DISSOLUTION OF PARTNERSHIP FIRM


Learning Objectives
After Studying this unit, the students will be able to understand:
*Meaning of Dissolution
* Distinction between Dissolution of Partnership and Dissolution of Partnership firm.
* Preparation of Realisation Account
* Procedure of settlement of accounts
* Preparation of Memorandum Balance sheet (to find out missing figures)
* Necessary journal entries to close the books of the firm.

SALIENT POINTS:
v Dissolution: Dissolution of the firm is different from Dissolution of Partnership.
v Realisation account : It is prepared to realize the various assets and pay off the liabilities.
v Closure of the Books of Accounts : When the firm is dissolved, finally all the books of accounts are closed through Bank Account.
1.   Distinguish between Dissolution of Partnership and Dissolution of Partnership firm

Dissolution of Partnership
Dissolution of partnership firm
a)The Partnership is dissolved but the business continues. The Business is not terminated
a)The firm winds up the business.
b)     Assets and liabilities are revalued through revaluation account and the Balance sheet is prepared
b)Assets are sold and the liabilities are paid off through Realisation account.
c)   The Books of accounts are not closed as the business is  not terminated.
d)     The Books of accounts are closed.




2. State the provisions of Section 48 of the Partnership Act 1932 regarding settlement of Accounts during the Dissolution of Partnership firm.
Ans. According to section 48—
a)Losses including the deficiencies of Capitals are to be paid---
i)                First out of profits
ii)              Next out of Capitals of the partners
iii)            Lastly if required, by the partners individually in their profit sharing ratio(as their liability is unlimited)
b)     The  Assets of the firm and the amount contributed by the partners to make up the deficiency of capital shall be applied for –
i)                First to pay the debts of the firm to the third parties.
ii)              Next, Partners Loan(Partner has advanced to the firm)
iii)            Partners capitals
iv)             The residue, if any shall be distributed among the partners in their profit sharing ratio.
3.                  Distinguish between Realisation account and Revaluation account

Realisation Account
Revaluation Account
a) It is prepared  in the case of Dissolution of Partnership firm.
a)It is prepared in the case of Dissolution of Partnership.
b)     This account is prepared to realise the assets & pay off the liabilities .
b) This Account is prepared to revalue the assets and liabilities during Admission, Retirement and Death of the partner.
4.  A and B are partners sharing profits and losses equally. They decided to dissolve their firm. Assets and Liabilities have been transferred to Realisation Account. Pass necessary Journal entries for the following.
a)     A was to bear all the expenses of Realisation for which he was given a commission of Rs 4000.
b)     Advertisement suspense account appeared on the asset side of the Balance sheet amounting Rs 28000
c)     Creditors of Rs 40,000 agreed to take over the stock of Rs 30,000 at a discount of 10% and the balance in cash.
d)     B agreed to take over Investments of Rs 5000 at Rs 4900
e)     Loan of Rs 15000 advanced by A to the firm was paid off.
f)      Bank loan of Rs 12000 was paid off.

                                                      JOURNAL

SN
Particulars
LF
   Debit(Rs)
Credit(Rs)
a)
Realisation account –Dr
      A’s Capital account
(Being commission given to A)

4000

4000
b)
A’s Capital account –Dr
B’s Capital account –Dr
      Advertisement Suspense account
(Being Advertisement suspense written off)

14000
14000


28000
c)
Realisation account –Dr
         Cash account
(Being creditors paid off)

13000

13000
d)
B’s Capital account –Dr
       Realisation account
(Being asset taken over by the partner)

4900

4900
e)
A’s Loan account –Dr
      Cash account
(Being partners loan paid off)

15000

15000
f)
Realisation account  -- Dr
      Cash account
(Being Bank loan paid off)

12000

12000

5. X and Y are partners in the firm who decided to dissolve the firm. Assets and Liabilities are transferred to Realisation account. Pass necessary journal entries—
a)Creditors were Rs 1,00,000. They accepted Building valued Rs 1,40,000 and paid cash to the firm Rs 40,000
b)     Aman, an old customer whose account of Rs 1000 was written off as bad in the previous year paid 40% of the amount.
c)There were 300 shares of Rs 10 each in ABC Ltd  which were acquired for Rs 2000 were now valued at Rs 6 each. These were taken over by the partners in the profit sharing ratio.
d)     Profit on Realisation Rs 42000 was divided among the partners.
e)  Land and Building (Book value Rs 1, 60,000) was sold for Rs 3,00,000 through a broker who charged 2% commission on the deal.
f)  Plant and machinery (Book value Rs 60,000) was handed over to the creditor in full settlement of his claim.




