Chapter 5 Dissolution of a Partnership Firm

Question 1

A, B and C were partners in a company sharing profits in the ratio 4:3:3. On 1-4-2015
they decided to dissolve the company. On that date, A’s capital was ₹1,25,000, B’s capital
was ₹45,000 and C’s capital was ₹15,000(Dr.). The creditors amounted to ₹23,150 and
cash in hand was ₹3,920. The assets realized ₹1,44,910 and the expenses of dissolution
were ₹1,860. Prepare realization account and show your working clearly.

Solution:

Balance Sheet as on 1st April 2015

Liabilities ₹ Assets ₹
Creditors 23,150 Cash in Hand 3,920
Capital Accounts: C’s Capital (Dr.) 15,000
A 1,25,000 Sundry Assets(Balancing Fig.) 1,74,230
B 45,000 1,70,000
1,93,150 1,93,150

Dr. Realization Account Cr.

Particular ₹ Particular ₹
To Sunder Assets 1,74,230 By Creditors 23,150
To Cash (Creditors
23,150 By Cash (Assets realized) 1,44,910
paid)
By Loss on Realization transferred
To Cash (Expenses) 1,860
to:
A’s Capital A/c 12,472
B’s Capital A/c 9,354
C’s Capital A/c 9,354 31,180
1,99,240 1,99,240

Question 2

Give the necessary journal entries in each of the following alternative cases:

(i) Realization expenses amounted to 500

(ii) Realization expenses paid by the company amounted to ₹500 and the partner has to
bear the realization expenses

(iii) ‘A’ one of the partners was to bear all the realization expenses for which he was given
a commission of 2% of net cash realized from dissolution. Cash realized from assets was
₹25,000 and cash paid for liabilities amounted to ₹5,000

Solution:

Journal
Date Particulars L.F Dr.(₹) Cr.(₹)
(i) Realization A/c Dr. 500
To Bank A/c

500
(Payment of realization expenses)

Partner’s Capital A/c Dr. 500

To Bank A/c

(ii)
500
(Payment of realization expenses by the firm on behalf of
the partner)

Bank A/c Dr. 25,000

To Realization A/c

25,000
(Amount realized on the sale of assets)

Realization A/c Dr. 5,000

To Bank A/c

(iii) 5,000
(Amount paid for liabilities)

Realization A/c Dr. 400

To A’s Capital A/c

400
(Commission allowed to A @2% on ₹20,000 i.e 25,000 –
5,000)

Question 3

A and B share profits and losses in the ratio of 3:2. They have decided to dissolve the firm.
Assets and external liabilities have been transferred to realization A/c. Pass the journal
entries to affect the following.

(1) Bank Loan of ₹12,000 is paid off.

(2) A was to bear all expenses of realization for which he is given a commission of ₹400

(3) Deferred Advertisement Expenditure A/c appeared in the book at 28,000

(4) Stock worth ₹1,600 was taken over by B at ₹1,200

(5) An unrecorded computer realized ₹7,000

(6) There was an outstanding bill of repairs for ₹2,000, which was paid off.

Solution:
Journal
Date Particulars L.F Dr.(₹) Cr.(₹)
1 Realization A/c Dr. 12,000
To Bank A/c

12,000
(Bank loan discharged)

2 Realization A/c Dr. 400

To A’s Capital A/c

400
(Commission payable to A)

A’s Capital A/c Dr. 16,800

3
B’s Capital A/c Dr. 11,200

To Deferred Advertisement Expenditure A/c

28,000
(Transfer of fictitious asset to partner’s capital accounts)

4 B’s Capital A/c Dr. 1,200

To Realization A/c

1,200
(Stock taken over by B)

5 Bank A/c Dr. 7,000

To Realization A/c

7,000
(Amount realized from unrecorded computers)

6 Realization A/c Dr. 2,000

To Bank A/c

2,000
(Payment of outstanding repairs)

Question 4

If the total assets are ₹5,00,000, total liabilities are ₹1,00,000, the amount realized on the
sale of assets is ₹ 4,20,000 and realization expenses are ₹5,000, what will be the profit or
loss on realization?
Solution:

Profit and loss of realization can be calculated by preparing a realization account as

follows.

Realization Account
Particular ₹ Particular ₹
To Assets 5,00,000
By liabilities 1,00,000

To Bank(Liabilities paid) 1,00,000

By Bank(Assets realized) 4,20,000
To Bank(expenses of realization) 5,000

By Capital A/c

85,000
(Loss on realization)

6,05,000 6,05,000