Chapter dissolution-of-partnership-firm: Dissolution of Partnership Firm Case Study Questions | accountancy Class 12 CBSE

Chapter dissolution-of-partnership-firm: Dissolution of Partnership Firm Case Study Questions | accountancy Class 12 CBSE | ByteNotes.in

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Priya and Kavya are partners sharing profits in the ratio of 3:2. On March 31, 2023, they decided to dissolve their firm. Their balance sheet showed: Priya's Capital Rs. 60,000; Kavya's Capital Rs. 40,000; Sundry Creditors Rs. 30,000; General Reserve Rs. 10,000. Assets included: Cash at Bank Rs. 15,000; Debtors Rs. 35,000; Stock Rs. 40,000; Fixed Assets Rs. 50,000. The firm was dissolved and debtors realised at 5% less than book value, stock at Rs. 38,000, and fixed assets at Rs. 55,000. Realisation expenses amounted to Rs. 1,500. Creditors were paid in full. Students are asked to analyse the dissolution process and accounting treatment.

Question 1: What is the first step in accounting treatment when a partnership firm is dissolved?

The first step is to open a Realisation Account.
All assets (except cash/bank and fictitious assets) are transferred to the debit side of the Realisation Account at their book values.

Question 2: How will the General Reserve of Rs. 10,000 be treated at the time of dissolution?

General Reserve is an accumulated profit and will NOT be transferred to Realisation Account.
It will be transferred directly to Partners' Capital Accounts in their profit sharing ratio of 3:2, i.e., Rs. 6,000 to Priya and Rs. 4,000 to Kavya.

Question 3: Calculate the profit or loss on realisation and show how it will be distributed between Priya and Kavya.

Realisation Account Dr. side: Debtors Rs. 35,000 + Stock Rs. 40,000 + Fixed Assets Rs. 50,000 + Bank (Creditors + Expenses) Rs. 31,500 = Total Rs. 1,56,500.
Realisation Account Cr. side: Sundry Creditors Rs. 30,000 + Bank (Debtors Rs. 33,250 + Stock Rs. 38,000 + Fixed Assets Rs. 55,000) = Rs. 1,56,250.
Loss on Realisation = Rs. 1,56,500 – Rs. 1,56,250 = Rs. 250. This loss will be borne by Priya (Rs. 150) and Kavya (Rs. 100) in their profit sharing ratio of 3:2.

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Case Set 2

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Arjun, Bhim and Nakul are partners sharing profits in the ratio of 2:2:1. On March 31, 2023, the firm was dissolved. The balance sheet showed Creditors Rs. 25,000; Bank Loan Rs. 20,000; General Reserve Rs. 15,000; Capitals: Arjun Rs. 50,000, Bhim Rs. 40,000, Nakul Rs. 30,000. Assets included Cash Rs. 10,000; Debtors Rs. 45,000; Stock Rs. 60,000; Buildings Rs. 65,000. Arjun agreed to take over Buildings at Rs. 70,000. Bhim agreed to pay off the Bank Loan and took over Debtors at Rs. 42,000. Nakul took over Stock at book value. Creditors were settled at 10% discount. Realisation expenses Rs. 2,000 were paid by Arjun on behalf of the firm.

Question 1: What journal entry will be recorded when Arjun pays Rs. 2,000 as realisation expenses on behalf of the firm?

Realisation A/c Dr. Rs. 2,000
To Arjun's Capital A/c Rs. 2,000 (Being realisation expenses paid by Arjun on behalf of the firm)

Question 2: What journal entry will be passed when Bhim takes responsibility to pay the Bank Loan of Rs. 20,000?

When Bhim assumes the liability of Bank Loan, the entry will be: Realisation A/c Dr. Rs. 20,000
To Bhim's Capital A/c Rs. 20,000 (Being Bank Loan liability assumed by Bhim)

Question 3: Calculate the amount realised from creditors settlement and explain the accounting treatment for assets taken over by partners.

Creditors = Rs. 25,000; discount at 10% = Rs. 2,500; so creditors paid = Rs. 22,500. Entry: Realisation A/c Dr. Rs. 22,500, To Bank A/c Rs. 22,500.
For Arjun taking over Buildings at Rs. 70,000: Arjun's Capital A/c Dr. Rs. 70,000, To Realisation A/c Rs. 70,000.
For Bhim taking over Debtors at Rs. 42,000: Bhim's Capital A/c Dr. Rs. 42,000, To Realisation A/c Rs. 42,000. Similarly for Nakul taking Stock at book value Rs. 60,000: Nakul's Capital A/c Dr. Rs. 60,000, To Realisation A/c Rs. 60,000.

