CHAPTER 5

DISSOLUTION OF A PARTNERSHIP FIRM

The word Dissolution implies the undoing or breaking of a bond tie. In other words, dissolution implies that the existing state of arrangement is done away with. Suppose, certain colour is put into the water, the colour dissolves into the water because the solid state of the colour disintegrates through the process of breaking of bond of chemicals that was the basis of that solid state. In life, anything dissolves only by losing its current state, so is true in the case of the partnership as well. An existing partnership dissolves whenever the reconstitution of the existing firm is caused by admission, retirement or death of a partner. However, the dissolution of partnership does not lead to the dissolution of the firm since the two situations are different. In case of dissolution of partnership, the firm continues, only the partnership relation is reconstituted, but in case of dissolution of firm, not only partnership is dissolved but the firm also loses its existence, implying thereby that the firm

LEARNING OBJECTIVES After studying this chapter you will be able to : State the meaning dissolution of firm; of

Dif ferentiate between dissolution of fir m and dissolution of partnership; Prepare realization account; Settle the claims against the firm; Record transactions for closure of the books and settlement of partners accounts.

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ceases to operate as a partnership firm (Section 39 of the Partnership Act, 1932). After dissolution of firm, the firm does not remain in business. The only business to be carried out is akin to its funeral ceremony, i.e., closing ceremony of all existing activities.

5.1 Dissolution of a Partnership

The relation of partnership among different partners is changed without changing the partnership firm. Thus, in case of dissolution of partnership, the economic basis of relationship of partners is reconstituted without affecting the entity of the firm which continues to remain in business as ever before. A partnership is dissolved by change of mutual contract in the following cases : Change in profit sharing ratio among partners; Admission of a new partner; Retirement of a partner, where at least two persons remain as partners; Death of a partner (Section 42); Adjudication of a partner as an insolvent; Completion of a venture if partnership is formed for that; Expiry of the period of partnership if partnership is for a pre-determined period; Merger of one partnership firm into another.

5.2 Dissolution of a Firm

Dissolution of a firm takes place in the following cases : (1) Dissolution by agreement : A firm is dissolved in case : (a) All the partners give consent to it, or (b) As per the terms of partnership agreement. (2) Compulsory dissolution : A firm is dissolved compulsorily in the following cases : (a) Where all the partners or all except one partner, become insolvent or insane rendering them incompetent to sign a contract; (b) Where the business becomes illegal;

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(c) Where all the partners except one decide to retire from the firm; (d) Where all the partners or all except one partner dies; (e) Where the partnership deed includes any provision regarding the happening of the following : (i) Expiry of the period for which the partnership was formed; (ii) (3) Completion of the specific venture or project for which the firm was formed.

Dissolution by notice : In case of partnership at will, the firm may be dissolved if any of the partners gives a notice in writing to the other partners signifying his intention of seeking dissolution of the firm. Dissolution by court : A court, may order a partnership firm to be dissolved (under Section 44), in case of a suit by a partner in the following situations : (a) A partner becomes insane; (b) A partner becomes permanently incapable of performing his duties as a partner; (c) A partner deliberately and consistently commits breach of agreements relating to the management of the firm; (d) A partners conduct is likely to adversely affect the business of the firm; (e) The partner transfers whole of his interest in the firm to a third party; (f) The business of the firm cannot be carried on, except at a loss; (g) The court, on any ground, regards dissolution to be just and equitable.

(4)

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5.3 Distinction between Dissolution of Partnership and Dissolution of Firm

Basis
1. Ter mination business of

Dissolution of Partnership
No, the business terminated. is not

Dissolution of Firm
The business of the firm is closed. Assets are sold and realized and liabilities are paid off. A firm can be dissolved by the courts order.

2. Settlement of assets and liabilities 3. Courts Intervention

Assets and liabilities are revalued and new balance sheet is drawn. Court does not intervene because partnership is dissolved by mutual agreement and through the process of reconstitution. Economic relationship may remain and changes. Does not require because the business is not terminated.

4. Economic Relationship 5. Closure of books

Economic relationship between the partners comes to an end. All books of accounts are closed.

5.4 Settlement of Accounts

In case of dissolution of firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all its assets for making payment to all the claimants against it. Section 48 of the Partnership Act provides the following rules for the settlement of accounts between the partners : (1) Loss to be paid first out of profits, next out of capital and lastly by the partners individually in the proportion in which they were entitled to share the profits. In other words, losses are to be shared by the partners in their profit sharing ratio; Assets of the firm are first to be applied in paying off the debts of the firm to the third parties, next in paying off to each partner proportionately what is due to him from the firm for advances as distinguished from

(2)

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capital; and the residue to be divided among the partners in the proportion in which they were entitled to share profits. In simple words, following is the order of payment from the proceeds of the sale of the firm : Expenses of realization; Payment to outside creditors. It is to be noted that secured creditors are to be paid off first out of the proceeds of secured assets before anything is paid to unsecured creditors; Loans and advances made by partners spouse; Loans and advances made by a partner apart form his capital; and Final claims of the partners on their capital account. 5.4.1 Debts of firm verses personal debts of partners If assets of the firm are not sufficient to pay off the firms creditors, the partners may be required to make contributions because of the unlimited nature of the liability of the partner. In such a case, the partner will have the right to apply his personal assets in paying off his personal debts first. Thereafter, the remaining surplus of personal assets will be used for making his contribution to satisfy the unsettled portion of outside creditors. It is to be further noted that personal assets of the partner are individually owned assets excluding the personal property of wife (Streedhan). Accordingly the following steps are taken : 1. 2. All assets would be disposed off and cash has to be realized; With the available funds, claims are satisfied in the following order (a) Payment of expenses for realizing the assets and collection of debts; (b) Payment of outside liabilities of the firm, i.e. creditors, loans, bank overdrafts, bills payable, advances from partners relatives; (c) Loans and advances made by a partner; (d) Repayment of advances extended by the partners;

(e) Repayment of capital contribution to the partner; (f) Any surplus left, is distributed among all partners in their profit sharing ratio.

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5.4.2 Accounting Treatment The books of accounts are closed and profit or loss on realizing the assets and discharge of liabilities has to be computed in the event of dissolution of the firm. For this purpose, a realization account is prepared for recording the realization of assets and payment of liabilities. Sale of assets is recorded at the realized value and payment to creditors is recorded at the settlement value. After recording of all transactions with respect to sale, transfer or takeover of assets and payment of all external liabilities, the realization account would have a balance that will either be profit or loss. Profit arises when assets are realized at more than the book value and/or liabilities are settled at less than book value. In an otherwise situation there is loss. The profit or loss on realization is transferred to partners capital accounts in their profit sharing ratio. Journal Entries 1. For transferring the assets Transfer to the debit of realization account at their gross book values of all accounts of assets excluding cash, bank and the fictitious assets.
Realization a/c Assets a/c(individually) Dr.

It is to be noted that debit balance such as accumulated losses deferred expenses are not transferred to the realization account. These are transferred to the partners capital account in their profit sharing ratio by recording the following entry :
Partners capital a/c Fictititous assets a/c Dr.

2.

For transferring the liabilities All external liability accounts including provisions, if any, in respect of assets which have been transferred to the realization account are closed by transferring them to the credit of realization account at their book values.
External liabilities a/c(Individually) Realization a/c Dr.

Partners capital account and loan account of the partner are prepared separately and are not transferred to realization account.

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3.

For sale of assets

Bank a/c(realized price) Realization a/c Dr.

4.

For an asset taken over by a partner

Partners capital a/c Realization a/c(Agreed price) Dr.

