NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 5

Q.1 State the difference between dissolution of partnership and dissolution of partnership firm.

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Q.2 State the accounting treatment at the time of dissolution of a firm for:
(i) Unrecorded assets
(ii) Unrecorded liabilities

Ans.

(i) Unrecorded assets: These are the assets which exist but do not appear in the books of accounts.

(ii) Unrecorded liabilities: These are the liabilities which exist but do not appear in the books of accounts.

Q.3 On dissolution, how will you deal with partner’s loan if it appears on the

(a) Assets side of the Balance Sheet (b) Liabilities side of the Balance Sheet

Ans.

(a) Assets side of the Balance Sheet: It means firm has given loan to the partner. It will be transferred to the debit side of the realisation account.

(b) Liabilities side of the Balance Sheet: It implies partner has given loan to the firm. It will not be transferred to the realisation account but paid through Partner’s loan account as it is an internal liability.

Q.4 Distinguish between firm’s debts and partner’s private debts.

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Q.5 State the order of settlement of accounts on dissolution.

Ans. In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all assets for satisfying all the claims against it.

The following rules as provided in Section 48 of the Partnership Act 1932 shall apply:

(a) Treatment of losses:

Losses including deficiencies of capital shall be paid:

• First out of profits
• Next out of capital of partners and
• Lastly, if necessary, by the partners individually in their profit sharing ratio

(b) Application of Assets:

The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital shall be applied in the following manner:

• In paying the debts of the firm to third parties
• In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (Partner’s loan)
• In paying to each partner proportionately what is due to him on account of capital: and
• The residue, if any, shall be divided among the partners in their profit sharing ratio.

Q.6 On what account realisation account differs from revaluation account.

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Q.7 Explain the process of dissolution of partnership firm.

Ans. According to the Section 39 of Partnership Act, dissolution of partnership between all the partners of a firm is called dissolution of partnership firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners:

1. Dissolution by Agreement: A firm is dissolved:

(a) with the consent of all the partners or

(b) in accordance with a contract between the partners.

2. Compulsory Dissolution:

(a) the adjudication of all the partners or of all partners but one as insolvent

(b) happening of an event or change in government policies that make the business unlawful.

3. On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved:

(a) If constituted for a fixed term, by the expiry of that term;

(b) If constituted to carry out one or more ventures, by completion thereof;

(c) by the death of a partner;

(d) by the adjudication of a partner as an insolvent.

4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, signifying his intention of seeking dissolution of the firm.

5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds:

(a) when a partner becomes insane.

(b) when a partner becomes permanently incapable of performing his duties as a partner.

(c) when a partner is guilty of misconduct which is likely to adversely affect the business of the firm.

(d) when a partner persistently commits breach of partnership agreement.

(e) when a partner has transferred the whole of his interest in the firm to a third party.

(f) when the business of the firm cannot be carried on except at a loss or

(g) when, on any ground, the court regards dissolution to be just and equitable.

Q.8 What is a Realisation Account?

Ans. When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed.

For this purpose, a realisation account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities.

Hence all assets (other than cash, bank or fictitious assets, if any) and all external liabilities are transferred to this account. It records the sale of assets, payment of liabilities and realisation expenses.

The balance in this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in their profit sharing ratio.

Q.9 Reproduce the format of Realisation Account.

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Q.10 How deficiency of creditors is paid off, at the time dissolution of firm?

Ans. At the time of dissolution of a firm, the amount received from the sale of firm’s assets are utilised to pay the creditors. If the sale receipts fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of creditors. There are generally two procedures to be followed to treat the deficiency of creditors.

1. Transferring deficiency to the Deficiency Account

2. Transferring deficiency to the Partner’s Capital Account

In the former procedure, a separate account is prepared for the firm’s creditors. Then in order to ascertain the firm’s cash balance accruing from the sale of the firm’s assets and partners’ private assets, Cash Account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.

In the latter procedure, creditors are paid by the cash available with the firm including the partners’ individual contribution. The deficiency or unpaid creditors amount is transferred to the Partner’s Capital Account. Thus, the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm. If the partnership deed is silent about such capital loss in the facet of insolvency of a partner, then according to the Garner v/s Murray case, such capital loss need to be borne by the solvent partners in their capital ratio.

Q.11 Journalise the following transactions regarding realisation expenses:

(a) Realisation expenses amounted to ₹2,500.

(b) Realisation expenses amounting to ₹3,000 were paid by Ashok, one of the partners.

(c) Realisation expenses ₹2,300 borne by Tarun personally.

(d) Amit, a partner was appointed to realise the assets, at a cost of ₹4,000. The actual amount of realisation amounted to ₹3,000.

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Q.12 Record necessary journal entries in the following cases:
(a) Creditors worth ₹85,000 accepted ₹40,000 as cash and investment worth ₹43,000, in full settlement of their claim.
(b) Creditors were ₹16,000. They accepted machinery valued at ₹18,000 in settlement of their claim.
(c) Creditors were ₹90,000. They accepted building valued at ₹1,20,000 and paid cash to the firm ₹30,000.

