Please refer to Dissolution of Partnership Firm Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.
Class 12 Accountancy Dissolution of Partnership Firm Notes and Questions
MEANING OF DISSOLUTION OF PARTNERSHIP FIRM
When the business of the firm is closed down and the firm comes to an end, it is termed as dissolution of partnership firm. On the dissolution of the firm the assets of the firm are sold and liabilities are paid off and balance, if any, is paid to the partners in settlement of their accounts.
According to Section 39 of the Indian Partnership Act, 1932, “Dissolution of the firm means dissolution of part-nership among all the partners in the firm”
Difference between Dissolution of Partnership and Dissolution of Firm.
Dissolution of Partnership: Dissolution of Partnership refers to termination of old partnershipagreement and reconstitution of the firm due to change in profit sharing ratio among the existing partners, admission of a partner, retirement or death of a partner. It may or may not result into closing down of the business as the remainingpartnersmayagree tocarryonthe business underanew agreement.
Dissolution of partnership firm: Dissolution of partnership firm means that the firm closes down its business and comes to an end. In such a case, the assets of the firm are sold and liabilities are paid off and out of the remaining amount, the accounts of the partners are settled.
Modes of Dissolution of a firm
1. Dissolution by mutual agreement :A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
2. Compulsory dissolution: A firm may be compulsorily dissolved
a) When all the partners or all the partners except one become insolvent
b) When business of the firm becomes unlawful
3. On happening of an event: A firm may be dissolved in any of the following events, if the partnership deed so provides
a) On expiry of the term for which the firm was constituted
b) On completion of the venture
c) On death of a partner
d) On adjudication of a partner as insolvent
4. By Notice: In case of Partnership at Will, the firm may be dissolved by any partner by giving no-tice in writing to all the other partners of his intention to dissolve the firm.
5. Dissolution by court: Court may dissolve a firm on any of the following grounds, namely
a) When apartnerhas becomeofunsoundmind
b) When apartnerhasbecomepermanentlyincapableofperforminghisdutiesaspartner.
c) When a partneris foundguiltyofmisconduct
d) When there is a BreachofAgreementbypartner
e) Thatthebusinessofthefirmcannotbecarriedonexceptataloss.
f) Court finds dissolution of the firm justified
On any other ground which renders it just and equitable that the firm should be dissolved
ACCOUNTINGON DISSOLUTION OF PARTNERSHIP FIRM
Dissolution process starts by preparing the following accounts in Firm’s books:
1. RealisationA/C–For realizing assets and payment of outside liabilities
2. Partner’sLoan A/C-For payment of partner’s loan if any
3. Partner’scapitalA/C-calculation of amount due to/due by partners.
4. Cash A/C-to check the receipts and payments of cash(should be tallied)
1. Realisation Account
– Realisation Account is a nominal account.
– The main purpose of this account is to calculate the profit or loss after realising the assets and paying the liabilities.
– Transfer All the assets (except Cash/Bank and fictitious assets)on the debit side of Realisation ac-count from the Balance sheet and show the realized value on the credit side of realization account.
– Transfer all the liabilities (outsider) to the credit side of realization account and liabilities paid on the debit side of realization account.
– Do not transfer capitals of the partners, Partner’s loan A/C and accumulated reserve and profit.
ACCOUNTING ENTRIES
1. When assets are transferred to the Realisation Account
Realisation A/c Dr.
To Sundry Assets A/c
2. When Provisions of related assets are transferred to realization A/c
Provisionfor doubtfuldebtsA/c Dr.
ProvisionforDepreciationA/c Dr.
ToRealisationA/c
3. WhenAssetsarerealized:
Cash/bankA/c Dr.
ToRealisationA/c
4. When liabilities are transferred to the Realisation Account: Sundries Liabilities A/c Dr.
To Realisation A/c
5. WhenLiabilitiesarepaid:
RealisationA/c Dr.
ToCash/BankA/c
6. When Asset is taken over by the partner:
Partners’ Capital A/c Dr.
To Realisation A/c
7. When Liability taken over by the partner
Realisation A/c Dr.
To Partners capital A/c
8. When unrecorded Assets are realized
Cash/bank A/c Dr.
To Realisation A/c
9. When unrecorded liabilities are realized
Realisation A/c Dr.
To Cash /Bank A/c
10. When Realisation expense are paid
Realisation A/c Dr.
To Cash/bank A/c
11. When Realisation expenses are paid by the partner
Realisation A/c Dr.
To Partners capital A/c
12. When bank overdraft is paid:
Bank overdraft A/c Dr.
