profits and losses in the proportion of 4 : 3,
respectively, decided to dissolve the partnership firm as on 31st December, 2016. At the date of dissolution
A’s capital was ` 1,25,030 and B’s ` 2,070; the creditors amounted to ` 23,150 and cash at bank ` 4,520. The
remaining assets realised ` 1,24,910 and the expenses of dissolution were ` 1,860. Both A and B were solvent.
Prepare the Balance Sheet of the firm as on the date of dissolution and also the accounts necessary to close
the books of the firm, showing the final adjustment of cash among the partners.
Solution
Balance Sheet of A & B
As on December 31, 2016

Liabilities ` Assets `
Sundry Creditors 23,150 Sundry Assets (Balancing figure) 1,45,730
Capital: A 1,25,030 Bank balance 4,520
B 2,070
1,50,250 1,50,250

Realisation Account

Particulars ` Particulars `
To Sundry Assets A/c 1,45,730 By Creditors A/c 23,150
To Bank A/c (creditors paid) 23,150 By Bank A/c (Assets realised) 1,24,910
To Cash A/c (Expenses) 1,860 By Loss transferred:
A’s Capital A/c 12,960
B’s Capital A/c 9,720
1,70,740 1,70,740

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Partners’ Capital Accounts

Particulars A B Particulars A B
To Loss on Realisation A/c 12,960 9,720 By Balance b/d 1,25,030 2,070
To Bank A/c 1,12,070 — By Bank A/c 7,650
1,25,030 9,720 1,25,030 9,720

Bank Account

Particulars ` Assets `
To Balance b/d 4,520 By Realisation A/c 23,150
To Realisation A/c 1,24,910 By Realisation A/c 1,860
To B’s Capital A/c 7,650 By A’s Capital A/c 1,12,070
1,37,080 1,37,080

Illustration 4.3 A, B and C were partners sharing profits and losses in the ratio of 2 : 2 : 1. On Jan. 1, 2015,
their Balance Sheet was as follows:
Liabilities ` Assets `
Sundry Creditors 12,000 Cash at Bank 12,200
General Reserve 5,000 Debtors8,000
Capital Accounts: Less: Provision 200 7,800
A15,000 Stock 6,000
B12,000 Furniture 2,000
C6,000 33,000 Buildings 22,000
50,000 50,000

The firm was dissolved on the date. The assets realised as under:
`
Debtors 7,000
Stock 5,000
Furniture 1,000
Buildings 25,000
The creditors were settled for ` 11,000. It was found, however, that there was a liability for ` 3,000 for
damages which had to be paid. The expenses of dissolution amounted to ` 1,000.
Give the Realisation Account, the Bank Account and the Capital Accounts of the partners.
Solution
Realisation Account

Particulars ` Particulars `
To Sundry Assets: By Sundry Creditors A/c 12,000
Debtors 8,000 By Provision for
Stock 6,000 Bad & Doubtful Debts A/c 200
Furniture 2,000 By Bank A/c 38,000
Building 22,000 38,000 By Loss Realisation:
To Bank A/c (Payment of liabilities) 14,000 A 1,120
To Bank A/c (Expenses) 1,000 B 1,120
C 560
53,000 53,000

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Bank Account

Particulars ` Particulars `
To Balance b/d 12,200 By Realisation A/c 14,000
To Realisation A/c 38,000 By Realisation A/c 1,000
By A’s Capital A/c 15,880
By B’s Capital A/c 12,880
By C’s Capital A/c 6,440
50,200 50,200

Capital Accounts of Partners

Particulars A` B` C` Particulars A` B` C`
To Loss on Realisation A/c 1,120 1,120 560 By Balance b/d 15,000 12,000 6,000
To Bank A/c 15,880 12,880 6,440 By General Reserve A/c 2,000 2,000 1,000
17,000 14,000 7,000 17,000 14,000 7,000

Illustration 4.4 The following was the Balance Sheet of Deepak and Neeru sharing profits and losses in the
ratio of 3 : 2 as on 31st December, 2016:

Liabilities ` Assets `
Creditors 38,000 Bank 11,500
Mrs. Deepak’s Loan 10,000 Stock 6,000
Neeru’s Loan 15,000 Debtors20,000
Reserve Fund 2,500 Less Provision 1,000 19,000
Deepak’s Capital 10,000 Furniture 4,000
Neeru’s Capital 8,000 Plant 28,000
Investments 10,000
P & L A/c 5,000
83,500 83,500

The firm was dissolved on 31st December, 2016 and the following was the result:
(a) Deepak took over investment at ` 8,000 and agreed to pay off the loan of his wife.
(b) The assets realised are as follows:
Stock: ` 1,000 less: Debtors: ` 18,500; Furniture: ` 500 more; Plant: ` 3,000 less.
(c) Expenses of realisation were ` 600.
(d) Creditors were paid off less 2½% discount.
Show ledger accounts to close the books of the firm.
Solution
Realisation Account

Particulars ` Particulars `
To Sundry Assets: By Sundry Creditors A/c 38,000
Stock 6,000 By Provision for bad
Debtors 20,000 and doubtful debts A/c 1,000
Furniture 4,000 By Bank A/c (Assets realised) 53,000
Plant 28,000 By Deepak A/c 8,000
(Contd.)

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Particulars ` Particulars `
Investments 10,000 68,000 By Loss on Realisation:
To Bank A/c (Expenses) 600 Deepak’s Capital A/c 3,390
To Bank A/c (Creditors paid) 37,050 Neeru’s Capital A/c 2,260
1,05,650 1,05,650

Partner’s Capital Accounts

Particulars Deepak ` Neeru ` Particulars Deepak ` Neeru `

To Realisation A/c (Loss) 3,390 2,260 By Balance b/d 10,000 8,000
To Realisation A/c (Investment) 8,000 – By Realisation A/c 10,000 –
To P & L A/c 3,000 2,000 By Reserve A/c 1,500 1,000
To Bank A/c 7,110 4,740
21,500 9,000 21,500 9,000

Neeru’s Loan Account

Particulars ` Particulars `
To Bank A/c 15,000 By Balance b/d 15,000
15,000 15,000

Bank Account

Particulars ` Particulars `
To Balance b/d 11,500 By Realisation A/c:
To Realisation A/c 53,000 Expenses 600
Creditors 37,050
By Deepak’s Capital A/c 7,110
By Neeru’s Capital A/c 4,740
By Neeru’s Loan A/c 15,000
64,500 64,500

Illustration 4.5 Read, Write and Add give you the following Balance Sheet as on Dec. 31, 2014.

Liabilities ` Assets `
Read’s Loan 15,000 Plant and Machinery at Cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors18,400
Add 2,000 42,000 Less: Provision 400 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Stock 6,200 Patents and Trade Marks 10,000
Joint Life Policy Reserve 12,400 Cash at Bank 8,000
93,400 93,400

The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. The firm was
dissolved on December 31, 2014 and you are given the following information:

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(a) Add had taken a loan from Insurers for ` 5,000 on the security of Joint Life Policy. The policy was
surrendered and Insurers paid a sum of ` 10,200 after deducting ` 5,000 for Add’s loan and ` 300 as
interest thereon.
(b) One of the creditors took some of the patents whose book value was ` 6,000 at a valuation of 4,500.
The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had written them off on
finding them useless. The share was now found to be worth ` 3,000 and the loan creditor agreed to
accept the shares at this value.
(d) The remaining assets realised the following amounts:
`
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of ` 500 was allowed by the creditors.
(f) The expenses of realisation amounted to ` 2,300.
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in columnar form.
Solution
Realisation Account

Particulars ` Particulars `
To Plant & Machinery A/c 30,000 By Sundry Creditors A/c 17,800
To Fixtures & Fittings A/c 2,000 By Loan A/c 6,200
To Stock A/c 10,400 By Joint Life Policy Reserve A/c 12,400
To Debtors A/c 18,400 By Provision for Doubtful Debts A/c 400
To Joint Life Policy A/c 15,000 By Add’s Capital A/c 5,300
To Patents & Trade Marks A/c 10,000 By Bank A/c (Insurance Co.) 10,200
To Bank A/c (Payment of creditors’ By Bank A/c (Realisation of assets):
loan—see Working Note) 16,000 Plant & Machinery 17,000
To Bank A/c (Expenses) 2,300 Fixture & Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 2,000 45,500
By Loss:
Read’s Capital A/c 2,800
Write’s Capital A/c 1,400
Add’s Capital A/c 2,100
1,04,100 1,04,100

Capital Accounts

Particulars Read ` Write ` Add ` Particulars Read ` Write ` Add `

To Realisation A/c — — 5,300 By Balance b/d 30,000 10,000 2,000
To Realisation A/c (loss) 2,800 1,400 2,100 By Bank A/c 5,400
To Bank A/c 27,200 8,600 —
30,000 10,000 7,400 30,000 10,000 7,400

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 3.180 Partnership Accounts

Read’s Loan Account

Particulars ` Particulars `
To Bank A/c 15,000 By Balance b/d 15,000
15,000 15,000

Bank Account

Particulars ` Particulars `
To Balance b/d 8,000 By Realisation A/c 16,000
To Realisation A/c 10,200 By Realisation A/c (Expenses) 2,300
To Realisation A/c 45,500 By Read’s Loan A/c 15,000
To Add’s Capital A/c 5,400 By Read’s Capital A/c 27,200
By Write’s Capital A/c 8,600
69,100 69,100

Working Note:
The amount paid to creditors and repayment of the loan:
Sundry Creditors ` 17,800
Loan on Hypothecation 6,200
24,000
Less: Patents taken 4,500
Shares taken 3,000
Discount allowed 500 8,000
Amount paid 16,000
Illustration 4.6 X, Y and Z carrying on business since 2004 decided to dissolve their partnership on 30th
June, 2017 when their Balance Sheet was as under:

Liabilities ` Assets `
Creditors 34,000 Cash 25,000
Capital Accounts: Debtors 62,000
X1,20,000 Stock 37,000
Y90,000 Tools 8,000
Z60,000 2,70,000 Motor Cars 12,000
Machinery 60,000
Freehold Building 1,00,000
3,04,000 3,04,000

Y and Z agreed to form a new partnership to carry on the business and it is agreed that they shall acquire
from the old firm the following assets at amounts shown hereunder:
`
Stock 40,000
Tools 5,000
Motor Cars 25,000
Machineries 78,000
Freehold Building 84,000
Goodwill 60,000

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The partnership agreement of X, Y and Z provided that trading profits or losses shall be divided in the ratio
of 3 : 2 : 1 and that capital profits or losses shall be divided in proportion of their capitals:
Debtors realise ` 59,000 and discount amounting to ` 720 are secured on payments due to creditors.
Prepare the necessary accounts of X, Y and Z giving effect to these transactions and prepare the Opening
Balance Sheet of Y and Z who bring the necessary cash to pay X in the ratio of 3 : 2.
Solution
M/s X, Y & Z
Realisation Account

Particulars ` Particulars `
To Sundry Assets: By Cash A/c (Debtors) 59,000
Debtors 62,000 By Sundry Creditors A/c 720
Stock 37,000 (Discount)
Tools 8,000 By Y & Z Joint Account
Motor Cars 12,000 Stock 40,000
Machinery 60,000 Tools 5,000
Freehold Buildings 1,00,000 Motor Cars 25,000
To Profit transferred to Capital A/cs: Machinery 78,000
X (32,000 + 360) 32,360 Freehold Buildings 84,000
Y (24,000 + 240) 24,240 Goodwill 60,000 2,92,000
Z (16,000 + 120) 16,120 72,720
3,51,720 3,51,720

Cash Account

Particulars ` Particulars `
To Balance b/d 25,000 By Sundry Creditors A/c 33,280
To Realisation A/c (Debtors) 59,000 By X’s Capital Account 1,52,360
To Y’s Capital Account 60,984
To Z’s Capital Account 40,656
1,85,640 1,85,640

Capital Accounts

Particulars X` Y` Z` Particulars X` Y` Z`
To Cash A/c 1,52,360 – – By Balance b/d 1,20,000 90,000 60,000
To Y & Z Joint By Realisation A/c
Account – 1,75,224 1,16,776 (Profit) 32,360 24,240 16,120
By Cash A/c – 60,984 40,656
1,52,360 1,75,224 1,16,776 1,52,360 1,75,224 1,16,776

Y & Z Joint Account

Particulars ` Particulars `
To Realisation Account 2,92,000 By Y’s Capital 1,75,224
By Z’s Capital 1,16,776
2,92,000 2,92,000

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 3.182 Partnership Accounts

M/s Y and Z
Balance Sheet
as on July 1, 2017

Liabilities ` Assets `
Y’s Capital 1,75,224 Goodwill 60,000
Z’s Capital 1,16,776 Freehold Buildings 84,000
Machineries 78,000
Motors 25,000
Tools 5,000
Stock 40,000
2,92,000 2,92,000

Working Notes:
(1) Ascertainment of Capital Profit:

Assets Book Value Value at which

taken over
` `
Motors 12,000 25,000
Tools 8,000 5,000
Machinery 60,000 78,000
Freehold Buildings 1,00,000 84,000
Goodwill — 60,000
1,80,000 2,52,000

Capital Profit ` 72,000 (i.e., ` 2,52,000 – 1,80,000)

This is divided in the ratio of 12 : 9 : 6 or 4 : 3 : 2 (Ratio of the Capitals).
(2) Ascertainment of Trading Profit:

Assets Book Value Value

` `
Stock-in-Trade 37,000 40,000
Sundry Debtors 62,000 59,000
Discount on Creditors – 720
99,000 99,720
Trading Profit is ` 720, credited in the ratio of 3 : 2 : 1.
(3) Division of Profit:
Capital Profit + Trading Profit Total
A ` 32,000 + 360 = 32,360
B 24,000 + 240 = 24,240
C 16,000 + 120 = 16,120
Illustration 4.7 A and B, who make up their accounts annually to 31st December, were in partnership
sharing profits and losses in the ratio of 2:1. No interest was charged on drawings or credited to capital.
The following was the summary of the balances as on 31st December, 2015.

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 Dissolution of Partnership Firms 3.183

Particulars ` Particulars `
Fixture and Fittings 22,000 Partners Capital Accounts:
Leasehold Premises 50,000 A 31,000
Stock (opening) 7,600 B 10,000
Debtors 1,800 Loan from A at 8% p.a. 20,000
Purchases 48,000 Creditors 6,400
Partners’ Drawings: A 6,000 Sales 1,04,000
B 4,800 Depreciation on Motor
Motor Vehicle at cost 9,000 Vehicle as on 1.1.15 3,600
Wages 36,000 Bank Overdraft 26,200
General Expenses 16,000
2,01,200 2,01,200

For the purpose of closing of accounts on 31.12.15, closing stock was valued at ` 6,200 and furniture
and fittings at ` 18,000. Provision for depreciation on motor vehicle is to be made at 20% p.a. calculated on
cost and for accrued general expenses ` 1,200. In addition one year’s interest is to be provided on A’s Loan.
The partnership was dissolved on 1.1.2016, it being agreed that
(i) A should take over stock for ` 6,000.
(ii) B should take over motor vehicle at ` 2,700 and part of the fittings and fixtures for ` 7,500.
(iii) Interest on A’s loan should cease with effect from 1.1.2016.
During January, 2016 the following transactions took place.
(a) Leasehold premises were sold, realising a net amount of ` 60,000.
(b) ` 1,600 was collected from debtors and the balance was taken over by A.
(c) A portion of the fittings and fixtures were auctioned and realised ` 10,000. It was also agreed that
the balance of fixtures and fittings should be taken over by B for ` 500.
(d) Creditors and accrued general expenses were paid in full.
(e) All amounts receivable and payable by A and B were settled.
Prepare: (1) Profit and Loss Account for the year ended 31st December, 2015 excluding profit or loss
arising on dissolution, (2) Realisation Account, (3) Cash Account for January, 2016, (4) Partners’ Accounts
showing the final settlement on dissolution. (ICWA Final, adapted)
Solution
1. Profit and Loss Account
for the year and 31st December, 2015

Particulars ` Particulars `
To Stock on 1.1.15 7,600 By Sales 1,04,000
Add: Purchases 48,000 By Net Loss:
55,600 A’s Capital A/c 4,000
Less: Stock on 31.12.15 6,200 49,400 B’s Capital A/c 2,000 6,000
To Wages 36,000
To Depreciation on Motor
Vehicles (20% on ` 9,000) 1,800
To Loss on Fixtures and
Fittings (` 22,000–` 18,000) 4,000
To Interest (8% on ` 20,000) 1,600
To General Expenses 17,200
1,10,000 1,10,000

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 3.184 Partnership Accounts

2. Realisation Account

Particulars ` Particulars `
To Stock A/c 6,200 By A’s Capital A/c (Stock) 6,000
To Motor Vehicle A/c (Depreciated Value) 3,600 By B’s Capital A/c (Motor Vehicles) 2,700
To Fixtures and Fittings A/c 18,000 By B’s Capital A/c (Fixtures & Fittings) 7,500
To Debtors A/c 1,800 By Cash (Debtors) 1,600
To Leasehold Premises A/c 50,000 By A’s Capital A/c (Debtors) 200
To Cash A/c (Realisation Expenses) 1,400 By Cash A/c (Fixture & Fittings) 10,000
To Profit on Realisation: By B’s Capital A/c (Fixture &, Fittings) 500
C’s Capital A/c 5,000 By Cash A/c (Leasehold Premises) 60,000
B’s Capital A/c 2,500 7,500
88,500 88,500

Working Notes:
(i) Balance Sheet
as on 31.12.2015 (after preparing P&L A/c as shown above)

Liabilities ` Assets `
Partner’s Capital Accounts: Fixed Assets:
A 31,000 Leasehold Premises 50,000
B 10,000 Fixtures & Fittings 22,000
Loan from A at 8% per annum 20,000 Less: Loss on Revaluation 4,000 68,000
Interest due on A’s loan 1,600 Motor Vehicle at cost 9,000
Creditors 6,400 Less Dep.
Creditors for accrued expenses 1,200 Up to 1.1.15 3,600
Bank Overdraft 26,200 For 2015 1,800 5,400 3,600
Current Assets:
Debtors 1,800
Stock 6,200
A’s Drawings 6,000
Add: Loss 4,000 10,000
B’s drawings 4,800
Add: Loss 2,000 6,800
96,400 96,400

The Realisation A/c has been prepared on the basis of the above Balance Sheet.
(ii) Alternatively, the Bank overdraft, Sundry Creditors, Accrued expenses, Loan from A and Interest
thereon can be passed through Realisation Account i.e. liabilities on the credit side of the above
Realisation Account and payment on the Debit side of the Realisation Account.

3. Cash Account for January, 2016

Particulars ` Particulars `
To Leashold A/c 60,000 By Bank overdraft 26,200
To Debtors A/c 1,600 By A’s Loan A/c 20,000
To Fixture and Fittings A/c (part sold) 10,000 By Creditors A/c 6,400
To B’s Capital A/c (Cash brought in) 5,000 By Interest on A’s Loan A/c 1,600
(Contd.)

