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GFGC Punjalakatte Belthangady Tq.

BBA First Year – Second Semester Accounting 2
PARTNERSHIP ACCOUNTS : DISSOLUTION OF A
PARTNERSHIP FIRM – PART 2
Contents:
1. Piecemeal Distribution of Cash on Dissolution
2. Insolvency of Partner
3. Problems and Solution

PIECEMEAL PAYMENTS
Generally, the assets sold upon dissolution of partnership are realised only in small instalments
over a period of time. In such circumstances, the choice is either to distribute whatever is collected
or to wait till the whole amount is collected. Usually, the first course is adopted. In order to ensure
that the distribution of cash among the partners is in proportion to their interest in the partnership
concern either of the two methods described below may be followed for determining the order in
which the payment should be made.

Maximum Loss Method

Each instalment realised is considered to be the final payment te., outstanding assets and claims
are considered worthless and partners' accounts are adjusted on that basis each time when a
distribution is made, following either Garner vs. Murray Rule or the profit-sharing ratio rule.

Proportionate Capital Method or Surplus Capital Method /Highest Relative Capital

Method (Method to be used as per Syllabus)
According to this method, the partner who has the higher relative capital, that is, whose capital is
greater in proportion to his profit-sharing ratio, is first paid off. This method is also called as
proportionate capital method.
For determining the amount by which the capital of each partner is in excess of his relative capital,
partners' capitals are first divided by figures that are in proportion to their profit-sharing ratio; the
smallest quotient will indicate the basic capital. Having ascertained the partner who has the
smallest basic capital, the amount of capital of other partners proportionate to the profit-sharing
ratio of the basic capital is calculated. These may be called as their hypothetical capitals. The
amount of hypothetical capital of each partner is then subtracted from the amount of his actual

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capital; the resultant figure will be the amount of excess capital held by him. By repeating the
process once or twice, as may be necessary between the partners having excess capital, the amount
by which the capital of each partner is in excess will be ascertained. The partner with the largest
excess capital will be paid off first, followed by payment to the other or others who rank next to
him until the capitals of partners are reduced to their profit-sharing ratio.

Problems and Solution:

1. A, B and C are partners is a firm sharing profits and losses in the proportion of 4/7 th, 2/7th
and 1/7th. They decided to dissolve the partnership on which date the Balance Sheet being
as follows:
Liabilities Assets
Creditors 28,500 Buildings 4,78,600
Bills Payable 81,250 Machinery 81,500
General Reserve 47,250 Furniture 12,300
Capitals: Investments 75,000
A 2,00,000 Stock-in-trade 3,20,750
B 4,00,000 Debtors 1,13,500
C 3,25,000 Cash 350
10,82,000 10,82,000
The partners decided that after paying outside creditors and providing 6,000 towards expenses
of realization, all cash available should immediately be divided between them. The assets are
realized as under:
First Realization:
Machinery 70,000
Investments (Part) 6,800
Second Realization:
Stock-in-trade (Part) 36,000
Debtors (Part) 41,500
Furniture 14,500
Third Realization:
Buildings 4,00,000
Debtors (Part) 61,995
Investment (Balance) 70,000
Fourth and Final realization:
Stock-in-trade 2,25,500
Debtors 6,000
Actual expenses of realization and dissolution amounted to 5,660. Prepare a statement
showing how cash should be distributed to the partners.

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Solution for problem no.1

Step 1. First calculate the surplus capital based upon the profit sharing ratio between partners
Step 2. Payment should be first made to the outsiders – Realisation expenses to be set aside,
Creditors, Bills payable, Expenses outstanding etc
Step 3: Payment be made towards Partner’s Loan Account if any
Step 4: Payment towards surplus capitals of partners
· Priority is given first to that partner who has highest surplus i.e.C here
· After his capital come in proportion to 2:1, B and C are paid
· After A , B, C capitals account come in proportion of 4:2:1. All the partners are paid in
Profit sharing ratio
Step 5: Balance may be realization profit (excess realization) or realization loss(Balance unpaid
if any)
Statement of Surplus Capital
Particulars A B C
Capital as per balance Sheet 200000 400000 325000
Add: Distribution of Gen. Reserves Rs.47250 in
27000 13500 6750
PSR
A. Capital Balance 227000 413500 331750
B. Profit Sharing Ratio 4 2 1
Step A divided by B 56750 206750 331750
C. least capital contribution per share is
Rs.50000 per share , so capital in PSR will be 227000 113500 56750
keeping A's capital as base
D Surplus Capitals in their proft sharing ratio
0 300000 275000
step A- Step C
300000/2=15 275000/1=2
0000 75000
E. least capital contribution per share is Rs.75000
per share , so capital in PSR will be keeping B's 150000 x 2 150000 x 1
capital as base
F. Capital in the Profit Sharing Ratio2:1 300000 150000
Surplus Capital (D-E) 0 125000