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Q.13 There was an old computer which was written off in the books of accounts in the previous year. The same has been taken over by a partner Nitin for ₹3,000. Journalise the transaction, when the firm has been dissolved.

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Q.14 What journal entries will be recorded for the following transactions on the dissolution of a firm?
a) Payment of unrecorded liabilities of ₹3,200.
b) Stock worth ₹7,500 is taken by a partner Rohit.
c) Profit on Realisation amounting to ₹18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7.
d) An unrecorded asset realised ₹5,500.

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Q.15 Give journal entries for the following transactions:

1. To record the realisation of various assets and liabilities.
2. A firm has a stock of ₹1,60,000. Aziz, a partner took over 50% of the stock at a discount of 20%.
3. Remaining stock was sold at a profit of 30% on cost.
4. Land & Building (book value ₹1,60,000) sold for ₹3,00,000 through a broker who charged 2%, commission on the deal.
5. Plant & Machinery (book value ₹60,000) was handed over to a creditor at an agreed valuation of 10% less than the book value.
6. Investment whose face value was ₹4,000 was realised at 50%.

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Q.16 How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases:

1. Realisation expenses amounts to ₹1,00,000.
2. Realisation expenses amounting to ₹30,000 are paid by Rashim, a partner.
3. Realisation expenses are to be borne by Rashim for which he will be paid ₹70,000 as remuneration for completing the dissolution process. The actual expenses incurred by Rashim were ₹1,20,000.

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Q.17 The book value of assets (other than cash and bank) transferred to Realisation Account is ₹1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost: 5% of the balance being obsolete, realised nothing and remaining assets are handed over to a creditor, in full settlement of his claim.

You are required to record the journal entries for realisation of assets.

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Q.18 Record necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya:

1. There was an old furniture in the firm which had been written-off completely in the books. This was sold for ₹3,000.
2. Ashish an old customer whose account for ₹1,000 was written-off as bad in the previous year, paid 60% of the amount.
3. Paras agreed to takeover the firm’s goodwill (not recorded in the books of the firm) at a valuation of ₹30,000.
4. There was an old typewriter which had been written-off completely from the books. It was estimated to realise ₹400. It was taken away be Priya at an estimated price less 25%.
5. There were 100 shares of ₹10 each in Star Limited acquired at a cost of ₹2,000 which had been written-off completely from the books. These shares are valued @ ₹6 each and divided among the partners in their profit sharing ratio.

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Q.19 All partners wishes to dissolve the firm. Yastin, a partner wants that her loan of ₹2,00,000 must be paid off before the payment of capitals to the partners. But Amart another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons.

Ans. Settlement of accounts in case of dissolution is dealt under section 48. There is a sequence of preferences given which tells the priority of payment at time of dissolution. In this case Yastin is correct, the partner’s loan is paid before payment of partners’ capital.

Q.20 What journal entries would be recorded for the following transactions on the dissolution of a firm of Arti and Karim after various assets (other than cash) on the third party liabilities have been transferred to Realisation account.
1. Arti took over the stock worth ₹80,000 at ₹68,000.
2. There was unrecorded Bike of ₹40,000 which was taken over by Mr. Karim.
3. The firm paid ₹40,000 as compensation to employees.
4. Sundry creditors amounting to ₹36,000 were settled at a discount of 15%.
5. Loss on realisation ₹42,000 was to be distributed between Arti and Karim in the ratio of 3:4.

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Q.21 Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows:

Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivables) realised ₹4,84,000. Creditors agreed to take ₹38,000. Cost of realisation was ₹2,400. There was a Motor Cycle in the firm which was bought out of the firm’s money, was not shown in the books of the firm. It was now sold for ₹10,000. There was a contingent liability in respect of outstanding electric bill of ₹5,000 which was paid, Bill Receivable taken over by Rose at ₹33,000.

Show realisation account, Partners Capital Account, Loan Account and Cash Account.

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Q.22 Shilpa, Meena and Nanda decided to dissolve their partnership on March 31, 2017. Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under:

The stock of value of ₹41,660 are taken over by Shilpa for ₹35,000 and she agreed to discharge bank loan. The remaining stock was sold at ₹14,000 and debtors amounting to ₹10,000 realised ₹8,000. Land is sold for ₹1,10,000. The remaining debtors realised 50% at their book value. Cost of realisation amounted to ₹1,200. There was a typewriter not recorded in the books worth ₹6,000 which were taken over by one of the Creditors at this value. Prepare Realisation Account.

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Q.23 Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their balance sheet as on March 31, 2017 is as follows:

The firm was dissolved on March 31, 2017 on the following terms:
Surjit agreed to take the investments at ₹8,000 and to pay Mrs. Surojit’s loan.
Other assets were realised as follows:

• Stock : ₹5,000
• Debtors: ₹18,500
• Furniture: ₹4,500
• Plant: ₹25,000

Expenses on realisation amounted to ₹1,600.
Creditors agreed to accept ₹37,000 as a final settlement.
You are required to prepare Realisation account, Partners Capital account and Bank account.

