After studying the chapter, you will be able to understand
The Meaning of Dissolution of Partnership and Factors Responsible for Dissolution of Partnership and Firms
The Destruction Between Dissolution of Partnership and Dissolution of Firm
Provisions Envisaged Under Section 48(a), 48(b) and 49 of Indian Partnership Act, 1932
Meaning, Features and Preparation of Realisation Account
Accounting Treatment of (i) Partner’s Loan Amount, (ii) Partner’s Capital Account, (iii) Bank and Cash Account, (iv) Goodwill and (v) Unrecorded Assets and Liabilities
Preparation of Balance Sheet as on Date of Dissolution
The Concept and Accounting Treatment of Return of Premium
Accounting Treatment of Gift of Firm Asset to Partners
Meaning and Features of Insolvency of Partners and the Application of Garner vs. Murray Principle (i) When Capitals are Fixed and (ii) When Capitals are Fluctuating
Accounting Treatment of Dissolution When All Partners are Insolvent.
To Compute the Amount Recoverable from Insolvent Partners Using Algebraic Equation
The Provisions of Section 30 Relating to the Position of Minor and Dissolution of Partnership and Accounting Treatment of Minor and Insolvency.
Measuring and Features of “Sale of a Firm to a Limited Company”
Accounting Entries Relating to Sale of a Firm to a Company and Preparation of Necessary Accounts to Close the Books of the Firm, Including Calculation of Purchase Consideration
Meaning and Features of Piecemeal Distribution
Proportionate or Surplus Capital Method and Maximum Possible Loss Method: For Distribution of Cash (Realised) Among the Partners
Dissolution means breaking of relationship among the partners. As per Section 39 of the Indian Partnership Act 1932, the dissolution of firm implies that not only partnership is dissolved but the firm loses its existence, i.e. after dissolution the firm does not remain in business.
The only business to be carried out, after dissolution, is that all the assets are disposed off and liabilities are paid off and only the balance left out is to be paid to partners in settlement of their accounts. At this stage, one has to understand the basic salient features of Dissolution of Partnership and Dissolution of Firm.
A partner’s change, without affecting the continuity of business, may be said as dissolution of partnership. When a partnership may be dissolved? A partnership is dissolved in any one of the following cases:
Dissolution of a firm occurs in the following cases:
In case of partnership at capital, notice by one partner, seeking dissolution of the firm.
A court may order for dissolution if a suit is filed by a partner, as per Section 44 of Indian Partnership Act, 1932 situations:
After studying the features of dissolution of partnership and dissolution of firm, one can easily distinguish between dissolution of partnership and dissolution of firms which is depicted in the tabular form below:
Basis of Difference | Dissolution of Partnership | Dissolution of Firm |
---|---|---|
1. Discontinuance of business |
It does not affect the continuation of business |
It affects the business. Firm is closed |
2. Assets and liabilities |
Assets and liabilities are revalued. New Balance Sheet is prepared |
Assets are sold and realised. Liabilities are paid off |
3. Closure of books |
No need to close account books, as the business continues to operate |
All the books of accounts are closed |
4. Intervention by court |
Court does not intervene |
Court has inherent powers to intervene. By its order, a firm can be dissolved |
5. Economic relationship |
Economic relationship among partners may remain or change |
Economic relationship among partners comes to an end |
Losses should be treated in the following order. Losses should be paid
The assets of the firm shall be applied in the following order:
Following are the provisions as per Section (49):
Now, one has to understand the difference between firm’s debt and private debt. They are as follows:
Basis of Difference | Firm’s Debt | Private Debt |
---|---|---|
1. Meaning |
Debts owed by a firm to outsiders |
Debt owed by a partner to any other person |
2. Liability |
All the partners are liable jointly and severally to firm’s debt |
Only the concerned partner is held liable |
3. Application of firm’s property |
Firm’s debts will be applied first |
Excess, if any, will be applied to private debts |
4. Application of private property |
Last priority, i.e. after the disposal of private debts |
First priority to individual, i.e. private debts |
In the event of dissolution of firms, books of accounts are to be closed.
The account, which has to be prepared to determine profit of loss on realising the assets and discharge of liabilities, is referred to as “Realisation Account.”
Features of Realisation Account:
Distribution between Revaluation Account and Realisation Account
Basis of Distinction | Revaluation Account | Realisation Account |
---|---|---|
1. Meaning |
It records the effect of revaluation of assets and liabilities |
It records the actual realization of assets and settlement of all liabilities |
2. Time of preparation |
It is prepared at the time of admission, retirement or death of a partner |
It is prepared at the time of dissolution of a firm |
3. Items to be recorded |
In this account only the items that cause change in the value of change of assets and liabilities are recorded |
In this account, all the items – all assets and liabilities are recorded |
4. Aim or object |
Its main aim of preparation is to make necessary adjustments and liabilities |
Its main aim of preparation is to determine the net profit/loss on realisation of assets and settlement of liabilities |
5. Number of times |
This may be prepared on a number of occasions during the life time of the firm |
This is prepared only once, i.e. at the time of dissolution of the firm |
Step 1: Account of all assets has to be closed. To close the accounts of assets, entry is:
|
Realisation Account |
Dr. |
|
To All Assets A/c |
|
|
(Closure of all assets accounts by transferring to Realisation A/c) |
Note:
For example, accumulated loss and deferred revenue expenses are not transferred to Realisation Account. They have to be transferred to their Capital Accounts separately in their sharing ratio.
Step 2: Accounts of all liabilities/credits have to be closed.
|
Sundry Creditors A/c |
Dr. |
|
Bills Payable A/c |
Dr. |
|
To Realisation A/c |
|
|
(Liabilities accounts are closed by transferring to Realisation A/c) |
Note: Accumulated profits, reserves, loan should not be transferred to Realisation Account.
Step 3: For realisation of assets:
The amount actually received (realised) is to be debited to Cash/Bank A/c and Realisation A/c is credited with the amount realised (received).
|
Cash/Bank A/c |
Dr. |
|
To Realisation A/c |
|
|
(Amount realised on assets) |
|
Step 3a: At times, a partner may take an asset. In such case, instead of Cash/Bank Account, his Capital Account has to be debited.
|
Partner’s Capital A/c |
Dr. |
|
To Realisation A/c |
|
|
(Asset taken over by the partner) |
|
Step 4: For payment of liabilities:
|
Realisation A/c |
Dr. |
|
To Cash A/c |
|
|
(Payment of liabilities) |
|
Step 4a: At times, a partner may take over a liability
|
Realisation A/c |
Dr. |
|
To Partner’s Capital A/c (partner discharged a liability) |
Step 5: For expenses on realisation:
|
Case 1: Expenses met by the firm |
||
|
Realisation A/c |
Dr |
|
|
To Cash A/c |
||
|
(Realisation expenses) |
||
|
Case 2: Partners bear the expenses |
||
|
Realisation A/c |
Dr. |
|
|
To partner’s Capital A/c |
||
|
(Expenses met by the partner) |
||
|
Case 2A: Sometimes (case 2) is treated as drawing’s by the partners |
||
|
Partner’s Capital A/c |
Dr. |
|
|
To Bank A/c |
|
|
|
(Expenses treated as partner’s drawings) |
Step 6: For closing of Realisation Account:
After making all the entries closing balance, i.e. profit or loss on realisation, is transferred to Capital Accounts of the partners in their profit sharing ratio.
Step 6a: Profit on realisation:
|
Realisation A/c |
Dr. |
|
To partner’s Capital A/c or Current A/c |
|
|
(profit on realisation transferred to partner’s Capital Account) |
Step 6b: Loss on realisation:
|
Partner’s Capital A/c |
Dr. |
|
To Realisation A/c |
|
|
(Loss on realisation transferred to Partner’s Capital Account) |
Illustration: 1
R and S are partners sharing profits equally and they have decided to dissolve the firm. Their liabilities are bills payable Rs 10,000; creditors Rs 20,000. Their capitals are Rs 50,000 and Rs 30,000, respectively. All the assets of the firm are realised at Rs 1,50,000. You area required to pass necessary journal entries and prepare Realisation Account.
Solution
Students must take into account all the six steps discussed. After passing entries, Realisation Account is prepared.
Step 1: Value of assets is not given in the question. So it has to be determined first. Value of Sundry Assets may be determined by preparing “Memorandum Balance Sheet.” It is prepared as:
Memorandum Balance Sheet
or
The same can be determined by applying the equation
|
Assets |
= |
Capital + Liabilities |
|
|
= |
{Rs 50,000 + Rs 30,000} + {Rs 10,000 + Rs 20,000} |
|
|
|
(R) (S) (Bills Payable) (Creditors) |
|
|
|
(Given) (Given) (Given) (Given) |
|
|
= |
Rs 80,000 + 30,000 |
|
|
= |
Rs 1,10,000 |
Step 2: Journal entries to be recorded in the order as
For closing the asset (values):
Here, value of Sundry Assets as determined in Step 1 is Rs 1,10,000
|
|
Rs |
Rs |
Realisation Account |
Dr. |
1,10,000 |
|
To All Assets A/c |
|
|
1,10,000 |
(Closure of all assets accounts by transferring to Realisation A/c) |
Step 3: For closing of accounts of all liabilities:
Sundry Creditor A/c |
Dr. |
20,000 |
|
Bills Payable A/c |
Dr. |
10,000 |
|
To Realisation A/c |
|
|
30,000 |
(Liabilities accounts are closed by transferring to Realisation A/c) |
Step 4: For assets realised (actual amount):
Cash/Bank Account |
Dr. |
1,50,000 |
|
To Realisation A/c |
|
|
1,50,000 |
(Realised value of accounts) |
Step 5: For payment of liabilities
Realisation A/c |
Dr. |
30,000 |
|
To Cash/Bank A/c |
|||
To Bills Payable A/c |
|
|
10,000 |
Creditors |
|
|
20,000 |
(All liabilities are paid off) |
Step 6: After having entered all entries, the net result, i.e. profit or loss on realization, has to be recorded (refer the next step). Here it is profit. This amount Rs 40,000 has to be apportioned in the profit sharing ratio among the partners. Here Rs 40,000 has to be divided equally (given in the question), i.e. for R: Rs 20,000 and for S: Rs 20,000. This amount is transferred to their Capital Accounts finally.
|
Realisation Account |
Dr. |
40,000 |
|
|
To Partner’s Capital A/c |
|||
|
R’s Capital A/c |
|
|
20,000 |
|
*S’s Capital A/c |
|
|
20,000 |
(Net profit on realisation transferred to the Capital Accounts of the partners)
Step 7: Preparation of Realisation Account
In the Books of R and S
Illustration: 2
X, Y and Z are partners sharing profit in the ratio (5:3:2). They decided to dissolve the firm. On Dec 31, 2009 the Balance Sheet of the firm was as follows:
Additional Information: X took over the building at the value of Rs 80,000; cash realised: Investments Rs 4,500; Book Details Rs 1,500; Stock Rs 11,000, Z agreed to take over the creditor at 20% discount. Realisation expenses amounted to Rs 1,000. You are required to pass necessary normal entries and prepare Realisation Account.
