NCERT Solution For Class 12 Accountancy Chapter 5 – Dissolution Of Partnership Firm

NCERT solution for class 12 Accountancy Chapter 5 – Dissolution Of Partnership Firm

Short Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 5

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

Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.

1. Amount which is received on sale of assets should be used in this sequence:

i. Paying off all external expenses and liabilities

ii. Loans and advances that are owed to partners should be cleared.

Iii.Capitals of all the partners must be paid off.

Any amount that still remains after paying off all these items must be distributed among partners of the dissolute firm in their original profit sharing ratio.

2. In case of loss and capital deficiency, the following must be paid in this order:

i. Adjust loss and capital deficiency against profits of firm

ii. Adjust against the total capital of the firm

iii. If any loss or deficiencies is present after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.

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

Long Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 5

1. Explain the process of dissolution of a partnership firm?

Dissolution of a partnership firm results in the business being discontinued. Dissolution consists of disposing off assets, clearing payment for liabilities and distributing the profit or loss among all partners.

A firm may be dissolved by the following ways:

1. Dissolution by agreement which can be with consent of all partners or a contract between all partners.

2. Dissolution which becomes compulsory when all partners become insolvent or any changes in government policies making the business illegal.

3. Dissolution that is based on certain condition such as a fixed period, purpose, death of a partner or insolvency of a partner/partners

4. Dissolution by a written notice given by a partner with the intention to dissolve the firm.

5. Dissolution by court on account of a partner becoming lunatic, indulged in illegal activities, found guilty of misconduct, incapable to perform duties or dissolution reason found justified.

Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.

1. Amount which is received on sale of assets should be used in the following order

i. Paying off all external expenses and liabilities

ii. Loans and advances that are owed to partners should be cleared.

Iii.Capitals of all the partners should be paid off.

Any amount that still remains after paying off all these items should be distributed among partners of the dissolute firm in their original profit sharing ratio.

2. In case of loss and capital deficiency, the following should be paid in order:

i. Adjust loss and capital deficiency against profits of firm

ii. Adjust against the total capital of the firm

iii. If there exists any loss or deficiencies after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.

2. What is a Realisation Account?

When a firm is dissolved, it results in closing of all accounts, assets are sold off and liabilities are paid off. To maintain a record of all such activities, a nominal account is prepared which is called as Realisation Account. Its main purpose is to determine profit or loss that happens due to settling off assets and liabilities. If this exercise results in profit or loss, it gets transferred to the Partners’ Capital Account with their original profit sharing ratio.

The main objectives of preparing a realisation account is:

1. To ensure all accounts are closed

2. To record all transactions that is related to sale of assets and paying off liabilities

3. Determining whether profit or loss is happening due to sale of assets and paying off liabilities.

The format of realisation account is as follows:

3. Reproduce the format of Realisation Account.

4. How deficiency of creditors is paid off?

Deficiency of creditors arises when a firm is unable to pay off the creditors after selling of all the assets and utilizing partner’s private assets. In such a situation there are two procedures that needs to be followed:

1. Transferring deficiency to Partners’ Capital Account: In this procedure creditors get paid from the cash available with the firm that includes each partner’s individual contribution. The deficiency is transferred to Partners capital account and therefore is managed by all partners as per their profit sharing ratio. In case a partner becomes insolvent, it is regarded as capital loss for the firm. If the partnership deed has no clause for such a situation, then the capital loss needs to be borne by partners who are in solvent state and as per their capital ratio in the firm, as per Garner vs. Murray case.

2. Transferring the deficiency to Deficiency Account: In this process, a separate account is prepared for creditors. Then for determining the cash obtained from sale of firms and partners private assets, a cash account is prepared. Then after determining the cash available with the firm, creditors and external liabilities are paid, but not in full. The remaining creditors or the deficiency is then transferred to the deficiency account.

Numerical Question for NCERT Accountancy Solutions Class 12 Part 1 Chapter 5

1. 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.

2. 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 Buildings valued ₹ 1, 20,000 and paid cash to the firm ₹ 30,000.

3. 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, supposing. That the firm has been dissolved.

4. 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.

5. Give journal entries for the following transactions:

1. To record the Realisation of various liabilities and assets,

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 and Building (book value ₹ 1,60,000) sold for ₹ 3,00,000 through a broker who charged 2%, commission on the deal,

5. Plant and 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%.

6. 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.

7. 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.

8. Record necessary journal entries to record the following unrecorded liabilities and assets 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 take over 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 realize ₹ 400. It was taken away by 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.

9. All partners wish 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.

As per section 48 of Partnership Act 1932, at the time of dissolution, loans and advances from the partners must be paid off before the settlement of their capital accounts. Hence, Yastin’s argument is correct that her loan of ₹ 2, 00,000 must be paid off before the payment of partners’ capital.

10. What journal entries would be recorded for the following transactions on the dissolution of a firm 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.

11. 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, Bill Receivable taken over by Rose at ₹ 33,000.

Show Realisation Account, Partners Capital Account, Loan Account and Cash Account.

Note: Here the Contingent Liability of Electricity Bill has been treated as Electricity Bill Payable.

12. 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 Shiplap 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.

13. 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:

1. Surjit agreed to take the investments at ₹ 8,000 and to pay Mrs. Surjit’s loan.

2. Other assets were realised as follows:

3. Expenses on Realisation amounted to ₹ 1,600.

4. Creditors agreed to accept ₹ 37,000 as a final settlement.

You are required to prepare Realisation Account, Partners’ Capital Account and Bank Account.

14. 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:

1. 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,

2. Assets were realised as follows:

3. Investments were realised at 85% of the book value,

4. Expenses of Realisation amounted to ₹ 4,100,

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

6. 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.

15. Anup and 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:

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

Prepare Realisation Account, Bank Account, and Partners Capital Accounts to close the books of the firm.

16. Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on December 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 take over by Harish at value of ₹ 80,000. Ashu agreed to pay Creditor 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.

Working Notes:

17. 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 and Bills receivable ₹ 31,000. Expenses of Realisation amounted to ₹ 4,500.

Prepare Realisation Account, Capital Accounts and Cash Account

18. The following is the Balance Sheet of Gupta and Sharma as on December 31, 2017:

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

(a) The Realisation of the assets were as follows:

(b) Investment was taken over by Gupta at agreed value of ₹ 36,000 and agreed to pay of Mrs. Gupta’s loan.

(c) The Sundry Creditors were paid off less 3% discount.

(d) 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.

19. Ashok, Babu and Chetan are in 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 was taken over by Chetan at ₹ 55,000. The remaining Assets realised as follows: Sundry Debtors ₹ 56,500 and 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, and Bank Account.

20. The following is the Balance sheet of Tanu and Manu, who shares profit and losses in the ratio of 5:3, On December 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 of 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.