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Q.24 Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the ratio of 3:2:1. On March 31, 2017 their balance sheet was as follows:

On the date of above mentioned date the firm was dissolved:

Rita was appointed to realise the assets. Rita was to receive 5% commission on the rate of assets (except cash) and was to bear all expenses of realisation.

Assets were realised as follows:

Debtors: ₹30,000

Stock: ₹26,000

Plant: ₹42,750

Investments were realised at 85% of the book value.

Expenses of realisation amounted to ₹4,100.

Firm had to pay ₹7,200 for outstanding salary not provided for earlier.

Contingent liability in respect of bills discounted with the bank was also materialized and paid off ₹9,800.

Prepare Realisation account, Capital accounts of Partners’ and Cash account.

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Note:
The answer given in the book shows: Loss on Realisation ₹1,15,970 and Total of Cash Account ₹1,65,705. As per the solution, The total of cash account is ₹1,79,900.

Q.25 Anup, Sumit are equal partners in a firm. They decided to dissolve the partnership on December 31, 2017. When the balance sheet is as under:

The assets were realised as follows:

Lease hold land: ₹72,000

Furniture: ₹22,500

Stock: ₹40,500

Plant: ₹48,000

Sundry Debtors: ₹10,500.

The creditors were paid ₹25,500 in full settlement. Expenses of Realisation amount to ₹2,500.

Prepare Realisation account, Bank account, Partners Capital accounts to close the books of the firm.

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Q.26 Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on March 31, 2017. Their balance sheet on the above date was:

Ashu is to take over the building at ₹95,000 and machinery and furniture is taken over by Harish at value of ₹80,000. Ashu agreed to pay Creditors and Harish agreed to meet Bank overdraft. Stock and Investments are taken by both partner in profit sharing ratio.
Debtors realised for ₹46,000, expenses of realisation amounted to ₹3,000. Prepare necessary ledger account.

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Working notes:

Q.27 Sanjay, Tarun and Vineet shared profit in the ratio of 3:2:1. On December 31, 2017 their balance sheet was as follows:

On this date the firm was dissolved. Sanjay was appointed to realise the assets. Sanjay was to receive 6% commission on the sale of assets (except cash) and was to bear all expenses of realisation.

Sanjay realised the assets as follows:

Plant: ₹72,000

Debtors: ₹54,000

Furniture: ₹18,000

Stock: 90% of the book value.

Investments: ₹76,000

Bills Receivable: ₹31,000.

Expenses of Realisation amounted to ₹4,500.

Prepare Realisation account, Capital accounts and Cash account.

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Q.28 The following is the Balance Sheet of Gupta and Sharma as on March 31, 2017:

The firm was dissolved on December 31, 2017 and asset realised and settlements of liabilities as follows:

The realization of the assets were as follows:

• Sundry Debtors: ₹52,000
• Stock: ₹42,000
• Bills Receivable: ₹16,000
• Machinery: ₹49,000
• Fixture ₹20,000

Investment was taken over by Gupta at agreed value of ₹36,000 and agreed to pay off Mrs Gupta’s loan.
The sundry creditors were paid off less 3% discount.
The realisation expenses incurred amounted to ₹1,200.
Journalise the entries to be made on the dissolution and prepare Realisation account, Bank account and Partners capital accounts.

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Q.29

Ashok, Babu and Chetan are in a partnership sharing profit in the proportion of 1/2,1/3,1/6 respectively. They dissolve the partnership of the December 31, 2017. When the balance sheet of the firm as under:

The machinery was taken over by Babu for ₹45,000. Ashok took over the Investment for ₹40,000 and freehold property took over by Chetan at ₹55,000. The remaining assets realised as follows:
Sundry Debtors: ₹56,500
Stock: ₹36,500
Sundry Creditors were settled at discount of 7%.
A office computer, not shown in the books of accounts realised ₹9,000. Realisation expenses amounted to ₹3,000.
Prepare realisation account, Partners Capital account, Bank Account.

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No information is given regarding payment of bills payable so they are paid at book value.

Q.30

The following is the Balance Sheet of Tanu and Manu, who shares profit and losses in the ratio of 5:3 on March 31, 2017.

On the above date the firm is dissolved and the following agreement was made:
Tanu agree to pay the bank loan and took away the sundry debtors. Sundry Creditors accepts stock and paid ₹10,000 to the firm. Machinery is taken over by Manu for ₹40,000 and agreed to pay off bills payable at a discount of 5%. Motor car was taken over by Tanu for ₹60,000. Investment realised ₹76,000 and fixtures ₹4,000.
The expenses of dissolution amounted to ₹2,200.
Prepare Realisation account, Bank account and Partners Capital Accounts.

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