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 Dissolution of Partnership Firms 3.185

Particulars ` Particulars `
By Realisation A/c (expenses) 1,400
By Accrued expenses A/c 1,200
By A’s Capital A/c 19,800
76,600 76,600

4. Partners’ Capital Accounts

Particulars A B Particulars A B
To Drawings A/c 6,000 4,800 By Balance b/d 31,000 10,000
To Loss (as per Profit & Loss A/c) 4,000 2,000 By Realisation Account 5,000 2,500
To Realisation A/c: By Cash A/c (brought in by B) 5,000
Stock 6,000 –
Motor Vehicles – 2,700
Fixtures & Fittings (7,500 + 500) – 8,000
Debtors 200 –
To Cash A/c 19,800 –
36,000 17,500 36,000 17,500

INSOLVENCY OF PARTNERS
A partner may owe some money to a partnership firm. This money should be paid by him to the firm.
However, in case he becomes insolvent, he may not be in a position to pay the amount owed by him to the
firm in full. The amount not so paid is a loss to the firm. This loss has to be borne by the solvent partners on
the basis of the following rules based on the decision given in the case of Garner vs. Murray:
(1) The solvent partners should bring in cash their share of loss on realisation.
(2) The loss on account of insolvency of partner should then be borne by the solvent partners in the ratio
of their capitals after bringing in cash for such loss on realisation.
In other words, according to Garner vs. Murray, the loss on account of insolvency of a partner should
be borne by the solvent partners in the ratio of their capitals standing in the balance sheet, just before the
dissolution of the partnership firm. In this connection, the following points should be noted:
(1) The term capital here means the real capitals of the partners and not capitals as may be standing in
the books of the partnership firm in the names of different partners. This distinction is particularly
important when the partners are maintaining their capital accounts on fluctuating capital system. The
true capitals in case of this system will be ascertained after making all adjustments regarding reserves,
drawings, unrecorded assets/liabilities, etc. on the date of the balance sheet, just before dissolution of
the partnership firm.
(2) In case a partner, though solvent has a debit balance in his capital account, just before the dissolution
of the partnership firm, such a partner will not be required to bear the loss on account of insolvency of
another partners.
Illustration 4.8 The following is the balance sheet of a firm as on 31st December, 2015, when D has
become insolvent:

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 3.186 Partnership Accounts

Balance Sheet
as on 31 December, 2015

Liabilities ` Assets `
Sundry Creditors 10,000 Sundry Assets 50,000
General Reserve 10,000 C’s Capital A/c 10,000
A’s Capital A/c 30,000 D’s Capital A/c 10,000
B’s Capital A/c 20,000
70,000 70,000

The assets realised ` 40,000. Creditors are paid in full. Partners share profits and losses equally. You are
required to close the books of the firm applying Garner vs. Murray rule.
Solution
Realisation Account

Particulars ` Particulars `
To Sundry Assets 50,000 By Sundry Creditors 10,000
To Bank A/c 10,000 By Bank A/c 40,000
By Loss on realisation:
A’s Capital A/c 2,500
B’s Capital A/c 2,500
C’s Capital A/c 2,500
D’s Capital A/c 2,500 10,000
60,000 60,000

Bank Account

Particulars ` Particulars `
To Realisation A/c 40,000 By A’s Capital A/c 26,590
To A’s Capital A/c 2,500 By B’s Capital A/c 18,410
To B’s Capital A/c 2,500 By Sundry Creditors 10,000
To C’s Capital A/c 2,500
To D’s Capital A/c 7,500
55,000 55,000

Capital Accounts

Particulars A` B` C` D` Particulars A` B` C` D`
To Balance b/d – – 10,000 10,000 By Balance b/d 30,000 20,000
To Realisation A/c 2,500 2,500 2,500 2,500 By General
To D’s Cap. A/c 5,910 4,090 – – Reserve A/c 2,500 2,500 2,500 2,500
To Bank A/c 26,590 18,410 – – By Bank A/c (Share
in Loss on
Realisation) 2,500 2,500 2,500 –
By A’s Cap. A/c – – – 5,910
By B’s Cap. A/c – – – 4,090
By Bank A/c – – 7,500
35,000 25,000 12,500 12,500 35,000 25,000 12,500 12,500

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 Dissolution of Partnership Firms 3.187

Working Notes:
The deficiency of D will have to be borne by partners A and B. C will not have to bear the deficiency because
he had a debit balance in his capital account. The ratio has been ascertained as follows:

Particulars A B
Capital 30,000 20,000
Add: Reserve 2,500 2,500
Realisation loss brought in cash 2,500 2,500
35,000 25,000
Less: Loss on Realisation 2,500 2,500
Real Capitals (in which deficiency of D has to be shared) 32,500 22,500
Share of D’s deficiency (` 10,000) 5,910 4,090

Tutorial Notes:
(i) While attempting an examination problem, the solvent partners may not be required to bring the
loss on realisation in cash. The deficiency of the insolvent partner may be distributed among the
solvent partners in the ratio of their capitals standing in the balance sheet just before dissolution
of the partnership firm. However, where an examination problem specifies that the rule in Garner
vs. Murray is to be applied, the solvent partners should be required to bring the loss on realisation
in cash.
(ii) In the above illustration if the partners had been following fixed capital system (i.e., when separate
current accounts are maintained) the deficiency of the insolvent partner D would have been borne
by the solvent partners A and B in the ratio of their fixed capital, i.e., 3 : 2.
Illustration 4.9 Ajay, Vijay, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of
4:1:2:3. The following is their Balance Sheet as on 31st March, 2016.

Liabilities ` Assets `
Sundry Creditors 3,00,000 Sundry Debtors 3,50,000
Capital A/cs: Less: Doubtful Debts 50,000 3,00,000
Ajay 7,00,000 Cash in Hand 1,40,000
Shyam 3,00,000 10,00,000 Stocks 2,00,000
Other Assets 3,10,000
Capital A/cs:
Vijay 2,00,000
Ram 1,50,000
13,00,000 13,00,000

On 31st March, 2016, the firm is dissolved and the following points are agreed upon:
Ajay is to take over sundry debtors at 80% of book value; Shyam is to take over the stocks at 95% of the
value; Ram is to discharge sundry creditors.
Other assets realise ` 3,00,000 and the expenses of realisation come to ` 30,000.
Vijay is found insolvent and ` 21,900 is realised from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash Account.
The loss arising out of capital deficiency may be distributed following the decision in Garner vs. Murray.
(C.A. Inter, adapted)

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 3.188 Partnership Accounts

Solution
Dr. Realisation Account Cr.

Particulars ` Particulars `
To Sundry Debtors A/c 3,50,000 By Sundry Creditors A/c 3,00,000
To Stock A/c 2,00,000 By Provision for Doubtful Debts 50,000
To Other Assets A/c 3,10,000 By Ajay’s Capital A/c (Debtors) 2,80,000
To Ram’s Capital A/c (Creditors) 3,00,000 By Shyam’s Capital A/c (Stock) 1,90,000
To Cash (Expenses on Realisation) 30,000 By Cash (Other Assets) 3,00,000
By Loss on Realisation to Capital A/cs:
Ajay 28,000
Vijay 7,000
Ram 14,000
Shyam 21,000
11,90,000 11,90,000

Dr. Capital Accounts Cr.

Particulars Ajay Vijay Ram Shyam Particulars Ajay Vijay Ram Shyam
` ` ` ` ` ` ` `
To Balance b/d – 2,00,000 1,50,000 – By Balance b/d 7,00,000 – – 3,00,000
To Realisation By Realisation
A/c (Debtors) 2,80,000 – – – A/c (Creditors) – – 3,00,000 –
To Realisation By Balance c/d – 2,07,000 – –
A/c (Stock) – – – 1,90,000
To Realisation
A/c (Loss) 28,000 7,000 14,000 21,000
To Balance c/d 3,92,000 – 1,36,000 89,000
7,00,000 2,07,000 3,00,000 3,00,000 7,00,000 2,07,000 3,00,000 3,00,000
To Balance b/d – 2,07,000 – – By Balance b/d 3,92,000 – 1,36,000 89,000
To Vijay A/c 1,29,570 – – 55,530 By Cash – 21,900 – –
To Cash A/c 2,62,430 – 1,36,000 33,470 By Ajay’s Capital – 1,29,570 – –
By Shyam’s Capital – 55,530 – –
3,92,000 2,07,000 1,36,000 89,000 3,92,000 2,07,000 1,36,000 89,000

Dr. Cash Account Cr.

Particulars ` Particulars `
To Balance b/d 1,40,000 By Realisation A/c (Expenses) 30,000
To Realisation A/c 3,00,000 By Capital A/cs:
To Vijay’s Capital A/c 21,900 Ajay 2,62,430
Ram 1,36,000
Shyam 33,470 4,31,900
4,61,900 4,61,900

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 Dissolution of Partnership Firms 3.189

Note:
1. Since creditors have been taken over by Ram as per Balance Sheet figures, a direct entry for the same in Ram’s
Capital A/c can also be entered in place of transferring it through Realisation Account.
2. Ajay takes over Debtors at 80% of ` 3,50,000 (i.e. ` 2,80,000).
3. Vijay’s deficiency will be borne by Ajay and Shyam in the ratio of 7:3—the ratio of their opening capitals of
` 7,00,000 and ` 3,00,000. Ram will not bear any portion of the loss since, at the time of dissolution, he has a
debit balance in his capital account.

In Case of Insolvency of All Partners

In case all partners become insolvent, the loss on account of insolvency of the partners will have to be borne
by the creditors. The creditors may be transferred to the Realisation Account. The amount available may
be paid to them through the Realisation Account. Any balance remaining unpaid to them represents their
sacrifice on account of insolvency of partners.

Illustration 4.10 Ram and Shyam were in equal partnership. Their Balance Sheet stood as under on 31st
December, 2015 when the firm was dissolved.

Liabilities ` Assets `
Creditors 3,200 Machinery and Plant 1,200
Ram’s Capital 400 Furniture 300
Debtors 500
Stock 400
Cash 180
Shyam’s Drawings 1,020
3,600 3,600

The assets realised as under: Machinery ` 600; Furniture ` 100; Debtors ` 400; Stock ` 300
The expenses of realisation amounted to ` 140. Ram’s private estate is not sufficient even to pay his
private debts, whereas in Shyam’s private estate there is a surplus of ` 140 only.
Give accounts to close the books of the firm.

Solution

Realisation Account

Particulars ` Particulars `
To Machinery & Plant A/c 1,200 By Creditors A/c 3,200
To Furniture A/c 300 By Cash A/c (assets realised) 1,400
To Debtors A/c 500
To Stock A/c 400
To Cash A/c (Expenses) 140
To Cash A/c (Creditors paid) 1,580
To Profit on Realisation:
Ram’s Capital A/c 240
Shyam’s Capital A/c 240
4,600 4,600

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 3.190 Partnership Accounts

Cash Account

Particulars ` Particulars `
To Balance b/d 180 By Realisation A/c 140
To Realisation A/c 1,400 By Creditors A/c 1,580
To Shyam A/c 140
1,720 1,720

Capital Accounts

Particulars Ram ` Shyam ` Particulars Ram ` Shyam `

To Balance b/d 1,020 By Balance b/d 400
To Shyam’s Capital A/c 640 – By Cash A/c – 140
By Realisation A/c 240 240
By Ram’s Capital A/c – 640
640 1,020 640 1,020

Alternatively, the creditors may not be transferred to the Realisation Account and any balance remaining
unpaid to the creditors will be transferred to a “Deficiency Account”. Similarly, the amounts not paid by the
partners will also be transferred to the deficiency amount.
The books of accounts will be closed as follows in case the alternative method is followed:

Realisation Account

Particulars ` Particulars `
To Machinery & Plant A/c 1,200 By Cash A/c (assets realised) 1,400
To Furniture A/c 300 By Loss on Realisation:
To Debtors A/c 500 Ram’s Capital A/c 570
To Stock A/c 400 Shyam’s Capital A/c 570
To Cash A/c (expenses) 140
2,540 2,540

Cash Account

Particulars ` Particulars `
To Balance b/d 180 By Realisation Account 140
To Shyam’s Capital A/c 140 By Creditors A/c 1,580
To Realisation A/c 1,400
1,720 1,720

Creditors Account

Particulars ` Particulars `
To Cash A/c 1,580 By Balance b/d 3,200
To Deficiency Account 1,620
3,200 3,200

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 Dissolution of Partnership Firms 3.191

Capital Accounts

Particulars Ram ` Shyam ` Particulars Ram ` Shyam `

To Balance b/d – 1,020 By Balance b/d 400 –
To Realisation A/c 570 570 By Cash A/c – 140
By Deficiency Account 170 1,450
570 1,590 570 1,590

Deficiency Account

Particulars ` Particulars `
To Ram’s Capital A/c 170 By Creditors A/c 1,620
To Shyam’s Capital A/c 1,450
1,620 1,620

Illustration 4.11 A, B, and C had the following balance sheet on 31st Dec. 2015:

Liabilities ` Assets `
Creditors 40,000 Fixed Assets 40,000
Loan from Mrs. A (with a charge on stock) 15,000 Sundry Debtors 24,000
Loan from A 10,000 Stock 20,000
Capitals: Cash at Bank 1,000
A20,000 Loss 30,000
B20,000
C10,000 50,000
1,15,000 1,15,000

The firm was dissolved. Stock realised ` 10,000 and fixed assets and debtors realised ` 30,000 in all. The
position of partners was as under:
Private Assets Private liabilities
` `
A 10,000 15,000
B 8,000 6,000
C was able to pay 50 paise in the rupee of what was payable on his own account to the partnership. The
partners shared profits and losses in the ratio of 4: 3: 3. The loss on realisation is to be determined after
considering the amount ultimately paid to creditors. Give entries in the ledger of the firm.
Solution
Realisation Account

Particulars ` Particulars `
To Sundry Assets (transfer): By Sundry Creditors Account 40,000
Fixed Assets 40,000 By Loan from Mrs. A 15,000
Sundry Debtors 24,000 By Bank:
Stock 20,000 84,000 Stock 10,000
To Bank (Loan from Mrs. A) 10,000 Fixed Assets & Debtors 30,000 40,000
(Contd.)

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 3.192 Partnership Accounts

Particulars ` Particulars `
To Bank (Sundry Creditors and Mrs A) 38,059 By Loss transferred to
Capital A/cs:
A14,823
B11,118
C11,118 37,059
1,32,059 1,32,059

Bank Account

Particulars ` Particulars `
To Balance b/d 1,000 By Realisation Account (Mrs. A’s
To Realisation Account Loan to the extent of amount
(Assets realised) 40,000 realised from stock) 10,000
To B’s Capital Account (Surplus By Realisation Account [Mrs. A’s
from private estate) 2,000 Loan (Balance) and Sundry
To C’s Capital A/c 5,059 Creditors] 38,059
48,059 48,059

Capital Accounts

Particulars A` B` C` Particulars A` B` C`
To Loss 12,000 9,000 9,000 By Balance b/d 20,000 20,000 10,000
To Realisation A/c By Loan A/c
(Loss) 14,823 11,118 11,118 (Transfer) 10,000 — —
To C’s Capital A/c By Bank A/c — 2,000 5,059
(Deficiency) 3,177 1,882 — By A’s Capital A/c
(Deficiency) — — 3,177
By B’s Capital A/c
(Deficiency) — — 1,882
30,000 22,000 20,118 30,000 22,000 20,118

Working Notes:
(1) The amount paid by C has been ascertained as follows:
Suppose the amount paid by C is X. Amount available for creditors and the balance of Mrs. A’s loan will be
[(` 40,000 – ` 10,000) + ` 1,000 + ` 2,000 + X] = ` 33,000 + X.
Loss on Realisation will be ` 32,000 + X calculated as follows:

Realisation Account

Particulars ` Particulars `
To Sundry Assets (Transfer) 84,000 By Sundry Creditors (Transfer) 40,000
To Bank (Mrs. A’s Loan paid) 10,000 By Loan from Mrs. A 15,000
To Bank (Balance of liabilities paid) 33,000+ X By Bank (Realised) 40,000
By Loss on Realisation (Bal. fig) 32,000+ X
1,27,000 + X 1,27,000 + X

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 Dissolution of Partnership Firms 3.193

C’s share of loss will be 3/10 × (32,000 + X) = 9,600 + 3/10 X

C’s Capital account will then appear as follows:

C’s Capital Account

Particulars ` Particulars `
To Loss 9,000 By Balance b/d 10,000
To Realisation 9,600 + 3/10X By Balance c/d 8,600 +3/10X
18,600 + 3/10X 18,600 +3/10X

Since C has brought only half of what was due from him.
Hence, 2X = 8,600 + 3/10X
or 2X – 3/10 Y = 8,600
or 17/10 X = 8,600
or X = ` 5,059.
(2) C’s deficiency has been debited to the accounts of A and B to the extent of balance in their accounts.
Illustration 4.12 A, B and C were equal partners in a firm. Their Balance Sheet as on 31st March, 2015 was
as follows:

Liabilities ` Assets `
A’s Capital 1,60,000 Building 4,00,000
C’s Capital 1,00,000 Machinery 4,00,000
A’s Loan 2,00,000 Furniture and Fixtures 1,60,000
Creditors 10,00,000 Stock 1,60,000
Book Debts 2,00,000
Cash at Bank 10,000
B’s Capital (Overdrawn) 1,30,000
14,60,000 14,60,000

The firm was dissolved as all the partners were declared insolvent. The assets were realized as under:
Book debts: 45% less; Building: ` 1,60,000; Stock: ` 1,00,000; Machinery: ` 2,00,000; and Furniture and
fixtures: ` 40,000. Realization expenses were ` 10,000.
The private assets and private liabilities of the partners were as follows:

Partner Private Assets (`) Private Liabilities (`)

A 2,50,000 2,50,000
B 2,00,000 1,80,000
C 2,30,000 2,50,000

You are required to prepare:

(i) Realisation Account,
(ii) Bank Account,
(iii) Creditors Account,
(iv) Partner’s Capital Account, and
(v) Deficiency Account.
(CMA, Intermediate, June, 2015)

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 3.194 Partnership Accounts

Solution

(1) ABC Partnership Firm

Dr. Realisation AccountCr.

Particulars ` Particulars `
To Building A/c 4,00,000 By Bank A/c (Realisation of Assets):
To Machinery A/c 4,00,000 Book Debts 1,10,000
To Furniture & Fixtures A/c 1,60,000 Building1,60,000
To Stock A/c 1,60,000 Stock1,00,000
To Book Debts A/c 2,00,000 Machinery2,00,000
To Bank A/c (Realisation Exp.) 10,000 Furniture40,000 6,10,000
By Loss transferred:
A’s Capital A/c 2,40,000
B’s Capital A/c 2,40,000
C’s Capital A/c 2,40,000 7,20,000
13,30,000 13,30,000

(2)
Dr. Bank AccountCr.

Particulars ` Particulars `
To Balance b/d 10,000 By Realisation A/c (Expenses) 10,000
To Realisation A/c (Assets Realised) 6,10,000 By Creditors (Available cash paid) 6,30,000
To B’s Capital A/c (2,00,000 – 1,80,000) 20,000
6,40,000 6,40,000

(3) Creditors Account

Particulars ` Particulars `
To Bank A/c (balance in figure) 6,30,000 By Balance b/d 10,00,000
To Deficiency A/c 3,70,000
10,00,000 10,00,000

(4)
Dr. Partners’ Capital AccountCr.

Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)

To Balance b/d 1,30,000 By Balance b/d 1,60,000 — 1,00,000
To Realisation A/c (Loss) 2,40,000 2,40,000 2,40,000 By A’s Loan A/c 2,00,000
To Deficiency A/c 1,20,000 By Bank A/c 20,000
By Deficiency A/c 3,50,000 1,40,000
3,60,000 3,70,000 2,40,000 3,60,000 3,70,000 2,40,000

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 Dissolution of Partnership Firms 3.195

(5) 
Dr. Deficiency AccountCr.

Particulars ` Particulars `
To B’s Capital A/c 3,50,000 By Creditors A/c (Balance in figure) 3,70,000
To C’s Capital A/c 1,40,000 By A’s Capital A/c 1,20,000
4,90,000 4,90,000

SALE OF FIRM TO A COMPANY

Sometimes the business of the partnership firm may be sold to a limited company. In such an event, the
procedure regarding closing of the books of account of the partnership firm is the same as in the case of
dissolution of a firm. However, the following are some special points:
1. The purchasing company generally purchases all assets including cash. Hence, unless otherwise stated,
cash account should be transferred to the realisation account.
2. The purchase consideration for the business is generally paid by the purchasing company in the form
of its own shares and debentures. There is a conflict of opinion among the accountants regarding the
distribution of such shares or debentures among the partners.
(i) According to some accountants, the shares or debentures received from the purchasing company
should be distributed among the partners in the same ratio in which profits and losses are shared
by them. The reason behind this mode of distribution is to give the partners the same right to
the benefit of appreciation and the same liability to loss by way of depreciation in the value of
the shares (or debentures) or in respect of liabilities to calls, just as if they had still remained as
partnership assets.
(ii) According to another group of accountants, the shares or debentures received from the purchasing
company as purchase consideration should be distributed among the partners in the ratio of
their final claims against the firm, i.e., in the ratio of capitals standing after the profit or loss on
realisation, and after transfer of other reserves and profits to the capital accounts of the partners.
In support of this mode of distribution, they put forward the provision contained under Section
48 (b) (iii) of the Partnership Act, which provides that assets of the firm should be used in paying
each partner rateably what is due to him on account of capital.
This controversy can be resolved by taking the following steps:
(i) The shares or debentures received from the company should be valued according to their present
worth. Any profit or loss on account of such revaluation should be transferred to partners’ capital
accounts in their profit sharing ratio.
(ii) The shares or debentures so revalued should now be distributed among the various partners in the
ratio of the final claims of the partners.
In the absence of any information regarding the present worth of shares or debentures, it may be presumed
that the shares or debentures are worth their book values. They are, therefore, be distributed among the
partners in the ratio of the final claims of the partners.
Tutorial Note: The students are advised to give clearly their assumption while distributing shares or
debentures among the partners in an examination problem in the absence of any specific instructions.
3. Sometimes, a partnership firm itself gets converted into a limited company. The partners in such a
case may desire that their relationship in the new company as regards the sharing of profits, interest,
salaries, etc. remain the same as it had been in the partnership firm. In such a case the following
arrangements may suit the partners:

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 3.196 Partnership Accounts

(a) Partners may take employment in the company in different capacities on the salaries they were
getting in the partnership firm.
(b) Capitals of the partners may be calculated according to their profits sharing ratio taking the capital
of the partner who has the least capital in the firm as the base. Equity shares in the company may
be issued to the partners in consideration of this capital.
(c) Preference shares may be given to partners for the capital contributed by them in excess of the
capital determined according to (b) above.
(d) Debentures may be given to partners for any loans that they might have given to the partnership
firm.
4. Sometimes, the purchasing company does not take over the debtors and creditors of the partnership
firm. It simply agrees to act as the agent of the vendor firm for collection of its debtors and making
payment to its creditors for an agreed commission. In such an event, the debtors and creditors of the firm
should not be transferred to the Realisation Account. A new account entitled as “Purchasing Company
Suspense Account” should be opened in the firm’s books and the firm’s debtors and creditors’ accounts
should be transferred therein.
The accounting entries in such can be understood with the help of the following illustration.
Illustration 4.13 A firm sells its business to a limited company. The company does not take over the debtors
and creditors of the firm but agrees to collect and pay them as the firm’s agent at a commission of 5% on all
receipts and payments. The firm’s debtors are of ` 30,000 and the creditors are of ` 10,000.
The company collects ` 28,000 from the firm’s debtors and pays ` 9,000 to firm’s creditors in full
satisfaction of their claims. After charging its commission it remits the balance of amount to the firm.
You are required to pass the necessary Journal entries in the books of the firm.
Solution
Journal Entries