To Cash/Bank A/c
13. When realization profit is transferred to the partners:
Realisation A/c Dr.
To partner’s capital A/c
– If there is loss on realization Account following entry should be recorded:
Partner’sCapitalA/c Dr.
To Realisation A/c
2. Partners Loan Account: –
– Partners Loan Account(shown in B/S) is not transferred to the Realization account or Partners’ capital account
– A separate account (Loan A/c) is prepared for this purpose.
3. Partner’s Capital Account
– Balances of Partner’s capital accounts and Current accoun’s balance are shown in this account
– All Reserve and undistributed profitsetc. should be recorded in the Partner’s capital account.
– Profit/loss calculated in realization account will be transferred to the partner’s capital account.
– If any asset is taken over by the partner, it will take place on the debit side of partner’s capital accounts. If any liability is taken over by the partner, it will be shown on the credit side of partner’s capital accounts.
– Final settlement with partners or closing the account by bringing or paying cash
4. Preparation of Bank A/c : Since the business is being closed, no need to prepare a balance sheet ,we prepare Cash/Bank Account. All cash realized are shown on the debit side of cash/Bank account and all cash payments are shown on the credit side of Cash/BankA/c.
DIFFERENCE BETWEEN REVALUATION ACCOUNT AND REALISATION ACCOUNT
TREATMENT OF REALISATION EXPENSES
CASE NO1: -RealisationExpensesare borne andpaidbythefirm
Realisation A/c———- Dr
To Cash/Bank A/c
(Being Realisation expenses paid by the firm)
CASE NO 2: When Realisation expenses are borneby firm but paid by the partner
Realisation A/c ————Dr.
To Partner’s Capital A/c
(Being Realisation expenses paid by a partner)
Note : Students must remember that these expenses are paid by the partner on behalf of the firm Because this is not the duty of partner to pay the realization expense
CASE NO 3:When Realisation expenses are borne by a Partner and paid by the Firm.
Partner’scapital A/c———Dr.
ToCash/BankA/c
(Being expense by paid by firm and borne by partner)
CASE NO4: When Expenses for realization are borne and paid by the same partner
NO ENTRY
Reason: According to Business Entity concept Business and Businessman are separate entity and we record only business transactions
VERY SHORT ANSWER QUESTIONS
Question. Which o the following will be Transferred to Realisation Account?
A. Goodwill appearing in the books at the time of Dissolution of Firm
B. Investment Fluctuation Reserve
C. Provision for Doubtful Debts
D. General Reserve
Choose the Correct Option:
1.D Only
2. A, B, C Only
3.Band C Only
4.Aand C Only
Answer
B
Question. In the event of dissolution of a partnership firm, the provision for doubtful debts is transferred to:
a) Realization account
b) Partner’s Capital Accounts
c) Cash account
d) Partner’s loan account
Answer
A
Question. On dissolution of a partnership firm, profit or loss on realization is distributed among the partners:
a) In capital ratio
b) In profit sharing ratio
c) Equally
d) None of the above
Answer
B
Question. Unrecorded liability, when paid on dissolution of a firm is debited to:
a) Profit & Loss account
b) Realizationaccount
c) Liabilities account
d) No need to record
Answer
B
Question. On dissolution of a firm, a partner paid Rs 700 for firm’s realization expenses. Which account will be debited?
a) Cash account
b) Realisation account
c) Capital account of the partner
d) Profit & Loss account.
Answer
B
Question. On dissolution of a firm, It’s Balance Sheet revealed total creditors Rs 50,000, total capital Rs 48,000, Cash balance Rs 3000, It’s assets were realized at 12% less. Loss on realization will be:
a) Rs 6000
b) Rs 11760
c) Rs 11400
d) Rs 3600
Answer
C
Question. An unrecorded asset was valued ar Rs 100000.On Firm’s dissolution, it was sold for 52%.Realisation Account will be credited with
a) Rs 48000
b) Rs 100000
c) Rs 52000
Answer
C
Question. A Partner took over the Investments of Rs 15000 at Rs 19000 on dissolution of a Firm. What amount will be credited in Realisation Account?
a) Rs 15000
b) Rs 19000
c) Rs 4000
d) Rs 23000
Answer
B
Question. Identify the sequence of application of assets at the time of Dissolution of a Firm:
A. Partner’s Loans and Advances
B. Partner’s Capital
C. Profit among the Partners at their profit sharing Ratio
D. Third Parties such as Creditors and Bank Loan
Choose the correct option:
1. D, C, B and A
2. A, B, C and D
3. D, B, C and A
4. D, A, B and C
Answer
D
Question. What journal entry will you pass when an asset is given away to any of the Firms creditors towards full payment of dues?