Solution
Step 1: All assets accounts have to be closed. For this refer the assets in the Balance Sheet. Transfer one after one and the total value of all assets to be debited with the Realisation Account (except cash).
|
|
Rs |
Rs |
Realisation Account |
Dr. |
89,000 |
|
To Building A/c |
|
|
70,000 |
To Investment A/c |
|
|
5,000 |
To Sundry Debtors A/c |
|
|
2,000 |
To Stock A/c |
|
|
12,000 |
(All assets except cash are transferred to Realisation A/c) |
Step 2: For closing of liabilities:
Sundry Creditors A/c |
Dr. |
5,000 |
|
To Realisation A/c |
|
|
5,000 |
(Liabilities transferred to Realisation A/c) |
Step 3: Amount actually realised on assets:
Cash/Bank A/c |
Dr. |
17,000 |
|
To Realisation A/c |
|
|
17,000 |
[Investments — Rs 4,500; Debtors Rs 500 Stock Rs 11,000 — Realisation of Assets] |
Step 3a: For assets taken over by a partner:
X’s Capital A/c |
Dr. |
80,000 |
|
To Realisation A/c |
|
|
80,000 |
(Value of Asset taken by X) |
Step 4: Discharge of liabilities:
(Z – a partner agreed to battle the creditors at 20% discount)
Step 4a:
Realisation A/c |
Dr. |
4,000 |
|
To Z’s Capital A/c |
|
|
4,000 |
(Z agreed to discharge the liability Rs 5,000 − 20% of Rs 5,000, i.e. 1,000 = Rs 4,000) |
Step 5: For realisation expenses
Realisation A/c |
Dr. |
1,000 |
|
To Cash/Bank A/c |
|
|
1,000 |
(Realisation expenses entered) |
Step 6: For profit/loss in Realisation Account
Realisation A/c |
Dr. |
8,000 |
|
To X’s Capital A/c |
|
|
4,000 |
To Y’s Capital A/c |
|
|
2,000 |
To Z’s Capital A/c |
|
|
1,600 |
(Profit is realisation transferred to Capital Accounts of partners in the ratio 5:3:2) |
Step 7: Preparation of Realisation Account.
So far, we have discussed the important six steps for recording Journal Entries to compute “Realisation Account.” Now, we have to discuss three more important items to be considered for treatment of accounts at the time of dissolution of firm.
Case(1): Partner’s Loan Amount
Entries for Partner’s Loan, Partner’s Capital Account, Bank and Cash Account, Goodwill and Unrecorded Assets and Liabilities.
Step 7:
Partner’s Loan A/c Dr.
To Cash/Bank A/c
(Payment of Partner’s Loan)
Case (2): Partner’s Capital Account
Step 8a: Entry for undistributed profit or reserve:
|
Profit and Loss A/c |
Dr. |
|
Reserve Fund A/c |
Dr. |
|
To Partner’s Capital A/c |
Step 8b: Cash brought by partners for deficiency in capital:
|
Cash/Bank A/c |
Dr. |
|
To Partner’s Capital A/c |
Step 8c: Payment to partners or to close partners Capital Accounts:
|
Partner’s Capital A/c |
Dr. |
|
To Cash/Bank A/c |
Case 3: Bank and Cash Account:
If both cash and bank balances are given, for convenience a single account is opened for both cash and bank transactions.
Other miscellaneous item:
Case 4 Goodwill
Step 9b: Goodwill appears in books:
|
Realisation A/c |
Dr. |
|
To Goodwill A/c |
|
|
(Goodwill is transferred to Realisation A/c) |
Step 9b: Amount is realised on goodwill:
|
Realisation Account |
Dr. |
|
To Realisation A/c |
Step 9c: Partner purchases goodwill:
|
Partner’s Capital A/c |
Dr. |
|
To Realisation A/c |
Case 5 Unrecorded assets and liabilities:
Step 10a: Cash realised from unrecorded assets:
|
Cash/Bank A/c |
Dr. |
|
To Realisation A/c |
Step 10b: Payment of unrecorded liability:
|
Realisation A/c |
Dr. |
|
To Cash/Bank A/c |
Step 10c: A partner takes over unrecorded assets:
|
Partner’s Capital A/c | Dr. |
|
To Realisation A/c |
Step 10d: A partner takes over unrecorded liabilities:
|
Realisation A/c |
Dr. |
|
To Partner’s Capital A/c |
Illustration: 3
X and Y were partners sharing profits and losses equally. They mutually dissolved the firm in 2006. The Balance Sheet on that date was as follows:
The firm was dissolved on the given date and the following transactions took place:
Solution
Step 1: All assets (excluding cash and deferred revenue advertising expenditure) are credited with their book value one after one and total of these are debited to Realisation A/c:
Rs | Rs | |
---|---|---|
Realisation A/c Dr. |
2,72,000 |
|
To Stock |
70,000 |
|
To Book Debts |
55,000 |
|
To Plant and Machinery |
30,000 |
|
To Land and Buildings |
80,000 |
|
To Joint Life Policy |
15,000 |
|
To Goodwill |
20,000 |
|
To Prepaid Insurance(expense) |
2,000 |
(Being the transfer of all assets to Realisation A/c)
Note:
Step 2: Transfer of liabilities to Realisation A/c:
All liabilities (each item one after one) are debited and their total is credited to Realisation A/c (Joint Life Policy Resource, Credited Reserve and Profit and Loss A/c items are excluded in this Step).
Rs | Rs | |
---|---|---|
Provision for Doubtful Debts Dr. |
5,000 |
|
Trade Creditors Dr. |
60,000 |
|
Bills Payable Dr. |
30,000 |
|
Mrs Y’s Loan Dr. |
20,000 |
|
To Realisation A/c |
1,15,000 |
|
(Being transfer of liabilities to Realisation A/c) |
Note: Provision for doubtful debts (appearing on assets side) is to be transferred here as it is a liability.
Step 3: For realisation of assets:
When assets are realised, Cash or Bank A/c credited with actual amount realised. Here, each item need not be shown separately.
Bank A/c |
Dr. |
3,18,000 |
|
To Realisation A/c |
|
|
3,18,000 |
(Being Stock, Debtors, Joint Life Policy, Land and Building realised)
Workings:
(i) |
Stock: Remaining Stock = 60% |
Rs |
|
60% of Rs 70,000 |
42,000 |
|
Add: 60% was disposed at a profit of 40% |
16,800 |
|
|
58,800 |
(ii) |
Book Debts |
55,000 |
|
Less: Bad Debts |
10,000 |
|
(refer further information) |
45,000 |
(iii) |
Land and Building (refer Information) |
2,00,000 |
(iv) |
Joint Life Policy (Surrendered value) |
15,000 |
|
Total Value of Assets Realised |
58,800 |
|
|
45,000 |
|
|
2,00,000 |
|
|
15,000 |
|
|
3,18,800 |
Step 4: For taking over of an asset by a partner:
X’s Capital A/c Dr. |
21,000 |
|
To Realisation A/c |
|
21,000 |
(Being 40% of stock taken over by X @ 25% discount) |
||
[Workings: 40% of stock = 40/100 of Rs 70,000] |
|
|
Rs |
|
|
28,000 |
|
Less: 25% of Discount |
7,000 |
|
|
21,000 |
Note: If an asset is taken over by a partner (after adjustment) it has to be debited to the partner’s Capital Account instead of Cash A/c (as in Step 3).
The difference is that instead of cash the concerned partner’s Capital Account is debited.
Step 5: For expenses realisation
Realisation A/c |
Dr. |
3,000 |
|
To Bank A/c |
|
|
3,000 |
(Being realisation expenses paid) |
Note: Suppose realisation expenses are borne by a partner, then partner’s Capital A/c has to be credited instead of Bank A/c
Step 6: For payment of liabilities:
Realisation A/c |
Dr. |
60,000 |
|
To Cash/Bank A/c |
|
|
60,000 |
(Being payment made to credits and bills payable holders) (Rs 30,000 + Rs 30,000) |
Step 7: For closing partner’s Loan A/c:
Realisation A/c |
Dr. |
20,000 |
|
To Y’s Capital A/c |
|
|
20,000 |
(Being payment of Mrs. Y’s loan by Y) |
Step 8: For debt, previously written off, recovered)
Bank A/c |
Dr. |
1,000 |
|
To Realisation A/c |
|
|
1,000 |
(Being a debt, previously written off, recovered) |
Step 9: For contingent liability discharged:
Realisation A/c |
Dr. |
2,000 |
|
To Bank A/c |
|
|
2,000 |
(Being a contingent liability discharged) |
Step 10: For transfer of profit on realisation
Realisation A/c |
Dr. |
98,800 |
|
To X’s Capital A/c |
|
|
49,400 |
To Y’s Capital A/c |
|
|
49,400 |
(Being transfer of profit on realisation) |
Step 11: For transfer of accumulated profit.
General Reserve A/c |
Dr. |
45,800 |
|
Joint Life Policy Reserve A/c |
Dr. |
15,400 |
|
Profit and Loss A/c |
Dr. |
25,400 |
|
To X’s Capital A/c |
|
|
42,500 |
To Y’s Capital A/c |
|
|
42,500 |
(Being accumulated profit transferred) |
Note: General Reserve J.L.P. Reserve. Profit and Loss added and distributed among partner’s ratio and credited to their Capital Accounts.
Step 12: For transfer of accumulated loss:
X’s Capital A/c |
Dr. |
25,00 |
|
Y’s Capital A/c |
Dr. |
25,00 |
|
To Deferred Reserve Expenditure A/c |
|
|
5,000 |
(Being transfer of accumulated losses) |
Note: Deferred revenue expenditure is accumulated loss. It has to be divided in the partner’s profit sharing ratio and debited to their Capital Accounts.
Step 13: For final payment made to partners:
X’s Capital A/c |
Dr. |
1,59,400 |
|
Y’s Capital A/c |
Dr. |
1,28,400 |
|
To Bank A/c |
|
|
2,87,8000 |
(Being final payment made to partners) |
Ledger Accounts Realisation Account
Note: Students may transfer entries from Journal to this Ledger A/c. But if straightaway ledger accounts are to be recorded they should be able to remember various items to be recorded on debit and credit side. So they are numbered serially and entries are recorded.
Bank Account
Capital Accounts of Partners
The net effect on realisation of assets and reassessment of liabilities is shown in this account. To find the net effect (profit/loss on realisation), the following steps have to be adhered.
Step 1: For closing assets accounts:
First, all assets (except cash, fictitious assets, debt balances of capital and current account as partner) are transferred to Realisation A/c as their book values:
|
Realisation A/c |
Dr. |
|
To Various Assets A/c |
Effect: This entry will close the accounts of various assets.
Step 2: For closing outside creditors accounts:
All liabilities (except loan from partners, reserve) are transferred to the Realisation A/c
|
Various Liabilities A/c |
Dr. |
|
To Realisation A/c |
Effect: This will close the accounts of liabilities.
Step 3: For realisation of assets:
Cash/Bank A/c will be debited and Realisation A/c credited with actual amount realised on assets.
|
Cash A/c |
Dr. |
|
To Realisation A/c |
Step 4: When a partner takes over a new asset.
|
Partner’s Capital A/c |
Dr. |
|
To Realisation A/c |
Effect: Partner’s share, other than cash, is ascertained.
Step 5: For expenses on realisation:
Expenses will incur and each expense have to be debited to Realisation A/c and credited to Cash A/c
|
Realisation A/c |
Dr. |
|
To Cash A/c |
Step 5a: If realisation expenses are borne by partner
|
Realisation A/c |
Dr. |
|
To Partner’s Capital A/c |
Step 6: For payment of liabilities:
On payment of liabilities, actual account paid will be debited to Realisation A/c and credited to Cash A/c
|
Realisation A/c |
Dr. |
|
To Cash A/c |
Step 6a: When a partner takes over a liability:
|
Realisation A/c |
Dr. |
|
To Partner’s Capital A/c |
Step 7: For closing partner’s Loan A/c:
|
Partner’s Loan A/c |
Dr. |
|
To Cash A/c |
Step 8: For closing reserve and undistributed profit A/c
|
Reserve fund A/c |
Dr. |
|
or |
Dr. |
|
Profit and Loss A/c Dr. |
Dr. |
|
To Partner’s Capital or Current A/c |
Step 9: For closing Realisation Account:
This is the stage at which this Realisation A/c will reveal profit or loss
[Profit if credit side is higher
Loss if debt side is higher]
|
If Profit: Realisation A/c |
Dr. |
|
To Partner’s Capital A/c |
|
|
If Loss: Partner’s Capital A/c |
|
|
To Realisation A/c |
Step 10: Accumulated loss (Debit balance in Profit and Loss A/c)
|
Partner’s Capital or Current A/c | Dr. |
|
To Accumulated Losses A/c |
Step 11:For bringing cash equal to debit balance in his Capital Account by a partner
|
Cash A/c |
Dr. |
|
To Partner’s Capital A/c |
Step 12: For closing partner’s Capital Accounts:
|
Partner’s Capital A/c |
Dr. |
|
To Cash A/c |
Usually, all the accounts related to dissolution are closed with these entries, so transferring them to the respective ledger accounts.