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Statement Showing Piecemeal Distribution of Cash
Particulars Amount Creditors B/P A's Cap B'S Cap C,s Cap
Balance as per Balance sheet 28500 81250 227000 413500 331750
Cash in hand 350
Add: Amount realised on First
Realisation 76800
77150
Less: Realisation Exp. set aside 6000
71150
Less: Payment to Creditors and Bills
payable proTotal of Creditors+Bills
payable= 109750
52674
Payment to Creditors = 18476 52674 0 0 0
81250/109750x71150
Payment to Bills payable = 18476
28500/109750x71150
Balance 0 10024 28576 227000 413500 331750
II Realisation Amount Received
( 36000+41500+14500) 92000
Less: Paid towards Creditors and
bills payable 38600 10024 28576 0 0 0
Balance 53400 0 0 227000 413500 331750
less: Amount paid to C towards
surplus capital 53400 0 0 0 53400
Balance 0 0 0 227000 413500 278350
III Realisation Amount
Received(400000+61995+7000) 531995
less:Amount paid to C towards
surplus capital 71600 0 0 0 0 71600
Balance 460395 0 0 227000 413500 206750
Less payment towards Surplus
Capital of B And C in the ratio of
2:1 450000 0 0 0 300000 150000
Balance 10395 0 0 227000 113500 56750
Less: paid to all partners in PSR
4:2:1 10395 0 0 5940 2970 1485
Balance 0 0 0 221060 110530 55265
Final Realisation Amount and
excess realisation expenses set 231840 0
aside (225500+6000+340) 0
Less: paid to all partners in PSR
4:2:1 231840 0 0 132480 66240 33120
REALISATION LOSS 0 0 0 88580 44290 22145

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2. Reena, Meena and Teena are partners who shgare profits in the ration 3:2:1. Their balance sheet
as on 31-03-2018 was as under –
LIABILITIES Rs. ASSETS Rs.
Capital: Sundry Assets 400000
Reena 60000
Meena 100000
Teena 100000
Creditors 140000
400000 400000
The firm was dissolved and the assets were realised as under –
I Realisation – Rs.100000
II Realisation – Rs.60000
III Realisation – Rs.120000
IV Realisation – Rs.60000
Final Realisation – Rs.30000
Prepare statement of Piecemeal Distribution of Cash according to Surplus Capital Method.

Solution:

Statement of Surplus Capital

Particulars Reena Meena Teena
A.Capital Balance 60000 100000 100000
b.Profit Sharing Ratio 3 2 1
Step A divided by B 20000 50000 100000
C. least capital contribution per share is
Rs.20000 per share , so cpital in nPSR will be 60000 40000 20000
keeping Reena's capital as base
d. Surplus Capitals in their proft sharing ratio
0 60000 80000
stepA- Step C
PSR 2 1
E. Step D/Step E 30000 80000
least capital contribution per share is Rs.30000
per share , so capital in PSR will be keeping
Meena's capital as base
F. PSR x Step E Capital in the Profit Sharing
60000 30000
Ratio2:1
Surplus Capital (D-F) 0 50000

Statement Showing Piecemeal Distribution of Cash

Capital Account of Partners
Particulars Amount Creditors Reena Meena Teena
Balance as per Balance sheet 140000 60000 100000 100000
I Realisation Amount Received 100000
Less: Payment to Creditors 100000 100000

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Balance 0 40000 60000 100000 100000
II Realisation Amount Received 60000
Less: Amount Payable towards
Creditors 40000 40000
Balance 20000 0 60000 100000 100000
less: Amount paid toTeena towards
surplus capital 20000 20000
Balance 0 0 60000 100000 80000
III Realisation Amount Received 120000
less:Amount paid to Teena towards
surplus capital 30000 30000
Balance 90000 0 60000 100000 50000
Less payment towards Surplus
Capital of Meena And Teena in the
ratio of 2:1 90000 60000 30000
Balance 0 0 60000 40000 20000
IV Realisation Amount Received 60000
Less: paid to all partners in PSR
3:2:1 60000 30000 20000 10000
Balance 0 0 30000 20000 10000
Final Realisation Amount Received 30000
Less: paid to all partners in PSR
3:2:1 30000 15000 10000 5000
REALISATION LOSS 0 0 15000 10000 5000

INSOLVENCY OF A PARTNER
A partner will be treated as insolvent partner if his liability is more than his assets.
In case of Insolvency of partner, insolvency loss of Insolvent partner should be distributed
among Solvent partners

1. In their profit sharing ratio as per partnership Act, 1932.

or
2. We have to follow the rules laid down by Garner v/s Murray

However, as per the curriculum, we will practice only the first method that is sharing of
Insolvency loss by solvent partners in their profit sharing ratio.
Consequences of Insolvency of a Partner:
If a partner goes insolvent then the following are the consequences:
1. The partner adjudicated as insolvent ceases to be a partner.
2. He ceases to be a partner on the date on which the order of adjudication is made.