Answer. No Entry
Question. On Firm’s Dissolution, what entry will be Passed on realization of Goodwill which was shown in Balance sheet?
a) Goodwill A/C—-Dr b) Cash A/C—–Dr c) Goodwill A/C—Dr
To Realisation To Realisation To Cash
Answer. Cash A/C—-Dr
To Realisation
Question. Name the Asset that is not transferred to the Realisation account, but bring certain amount of cash against its disposal at the time of dissolution of the Firm?
Answer. Unrecorded Asset
SHORT ANSWER QUESTIONS
Question. ZENIT and JANET are two partners sharing profits in the ratio 2:1. Give the journal at the time of dissolution in the following cases:
i) Deferred revenue advertising expenditure appeared at Rs 30,000
ii) Profit & Loss A/c was appearing on the asset side of the Balance Sheet at Rs 60,000
iii) An unrecorded investment realized Rs 6,000
iv) Partner ZENIT paid to a creditor Rs 20,000
Answer.
Question. Rohit and Suresh are in partnership sharing profit in the ratio 2:3. On March 31.2005, they agree to dissolve the business. Pass necessary journal entries at the time of dissolution to record the follow-ing:
a) Realisation expenses amounted to Rs 2000
b) Deferred revenue advertising expenditure appeared in the books at Rs 60,000
c) P & L A/c on the asset side of the balance sheet was Rs 30,000
d) An unrecorded asset of Rs 3,000 was taken over by Suresh
e) Liabilities amounting to Rs 24,000 already transferred to Realisation account, was settled at Rs 22,000.
f) Loan to Rohit was adjusted through his Capital A/c Rs 15,000
Answer.
Question. Pass necessary journal entries for the following transactions on the dissolution of the firm of Sudha and Shiva after the various assets (other than cash) and liabilities were transferred to Realisation A/c:
i) Sudha agreed to pay off her husband’s loan Rs 19,000
ii) A debtor whose debt of Rs 9,000 was written off in the books paid Rs 7,500 in full settlement
iii) Shiva took over all investments at Rs 13,300
iv) Sundry creditors Rs 10,000 was paid at 9% discount
v) Realisation expenses Rs 3.400 were paid by Sudha for which she was allowed Rs 3,000
vi) Loss on realization Rs 9,400 was divided between Sudha and Shiva in 3:2 ratio
Answer.
Question. A & B share profits and losses in the ratio 3:2. They have decided to dissolve the firm. Assets and external liabilities have been transferred to Realisation A/c. Pass the journal entries to effect the fol-lowing:
a) Bank Loan of Rs 12,000 is paid off
b) A was to bear all expenses of realization for which he is given a commission ofRs 400.
c) Deferred Advertisement Expenditure A/c appeared in the books at Rs 28,000.
d) Stock worth Rs 1,600 was taken over by B at Rs 1,200.
e) An unrecorded computer realized Rs 7,000.
f) There was an outstanding bill of repairs for Rs 2,000 which was paid off.
Answer.
Question. What journal entries would be passed for the following transactions on the dissolution of a firm, after various assets (other than cash) and third party liabilities have been transferred to Realisation A/c:
i) Stock worth Rs 15,000 is taken over by partner A
ii) Compensation to employees paid by the firm amounting to Rs 20,000
iii) Sundry creditors amounted to Rs 8,000. They were paid at a discount of 5%
iv) There was an unrecorded asset of Rs 2,000 which was taken over by B at Rs 1,500
v) Profit on Realisation Rs 21,000 was to be distributed between A and B in the ratio 4:3
Answer.
Question. Pass the necessary Journal entries for the following transactions on the dissolution of the firm T and p after the various assets (other than cash) and outside liabilities have been transferred to Realisation Account:
i) Bank Loan Rs 34,000 was paid
ii) Furniture work Rs 70,000 was taken over by partner T at Rs 43,000
iii) Partner P agreed to pay creditor Rs 7,500
iv) A computer previously written off fully realized Rs 3,900
v) Expenses on realization s 3,200 was paid by partner T
vi) Profit on realization Rs 4,800 was distributed between T and P in 5:3 ratio
Answer.
Question. Manu and Nandu were partners sharing profits in the ratio of 3:2. Pass journal entries under the following situations at the time of dissolution of Firm:
(a) Workmen Compensation Reserve stood at Rs. 1,00,000 and there was no liability towards Workmen Compensation.