Opening balance of cash (both cash in hand and cash at Bank)
Note: Student at this level should take care to record transactions relating to cash and bank, it is desirable to record either as Cash A/c or as Bank A/c and not both accounts separately and has to be treated under one head only, either Cash or Bank A/c.
Partner’s Capital A/c Dr.
To Partner’s Current A/c
Partner’s Current A/c
To Partner’s Capital A/c
Partners Loan A/c Dr.
To Cash A/c
Dissolution of firm and goodwill:
Realisation A/c |
Dr. |
To Goodwill A/c |
|
Cash/Bank A/c |
Dr. |
To Realisation A/c |
|
Partner’s Capital A/c | Dr. |
To Realisation A/c |
|
At the time of dissolution of the firm, some assets and liabilities may not appear in the books.
Cash A/c |
Dr. |
To Realisation A/c |
|
(Being cash realised on unrecorded assets)
Partner’s Capital A/c | Dr. |
To Realisation A/c |
|
(Being the partner took over unrecorded assets)
Realisation A/c |
Dr. |
To Cash A/c |
|
(Being unrecorded liability discharged)
Realisation A/c |
Dr. |
To Partner’s Capital A/c |
|
(Being a partner took over unrecorded liability)
Illustration: 4
A and B are partners in a firm. Their capitals are Rs 2,20,000 and Rs 1,80,000, respectively. The creditors are Rs 1,00,000. The assets of the firm realised Rs 5,60,000. You are required to prepare Realisation A/c, Partner’s Capital A/c and Bank Account.
Solution
Memorandum Balance Sheet
Note: Creditors and Capitals are added and this total is transferred to assets side of the Balance Sheet (Balancing figure), to ascertain the value of Sundry Assets.
Realisation Account
Capital Accounts of Partners
Cash/Bank A/c
Illustration: 5
The following is the Balance Sheet of Kashyap and Verma as on Dec 31, 2006.
The firm was dissolved on Dec 31, 2006 and the following were agreed upon:
Other assets realised at |
Rs |
Plant and Machinery |
40,000 |
Land and Buildings |
80,000 |
Goodwill |
20,000 |
Investments (balance) |
9,000 |
Journal
Ledger Accounts Realisation Account
Partner’s Capital Accounts
Treatment of goodwill in case of dissolution of a firm may be put in a nut-shell
Note: Accounting treatment differs only in the case of goodwill not appearing in the Books for transfer to Realisation A/c.
Need to prepare:
To ascertain the missing information (e.g. value of any asset or liability) on the date of dissolution of a firm, Balance Sheet as on that date has to be prepared.
Method of drawing Balance Sheet.
Care should be taken to record.
Illustration: 6
You are required to draw the Balance Sheet of the firm as at Mar 31, 2009 being the date of dissolution of loss incurring in firm from the following particulars:
Solution
Note:
Illustration: 7
On Apr 1, 2007, A, B and C commenced business in partnership sharing the profits and losses in the ratio of 5:3:2, respectively with capitals of Rs 50,000, Rs 30,000 and Rs 20,000, respectively. During 2007–2008 and 2008–2009 they made profits of Rs 50,000 and Rs 80,000 (before allowing interest on capital @ 10%). Drawings of each partner were Rs 1,000 p.m. The creditors stood at Rs 20,000 as on Mar 31, 2009. Draw a Balance Sheet as on Dec 31, 2009.
Solution
In this problem,
were given. So Capital Account for each partner has to be prepared first and only then the Balance Sheet has to be drawn up.
Stage I
Statement Showing Capitals of Partners as on Mar 31, 2009
Stage II
Balance Sheet as on Mar 31, 2009
When all partners agree to dissolve the firm:
Illustration: 8
X, Y and Z sharing in the ratio of 2:2:1 agreed upon dissolution of their partnership on Dec 31, 2008 on which date their Balance Sheet was as follows:
Investments were taken over by X at Rs 9,000; Creditors of Rs 15,000 were taken over by Y who agreed to settle account with them at Rs 14,850; Remaining Creditors were paid at Rs 11,250; Joint Life Policy was surrendered and fixed assets realised Rs 1,05,000; Stock and debtors realised Rs 10,5000 and Rs 13,500, respectively. One customer whose account was written as bad, now paid Rs 1,200 which is included in Rs 15,000 above. There was an unrecorded asset of Rs 4,500 half of which was handed over to settle half of an unrecorded liability of Rs 7,500 and the balance of the unrecorded asset was sold in the market which realised Rs 1,950; Y took over the responsibility of completing dissolution and he is granted salary of Rs 600 per month. Actual realisation expenses amounted to Rs 1,650. Dissolution was completed and final payments were made on Apr 30, 2009. Prepare necessary ledger accounts in the books of the firm.
[B. Com (Hons.) – Delhi]
Solution
Stage I
Preparation of Realisation A/c
Stage II
Preparation of Capital A/c
Stage III: Finally Bank Account has to be prepared.
Dissolution on death of a partner.
Illustration: 9
X, Y and Z are partners of a firm whose balance sheet as on Mar 31, 2009 was as follows:
The value of Joint Life Policy shown in the Balance Sheet represents the surrender value of the policy taken by the firm of Rs 1,50,000 to enable the settlement of accounts with a partner’s legal execute in case of death of a partner during the continuance of the firm. X died on Apr 10, 2009.
The remaining partners could not arrive at any understanding with the legal representative of X with the result the firm was dissolved immediately subject to the following adjustments afterwards:
Draw up the necessary accounts to close the books of the firm.
Solution
Stage I: Preparation of Current Account of Partners
Current Account
Capital Account
Cash and Bank A/c
X, Y, Z Realisation Account
Note: Fraction of 0.50 was rounded off in the Current Account of Partners.
Dissolved firm (assets and liabilities) taken over by some partners or only one partner.
In general, accounting procedure for this case is similar to other cases of dissolution that we have discussed so far.
In addition, the following should also be followed.
Joint Account of Partners (concerned) A/c |
Dr. |
To Realisation A/c |
|
Realisation A/c |
Dr. |
To Joint Account of Partners. |
|
Note:
Illustration: 10
A, B and C who were sharing profits and losses in the ratio of 2:2:1 decided to dissolve the partnership on Mar 31, 2009 on which date their Balance Sheet was as follows:
B and C continued the business, agreeing to purchase A’s share in the capital of the firm in the proportion in which they shared profits and losses. Mrs. A agreed to allow her loan to remain in the business. B and C utilised the available bank balance to pay A and contributed the balance. Assets were valued as follows:
Fixed Assets Rs 54,600; Stocks Rs 27,000; Debtors as in the Balance Sheet, subject to Rs 3,300 as Provision for Doubtful Debts and an allowance of 5% for discounts. The liability of creditors is taken over by B and C subject to an allowance of Rs 600 for discount. B and C continue to share profits and losses in the same proportion as before.
You are required to prepare
Solution
Step 1: First, Net Debtors has to be computed
|
|
Rs |
|
(i) As per Balance Sheet |
42,000 |
|
(ii) Less: Provision for Doubtful Debts |
3,300 |
|
(iii) Good Debts (i–ii) |
______ 38,700 |
|
(iv) Less: 5% Allowance for Discount |
1,935 |
|
(v) Net Debtors (iii–iv) |
______ 36,765 ______ |
Step 2: Preparation of Realisation Account
Realisation Account
Step 3: Preparation of capital accounts of partners
Capital Account of Partners
Step 4: Preparation of B and C Joint A/c
B and C Joint Account
The Indian Partnership Act 1932 (Section 51) stipulates that where a partner has been admitted to the partnership and that the firm would be for a fixed period, then such partner will be eligible to claim refund of such amount of premium. But this refund is subject to:
Such refundable claim is also debited to other partners in their profit sharing ratio (the agreement should not be contrary).
No refund claim can be possible when
Illustration: 11
P, Q and R were in partnership sharing profits and losses in the ratio of 6:3:1. R was admitted to the firm on Apr 1, 2004 paying Rs 30,000 as premium (share of goodwill) with the stipulation that the term for the newly constituted firm will be 10 years. But this newly constituted firm had to be dissolved on Apr 1, 2009. R demands the refund of his premium.
How will you deal with the claim of R in each of the following alternative cases?
The account has to be closed on Mar 31 every year.
Solution
Step 1
Under Section 51 of Indian Partnership Act 1932, no claim can be made for the cases (i), (ii) and (iii). For the other cases (iv), (v) and (vi), the amount of refund is calculated by applying the formula:
Return of Premium = Total Premium Paid × Unexpired Term/Total Term
|
Here Total premium paid |
Rs 30,000 |
|
Unexpired Term from Apr 1, 2009 to Apr 1, 2014 |
|
|
Apr 1, 2009 to Apr 1, 2014 |
60 months |
|
Total Term |
120 months |
|
i.e. from = Apr 1, 2004 to 10 years, i.e. Apr 1, 2001 |
|
|
Hence return of premium = Rs 30,000 × 60/120 = Rs 15,000 |
|
Step 2: Accounting Entry
This claim, i.e. Rs 15,000 has to be apportioned in the ratio of 6:3 and distributed among others and transferred into their respective capital.
Accounts | Rs | Rs |
---|---|---|
P’s Capital A/c Dr. |
10,000 |
|
Q’s Capital A/c Dr. |
5,000 |
|
To R s Capital A/c |
15,000 |
|
(Being the refund of Premium become by P&Q in the ratio of 6:3) |
At times, some asset of the firm may be gifted to partner(s) in recognition of service, when a firm is dissolved.
There are two cases:
Case 1: Gift by the firm:
In this case, no accounting entry is made because the firm as a whole bears it (loss).
Case 2: Gift by one or more than one partner:
In case if the gift is given by one partner, his account will be debited and Realisation Account will be credited.
The Journal Entry is
Concerned Partner’s Capital A/c Dr.
To Realisation A/c
In case, if there are three partners and two of them give gift, the accounts of the partners giving the gift will be debited in their profit sharing ratio and Realisation Account will be credited with the total value of the asset.
Illustration: 12
A, B and C were partners in a firm sharing profit and losses in the ratio of 5:3:2, respectively. Their Balance Sheet as on Dec 31, 2008 was as follows:
The firm has a fully depreciated computer that can fetch Rs 2,500. In addition, there is a liability for bonus payable to employees amounting to Rs 15,000.
The firm was dissolved on the above date due to disagreement among the partners. It was found that goods amounting to Rs 5,000 were purchased in Oct 2008 and has been received in Dec but were not recorded in the books.
Some of the fixed assets realised Rs 1,25,000, stock Rs 50,039 and debtors 5% less. The creditors allowed discount at 3% on an average.
Fixed assets included two scooters one of which was taken over by C for Rs 7,500 and the other was gifted by A and C to B in recognition of his services to the firm. The market value of this gifted scooter was Rs 10,500. A agreed to take over his wife’s loan. B is entitled to a commission on the amount collected from debtors. Overall expenses on realisation amounted to Rs 4,225.
You are required to prepare necessary accounts to close the books of the firm.
Solution
Step 1: Preparation of Realisation Account
Realisation Account
Step 2: Preparation of Current Account of Partners
A, B and C Current Account
Step 3: Preparation of Capital Account of Partners
A, B and C Capital Account
Step 4: Preparation of Bank Account
Bank Account
An important landmark case relating to this matter came up in the Court of England called as Garner vs. Murray (1903). The decision of the court in this case is a guiding principle followed in our country till date.
The deficiency on the insolvent partner’s capital account must be borne by the other solvent partners, in proportion to their capitals, after each solvent partner has brought in cash to the extent of his own share of loss on realisation.
When they should apply Garner vs. Murray decision in solving problems in partnership?
Implications of Garner vs. Murray decision: This decision puts much emphasis on “last agreed capital.” What does it mean really?
So necessity arises to know exactly the quantum of “last agreed capital.” It means or indicates the capitals of partners just before dissolution took place. As it relates to capitals of partners, the partners may be maintaining under Fixed Capital System or Fluctuating Capital System. As such accounting treatment will also vary depending on the nature of partner’s capital “Fixed” or “Fluctuating.”