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Case Set 3

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Ravi and Mohan are equal partners. Their firm is being dissolved. The Balance Sheet as on March 31, 2023 shows: Sundry Creditors Rs. 40,000; Ravi's Loan Rs. 15,000 (asset side); Mohan's Loan Rs. 20,000 (liability side); Capitals: Ravi Rs. 80,000; Mohan Rs. 60,000. Assets: Cash Rs. 10,000; Debtors Rs. 55,000; Machinery Rs. 90,000; Investment Rs. 40,000. All assets were realised at book value except machinery which was sold for Rs. 95,000. Creditors were paid Rs. 38,000 in full settlement. There was an unrecorded computer sold for Rs. 8,000. Realisation expenses Rs. 3,000 were borne by Ravi personally.

Question 1: How will Ravi's Loan (appearing on assets side) and Mohan's Loan (appearing on liability side) be treated at the time of dissolution?

Ravi's Loan on assets side means Ravi has taken a loan from the firm. It will be recovered from Ravi. Entry: Bank A/c Dr., To Loan to Ravi A/c.
Mohan's Loan on liability side means the firm owes money to Mohan. It will be paid before capitals. Entry: Mohan's Loan A/c Dr., To Bank A/c.

Question 2: What journal entry is passed for the unrecorded computer sold for Rs. 8,000?

For realisation of an unrecorded asset, the entry is: Bank A/c Dr. Rs. 8,000
To Realisation A/c Rs. 8,000 (Being unrecorded asset realised)

Question 3: If Ravi agreed to bear realisation expenses of Rs. 3,000 himself (pays personally), what entry is required? Also explain the rule regarding the order of settlement of accounts on dissolution.

Since Ravi agreed to bear and also personally paid the expenses, NO entry is required in the firm's books as the partner himself paid without involving firm's funds.
Order of settlement under Section 48: (i) First, outside liabilities (creditors, loans, etc.) are paid from firm's assets. (ii) Then, partner loans/advances are repaid. (iii) Then, partners' capital accounts are settled.
Finally, any surplus is divided among partners in their profit sharing ratio.

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Case Set 4

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A partnership firm of Sunita, Rekha and Pooja sharing profits in 3:2:1 was dissolved on March 31, 2023. Their Balance Sheet showed: Creditors Rs. 36,000; Bills Payable Rs. 24,000; Investment Fluctuation Reserve Rs. 6,000; Capitals: Sunita Rs. 90,000, Rekha Rs. 60,000, Pooja Rs. 45,000. Assets included: Cash Rs. 12,000; Debtors Rs. 60,000; Investments Rs. 80,000; Plant Rs. 1,09,000. On dissolution, Plant was sold for Rs. 1,20,000. Investments were taken over by Sunita at book value less 10%. Debtors realised Rs. 57,000. Bills payable were settled at a discount of 5%. Creditors accepted Plant worth Rs. 30,000 and paid cash Rs. 6,000 to the firm.

Question 1: How will the Investment Fluctuation Reserve be treated in the Realisation Account?

Investment Fluctuation Reserve is transferred to the Credit side of the Realisation Account.
It acts as a provision against fall in value of investments and reduces the debit side effect.

Question 2: When creditors accept Plant worth Rs. 30,000 and pay Rs. 6,000 cash to the firm, what journal entry is recorded?

Since the creditor receives an asset worth more than the dues, the creditor pays the difference. Entry: Bank A/c Dr. Rs. 6,000, To Realisation A/c Rs. 6,000.
No separate entry is needed for the asset transferred to the creditor as it is already accounted for in the Realisation Account.

Question 3: Calculate the value at which Sunita takes over investments and prepare the journal entry. Also calculate profit/loss on realisation if total debit side excluding profit = Rs. 3,05,000 and total credit side excluding profit = Rs. 3,12,000.