5.

For payment to creditors Any amount paid in cash to creditors, realisation account is debited and cash/bank account is credited.
Realization a/c Bank a/c Dr.

6.

Settlement with the creditors through transfer of asset When a creditor accepts an asset in part payment no entry is recorded. It is because the liability due to the creditors has already been transferred to the credit of realization account and the asset taken over by the creditor is appearing on the debit side of the realization account. Thus, the debit of the asset cancels the credit of the corresponding liability in the realization account. Sometimes, a creditor may accept part of his payment in cash and part of his payment by taking over an asset. In this case, the entry will be recorded for cash payment only. For example, a creditor to whom Rs. 10,000 was due accepted office equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by recording the following entry :
Realization a/c Bank a/c Dr. Rs. 2,000 Rs. 2,000

Whenever a creditor takes over an asset, there may be two situations : (a) When a creditor accepts an asset whose value is more than the amount due to him, he will pay cash. It is recorded as :
Bank a/c Realization a/c Dr.

(b) When a creditor accepts an asset as full and final settlement, no journal entry is recorded.

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7.

Expenses of realization (a) When realization expenses are paid by the firm
Realization a/c Bank a/c Dr.

(b) When firm has agreed to pay partner a fixed amount towards realization expenses irrespective of the actual realization expenses
Realization a/c Partners capital a/c Dr.

(c)

When the actual expenses are paid by the firm on behalf of a partner, the following entry will be recorded :
Partners capital a/c Bank a/c Dr.

(d) However, if a partner himself pays and agreed not to get them reimbursed, no journal entry is recorded. (e) When the partner agrees to pay the expenses on behalf of the firm, the entry to be recorded :
Realization a/c Partners capital a/c Dr.

8.

When liabilities are paid off

Realization a/c Bank a/c Dr.

9.

When partner discharges a liability The liability account is transferred from realization account to partners capital account by recording the following entry :
Realization a/c Partners capital a/c Dr.

10. For realization of any unrecorded assets

Bank a/c Realization a/c Dr.

11. Unrecorded asset taken over by a partner

Partners capital a/c Realization a/c Dr.

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12. For settlement of any unrecorded liability

Realization a/c Bank a/c Dr.

13. Unrecorded liability taken over by a partner

Realization a/c Partners Capital a/c Dr.

14. When the profit (loss) on realization is transferred to partners capital account in their respective profit sharing ratio : (a) In case of profit on realization
Realization a/c Partners Capitals a/c(individually) Dr.

(b) In case of loss on realization

Partners Capitals a/c (individually) Realization a/c Dr.

15. For transferring accumulated profits and reserve All accumulated profits and reserves are transferred to the partners capital account in their respective profit sharing ratio :
Accumulated profit/reserves Partners capitals a/c (Individually) Dr.

16. Transfer of fictititous assets All accumulated losses and fictitious assets are debited to the partners capital accounts in their profit sharing ratio :
Partners capitals a/c (Individually) Dr. Accumulated losses/Fictitious Assets a/c

17. Payment of loans Any loans due to partners are paid off :
Partners loan a/c Bank a/c Dr.

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18. Settlement of capital accounts (a) If the partners capital account shows debit balance, he is to bring in the necessary cash :
Bank a/c Partners capital a/c Dr.

(b) In case of partners whose accounts show credit balance, the same is paid off :
Partners capitals a/c Bank a/c Dr.

It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in the bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution. At times, the Balance Sheet of the firm may not be available on dissolution of partnership firm. In such a situation, first of all, all the relevant ledger balances are worked out and then Balance Sheet of the firm on the date of its dissolution is prepared. Thereafter, the process of dissolution is undertaken in the same manner as discussed above. Illustration 1(Ascertaining the value of assets) Ram and Shyam share the profits equally. They decided to dissolve their firm. Their liabilities were : Rams Capital Rs. 25,000; Shyams Capital Rs. 30,000; Creditors Rs. 12,500; Bills payable Rs.7,500; Assets of the firm realized Rs.1,00,000. Prepare a Realization Account. Solution
Books of Ram and Shyam Realization Account Dr. Date Particulars Sundry assets Bank: Creditors Bills payable Capital Accounts: Ram 12,500 Shyam 12,500 Total J.F. Amount (Rs.) 75,0001 12,500 7,500 Date Particulars Bank Creditors Bills payble J.F. Cr. Amount (Rs.) 1,00,000 12,500 7,500

25,000 1,20,000 Total 1,20,000

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Notes to the Solution Capital + Liabilities = Assets Capital + Creditors + Bills payable = Assets Rs. 25,000 + 30,000 + 12,500 + 7,500 = Rs. 75,0001

Illustration 2(When balance sheet at the time of dissolution is not given) Kumar, Yash and Zakir commenced business on January 1, 2001 with capitals of Rs. 1,00,000, Rs. 80,000 and Rs. 60,000 respectively. Profits are shared in the ratio [Link]. Capitals carried interest at 5% p.a. During 2001 and 2002 they made profits of Rs. 40,000 and Rs. 50,000 (before allowing interest on capitals). Drawings of each partner were Rs. 10,000 per year. On December 31, 2002 the firm was dissolved. Creditors on that date were Rs. 24,000. The assets realized Rs. 2,60,000 net. Prepare the necessary accounts to close the books of the firm. Solution
Books of Kumar, Yash and Zakir Partners Capital Accounts Dr.
Date Particulars
2001 Dec. 31 Drawings Bal. c/f

Cr.
J.F. Kumar Rs.
10,000 1,06,200 1,16,200

Yash Rs.
10,000 82,400

Zakir Date Particulars Rs.

2001 10,000 Jan. 1 Bank 61,400 Int. on Capital Dec. 31 Net profit

J.F.

Kumar Rs.
1,00,000 5,000 11,200

Yash Rs.

Jakir Rs.

80,000 60,000 4,000 3,000 8,400 8,400

92,400 71,400 10,000 87,770 2002 10,000 Jan. 1 Bal. b/f 65,720 Int. on capital Net Profit

1,16,200 92,400 71,400 1,06,200 5,310 15,000 82,400 61,400 4,120 3,070 11,250 11,250

2002 Dec. 31 Drawings Bal. c/f

10,000 1,16,510 1,26,510

97,770 75,720 10,200 77,570 10,200 Jan. 1 Balance b/f 55,520 Total

1,26,510 97,770 75,720 1,16,510 87,770 65,720

Dec. 31 Realization a/c Bank Total

13,600 102,910 1,16,510

87,770 65,720

1,16,510 87,770 65,720

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Balance Sheet as at December 31, 2002 Liabilities Amount (Rs.) Assets 1,16,510 87,770 65,720 Assets Amount (Rs.) 2,94,000

Capital : Kumar Yash Zakir Creditors Total

Assets(balancing figure)

2,70,000 24,000 2,94,000 Total 2,94,000

Realization Account Dr. Date Particulars 2002 Dec31 Assets Bank (Creditors) J.F. Cr. Amount Date Particulars J.F. Amount (Rs.) 2002 (Rs.) 2,94,000 Dec31 Bank (Assets) 2,60,000 24,000 Creditors 24,000 Loss transferred to: Kumars Capital 13,600 Yashs Capital 10,200 Zakirs Capital 10,200 3,18,000 Bank Account Dr. Date Particulars 2002 Dec31 Realization (assets) J.F. Amount Date Particulars (Rs.) 2002 2,60,000 Dec 31 Realization (Creditors) Capital : Kumar Yash Zakir 2,60,000 Total J.F. Cr. Amount (Rs.) 24,000 Total 3,18,000