The accounting entries are:
Profit and Loss A/c |
Dr. |
Reserve Fund Account |
Dr. |
Any other Fund Account |
Dr. |
To Partner’s Current A/c |
|
Realisation A/c |
Dr. |
To Partner’s Current A/c Dr. |
|
Note (Reserve for loss on Realisation)
Bank A/c |
Dr. |
To Solvent Partner’s Current A/c |
|
Insolvent Partner’s Current Account | Dr. |
To Insolvent Partner’s Capital Account |
|
Insolvent Partner’s Current Account | Dr. |
To Insolvent Partner’s Capital A/c |
|
Solvent Partner’s Respective Current Account | Dr. |
To Insolvent Partner’s Capital Account |
|
To put in a nutshell:
Students are advised to follow these principles while solving problems in applying Garner vs. Murray decision.
(Garner vs. Murray – Application)
Illustration: 13
X, Y and Z were equal partners in a firm. They decided to dissolve the firm on Mar 31, 2009 due to financial difficulties. Their Balance Sheet as on that date was as follows:
At the time of dissolution, it was found that Z was insolvent and the creditors agreed to allow a discount of Rs 2,000. Assuming that Z could not bring in anything towards his capital deficiency. Prepare the necessary ledger account when
(B. Com. Bangalore – Modified)
Important Notes
Solution
First Creditors Account and then Realisation Account will have to be prepared, as these two accounts form the basis for other accounts.
Step 1: Preparation of Creditors Account
Creditors Account
Step 2: Preparation of Realisation Account
Realisation Account
Step 3
Now we have to workout, when Garner vs. Murray rule is not applicable: Capital Account of Partners is to be prepared
X, Y and Z Capital Account
In this case Garner vs. Murray rule is not applied. As such deficiency in Z’s Capital Account, i.e. Rs 12,000 is shared by solvent partners, here X and Y in their profit sharing ratio, i.e. equally (1:1)
Step 4
When Garner vs. Murray rule is applied when capitals are fixed: When capitals are fixed, first current accounts of partner’s have to be prepared and then capital account of partners have to be computed. First, necessary adjustments have to be carried out in the current account and the end result is to be transferred to capital accounts of the partners.
Current Account
Step 5: Preparation of Capital Accounts
Capital Accounts
Important Notes
Step 6: Preparation of Cash Account
Cash Account
Step 7: When capitals are fluctuating
In this case, no need to prepare current accounts and capital accounts will have to be prepared straight.
Capital Account
Step 8: Preparation of Cash Account
Cash Account
Important Notes
Capital deficiency of the insolvent partner Z is shared by the solvent partners X and Y in their capital ratio 156:76 (or) 78:38 (or) 39:19. This is based on capitals on the date of dissolution. Debit balance of Profit and Loss Account is adjusted.
As it is stated in the problem: equal partners, all the partners share profit and losses equally, i.e. 1:1:1. This is the profit sharing ratio.
Illustration: 14
Amar, Akbar and Antony are partners sharing profits and losses in the proportion of 3:2:1. The partnership was dissolved on Mar 31, 2009, on which date the Balance Sheet of the firm was as follows:
The lives of partners were insured severally for Amar Rs 2,00,000, Akbar Rs 1,00,000 and Antony Rs1,20,000. The premium was treated as business expenses. On the date of dissolution, the surrender value of each of the policies was 30% of the sum assured. Amar took over his policies but the policies of Akbar and Antony were surrendered.
In the course of dissolution, it was found
You are required to prepare the necessary accounts to close the books of the firm
[B.Com (Hons) – Modified]
Solution
Note: This problem is solved by applying Garner vs. Murray rule
Amar Rs |
Amar Rs |
|
---|---|---|
Capital as per Balance Sheet |
1,56,000 |
1,44,000 |
Add: Reserves (Rs 72,000 in 3:2:1) |
36,000 |
24,000 |
Life Policies: |
63,000 |
42,000 |
(Amar = ⅓ of 30% of Rs 2,10,000 |
||
Akbar = ⅓ of 30% of Rs 2,10,000 |
||
|
—— |
—— |
|
2,55,000 |
2,10,000 |
Less: Creditors omitted in the Balance Sheet |
15,000 |
10,000 |
Adjusted Capital: |
2,40,000 |
2,00,000 |
Therefore, Ratio = 2,40,000:2,00,000 |
||
24:20 |
||
12:5 |
Deficiency of Antony’s capital will have to be borne by Amar and Akbar in this ratio, i.e. 12:5. Now, the needed accounts are to be prepared in the sequence as follows:
Realisation Account
Amar’s Capital Account
Akbar’s Capital Account
Cash Account
Partner’s Debit balance in the Capital Account on the date of dissolution.
Illustration: 15
P, Q, R and S were partners sharing profits and losses in the ratio of 3:3:2:2, respectively. Their Balance Sheet on Dec 31, 2008 was as follows:
It was decided to dissolve the firm with effect from Dec 31, 2008 and Q 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 including loans, if any. He was to bear the expenses of realisation that amounted to Rs 1,500. The assets realised Rs 1,62,000. Creditors were paid in full. In addition a sum of Rs 15,000 was also paid to staff on retrenchment in full settlement of their claims. S was insolvent and the partners accepted Rs 22,200 from his estate in settlement. Applying the rule in Garner vs. Murray, prepare necessary ledger accounts.
Commission payable to Q is note to be treated as firm’s expense.
(B.Com (Delhi) – Adapted and Modified)
Here, students have to note one more information.
Realisation Account
*Balancing figure Rs 72,000 is the total loss on realisation. This amount is applied in the ratio of 3:3:2:2 (i.e., P: 3/10 Q: 3/10 R: 2/10 S: 2/10) and transferred to other respective capital accounts.
P’s Capital Account
Q’s Capital Account
S’s Capital Account
Bank Account
Working Notes:
Calculation of Commission Payable to Q |
Rs |
Amount Due before Charging Commission |
1,29,600 |
Less: Cash brought before Realisation Loss |
21,600 |
|
1,08,000 |
Commission = 1,08,000 × 5/105 = Rs 5,142 (rounded off)
Illustration: 16
The following Balance Sheet is presented to you
The partners shared profit and losses in the ratio of 2:3:3:2.
The position of partners was as follows:
Private Estate Rs |
Private Liability Rs |
|
---|---|---|
A |
1,00,000 |
1,50,000 |
B |
2,00,000 |
60,000 |
C |
50,000 |
40,000 |
D |
80,000 |
90,000 |
The assets realised was Rs 2,60,000 and expenses of realisation was Rs 10,000. Prepare ledger accounts giving effect to the dissolution.
B. Com (Hons) Delhi
B. Com (pass) Madras
Adapted and Modified
Solution
B’s Loan Account
A, B, C and D Realisation Account
A’s Capital Account
C’s Capital Account
D’s Capital Account
Cash Account
Working Notes:
At times, situations may arise for a firm which will not be in a position to meet the claims of its creditors in full due to insufficiency of firm’s assets as well as private estates of partners. In such a situation, all the partners are said to be insolvent. Even we can call it as insolvency of the firm.
Illustration: 17
The Balance Sheet of X, Y and Z who are sharing profits in the ratio of 2:2:1 was as follows on Mar 31, 2009, the date of dissolution.
Stock realised Rs 26,000, and other assets were sold for Rs 45,000, Expenses on realisation amounted to Rs 1,500. Assuming that all the partners are insolvent, prepare the necessary ledger accounts to close the books of the firm.
[B.Com (Hons) – Delhi Modified]
Solution
Realisation Account
Sundry Creditors Account
Capital Account
Deficiency Account
Cash Account
Under the following circumstances, we have to see the help of algebraic equation to compute the amount recoverable from the insolvent partners.
This can be best illustrated as follows.
P, Q and R were in partnership sharing profits and losses in the ratio of 2:3:5. They prepared the following Balance Sheet on Mar 31, 2009, when they decided to dissolve.
Balance Sheet as on Mar 31, 2009
Plant and Machinery realised Rs 1,75,000; debtors Rs 15,000 and stock Rs 20,000. P has a private estate, valued at Rs 50,000 and his liabilities amounted to Rs 20,000. The private estate realised only Rs 30,000. Q is insolvent. R can pay only 50 paise in the rupee of what is payable on his own account to the firm. Prepare the necessary ledger accounts, assuming that the loss on realisation is to be determined after considering the amount ultimately paid to all the creditors.
[B. Com (Hons) – Modified]
Solution
Study the problem – The sentence “R can pay only 50 paise in the rupee of what is payable on his own account to the firm” – indicates the use of algebraic equation to compute the amount recoverable from the insolvent partner.
So, before applying the equation, provisional accounts have to be prepared for Realisation Account, Bank Account and R’s Capital A/c.
Important Note: Let the amount payable by R be taken as X (assumption)
Step 1:
(Provisional) Realisation Account
(Provisional) Bank Account
Step 3
(Provisional) R’s Capital Account
Now R’s Capital Account is to be completed for this value of X is to be ascertained.
Calculation of the amount to be brought in by R:
R will bring cash X (assumed)
Then his Capital Account (refer Provisional Capital A/c of R) is credited with Rs 30,000 and Rs 20,000. and
Debited with Rs 37,000 and ½ of ×+17,500
Net position is:
30,000 + 20,000 − (37,500 + X/2 + 17,500) (1)
(All Credit Items)—(All Debit Items)
(1) is rearranged as:
Rs 37,000 + X/2 + 17,500 − Rs 30,000 − Rs 20,000
This will be equal to cash + X/2 (Debit Balance)
Hence 37,500 + X/2 + 17,500 − Rs 30,000 − Rs 20,000 = Rs 5,000 + X/2
R’s contribution is 50 paise in the rupee which means 50% of what is payable on his own account (given in the question).
∴R will contribute 50% of (Rs 5,000 + X/2)
This will be equal to the R’s contribution to capital, i.e. × (assumed already)
∴ 50% of (5,000 + X/2) = X
(50/5,000) × 1/2 (5,000 + X/2) = X
5,000/2 + X/4 = X
2,500 + X/4 = X (2)
Now, we have to substitute this value 3,333 in the place of X and prepare the completed form of Realisation Account, Bank Account and R’s Capital Account and other accounts in the usual manner.
Realisation Account
R’s Capital Account
P’s Capital Account
Q’s Capital Account
Bank Account
(*Rounded off here)
L, M and N are partners in a firm sharing profit/loss in the ratio of 5:3:2. The Balance Sheet of the firm as at Mar 31, 2009 was as follows:
The bank loan was secured by charge on buildings. Assets realised as under:
|
|
Rs |
|
Buildings |
1,20,000 |
|
Furniture |
12,000 |
|
Investment |
42,000 |
M’s private estate realised Rs 36,000 and his private liabilities are Rs 30, 000. N was insolvent and L could just contribute one-third of what was finally due from him on his own account. Show the ledger accounts closing the books of the firm.
[B.Com (Hons) – Adapted and Modified]
Solution
Study the problem: The sentence “L could contribute one-third of what was finally due from him on his own account.” Such version also indicates the use of algebraic equation to compute the amount recoverable from the insolvent partners.
So here also provisional accounts have to be prepared, algebraic equation is to be applied and then only Realisation Account, Bank Account and Capital Account of Partners can be computed.
Let L’s contribution be taken as X (assumption).
(Provisional) Realisation Account
(Provisional) L’s Capital Account
Total deficiency in L’s capital account is 3,000 +X/2. As per instructions given in the question, L is expected to contribute 1/3 of his deficiency, i.e. 1/3 of (3,000 +X/2)
|
Then his contribution is (3,000/3 + X/6) |
||
|
Our assumption on his contribution = X |
||
|
∴ 3,000/3 + X/6 |
= |
X |
|
6,000 + X/6 |
= |
X |
|
6,000 + X |
= |
6X |
|
6,000 |
= |
6X – X |
|
5X |
= |
6,000 |
|
X |
= |
6,000/5 = 1,200 |
Substituting the value of X, main accounts have to be prepared.
Realisation Account
L’s Capital Account
M’s Capital Account
N’s Capital
Deficiency Account
Note: Deficiency in the Capital Account of L and N is also to be transferred to M’s Capital Account.