S.N
Particulars
LF
Debit(Rs)
Credit(Rs)
a)
Cash account –Dr
      Realisation account
(Being cash received from the creditor)

40000

40000
b)
Cash a/c –Dr
      Realisation a/c
(Being cash received from a debtor whose account was written off earlier)

400

400
c)
X’s Capital a/c –Dr
Y’s Capital a/c –Dr
        Realisation a/c
(Being Investments taken over by the partners)

900
900


1800
d)
Realisation a/c –Dr
      X’s Capital a/c
      Y’s capital a/c
(Being profit on Realisation distributed among the partners)

42000

21000
21000
e)
Cash a/c—Dr
      Realisation a/c
(Being Land and Building realized)

294000

294000
f)
NO JOURNAL ENTRY






LONG QUESTIONS—6-8 MKS
6) Following is the Balance sheet of Karan and Sandeep who share profits and losses equally as on 31st march 2010
Liabilities
Rs
Assets
Rs
Capitals--

Bank
40,000
Karan
1,00,000
Debtors
25,000
Sandeep
   50,000
Stock
35,000
Creditors
   30,000
Machinery
60,000
Workmen compensation fund
  15,000
Furniture
40,000

Bank loan
      5000



2,00,000

2,00,000

The firm was dissolved on the above date.
1. Karan  agreed to take over 50% of the stock at 10% less on its book value, the remaining stock was sold at a gain of 15%. Furniture and machinery realized for Rs 30,000 and 50,000 respectively.
2.  There was unrecorded Investments which was sold for Rs 25,000.
3.  Debtors realized Rs 31,500 (with interest) and Rs 1200 was recovered for bad debts written off last year.
4. There was an outstanding bill for repairs which had to be paid Rs 2000.
      Prepare necessary Ledger accounts to close the books of the firm.
                                               


Realisation account
Particulars
Rs
Particulars
Rs
Sundry assets
Debtors-25000
Stock-35,000
Furniture-40,000
Machinery-60,000




1,60,000
Liabilities:
Creditors : 30,000
Bank loan :   5000


    35000
Bank a/c(outstanding repair bill)
        2000
Karan’s Capital a/c
  15750
Bank(Creditors & Bank loan)

    35,000
Bank a/c(stock)
   20125
Capital accounts-
Karan    :     5787.5
Sandeep:    5787.5

Bank a/c(Assets realized)
  80,000

11575
Bank a/c(Debtors)
   32700


Bank a/c(Investments)

  25,000

208575

208575



                                                                Partners Capital accounts
Particulars
Karan
Sandeep
Particulars
Karan
Sandeep
Realisation a/c(stock)
15750

Balance b/d
1,00,000
50,000



Workmen’s compensation fund

7500

7500
Bank account
97537.5
63287.5
Realisation a/c
5787.5
5787.5

113287.5
63287.5

113287.5
63287.5
                                                            Bank account
Particulars
Amount
Particulars
Amount
Balance b/d
40,000
Realisation a/c
(repair bill, creditors and bank loan)
37000
Realisation a/c( stock)
20125
Karan’s capital
97537.5
Realisation a/c(Machinery & furniture)

80,000

Sandeep’s capital

63287.5
Realisation a/c(Debtors)
32700


Bank(Investments)
25,000



197825

197825

6.  Following is the Balance sheet of X and Y who share profits in the ratio of 4:1 as on 31st march 2010
                                                Balance sheet
Liabilities
Rs
Assets
Rs
Sundry Creditors
    8,000
Bank
20,000
Bank overdraft
    6,000
Debtors     17,000
Less provision  2000

15,000
X’s Brother’s loan
    8,000
Stock
15,000
Y’s Loan
    3,000
Investments
25,000
Investment Fluctuation fund