Total

1,02,910 77,570 55,520 2,60,000

Total

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Illustration 3(Preparation of Realization Account) The following is the Balance Sheet of Anju and Manju sharing profits in the ratio of 3:2 as on December 31, 2003 :
Balance Sheet as at December 31, 2003 Liabilities Creditors Loan by Anjus brother Loan by Manju General Reserve Capitals : Anju 5,000 Manju 4,000 Total Amount (Rs.) 19,000 5,000 7,500 1,250 Assets Plant and Machinery Furniture and Fixtures Investment Stock Debtors 10,000 Less: provision 500 Bank Profit and Loss Total Amount (Rs.) 14,000 2,000 5,000 3,000 9,500 5,750 2,500 41,750

9,000 41,750

The firm was dissolved on March 31, 2003. As a result, (a) Anju took over investments at an agreed value of Rs. 4,000 and agreed to pay loan taken from her brother (b) Realization of assets is as follows : Stock Rs. 2,500, Debtors Rs. 9,250, Furniture and Fixture Rs. 2,250, Plant and Machinery Rs. 12,500 (c) Expenses of realization were Rs. 300 (d) Creditors allowed 2.5% discount in full settlement. Record necessary journal entries and close the books of the firm.

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Solution
Books of Anju and Manju
Journal Date 2003 Dec 31 Particulars L.F. Debit Amount (Rs.) 34,000 3,000 10,000 2,000 14,000 5,000 Credit Amount (Rs.)

Realization a/c Dr. Stock Debtors Furniture and Fixtures Plant and Machinery Investments (Transfer of Sundry assets to realization account) Loan by Anjus brother a/c Sundry creditors a/c Provision for doubtful debts a/c Realization a/c (Transfer to Sundry Liabilities to Realization Account) Bank a/c Realization a/c (Value of assets realized) Realization a/c Anjus capital a/c (For adjustment of liabilities taken over by Anju) Dr. Dr. Dr.

5,000 19,000 500 24,500

Dr.

26,500 26,500

Dr.

5,000 5,000

Anjus capital a/c Dr. Realization a/c (Ajustment of investment taken over by Anju) Realization a/c Dr. Bank a/c (Payment to creditors at a discount of 2.5%) Anjus capital a/c Manjus capital a/c Realization a/c (Transfer of loss on realization) Anjus capital a/c Manjus capital a/c Profit and Loss a/c (Transfer of accumulated loss to capital accounts) Dr. Dr.

4,000 4,000 18,525 18,525 1,695 1,130 2,825

Dr. Dr.

1,500 1,000 2,500

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General Reserve a/c Anjus capital a/c Manju s capital a/c (Transfer of General Reserve to Capital Account) Manjus loan a/c Bank a/c (Loan paid off) Anjus capital a/c Manjus capital a/c Bank (Final payment to partners)

Dr.

1,250 750 500

Dr.

7,500 7,500

Dr. Dr.

3,555 2,370 5,925

Realization Account Dr. Date Particulars J.F. 2003 Dec31 Stock Debtors Furniture and Fixture Plant and Machinery Investments Anjus Capital (Anju brothers loan) Bank (Expenses) Bank (Creditors) Amount Date (Rs.) 2003 3,000 Dec31 10,000 2,000 14,000 5,000 5,000 300 18,525 Particulars Sundry Creditors Provision for doubtful debts Loan by Anjus brother Bank (assets realized) Anjus capital (Investment) Capitals (loss on realization) Anju 1,695 1,130 Manju Total Cr. J.F. Amount (Rs.) 19,000 500 5,000 26,500 4,000

2,825 57,825

Total

57,825

Anjus Capital Account Dr. Date Particulars J.F. 20.03 Dec 31 Realization (loss) Realization (Investment) Profit and Loss Bank Total Cr. Amount Date Particulars J.F. Amount (Rs.) 2003 (Rs.) 1,695 Dec 31 Balance b/f 5,000 4,000 Realization 5,000 (Anju brothers loan) 1,500 General Reserve 750 3,555 10,750 Total 10,750

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Manjus Capital Account Dr. Date Particulars 2003 Dec31 Realization (loss) Profit and Loss Bank Total J.F. Amount Date (Rs.) 2003 Particulars J.F. Cr. Amount (Rs.) 4,000 500 4,500

1,130 Dec 31 Balance b/f 1,000 General Reserve 2,370 4,500 Total

Manjus Loan Account Dr. Date 2003 Particulars J.F. Amount Date (Rs.) 2003 Particulars J.F. Cr. Amount (Rs.) 7,500

Dec 31 Bank

7,500 Dec 31 Balance b/f

Bank Account Dr. Date 2003 Dec31 Particulars Balance b/f Realization a/c (assets realized) J.F. Amount Date (Rs.) 2003 Particulars J.F. Cr. Amount (Rs.) 18,525 300 7,500 2,370 3,555 32,250

5,750 Dec 31 Realization : 26,500 Creditors Expenses Manjus Loan Manjus Capital Anjus Capital 32,250 Total

Total

Illustration 4 (Preparation of Balance Sheet at the time of Dissolution) X and Y are partners in a firm with a profit sharing ratio of 3:2 respectively. They decided to dissolve the partnership on June 1, 2001. On that date their capitals stood as Rs. 20,000 and Rs. 10,000, respectively. Amount owed by Y to the firm was Rs. 6,400 and there was a loan by X for Rs. 8,000; Creditors were Rs. 50,000 and cash Rs. 5,400. The remaining assets other than loan to Y and cash, realized Rs. 59,200. Realization expenses amounted to Rs. 2,000. Prepare the Balance Sheet of the firm as on June 1, 2001 and necessary ledger accounts to close the books of the firm.

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Solution
Books of X and Y Balance Sheet as at June 1, 2001 Liabilities Sundry Creditors Xs Loan Capitals: X 20,000 Y 10,000 Total Amount (Rs.) 50,000 8,000 Assets Cash Ys Loan Other Assets (Balancing figure) Total Amount (Rs.) 5,400 6,400 76,200

30,000 88,000 88,000

Realization Account Dr. Date Particulars 2001 June Sundry Assets 1 Cash (expenses) Cash (Creditors) J.F. Amount Date (Rs.) 2001 76,200 June 2,000 1 50,000 Particulars Creditors Cash (Assets realised) Capitals: Loss on realisation : X 11,400 Y 7,600 Total J.F. Cr. Amount (Rs.) 50,000 59,200

19,000 1,28,200

Total

1,28,200 Cash Account

Dr. Date Particulars 2001 June Balance b/f 1 Realization (Assets) Ys capital J.F. Amount Date (Rs.) 2001 5,400 59,200 4,000 Particulars J.F.

Cr. Amount (Rs.) 2,000 50,000 8,000 8,600 68,600

June Realization 1 (expenses) Realization (Creditors) X Loans Xs capital Total

Total

68,600

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Loan Account Cr. Particulars J.F. Amount (Rs.) 8,000

Xs Dr. Date Particulars 2001 J.F.

Amount Date (Rs.) 2001

June 1
Dr.

Cash

8,000 June 1 Balance b/f Capital Accounts

Cr. J.F. X Rs. 11,400 8,600 Y Date Particulars Rs. 2001 6,400 7,600 Total 20,000 14,000 Balance b/d Cash L.F. X Rs. Y Rs.