(b) Workmen Compensation Reserve stood at Rs.1,00,000 and liability in respect of it was as-certain at Rs.75,000.
(c) Workmen Compensation Reserve stood at Rs.1,00,000 and liability in respect of it was as-certained at Rs. 1,20,000.
(d) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it was ascertained at Rs. 1,00,000.
Answer.
Question. Disha, Mohit and Nandan are partners. They decided to dissolve the firm. Pass necessary journal entries for the following after the various assets (other than cash and bank) and outside liabilities have been transferred to Realisation Account:
a) Ann old typewriter which was not recorded in the books was sold for Rs 2,000 whereas the expected value was Rs 5,000
b) Stock of Rs 70,000 was taken by Disha at a discount of 30%
c) Total creditors of the firm were Rs 20,000. A creditor for Rs 2,000 was untraceable and other creditors accepted payment allowing 10% discount.
d) Mohit paid realization expenses of Rs 18,000 out of his private funds, who was to be paid remuneration of Rs 13,000 for completing the dissolution process and was responsible to bear all the realization expenses.
e) Nandan had taken a loan of Rs 50,000 from the firm, which was paid fully by him to the firm
f) Rs 12,000 were recovered from a debtor which was written off as Bad Debts last year.
Answer.
Question. Record necessary journal entries in the following cases:
a) Creditors worth Rs 85,000 accepted Rs 40,000 as cash and investment worth Rs 43,000 in full settlement of their claim
b) Creditors were Rs 16,000. They accepted machinery valued at Rs 18,000 in settlement of their claim
c) Creditors were Rs 90,000. They accepted buildings valued at Rs 1,20,000 and paid cash to the firm Rs 30,000
Answer.
Question. Record necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya:
i) There was an old furniture in the firm which had been written off completely in the books. This was sold for Rs 3,000
ii) Ashish, an old customer whose account for Rs 1,000 was written off as bad in the previ-ous year, paid 60% of the amount.
iii) Paras agree to take over the firm’s goodwill (not recorded in the books of the firm) for a valuation of Rs 30,000
iv) There was an old typewriter which had been written off completely from the books. It was estimated to realize Rs 400. It was taken away by Priya at an estimated price less 25%
v) There were 1000 shares of Rs 10 each in Star Limited acquired at a cost of Rs 2000 which had been written off completely from the books. These shares are valued at Rs 6 each and divided among the partners in their profit sharing ratio
Answer.
Question. The book value of assets other than cash and bank transferred to realization account is Rs 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount or 20%. 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realized 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 realization of assets
Answer.
Question. Pass necessary journal entries to record the following at the time of dissolution of the partnership firm assuming that the Assets and third party liabilities have already been transferred to Realisation A/c:
a) An unrecorded asset of Rs 300 was taken over by A, one of the partners
b) Creditors were paid Rs 14,000 in full settlement of their claims for Rs 15,000
c) Sundry assets realized Rs 1,95,000
d) B (another partner) was to bear the expenses on dissolution, which amounted Rs 1,500
e) Value of Sundry liabilities including creditors at the time of dissolution was Rs 1,90,000
f) A take over the loan payable to MrsA Rs 15,000
Answer.
LONG ANSWER QUESTIONS
Question. Parul, Payal and Priyanka are partners. They decided to dissolve the firm. Pass necessary journal en-tries for the following after the various assets (other than cash and Bank) and outside liabilities have been transferred to Realisation Account:
a) There were total debtors of Rs 76,000. A provision of Bad and Doubtful Debts also stood in the books at Rs 6,000. Rs 12,000 debtors proved bad and rest paid the amount due
b) Parul agreed to pay off her husband’s loan of Rs 7,000 at a discount of 5%
c) Total creditors of the firm were Rs 40,000. Creditors worth Rs 10,000 were given a piece of furniture costing Rs 8,000 in full and final settlement. Remaining creditors allowed a discount of 10%
d) Payal had given a loan of Rs 70,000 to the firm which was duly paid
e) A contingent liability (not provided for) of Rs 4,000 was also discharged
f) The firm had a debit balance of Rs 27,000 in the Profit & Loss A/C on the date of dissolu-tion
Answer.