Investment book value = Rs. 80,000. Sunita takes over at 10% less = Rs. 80,000 – Rs. 8,000 = Rs. 72,000. Entry: Sunita's Capital A/c Dr. Rs. 72,000, To Realisation A/c Rs. 72,000.
Profit on Realisation = Cr. side total – Dr. side total = Rs. 3,12,000 – Rs. 3,05,000 = Rs. 7,000.
Profit distribution in 3:2:1 ratio: Sunita = Rs. 3,500; Rekha = Rs. 2,333; Pooja = Rs. 1,167.

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Case Set 5

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Amit and Sumit are partners sharing profits equally. Their firm was dissolved. Amit was appointed to look after the dissolution process and was to be paid a fixed remuneration of Rs. 12,000 irrespective of actual expenses. He also agreed to bear actual realisation expenses. The actual realisation expenses paid by the firm amounted to Rs. 9,000. Assets realised Rs. 2,00,000. Liabilities paid Rs. 80,000. Opening capitals: Amit Rs. 70,000, Sumit Rs. 60,000. There was also an outstanding salary of Rs. 5,000 not recorded in the books. This unrecorded liability was discovered and paid during dissolution.

Question 1: What journal entry is passed for the fixed remuneration of Rs. 12,000 allowed to Amit?

Realisation A/c Dr. Rs. 12,000
To Amit's Capital A/c Rs. 12,000 (Being remuneration allowed to Amit for looking after dissolution work)

Question 2: When actual realisation expenses of Rs. 9,000 are paid by the firm but are to be borne by Amit, what journal entry is passed?

Since the firm paid but Amit agreed to bear, the entry will be: Amit's Capital A/c Dr. Rs. 9,000, To Bank A/c Rs. 9,000.
The expense is debited to Amit's Capital Account (not Realisation Account) since he agreed to bear it.

Question 3: What is the accounting treatment for the unrecorded outstanding salary of Rs. 5,000 paid during dissolution? Explain the concept of unrecorded liabilities with its journal entry.

An unrecorded liability is one that was not previously recorded in the books of the firm but needs to be settled at the time of dissolution.
When such a liability is paid: Realisation A/c Dr. Rs. 5,000, To Bank A/c Rs. 5,000. This is debited to Realisation Account because it is an additional cost of dissolution.
The effect of paying unrecorded liabilities is to reduce profit or increase loss on realisation, which is then shared by partners in their profit sharing ratio.

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Chapter dissolution-of-partnership-firm: Dissolution of Partnership Firm | Case Study Questions

Passage

Question 1: What is the first step in accounting treatment when a partnership firm is dissolved?

Question 2: How will the General Reserve of Rs. 10,000 be treated at the time of dissolution?

Question 3: Calculate the profit or loss on realisation and show how it will be distributed between Priya and Kavya.

Passage

Question 1: What journal entry will be recorded when Arjun pays Rs. 2,000 as realisation expenses on behalf of the firm?

Question 2: What journal entry will be passed when Bhim takes responsibility to pay the Bank Loan of Rs. 20,000?

Question 3: Calculate the amount realised from creditors settlement and explain the accounting treatment for assets taken over by partners.

Passage

Question 1: How will Ravi's Loan (appearing on assets side) and Mohan's Loan (appearing on liability side) be treated at the time of dissolution?

Question 2: What journal entry is passed for the unrecorded computer sold for Rs. 8,000?

Question 3: If Ravi agreed to bear realisation expenses of Rs. 3,000 himself (pays personally), what entry is required? Also explain the rule regarding the order of settlement of accounts on dissolution.

Passage

Question 1: How will the Investment Fluctuation Reserve be treated in the Realisation Account?

Question 2: When creditors accept Plant worth Rs. 30,000 and pay Rs. 6,000 cash to the firm, what journal entry is recorded?

Question 3: Calculate the value at which Sunita takes over investments and prepare the journal entry. Also calculate profit/loss on realisation if total debit side excluding profit = Rs. 3,05,000 and total credit side excluding profit = Rs. 3,12,000.

Passage

Question 1: What journal entry is passed for the fixed remuneration of Rs. 12,000 allowed to Amit?

Question 2: When actual realisation expenses of Rs. 9,000 are paid by the firm but are to be borne by Amit, what journal entry is passed?

Question 3: What is the accounting treatment for the unrecorded outstanding salary of Rs. 5,000 paid during dissolution? Explain the concept of unrecorded liabilities with its journal entry.

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