Date Particulars 2001 Loan to Y Realization (Loss) Cash Total

20,000 10,000 - 4,000

20,000 14,000

Illustration 5 (Realization of Assets by a partner) Dinesh, Ramesh and Satish were partners in a firm sharing-profits in the ratio of [Link]. They agreed to dissolve their partnership firm on March 31, 2002. Dinesh was asked to realize the assets and pay off liabilities. He had to bear the realization expenses for which he was promised a lump sum amount of Rs. 2,000. Their financial position on that date was as follows :
Balance Sheet as at March 31, 2002 Liabilities Creditors Invst. Fluctuation fund Capitals: Dinesh Ramesh Amount (Rs.) 27,500 9,000 75,000 30,000 Assets Plant and Equipment Investment Stock Debtors 14,200 Less Provision for 900 Doubtful debts Cash Satishs Capital Total Amount (Rs.) 60,000 30,000 11,000

13,300 11,200 16,000 1,41,500

Total

1,41,500

Dinesh agreed to purchase investments at Rs. 25,000. Ramesh took over stock at Rs. 10,500 and Debtors at Rs. 11,800. Plant and Equipment was sold for Rs. 45,000. Unrecorded assets realized cash of Rs. 3,000. Actual realization

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expenses amounted to Rs. 1,800. Prepare necessary ledger accounts on the dissolution of firm. Solution
Books of Dinesh, Ramesh and Satish Realization Account Dr. Date Particulars 2002 Mar. Plant and Equip. 31 Stock Investment Debtors Dineshs Capital (expenses) Cash (Payment to Creditors) J.F. Amount Date (Rs.) 2002 60,000 11,000 30,000 14,200 2,000 27,500 Mar. 31 Particulars Creditors Provision for doubtful debts Investment fluctuation fund Dineshs Capital (Investments) Rameshs Capital (Stock) Rameshs Capital (Debtors) Cash (Plant and Equipment) Cash (Unrecorded assets) Capitals : (Loss on realization) Dinesh Ramesh Satish Total 1,44,700 Cash Account Dr. Date Particulars 2002 Balance b/f Equipment Realization (Unrecorded asset) Satishs Capital Total J.F. Amount (Rs.) 11,200 45,000 3,000 18,400 77,600 Date 2002 Particulars Realization (Creditors) Dineshs Capital Rameshs Capital J.F. Cr. Amount (Rs.) 27,500 46,000 4,100 Total 6,000 3,600 2,400 12,000 1,44,700 J.F. Cr. Amount (Rs.) 27,500 900 9,000 25,000 10,500 11,800 45,000 3,000

Total

77,600

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Partners Capital Dr.

Date Particulars Balance b/f Realization (Loss) Realization (Investments) Realization (Stock) Realization (Debtors) Cash Total J.F. Dinesh Rs. 6,000 25,000 46,000 77,000 Ramesh Rs. 3,600 10,500 11,800 4,100 Satish Date Rs. 16,000 2,400 Total 77,000 30,000 18,400 Particulars Balance c/d Cash Realization (Expenses) J.F. Dinesh Rs. 75,000 2,000 Ramesh Rs.

Cr.
Satish Rs.

30,000 - 18,400

30,000 18,400

Illustration 6 (Preparation of ledger accounts) A, B and C are running a hardware shop sharing profits equally. Their financial position is as under :
Balance Sheet as at March 31, 2003 Liabilities Accounts Payable Bank Loan Bs Loan Joint Life Policy Reserve Capitals : A B C Total Rs. 27,000 Rs. 34,000 Rs. 23,000 Amount (Rs.) 20,000 7,000 20,000 18,000 Assets Land and Buildings Office Equipment Stock Accounts Receivable Joint Life Policy Bank Amount (Rs.) 50,000 5,000 40,000 30,000 18,000 6,000

84,000

1,49,000

Total

1,49,000

Partners agreed to dissolve the firm on that date. You are given the following information regarding dissolution : 1. The Joint Life Policy was surrendered to the insurance company. The company paid a sum of Rs. 11,500 after deducting an amount of Rs. 6,500 towards loan and interest thereon by B against the policy.

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ACCOUNTANCY

2. 3. 4.

Office equipment was accepted by a Accounts Payable for Rs. 7,000 at Rs. 3,500 and the balance was paid to him by cheque. Bankers accepted stock worth Rs. 5,000 and the balance in cash. The firm purchased 200 convertible debentures of a leasing company in 2001. After sometime the investment was treated as bad and was written off. These debentures were found to be having a market value of Rs. 8,000 and were accepted by a creditor at this value. Assets realized in the following manner : Land and Buildings Stock Accounts Receivable Rs. 2,00,000 Rs. Rs. 30,000 20,000

5.

6. 7.

All the liabilities were paid off. Accounts Payable allowed a discount of Rs. 200. Realization expenses amounted to Rs. 1,800. You are required to prepare the realization account, bank account and capital accounts of the partners.

Solution
Books of A, B and C Realization Account Dr. Date Particulars 2003 Mar31 Land and Buildings Office equipments Stock Accounts Receivable Joint Life Policy Bank 20,000 (Accounts Payable) Less: Office Equip. 7,000 Debentures 8,000 Discount 200 15,200 Total c/f J.F. Amount Date (Rs.) 2003 Particulars J.F. Cr. Amount (Rs.) 20,000 7,000 18,000

50,000 Mar31 Accounts payable 5,000 Bank Loan 40,000 Joint Life Policy 30,000 Reserve 18,000 Bank : Joint Life 11,500 Policy Land 2,00,000 and Building Stock 30,000 Accounts 20,000 4,800 Receivable 1,47,800 Total c/f

2,61,500 306,500

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Total b/f Bs Capital Joint Life Policy 306,500 6,500

Total b/f Bank 7,000 (Bank Over draft) Less: Stock 5,000 Bank (Realization Expenses) Capitals-Gain on Realization A Rs. 53,800 B Rs. 53,800 C Rs. 53,800 Total

1,47,800

2,000 1,800

1,61,400 3,13,000 Bank Account Total 3,13,000

Dr. Date Particulars J.F. 2003 Mar Balance b/f 31 Realization : Joint Life Policy Land and Buildings Stock Accounts Receivables Realization Accounts Receivable Amount Date (Rs.) 2003 6,000 Mar 31 11,500 2,00,000 30,000 20,000 Particulars Realization (Accounts Payable) Realization (Bank Overdraft) Realization (Expenses) Bs Loan Capital : A 80,800 B 81,300 76,800 C Total J.F.

Cr. Amount (Rs.) 4,800

2,000

1,800 20,000

2,38,900 2,67,500

Total

2,67,500

As Capital Account Dr. Date Particulars 2003 Mar Bank 31 Total J.F. Amount Date (Rs.) 2003 80,800 80,800 Mar 31 Particulars Balance b/f Realization (Gain) Total J.F. Cr. Amount (Rs.) 27,000 53,800 80,800

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ACCOUNTANCY

Bs Capital Account Dr. Date Particulars 2003 Mar 31 Realization (JLP) Bank Total J.F. Amount Date (Rs.) 2003 6,500 81,300 87,800 Mar 31 Particulars Balance b/f Realization (Gain) Total J.F. Cr. Amount (Rs.) 34,000 53,800 87,800

Cs Capital Account Dr. Date Particulars 2003 Mar 31 Bank Total J.F. Amount Date (Rs.) 2003 76,800 76,800 Mar 31 Particulars Balance b/f Realization (Gain) Total J.F. Cr. Amount (Rs.) 53,800 23,000 76,800

Illustration 7 ( Preparation of ledger accounts) R and K are equal partners. They decided to dissolve their firm as on December 31, 2000. Their Balance Sheet on that day stood as under :
Balance Sheet of R and K as at December 31, 2000 Liabilities Sundry Creditors Bills Payables Capitals : Ram 15,000 Krishan 15,000 Total Amount (Rs.) 10,000 20,000 Assets Land and Buildings Furniture and Fittings Lorry Stock Debtors Cash Total Amount (Rs.) 20,000 14,000 10,000 5,000 6,000 5,000 60,000

30,000 60,000

They decided to take up liabilities : R : Sundry Creditors and K : Bills Payable. Assets realized Debtors Rs. 4,000; Furniture Rs. 10,000; Stock Rs. 4,000; Lorry Rs.15,000 and Land and Buildings Rs. 35,000. Expenses on realization amounted to Rs. 500.