Date Particulars Dr. ` Cr. `

Purchasing Company Suspense Account Dr. 30,000
To Debtors A/c 30,000
(Being transfer of debtors to purchasing company for collection)
Creditors A/c Dr. 10,000
To Purchasing Company Suspense Account 10,000
(Being transfer of firm’s creditors to purchasing company for
payment as firm’s agent)
Bank Account Dr. 17,150
Realisation Account Dr. 2,850
To Purchasing Company Suspense A/c 20,000
(Being the amount received from the purchasing company)

Working Notes:
Commission payable to purchasing company: `
On collection of debtors 28,000 × 5/100 1,400
On payment to creditors 9,000 × 5/100 450
1,850
Add : Loss suffered on collection of debtors 2,000
3,850

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 Dissolution of Partnership Firms 3.197

Less: Profit made on payment to creditors 1,000

Total loss and commission 2,850

Illustration 4.14 Anu and Sonu were in partnership sharing profits and losses in the ratio of 2:1. Their
summarised Balance Sheet as on 31st March, 2015 was as under:

Liabilities ` Assets `
Capital Accounts: Fixed Assets (including two motor cars 1,40,000
Anu 1,00,000 of ` 28,000)
Sonu 80,000 1,80,000 Stock 70,000
Current Accounts: Debtors 1,00,000
Anu 40,000 Bills Receivable 25,000
Less: Sonu 23,000 17,000 Bank 20,000
Loan from Sonu 63,000 Advertisement suspense Account 15,000
Creditors for Goods 1,10,000
3,70,000 3,70,000

They decided to dissolve the business and accepted the offer of Nanak and Co. Ltd. to acquire stock and
fixed assets excluding two motor cars at a total price of ` 3,35,000. The debtors realised ` 97,000 and Bills
Receivable ` 24,000. Creditors for goods allowed a discount of 5%.
The purchased consideration was to be discharged by a cash payment of ` 83,000, the allotment by the
company to the partners of 8,000 preference shares of ` 10 each (valued at ` 9 each), and the balance by the
allotment of 9,000 ordinary shares of ` 10 each.
The partners agreed that the following should be the basis of distribution on dissolution of the firm:
(a) Anu to take over one Motor car at a value of ` 25,000 and Sonu the other car at ` 15,000.
(b) Sonu to accept preference shares for her loan to the firm, the remainder to be taken over by Anu.
(c) The ordinary shares to be taken over by Anu and Sonu in proportion of their fixed capitals.
(d) The balance to be settled in cash.
Prepare the necessary accounts to close the books of the firm. ([Link] Hons., Delhi, adapted)

Solution

Realisation Account

Particulars ` Particulars `
To Fixed Assets A/c 1,40,000 By Creditors for goods A/c 1,10,000
To Stock A/c 70,000 By Nanak & Co A/c 3,35,000
To Debtors A/c 1,00,000 By Bank A/c (Debtors) 97,000
To Bills Receivable A/c 25,000 By Bank A/c (B/R) 24,000
To Bank A/c (Creditors) 1,04,500 By Anu’s Capital A/c 25,000
To Profit on Realisation: By Sonu’s Capital A/c 15,000
Anu’s Capital A/c 1,10,000
Sonu’s Capital A/c 55,500 1,66,500
6,06,000 6,06,000

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 3.198 Partnership Accounts

Partners’ Capital Accounts

Particulars Anu ` Sonu ` Particulars Anu ` Sonu `

To Realisation A/c 25,000 15,000 By Balance b/d 1,00,000 80,000
To Pref. Shares in Nanak & Co. 9,000 By Current A/c 1,41,000 27,500
To Equity Shares in Nanak & Co. 1,00,000 80,000
To Bank A/c 1,07,000 12,500
2,41,000 1,07,500 2,41,000 1,07,500

Partners’ Current Accounts

Particulars Anu ` Sonu ` Particulars Anu ` Sonu `

To Balance b/d 23,000 By Balance b/d 40,000
To Advt. Suspense A/c 10,000 5,000 By Realisation A/c 1,11,000 55,500
To Capital A/c 1,41,000 27,500
1,51,000 55,500 1,51,000 55,500

Sonu’s Loan Account

Particulars ` Particulars `
To Pref. Shares in Nanak & Co. A/c 63,000 By Balance b/d 63,000
63,000 63,000

Bank Account

Particulars ` Particulars `
To Balance b/d 20,000 By Realisation A/c 1,04,500
To Realisation A/c 97,000 By Anu’s Capital A/c 1,07,000
To Realisation A/c 24,000 By Sonu’s Capital A/c 12,500
To Nanak & Co. A/c 83,000
2,24,000 2,24,000

Nanak & Co.

Particulars ` Particulars `
To Realisation A/c 3,35,000 By Bank A/c 83,000
By Pref. Shares in Nanak & Co. A/c 72,000
By Equity Shares in Nanak & Co. A/c 1,80,000
3,35,000 3,35,000

Pref. Shares in Nanak & Co. Account

Particulars ` Particulars `
To Nanak & Co. A/c 72,000 By Sonu’s Loan A/c 63,000
By Anu’s Capital A/c 9,000
72,000 72,000

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 Dissolution of Partnership Firms 3.199

Equity Shares in Nanak & Co. Account

Particulars ` Particulars `
To Nanak & Co. 1,80,000 By Anu’s Capital A/c 1,00,000
By Sonu’s Capital A/c 80,000
1,80,000 1,80,000

Illustration 4.15 M. Pande and D. Deshmukh were carrying on business as equal partners. The balance
sheet as on 31st December, 2016 was as follows:

Liabilities ` Assets `
Sundry Creditors 65,500 Stock 54,000
Bank Overdraft 30,000 Plant & Machinery 1,82,000
Bills Payable 12,500 Office Furniture 15,000
Capital Accounts: Book Debts 73,000
M. Pande 1,50,000 Joint Life Policy (Surrender value) 9,500
D. Deshmukh 1,48,000 Leasehold Premises 34,500
Profit and Loss A/c (Debit balance) 26,000
Drawings Account:
M. Pande 9,000
D. Deshmukh 3,000
4,06,000 4,06,000

The business was carried on till 30th June, 2017. The partners withdrew in equal amounts half the amount
of profits made during the period of six months (from January to June, 2017) after 10% p.a. had been written
off on leasehold premises, 10% p.a. off plant and machinery and 5% p.a. off office furniture. Meanwhile
Sundry Creditors were reduced by ` 10,000, Bills Payable by ` 2,300 and Bank Overdraft by ` 15,000. On 30
June, 2017, Stock was valued at ` 63,400, Book Debts at ` 65,000, the Joint Life Policy was surrendered for
` 9,500 and other items remained the same as on 31th December, 2016.
On 30th June, 2017, the firm sold the business to a Limited Company. The value of the goodwill was
estimated at ` 1,08,000 and the rest of the assets were valued on the basis of the Balance Sheet as on 30th
June, 2017. The company paid the purchase consideration in equity shares of ` 10 each.
Disregarding interest on drawings and capital, you are required to prepare a Realisation Account and
Capital Accounts of the partners.
(C.A. Inter, adapted)
Solution
Realisation Account

Particulars ` Particulars `
To Sundry Assets: By Sundry Creditors 55,500
Stock 63,400 By Bills Payable 10,200
Debtors 65,000 By Bank Overdraft 15,000
Plant & Machinery 1,72,900 By Shares in Ltd. Co. 3,76,000
Leasehold Premises 32,775
Office Furniture 14,625
(Contd.)

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 3.200 Partnership Accounts

Particulars ` Particulars `
To Profit:
M. Pande 54,000
D. Deshmukh 54,000
4,56,700 4,56,700

Capital Accounts

Date Liabilities M Pande D Deshmukh Date Assets M Pande D Deshmukh

2017 2017
Jan. 1 To P & L A/c 13,000 13,000 Jan. 1 By Balance b/d 1,50,000 1,48,000
To Drawings A/c 9,000 3,000 Jun. 30 By Profit 8,000 8,000
To Cash A/c By Realisation
(Drawings) 4,000 4,000 A/c (Profit) 54,000 54,000
June 30 To Shares in
Ltd. Co. A/c 1,86,000 1,90,000
2,12,000 2,10,000 2,12,000 2,10,000

Working Notes:
1. Shares have been distributed between the two partners in the ratio of their final claims. It is also
possible that the shares may be distributed equally (i.e., in the profit sharing ratio). In that case, each
partner will get ` 1,88,000 worth of shares; M. Pande will have to pay ` 2,000 cash in the firm to pay
D. Deshmukh.

2. Balance Sheet on 30.6.2017

(to ascertain total capital)

Liabilities ` Assets `
Sundry Creditors 55,500 Stock 63,400
Bills Payable 10,200 Book Debts 65,000
Bank Overdraft 15,000 Plant & Machinery 1,82,000
Total Capital (balancing figure) 2,68,000 Less: Depreciation 9,100 1,72,900
Office Furniture 15,000
Less: Depreciation 375 14,625
Leasehold Premises 34,500
Less: Depreciation 1,725 32,775
3,48,700 3,48,700

3. Profit earned during six months to 30th June, 2017.

Capital (Total) on 30th June, 2017 ` 2,68,000
Capital (Total) on 1st January, 2017
Pande ` 1,50,000
Deshmukh 1,48,000
2,98,000
Less: Loss ` 26,000
Drawing Accounts 12,000 38,000 2,60,000

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 Dissolution of Partnership Firms 3.201

Net increase (after drawings) 8,000

Since drawings are half of profits, profit earned is ` 16,000
4. Purchase consideration:
Assets [as per (2) above] ` 3,48,700
Add: Goodwill 1,08,000
4,56,700
Less: Liabilities 80,700
Purchases consideration 3,76,000

Illustration 4.16 Ashok, Rao and Surendar are carrying on business in hosiery. They close their books of
account on 31st March every year. The partners share profits and losses in the ratio of 4:3:2. The Balance
Sheet of the firm as on 31st March, 2014 is as under:

Liabilities ` Assets `
Sundry Creditors 10,000 Cash in hand 2,500
Bank Overdraft 7,500 Sundry Debtors 40,000
Ashok’s Loan Account (carrying interest Stock-in-trade 60,000
of 12% payable at the end of every month) Delivery Van 15,000
25,000 Furniture and Fittings 15,000
Ashok’s Capital Account 40,000
Rao’s Capital Account 30,000
Surendar’s Capital Account 20,000
1,32,500 1,32,500

The firm had been carrying on negotiation with Global Apparels Limited for the sale of the business
as a going concern and the negotiations are completed to be effective on 1st June 2014, when the limited
company takes over the business. For the months of April and May 2014, the following transactions have
taken place:

` `
Cash Sales 20,000 Cash Purchases 5,000
Credit Sales 15,000 Paid to Creditors 5,000
Recovery from Debtors 8,000 Discount earned from Creditors 300
Discount allowed to Debtors 500 Salaries and other Office expenses
Credit Purchases 10,000 paid (excluding partners’ interest) 4,000

Stock-in hand on 31st May 2014 is ` 45,000

Global Apparels Limited purchase the business (including all liabilities except to partners) for a sum of
` 1,50,000; half of this to be satisfied by payment in cash and the other half to be allotted in the shape of
equity shares of ` 10 each in the Company.
Prepare Journal entries in the books of the firm and show the Capital Accounts of the partners as these
would appear on giving effect to the arrangement and after noting the following specifications:
(a) No depreciation need be provided on the fixed assets for the two-month period:
(b) Ashok took over the entire shares at their face value and the remainder of the purchase consideration
was shared among the partners.
(C.A. Inter O.S., adapted)

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 3.202 Partnership Accounts

Solution
M/s Ashok, Rao and Surendar
Journal

Particulars Dr. ` Cr. `

Realisation Account Dr. 1,30,000
To Cash in hand A/c 8,500
To Sundry Debtors A/c 46,500
To Stock-in-trade A/c 45,000
To Delivery Van A/c 15,000
To Furniture & Fittings A/c 15,000
(Sundry Assets transferred to Realisation A/c on sale of business to
Global Apparels Ltd. as per Balance Sheet on 31st May, 2004)
Sundry Creditors A/c Dr. 14,700
To Realisation Account 14,700
(Liabilities as on 31st May, 2004 transferred to Realisation Account)
Global Apparels Ltd. A/c Dr. 1,50,000
To Realisation Account 1,50,000
(Amount of purchase consideration payable by the Purchasing company)
Realisation Account Dr. 34,700
To Ashok’s Capital A/c 15,422
To Rao’s Capital A/c 11,567
To Surendar’s Capital Account 7,711
(Profit on realisation transferred to partners’ Capital Accounts)
Cash Account Dr. 75,000
Shares in Global Apparels Ltd. A/c Dr. 75,000
To Global Apparels Ltd. A/c 1,50,000
(Being purchase consideration received in the form of cash and shares)
Ashok’s Loan Account Dr. 25,000
To Ashok’s Capital Account 25,000
(Transfer of Ashok’s loan to his capital account)
Ashok’s Capital Account Ltd. A/c Dr. 75,000
To Shares in Global Apparels Ltd. A/c 75,000
(Shares in Global Apparels Ltd. transferred to Ashok as per agreement)
Ashok’s Capital Account Dr. 5,555
Rao’s Capital Account Dr. 41,667
Surendar’s Capital Account Dr. 27,778
To Cash A/c 75,000
(Payment to partners on dissolution to close the Capital Accounts)

Partners’ Capital Accounts

Particulars Ashok Rao Surendar Particulars Ashok Rao Surendar

To Shares in Global By Balance b/d 40,000 30,000 20,000
Appearels Ltd. 75,000 – By P & L A/c 133 100 67
To Cash A/c 5,555 41,667 27,778 By Ashok’s Loan A/c 25,000 – –
By Realisation A/c 15,422 11,567 7,711
80,555 41,667 27,778 80,555 41,667 27,778

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 Dissolution of Partnership Firms 3.203

Working Notes:

(1) Trading and Profit and Loss Account

for the period 1 April to 31st May, 2014

Particulars ` Particulars `
To Opening Stock 60,000 By Sales 35,000
To Purchases A/c 15,000 By Closing Stock 45,000
To Gross Profit c/d 5,000
80,000 80,000
To Salaries A/c 4,000 By Gross Profit b/d 5,000
To Discount A/c 500 By Discount A/c 300
To Interest on Loan A/c 500
To Net Profit to:
Ashok133
Rao 100
Surendar67 300
5,300 5,300

(2) Balance Sheet

as on 31st May, 2014

Liabilities ` Assets `
Sundry Creditors 14,700 Cash on hand 8,500
Ashok’s Loan Account 25,000 Sundry Debtors 46,500
Capitals: Ashok 40,133 Stock-in-trade 45,000
Rao 30,100 Delivery Van 15,000
Surendar 20,067 Furniture & Fittings 15,000
1,30,000 1,30,000

(3) Total Debtors Account

Particulars ` Particulars `
To Balance b/d 40,000 By Cash A/c 8,000
To Sales A/c 15,000 By Discount A/c 500
By Balance c/d 46,500
55,000 55,000

(4) Total Creditors Account

Particulars ` Particulars `
To Cash A/c 5,000 By Balance b/d 10,000
To Discount A/c 300 By Purchases A/c 10,000
To Balance c/d 14,700
20,000 20,000

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 3.204 Partnership Accounts

(5) Cash/Bank Account

Particulars ` Particulars `
To Balance b/d 2,500 By Balance b/d 7,500
To Sales A/c 20,000 By Purchases A/c 5,000
To Sundry Debtors A/c 8,000 By Interest Account 500
By Sundry Creditors A/c 5,000
By Sundry Expenses A/c 4,000
By Balance c/d 8,500
30,500 30,500

Illustration 4.17 A, B and C were partners in business, sharing profits and losses in the ratio 2:1:1. Their
Balance Sheet as at 31.3.2017 is as follows:

Balance Sheet
as at 31.3.2017 (Figures in ` ’000)

Liabilities ` Assets `
Fixed Capital: A200 Fixed Assets 300
B100 Investments 50
C100 400 Current Assets:
Stock 100
Debtors 60
Current Accounts: A 40 Cash & Bank 150 310
B 20 60
Unsecured Loans 200
660 660

On 1.4.2017, it is agreed among the partners that BC (P) Ltd., a newly formed company with B and C
having each taken up 100 shares of ` 10, each will take over the firm as a going concern including goodwill
but excluding cash and bank balances. The following points are also agreed upon:
(a) Goodwill will be valued at 3 years purchase of super profits.
(b) The actual profit for the purpose of goodwill valuation will be ` 1,00,000.
(c) Normal rate of return will be 15% on fixed capital.
(d) All other assets and liabilities will be taken over at book values.
(e) The purchase consideration will be payable partly in shares of ` 10 each and partly in cash. Payment
in cash being to meet the requirement to discharge A, who has agreed to retire.
(f) B and C are to acquire equal interest in the new company.
(g) Expenses of liquidation ` 40,000
You are required to prepare the necessary Ledger Accounts: (C.A. Inter, adapted)
Solution
Basic Calculations
1. Computation of Goodwill: `
Weighted Average of Actual Profits 1,00,000
Less: Normal Profits at 15% of fixed capital employed ` 4,00,000 60,000
Super Profits 40,000
Goodwill at 3 years’ purchase. ( i.e. 40,000 × 3) 1,20,000

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 Dissolution of Partnership Firms 3.205

2. Computation of Purchase Consideration:

Total Assets as per Balance Sheet 6,60,000
Less: Cash & Bank Balances 1,50,000
5,10,000
Add: Goodwill 1,20,000
6,30,000
Less: Unsecured Loans 2,00,000
Purchase Consideration 4,30,000

Realisation Account

Particulars ` Particulars `
To Sundry Assets A/c 5,10,000 By Unsecured Loans A/c 2,00,000
To Goodwill A/c 1,20,000 By BC (P) Ltd. 4,30,000
To Bank A/c (Expenses) 40,000 By Capital Accounts: A20,000
B10,000
C10,000 40,000
6,70,000 6,70,000

Partners’ Capital Accounts

Particulars A B C Particulars A B C
To Realisation A/c 20,000 10,000 10,000 By Bal. c/d 2,00,000 1,00,000 1,00,000
To Cash A/c 2,80,000 By Cur. A/c 40,000 20,000
To C (Capital By Goodwill A/c 60,000 30,000 30,000
adjustment) 10,000 By B’s (Capital 10,000
To Shares in adjustment)
BC (P) Ltd. 1,30,000 1,30,000
3,00,000 1,50,000 1,40,000 3,00,000 1,50,000 1,40,000

Cash & Bank Account

Particulars ` Particulars `
To Balance b/d 1,50,000 By Realisation A/c (Expenses) 40,000
To BC (P) Ltd. (Bal. figure) 1,70,000 By A’s Capital A/c 2,80,000
3,20,000 3,20,000

BC (P) Ltd.

Particulars ` Particulars `
To Realisation A/c 4,30,000 By Cash A/c 1,70,000
By Equity Shares (Bal. figure)
(26,000 shares of ` 10 each) 2,60,000
4,30,000 4,30,000

Illustration 4.18 X,Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that:
(a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his remuneration,
but before charging interest on capital for taxation.

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 3.206 Partnership Accounts

(b) Interest is to be provided on capital at 15% per annum.

(c) Balance profits after making provision for taxation is to be shared in the ratio of 1:2:2 by the three
partners.
During the year ended 31st March, 2017 (i) the net profit before tax and before making any payment
to partners amounted to ` 6,90,000; (ii) interest on capitals at 15% per annum amounted to ` 60,000 for X;
` 1,50,000 of Y Ltd., and ` 1,80,000 for Z Ltd. The Capitals have remained unchanged during the year;
(iii) provision for tax is to be at 40% of “total income” of the firm. The total income has been computed at
` 1,95,000.
You are asked by:
(a) The firm to pass closing entries in relation to the above;
(b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show the investment
in partnership account as it would appear in its ledger;
(c) Z Ltd. to show how the above information will appear in its financial statements for the year.
(d) Shri X to show the working, if any, in relation to the above. (C.A. Inter, adapted)
Solution
M/s X, Y Ltd., and Z Ltd.
(a) Closing Journal entries
on 31st March, 2017

Particulars Dr. ` Cr. `

Profit and Loss Account Dr. 78,000
To Provision for Taxation (for Account year 2017–2018) 78,000
(Being provision made for taxation at 40% on total income of ` 1,95,000)
Profit and Loss Appropriation Account Dr. 4,80,000
To Remuneration to X, (the working partner) 90,000
To Interest on Capital X: 60,000
Y Ltd. 1,50,000
Z Ltd. 1,80,000
(Being interest on capitals provided at 15% per annum and remuneration to
working partner X at 15% of net profit after charging his remuneration
but before providing for tax and interest on capitals - now recorded)
Profit and Loss Appropriation Account Dr. 1,32,000
(` 6,90,000 – ` 78,000 – ` 4,80,00)
To Capital Accounts: X 26,400
Y Ltd. 52,800
Z Ltd. 52,800
(Being balance profits credited to partners’ capital accounts in the ration 1 : 2 : 2)

(b) Books of Y Ltd.

Particulars Dr. ` Cr. `

Investment in Partnership with X and Z Ltd. A/c Dr. 2,02,800
To Interest on Capital A/c (taxable) 1,50,000
To Share of Profits A/c (non-taxable) 52,800
(Being entry to record interest income at 15% p.a. on capital of
` 10,00,000 and 2/5th share of profits in firm)
(Contd.)

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 Dissolution of Partnership Firms 3.207

Particulars Dr. ` Cr. `

Interest on capital A/c Dr. 1,50,000
Share of profits A/c Dr. 52,800
To Profit and Loss A/c 2,02,800
(Being incomes transferred to profit and loss account)

Ledger Account
Investment in Partnership with X and Z Ltd.