Illustration: 20
A, B and C shared profits and losses in the ratio of 5:3:2. On Mar 31, 2009, their balance sheet was as follows:
The bank had a charge on all the assets. Furniture realised Rs 12,000 while the entire stock was sold for Rs 1,00,000, B’s private estate realised Rs 24,000; his private creditors were Rs 20,000. C was unable to contribute anything. A paid one-third of what was finally due from him (taking the payment also into account) except on account of other partners. Prepare Realisation Account, Cash Account and Partner’s Capital Accounts, passing all matters relating to realisation of assets and payments of liabilities through the Realisation Account. Clearly show your calculation regarding cash brought in by A.
(B.Com – Modified)
Solution
Total cash available is computed as:
Assets realised | Rs |
---|---|
Furniture |
12,000 |
Stock |
1,00,000 |
Total |
1,12,000 |
Add Cash |
4,000 |
|
1,16,000 |
Add: From B’s Private estate |
4,000 (24,000 – 20,000) |
Total Cash available |
1,20,000 |
(Provisional) Realisation Account
[A’s Share =½(84,000 +X) = 42,000 +X/2]
(Provisional)A’s Capital
Debit Balance in A’s Capital Account = 2,000 +X/2
A has to pay ⅓of total deficiency (i.e.)
⅓ of (2,000 +X/2)
2,200/3 +X/6 = X
2,000/3 +*X/6 = X
4,000 +X = 6X
4,000 = 5X
X = 4,000/5 = 800
A has to contribute Rs 800
*Creditors will be able to get = 80,800 (80,000 +X)
Realisation Account
B’s Capital Account
C’s Capital Account
Deficiency Account
In general, as per statutory provisions, a minor (i.e., who has not completed 18 years of age) is not competent to enter into any contract. So, a minor is not eligible to act as a full fledged partner in a firm. But Section 30 of the Indian Partnership Act 1932 stipulates that a minor may be admitted (to enjoy the benefits only) as a partner in a firm with the consent of all the other partners.
However, in case of dissolution of partnership firms, a minor
Illustration: 21
P, Q and R were partners and S, a minor was admitted in a partnership firm. S was given 20% share. P, Q and R share the profits in the ratio of 2:1:1. The Balance Sheet as on Dec 31, 2008 was as follows:
On the date R become insolvent, it was decided to dissolve the firm. The assets realised Rs 6,90,000. Creditors were settled for 3,90,000. Expenses of realisation amounted to Rs 6,000. A dividend of 40 in a rupee was received from R’s estate. Close the books of the firm.
Solution
Realisation Account
R’s Capital Account
S’s Capital Account
Bank Account
*Capital Ratios is computed after taking into account Advertising Suspense Account.
Illustration: 22
K, L and M are partners in a firm sharing profits and losses in the ratio of 2:2:1. They decided to dissolve the firm and appoint one to realise the assets and distribute the proceeds for which he is to receive 10% commission on the amounts ultimately paid to K and M. The realisation expenses will be borne by the firm. The Balance Sheet of the firm on the date of dissolution was as follows:
L informs the following realisation: Debtors Rs 1,70,000; Stock 1,25,000; Furniture and Fittings Rs 20,000 and Goodwill Rs 41,000. There was unrecorded liability of Rs 2,500 which has now been paid. Realisation expenses amounted to 16,000.
M is able to contribute Rs 2,500 only. Commission payable to L is to be treated as firm’s expense. Close the books of the firm.
(B.Com – Madras Adapted and Modified)
Solution
Realisation Account, M’s Capital Account (to complete deficiency) and K’s Capital Account (amount payable to K) – all have to be prepared provisionally. Commission payable to L has to be ascertained by using algebraic equation.
Realisation Account (Provisional)
Commission Payable to L is to be computed as:
Let the commission payable to L be X (assumed)
Then realisation loss after commission = 45,000 +X
K’s share of loss = 18,000 +2/5 X
L’s share of loss = 18,000 +2/5 X
M’s share of loss = 9,000 +1/5 X
(Loss in 2:2:1 ratio, as given in the problem)
M’s deficiency has to be borne by K and L in their capitals ratio – (Garner vs. Murray rule) (i.e.)
2,02,500: 1,35,000 (OR) – 3:2
Now, deficiency of M is ascertained as:
M’s Capital Account (Provisional)
This deficiency will have to be borne by K and L in 3:2 ratio.
So K will have to bear 3/5 of (14,000 +X/5) = 8,400 +3X/25
L will have to bear 2/5 of (14,000 +X/5) = 5,600 +2X/25
Now, amount payable to K is to be computed as:
K’s Capital Account (Provisional)
Coming back,
Commission Payable to L:
1/10 (1,76,100 − 13/25X) = X
1,76,100 – 13/25X = 10X
44,02,500 = 250X +13X
263X = 44,02,500
X = 44,02,500/1,263 = 16,740
Now, final main accounts for realisation, capital account of partners and cash/bank will have to be calculated.
Realisation Account
M’s Capital Account
K’s Capital Account
L’s Capital Account
Cash Account
Conversion of a firm to limited company
The disposal of assets not taken over by the purchasing company is to be recorded through Realisation Account as well as the payment to outside liabilities (not taken over by the purchasing company) is to be recorded through the Realisation Account.
But from the point of view of the firm, it is known as “Sale Price.”
Accounting Entry:
This item (agreed purchase consideration or sale price) is to be recorded as:
Purchasing Company’s Account | Dr. |
To Realisation Account |
|
Calculation
The purchase consideration may be provided in either of the two following forms:
If lump sum figure is given, no need arises for further calculation. The lump sum figure itself will be the value of purchase consideration.
In case of the lump sum figure is not specified as a lump sum figure, purchase consideration will be calculated by either of the two methods:
Purchase Consideration = Total Value of Assets – Total Value of Liabilities
Important Notes
Here, value represents the agreed value between the firm and the purchasing company. It should never be calculated at their book value.
The purchase price may be paid partly in cash and partly by allotment of its own shares and debentures. Then purchase consideration value will be the aggregate amount of cash, issue price of shares – preference shares and issue price of debentures issued.
Here arises an important question – if the purchase consideration is exclusively cash, then no problem arises. But in case, purchase consideration is carried out by issuing shares and debentures. The most important and controversial subject is the basis of distribution of shares and debentures among the partners. There are two different schools of thought:
The author does not want to enter into controversy, as his main aim is to present the subject matter in a lucid manner to the students. As such students are asked to follow the procedure as mentioned below.
Generally, problems in the examination papers will provide some requirements or directions on how the shares, debentures, etc. are to be distributed among the partners. If there are no indications, then they are advised to put a note and proceed in line with Section 48(b)(ii) of the Partnership Act. (This procedure is followed in the forthcoming illustrations in this section: sale of a firm to a company – partnership dissolution.)
Sale of Firm to a Company
Item of Transaction | Account to be | |
---|---|---|
Debited | Credited | |
1. Transfer of Assets |
Realisation |
Assets (concerned) |
2. Transfer of Liabilities |
Liabilities (concerned) |
Realisation |
3. Purchase Price |
(Purchasing Company) |
Realisation |
4. Assets sold (not taken over by the purchasing company) |
Cash or Bank |
Realisation |
5. Assets not sold (taken over by the purchasing company) |
Cash or Bank |
Realisation |
6. Payment of Liabilities |
Realisation |
Cash or Bank |
7. Realisation Expenses |
Realisation |
Cash |
8. Receipts to Purchase Consideration (Cash, Shares, Preference Shares, Debentures, etc. form the purchasing company) |
(Concerned) Assets |
Purchasing Company |
9. Distribution of Cash among the Partners |
Capital |
Cash |
10. Distribution of Shares/Debentures among the Partners |
Capital |
Shares/Debentures |
11. Realisation Account: Profit |
Realisation |
Capital A/c (or) Current A/c |
12. Realisation Account: Loss |
Capital A/c or Current A/c |
Realisation A/c |
Illustration: 23
The Himalya Company Limited was formed to acquire the business of X and Y who hare profits on the ratio of 3:2, respectively. The Balance Sheet of X and Y on Mar 31, 2009 was as follows:
It was agreed by the company to take over the assets at book value with the exception of land and buildings and stock which are taken over at Rs 40,000 and Rs 20,000, respectively. The investments were retained by them and sold for Rs 2,000. They also discharged the loan of No. X. The company took over the remaining liabilities. The value of goodwill is fixed at Rs 30,000.
The purchase consideration is discharged as follows:
10,000 ordinary shares of Rs 10 each and the balance in cash.
You are required to
Solution
While computing the value of purchase consideration, care should be taken for the following items:
Step 1
Computation of Purchase Consideration
Rs | ||
---|---|---|
Assets: (at agreed price) |
|
|
Land and Building |
|
40,000 |
Stock |
|
20,000 |
Machinery |
|
20,000 |
Debtors |
|
20,000 |
Bills Receivable |
|
4,500 |
Cash or Bank |
|
5,000 |
Goodwill |
|
30,000 |
(A) Total Value of Assets (at agreed price) |
|
1,39,500 |
Liabilities: (Taken over) |
|
|
Bill Payable |
7,500 |
|
Sundry Creditors |
18,000 |
|
(B) Total Value of Liabilities |
25,500 |
25,500 |
(C) = A – B: Purchase Consideration |
|
1,14,000 |
Step 2
Journal Entries
Rs | Rs | |
---|---|---|
1. For Transfer of Assets |
||
Realisation Account: Dr. |
1,07,500 |
|
To Land and Buildings |
30,000 |
|
To Stock |
23,000 |
|
20,000 |
||
To Debtors |
20,000 |
|
To Bills Receivable |
4,500 |
|
To Cash at Bank |
5,000 |
|
To Goodwill |
5,000 |
|
(Being the transfer of assets of realisation account at their Book Value—assets being taken over by the company) |
||
(Note: Investments omitted) |
||
2. For transfer of Liabilities: |
||
Bills Payable Account Dr. |
7,500 |
|
Sundry Creditors Account Dr. |
18,000 |
|
To Realisation Account 25,500 |
||
(Being the transfer of liabilities to realisation account at Book Value – Liabilities to be discharged by the Company) |
||
3. For Purchase Price: |
||
The Himalaya Company Ltd Dr. |
1,14,000 |
|
To Realisation A/c |
1,14,000 |
|
(Being the Purchase Consideration, refer Step 1) |
||
4. For Assets sold (not taken over by company) |
||
Bank A/c Dr. |
2,000 |
|
Realisation A/c Dr. |
500 |
|
To Investment A/c |
2,500 |
|
(Being the sale of investments not taken over by the company) |
||
5. For receipts to Purchase Consideration: |
||
Shares in The Himalaya Co Ltd Dr. |
1,00,000 |
|
Bank A/c Dr. |
14,000 |
|
To The Himalaya Co Ltd |
1,14,000 |
|
(Being receipt to Purchase Consideration 10,000 shares @ Rs 10 each, and the balance Rs 14,000 in cash) |
||
6. For distribution of Cash and Shares: |
||
(a) For X: |
||
X’s Capital A/c Dr. |
68,900 |
|
To shares in Himalaya Co Ltd |
61,794 |
|
To Bank A/c |
7,1064 |
|
(Being payment to X) |
||
(b) For Y: |
||
Y’s Capital A/c Dr |
42,600 |
|
To Shares in Himalaya Co Ltd |
38,206 |
|
To Bank A/c |
4,394 |
|
(Being payment to Y) |
||
Realisation Account Dr. |
31,500 |
|
To X’s Capital Account |
18,900 |
|
To Y’s Capital Account |
12,600 |
|
(Being the profi t of realisation transferred to Capital Accounts of Partners) |
Important Note: Shares have been distributed in the ratio of final claims of X and Y:
68,900: 42,600
689: 426
Realisation Account
Bank Account
The Himalaya Co Ltd
Partner’s Capital Accounts
X and Y were equal partners. On Mar 31, 2009 their balance sheet was as follows:
On that date, the partners dissolved the firm. Fixed assets were sold to Alfa Co Ltd for Rs 2,00,000, payable in the form of 20,000 shares of Rs 10 each. X look over the Joint Life Policy at an agreed valuation of Rs 10,000. Stock and debtors realised Rs 47,400. Expenses came to Rs 600. X and Y agreed to distribute shares in Alfa Co Ltd among themselves in the ratio of their final claims. Sundry Creditors were paid at book value.