DISSOLUTION OF A PARTNERSHIP FIRM

229229

Record necessary journal entries for the above transactions and prepare realization account, cash account and capital accounts of partners. Solution
Books of R and K Journal Date 2000 Dec 31 Realization a/c Debtors Furniture and Fittings Stock Lorry Land and Building (Asset Accounts Closed) Sundry Creditors Bills Payable Realization a/c (Transfer of Liability) Cash a/c Realization a/c (Assets realised) Realisation a/c Cash a/c (Expense on Realization paid off) Realization a/c R K (Liabilities taken over by partners R Sundry creditors, K Bills payable) Realization a/c R K (Profit credited) R K Cash a/c Dr. Particulars L.F. Debit Amount (Rs.) 55,000 6,000 14,000 5,000 10,000 20,000 Dr. Dr. 10,000 20,000 30,000 Dr. 68,000 68,000 Dr. 500 500 Dr. 30,000 10,000 20,000 Credit Amount (Rs.)

Dr.

12,500 6,250 6,250

Dr. Dr.

31,250 41,250 72,500

(Final payment to partners)

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Realization Account Dr. Date Particulars 2000 Mar31 Sundry Debtors Furniture and Fittings Stock Lorry Land and Buildings R (Creditors) K (Bills Payable) Cash (Expenses on Realization) Capital (Gain on Realization): R 6,250 6,250 K Total J.F. Amount Date (Rs.) 2000 Particulars J.F. Cr. Amount (Rs.) 10,000 20,000 68,000

6,000 Mar31 Sundry creditors 14,000 Bills Payable Cash : Assets 5,000 Realized 10,000 20,000 10,000 20,000 500

12,500 98,000 Cash Account Total 98,000

Dr. Date Particulars 2000 Dec31 Balance b/f Realization Assets

J.F.

Amount Date (Rs.) 2000

Particulars

J.F.

Cr. Amount (Rs.) 500

5,000 Dec31 Realisation 68,000 Expenses Capitals R 31,250 41,250 K 73,000 Total

72,500 73,000

Total

Rs Capital Account Dr. Date Particulars 2000 Dec31 Balance c/f J.F. Amount Date (Rs.) 2000 Particulars J.F. Cr. Amount (Rs.) 15,000 10,000 6,250 31,250

Total

31,250 Dec31 Balance b/f Realization Creditors Realization(Gain) 31,250 Total

DISSOLUTION OF A PARTNERSHIP FIRM

231231

Krishans Capital Account Dr. Date Particulars 2000 Dec31 Balance c/f J.F. Amount Date (Rs.) 2000 Particulars J.F. Cr. Amount (Rs.) 15,000 20,000 6,250 41,250

41,250 Dec31 Balance b/f Realization (Bills Payable) Realization Profit

Total

41,250

Total

Illustration 8 (Unrecorded assets and liabilities)

Lata, Geeta and Neeta were partners sharing profits in the ratio of [Link]. They decided to dissolve the partnership on March 31, 2001 and their balance sheet was as under.
Balance Sheet Lata, Geeta and Neeta as at March 31, 2001 Liabilities Sundry creditors Bills payable Mortgage loan General reserve Capital accounts : Lata 22,000 Geeta 18,000 10,000 Neeta Total Amount (Rs.) 16,600 3,400 15,000 4,500 Assets Plant and Machinery Stock Debtors Less : provision Cash at bank 25,000 5,000 Amount (Rs.) 40,000 10,000 20,000 19,500

50,000 89,500 Total 89,500

There was a typewriter written off which realised Rs. 500. They had a joint life policy of Rs. 20,000 which was surrendered for Rs. 5,000. Goodwill was sold for Rs. 5,000. Other assets realized stock Rs. 6,700; debtors 50%; plant and machinery 10% less than its book value. Creditors were paid Rs. 16,000. But an outstanding bill of Rs. 400 for repairs was to be paid off. Expenses on realization amounted to Rs. 620.

Give journal entries to record the above transactions and also prepare necessary ledger accounts.

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ACCOUNTANCY

Solution
Books of Lata, Geeta and Neeta Journal Date 2001 Mar 31 Particulars L.F. Debit Amount (Rs.) 70,000 Credit Amount (Rs.) 10,000 20,000 40,000 16,600 3,400 15,000 35,000 16,000 16,000 400 400 5,500 5,500

Realization a/c Dr. Stock Sundry Debtors Plant and Machinery ( All assets transferred to realization account) Sundry Creditors a/c Dr. Bills Payable a/c Dr. Mortgage loan a/c Dr. Realization a/c ( All external liabilities transferred realization account) Realisation a/c Dr. Bank a/c ( Payment made to creditors) Realization a/c Dr. Bank a/c (Outstanding bill of repairs paid off) Bank a/c Dr. Realization a/c (Unrecorded assets a typewriter and J.L.P Surrender value realized Rs. 500 and Rs. 5,000 respectively) Bank a/c Dr. Realization a/c (Assets realized at the time of dissolution) Realization a/c Dr. Bank a/c ( Bills payable and mortgage paid off) Realization a/c Dr. Bank a/c (Realization expenses paid off) Latas capital a/c Dr. Geetas capital a/c Dr. Neetas capital a/c Dr. Realization a/c (Transfer of loss to partners capital account) General Reserve a/c Dr. Latas capital a/c Geetas capital a/c Neetas Capital a/c (General reserve distributed among partners) Latas Capital a/c Dr. Geetas Capital a/c Dr. Neetas Capital a/c Dr. Bank a/c (Final payment to partners after dissolution)

52,700 52,700 15,400 15,400 620 620 5,400 3,240 1,080 9,720 4,500 2,500 1,500 500 19,100 16,260 9,420 44,780

DISSOLUTION OF A PARTNERSHIP FIRM

233233

Bills Payable Account Dr. Date Particulars 2001 Mar31 Realization J.F. Amount Date Particulars (Rs.) 2001 3,400 Mar31 Balance b/f J.F. Cr. Amount (Rs.) 3,400

Mortgage Loan Account Dr. Date Particulars 2001 Mar31 Realisation J.F. Amount Date (Rs.) 2001 Particulars J.F. Cr. Amount (Rs.) 15,000

15,000 Mar31 Balance b/f General Reserve Account

Dr. Date Particulars 2001 Mar31 Capitals : Lata Geeta Neeta Total J.F. Amount Date Particulars (Rs.) 2001 Mar31 Balance b/f 2,500 1,500 500 4,500 Stock Account Dr. Date Particulars 2001 Mar31 Balance b/f Total J.F.

Cr. Amount (Rs.) 4,500

4,500

J.F.

Amount Date (Rs.) 2001

Particulars

J.F.

Cr. Amount (Rs.) 10,000

10,000 Mar31 Realization Debtors Account

Dr. Date Particulars 2001 Mar31 Balance b/f

J.F.