Date Particulars Dr. ` Cr. ` Balance `

2016
April 1 To Balance b/d 10,00,000 Dr. 10,00,000
2017
March 31 To Interest Income from the Firm 1,50,000 Dr. 11,50,000
To Share of Profits in the Firm 52,800 Dr. 12,02,800
By Balance c/d 12,02,800
12,02,800 12,02,800

(c) Extracts from the Financial Statements of Z Ltd.

(i) Revenue Statement for the year ended 31st March, 2017

Particulars 2016–17 ` 2015–16 `

Operating Income: Income from partnership:
Interest on capital invested 1,80,000
Share of profits 52,800
2,32,800

Extracts from Schedule of Investments attached to and forming part of Balance Sheet as at 31st March, 2017.

Particulars 2016–17 ` 2015–16 `

Investment in partnership with X and Y Ltd. 14,32,800 12,00,000

Partners Capitals as on 31st March Share of Profits

2017 2016 2016–17 2015–16
` `
X 5,76,400 4,00,000 1/5 1/5
Y Ltd. 12,02,800 10,00,000 2/5 2/5
Z Ltd. 14,32,800 12,00,000 2/5 2/5

(i) Working for Capitals:

Particulars X (`) Y Ltd. (`) Z Ltd. (`)
Opening Capital 4,00,000 10,00,000 12,00,000
Remuneration credited 90,000 – –
Interest on capital 60,000 1,50,000 1,80,000
Share in profits 26,400 52,800 52,800
5,76,400 12,02,800 14,32,800

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 3.208 Partnership Accounts

100
X = ` 60, 000 ×
= ` 4, 00, 000
15
100
Y Ltd. = ` 1, 50, 000 × = ` 10, 00, 000
15
100
Z Ltd. = ` 1, 80, 000 × = ` 12, 00, 000
15
(ii) Working for Remuneration to X, the working partner
` 6, 90, 000 × 15
= ` 90, 000
115
Illustration 4.19 Arun, Barun and Karun were carrying business as Oil dealers and they share profits
seven-fifteenth, five-fifteenth and three-fifteenth respectively. On 31st March 2016 they dissolve partnership.
The Balance Sheet of the firm on that date was as follows:

Liabilities ` Assets `
Sundry Creditors 12,500 Land and Building 37,500
Loan from Arun at 5 per cent 30,000 Plant 11,250
Capitals: Furniture 5,000
Arun 45,000 Stock 53,250
Barun 30,000 Sundry Debtors 15,000
Karun 12,500 87,500 Cash at Bank 8,000
1,30,000 1,30,000

Arun and Barun wanted Karun to join them in floating the concern as a Private Limited Company but
Karun refused and Arun and Barun arranged to pay Karun out and then form the company.
The arrangements between Arun, Barun and Karun were as follows:
Arun and Barun took over the liabilities at book figure plus ` 2,500 allowed for realisation expenses; they
also took over the Cash at Bank and the Furniture was sold for cash realising ` 3,700. The other assets which
Arun and Barun agreed to take over are as follows: Land and Building ` 50,000; Plant less 10 per cent; Stock
less 20 per cent; Debtors at ` 10,575.
Arun and Barun having paid the realisation expenses ` 2,500 and having paid out Karun by providing the
required cash in the same proportion as they share the profits and losses inter se proceed to sell the assets as
they stand to AB & Company Private Limited for ` 60,000 cash and ` 60,000 in fully paid shares. The latter
Arun and Barun take in the same proportions as they share profits and losses.
Arun and Barun thus pay off the liabilities and close the partnership books.
You are required to show (a) the Bank Account; (b) the Capital Accounts; (c) the Realisation Accounts
and (d) AB & Company Private Limited Account
Assume that all the above transactions are put through on March 31, 2016. (Calculations to be made to
the nearest Rupee.) (I.C.W.A, Inter adapted)
In the Books of Arun, Barun and Karun
Dr. Realisation Account Cr.

Particulars ` Particulars `
To Sundry Assets: By Sundry Creditors 12,500
Land & Building 37,500 By Bank A/c — Furniture sold 3,700
(Contd.)

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 Dissolution of Partnership Firms 3.209

Particulars ` Particulars `
Plant 11,250 By A & B’s Realisation A/c:
Furniture 5,000 Assets:
Stock 53,250 Land & Building 50,000
Debentures 15,000 Plant at 90% 10,125
To A & B’s Realisation A/c (Creditors) 12,500 Stock at 80% 42,600
To Bank A/c — Debtors 10,575 1,13,300
Realsiation expenses paid 2,500 By Partners’ Capital A/c:
Loss on Realisation [7:5:3]
Arun 3,500
Barun 2,500
Karun 1,500 7,500
1,37,000 1,37,000

Dr. Partners’ Capital Accounts Cr.

Particulars Arun Barun Karun Particulars Arun Barun Karun

To Realisation A/c By Balance b/d 45,000 30,000 12,500
(Loss) 3,500 2,500 1,500 By Bank A/c
To Bank A/c (Introduced to
(Karun’s dues pay Karun) 1,050 750 –
paid off) – – 11,000 By A & B A/c
To Shares in AB & Co 35,000 25,000 – (Realisation
To Bank — Final Profit – 7:5) 3,908 2,792 –
payment 11,458 6,042 –
49,958 33,542 12,500 49,958 33,542 12,500

Dr. Bank Account Cr.

Particulars ` Particulars `
To Balance b/d 8,000 By Realisation A/c — Expenses paid 2,500
To Realisation A/c—(Furniture sold) 3,700 By Karun’s Capital A/c 11,000
To A’s Capital A/c 1,050
B’s Capital A/c 750 1,800
13,500 13,500
To AB & Co. (P) Ltd. 60,000 By A & B’s Realisation A/c
(Sundry Creditors) 12,500
By A’s Loan A/c (Fully paid) 30,000
By Partners’ Capital A/cs.
Arun 11,458
Barun 6,042 17,500
60,000 60,000

Dr. A & B’s Realisation Account Cr.

Particulars ` Particulars `
To Realisation A/c Asset taken over 1,13,300 By Realisation A/c (Sundry Crs.) 12,500
To Bank A/c (Sundry Crs.) 12,500 By AB & Co. (P) Ltd.–
(Purchase Consideration) 1,20,000
(Contd.)

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 3.210 Partnership Accounts

Particulars ` Particulars `
To A’s Capital A/c (Arun) 3,908
To B’s Capital A/c (Barun) 2,792 6,700
1,32,500 1,32,500

Dr. A & B and Company Pvt. Ltd. Account Cr.

Particulars ` Particulars `
To A & B Realisation A/c 1,20,000 By Bank A/c 60,000
(Purchase Consideration) By Equity Share Capital A/c- 60,000
Shared by A & B (7:5)
1,20,000 1,20,000

Illustration 4.20 P, Q and R were carrying on business in partnership sharing profits and losses in the ratio
of 5, 4 and 3 respectively. The trial balance of the firm on 31st March, 2017 was as under:

Particulars Debit Credit

` `
Plant and Machinery at cost 85,000
Stocks 64,200
Sundry Debtors 66,500
Capital A/c : P 63,000
Capital A/c : Q 42,000
Capital A/c : R 21,000
Sundry Creditors 84,700
Drawings A/c : P 20,000
Drawings A/c : Q 20,000
Drawings A/c : R 15,000
Depreciation on Plant and Machinery 25,000
Trading Profit for the year 1,23,300
Cash at Bank 88,300
3,59,000 3,59,000

Interest on Capital accounts at 5% p.a. on the amount standing to the credit of Partners’ Capital Accounts
at the beginning of the year was not provided before the above trial balance. On 31st March, 2017 they
formed a Private Limited Co. with an authorised share capital of ` 2,00,000 in shares of ` 10 each to be
divided in different classes to take over the business of partnership.
You are informed that:
(1) Plant and machinery is to be transferred at it w.d.v. for income tax which is ` 60,000.
(2) Shares in the company are to be issued to the partners at par in such numbers and such classes as will
give the partners, by reason of their shareholdings alone, the same right as regards interest on capital
and the sharing of profits and losses as they had in the partnership. Valuation of goodwill is arrived at
by this mode.
(3) Before transferring the business the partners wish to draw from the partnership their profits to such an
extent that the bank balance is reduced to ` 50,000. For this purpose sufficient profit of the year is to
be retained in profit sharing ratio.

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 Dissolution of Partnership Firms 3.211

(4) All assets and liabilities except plant and machinery and the bank balance are to be transferred at their
value in the books of the partnership as on 31.3.2017.
You required to prepare:
(a) P & L Account for the year ending 31.3.2017.
(b) Capital Accounts showing all the adjustment required to dissolve the partnership.
(c) Your statement showing the workings of the number of shares of each class to be issued by the
company to each of the partners and details of right attaching to those shares.
(d) The Balance Sheet of the Company immediately after acquiring the partnership and issuing of shares.
(C.A. Final O.S., adapted)
Solution
M/s P, Q & R
(a) Profit and Loss Account
for the year ending 31st March, 2017

Particulars ` Particulars `
To Interest on Capital: By Trading Profit 1,23,300
P3,150
Q2,100
R1,050 6,300
To Capital A/cs:
P48,750
Q39,000
R29,250 1,17,000
1,23,300 1,23,300

(b) Capital Accounts

Date Particulars P` Q` R` Date Particulars P` Q` R`

2017 2017
Mar. 31 To Drawings A/c 20,000 20,000 15,000 April 1 By Balance B/d 63,000 42,000 21,000
To Cash A/c (addl. Mar. 31 By Interest on
drawings) 19,400 11,100 7,800 Capital A/c 3,150 2,100 1,050
To 5% Preferance By Profit for the
share of ` 10 year 48,750 39,000 29,250
each in Ltd. Co. 28,000 14,000 – By Plant and
To Equity Shares Machinery A/c
of ` 10 each in (Profit on transfer) 2,500 2,000 1,500
Ltd. Co 50,000 40,000 30,000
1,17,400 85,100 52,800 1,17,400 85,100 52,800

Working Note regarding additional drawings:

Total drawings (already made, ` 55,000 plus those to be made ` 38,300 (i.e., ` 88,300 – 50,000) are ` 93,300.
Of these ` 6,300 are for interest. The remaining amount is ` 87,000 to be drawn by the partners in the ratio
of 5:4:3. The amount of drawings is as follows for each partner.
P` Q` R`
Total Drawings excluding interest (Ratio 5:4:3) 36,250 29,000 21,750
Add: Interest 3,150 2,100 1,050
39,400 31,100 22,800

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 3.212 Partnership Accounts

Less: Amount already drawn 20,000 20,000 15,000

Additional Drawings 19,400 11,100 7,800

(c) Statement Showing Working of the Number of Shares to be issued to M/s P Q & R
(i) Purchase Consideration: `
Plant and Machinery 66,000
Stock 64,200
Debtors 66,500
Cash at Bank 50,000
2,46,700
Less: Sundry Creditors 84,700
Value of net assets, taken over by the Co. 1,62,000
(ii) The purchase consideration will be satisfied by issue of preference shares and equity shares as
follows:
Particulars P` Q` R`
Total amount due as capital 78,000 54,000 30,000
Amount according to the profit sharing ratio, taking
R’s capital as the basis 50,000 40,000 30,000
Excess 28,000 14,000 –

P, Q and R respectively will be given equity shares of ` 50,000, ` 40,000 and ` 30,000 which will enable
them to divide profit of the company in the ratio of 5:4:3.
P and Q will be respectively given 5% non-cummulative preference shares for ` 28,000 and ` 14,000.
The above is based on the principle that the function of ‘interest’ in case of partnership is to compensate
those partners who contribute capital in excess of what is required according to the profit sharing ratio.

(d) Balance Sheet

as at 31st March, 2017

Liabilities ` Assets `
Share Capital: Authorised Fixed Assets :
20,000 Shares of ` 10 each 2,00,000 Plant and Machinery at cost 66,000
Issued : 4,200 5% Preference Share of Current Assets :
` 10 each fully paid 42,000 Stock at cost 64,200
12,000 Equity shares of ` 10 each fully Debtors 66,500
paid (both these shares have been issued Cash at Bank 50,000 1,80,700
for consideration other than cash) 1,20,000
Current Liabilities: Sundry Creditors 84,700
2,46,700 2,46,700

Illustration 4.21 X and Y are partners sharing profits and losses in the ratio of 3 : 2. On 30th September,
2016 they admitted Z as a partner. The new profit sharing ratio agreed was 2:2:1.
At the time of admission Z brought in a fixture valued at ` 6,000 and a machinery worth ` 24,000. No
accounting entry was passed for the fixture brought in by partner Z in the books of the firm.

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 Dissolution of Partnership Firms 3.213

Also at the time of admission the valuation of goodwill was made. The value of goodwill of X and Y was
decided at ` 40,000 and the value of goodwill of partner Z was fixed at ` 20,000. No effect was given to the
goodwill value in the books of the firm.
On 31.3.2017, it was decided that partner X would retire and the other partners viz., Y and Z would
continue the business of the firm by converting it into a company called YZ Ltd., with equal shareholding in
the company.
The partners agreed as below:
(i) The goodwill of the firm shall be fixed at ` 80,000. Necessary effect for goodwill value not
recorded earlier shall be given. The present goodwill value being ` 80,000 shall be reflected in the
books of the company.
(ii) All the assets and liabilities of the firm shall be taken over by the company.
(iii) Partner X would take motor car of the firm at a value of ` 7,400.
(iv) A plant owned by the firm is sold for ` 6,000.
(v) The profit of the firm up to 30.9.2016 was ` 44,000.
(vi) Partner X agreed to leave ` 90,000 as loan with the firm in return for 12% interest per annum.
Following is the Trial Balance of the firm as on 31.3.2017:

Particulars Debit Credit

` `
Capital Account:
X – 80,000
Y – 50,000
Z – 24,000
Drawings Account:
X 22,000 –
Y 20,000 –
Z 9,600 –
Sundry Debtors 70,000 –
Sundry Creditors – 32,000
Plant (Book value of plant sold ` 8,000) 46,000 –
Fixtures 14,000 –
Stock 24,000 –
Motor car 5,400 –
Cash at Bank 34,600 –
Profit and Loss A/c (for the year) – 59,600
2,45,600 2,45,600

You are required to prepare:

(i) Goodwill Adjustment Account
(ii) Profit and Loss Appropriation Account
(iii) Partners’ Capital Accounts
(iv) Balance Sheet of YZ Ltd. after conversion.  (PCE, ICAI, Nov., 2007, adapted)

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 3.214 Partnership Accounts

Solution

(i) Goodwill Adjustment Account

Date Particulars ` Date Particulars `

30.9.16 To Partners’ Capital A/cs 30.9.16 By Partners’ Capital A/cs
X (3/5) 24,000 X (2/5) 24,000
Y (2/5) 16,000 Y (2/5) 24,000
Z 20,000 Z(1/5) 12,000
31.3.17 To Partners’ Capital A/cs 31.3.17 By Goodwill A/c
X (2/5) 32,000 (Goodwill raised in the books) 80,000
Y (2/5) 32,000
Z (1/5) 16,000
1,40,000 1,40,000

(ii) Profit and Loss Appropriation Account

Particulars ` Particulars `
To Plant – Loss on sale of plant 2,000 By Motor Car 2,000
To Partners’ Capital A/cs* By Profit and Loss A/c 59,600
X 32,640
Y 23,840
Z 3,120
61,600 61,600

*Calculation of profit apportionment:

Total X Y Z
` ` ` `
Up to 30.9.2016 (in 3 : 2) 44,000 26,400 17,600 Nil
From 01.10.2016 to 31.3.2017 (in 2 : 2 : 1) 15,600 6,240 6,240 3,120
59,600 32,640 23,840 3,120

(iii) Partners’ Capital Accounts

Date Particulars X Y Z Date Particulars X Y Z

` ` ` ` ` `
30.9.16 To Goodwill 30.9.16 By Balance
Adjustment A/c 24,000 24,000 12,000 b/d 80,000 50,000 –
31.3.17 To Motor Car 7,400 – – By Plant &
Machinery A/c – – 24,000
To Drawings A/c 22,000 20,000 9,600 By Fixtures A/c – – 6,000
To 12% Loan A/c 90,000 – – By Goodwill
To Bank A/c 25,240 – – Adjustment
A/c 24,000 16,000 20,000
By Profit up to
30.9.16 26,400 17,600 –
(Contd.)

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 Dissolution of Partnership Firms 3.215

Date Particulars X Y Z Date Particulars X Y Z

` ` ` ` ` `
31.3.17 To Balance c/d – 77,840 47,520 31.3.17 By Profit for
6 months
ended 31.3.17 6,240 6,240 3,120
By Goodwill A/c
Adjustment
A/c 32,000 32,000 16,000
1,68,640 1,21,840 69,120 1,68,640 1,21,840 69,120
31.3.17 To Bank A/c 15,160 – 31.3.17 By Balance b/d 77,840 47,520
To Shares of By Bank A/c – 15,160
YZ Ltd.
(WN 2) 62,680 62,680
77,840 62,680 77,840 62,680

(iv) Balance Sheet of YZ Ltd.

Liabilities ` Assets `
Share Capital 1,25,360 Goodwill 80,000
12% Loan 90,000 Plant (46,000 – 8,000) 38,000
Sundry Creditors 32,000 Fixtures (14,000 + 6,000) 20,000
Stock 24,000
Sundry Debtors 70,000
Cash at Bank (WN. 1) 15,360
2,47,360 2,47,360

Working Notes:
1. Bank Account

Particulars ` Particulars `
To Balance b/d 34,600 By X’s Capital A/c 25,240
To Plant (sold) A/c 6,000 By Y’s Capital A/c 15,160
To Z’s Capital A/c 15,160 By Balance c/d 15,360
55,760 55,760

2. Total Capital of the firm before conversion

`
Y 77,840
Z 47,520
1,25,360
Since Y and Z would continue with equal shareholding, therefore, share capital of Y and Z would be
` 1,25,360/2 = ` 62,680 each.
`
Z should bring cash ` (62,680 – 47,520) = 15,160
Y should withdraw cash ` (77,840 – 62,680) = 15,160

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 3.216 Partnership Accounts

GRADUAL REALISATION OF ASSETS AND PIECEMEAL DISTRIBUTION

In the preceding pages, while working out various illustrations on dissolution of a partnership firm, it has
been assumed that all assets have been realised on the date of dissolution and all liabilities have also been paid
on that date. This assumption makes possible the ascertainment of profit or loss on realisation immediately.
However, in actual practice, this does not happen. The assets are sold gradually to realise the best price for
them. Similarly the liabilities are paid gradually depending upon the amount realised from the sale of the
assets.
Thus, the final profit or loss on realisation can be known only after the expiry of certain time when all
assets are completely realised and all liabilities are completely paid off.
After payment of all outside liabilities and partners’ loans, the capitals of the partners are returned.
However, the amount payable to a partner on account of his capital cannot be ascertained, unless the total profit
or loss on realisation is known. This means that the partners should not be paid any amount till realisation is
complete. This may create financial problems for the partners, since on the one hand the partnership business
is being dissolved and on the other the partners do not get any money from the firm to start a new business
or to meet their expenses. Thus, the partners should not be required to wait till realisation is complete. They
should be paid as and when the firm has funds left with it after payment of all outside liabilities.
Basis of Distribution
In case a firm decides to make a piecemeal distribution of cash among its partners for return of capital,
problem arises regarding the determination of the basis on which such funds should be distributed. The
method or basis adopted should be such that amounts finally left unpaid (the loss to be borne by the partners)
are in the ratio in which profits and losses are shared.
The capitals contributed by the partners may or may not be in their profit sharing ratio. In case the capitals
of the partners are in their profit sharing ratio, distribution of surplus cash left after payment of liabilities can
be made in the profit sharing ratio. However, in case the capitals of the partners are not in their profit sharing
ratio, any of the following two methods can be adopted:
1. Proportionate capital method According to this method a partner who has contributed more than his
proportionate share of capital is paid first in priority to the other partners. For identifying the partner who has
to be paid first, the partner’s capital being the least is taken as the base. The working of this system can be
understood with the help of the following illustration:
Illustration 4.22 The following is the balance sheet of partnership firm:

Liabilities ` Assets `
Creditors 10,000 Sundry Assets 30,000
Capitals:
A 10,000
B 5,000
C 5,000
30,000 30,000

The assets were realised as follows:

First realisation ` 10,000
Second realisation ` 10,000
Final realisation ` 5,000
Profits are shared by the partners A, B and C in the ratio of 3 : 2 : 1 respectively.