Question. A, B and C were partners sharing profits and losses in the ratio 2:1:1. The partners decided to dissolve the firm. Their Balance Sheet as at 31.3.2020 was as under:
Following transactions took place
a) The assets realised Goodwill Rs 20,000, Land and Building Rs 1,00,000, Plant and machinery Rs 50,000, Motor car Rs 25,000 and Debtors Rs 24,000
b) Realisation expenses were Rs 2,000
Prepare the Realisation A/C,Partner’s Capital Accounts and Cash A/C to close the books of the firm.
Answer.
Question. Arun and Tarun were partners sharing profit and losses in the ratio 3:2. They decided to dissolve the firm on 31.3.2019, when their balance sheet was as under:
The firm was dissolved on 1.4.2019 on the following terms:
a) Arun took over the investment at Rs 8,000 and agreed to pay off the loan of his wife
b) The assets realized as follows: Stock Rs 2,000, Debtors Rs 20,500, Furniture Rs 1,000 more than its book value, Plant Rs 20,000 less than its book value.
c) Expenses of realization were Rs 1,200
d) Creditors were paid off at a discount of 3%
e) Firm had an unrecorded asset which was valued at Rs 5,000 which was accepted by unrecorded liability of Rs7,000, in full settlement of their claims
Prepare the Realisation A/C, Partner’s Capital Accounts and Bank A/C to close the books of the firm.
Answer.
Question. A, B and C were partners sharing profit in the ratio 3:1:1. Their Balance Sheet 31.3.2019, the date on which they dissolve their firm, was as follow:
BALANCE SHEET AS ON 31.3.2019
It was agreed that:
a) A to take over Bills receivable at Rs 800, debtors amounting to Rs 20,000 at Rs 17,200 and the Creditors of Rs 6,000 were to be paid by him at this figure.
b) B to take over all Stock for Rs 7,000 and some Sundry assets at Rs 7,200 (being 10% less than the book value)
c) C to take over remaining sundry assets at 90% of the book value and assume the respon-sibility of discharge of loan together with accrued interest of Rs 300. The remaining debtors were sold to a debt collecting agency at 50% of the book value.
d) The expenses of realization were Rs 270.
Prepare Realisation A/c, Partner’s Capital A/c and Cash A/C
Answer.
Question. X and Y were partners sharing profit and losses in the ratio 3:2. The partners decided to dissolve the firm. Their Balance sheet as on 31.3.2021 was as under:
Following transactions took place:
a) Motor Vehicles and Stock were sold for cash at Rs 16,950 and Rs 77,600 respectively. Debtors were realized in full.
b) X took over the Land and Building at an agreed valuation of Rs 43,500
c) Creditors were paid off subject to discount of Rs 1,700
d) Expenses for realization were Rs 1,250
Prepare the Realisation Account, partner’s Capital Accounts and Bank Account to close the books of the firm.
Answer.
Question. Following is the Balance Sheet of Ramesh and Suresh as at 30.3.2021:
On the above date Suresh and Ramesh decided to dissolve the firm. Ramesh took over the credi-tors and Suresh took over the Bills payable. Assets realized as follows:
a) Debtors Rs 9,000, Furniture Rs 21,000, Stock Rs 6,000, Truck Rs 32,000 and Land and Building Rs 60,000.
b) Expenses on Realisation paid by Ramesh were Rs 1,200.
Prepare Realisation Account, Cash Account and Capital Accounts of the Partners to close the books of the firm.
Answer.
Question. Amit and Sumit were partners sharing profit and losses in the ratio 3:2. They decided to dissolve the firm on 31.12.2014, when their Balance Sheet was as under:
BALANCE SHEET
The firm was dissolved on the following terms:
a) Assets were realized as follows: Debtors Rs 1,800 and Stock Rs 2,800
b) Machinery was sold for Rs 20,000 at commission of 10%
c) Amit took over the investments at an agreed value of Rs 3,800
d) Creditors of the firm agreed to accept 5% less
e) Expenses of Realisation amounted Rs 400
f) An unrecorded furniture is sold for Rs 10,000
Prepare Realisation A/C, Partner’s Capital Accounts and Bank A/C to close the books of the firm.
Answer.
Question. A, B and C who share profits in the ratio 3:3:1 agreed upon the dissolution of their partnership firm on 31.3.2014, at which date their Balance Sheet was as under:
Following transactions took place:
a) The investments were taken over by A for Rs 17,500. A also agreed to discharge his wife’s loan. B took over stock at Rs 7,500.
b) Machinery realized Rs 65,000 and debtors realized 50% of their book value
c) The expenses of realization amounted to Rs 500.
Prepare the Realisation Account, Partner’s Capital Accounts and Bank Account to close the books of the firm.
Answer.