Amount Date (Rs.) 2001

Particulars

J.F.

Cr. Amount (Rs.) 25,000

25,000 Mar31 Realization Provision for Bad and Doubtful Debts Account

Dr. Date Particulars 2001 Mar31 Realization J.F. Amount Date (Rs.) 2001 Particulars J.F.

Cr. Amount (Rs.) 5,000

5,000 Mar31 Balance b/f

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ACCOUNTANCY

Creditors Account Dr. Date Particulars 2001 Mar31 Realization a/c J.F. Amount Date (Rs.) 2001 Particulars J.F. Cr. Amount (Rs.) 16,600

16,600 Mar31 Balance b/f Plant and Machinery Account

Dr. Date Particulars 2001 Mar31 Balance b/f J.F. Amount Date (Rs.) 2001 Particulars J.F.

Cr. Amount (Rs.) 40,000

40,000 Mar31 Realization Realization Account

Dr. Date Particulars 2001 Mar31 Stock Debtors Plant and Machine Bank : Sundry creditors 16,000 Bills payable 3,400 Mortgage 15,000 loan Bank : (repairs outstanding) Realization expenses

J.F.

Amount Date (Rs.) 2001 10,000 Mar31 25,000 40,000

Particulars Provision for bad debts Sundry creditors Bills payable Mortgage loan Bank assets realized : Stock 6,700 Debtors 12,500 Plant and 36,000 Machinery Bank unrecorded assets realised Goodwill 2,500 Typewriter 500 Joint life policy 2,500 Partner Capitals Loss : Lata : 5,400 Geeta : 3,240 Neeta : 1,080 Total

J.F.

Cr. Amount (Rs.) 5,000 16,600 3,400 15,000

34,400 400 620

55,200

5,500

Total

1,10,420

9,720 1,10,420

Capital Account Dr.

Date Particulars 2001 Mar31 Realization (Loss) Bank Total J.F. Lata Rs. 5,400 Geeta Rs. 3,240 Neeta Date Particulars Rs. 2001 1,080 Mar31 Balance b/f General Reserve Total J.F. Lata Rs. Rs.

Cr.
Geeta Neeta Rs.

22,000 18,000 10,000 2,500 1,500 500 24,500 19,500 10,500

19,100 16,260 9,420 24,500 19,500 10,500

DISSOLUTION OF A PARTNERSHIP FIRM

235235

Bank Account Dr. Date Particulars 2001 Mar31 Balance b/f Realization (Assets Realized) Realization (Unrecorded assets) J.F. Amount Date (Rs.) 2001 Particulars J.F. Cr. Amount (Rs.) 34,400 400

19,500 Mar31 Realization (liabilities) Realization 55,200 (unrecorded 5,500 liabilities) Realization (Expenses) Capitals : Lata 19,100 Geeta 16,260 9,420 Neeta 80,200 Total

620

44,780 80,200

Total

Illustration 9(Preparation of ledger accounts)

Following is the Balance Sheet of Raman and Ramesh on June 30, 2002.
Liabilities Sundry creditors Bills payable Bank overdraft Mrs. Ramans loan Rameshs loan Investment fluctuation fund Employees provident fund General reserve Ramans capital Rameshs capital Total Amount (Rs.) 20,000 20,000 10,000 20,000 10,000 2,800 1,200 2,000 20,000 20,000 1,26,000 Assets Goodwill Building Plant and fittings Investment Stock Debtors 17,000 Less provision 2,000 for bad debts Bills receivable Cash at bank Profit and loss Total Amount (Rs.) 10,000 25,000 25,000 15,300 8,700 15,000 10,000 13,000 4,000 1,26,000

The firm was dissolved on June 30, 2002 and following was the position : 1. 2. 3. 4. Raman agreed to pay off his wifes loan. Debtors realized Rs. 12,000. Ramesh took away all the investments at Rs. 12,000. Other assets realized as follows :

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ACCOUNTANCY

5. 6. 7.

Plant and Fittings 20,000 Building 50,000 Goodwill 6,000 Sundry creditors and Bills payable were settled at 5% discount. Raman accepted stock at Rs 8,000 and Ramesh took over bills receivable at 20% discount. Realization expenses amounted to Rs. 2,000. Record journal entries and also prepare various ledger accounts.

Solution
Books of Raman and Ramesh Journal Date 2002 June 30 Particulars L.F. Debit Amount (Rs.) 1,11,000 15,300 8,700 10,000 17,000 25,000 25,000 10,000 Credit Amount (Rs.)

Realization a/c Investments Stock Bills receivable Debtors Plant and fittings Buildings Goodwill (Sundry asset accounts closed by transferring to Realization accounts)

Dr.

Provision for bad and doubtful debts a/c Dr. Sundry creditors Dr. Bills payable Dr. Bank overdraft Dr. Mrs. Ramans loan Dr. Employees provident Dr. Investment fluctuation fund Dr. Realization a/c (Sundry external liabilities transferred to Realization account) Realization a/c Dr. Bank a/c (Payment to creditors and bills payable)

2,000 20,000 20,000 10,000 20,000 1,200 2,800 76,000

38,000 38,000

DISSOLUTION OF A PARTNERSHIP FIRM

237237
Dr. 11,200 11,200

Realization a/c Bank a/c (Payment of bank overdraft and employees provident fund) Realization a/c Bank a/c (Payment of realization expenses)

Dr.

2,000 2,000 20,000 20,000 88,000 88,000 20,000 8,000 28,000

Realization a/c Dr. Ramans Capital a/c (Mrs. Ramans loan paid off by Raman) Bank a/c Realization a/c (Assets realized) Dr.

Rameshs Capital a/c Dr. Ramans Capital a/c Dr. Realization a/c (Bills receivable taken over by Ramesh and investments and stock taken over by Raman) Realization a/c Rameshs Capital a/c Ramans Capital a/c (Profit on realization) Dr.

9,800 4,900 4,900 10,000 10,000 2,000 1,000 1,000

Rameshs loan a/c Dr. Rameshs Capital a/c (Rameshs loan transferred to his capital) General Reserve a/c Rameshs Capital a/c Ramans Capital a/c (General reserve distributed) Ramans Capital a/c Rameshs Capital a/c Proft and Loss a/c (Transfer of loss to partners capital accounts) Ramans Capital a/c Rameshs Capital a/c Bank a/c (Final payment to partners) Dr.

Dr. Dr.

2,000 2,000 4,000

Dr. Dr.

35,900 13,900 49,800

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ACCOUNTANCY

Realization Account Dr. Date Particulars J.F. 2002 June Investments 30 Stock Bills receivable Debtors Plant and fittings Buildings Goodwill Bank Creditors 19,000 Bills Payable19,000 Bank Bank Overdraft Employees P.F. Bank (Realization Expenses) Ramans Capital : (Mrs. Romans loan) Capital Account: Raman 4,900 Ramesh 4,900 Amount Date (Rs.) 2002 15,300 June 8,700 30 10,000 17,000 25,000 25,000 10,000 38,000 10,000 1,200 2,000 20,000 Particulars Provision for bad and Doubtful debts Sundry creditors Bills payable Bank overdraft Mrs. Ramans loan Employees P.F. Investment Fluctuation Fund Bank Debtors 12,000 Plant and 20,000 Fittings Building 50,000 6,000 Goodwill Rameshs capital Bills Receivable Ramans Capital Stock Rameshs CapitalInvestment Total J.F. Cr. Amount (Rs.) 2,000 20,000 20,000 10,000 20,000 1,200 2,800

88,000 8,000 8,000 12,000 1,92,000

9,800

Total

1,92,000 Bank Account

Dr. Date Particulars 2002 June Balance b/f 30 Realization : Debtors 12,000 Plant and 20,000 Fittings : Buildings 50,000 Goodwill 6,000

J. F.

Amount Date (Rs.) 2002 13,000 June 30

Particulars Realization : 19,000 Creditors Bills Payable 19,000 Realization Expense Realization Employees Provident fund Realization Bank Overdraft Ramans Capital Rameshs Capital Total

J. F.

Cr. Amount (Rs.)