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 Dissolution of Partnership Firms 3.217

Solution
Out of the first realisation of ` 10,000, creditors will be paid in full. The second realisation of ` 10,000 should
be distributed among the partners. In order to decide who should be paid first, the partner whose capital is the
least will be taken as the base presuming that no fresh capital is to be introduced at this stage by any partner.
In the present illustration B has contributed the least capital according to the Profit Sharing ratio. In case
his capital is taken as the base, the capitals of the partners should be as follows:
A ` 5,000 × 3/2 = 7,500
B ` 5,000
C ` 5,000 × 1/2 = 2,500
Thus B cannot be paid in priority to A and C.
In order to decide who has to be paid first in between A and C, it will have to be seen who has contributed
less capital. In the illustration given A has contributed less capital as compared to C according to the profit
sharing ratio. Taking A’s capital as the base, the capital to be contributed by C comes to ` 3,333 (i.e., 10,000 ×
1/3). Thus C should be paid first ` 1,667.
After payment of ` 1,667 to C, the capitals of A and C would be in their profit sharing ratio. They would
continue to be paid till their unpaid capitals come down to ` 7,500 and ` 2,500 respectively. Once they come
to this level all three partners A, B and C will be paid in their profit sharing ratio.
The statement of piecemeal distribution of cash now can be prepared as follows:

Particulars Creditors Partners

A B C
` ` `
First Realisation 10,000 10,000 10,000 5,000 5,000
Less: Paid to Creditors 10,000 10,000
Second Realisation 10,000 ×
Less: Paid to C1,667 1,667
8,333 3,333
Less: Paid to A & C3,333 2,500 833
5,000 7,500 2,500
Less: Amount distributed among A, B & C5,000 2,500 1,667 833
Balance Due 5,000 3,333 1,667
Final Realisation 5,000
Distributed among A, B & C5,000 2,500 1,667 833
Among unpaid (being loss on realisation) 2,500 1,666 834

2. Maximum loss method According to this method, at every stage of realisation it is presumed that
there would be no further realisation. In other words, this method takes into consideration the worst that
could happen. Realisation loss is ascertained at every stage and distributed among the partners in their profit
sharing ratio. In case the capital account of a partner starts showing a debit balance on account of such loss,
he is presumed to be insolvent and his deficiency is to be charged to the solvent partners in the ratio of their
capitals as per Garner vs Murray rule.
It should be noted that the distribution of cash among the different partners over different instalments may
be different in case of the proportionate capital method and the maximum loss method. This difference is due
to application of Garner vs Murray rule in case of maximum loss method. However, if the loss on account of
presumed insolvency of a partner is charged to the other partners in the profit sharing ratio, the distribution
of cash among the partners in respect of each instalment would be the same. In any case the final loss on
realisation suffered by each partner would be the same in case of both the methods.

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 3.218 Partnership Accounts

In case Illustration 4.21 is worked out according to maximum loss method, the distribution of cash will
be as follows:

Statement Showing Distribution of Cash

Particulars ` Creditors Partners

A B C
First Realisation 10,000 10,000 5,000 5,000
Second Realisation 10,000 10,000
Loss on Realisation 10,000 (i.e., ` 20,000 – 10,000) 10,000 ×
shared by the partners in their profit sharing ratio 5,000 3,333 1,667
5,000 1,667 3,333
Amount paid to partners out of second realisation 5,000 1,667 3,333
Amount outstanding 5,000 3,333 1,667
Final realisation 5,000
Loss on realisation (i.e., ` 10,000 – 5,000) 5,000
Shared by partner in the profit sharing ratio 2,500 1,667 833
Amount paid to partners out of 3rd realisation 2,500 1,666 834
2,500 1,666 834
Amount unpaid (being Loss on Realisation) 2,500 1,667 833

Points worth noting While attempting an examination problem on piecemeal distribution, the students
should take care of the following points:
(i) In case a partner purchases an asset from the firm, it should be presumed that such a partner will
pay in cash for the asset to the firm. Such cash will be distributed among all the partners (including
the partner who purchases the asset).
(ii) In case the final loss on realisation does not come in the profit sharing ratio because of low realisation,
the total loss should be ascertained and the same be distributed among the partners in their profit
sharing ratio. The partners whose share of loss is more than the amount remaining unpaid to them
will bring cash in the firm and such cash will be distributed among the other partners. For example,
the amounts unpaid to partners, A, B and C, after distribution of all instalments are ` 3,000, 2,000
and ` 1,000 respectively and the partners are sharing profits and losses equally. In such a case, the
share of loss of each partner should have been ` 2,000. Since C’s share of loss is ` 1,000, more than
the amount unpaid to him, he will bring ` 1,000 in cash, which will be paid to A, thus making each
partner to bear loss of ` 2,000.
(iii) In case some money is to be kept for realisation expenses, it should be kept out of first instalment
or any balance of cash already in hand. If finally the realisation expenses are less than the amount
so kept as a reserve, the balance will be distributed among the partners.
(iv) In case there are certain contingent liabilities, the amount should preferably be kept in reserve for
meeting such liabilities before any distribution is made among the partners. The amount so kept as
a reserve will be distributed among the partners when it become certain that such liabilities would
not have to be paid.
(v) Secured creditors will be paid first out of the security charged in their favour. However, if the
security charged in their favour is sold after sale of other assets, they will be entitled to share the
proceeds of such other assets with the unsecured creditors.

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 Dissolution of Partnership Firms 3.219

(vi) In case there are two or more creditors entitled to recover their money out of the sale proceeds of
the same asset(s), they will be paid in proportion to their claims.
Students can follow any method of their choice. However, where the profit sharing ratio and the loss
sharing ratio are different, it will be advisable to follow the maximum loss method.
Illustration 4.23 Ramprasad, Vinodkumar, Sohanlal and Shantiprasad were partners in a firm. The capital of
the firm consisted of ` 40,000 contributed originally in the proportion of 2/5, 3/10, 1/5 and 1/10 respectively.
The profits and losses were shared in the same proportion. The firm was dissolved on March 31, 2016. The
Balance Sheet as on that date was as under:

Liabilities ` Assets `
Capitals: Ramprasad 20,000 Cash 6,000
Vinodkumar 14,000 Debtors 50,000
Sohanlal 10,500 Stock 19,000
Shantiprasad 2,500
47,000
Loans: Ramprasad 5,000
Sohanlal 8,000
Creditors 15,000
75,000 75,000

It was decided on April 15 that the net realisations should be distributed on the first of each month in the
appropriate order. The realisation and expenses at the end of the each month were as under.

Month Debtors Stock Expenses

` ` `
April 15,000 7,000 500
May 8,500 5,000 1,000
June 11,000 Nil 250
July 5,500 4,000 150
August 7,000 2,500 100

The stock was completely disposed of. It was further agreed that Vinodkumar should take over the
remaining debts for ` 2,500. Show how the cash was distributed, according to (a) Maximum Loss Method,
and (b) Proportionate Capital Method.
(B. Com. Hons., adapted)
Solution
(a) Maximum Loss Method
Statement Showing Distribution of Cash

Creditors Loan Capitals Total

` R` S` R` V` S` Sh ` `
May, 1 15,000 4,808 7,692 – – – – 27,500
June, 1 – 192 308 5,551 3,185 3,264 – 12,500
July, 1 – – – 4,749 3,540 2,386 75 10,750
Aug., 1 – – – 3,740 2,805 1,870 935 9,350
Sept., 1 – – – 4,760 3,570 2,380 1,190 11,900
15,000 5,000 8,000 18,800 13,100 9,900 2,200 72,000
Loss (Final) – – – 1,200 900 600 300 3,000

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 Working Notes:
Distribution of Realisation

Date Particulars Creditors Loans Capitals

` R` S` R` V` S` Sh `
Apr. 1 Claim 15,000 5,000 8,000 20,000 14,000 10,500 2,500

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May 1 Amount available (net) ` 27,500 15,000 4,808 7,692
Balance – 192 308
June 1 Amount realised (net) ` 12,500; ` 500 paid for
3.220 Partnership Accounts

Loans: Maximum loss ` 35,000 (i.e., ` 47,000 – ` 12,000)

debited to partners in profit sharing ratio 192 308 14,000 10,500 7,000 3,500
6,000 3,500 3,500 1,000 Dr.
Debit Balance of Shantiprasad debited to others
in ratio of their capitals (20 : 14 : 10.5) 449 315 236 1.000 Cr.
Amount due and paid 5,551 3,185 3,264 –
July 1 Amount due to Partners on capital
account after payment on June, 1 14,449 10,815 7,236 2,500
Amount realised (net) ` 10,750: Maximum Loss ` 24,250,
debited to partners in profit sharing ratio 9,700 7,275 4,850 2,425
Amount due and paid 4,749 3,540 2,386 75
Aug. 1 Amount due to Partners after payment on July, 1 9,700 7,275 4,850 2,425
Amount realised (net) ` 9,350, Maximum Loss ` 14,900
debited to partners in the profit sharing ratio 5,960 4,470 2,980 1,490
Amount due and paid 3,740 2,805 1,870 935
Sept. 1 Amount due to partners after payment on August, 1 5,960 4,470 2,980 1,490
Total amount including book debts taken over by Vinodkumar
` 11,900: Capitals being ` 14,900 (at present) loss of
` 3,000 debited to partners in profit sharing ratio 1,200 900 600 300
Due to partners and paid 4,760 3,570 2,380 1,190
Notes:
(i) On May 1, ` 15,000 is paid to creditors and the balance of ` 12,500 is paid to Ramprasad and Sohanlal in the ratio of 5: 8 in repayment of their
loans.
(ii) Maximum loss at each stage has been ascertained by deducting net amount available from the total amount still standing to the credit of partners by
way of capital.

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 Dissolution of Partnership Firms 3.221

(b) Proportionate Capital Method

Statement Showing Distribution of Cash

Creditors Loans Capitals Total

` R` S` R` V` S` Sh ` `
May, 1 15,000 4,808 7,692 – – – – 27,500
June, 1 – 192 308 5,555 3,167 3,278 – 12,500
July, 1 – – – 4,745 3,558 2,372 75 10,750
Aug., 1 – – – 3,740 2,805 1,870 935 9,350
Sept., 1 – – – 4,760 3,570 2,380 1,190 11,900
15,000 5,000 8,000 18,800 13,100 9,900 2,200 72,000
Loss (Final) – – 1,200 900 600 300 3,000

R = Ramprasad, V = Vinodkumar, S = Sohanlal, Sh = Shantiprasad.

Working Notes:
(a) Capitals (i) Capitals (ii)
Actuals Proportionate Excess Proportionate Excess
` ` ` ` `
R 20,000 10,000 10,000 18,667 1,333
V 14,000 7,500 6,500 14,000 –
S 10,500 5,000 5,500 9,333 1,167
Sh 2,500 2,500 – 4,667 –

(i) Taking Shantiprasad’s capital as the basis.

(ii) Taking Vinodkumar’s capital as the basis.
(b) The amount available on 1st June, ` 12,000 is paid as follows:
(i) R 1,333 to make capitals of R, V and S
S 1,167 proportionate
2,500
(ii) The balance of ` 9,500 in the ratio 4 : 3 : 2 among R, V and S.

Partners Share in ` 9,500 Total payment including Balance still due

(b) (i) above ` `
R 4,222 5,555 14,445
V 3,167 3,167 10,833
S 2,111 3,278 7,222
Sh — — 2,500
9,500 12,000 35,000

(c) The amount available on July, 1 is ` 10,750. It should be utilised to as under:

Partners Share in ` 10,000 to make Share in ` 750 Balance still due

capitals as per (a) (i) ` ` `
R 4,445 300 4,745
V 3,333 225 3,558
(Contd.)

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 3.222 Partnership Accounts

Partners Share in ` 10,000 to make Share in ` 750 Balance still due

capitals as per (a) (i) ` ` `
S 2,222 150 2,372
Sh — 75 75
10,000 750 10,750

(i) To see that capitals of all partners are proportionate as per a (i) above.
(ii) Balance distributed among all partners in the profit sharing ratio.
(d) The amount available on August 1 and September 1 will be distributed in the profit sharing ratio.

Partners August 1 September 1

` `
R 3,740 4,760
V 2,805 3,570
S 1,870 2,380
Sh 935 1,190
9,350 11,900

Illustration 4.24 Ananth Associates is a reputed firm. On account of certain misunderstanding between
the partners it was decided to dissolve the firm as on 31st December, 2016. Their Balance Sheet as on 31st
December, 2006 was as follows:

Liabilities ` Assets `
Capitals: Land and Building 7,00,000
Ananth 3,00,000 Other Fixed Assets 3,00,000
Kishore 2,00,000 Stock-in-trade 2,00,000
Kumar (minor) 1,00,000 6,00,000 Debtors 4,00,000
Mortgage Loans 3,00,000 Bills 1,50,000
Bank O.D. 3,00,000 Goodwill 30,000
Other Loans 2,00,000 Cash 20,000
Creditors 2,00,000
Kumar’s Loan 2,00,000
18,00,000 18,00,000

It was decided that Mr. Ananth shall be in-charge of realisations. He shall set apart ` 10,000 toward
expenses. He shall be paid a remuneration of 5 per cent on the amounts distributed to the partners towards
their contribution, other than loans. Assets realised as under
`
1.1.2017 Debtors 3,50,000
15.1.2017 Fixed Assets 4,00,000
1.2.2017 Debtors 50,000
15.2.2017 Bills 1,40,000
1.3.2017 Fixed Assets 50,000
15.3.2017 Land and Buildings 8,00,000
Prepare a statement showing how the monies received on various dates will be distributed assuming:
(a) The actual expenses of realisation amounted to ` 20,005.
(b) The firm is solvent.

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 Dissolution of Partnership Firms 3.223

(c) The partners profit and loss sharing ratio was as under:
Profit Loss
Ananth 2 1
Kishore 2 1
Kumar 1 nil
5 2
(d) The final dissolution is made on 15th March, 2017.
(C.A. Inter New Scheme, adapted)
Solution (See Table on the next Page)
Working Notes:
(i) The amount available on 1st Jan., 2017 is ` 3,60,000 (i.e., ` 3,50,000 realised from debtors +
` 20,000 cash balance–` 10,000 reserved for expenses).
(ii) It has been assumed that Mortgage Loan is on the security of fixed assets.
(iii) On the basis that distribution is to be made on the most conservative basis, assuming that assets
will realise nothing in the future, even secured creditors are treated as unsecured except when the
security concerned is realised. This is why, the amount available on 1st January, 2017 is distributed
prorata among all the creditors.
(iv) Amount realised on 15.3.2017 ` 8,00,000
Less: Additional payment for expenses 10,005
7,89,995
Less: Paid against Kumar’s Loan 2,00,000
5,89,995
Less: Ananth’s Commission @ 5/105 28,095
5,61,900
Illustration 4.25 The Balance Sheet of X, Y and Z as on December 31, 2015 (on which date they decided
to dissolve their firm) was as under:
Balance Sheet

Liabilities ` Assets `
Capitals: Cash in Hand 5,000
X20,000 Other Assets 65,000
Y30,000
Z10,000 60,000
Sundry Creditors 10,000
70,000 70,000

The partnership deed provided that the loss arising on account of unrecovered deficiency of any partner
in the event of dissolution should be borne by the remaining partners in the ratio in which such remaining
partners’ capitals stood on the eve of dissolution, Subject thereto, the profits and losses were to be shared in
the ratio of 1 : 2 : 1.
Upon dissolution, the realization of other assets were as under:
Date Book value of assets realised Amount realised
2016 January, 31 21,000 9,000
February, 28 36,000 4,000
March, 31 8,000 4,000

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 Solution: Illustration 4.24

Statement Showing Distribution of Cash Proceeds

Date Particulars Mortgage Bank O.D. Other Creditors Kumar’s Capitals

2007 Loan Loans Loan Ananth Kishore Kumar

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` ` ` ` ` ` ` `
Amount Due 3,00,000 3,00,000 2,00,000 2,00,000 2,00,000 3,00,000 2,00,000 1,00,000
1 Jan. Realisation from Drs. etc.
3.224 Partnership Accounts

Amounts available
(` 3,70,000 – ` 10,000 = ` 3,60,000)
(prorata among outsiders) 1,08,000 1,08,000 72,000 72,000 – – – –
Balance Due 1,92,000 1,92,000 1,28,000 1,28,000 2,00,000 3,00,000 2,00,000 1,00,000
15 Jan. Fixed Assets 1,92,000
Balance (` 2,08,000) (prorata
among other outsiders) – 89,143 59,429 59,428 – – – –
Balance Due Nil 1,02,857 68,571 68,572 2,00,000 3,00,000 2,00,000 1,00,000
1 Feb. Debtors (prorata among
outsiders ` 50,000) 21,429 14,285 14,286 – – – –
Balance Due 81,428 54,286 54,286 2,00,000 3,00,000 2,00,000 1,00,000
15 Feb. Bills (distributed ` 1,40,000) 60,000 40,000 40,000 – – – –
Balance Due 21,428 14,286 14,286 2,00,000 3,00,000 2,00,000 1,00,000
1 March Fixed Assets ` 50,000 21,428 14,286 14,286 – – – –
Balance Due Nil Nil Nil 2,00,000 3,00,000 2,00,000 1,00,000
15 March Land and Buildings: 2,00,000 – – –
` 8,00,000 (see Note iv) × 3,00,000 2,00,000 1,00,000
Balance ` 5,61,900
Maximum Loss on Realisation
(` 6,00,000 – ` 5,61,900) 19,050 19,050 –
Balance Due 2,80,950 1,80,950 1,00,000
Cash Paid ` 5,61,900 2,80,950 1,80,950 1,00,000

Note: The partners decided to distribute the available cash amongst themselves in a manner which is most conservative.
Show, with the aid of necessary workings, the accounts of the Partners, Realization Account and Cash/Bank Account. Z was insolvent and
was unable to contribute anything towards his deficiency.

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 Dissolution of Partnership Firms 3.225

Solution
Realisation Accounts

Date Particulars ` Date Particulars `

2016 2016
Jan. 1 To Sundry Assets A/c Jan. 31 By Cash A/c 9,000
(transfer) 65,000 Feb. 28 By Cash A/c 4,000
Mar. 31 By Cash A/c 4,000
Mar. 31 By Capital A/c:
X12,000
Y24,000
Z12,000 48,000
65,000 65,000

Cash/Bank Accounts

Date Particulars ` Date Particulars `

2016 2016
Jan. 1 To Balance b/d 5,000 Jan. 1 By Sundry Creditors A/c 5,000
Jan. 31 To Realisation Account Jan. 31 By Sundry Creditors A/c 5,000
(assets realised) 9,000 By X’s Capital Account 4,000
Feb. 28 To Realisation Account Feb. 28 By X’s Capital Account 1,800
(assets realised) 4,000 By Y’s Capital Account 2,200
Mar. 31 To Realisation Account Mar. 31 By X’s Capital Account 1,400
(assets realised) 4,000 By Y’s Capital Account 2,600
22,000 22,000

Realisation Accounts

Date Particulars X Y Z Date Particulars X Y Z

2016 2016
31/1 To Cash A/c 4,000 – – 1/1 By Balance b/d 20,000 30,000 10,000
28/2 To Cash A/c 1,800 2,200 31/3 By X’s Capital A/c 800
31/3 To Cash A/c 1,400 2,600 By Y’s Capital A/c 1,200
31/3 To Realisation
A/c (Loss) 12,000 24,000 12,000
To Z’s Capital A/c 800 1,200 –
20,000 30,000 12,000 20,000 30,000 12,000

Note: In view of the fact cash is being distributed piecemeal, it has been assumed that it is not necessary for X and Y to
bring in cash equal to their share of the loss on realisation.

Statement Showing Cash Distribution

Particulars Total X Y Z
` ` `
January, 2016
Capitals 60,000 20,000 30,000 10,000
Less: Actual Loss till 31.1.2016 12,000 3,000 6,000 3,000
48,000 17,000 24,000 7,000
(Contd.)

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 3.226 Partnership Accounts

Particulars Total X Y Z
` ` `
Less: Possible loss if the remaining
assets fetch nothing 44,000 11,000 22,000 11,000
4,000 + 6,000 + 2,000 – 4,000
Adjustment of Z’s deficiency – – 1,600 – 2,400 + 4,000
4,000 + 4,400 – 400 –
Adjustment of Y’s deficiency – – 400 + 400 –
Cash paid 4,000 + 4,000 – –
February, 2015
Capital (after actual loss till 31.1.2016) 48,000 17,000 24,000 7,000
Less: Paid in January 4,000 4,000 – –
44,000 13,000 24,000 7,000
Less: Actual Loss in February, 2016 32,000 8,000 16,000 8,000
12,000 5,000 + 8,000 – 1,000
Less: Possible loss if the remaining assets fetch nothing – 8,000 – 2,000 – 4,000 – 2,000
4,000 + 3,000 + 4,000 – 3,000
Less: Adjustment of Z’s deficiency – – 1,200 – 1,800 + 3,000
Cash paid 4,000 + 1,800 + 2,200
March, 2016
Capital (after actual loss in Feb. 2016) 12,000 5,000 8,000 – 1,000
Less: Cash paid in February 4,000 1,800 2,200 –
Balance on 28.2.2016 8,000 3,200 5,800 – 1,000
Actual loss in March – 4,000 – 1,000 – 2,000 –1,000
Balance: 4,000 2,200 3,800 – 2,000
Adjustment of Z’s deficiency – – 800 – 1,200 + 2,000
Amount due, cash paid 4,000 1,400 2,600 –

Illustration 4.26 The firm of LMS was dissolved on 31.3.2015, at which date its Balance Sheet stood as
follows:
Liabilities ` Assets `
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capitals:
L 15,00,000
M 10,00,000
S 5,00,000
Total 47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and
distribute the cash after discharge of liabilities. Their fees which are to include all expenses is fixed at
` 1,00,000. No loss is expected on realisation since fixed asset include valuable land and building.
Realisations are:
S. No 1 2 3 4 5
Amounts 5,00,000 15,00,000 15,00,000 30,00,0000 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You
are required to prepare a statement showing distribution of cash with necessary workings.
(C.A. Inter, adpated)

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 Solution
M/s. LMS
Statement of Piecemeal Distribution
(Under Higher Relative Capital Method)

AA_SEC3 CH04_169-[Link] 227

Particulars Amount Creditors Bank Loan L’s loan Capital Account
available L M S
` ` ` ` ` ` `
Balance due 2,00,000 5,00,000 10,00,000 15,00,000 10,00,000 5,00,000
1st Instalment (including Cash and Bank
balances)* 5,00,000
Less: Liquidator’s Expenses and Fees (1,00,000)
4,00,000
Less: Payment to Creditors and repayment of
Bank Loan in the ratio of 2:5 (4,00,000) (1,14,286) (2,85,714) — — — —
Balance Due 85,714 2,14,286 10,00,000 15,00,000 10,00,000 5,00,000
2nd Instalment 15,00,000
Less: Payment to Creditors and repayment of
Bank Loan in full settlement (3,00,000) (85,714) (2,14,286) — — — —
12,00,000 — — — — — —
L’s Loan full payment (10,00,000) (10,00,000) — —
2,00,000 —
Less: Payment to Mr. L toward relative
higher capital (WN 1) (2,00,000) (2,00,000)
Balance Due — 13,00,000 10,00,000 5,00,000
3rd Instalment 15,00,000
Less: Payment to Mr. L toward higher
relative capital (WN 2) (3,00,000) (3,00,000)
12,00,000 10,00,000
Less: Payment to Mr. L & Mr. M toward
excess capital (WN 1 & 2) (10,00,000) (5,00,000) (5,00,000)
2,00,000 5,00,000 5,00,000
Less: Payment to all the partners equally 2,00,000 (66,667) (66,667) (66,666)
Balance due 4,33,333 4,33,333 4,33,334
4th Instalment 30,00,000
Less: Payment to all the partners equally (30,00,000) (10,00,000) (10,00,000) (10,00,000)
Realisation Profit credited to partners
Dissolution of Partnership Firms

5th Instalment 30,00,000 5,66,667 5,66,667 5,66,666

Less: Payment to all partners equally (30,00,000) 10,00,000 10,00,000 10,00,000
Profit on Realisation credited to partners 15,66,667 15,66,667 15,66,666
3.227

*It could also be presumed that ` 5,00,000 is in addition to ` 2,00,000 of cash and bank balances. The computation would have changed accordingly.