Show the necessary ledger accounts.
[B. Com (Delhi) Adapted and Modified]
Solution
Realisation Account
X’s (partners) Capital Accounts
Y’s (partners) Capital Accounts
Note: In this account, no need arises to establish the ratio of final claim because the one and only asset available for closing the capital accounts shares in the Alfa Co Ltd.
Cash Account
X’s Loan A/c
*Note: There is no sufficient cash. So for the balance of X’s Loan, i.e. for Rs 19,800 shares in Alfa Co Ltd are provided.
Alfa Co Ltd
Shares Account
Dealing with assets not taken over by such assets are dealt through Realisation Account.
Illustration: 25
A and B were partners sharing profits and losses in the ratio of 3:2, respectively. Their Balance Sheet as on Mar 31, 2009 was as follows:
Vas Ltd was formed with an authorised capital of Rs 15,00,000 divided with 75,000 equity shares of Rs 10 each and 75,000 preference shares of Rs 10 each to acquire the going concern of A and B on the following terms:
You are required to prepare in the books of the firm X and Y
assuming that the shares and debentures are to be distributed in profit sharing ratio, the final settlement being made in cash.
(B.Com Madras University – Adapted and Modified)
Solution
= 2/3 × (45,000 +115,000) +(54,000 +15,000) +(63,000 +15,000)
= 2/3 (60,000 +69,000 +78,000)
= 2/3 × 2,07,000 = 1,38,000
Step 1: Purchase Consideration
Assets |
Rs |
Goodwill |
1,38,000 |
Cash |
13,500 |
22,500 |
|
Stock |
83,700 |
Plant and Machinery |
1,35,000 |
Freehold Premises |
1,62,000 |
(A) Total of All Assets |
5,54,000 |
Liabilities |
Rs |
|
Bills Payable |
10,500 |
|
Sundry Creditors |
19,200 |
|
(B) Total of All liabilities |
(29,700) |
29,700 |
(C) = (A)—(B) = Purchase consideration |
|
5,25,000 |
Step 2
Realisation Account
Cash Account
Capital Accounts of A and B
X, Y and Z were partners in business sharing profits and losses in the ratio 2:1:1. Their Balance Sheet as at Mar 31, 2009 was as follows:
Balance Sheet as on Mar 31, 2009
On Apr 1, 2009 it is agreed among the partners that Dev. Ltd a newly formed company with Y and Z having each taken up 50 shares of Rs 10 each will take over the firm as a going concern including goodwill but excluding cash and bank balance. The following points are also agreed upon:
You are required to prepare the necessary ledger accounts
[C. A. (Inter) Modified]
Solution
Calculation of Goodwill: |
Rs |
Capital employed on Mar 31, 2009 (Fixed Capital) |
2,00,000 |
Actual Profits |
50,000 |
Less: Normal profits @ 15% of Rs 2,00,000 |
30,000 |
Super Profits |
20,000 |
Goodwill at 3 years’ purchase 20,000 × 3 |
60,000 |
Calculation of Purchase Consideration |
|
Assets: |
|
Assets (Total) as per Balance Sheet |
3,30,000 |
Deduct Cash and Bank Balances (as per instructions in the question) |
75,000 |
|
2,55,000 |
Add: Goodwill |
60,000 |
(A) Total Assets |
3,15,000 |
(B) Total Liabilities: |
|
Unsecured Loans 1,00,000 |
(1,00,000) |
(C) = (A) – (B): Purchase Consideration |
2,15,000 |
Realisation Account
Capital Accounts
Cash and Bank Account
Dev Ltd
Ratio Y:Z = 1:1
No. of Shares 13,000/2 = 6,500 shares each
Current Accounts
Accounting procedure for dissolution of partnership was based on the assumption that all assets are treated as sold on the same date of dissolution as well as liabilities are cleared off and partner’s accounts are closed or shown as settled. But in reality, it cannot be possible to dispose of everything on a single date.
In situations, the net proceeds are then and there distributed to partners, immediately after realisation. This procedure is termed as interim distribution of cash. But such a practice may result in overpayment to one or more partners. If such overpayment takes place, at times, the solvent partner will be taxed further and further.
To avoid this danger of overpayment, the cash realised may be distributed to the partners in such a way as to reduce the balances on the capital accounts to the profit sharing ratio. If it is done so, the unpaid balance of the capital of each partner is retained in the profit sharing ratio.
The process of realising the assets, selling piece by piece over a period of dissolution and the periodical distribution of cash in such a way that the unpaid balance of the capital of each partner is retained in the profit sharing ratio is termed as “Piecemeal Distribution.”
On piecemeal (on realisation of assets over a period) cash realised will be disbursed in the order as mentioned below:
On payment to partners, the following criteria should be complied with:
It is emphasised that the gradual realisation of cash has to be disbursed among the partners in such a way so as to ensure that unpaid balance of partners is retained in the profit sharing ratio. No problem arises as long as the payments are made in profit sharing ratio. If some other basis is in operation (e.g. capital ratio), then the real problem arises. This can be illustrated as follows:
Illustration: 27
At the time of dissolution of a firm, its partners X and Y have outstanding capital balances at Rs 1,00,000 and Rs 60,000, respectively. Profit sharing ratio is 3:2. After making all payments to outside liabilities and partner’s loans, the following realisations are made:
Show the net final result if
Case (a) : Distribution in profit Sharing Ratio:
Profit sharing ratio 3:2
|
X |
Y |
|
Rs |
Rs |
Capitals |
1,00,000 |
60,000 |
I. Realisation: Rs 75,000 divided in the ratio 3:2 |
(45,000) |
(30,000) |
Balance after I Realisation |
55,000 |
30,000 |
II. Realisation: Rs 50,000 divided in the ratio 3:2 |
(30,000) |
(20,000) |
Unpaid Balance (or) Loss |
25,000 |
10,000 |
Unpaid balance for X = 25,000 |
|
|
Unpaid balance for Y = 10,000 |
|
|
Ratio: 25,000:10,000 |
|
|
5:2 |
|
|
Profit sharing ratio given in the question is 3:2
After realisation, unpaid balance ratio is 5:2
Note, even in this case, if the result is not in conformity with the profit sharing ratio. It differs
case (b): Distribution in the Capital Ratio:
|
X |
Y |
|
Rs |
Rs |
Capitals |
1,00,000 |
60,000 |
Capital Ratio = 1,00,000:60,000 |
|
|
= 5:3 |
|
|
I. Realisation: Rs 75,000 is divided in the ratio of 5:3 |
(46,875) |
(28,125) |
Balance after I Realisation |
53,125 |
31,875 |
II. Realisation: Rs 50,000 is divided in the ratio 5:3 |
(31,250) |
(18,750) |
Unpaid Balance (or) Loss |
21,875 |
13,125 |
Unpaid Balance is 21,875:13,125 |
|
|
875:525 |
|
|
35:21 |
|
|
Again it is not the same as that of profit sharing ratio.
To solve this problem to a certain extent, proportionate method is applied. To use this surplus method, the following procedure has to be adopted:
Illustration: 28
The following is the Balance Sheet of P, Q and R (whose profit sharing ratio is 4:3:1) as on Mar 31, 2009, on which date they dissolve partnership. The capitals are to be repaid as and when assets are realised.
Balance Sheet as on Mar 31, 2009
The assets were realised as follows
|
|
Rs |
|
I Realisation |
20,000 |
|
II Realisation |
15,000 |
|
III Realisation |
25,000 |
|
IV Realisation |
40,000 |
|
V Realisation |
65,000 |
No further sums could be realised.
You are required to prepare a statement showing the distribution on the basis of Proportionate Capital Method (Surplus Capital Method)
Solution
Statement Showing the Distribution (on Surplus Capital Method)
Notes:
*(1) I Realisation of Rs 20,000 will be distributed between Creditors and Bank O/D in the ratio of 3:1.
*(2) II Realisation of Rs 15,000 will be distributed between Creditors and Bank O/D in the ratio of 3:1. Claims of both outside creditors are eliminated (settled) in full.
Realisation III, IV and V is to be distributed among the partners as follows:
Finally, cash would be disbursed among all the partners in the ratio of 4:3:1.
The underlying notion behind such procedure as described above is none of the partners paid more than what is due to them and none paid less.
In the same way, the following items:
General reserve, any liability, loan from partners profit/loss on assets realised can be dealt with.
In each and every stage of realisation, adjustments (distribution process) have to be worked out keeping in mind the above principle and distribution has to be carried out appropriately and judiciously.
Rose, Jasmine and Lilly had the following Balance Sheet as at Dec 31, 2008:
The partners decided to dissolve the firm. They shared profits in the ratio 2:2:1. Show the distribution of assets among the partners as and when realised applying the Surplus Capital Method. Close the books of account.
The proceeds of realisation were:
|
|
|
Rs |
|
I |
Jan 14, 2009 |
25,000 |
|
II |
Feb 14, 2009 |
49,000 |
|
III |
Mar 14, 2009 |
50,000 |
[B. Com (Madras). Modified]
Statement Showing Surplus Capital on the Basis of Profit Sharing Ratio
Next, the statement showing piecemeal distribution has to be prepared. Study the problem:
First, outside liability, here – Sundry Creditors – has to be settled.
Second, partner’s advances – both Rose and Jasmine – in the ratio of their advances 20,000:16,000, i.e. 5:4 have to be distributed.
Third, Absolute Surplus Capital of Lilly has to be dealt with.
Fourth, for the surplus of capital: Rose and Lilly in their ratio, i.e. 2:1 has to be distributed.
Finally, the balance to all the partners in 2:2:1 ratio has to be distributed and books are closed thereby
In this method too, cash disbursement on each stage of realisation will be in the following order, as discussed in the Surplus Capital Method, i.e.
Only difference here is that at every stage of realisation, it is presumed that the unrealised assets are worthless.
The cash realised is deducted from the total amount outstanding on partner’s capitals and the difference is referred to as Maximum Possible Loss.
This is apportioned among the partners in the Profit Sharing Ratio.
At the stage of next realisation, partner’s capital accounts are to be opened with the balance, i.e. the balance due at previous realisation reduced by the part payment made in that realisation.
This rule may be applied in piecemeal realisations also. A partner with debit balance (or negative) in his Capital Account is presumed to be insolvent. His deficiency is to be distributed to the capital accounts of other partners in proportions to their capitals last agreed.
Under Maximum Loss Method, it is presumed that
Illustration: 30
A, B, C and D were partners in a firm. The capital of the firm consisted of Rs 2,00,000 contributed originally in the proportion of 4:3:2:1. The profits and losses were also shared in the same proportion. The firm was dissolved on Mar 31, 2009. The Balance Sheet as on that date was as follows:
It was decided on Apr 10 that the net realisations should be distributed on the first day of each month in the appropriate order. The realisations and expenses at the end of each month were as follows:
The stock was disposed off completely. It was further agreed that B should take over the remaining debts or Rs 12,500. Show how the cash was distributed.
[B. Com (Hons) – Delhi – Adapted and Modified]
Solution
[As it is not specifically mentioned in the question as to which method has to be adopted, students are in a position to choose the method, i.e. either Surplus Capital Method or Maximum Loss Method. But they are advised to put a note in the beginning itself, the method to be used in solving the problem.
But if the following keywords appear, i.e. show the piecemeal distribution in a safe manner or as safe as possible, any partner is shown as having debit balance, any partner is declared insolvent, then the students have to follow Maximum Possible Loss Method only.] Here, Maximum Possible Loss Method is followed.
Statement Showing Piecemeal Distribution
X, Y and Z are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were 5:3:2. Their capitals were Rs 48,000s Rs 30,000 ads Rs 42,000, respectively. After paying creditors, the liabilities and assets of the firm were as follows
The assets realised full in the order in which they are listed above. Y is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available, applying Maximum Loss Procedure.