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3. The firm is dissolved on the date of the order of adjudication unless there is a contract to the
contrary.
4. The estate of the insolvent partner is not liable for any act of the firm after the date of the
order of adjudication, and
5. The firm cannot be held liable for any acts of the insolvent partner after the date of the order
of adjudication.

Problem and Solution:

P, Q and R were partners in a firm sharing profits and losses in the ratio of 3:2:1, No salary or
interest were allowed to partners. Their Balance sheet as on 31st March 2019 stood as follows:
Liabilities RS. RS. Assets RS. RS.

Fixed Capital Fixed assets:

P 20000 Freehold Property 48000
Q 20000 Plant and Equipment 12,800
R 10000 50,000 Motor Vehicle 700
Current Accounts: Current Assets - Stock 3,900
P 500
Q 9000 9,500
Loan from P 8,000 Trade Debtors 2000
Less: Provision (100) 1,900
Trade Creditors 12400 Cash at Bank 200
Miscellaneous losses
R's Current Account 400
Profit and Loss
Account 12,000
79,900 79,900
On 1st July, 2012 the partnership was dissolved. Motor Vehicle was taken over by Q at a
value of 1500 but no cash passed specifically in respect of this transaction.
Sale of other assets realised the following amounts: Goodwill - nil, Freehold Property -
7,000, Plant and Equipment - 5,000, Stock - 3,000, Trade Debtors - 1,600
Trade Creditors were paid Rs. 11,700 in full settlement of their debts. The costs of
dissolution amounted to Rs 1,500. The loan from P was repaid, P and Q were both fully
solvent and able to bring in any cash required , but R has become insolvent and is forced
into bankruptcy and was only able to bring 1/3 of the amount due.
You are required to show:
(a) Cash and Bank Account,
(b) Realisation Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts' balances).

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SOLUTION:
Cash I Bank Account
Rs. Rs.
By Realisation A/c-
To Balance b/d 200 Creditors 11,700
By Realisation A/c-
To Realisation A/c- Expenses 1,500
Freehold property 7,000 By P’s Loan A/c 8,000
Plant and Equipment 5,000 By P’s Capital A/c 14,260
Stock 3,000 By Q’s Capital A/c 24,140
Trade Debtors 1,600
To Capital Accounts:
P 25,500
Q 17,000
R 300 42.800
59,600 59,600

Realisation Account
Rs. Rs.
To Goodwill 40,000 By Trade Creditors 12,400
To Freehold Property 8,000 By Provision for Bad Debts 100
To Plant and Equipment 12,800 By Bank:
To Motor Vehicle 700 Freehold Property 7,000
To Stock 3,900 Plant and Equip. 5,000
To Sundry Debtors 2,000 Stock 3,000
To Bank (Creditors) 11,700 Debtors 1,600 16,600
To Bank (Expenses) 1,500 By Q (Car) 500
By Capital Accounts: (Loss)
P 25,500
Q 17,000
R 8,500 51,000
80,600 80,600

Current account balances have been arrived after adjusting profit and loss account debit balance
as follows:
P’s Current account *Rs. 6,000- Rs. 500= Rs. 5,500
R’s Current account ** Rs.2,000 + Rs. 400 = Rs. 2,400
Q’s Current account *** Rs.9,000 - Rs. 4,000 = Rs. 5,000

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Partners’ Capital Accounts
P Q R P Q R
To Current A/c 5,500* — 2,400** By Balance b/d 20,000 20,000 10,000
(Transfer)
To Realisation A/c 25,500 17,000 8,500 By Current A/c — 5,000*** —
(Loss) (Transfer)
To Realisation A/c 500 By Bank
(Car)
To R’s Capital A/c 360 240 — By Bank 25,500 17,000 300
(Deficiency borne in (realization
PSR) loss)
To Bank 14,260 24140 ByP & Q 600
(Deficiency)
45500 42000 10900 45,500 42,000 10,900

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