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 3.228 Partnership Accounts

Working Notes:
(i) Scheme of Payment of Surplus Amount of ` 2,00,000 out of Second Instalment.

Particulars CapitaI Accounts

L` M` S`
Balance (i) 15,00,000 10,00,000 5,00,000
Profit Sharing Ratio (ii) 1 1 1
Capital taking S’s Capital as base (iii) 5,00,000 5,00,000 5,00,000
Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000
Profit Sharing Ratio 1 1
Excess capital taking M’s excess Capital as base (v) 5,00,000 5,00,000
Higher Relative Excess (iv) – (v) 5,00,000

Mr. L should get ` 5,00,000 first which will reduce his capital account balance from ` 15,00,000 to
` 10,00,000. Surplus amounting to ` 2,00,000 on second realisation after payment of all liabilities should be
paid to Mr. L towards higher relative capital.
(ii) Scheme of payment of ` 15,00,000 realised in 3rd Instalment:
(a) Payment of ` 3,00,000 will be made to Mr. L to discharge higher relative capital. This makes
the higher capital of both Mr. L and Mr. M ` 5,00,000 as compared to capital of Mr S.
(b) Payment of ` 5,00,000 each of Mr. L & Mr. M to discharge the higher capital.
(c) The Balance ` 2,00,000 will be divided equally among L, M and S (i.e. ` 66,667 to each
respectively).

Key Terms
•• Dissolution of Firm: It is dissolution of partnership among all the partners of a firm. In such an event
the business of the firm is closed down and its affairs are wound up.
•• Dissolution of Partnership: It implies change in the relations of partners. In other words there is
dissolution of partnership whenever a partnership is reconstituted on admission, retirement, death or
insolvency of a partner. In dissolution of partnership the firm continues to carry on its business in a
reconstituted form.
•• Garner versus Murray Rule: The rule provides that loss on account of insolvency of a partner should
be borne by the solvent partners in the ratio of capitals standing in the Balance Sheet just before the
dissolution of the firm. The rule is applicable in the absence of any contract to the contrary amongst
the partners.

tEST qUESTIONS
Objective Type
1. State whether each of the following statement is ‘True’ or ‘False’.
(a) Dissolution of a firm automatically results in dissolution of a partnership.
(b) Only firm’s assets can be used for payment of firm’s liabilities.
(c) Loss on realisation is transferred to partners’ capital account in their capital ratio.
(d) Any amount realised from the sale of an unrecorded asset is credited to the Realisation Account.
(e) Partner’s wife loan is treated at par with other liabilities of the partnership firm.
(f) Partner’s loan is transferred to the Realisation Account with liabilities of the firm.
(g) A partnership firm will get dissolved if all the partners except one are declared insolvent.
(h) In case of insolvency of a partner, his deficiency is borne by the solvent partners in their profit sharing ratio.
[Ans. (a) True; (b) False; (c) False; (d) True; (e) True; (f) False; (g) True; (h) False]

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 Dissolution of Partnership Firms 3.229

2. Select the most appropriate answer.

(i) In the event of dissolution of a partnership firm, the provision for doubtful debts is transferred to:
(a) Realisation Account
(b) Partners’ Capital Accounts
(c) Sundry Debtors Account
(ii) Unrecorded liability when paid on dissolution of a firm is debited to:
(a) Realisation Account
(b) Partners’ Capital Accounts
(c) Liability Account
(iii) In the event of dissolution of a firm, the partners assets are first used for payment of the
(a) Personal liabilities
(b) Firm’s liabilities
(c) None of the two
(iv) When the partners’ capital accounts are fixed, as per the decision in the Garner vs. Murray case, any loss arising
due to the capital deficiency in the insolvent partners’ capital accounts is to be borne by solvent partners in the
ratio of
(a) Fixed Capital.
(b) Fluctuating Capital.
(c) Profit Sharing. (CS Foundation, adapted)
(v) In the absence of any contract to the contrary, capital profit on dissolution of a partnership firm is credited, to
the partners:
(a) In Capital Ratio
(b) In Profit Sharing Ratio
(c) Equally
[Ans. (i) (a); (ii) (a); (iii) (a); (iv) (a); (v) (b)]

Essay Type
1. Differentiate between dissolution of partnership and dissolution of firm. State the circumstances under which a
partnership firm may be dissolved.
2. When does the implied authority of a partner to bind the firm terminate in the event of dissolution of a partnership
firm?
3. State the rules regarding: (a) payment of firm’s debts and separate debts and (b) the order of distribution of firm’s
assets in the event of dissolution of a partnership firm.
4. What is Piecemeal Payments Method under Partnership Dissolution? Briefly explain the two methods for determining
the orders in which the payments are to be made. (C.A. IPCE May, 2010)

PRACTICAL PROBLEMS
Simple Dissolution
1. The partnership between A and B was dissolved on December 31, 2015. On that date the respective credits to the
capitals were A ` 1,70,000 and B ` 30,000. ` 20,000 were owed by B to the firm; ` 1,00,000 were owed by the firm
to A and ` 2,00,000 were due to the trade creditors. Profits and losses were shared in the proportion of 2/3 to A and
1/3 to B.
The assets represented by the above stated net liabilities realised ` 4,50,000 exclusive of ` 20,000 owed by B. The
liabilities were settled at book figures. Prepare the Realisation Account, Cash Account and Capital Accounts showing
the distribution to the partners.
[Ans. Loss on Realisation ` 30,000. A gets ` 1,50,000]
2. X, Y and Z commenced business on 1st January, 2015 with capitals of ` 1,00,000, ` 80,000 and ` 60,000 respectively.
Profits and losses were shared in the ratio of 4:3:3. Capitals carried interest at 5% p.a. During 2015 and 2016 they

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 3.230 Partnership Accounts

made profits of ` 40,000 and ` 50,000 (before allowing interest on capitals). Drawings of each partner were ` 10,000
per year.
On 31 December, 2016 the firm was dissolved. Creditors on that date were ` 24,000. The assets realised ` 2,60,000
net. Give the necessary accounts to close the books of the firm.
[Ans. Assets at the time of dissolution were of ` 2,94,000; Loss on Realisation ` 34,000;
X gets ` 1,02,920; Y ` 77,570 and Z ` 55,520]
3. Kaju, Mutter and Kishmish were sharing profits in the ratio of 3 : 2 : 1 in a partnership business. Their Balance Sheet
as on 31st December, 2014 was as follows:

Liabilities ` Assets `
Sundry Creditors 1,54,000 Cash at Bank 35,000
Bills Payable 36,000 Stock 1,98,000
Kaju’s Loan A/c 1,00,000 Debtors1,50,000
Capitals Accounts: Less: Provision 10,000 1,40,000
Kaju 2,00,000 Joint Life Policy 40,000
Mutter 1,60,000 Plant & Machinery 4,37,000
Kishmish 80,000
Reserve Fund 1,20,000
8,50,000 8,50,000
The firm was dissolved on January 1, 2015. Joint life policy was taken over by Kaju at ` 50,000. Stock realised
` 1,80,000. Debtors realised ` 1,45,000. Plant and Machinery was sold for ` 3,60,000. Liabilities were paid in full.
In addition one bill for ` 7,000 under discount was dishonoured and had to be taken up by the firm.
Give Journal entries and the necessary ledger accounts to close the books of the firm.
[Ans. Loss on Realisation ` 87,000; Kaju gets ` 1,66,500;
Mutter gets ` 1,71,000; and Kishmish gets ` 85,500]
4. The following is the Balance Sheet of Suneel and Sharad on December 31, 2015.

Liabilities ` Assets `
Creditors 3,00,000 Cash in Hand 5,000
Bills Payable 80,000 Cash at Bank 80,000
Mrs. Suneel’s Loan 50,000 Investments 1,00,000
Mrs. Sharad’s Loan 1,00,000 Stock 50,000
Reserve Fund 1,00,000 Debtors2,00,000
Investment Fluctuation Fund 10,000 Less: Provision of Bad Debts 20,000 1,80,000
Suneel’s Capital 1,00,000 Plant and Fittings 2,00,000
Sharad’s Capital 1,00,000 Buildings 1,50,000
Goodwill 40,000
Profit and Loss Account 35,000
8,40,000 8,40,000
The firm was dissolved on 31st December, 2015 and the following was the position:
(a) Suneel promised to pay of Mrs. Suneel’s loan and took away stock of ` 40,000.
(b) Sharad took away half of the investments at a discount of 10 per cent.
(c) Debtors were realised at ` 1,90,000.
(d) Creditors and Bills Payable were paid at discount of ` 1,500 and 400 respectively.
(e) Other assets realised are as follows:
Plant ` 2,50,000
Buildings 4,00,000

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 Dissolution of Partnership Firms 3.231

Goodwill 60,000
Investments (balance) 45,000
(f) There was an old typewriter which had been written off completely from the books, it is now estimated to realise
` 3,000. It was taken away by Sharad at the estimated price.
(g) Realisation expenses amounted to ` 10,000.
Make Journal entries and prepare various ledger accounts.
[Ans. Profit on Realisation ` 3,14,900; Suneel gets ` 2,99,950
and Sharad gets ` 2,41,950]
5. Apple and Orange are equal partners. They decided to dissolve the partnership on December 31, 2015 when their
Balance Sheet was as follows:

Balance Sheet
as on 31st December, 2015

Liabilities ` Assets `
Creditors 1,200 Premises 30,000
Capitals: Plant 9,600
Apple 24,000 Debtors 2,880
Orange 24,000 Stock 3,480
Cash at Bank 3,240
49,200 49,200
Apple is to take over the business and pay ` 6,000 for goodwill, which had not been previously valued. He is also to
take over the premises and stock at book values and plant at ` 9,000.
During the period up to 30th April, 2016, he collects ` 2,400 from the firm’s debtors and pays the liabilities getting
` 120 for cash discount. He also pays for the cost of dissolution agreement amounting to ` 240.
You are required to prepare the Realisation Account, Cash Account and the Partners’ Capital Accounts showing the
amount Apple pays to Orange, assuming that settlement was made on 30th April, 2016.
(C.A. Inter OS, adapted)
[Ans. Realisation Profit ` 4,800; Apple brings ` 22,080;
Orange is paid ` 26,400]
6. A, B and C were in partnership sharing profits and losses in the ratio 3 : 2 : 1. They decided to dissolve the partnership
on 31st December, 2015, when the partnership assets and liabilities were as under:

Liabilities ` Assets `
Capital Accounts: Goodwill 45,630
A42,000 Plant and Machinery 60,750
B22,500 Furniture 6,465
C12,000 76,500 Stock 23,670
Loan: Mrs. A 15,000 Book Debts 53,400
Sundry Creditors 56,700 Joint Life Policy 26,550
Bank Overdraft 60,645 Accrued Agency Commission 14,055
Life Policy Fund 26,550 Cash at Bank 4,875
2,35,395 2,35,395

The following particulars are pertinent:

(1) The Life Policy was surrendered for ` 23,250.
(2) A took over goodwill and plant and machinery for ` 90,000.
(3) A also agreed to discharge Bank Overdraft and loan from Mrs. A.
(4) Furniture and stock were divided equally between A and B at an agreed valuation of ` 36,000.

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 3.232 Partnership Accounts

(5) Book Debts were assigned to firm’s creditors in full satisfaction of their claim.
(6) The agency commission was received in time.
(7) A Bill Receivable discounted was returned dishonoured and subsequently proved valueless ` 3,075 (including
` 50 noting charges).
(8) A paid the expenses of dissolution ` 1,800.
(9) C agreed to receive ` 15,000 in full satisfaction of his rights, title and interest in the firm. You are required to
show the accounts relating to final dissolution of the firm. (C.A. Final O.S., adapted)
[Ans. Realisation Profit ` 8,160; Amounts paid A ` 16,341; B ` 7,764; C ` 15,000]
7. The following is the Balance Sheet of Sudhir and Romesh as on 31st December, 2015.

Liabilities ` Assets `
Sundry Creditors 76,000 Cash at Bank 23,000
Loan from Lata, wife of Sudhir 20,000 Stock in Trade 12,000
Loan from Romesh 30,000 Sundry Debtors 40,000
Reserve Fund 10,000 Less: Provision 2,000 38,000
Capitals: Furniture 8,000
Sudhir 20,000 Plant 56,000
Romesh 16,000 Investments 20,000
Profit and Loss A/c 15,000
1,72,000 1,72,000
The firm was dissolved on 31st December, 2015 and following was the result:
(i) Sudhir took over investment at an agreed value of ` 16,000 and agreed to pay off the Loan to Lata, wife of
Sudhir.
(ii) The assets realised as under:
(a) Stock ` 10,000
(b) Debtors 37,000
(c) Furniture 9,000
(d) Plant 50,000
The expenses were 2,200
(iii) The sundry creditors were paid off less 2½% discount. Sudhir and Romesh shared profits and losses in the
ratio of 3 : 2. Show Realisation Account, Bank Account and Partners’ Capital Accounts.
(I.C.W.A. Inter, adapted)
[Ans. Realisation Loss ` 12,300; Sudhir gets ` 13,620 and Romcsh gets ` 9,080]
8. X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1. The position of the firm as on 1st January,
2014 was as under:

Liabilities ` Assets `
X’s Capital 30,000 Fixed Assets 40,000
Y’s Capital 20,000 Debtors 30,000
Z’s Capital 10,000 Stock 40,000
General Reserve 12,000 Bank Balance 10,000
Capital Reserve 9,000
Creditors 39,000
1,20,000 1,20,000
On this date, the partners decided to change their profit and loss sharing ratio to 1:2:3. Goodwill was valued at
` 18,000. No entries were however passed to give effect to this change.

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 Dissolution of Partnership Firms 3.233

On 31 st December 2014 the Balance Sheet of the firm was as under:

Liabilities ` Assets `
X’s Capital 30,000 Fixed Assets 36,000
Less: Drawings 5,000 25,000 Debtors 45,000
Y’s Capital 20,000 Stock 55,000
Less: Drawings 3,000 17,000 Advances 14,000
Z’s Capital 10,000
Less: Drawings 4,000 6,000
General Reserve 36,000
Capital Reserve 9,000
Creditors 50,000
Bank Overdraft 7,000
1,50,000 1,50,000

On 31st December, 2014 the firm was sold as a going concern to Y for ` 1,35,000. Y introduced sufficient funds to
pay off X and Z.
You are asked to (a) Pass Journal entries on 31st December, 2014 to give effect to the above changes in the constitution
of the firm on 1 January 2014 and to close the books of the firm on sale of business and (b) Prepare the Balance Sheet
of Y as on 1st January, 2015. (C.A. Inter, adapted)
[Ans. Realisation Profit ` 24,000, X gets ` 52,500, Z gets ` 36,500]
9. A, B and C are partners of a firm of Chartered Accountants having offices at Mumbai, Hyderabad and Bhopal, sharing
profits and losses in the ratio of 5:3:2 respectively. The statement of affairs of the firm as at 31st March, 2014 is
shown below:

Particulars ` `
Capital Accounts:
A 15,000
B 12,000
C 6,000
Current Accounts:
A 7,550
B 2,575
C 1,115
Accounts Payable 4,915
Accounts Receivable:
Mumbai 12,000
Hyderabad 8,625
Bhopal 9,875
Goodwill 5,000
Cash in Hand 575
Cash with Bank 5,700
On that date, due to old age A desires to retire from the firm and the other two partners agree and it is decided that
B would take over the Mumbai and Hyderabad offices and C would take over the Bhopal office with the respective
assets and liabilities. You are given the following additional information:
(a) A’ share of goodwill is valued at ` 15,000 and this would be bought in by B and C in their profit sharing ratio.
(b) Accounts payable include rent of the Bhopal office for the months of February and March 2014 at the monthly
rate of ` 250 and the balance represents outstanding expenses of Mumbai and Hyderabad offices:

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 3.234 Partnership Accounts

(c) Cash in hand is to be utilised to pay A and other settlements inter se to take place before 1st May, 2014.
(d) Accounts receivable to be discounted by 2%.
Draw up accounts necessary to give effect to the above and close the books of the firm. (C.A. Inter, adapted)
[Ans. Realisation Profit ` 5,610, A is paid ` 34,745, B brings ` 17,055 and C brings ` 11,415].

Insolvency
10. The following is the Balance Sheet of a firm as on December 31, 2014, where capitals of the partners are fixed:

Liabilities ` Assets `
Creditors 1,02,400 Bank 5,500
Loans: Debtors 96,060
P 30,000 Stock 64,000
Q 12,000 Machinery 28,600
Current Accounts: Land 84,000
P 21,200 R’s Current Account 9,940
Q 2,500
Capital Accounts
P 60,000
Q 40,000
R 20,000
2,88,100 2,88,100
Owing to heavy losses in the past two years, it was decided to close the business. The assets with the exception of
bank balance realised ` 2,26,880. The firm has to pay ` 1,500 for an outstanding bill not recorded in the books. R
becomes insolvent and ` 1,000 is realised from his estate.
Prepare necessary accounts to close the books of the firm. ([Link]. Pass, adapted)
[Ans. Realisation ` 47,280; P gets ` 62,620; Q gets ` 24,860]
11. P, Q, R and S are partners sharing profits and losses in the ratio of 4: 3: 2: 1. Their position statement was as follows:

Liabilities ` Assets `
Bank Loan 20,000 Cash 1,500
Creditors 40,000 Buildings 44,000
P’s Capital 30,000 Stock 60,000
Q’s Capital 20,000 R’s Capital 3,500
S’s Capital 1,000
1,10,000 1,10,000
The firm is dissolved. All assets realised ` 82,000. All outside liabilities are paid ` 58,500 in full satisfaction.
Outstanding creditors are also paid ` 500. The expenses of dissolution are ` 600. S becomes insolvent and R paid
only ` 3,000.
Prepare ledger accounts to close the books of the firm. ([Link]. Pass, adapted)
[Ans. Realisation Loss ` 21,600; R’s Deficiency ` 4,820; S’s Deficiency ` 3,160;
Final payments to P ` 16,572; Q ` 10,328]
12. A, B and C were carrying on business in partnership sharing profits and losses in the ratio of 3 : 2 : 1. They decided
to dissolve the firm on 31.12.2015, on which their balance sheet stood as follows:

Liabilities ` Assets `
Creditors 97,000 Land and Buildings 1,14,000
A’s Loan A/c 20,000 Stock 1,00,000
(Contd.)

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 Dissolution of Partnership Firms 3.235

Liabilities ` Assets `
Capital Accounts: Debtors 1,00,000
A1,80,000 Cash 6,000
B20,000 Profit and Loss 3,000
C20,000 2,20,000 B’s Current Account 4,000
C’s Current Account 10,000
3,37,000 3,37,000
Land and Buildings were sold for ` 80,000, Stock and Debtors realised ` 60,000 and ` 84,000 respectively. The
Goodwill was sold for ` 1,200. The expenses of realisation amounted to ` 2,400. C is insolvent and a final dividend of
50 paise in a rupee is received from his estate in full settlement.
Prepare the necessary accounts closing the books of the firm applying the ruling given in Garner vs Murray.
[Ans. Realisation Loss ` 91,200; C’s Deficiency ` 2,850 borne by A : ` 2,565 and B : ` 285]
13. X, Y and Z are partners sharing profits and losses in the ratio of 3 : 2 : 3. Their Balance Sheet on the date of dissolution
was as follows:

Balance Sheet

Liabilities ` Assets `
Creditors 3,40,000 Cash 25,000
X’s Capital 2,60,000 Debtors 3,00,000
Z’s Capital 1,55,000 Stock 2,31,000
Land and Buildings 1,50,000
Y’s Capital 49,000
7,55,000 7,55,000
The assets realised ` 2,61,000. The creditors were paid ` 2,55,000 in full settlement. Expenses of dissolution were
` 2,000. Y became insolvent and 50% was received from his private estate.
Prepare necessary ledger accounts to close the books of the firm in accordance with the decision in Garner vs Murray
case.([Link]. Pass, adapted)
[Ans. Realisation Loss ` 3,37,000; Y’s Deficiency total ` 66,625 shared by X ` 41,741 and Z ` 24,884]
14. The following was the Balance Sheet of P, Q and R on 31st March, 2015.