Solution
Statement showing the distribution of cash
Illustration: 32
Ram, Robert and Rahim are partners sharing profits in the ratio of 3:2:1, respectively. Their Balance Sheet as on Mar 31, 2009 was as follows:
Balance Sheet as on Mar 31, 2009
The partnership is dissolved and the assets are realised as follows:
|
|
Rs |
|
First instalment |
20,000 |
|
Second instalment |
30,000 |
|
Third instalment |
50,000 |
You are required to prepare a statement showing how the distribution would be made applying Garner vs. Murray principle.
Solution
Note: Keyword “Garner vs. Murray” is found in the question. As such Maximum Loss Possible Method is used in piecemeal distribution of cash.
Statement Showing Piecemeal Distribution of Cash
Firm Debt: Debts owed by a firm to outsiders.
Garner vs. Murray: It is the decision of case – Garner vs. Murray – in court of England (1903). As per this decision, the deficiency on the insolvent partner’s capital account must be borne by the other partners in proportion to their capitals, after each such partner has brought in cash to the extent of his own share or loss on realisation.
Insolvent: When a partner attains the status of debtor to the firm, such a person has to bring in needed debit balance in his capital account. If he is unable to make up such deficiency, such a partner is said to be insolvent.
Surplus Capital Method: It is a method of gradual realisation of cash disbursement to partners in such a way as to ensure unpaid balance of partners is retained in profit sharing ratio.
Maximum Possible Loss Method: It is a method of cash disbursement on each stage of realisation. The difference between cash realised deducted from total amount and Partner’s Capital Account is maximum possible loss. It is presumed that at every stage of realisation, unrealised assets are worthless.
Minor: A person who has not completed 18 years of age.
Memorandum Balance Sheet: To ascertain the value of Sundry Assets – the missing figure – the Balance Sheet to be prepared is called Memorandum Balance sheet.
Partnership: A business owned by two or more persons who agree to share profits and losses and other obligations of business.
Partnership Deed: A document settling out the agreement of the partners on running the business including profit and loss sharing ratio.
Partnership Dissolution: A partner’s change without affecting the continuity of the business may be said as dissolution of partnership.
Piecemeal Distribution: The process of realizing assets, selling piece by piece over a period of dissolution and the periodical distribution of cash in such a way that the unpaid balance of the capital of each partner is retained in the profit sharing ratio.
Private Debt: Debts owed by a partner to any other person.
Realisation Account: The account which has to be prepared to determine profit or loss on realising assets and discharging liabilities in the event of dissolution of firm.
Anthony R. N and J. S. Reece, “Accounting Principles,” Richard D. Irwin Inc.
Monga J. R., “Financial Accounting: Concepts and Applications,” Mayoor Paper Backs, New Delhi, 2007–08.
Gupta R. L. and M. Radhasamy, “Advanced Financial Accounts,” Sultan Chand and Sons, New Delhi, 2008.
Shukla M. C., T. S. Grewal and S. C. Gupta, “Advanced Accounts,” Chand & Co., New Delhi, 2008.
I State whether the following statements are True or False
Answers
1. True |
2. True |
3. False |
4. True |
5. False |
6. True |
7. False |
8. True |
9. True |
10. False |
11. True |
12. False |
13. False |
14. True |
15. True |
16. False |
17. False |
18. False |
19. True |
20. True |
21. True |
22. True |
23. True |
24. False |
25. True |
26. False |
27. False |
28. False |
29. False |
30. True |
II Fill in the blanks with suitable words
Answers
Note: All questions are taken from reputed university question papers. But certain modifications have been made over such questions.
1. P, Q and R sharing profit in the ratio of 3:1:1 decided to dissolve their firm on Mar 31, 2010, their position was as follows:
It is agreed that:
Answer: Realisation Account: Loss: Rs 8,400; Capital Accounts of Partners: P gets Rs 23,960; Q and R contribute Rs 10,680 and Rs 280.
2. Anil, Sunil and Vinyl are partners of a firm sharing profits and losses at 20%, 40% and 40%, respectively. Their summarised Balance Sheet on Dec 31, 2009, when they decided to dissolve the firm, was as follows:
Additional Information
You are required to prepare:
Realisation Account
Cash and Bank Account
Capital Accounts of the partners
Answer: (1) Realisation Account – Loss Rs 50,000, (2) Capital Accounts: (i) Receive from Anil Rs 61,500 and (ii) Pay Rs 1,13,250 each to Sunil and vinyl]
3. A, B and C were partners sharing profits and losses in the ratio of 3:2:1 on Mar 31, 2010 their balance sheet was as follows:
The firm was dissolved on Apr 1, 2010. Joint Life Policy was taken over by A at 125%. Stock realised 1/11th less. Debtors realised 90% furniture fetched 26% less while machinery was sold for 105%. In addition, one bill for Rs 10,000 under discount was dishonoured and had to be taken up by the firm. Expenses of realization amounted to Rs 3,970.
You are required to provide the necessary ledger accounts to close the books of the firm.
Answer:
Realisation Account: |
Loss Rs 17,400 |
Capital Account: |
A receives Rs 33,300 |
|
B receives Rs 34,100 and |
|
C receives Rs 17,100 |
4. X, Y and Z were partners sharing profit and losses in the ratio of 2:2:1 dissolved the firm on Dec 31, 2009, whose Balance Sheet on that date was as follows:
Note: There is a bill for Rs 10,000 under discount. The bill was received from “A.”
The assets except Cash at Bank and Joint Life Policy were sold to a company which paid Rs 1,74,000 in cash. The Joint Life Policy was surrendered @ 110%. “A” proved insolvent and a dividend of 50% was received from his estate. Sundry Creditors were paid 95% in full settlement. The realisation expenses amounted to Rs 8,030.
You are required to prepare the Realisation Account, Cash Book and Partner’s Capital accounts.
Answer: Realisation Account: Profit – Rs 29,600
Capital Account: X Receives Rs 69,840; Y Receives Rs 49,840; Z Receives Rs 35,920]
5. P, Q and R, who shared profits and losses equally, were in partnership for many years. As their business was declining they decided to dissolve the partnership on Dec 31. The closing Balance Sheet as on that date was as follows:
The plant and machinery and the stock were sold by auction and realised Rs 25,000 and Rs 10,750. The firm was able to obtain discount of Rs 1,500 and allowances of Rs 8,500 on settlement of creditors. The bank charged Rs 1,250 for bank charges and interest debtors realised Rs 78,000. The freehold property was taken over by P (subject to the existing mortgage) and was revalued at Rs 1,50,000. The legal costs and consultant’s fees amounted to Rs 5,000 which was paid by the firm.
Prepare accounts showing the results of the dissolution, assuming that R was unable to contribute more than Rs 12,500 to his share of any deficiency of assets, and that the remaining amount due was shared by other partners equally.
Answer: Realisation loss – Rs 1,27,500
Payments to P – Rs 10,750
Payments to Q – Rs 24,250]
6. The following is the Trial Balance of the firm of A, B and C on Mar 31, 2010.
Dr. (Rs) | Cr. (Rs) | |
---|---|---|
Freehold Property (Chennai) |
90,000 |
– |
Leasehold Property (Delhi) |
30,000 |
– |
Leasehold Property (Lucknow) |
24,000 |
– |
Investments |
12,000 |
– |
Office Furniture |
2,000 |
– |
Stock (Chennai) |
36,000 |
– |
Stock (Delhi) |
32,000 |
– |
Stock (Lucknow) |
28,000 |
– |
Sundry Debtors |
25,000 |
– |
Sundry Creditors |
– |
37,000 |
Capital: A |
– |
1,00,000 |
B |
– |
90,000 |
C |
– |
60,000 |
Cash at Bank |
8,000 |
– |
|
2,87,000 |
2,87,000 |
They agreed to dissolve the firm with immediate effect on the following terms:
Pass entries necessary to close the books of the firm. Also show realisation account and capital accounts of the partners.
Answer: Realisation Profit – Rs 1,40,800
Payments to A – Rs 1,56,320
Payments to B – Rs 32,240
Payments to C – Rs 22,240]
7. P, Q, R and S were in partnership sharing profits at 4:3:2:1. Their position on Dec 31, 2009 was as follows:
They decided to dissolve the firm on this date. The assets realised Rs 81,000. P and Q are both insolvent. Q’s private assets amount to Rs 24,000 and his private liabilities Rs 21,000. S’s private assets are Rs 18,000 and his private liabilities are Rs 3,000. Show the relevant accounts assuming that all the transactions are put through on Mar 31 and that Q’s estate realised only Rs 12,000 and S’s estate realised Rs 15,000.
Answer: Loss on Realisation – Rs 15,000
Capital deficiency of P and Q, i.e. Rs 3,000 and Rs 6,000, respectively, shared by R and S in the ratio of 2:1
8. The following is the Balance Sheet as on Mar 31, 2010 of a firm:
Capitals of the partners are fixed by the deed, profits and losses are shared equally. The business is closed due to loss. The assets, except the bank balance, realised net Rs 1,15,000. R is insolvent and realization expenses amounted to Rs 1,560. Show the final realisation and division amongst the partners. Apply Garner vs. Murray rule.
Answer: Loss on realisation – Rs 22,890; P receives Rs 39,040 and Q receives Rs 20,210 in addition to loan due]
9. Amar, Akbar and Antony are partners sharing profits and losses in the ratio of 2:1:1. On Mar 31, 20 –, their Balance Sheet was as follows:
On that day there were three devastating incidents:
A customer who owed Rs 1,20,000 became insolvent and nothing could be recovered from his estate. The ship was caught in a storm and it sunk with the entire cargo. The stock was not insured.
The godown caught fire. The stock that could be saved was only worth Rs 6,000. This stock was also not insured.
The partners decided to dissolve the firm. Fixed assets realised Rs 2,000; remaining debtors realized Rs 19,000; stock was sold for Rs 5,000. The creditors claiming payment totaled Rs 84,000. The partners did not have any private assets. Realisation expenses amounted to Rs 1,000.
You are required to pass journal entities to close the books of the firm. Also, show Realisation Account; Cash and Bank A/c and partner’s Capital Accounts.
Answer: Realisation Loss – Rs 5,10,000
Payment to Anwar – Rs 7,334
Payment to Akbar – Rs 3,666]
10. Kamal, Vimal and Sunil were partners sharing profits and losses in the ratio of 5:3:2, respectively. Their Balance Sheet as on Mar 31, 2010 was as follows:
The firm was dissolved on that date. Assets realised as follows:
Furniture and Fixtures: Rs 10,000; Stock: Rs 1,00,000; Debtors: Rs 1,20,000.
Sundry creditors to the extent of Rs 500 were paid in full. The total payment to sundry creditors was Rs 1,04,500. It was found that there was a liability of Rs 30,500 for damages which had also to be paid.
Winding up expenses amounted to Rs 10,000. Sonal became insolvent and he could pay only 20 paise in a rupee.
Prepare ledger accounts to close the books of the firm following Garner vs. Murray rule.
Answer: Realisation loss – Rs 1,50,000
Payment to Kamal – Rs 1,22,727.50
Payment to Vimal – Rs 93,272.50
Payment to Sunil – NIL]
11. The position of R, S and T as on Mar 31, 2010 was as follows:
Profits and losses are shared R: 18/35; S: 7/35; T: 10/35. The firm was dissolved on the above date. Sundry assets realised 80%. Sundry creditors are paid 90% full settlement. Expenses amount to Rs 2,190. S is insolvent. Assume the capitals are not fixed. Close the books of the firm applying Garner vs. Murray rule.
Answer: Loss on realisation Rs 10,500
R receives Rs 16,401; S receives Rs 8,199 for capital inclusive of amount for making up realisation loss
12. The following was the Balance Sheet of C, D and E on Dec 31, 2009.
The partners shared profit and losses in the ratio 3:2:3. It was decided to dissolve the partnership as on the date of the Balance Sheet. The assets realised are as follows: Freehold Property 30%; Furniture 80% less; Stock 40%; Debtors 50% less.
The realisation expenses amounted to Rs 5,240. The sundry creditors agreed to take 75 paise in the rupee in full satisfaction if D is insolvent. A dividend of 50 paise in the rupee was received from the court receiver.