38,000 2,000 1,200

88,000

10,000 35,900 13,900 1,01,000

Total

1,01,000

DISSOLUTION OF A PARTNERSHIP FIRM

239239

Capital Accounts Dr.

Date Particulars 2002 June Realization 30 Investment Bills receivable Stock Profit and Loss Bank (settlement amount) Total J.F. Raman Ramesh Date Particulars Rs. Rs. 2002 June Balance b/f 30 Loan Mrs. Ramans loan 2,000 General Reserve 13,900 Realization (Profit) 12,000 8,000 35,900 Total L.F.

Cr.
Raman Ramesh Rs. Rs. 20,000 20,000 1,000 4,900 20,000 10,000 1,000 4,900

8,000 2,000 35,900

45,900

45,900

35,900

Terms introduced in this chapter Dissolution of Partnership Dissolution of Firms Partnership at Will Realization account Compulsory dissolution Dissolution by notice

Summary 1. Dissolution of partnership firm The dissolution of a firm implies the discontinuance of the partnership business and separation of economic relation between the partners. In the case of a dissolution of a firm, the firm closes its business altogether and realizes all its assets and settles all liabilities. The payment is made to the creditors, first out of profits and assets realized, next out of the contributions made by the partners in their profit sharing ratio. When the final payment is made to the partners for their due share, the books of the firm are closed.

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ACCOUNTANCY

2. Dissolution of Partnership A partnership gets terminated in case of admission, retirement and death of a partner. But the firm continues its business. 3. Realization Account The Realization Account is prepared to record the transactions relating to sale and realization of assets and settlement of creditors. Any profit or loss arising out of this process is shared by the partners in their profit sharing ratio. Partners are paid off in the final settlement, if any sum is due to them. At the end Cash/Bank Account is closed by making payment to partners. Questions and Exercises 1. Objective Type Questions A. On the dissolution of a firm the cash-on-hand is transferred to : (i) Realization Account

(ii) Capital Accounts of the partners in profit sharing ratio (iii) Cash Account (iv) Creditors Account. B. On dissolution of a partnership, the realization account is debited with (i) All the liabilities of the firm

(ii) Cash received on the sale of the assets iii) Any asset taken over by one of the partners (iv) All assets to be realized. C. On dissolution of a firm, creditors are paid out of (i) Profits, realized assets, and contributions by partners

(ii) Contributions by partners, realized assets and profits (iii) Realized assets, profits, contributions by partners (iv) None of the above. 2. Short Answer Questions (i) What is Realization Account?

(ii) List the order of payment to creditors. (iii) How deficiency of creditors is paid off?

DISSOLUTION OF A PARTNERSHIP FIRM

241241
Problems

3.

Gurmeet, Harinder and Jagat are in partnership sharing profits and losses in the ratio of [Link]. They were trading in readymade garments for sports persons. They started facing problems due to changes in fashions and therefore, agreed to dissolve the firm on March 31, 2002, when their Balance Sheet stood as follows : Gurmeet, Harinder and Jagat Balance Sheet as at March 31, 2002 Liabilities Notes Payable Sundry Creditors Advance from Harinder Current accounts Gurmeet 2,400 Harinder 1,460 1,740 Jagat Capitals : Gurmeet 50,000 Harinder 30,000 Jagat 20,000 Total Amount (Rs.) 50,800 29,200 40,000 Assets (Rs.) Land and building Cash Marketable securities Sundry debtors 50,000 Less : Provision for 11,760 Doubtful debts Stock Equipment 1,00,000 2,25,600 80,000 30,000 20,000 Amount

38,240 34,360 23,000

5,600

Total

2,25,600

They realized as follows : Land and buildings Rs.70,000; Marketable Securities Rs.18,000; Sundry Debtors Rs. 47,000; Stock Rs.30,000; Equipment Rs. 22,240. Close the books of the firm showing the necessary ledger accounts. 4. Deshmukh and Desai started a partnership firm selling tinned food products on April 1, 2000. They are contributed Rs. 30,000 and Rs. 20,000. Profits to be shared in proportion to their capitals. They conducted the business for a period of three years, the business results of which are as follows : For the 1st year ending on March 31, 2001 Profit of Rs.30,000 For the 2nd year ending on March 31, 2002 Profit of Rs.22,200 For the 3rd year ending on March 31, 2003 Loss of Rs. 5,380 As the business slumped into making losses, they decided to dissolve the firm on March 31, 2003. The partners were drawing Rs. 4,000 each p.a. Creditors amounted to Rs. 16,400 on the date of dissolution. Assets of the firm were sold for Rs. 75,000 at an expense of Rs. 550. Close the books of the firm and prepare necessary ledger accounts.

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ACCOUNTANCY

5.

Naresh and Munish are equal partners running general stores including some fancy goods. On March, 31, 2000, they decided to dissolve the firm. Their financial position on that day is given below : Naresh and Munish Balance Sheet as at March 31, 2000 Liabilities Accounts Payable Capitals : Naresh 12,000 Munish 8,000 Total Amount (Rs.) 1,800 Assets Bank Account Receivable Stock Furniture Lease Total Amount (Rs.) 2,000 3,800 10,000 2,000 4,000 21,800

20,000 21,800

Various assets realized as under : Lease Rs. 6,000; Furniture Rs. 2,200; Stock Rs. 9,200; Debtors Rs. 3,600. Creditors agreed to accept Rs. 1,720 as final settlement. Expenses amounting to Rs. 128 were spent for realization. Prepare the required ledger accounts to close the books of the firm. Record necessary journal entries. 6. Read the following information : X, Y and Z Balance Sheet as at 31st March, 2001 Liabilities Accounts Payable Joint Life Policy Reserve General Reserve Capitals : X 15,000 Y 10,000 Y 5,000 Total Amount (Rs.) 25,200 5,000 6,000 Assets Land and Buildings Cash at Bank Stock Accounts Receivable Investments Office Equipment Total Amount (Rs.) 11,750 3,250 8,000 10,050 31,300 1,850 66,200

30,000 66,200

X, Y and Z were sharing profits in proportion to their capitals. They agreed to dissolve the firm on the date. X and Y took over investments and stock at Rs. 9,000 and Rs. 8,750, respectively. Office equipment was taken over by Z at book value. Accounts receivable and land and buildings realized Rs. 28,500 and Rs. 12,500, respectively. The firm incurred Rs. 225 as realization expense.