Liabilities ` Assets `
P’s Capital 25,000 Freehold Property 10,000
R’s Capital 15,000 Furniture 5,000
P’s Current Account 1,000 Stock-in-Trade 23,100
R’s Current Account 500 Debtors 30,000
Sundry Creditors 30,000 Cash 2,500
Loan on Mortgage of Freehold Property 4,000 Q’s Current Account 4,900
75,500 75,500
The partners shared profits and losses in the proportion of 6 : 3 : 5. It was decided to dissolve the partnership as on
the date of the Balance Sheet.
Freehold Property ` 6,000
Furniture 2,000
Stock-in-trade 15,000
Debtors 20,000

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 3.236 Partnership Accounts

The expenses on realisation amounted to ` 2,000. The sundry creditors agreed to take 75 paise in a rupee in full
satisfaction. It was ascertained that Q has become insolvent. A dividend of 50 paise in a rupee was received from the
Court Receiver.
Write up the Realisation Account, Bank Account, Capital and Current Accounts of the partners. Indicate the basis
adopted for distributing the deficiency in the capital accounts. (I.C.W.A. Final, adapted)
[Ans. Realisation Loss ` 19,600; P gets ` 15,325 and R gets ` 7,135]
15. P, Q, R and S had been carrying on business in partnership sharing profits & losses in the ratio of 4:3:2:1. They
decided to dissolve the partnership on the basis of following Balance Sheet as on 30th April, 2011:

Liabilities Amount Assets Amount

(`) (`)
Capital Accounts: Land & building 2,46,000
P1,68,000 Furniture & fixtures 65,000
Q1,08,000 2,76,000 Stock 1,00,000
General reserve 95,000 Debtors 72,500
Capital reserve 25,000 Cash in hand 15,500
Sundry creditors 36,000 Capital overdrawn:
Mortgage loan 1,10,000 R25,000
S18,000 43,000
5,42,000 5,42,000
(i) The assets were realized as under: `
Land & building 2,30,000
Furniture & fixtures 42,000
Stock 72,000
Debtors 65,000
(ii) Expenses of dissolution amounted to ` 7,800.
(iii) Further creditors of ` 18,000 had to be met.
(iv) R became insolvent and nothing was realized from his private estate.
Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account, Partners’ Capital Accounts
and Cash Account.
(IPCE, ICAI, Nov, 2011)
[Ans. Realisation Loss ` 1,00,300, Trial settlement R’s Deficiency borne by P ` 12,636,
Q ` 8,424. S brings ` 6,000, P gets ` 2,03,364, Q gets ` 1,35,576]
16. A, B, C and D were partners sharing profits and losses in the Ratio of 3 : 3 : 2 : 2 respectively. The following is their
Balance Sheet as at 31st December, 2014.

Liabilities ` Assets `
Creditors 31,000 Cash in Hand 4,000
A’s Loan 20,000 Debtors32,000
Capital Accounts: Less: Provision for
A40,000 doubtful debts 1,000 31,000
B30,000 70,000 Stock 20,000
Furniture 8,000
Car 14,000
Capital Accounts:
C12,000
D32,000 44,000
1,21,000 1,21,000

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 Dissolution of Partnership Firms 3.237

It was decided to dissolve the firm with effect from December 31, 2014, and B was appointed to liquidate the assets
and pay the creditors. He was entitled to receive 5% commission on the amounts finally paid to other partners
towards capitals. He was to bear the expenses of realisation which amounted to ` 500.
The assets realised ` 54,000 excluding cash on hand. Creditors were paid in full. In addition a sum of ` 5,000 was
also paid to staff on retrenchment in full settlement of their claim: D was insolvent and the partners accepted ` 7,400
from his estate in settlement.
Applying the rule in the leading case of Garner vs Murray, prepare the necessary ledger accounts and close the books
of the firm.
[Ans. Realisation Loss ` 24,000; Final Payment to A ` 22,438; B ` 18,162;
C brings ` 16,800 (including realisation loss)]
17. Hope, Faith, Wisdom and Courage had been carrying on business in partnership sharing profits and losses in the ratio
of 3 : 2 : 1 : 1.
They decided to dissolve the partnership on the basis of the following Balance Sheet as on 30th April, 2015.

Liabilities ` Assets `
Capital Accounts: Premises 60,000
Hope 50,000 Furniture 20,000
Faith 30,000 80,000 Stock 50,000
Debtors 20,000
General Reserve 28,000 Cash 4,000
Capital Reserve 7,000 Capital Overdrawn
Sundry Creditors 10,000 Wisdom 5,000
Mortgage Loan 40,000 Courage 6,000 11,000
1,65,000 1,65,000
(1) The assets were realised as under:
Debtors (`) 12,000
Stock 30,000
Furniture 8,000
Premises 45,000
(2) Expenses of dissolution amounted to ` 2,000.
(3) Further creditors of ` 6,000 had to be met.
(4) General Reserve unlike Capital Reserve was built up by appropriation of profits.
You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash Account assuming that
Wisdom became insolvent and nothing was realised from his private estate. Apply the principles laid down in Garner
vs. Murray. (C.A. Final OS, adapted)
[Ans. Realisation Loss ` 63,000; Final payment to Hope ` 59,428;
Faith ` 36,572; Courage brings ` 1,000]
[Hint. No distinction made between Capital and Revenue Profits]
18. The balance sheet of A, B and C who are sharing profits and losses in the ratio of 2 : 2 : 1 was as follows on 31st
March, 2015 the date of dissolution:

Balance Sheet of A, B and C

as on March 31st, 2015

Liabilities ` Assets `
Sundry Creditors 1,20,000 Cash 1,000
Bank Loan (with a charge on stock) 50,000 Stock 60,000
(Contd.)

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 3.238 Partnership Accounts

Liabilities ` Assets `
Capital: Other Assets 1,09,000
A 30,000 Goodwill 30,000
B 20,000 Capital C 20,000
2,20,000 2,20,000
Stock realised ` 52,000 and other assets were sold for ` 90,000. Expenses on realisation amounted to ` 3,000.
Assuming that all the partners are insolvent, prepare the necessary ledger accounts to close the books of the firm.
([Link]. Hons., adapted)
[Ans. Profit on Realisation: ` 60,000; Deficiency borne by creditors etc.: ` 30,000]
19. A, B and C are partners sharing profit and losses in the ratio of 4 : 3 : 2. Their balance sheet as on 31.12.2013 stood
as follows:

Liabilities ` Assets `
S. Creditors 20,000 Cash 2,000
Bank Overdraft (secured against stock) 15,000 Debtors18,000
Loan (against the mortgage of machinery) 25,000 Less: Reserve for D. Debts 1,000 17,000
Capitals:
A 20,000 Machinery 40,000
B 10,000 Stock 25,000
C 3,000 Profit and Loss A/c (Debit Balance) 9,000
93,000 93,000
The firm was dissolved on that date. Stock was taken over by the banker and it realised ` 20,000. Bank paid back
` 4,000 after recovering its overdraft and interest due thereon.
Machinery was disposed of for ` 24,000 and debtors realised ` 14,000 only. Loan was fully paid off along with interest
due of ` 1,000. Sundry Creditors were discharged at 10% discount. Expenses amounted to ` 300 which were paid by A.
C became insolvent and only ` 950 could be recovered from his active assets.
Prepare necessary ledger accounts to close the books of the firm assuming that the required cash was brought in by
the partners to make the final payments. (B. Com. Hons., adapted)
[Ans. Realisation loss ` 24,300; C’s Deficiency ` 3,450 shared by A and B in
the ratio of 16 : 7. A gets ` 13,900 and B gets ` 5,950 in final settlement]
20. A, B and C are partners sharing profits and losses in the proportion of one-half, one-third and one-sixth respectively.
The partnership was dissolved on 31st March, 2016 on which date the Balance Sheet of the firm was as follows:

Liabilities ` Assets `
A’s Capital 8,415 Sundry Assets 6,750
B’s Capital 5,916 Sundry Debtors 3,415
Reserve 3,600 Bills Receivable 2,518
Sundry Creditors 14,982 Stock 4,516
C’s Account 12,500
Cash in hand 3,214
32,913 32,913
The lives of the partners were insured severally for A ` 10,000, B ` 5,000 and C ` 6,000. The premiums were charged
to Profit and Loss Account. On the date of the dissolution the surrender value of each of the policies was 30% of the
sum assured. A took over his policy but the policies of B and C were surrendered.
In the course of realisation it was found: (i) that a liability of ` 1,500 for purchases of goods in 2014–15 had been
omitted from the Balance Sheet and that the goods had been included in the value of stock; (ii) that Bills Receivable
discounted by the firm amounting to ` 3,500 were dishonoured and proved to be valueless.
A agreed to take over the goodwill of the firm at ` 2,500. The Bills Receivable were retired by the acceptors for
` 2,400. The remaining assets realised ` 10,399. The expenses of realisation amounted to ` 600, C is insolvent but
his estate pays ` 2,100.

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 Dissolution of Partnership Firms 3.239

Prepare the final accounts of the partners, closing the books of the firm and show the result of the dissolution.
[Ans. Realisation Loss ` 6,000, A gets ` 1,202 and B gets ` 4,629 as final payments]
21. Ashok, Bipin and Chotelal were carrying on business in the firm, name and style of Messrs. ABC Film Producers and
Exhibitors, sharing profits and losses in the ratio of one-half one-third and one-sixth respectively. Chotelal became
insolvent and retired from partnership on 31st December, 2016 and Ashok and Bipin decided to carry on business
separately from the same date, Ashok taking over the film producers’ business and Bipin the film exhibitors’ business.
The Balance Sheet of the firm as at 31st December, 2016 was as follows:

M/s ABC Film Producers and Exhibitors

Balance Sheet
as at 31 st December, 2016

Liabilities ` Assets `
Partners’ Capital Accounts: Lease of Studios & Bldgs
Ashok 2,50,000 Producers 46,000
Bipin 94000 3,44,000 Exhibitors 14,000 60,000
Creditors: Furniture & Fittings:
Producers 20,000 Producers 1,50,000
Exhibitors 16,000 36,000 Exhibitors 28,000 1,78,000
Debtors:
Producers 75,000
Exhibitors 11,000 86,000
Cash 14,000
Partners’ Capital Account: Chotelal 24,000
Profit & Loss A/c 18,000
3,80,000 3,80,000
It was agreed that Chotelal should be credited with ` 10,000 for his share goodwill and that the sum should be provided
by Ashok and Bipin in their profit sharing ratios. Ashok took over the Producers’ Lease, Furniture and Fittings, and
Debtors at ` 50,000, ` 1,70,000 and ` 60,000 respectively. Bipin took over the Exhibitors’ Lease, Furniture and
Fittings, and Debtors at ` 15,000, ` 30,000 and ` 8,000 respectively. The expenses of dissolution amounted to
` 6,000 and the creditors were paid in full. Chotelal was able to pay only 50 per cent of his debts. Prepare accounts
to show clearly the winding up of the partnership assuming that the whole agreement was implemented and the cash
payments were made on 31st December, 2016. (C.A. Final Old Scheme, adapted)
[Ans. Realisation Profit ` 3,000; Chotelal’s Deficiency ` 8,250;
Ashok pays ` 49,543, Bipin is paid ` 29,793].
22. Reck, Waste and Spend shared profits and losses in the ratio of 5:3:2. On 31st December, 2015, their Balance Sheet
was as follows:

Liabilities ` Assets `
Trade Creditors 30,000 Sundry Assets 60,000
Bank Loan 10,000 Loss 40,000
Capitals:
Reck 30,000
Waste 20,000
Spend 10,000 60,000
1,00,000 1,00,000
The Bank had a charge on all the assets; these realised ` 29,000 in all. Waste’s private estate realised ` 6,000; his
private creditors were ` 5,000. Spend was unable to contribute anything. Reck paid 1/3 of what was finally due from

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 3.240 Partnership Accounts

his except on account of other partners. Prepare ledger accounts, passing all matters relating to realisation of assets
and payment of liabilities through the Realisation Account. ([Link], Hons., adapted)
[Ans. Realisation Loss ` 21,200, Reck pays ` 200]
23. Ram, Indra, Triveni and Umesh were partners sharing profits and loss in the ratio of 3 : 3 : 2 : 2. Following is their
Balance Sheet as on 31st March, 2013.

Capital & Liabilities ` Assets `

Sundry Creditors 46,500 Cash at Bank 6,000
Ram’s Loan 30,000 Sundry Debtors 48,000
Capital Accounts: Less: Provision 1,500 46,500
Ram 60,000 Stock 30,000
Indra 45,000 1,05,000 Furniture & Fixtures 12,000
Trade Marks 21,000
Capital Accounts:
Triveni 48,000
Umesh 18,000 66,000
1,81,500 1,81,500
On 31st March, 2013, the firm was dissolved and Indra was appointed to realise the assets and to pay of the liabilities.
He was entitled to receive 5% commission on the amount finally paid to other partners as capital. He was to bear the
expenses of realisation.
The assets realised as follows: Sundry Debtors ` 33,000; Stock ` 24,000 Furniture ` 3,000; Trade Marks ` 12,000.
Creditors were paid off in full and, in addition to it, a contingent liability for bills receivable discounted materialised
to the extent of ` 7,500. Also there was a joint life policy for ` 90,000. This was surrendered for ` 9,000. Expenses
of realisation amounted to ` 1,500. Triveni was insolvent, but ` 11, I00 were recovered from his estate.
Write up the necessary accounts to close the books of the firm according to Garner vs Murray Rule.
(C.A. Final O.S., adapted)
[Ans. Realisation Loss ` 36,000; Final payment to Ram ` 33,657; Indra ` 27,243;
Umesh brings ` 25,200 (including loss on realisation)].
24. A, B and C are partners in A & Company sharing profits and losses in the ratio 2:2:1 respectively. The Balance Sheet
as at 31-3-2014 is as follows:

Liabilities ` Assets `
Capital: A 1,46,000 Fixed Assets 2,00,000
B 54,000 Current Assets:
C 50,000 Stocks 1,25,000
C’s Loan Account 25,000 Debtors 1,25,000
Loan form Mrs. A 50,000 Cash 5,000
Sundry Creditors 1,25,000 B’s Current Account 20,000
Provision for Debts 25,000
4,75,000 4,75,000
The firm was dissolved on the date of Balance Sheet due to continued losses. After preparing the above balance sheet
as on 31.3.2014, it was discovered that purchases amounting to ` 22,000 in March, 2014 were not recorded in books
though the goods were received during March, 2014.
Fixed Assets realised ` 1,00,000, Stocks ` 1,05,000, and Debtors ` 1,02,500. Creditors were paid after deduction of
discount @ 2%. The expenses of realisation came to ` 5,400. A agreed to take over the loan of Mrs. A, B is insolvent
and his estate is unable to contribute anything.
Prepare the relevant accounts to close the books of A & Company applying the decision of Garner vs Murray.
(C.A. Inter, adapted)
[Ans: Realisation Loss ` 1,40,000; B’s Deficiency ` 22,000 borne by A & C in the ratio of 146: 54,
Final Payment to A ` 1,23,940 and C ` 16,060].

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 Dissolution of Partnership Firms 3.241

Sale to a Company
25. Lion and Tiger were in partnership sharing profits and losses in the ratio 3 : 1. The following is the Balance Sheet of
the partnership as at 31st March, 2013.

Liabilities ` Assets `
Capital Accounts: Fixed Assets 21,000
Lion 24,000 Stock 11,200
Tiger 8,000 32,000 Debtors 19,600
Current Accounts: Cash at Bank 3,720
Lion 4,200
Tiger 2,000 6,200
Loan—Tiger 3,000
Creditors 14,320
55,520 55,520

Elephant Ltd. agreed to take over Stock and Fixed Assets, excluding the value of motor car ` 4,100, for a consideration
of ` 48,000 which is to be satisfied by payment of cash. ` 16,000, allotment of 160 Preference Shares of ` 100 each
valued at ` 75 per share, and the balance by allotment of 1,600 Equity Shares of the face value of ` 10 each.
The debtors realised ` 19,200 and the creditors were settled for ` 14,000.
The following were agreed between the partners:
(1) The Equity Share should be allotted in the ratio of the partners’ capital accounts as per Balance Sheet.
(2) Lion to take over the motor car at an agreed value of ` 4,200.
(3) The Preference Shares to be allotted to Tiger to the value of his loan and the remainder to be allotted equally
between the partners.
(4) Balance remaining to be settled in cash.
You are required to show:
(i) The Realisation Account, (ii) Partners’ Capital Accounts, (iii) Bank Account
(C.A. Inter, O.S., adapted)
[Ans. Realisation Profit ` 19,920; Payment to Lion: Pref. Shares ` 4,500;
Equity Shares ` 15,000; Cash ` 19,440; Payment to Tiger: Preference
Shares ` 4,500; Equity Shares ` 5,000; Cash ` 5,480].
26. The following is the Balance Sheet as at 31st March, 2014 of Antony, Birdy and Costello carrying on business in
Partnership sharing profits and losses as 2 : 2 : 1.

Liabilities ` Assets `
Capital Accounts: Fixed Assets 70,000
Antony 40,000 Sundry Debtors 30,000
Birdy 25,000 65,000 Stock 10,000
Mortgage Loan 40,000 Cash 5,000
Reserve 6,000 Capital Account (Dr. Balance):
Sundry Creditors 10,000 Costello 6,000
1,21,000 1,21,000

They decided to dissolve the partnership and the following arrangements were agreed upon.
(1) Fixed assets included:
(i) Motor Car ` 5,500 taken over by Birdy at an agreed value of ` 9,000 after necessary repairing costs amounting
to ` 2,000 to be borne by the firm.
(ii) Land and Building ` 50,000 subject to mortgage loan, taken over by Antony at an agreed value of ` 60,000
subject to mortgage loan to be taken over at ` 40,000.

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 3.242 Partnership Accounts

(2) Creditors and other assets excluding cash are taken over by Eureka Limited in consideration of issue of 5,000
equity shares of ` 10 each fully paid. These shares are taken over at a total agreed value of ` 48,000 equally by
Antony and Birdy.
(3) A creditor for ` 2,500 not provided for in the books had to be paid.
Prepare the following accounts assuming that the final settlement was made by the partners bringing in the amounts
due from them: (1) Realisation Account, (2) Partners’ Capital Accounts, (3) Cash Account.
(C.A. Inter O.S., adapted)
[Ans. Profit on Realisation ` 12,500; Antony is paid ` 3,400; Birdy brings ` 600; Costello brings ` 2,300]
27. Kapoor and Jain were carrying on business sharing profits and losses equally. The firm’s Balance Sheet as at 31st
December, 2014 was as follows:

Liabilities ` Assets `
Sundry Creditors 60,000 Stock 60,000
Bank Overdraft 35,000 Machinery 1,50,000
Capital Accounts: Debtors 70,000
Kapoor 1,40,000 Joint Life Policy 9,000
Jain 1,30,000 Leasehold Premises 34,000
Profit and Loss Account 26,000
Drawing Accounts:
Kapoor 10,000
Jain 6,000
3,65,000 3,65,000
The business was carried on till 30th June, 2015. The partners withdrew in equal amounts half the amount of profit
made during the period of six months after charging depreciation at 10% p.a. on Machinery and after writing off 5%
on Leasehold premises. In the half year, Sundry Creditors were reduced by ` 10,000 and bank overdraft by ` 15,000.
On 30th June, 2015, Stock was value at ` 75,000 and Debtors at ` 60,000; the Joint Life Policy had been surrendered
for ` 9,000 before 30th June, 2015 and other items remained the same as at 31 December, 2014.
On 30th June, 2015, the firm sold the business to a Limited Company. The value of goodwill was fixed at ` 1,00,000
and the rest of the assets were valued on the basis of the Balance Sheet as at 30th June, 2015.
The Company paid the purchase consideration in Equity Shares of ` 10 each.
You are required to prepare: (a) Balance Sheet of the firm as at 30th June, 2015. (b) The Realisation Account,
(c) Partners’ Capital Accounts showing the final settlement between them. (C.A. Inter N.S., adapted)
[Ans. Realisation Profit ` 1,00,000; Payments: Kapoor ` 1,69,900 in Shares and ` 3,000 in Cash; Jain
` 1,69,900 in Shares. Shares have been distributed in Profit Sharing Ratio]
28. Ram, Rahim and Rogers carry on business in partnership under the style of M/s R & Co. sharing profits and losses
in the ratio of 5 : 3 : 2. They have floated R Pvt. Ltd. for the purpose of take over of their business. The following is
the Balance Sheet of the firm as on 30th September, 2016:

M/s R & Co.

Balance Sheet
as on 30.9.2016

Liabilities ` Assets `
Creditors 50,000 Cash 6,000
Capitals: Bank 14,000
Ram 1,01,000 Debtors60,000
(Contd.)