Prepare Realisation Account, Capital and Current Accounts of partners by applying Garner vs. Murray rule.
Answer: Loss on Realisation – Rs 73,200
C Receives – Rs 43,218
E Receives – Rs 25,732]
13. J, K and L were in partnership sharing profits and losses in the ratio of 2:3:5. They prepared the following Balance Sheet on Dec 31, 2009, when they decided to dissolve:
Plant and Machinery, Debtors and stock realised 70%. Prepare the necessary ledger accounts (including loan from Mrs. L Account and Trade Creditors’ Account, after considering the position of partners as follows:
Answer: Loss on realisation – Rs 90,000
Amount to be brought in by J Rs 61,666
Amount to be brought in by L Rs 3,334]
14. Ajay, Vijay and Sanjay were in partnership sharing profits and losses in the ratio of 1/5:3/10:1/2. The Balance Sheet as on Dec 31, 2009, when they decided to dissolve, was as follows:
You ascertain that the balance in Profit and Loss Account is prior to charging interest on Sanjay’s loan. Plant and Machinery and Debtors realised 80%. Ajay’s private estate which was valued at Rs 2,10,000 has a liability there on Rs 90,000. The private estate realised only Rs 1,20,000. Vijay is insolvent on his own account to partnership.
You are required to prepare Realisation Account, Cash Account and Partner’s Capital Accounts.
Answer: Loss on Realisation – Rs 98,799
Amount to be brought in by Ajay – Rs 30,000
Amount to be brought in by Sanjay – Rs 8,799]
15. X, Y and Z had the following Balance Sheet as on Mar 31, 20 –
The firm was dissolved. Stock realised Rs 40,000; Fixed assets and debtors realised Rs 1,20,000 in all. The private position of the partners was as follows:
X | Y | |
Rs | Rs | |
Private Estate | 40,000 | 32,000 |
Private Liabilities | 60,000 | 24,000 |
Z was able to pay 50 paise in the rupee what was payable on his own account to the partnership. The partners shared profits and losses in the ratio of 4:3:3 for X, Y and Z, respectively. The loss on realisation is to be determined after considering the amount finally paid to the creditors. You are required to close the books of the firm by preparing the necessary ledger accounts.
Answer: Realisation Loss – Rs 1,52,236
Cash brought in by Z – Rs 20,236]
16. A, B, C and D are partners of a firm. A gets one-fourth share in profits. The other partners shared the balance equally. The following is their Balance Sheet as on Mar 31, 20--.
The partnership was dissolved on the date of Balance Sheet on the following terms:
Prepare Realisation Account, Cash Account and partner’s Capital Accounts.
Answer: Realisation Loss – Rs 1,20,000
Deficiency in B’s Account – Rs 15,000]
17. X and Y were carrying on business in partnership sharing profits and losses in the ratio of 3/5 and 2/5. On Mar 31, 20–, they transferred their business to Alpha RT Ltd. The Balance Sheet of X and Y as on Mar 31 was as follows:
The company took the following assets at the following valuation:
Land 50%; Building 125%; Stocks 93.75%; Machinery 20% less; Debtors Rs 42,500; Goodwill Rs 30,000. Creditors were paid 93.75% in full and final settlement. Company paid Rs 25,000 in fully paid 25,000 equity, shares of Rs 10 each and balance in cash. Expenses of transfer amounted to Rs 2,500.
Prepare ledger accounts in the books of the firm and make opening entities in the books of a company.
Answer: Profit on Realisation – Rs 52,500; Cash brought in by Y – Rs 4,000; Cash paid to X – = Rs 31,500]
18. C and D were equal partners. On Dec 31, 20–, their Balance Sheet was as follows:
On that day they dissolved the firm. Fixed Assets were sold to Beta. Co. Ltd for Rs 2,00,000 payable in the form of 20,000 shares of Rs 10 each. C took over Joint Life Policy at an agreed valuation of Rs 10,000. Stock and debtors realised Rs 47,400. Expenses amounted to Rs 600. C and D agreed to distribute shares in Beta Co. Ltd between themselves in the ratio of their final claims. Sundry Creditors were paid at book value. Prepare Realisation Account, Capital Accounts and Cash Book.
Answer: Loss on Realisation – Rs 29,900; C’s Loan to be repaid Rs 200 in cash and Rs 19,800 in shares; C’s Capital is to be paid Rs 1,25,100 in shares and D’s Capital is to be paid in Rs 55,100 in shares]
19. X, Y and Z carry on business in partnership sharing profits and losses in the proportions of ½, 3/8, and 1/8, respectively. On Mar 31, 2010, they agreed to sell their business to Victory Ltd. Their position on that date was as follows:
Victory Ltd took the following assets at the valuation as follows:
Freehold Property 30% more; Machinery 30% less; Book Debts 90%; Stock 10% less; Goodwill Rs 38,220.
The company also agreed to pay the Trade Creditors which were agreed to allow a discount of 2%. The company paid Rs 2,01,000 in fully paid shares of Rs 10 each and the balance in cash. The expenses amounted to Rs 4,500.
You are required to prepare the necessary ledger accounts in the books of the firm.
Answer: Purchase Consideration – Rs 3,63,300;
Realisation Profit – Rs 28,800
Distribution of shares: X – 8,526; Y – 6,396; Z – 5,208]
20. Success Ltd was formed to acquire the business of R and S who share profits in the ratio of 2:1, respectively. The Balance Sheet of R and S on Dec 30, 2009 was as follows.
It was agreed by the company to take over the assets at book value with the exception of Land and Buildings and Stock which are taken over at Rs 80,000 and Rs 50,000, respectively. The investments are retained by the firm and sold by the firm for Rs 8,000. They also discharged the loan of Mrs. R. The company takes over the remaining liabilities. The value of goodwill is fixed at Rs 57,600.
The purchase consideration is discharged as follows: 20,000 equity shares of Rs 10 each and the balance in cash. Close the books of the firm.
Answer: Profit on Realisation – Rs 42,000
R receives Rs 1,24,800 in shares and Rs 31,200 in cash
S receives Rs 75,200 in shares and Rs 18,800 in cash]
21. L, M and N were partners in a business sharing profits and loses in the ratio of 2:1:1. Their Balance Sheet as at Dec 31, 2009 was as follows:
On Jan 1, it is agreed among the partners that Supriya & Co, Ltd, a newly formed company with M and N having each taken up 50 shares of Rs 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:
Answer: Loss on realisation – Rs 40.000]
22. Green and Red were in partnership sharing profits in the proportion ¾th and ¼th. The following is the Balance Sheet of the firm as at Dec 31, 2009.
Himalaya Ltd agreed to take over stock and fixed assets excluding the value of scooter Rs 20,500 for a consideration of Rs 2,40,000 which is to be satisfied by payment of cash Rs 80,000, allotment of 800 preference shares of Rs 100 each valued as Rs 75 per share and the balance by allotment of 8,000 equity shares of the face value of Rs 10 each.
The debtors realised Rs 96,000 and the creditors were settled for Rs 70,000.
The following were agreed between the partners:
You are required to show (i) the Realisation Account, (ii) partner’s Capital Account, (iii) Bank Account and (iv) statement showing distribution of cash.
Answer: Profit on Realisation – Rs 99,600
Green gets: Rs 22,500 in preference shares; Rs 75,000 in equity shares and Rs 97,200 in cash
Red gets: Rs 22,500 in preference shares; Rs 25,000 in equity shares and Rs 27,400 in cash]
23. For partnership dissolved on July 31, balance sheet on the date of dissolution was as follows:
The assets were realised in instalments and payment was made on the proportionate capital basis. Creditors were paid Rs 43,500 in full settlement of their accounts. Expenses on realisation were estimated to be Rs 8,100 but actual amount spent on this was Rs 6,000. This amount was paid on Nov 2. Draw up memorandum of distribution of cash that was realised as follows:
On Aug 10, Rs 37,800
On Sep 15, Rs 90,000
On Nov 2, Rs 1,20,000
The partners shared profits and losses in the ratio of 2:2:1
Answer: Unpaid Amounts: Mohan – 16,200
Mohamed – 16,200
Martoni – 8,100]
24. X, Y and Z were in partnership sharing profits and losses in the ratio of 2:1:1, respectively. On Dec 31, they decided to dissolve the partnership where their Balance Sheet stood as follows:
The assets were realised in piecemeal as follows:
Jan 27 Premises: Rs 15,000 (received after meeting in full the liability on the mortgage ban); Sundry debtors – Rs 18,000; Stock – Rs 21,000
Feb 20 Sundry Debtors – Rs 22,500; Stock – Rs 25,500
Mar 25 Sundry Debtors – Rs 60,000; Stock – Rs 69,000
Apr 27 Sundry Debtors – Rs 45,000; Stock – Rs 75,000 and furniture Rs 24,000.
The remaining stock was taken over by Y at an agreed amount of Rs 9,000. The trade creditors were settled for Rs 12,000. The partners distributed cash at the end of every month beginning on Jan 31.
You are required to show the distribution of cash in the form of a statement applying the proportionate capital basis.
Answer: Unpaid amounts:
X – Rs 16,500
Y – Rs 8,250
Z – Rs 8,250]
25. A, B and C were in partnership with a capital of Rs 90,000 originally contributed in the ratio of 3:2:1, respectively, and sharing profits and losses in the same ratio. The partnership was dissolved on Dec 31 on which date the Balance Sheet stood as follows:
It was agreed that the net realisations should be distributed in their due order at the end of each calendar month. The realisations and expenses were as follows:
The stock having been completely disposed of it was agreed that C should take over the remaining debts at Rs 1,800. Show how the cash was distributed by applying Proportionate Capital Method.
Cash Received By
Answer:
26. P, Q and R were in partnership. The following is their Balance Sheet as at Dec 31 on which date they dissolved it:
The partners share profits in the ratio of 5:3:2. It was agreed to repay the amounts due to the partners as and when the assets were realised as Feb 1; Rs 1,20,000; Apr 1, Rs 2,92,000; June 1, Rs 1,88,000. You are required to prepare a statement showing how the distribution should be made applying Maximum Loss Method.
Cash Received By
Answer:
27. R, S and T were partners sharing profits and basses in the proportion ½; 3/10 15 and 1/5 15, respectively. On Dec 31, 2009 they decided to dissolve the partnerships and the Balance Sheet as on that date was as follows:
The firm was dissolved on Jan 1. The assets realised were as follows:
Cash received was paid to the rightful claimants. Show the distribution of cash according to Maximum Loss Method.
Answer: Cash Received By
28. A, B and C have capitals of Rs 96,000; Rs 60,000 and Rs 84,000 and share profits and losses in the ratio of 3:2:1, respectively. After paying creditors, the following sums become available and it was agreed that they shall be distributed as and when determined:
Oct 15 – Sale Proceeds of Machinery – Rs 15,000
Expenses – Rs 3,000
Dec 31 – Realisation from Debtors – Rs 45,000
Expenses – Rs 5,000
B is insolvent. All assets are realised. Show the sums to be paid to the partners out of the amounts available according to Maximum Loss Method.
Answer: Oct 15 – C receives Rs 12,000
Dec 31 – A receives Rs 580
C receives Rs 39,420]
29. Ram, Rahim and Robert share profits and losses in the ratio of 4:2:1. They decide to dissolve the partnership and their Balance Sheet as on the date of dissolution was as follows:
The partners also decide that after the creditors have all been paid and providing a sum of Rs 3,600 to meet payable expenses of realisation and dissolution, all cash realised should immediately be divided among them. The assets are realised as follows: first realisation – Rs 46,080; second realisation Rs 55,200; third realisation: 2,89,197; final realisation – Rs 1,68,900. Expenses of realisation and dissolution amount to Rs 3,396. Prepare a statement showing how cash should be distributed among the partners according to Maximum Loss Method.
Answer: Out of the second realisation: Robert is paid Rs 32,040
Out of third instalment: Rahim receives Rs 1,65,678
Robert receives Rs 1,23,519
Out of final instxalment = Ram receives – Rs 83,052
Rahim receives – Rs 55,848
Robert receives – Rs 30,204]
18.220.203.200