DISSOLUTION OF A PARTNERSHIP FIRM

243243

A bill receivable discounted by bankers was dishonoured and the firm had to pay Rs. 250 to the bankers. Record journal entries and prepare the ledger accounts to close the books of the firm. 7. The following is the Balance Sheet of Arun and Tarun sharing profits 3:2 as on December 31, 2001 : Liabilities Creditors Mrs. Aruns Loan Taruns Loan General Reserve Capitals : Arun 10,000 8,000 Tarun Total Amount (Rs.) 40,000 10,000 15,000 5,000 Assets Cash Stock Debtors 18,000 Less : Provisions 1,000 Furniture Plant Investments Profit and Loss Total Amount (Rs.) 14,000 8,000 17,000 4,000 30,000 10,000 5,000 88,000

18,000 88,000

The firm was dissolved on December 31, 2001 and the following was the result: (a) Arun took over investments at Rs. 8,000 and agreed to pay off the loan of his wife. (b) The asset realized as follows : Stock Rs. 2,000, Debtors Rs. 20,500, Furniture Rs. 1,000 more, Plant Rs. 20,000 less. (c) Expenses of realization were Rs.1,200. (d) Creditors were paid off less 3% discount. Show ledger accounts to close the books of the firm. 8. Amar, Akbar and Anthony are partners sharing profits in the proportion of 1/2:1/3 and 1/6, respectively. The firms Balance Sheet of March 31, 2001 was as follows : Liabilities Sundry Creditors Bills Payable Reserve Fund Capital Account : Amar 40,000 Akbar 30,000 25,000 Anthony Total Amount (Rs.) 19,000 5,000 12,000 Assets Cash at Bank Debtors 16,000 500 Less : Provision Stock Motor Vans Plant and Machinery Factory Buildings Total Amount (Rs.) 2,500 15,500 25,000 8,000 35,000 45,000 1,31,000

95,000 1,31,000

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ACCOUNTANCY

Assets realized Rs. 1,20,000. Creditors were paid off in full. Expenses of realization amounted Rs. 5,000. Close the books of accounts. 9. Ram, Shyam and Abrar were partners sharing profits and losses in the ratio of [Link]. On January 1, 2002, their Balance Sheet was as follows : Liabilities Sundry Creditors General Reserve Capital Accounts : Ram 15,000 Shyam 12,000 6,000 Abrar Total Amount (Rs.) 12,000 5,000 Assets Cash in Bank Debtors 8,000 200 Less : Provision Stock Furniture Buildings Total Amount (Rs.) 12,200 7,800 6,000 2,000 22,000 50,000

33,000 50,000

The firm was dissolved on that date, The assets realized as under : Debtors Stock Furniture Buildings Rs. 7,000 Rs. 5,000 Rs. 1,000 Rs. 25,000

The creditors were settled for Rs. 11,000. It was found, however, that there was a liability for Rs. 3,000 for damages which had to be paid. The expenses of dissolution amounted to Rs.1,000. Give the Realization Account, the Capital Accounts of the partners and the Bank Account. 10. A, B and C commenced business on January 1, 2000, with capitals of Rs. 50,000, Rs. 40,000 and Rs. 30,000, respectively. Profits were shares in the ratio of [Link]. During 2000 and 2001 they made profits of Rs. 20,000 and Rs. 25,000 respectively. Each partner withdrew Rs. 5,000 per year. On 31st December, 2001, the firm was dissolved. Creditors and cash on that date were Rs.12,000 and Rs. 2,000 respectively. The assets realized were Rs. 1,50,000. Creditors were settled for Rs.11,500. Realization expenses were Rs. 500. Prepare the Realization and Cash Accounts. 11. Mohan, Sohan and Rohan were in partnership sharing profits equally. They decided to dissolve the partnership. The assets and liabilities as on December 31, 2003, the date of dissolution, were as follows :

DISSOLUTION OF A PARTNERSHIP FIRM

245245

Balance Sheet of Mohan, Sohan and Rohan as at Dec 31, 2003 Liabilities Sundry Creditors Capital Accounts : Mohan 25,000 12,500 Sohan Amount (Rs.) 18,000 Assets Cash Sundry Assets Rohans Capital Amount (Rs.) 2,000 52,000 1,500 55,500

37,500 55,500

It is agreed among partners that Mohan takes over the assets at a value of Rs. 48,000 liabilities at a Value of Rs. 17,000. The partners are required to adjust the account as between themselves on a cash basis. Close the books of the firm. 12. The Balance Sheet of Bora, Singh and Ibrahim sharing profits in the ratio of [Link], respectively stood as follows on June 30, 2002. Balance Sheet of Bora, Singh and Ibrahim as at June 30, 2002 Liabilities Creditors Joint Life Policy Reserve Reserve Fund Bora Rs.30,000 Singh Rs.20,000 Ibrahim Rs.10,000 Total Amount (Rs.) 50,400 10,000 12,000 Assets Cash Stock Debtors Investment Furniture Buildings Total Amount (Rs.) 3,700 20,100 62,600 16,000 6,500 23,500 1,32,400

60,000 1,32,400

The firm was dissolved as on that date. For the purpose of dissolution, the investment were valued at Rs.18,000 and stock at Rs. 17,500. Bora agreed to take over Investment and Singh to take over stock. Ibrahim took over the furniture at book value. Debtors and Buildings realized Rs. 57,000 and Rs. 25,000 respectively. Expenses of realization amounted to Rs. 450. In addition, one bill for Rs. 500 under discount was dishonoured and had to be taken up by the firm. Prepare the necessary ledger accounts to close the books of the firm. 13. Give the necessary journal entries in each of the following alternative cases : (i) (ii) Realization expenses amounted to Rs. 500 Realization expenses amounted to Rs. 500 and the partner has to bear realization expenses.

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ACCOUNTANCY

(iii) A one of the partners was to bear all the realisation expenses for which he was given a commission of 2 % of net cash realised from dissolution. Cash realised from assets was Rs 25,000 and cash paid for liabilities amounted to Rs 5,000. 14. Z & Y are two partners sharing profits in the ratio of 2 :1 . Give the journal entry at the time of dissolution in the following cases. (i) (ii) Deferred revenue advertising expenditure appeared at Rs 30,000. Profit & Loss a/c was appearing on the asset side of balance sheet at Rs 60,000.

(iii) An unrecorded investment of Rs 6,000. Answers

Dissolution 3. Loss on Amount Amount Amount Realization Rs 8,360 paid to Gurmeet Rs. 48,220 paid to Harminder Rs. 28,952 paid to Jagat Rs. 20,068

4.

Sundry assets before dissolution Rs. 89,220; Less on Realization Rs. 14,770 Amount paid to Deshmukh Rs. 37,230. and Desai Rs. 20,820. Profit on Realization Rs. 1,152; Amounts paid to Naresh Rs. 12,576 and Munish Rs. 8,576. Profit on Payment Payment Payment Realization Rs. 2,175 to x Rs. 10,088 to y Rs. 3,975 to z Rs. 4,512.

5.

6.

7.

Loss on Realization Rs. 23,500 Amount paid by Arun Rs. 2,100 Amount paid by Tarun Rs. 1,400 Loss on Realization : Rs 3,500 Amount paid to Amar : Rs 47,750 Amount paid to Akbar : Rs 29,500 Amount paid to Anthony : Rs 24,750 Loss on Realization : Rs 2,800 Amount paid to Ram : Rs 15,880 Amount paid to Shyam : Rs 12,880 Amount paid to Abrar : Rs 6,440

8.

9.

DISSOLUTION OF A PARTNERSHIP FIRM

247247

10.

Memorandum B/S (Total) : Rs 1,47,000 Profit on Realization : Rs 5,000 Amount/Cash paid to A : Rs 60,000 Amount/Cash paid to B : Rs 45,000 Amount/Cash paid to C : Rs 35,000 Loss on Realization Amount/Cash paid Amount/Cash paid Amount/Cash paid : Rs 3,000 to Sohan : Rs 11,500 by Mohan : Rs 7,000 by Rohan : Rs 2,500

11.

12.

Loss on Realization : Rs. 5,650.