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 Dissolution of Partnership Firms 3.243

Liabilities ` Assets `
Rahim 1,51,000 Less: Provision for doubtful debts 2,000 58,000
Rogers 1,33,000 3,85,000 Stock 42,000
Fixed assets—written down value 3,00,000
Expenditure in relation to R Pvt. Ltd.:
Formation expenses 12,000
Bank A/c (in the name of R Pvt. Ltd.
Deposit of par value of 3,000 equity
shares of ` 10 each subscribed equally
by Ram, Rahim and
Rogers as subscribers to the
Memorandum and Articles
of Association) 3,000 15,000
4,35,000 4,35,000
On that day R Pvt. Ltd. took over the business for a total consideration of ` 5,00,000. The purchase consideration was
to be discharged by the allotment of equity shares of ` 10 each at par in the profit sharing ratio and 15% debentures
of ` 100 each at par for surplus capital.
The directors of R Pvt. Ltd. revalued the fixed assets of R & Co. at ` 4,00,000.
You are asked to:
(a) Give a Statement on the number of equity and debentures allotted by R Pvt. Ltd. to Ram, Rahim and Rogers.
(b) Show Journal entries in connection with the above transactions in the books of R Pvt. Ltd.
(C.A. Inter N.S., adapted)
[Ans. Goodwill ` 18,000;
Ram Rahim Rogers
Equity shares 16,000 9,600 6,400
Debentures 904 926]
29. Amit and Asit were in partnership sharing profits and losses: Amit two-thirds; Asit one-third.
The summarised partnership Balance Sheet as on 31st March, 2014 was as follows:

Liabilities ` Assets `
Fixed Capital Accounts: Fixed Assets 70,000
Amit 50,000 Current Assets:
Asit 40,000 90,000 Stock 35,000
Current Account: Debtors 65,000
Amit20,000 Balance at Bank 15,000 1,15,000
Less: Asit10,000 10,000
Loan — Asit 30,000
Creditors 55,000
1,85,000 1,85,000
The fixed assets included two motor-cars having book values of ` 8,000 and ` 6,000 respectively.
The partners desiring to retire from business accepted the offer of Western India Limited to acquire the stock and
fixed assets, other than the motor-cars, at an agreed purchase price of ` 1,60,000.
The purchase consideration was to be satisfied by a cash payment of ` 56,000, the allotment by the company to the
partners of 400,5 per cent preference shares of ` 100 each, and the balance by the allotment of 900 equity shares of
` 100 each. The debtors realised ` 61,000 and the creditors were settled for ` 51,000.
The partners agreed that the following should be the basis of distribution on dissolution of the partnership.
(1) Amit to take over one car at a valuation of ` 12,000 and Asit the other at ` 8,000.

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 3.244 Partnership Accounts

(2) Asit to be allotted preference shares to the value of his loan, the remainder to be allotted to Amit.
(3) The Equity Shares to be alloted in proportion of fixed capitals.
(4) Both the preferences and equity shares to be valued at ` 80 per share.
(5) The balance to be settled in cash.
You are required to prepare: (a) the Realisation Account; (b) the Bank Account; and (c) the Partners’ Capital Accounts
showing the final settlement between them. (C.A. Inter, adapted)
[Ans. Realisation Profit ` 75,000, Purchase consideration ` 1,60,000. Amit gets ` 40,000 in equity shares and
` 66,000 in cash, Asit gets ` 32,000 in equity shares and ` 15,000 in cash].
30. A, B and C were trading in partnership. They shared profits and losses in the ratio of 5 : 4 : 3 respectively.
They formed a limited company on 31st March, 2017 with an authorised capital of ` 3,00,000 to take over the
business of the partnership. The share capital is to be divided into different classes of shares.
The Trial Balance of the Partnership as on 31 st March, 2017 was as under:

Particulars Dr. ` Cr. `

Capital Accounts as on 1.4.2016
A 94,500
B 63,000
C 31,500
Drawings:
A 30,000
B 30,000
C 22,500
Plant & Machinery (at cost) 1,27,500
Depreciation on Plant & Machinery 37,500
Stock and Work-in-progress 96,300
Debtors/Creditors 99,750 1,27,050
Bank Balance 1,32,450
Profit for the year 1,84,950
5,38,500 5,38,500
Profit for the year is subject to interest on Partners’ Capital Accounts, which is to be provided at the rate of 5% p.a.
on the balance at the beginning of the year.
You are informed that:
(i) Plant & Machinery to be transferred at Income-tax written down value which is ` 99,000.
(ii) Goodwill is not required to be valued. Shares in the company are to be issued to partners at par in such number
and such classes as will give partners the same rights as regards capital, interest and profit as they had in
partnership.
(iii) The other assets and liabilities are to be transferred at their values in the books of the partnership as on 31st
March, 2017.
You are required to prepare:
(1) Profit & Loss Appropriation Account of the partnership for the year ended 31st March, 2017.
(2) Capital Accounts.
(3) Computation showing division of shares into different classes. (C.A. Final O.S., adapted)
[Ans. Net Profit ` 1,75,500
Equity Shares Preference Shares Cash
A is paid 94,500 51,200 400
B is paid 75,600 22,000 50
C is paid 56,700 – – ].

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 Dissolution of Partnership Firms 3.245

31. Given below is the Balance Sheet of M/s A, B & C as on 31st December, 2016 (on which date they decided to dissolve
their partnership by sale to a newly formed company). They share their Profits and Losses in the ratio of 2 : 2 : 1].

M/s A, B & C
Balance Sheet
as on 31st December 2016

Liabilities ` Assets `
Partners’ Capitals: Goodwill 60,000
A1,00,000 Other Fixed Assets 2,00,000
B80,000 Cash and Bank 10,000
C 20,000 2,00,000 Other Current Assets 1,20,000
Partners’ Loans (bearing interest Partners’ Current A/cs:
@ 8% p.a.) B8,000
A 30,000 C2,000 10,000
B 30,000 60,000
A’s Current A/c 5,000
Sundry Liabilities 1,35,000
4,00,000 4,00,000
The new limited company took goodwill as worthless, other fixed assets at 80% of their book value, the remaining at
par, except Cash and Bank and Sundry liabilities. The purchase consideration is to be discharged partly in the form
of 8% debentures in the new company and balance in equity shares therein. The partners decide that the allocation
of the debentures and shares received from the company (and the cash and bank balances) should be done in such a
manner as to leave the position of the partners inter se as nearly the same in the new company as before and. for that
purpose, if any partner has to bring in any amount he is to do so.
Show ledger accounts to close the book of the firm.
(Ans. Loss on Realisation ` 1,00,000, Purchase consideration
` 1,45,000 to be satisfied in ` 60,000 debentures and
` 84,000 in Equity Shares. Shares to be divided in profit sharing ratio].
32. A and B were carrying on business as equal partners. The firm’s Balance Sheet as on 31 st December, 2016 was as
follows:

Liabilities ` Assets `
Capital Accounts: Fixed Assets:
A 1,38,000 Leasehold Building 80,000
B 1,52,000 Plant & Machinery 1,80,000
Bank Loan 40,000 Furniture 20,000
Current Liabilities: Current Assets:
Sundry Creditors 70,000 Stock 60,000
Bills Payable 10,000 Book Debts 68,000
Cash at Bank 2,000
4,10,000 4,10,000
The business was carried on till 30th June, 2017. The partners withdrew in equal amounts half the amount of profits
made during the period of six months (from January to June 2017) after charging depreciation on Leasehold Building
at 10% per annum, Plant & Machinery at 10% per annum, and Furniture at 10% per annum.
Meanwhile sundry creditors were reduced by ` 15,000, Bills payable by ` 2,500 and Bank Loan by ` 20,000.
On 30th June Stock was valued at ` 70,000, Book Debts were ` 75,000 and Cash at Bank was ` 2,500.

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 3.246 Partnership Accounts

On 30th June 2017, the firm sold the business to a Limited Company for ` 4,00,000 payable in Equity Shares of ` 10
each.
The partners decided to take shares in the profit sharing ratio, any difference to be settled in cash.
You are required to prepare:
(i) Statement of Net Assets as on 30th June, 2017.
(ii) Statement of profit earned during the period of six months ended on 30.6.2017.
(iii) Realisation Account.
(iv) Capital Accounts of the partners (C.A. Inter, adapted)
[Ans. (i) ` 3,31 ,000 (ii) ` 82,000 (iii) Profit on Realisation—` 69,000 (iv) Partners’ Capital Accounts:
A is paid ` 7,000; B brings ` 7,000 in cash].
33. A, B and C were partners sharing profits and losses in the ratio of 5 : 3 : 2. The trial balance of the firm on 31 st March,
2016 was as follows:

Particulars Dr. ` Cr. `

Machinery at cost 1,00,000
Stock 68,700
Sundry Debtors 62,000
Sundry Creditors 64,700
Bills Payable 20,000
Capital Accounts:
A 68,000
B 45,000
C 23,000
Drawings Accounts:
A 25,000
B 23,000
C 17,000
Depreciation on Machinery 40,000
Profit for the year ended 31.3.2016 1,24,300
Cash at Bank 89,300
3,85,000 3,85,000
Interest on Capital accounts at 10% per annum on the amount standing to the credit of partners’ capital accounts at
the beginning of the year was not provided before preparing the above trial balance. On I st April 2016 they formed
a Private Limited Company with an Authorised Share Capital of ` 2,00,000 in shares of ` 10 each to be divided in
different classes to take over the business of partnership.
You are informed as under:
(1) Machinery is to be transferred at ` 70,000.
(2) Shares in the company are to be issued to the partners at par in such numbers, and in such classes as well give the
partners, by reason of their share holdings alone, the same rights as regards interest on capital and the sharing of
profits and losses as they had in the partnership.
(3) Before transferring the business, the partners wish to draw from the partnership profits to such an extent that
the bank balance is reduced to ` 50,000. For this purpose sufficient profit of the year is to be retained in profit
sharing ratio.
(4) All assets and liabilities except machinery and bank are to be transferred at their book value as on 31st March,
2016.
You are required to prepare:
(a) Capital Accounts showing all adjustments required to dissolve the partnership.
(b) Statement showing the workings of the number of shares of each class to be issued by the company to each of
the partners and a statement of additional drawings in cash.

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 Dissolution of Partnership Firms 3.247

(c) The Balance Sheet of the company immediately after acquiring the business of the partnership and issuing of
shares.(CA Inter, adapted)
[Ans.
A B C
Additional Drawings in Cash ` 27,150 ` 8,710 ` 3,440
Numbers of shares issued: Preference 68,000 45,000 23,000
Equity 15,000 9,000 6,000
Total of Balance Sheet-` 2,50,700].

Piecemeal Distribution
34. A, B and C carried on business as partners, sharing profits and losses in the ratio of 3 : 4 : 5. They decided to dissolve
the partnership as on 1st July, 2015 and agreed that the sale of the assets should not be forced but should be made
gradually. As the realisation was not likely to be completed for over a year and as the partners wished the receipts
from sales to be dealt with as and when received, you were asked to prepare a scheme for the equitable distribution
of such receipts.
The following was the Balance Sheet of the firm at the date of dissolution:

Liabilities ` Assets `
Creditors 10,000 Sundry Assets 36,000
Loan Account—B 2,000
Capital Accounts:
A12,000
B8,000
C4,000 24,000
36,000 36,000
The net amounts realised from the gradual sale of assets were as follows:
1st Instalment ` 5,000
2nd Instalment 10,000
3rd Instalment 5,100
4th Instalment 6,300
5th Instalment 5,700
Draw up a detailed statement showing the distribution of each instalment received and the final settlement.
(C.A. Inter O.S., adapted)
[Ans. Proportionate Capital Method:
A B C
Instalment II ` 3,000 ` — ` —
III 3,900 1,200 —
IV 2,700 3,600 —
V 1,425 1,900 2375].
35. Orange, Apple and Banana were in partnership sharing profits and losses in the ratio of 3 : 2 : 1. They decided to
dissolve the partnership and to distribute sale proceeds as and when realised. The partners’ capital were: Orange
` 10,000, Apple ` 9,000 and Banana ` 5,000. Apple’s loan (Cr.) amounted to ` 3,000.
Sundry Creditors amounted to ` 6,000.
The assets were realised as under:

Month Stock ` Furniture ` Debtors ` Expenses `

July 3,000 300 2,000 500
August 2,000 100 1,500 200
September 2,500 2,000 300
October 3,000 1,500 200

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 3.248 Partnership Accounts

You are required to draw up a statement showing the distribution of cash and the Journal Entry for closing finally the
Capital Accounts of the Partners. (C.A. Inter O.S., adapted)
[Ans. Proportionate Capital Method–Amounts paid:
Orange Apple Banana
Sept. — 1,933 1,467
Oct. 1,850 1,633 817
Maximum Loss Method Amounts paid:
Sept. — 1,940 1,460
Oct. 1,850 1,627 823 ]
36. A partnership firm was dissolved on 30th June, 2014. Its Balance Sheet on the date of dissolution was as follows:

Liabilities ` Assets `
Capitals: Cash 5,400
Ram 38,000 Sundry Assets 94,600
Shyam 24,000
Mohan 18,000 80,000
Loan A/c—Shyam 5,000
Sundry Creditors 15,000
1,00,000 1,00,000
The assets were realised in instalments and the payments were made on the proportionate capital basis. Creditors
were paid ` 14,500 in full settlement of their account. Expenses of realisation were estimated to be ` 2,700 but actual
amount spent on this account was ` 2,000. This amount was paid on 15th September.
Draw up a Memorandum of Distribution of Cash, which was realised as follows:
On 5th July, 2014 ` 12,600; On 30th Aug., 2014 ` 30,000; On 15th Sept., 2014 ` 40,000
The partners shared profits and losses in the ratio of 2 : 2 : 1. Give working notes. (B. Com. Hons., adapted)
[Ans. Distribution
Ram ` Shyam ` Mohan `
Aug 30, 2014 16,320 2,320 1,160
Sept 15, 2014
(incl. saving in expenses) 16,280 16,280 8,140].
37. Lamb, Deer and Peacock were in partnership, their respective shares being 1/2, 1/4 and 1/4. The following was their
Balance Sheet on December 31, 2014 on which date they decided to dissolve the firm:

Balance Sheet

Liabilities ` Assets `
Creditors 15,000 Cash 9,000
Income Tax Payable 4,000 Stock 40,000
Loan from Bank (secured by Debtors 60,000
pledge of stock) 30,000 Furniture 36,000
Deer’s Loan 11,000 Motor Car 25,000
Partners’ Capitals:
Lamb 40,000
Deer 40,000
Peacock 30,000 1,10,000
1,70,000 1,70,000
(1) Bank could realise only ` 25,000 on disposal of stock.
(2) A sum of ` 3,000 was spent for repairs of furniture, for getting better price.

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 Dissolution of Partnership Firms 3.249

(3) Other assets were realised as follows:

In January, 2015 ` 12,000
In February, 2015 15,000
In March, 2015 10,000
In April, 2015 30,000
In May, 2015 35,000
The partners distributed the cash as and when available.
Show the distribution of cash on the basis of “highest relative capitals”. (C.A. Inter Old Scheme, adapted)
[Ans. Amounts paid: March 2015: Deer ` 8,000; April 2015: Lamb 4,000;
Deer 14,000; Peacock ` 12,000; May 2015: Lamb 17,500; Deer 8,750; Peacock 8,750]
38. Antimony, Gold and Copper were in partnership sharing profits and losses in the ratio of 2 : 1 : 1. They decided to
dissolve the partnership on the basis of the following Balance Sheet.
Balance Sheet

Liabilities ` Assets `
Sundry Creditors 5,000 Premises 40,000
Loan (on mortgage of Premises) 30,000 Sundry Debtors 60,000
Partner’s Loan: Antimony 15,000 Stock 70,000
General Reserve 10,000 Cash 3,000
Partners’ Capitals:
Antimony 50,000
Gold 40,000
Copper 23,000 1,13,000
1,73,000 1,73,000
The assets were realised piecemeal as follows:
2014 June ` 5,000, received after meeting in full the mortgage loan.
July Debtors ` 15,000, Stock ` 10,000
August Debtors ` 20,000, Stock ` 25,000
September (Final) Debtors ` 17,000, Stock ` 20,000
The remaining stock was taken over by Gold at an agreed value of ` 3,000.
The sundry creditors were settled for ` 4,000.
The partners decided to distribution of cash as and when realised.
You are required to show the distribution of cash, applying the “highest relative capitals” method.
(C.A. Inter O.S., adapted)
[Ans. Payments Antimony ` Gold ` Copper `
July — 14,000 9,500
Aug. 23,000 12,500 —
Sept. 20,000 10,000 (incl. Stock) 10,000]
39. South, North and East sharing profits and losses in the ratio of 1 : 2 : 1 decided to dissolve their partnership business
on the basis of the following Balance Sheet as on 31st December, 2015.

Balance Sheet

Liabilities ` Assets `
Capitals: Other Assets 1,65,000
South 50,000 Investments 6,000
North 1,00,000 1,50,000 Cash in hand 12,000
General Reserve 8,000
(Contd.)

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 3.250 Partnership Accounts

Liabilities ` Assets `
Sundry Liabilities 25,000
1,83,000 1,83,000
The following realisations were made:
January 2016 Other Assets ` 52,000
February 2016 Other Assets ` 72,000
March 2016 Other Asset (Final) ` 12,000
It was agreed that North will take over the Investments at a settled value of ` 5,600.
Partners decided to distribute cash as and when realised.
The Partnership Deed provides, inter alia, that the loss, if any, arising out of insolvency of any partner on dissolution
of the firm shall be borne equally by the solvent partners.
East became insolvent and nothing was realised from his estate.
Prepare the statement of distribution of cash and assets amongst partners following the “maximum loss” basis. Show
rough workings.
(C.A. Final, adapted)
[Ans. Payments:
South North
` `
Jan., 2016 8,375 30,625
Feb., 2016 27,000 45,000
March, 2016 6,600 11,000 (including investments)].
40. Rahim, Antony and Prasad were in partnership sharing profits and losses in proportion to 5 : 4 : 3. They agreed to
dissolve the partnership on 1st January, 2014 on which date their assets and liabilities were as under:

Liabilities ` Assets `
Creditors 76,000 Debtors 1,45,000
Loan from Antony 9,000 Stock 1,50,000
Capital Accounts: Plant 50,000
Rahim 1,20,000 Furniture 10,000
Antony 90,000
Prasad 60,000
3,55,000 3,55,000
The assets were realised in the following instalments and the proceeds were distributed as and when realised:
1st instalment ` 50,000
2nd instalment 30,000
3rd instalment 21,000
4th instalment 90,000
5th instalment 84,000
The cost of dissolution was estimated at ` 5,000 and the amount was kept as reserve before distribution of the
proceeds until the 3rd instalment when the actual cost of ` 4,000 was met.
Prepare a statement showing the distribution of each instalment realised and the final Journal entry for closing the
books of the firm.
[Ans. Max. Loss Method:
Rahim ` Antony ` Prasad `
3rd Instalment 9,928 2,072
4th Instalment 40,072 31,928 18,000
5th Instalment 35,000 28,000 21,000].

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 Dissolution of Partnership Firms 3.251

41. Given below is the Balance Sheet of A, B and C as on 31st Dec., 2015 on which date they dissolved their partnership.
They shared profits and losses in the ratio of 4 : 3 : 3. Since the realisation of assets was protracted, they decided to
distribute amounts as and when feasible and to appoint C for this purpose who was to get as his remuneration 1% of
the value of the assets realised other than Cash at Bank and 10% of the amount distributed to the partners:

Balance Sheet
as on 31st Dec, 2015

Liabilities ` Assets `
Capitals: Cash at Bank 275
A 15,000 Sundry Assets 53,725
B 7,500
C 15,000
Sundry Creditors 16,500
54,000 54,000
Assets realised as under:
First Instalment ` 16,250
Second Instalment 12,750
Third Instalment 10,000
Last Instalment 7,500
Prepare a statement showing distribution of cash and also the necessary Journal entries to close the books of the firm.
(C.A. Inter New Scheme, adapted)
[Ans. Proportionate Capital Method:
A` B` C`
Amount paid: 2nd Instalment 4,342 – 7,008
3rd Instalment 3,798 2,355 2,847
Last Instalment (including
commission to C) 2,700 2,025 5,200].
[Hint. It has been presumed that commission to C has been paid after total realisations].
42. The firm of Rich persons presented you with the following Balance Sheet drawn as at 31st March, 2014.

Liabilities ` Assets `
Sundry Creditors 37,000 Cash in Hand 3,000
Capital Accounts of Partners Sundry Debtors 34,000
A40,000 Stock-in-Trade 39,000
B30,000 Plant and Machinery 51,000
C27,000 97,000 Current Accounts:
B4,000
C3,000 7,000
1,34,000 1,34,000
Partners shared profits and losses in the ratio of 4: 3 : 3. Due to difference among the partners, it was decided to wind
up the firm, realise the assets, and distribute cash among the partners at the end of each month.
The following realisations were made:
(i) May 2014 ` 15,000 from debtors and ` 20,000 by sale of stock.
Expenses on realisation were ` 500.
(ii) June 2014 Balance of debtors realised ` 10,000. Balance of stock fetched ` 24,000.
(iii) August 2014 Part of machinery was sold for ` 18,000. Expenses incidental to sale were ` 600.
(iv) September 2014 Part of machinery valued in the books at ` 5,000 was taken by A in part discharge
at an agreed value of ` 10,000. Balance of machinery was sold for ` 30,000 (net).

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 3.252 Partnership Accounts

Partners decided to keep a minimum cash balance of ` 2,000 in the first 3 months and ` 1,000 thereafter. Show how
the amounts due to partners will be settled. All workings should form part of your answer
(C.A. Inter, adapted)
[Ans. Amounts distributed:
A` B` C`
June 2014 17,000 8,750 6,750
Aug. 2014 7,360 5,520 5,520
Sept. 2014 16,400 12,300 12,300
Presume all partners as solvent].

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