    5,000
Building
25,000
Capitals-
X-50,000
y-40,000


 90,000

Goodwill

10,000


Profit and Loss a/c
10,000

1,20,000

1,20,000
The firm was dissolved on the above date and the following was decided—
a)     X agreed to pay off his brother’s loan
b)     Debtors of Rs 5000 proved bad.
c)     Other assets realized as follows—Investments 20% less, and Goodwill at 60%.
d)     One of the creditors for Rs 5000 was paid only Rs 3000.
e)     Building was auctioned for Rs 30,000 and the auctioneer’s commission amounted to Rs 1000.
f)      Y took over part of the stock at Rs 4000(being 20% less than the book value)Balance stock realized  50%
g)     Realisation expenses amounted to Rs 2000.
Prepare Realisation account, Partners capital accounts and Bank account.
                                          Realisation account
Particulars
Amt(Rs)
Particulars
Amt(Rs)
Sundry Assets
Debtors          17,000
Stock              15,000
Investments  25,000
Building          25,000
Goodwill         10,000




92,000

Sundry Liabilities
Creditors –             8000
Bank overdraft -    6000

X’s Brothers loan-  8000

Investment Fluctuation fund –                       5,000
Provision for doubtful debts -                       2000





29000
X’s Capital(Brothers loan)
8000
Bank a/c (Assets realized)
72,000
Bank(Liabilities paid off)
Creditors- 6000
Bank overdraft 6000


12000
Y’s Capital(stock)
Loss transferred to capitals
X-    7200
Y-    1800
4000


9000
Bank(Realisation expenses)

2000



1,14000

1,14,000
Partner’s Capital Accounts
Particulars
X
Y
Particulars
X
Y
Profit & Loss a/c
8,000
2,000
Balance b/d
50,000
40,000
Realisation a/c

  4,000
Realisation a/c
8,000

Realisation a/c(loss)

7,200

1,800



Bank a/c
42,800
32,200




58,000
40,000

58,000
40,000

Bank account
Particulars
Amt (Rs)
Particulars
Amt(Rs)
Balance b/d
20,000
Y’s loan a/c
   3,000
Realisation a/c(assets realized)

72,000
Realisation a/c(liabilities paid off)

 12,000


Realisation a/c(expenses)
   2,000


X’s Capital a/c
42,800


Y’s capital a/c
32,200

92,000

92,000
7. A, B and C commenced business on 1st January 2008 with capitals of Rs 50,000, 40,000 and Rs 30,000 respectively. Profits and losses are shared in the ratio of 4:3:3. During 2008 and 2009 they made profit of Rs 20,000 and Rs 25000 respectively. Each partner withdrew Rs 5000 per year.
              On 31st December 2009, they decided  to dissolve the firm. Creditors and cash on that date were Rs 12,000   and Rs 2000 respectively. The Assets realized Rs 1,50,000. Creditors were settled for Rs 11,500 and realization expenses were Rs 500.
                 Prepare Realisation a/c, Capital accounts and Cash account.
                                                         Realisation account
Particulars
Rs
Particulars
Rs
Sundry Assets
1,45,000
Creditors
12,000
Cash a/c(Creditors)
    11,500
Cash a/c(Assets realized)

1,50,000
Cash a/c(Expenses)
          500


Capital Accounts-
A-    2,000
B-     1,500
C-     1,500



      5,000



  1,62,000

1,62,000



Partners Capital Accounts
Particulars
A
B
C
Particulars
A
B
C
Cash a/c
60,000
45,000
35,000
Balance b/d
58,000
43,500
33,500




Realisation a/c
2,000
1,500
1,500

60,000
45,000
35,000

60,000
45,000
35,000
                                                             Cash account
Particulars
Rs
Particulars
Rs
Balance b/d
     2,000
Realisation(Creditors)
11,500
Realisation a/c
1,50,000
Realisation a/c(expenses)
      500


A’s Capital a/c
60,000


B’s Capital a/c
45,000


C’s Capital a/c
35,000

1,52,000

1,52,000
Working Note: Calculation of Closing capital(Capital as on 31/12/2009)
Particulars
A
B
C
Opening Capital
50,000
40,000
30,000
Add Profits(of two yrs)
18,000
13,500
13,500
Less Drawings(of 2 yrs)
10,000
10,000
10,000
Closing Capital
58,000
43,500
33,500




Memorandum Balance sheet as on 31/12/2009

Liabilities
Rs
Assets
Rs
Capitals-
X-58000
Y-43500
Z-33500



1,35,000



Cash



      2000
Creditors
    12,000
Sundry Assets(Balancing fig)

1,45,000

1,47,000

1,47,000