Dissolution of Partnership Firm

This page contains the CBSE accountancy class 12 chapter Dissolution of Partnership Firm. You can find the questions/answers/solutions for the chapter 5 of CBSE class 12 accountancy in this page. So is the case if you are looking for CBSE class 12 Commerce related topic Dissolution of Partnership Firm. This page contains theretical questions, Test Your Understanding, Do It Yourself, Short Answers and Long Answers. If you’re looking for Numerical Questions Solutions, you can find them at Numerical Questions Solutions

Test your Understanding – I
State giving reasons, which of the following statements are true or false:
1.
Dissolution of a partnership is different from dissolution of a firm, (✔ True)
2.
A partnership is dissolved when there is a death of a partner, (✔ True)
3.
A firm is dissolved when all partners give consent to it. (✔ True)
4.
A firm is compulsorily dissolved when a partner decide to retire. (❌ False)
5.
Dissolution of a firm necessarily involves dissolution of partnership. (✔ True)
6.
A firm is compulsorily dissolved when all partners or when all except one partner become involvent. (✔ True)
7.
Court can order a firm to be dissolved when a partner becomes insane. (✔ True)
8.
Dissolution of partnership can not take place without intervention of the court. (❌ False)

Test your Understanding – II
Tick (✔) the Correct Answer
1.
On dissolution of a firm, bank overdraft is transferred to :
(a)
Cash Account
(b)
Bank Account
(c)
Realisation Account
(d)
Partner’s capital Account.
2.
On dissolution of a firm, partner’s loan account is transferred to:
(a)
Realisation Account
(b)
Partner’s Capital Account
(c)
Partner’s Current Account
(d)
None of the above.
3.
After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of any information regarding their payment, such liabilities are treated as:
(a)
Never paid
(b)
Fully paid
(c)
Partly paid
(d)
None of the above.
4.
When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to:
(a)
Realisation Account
(b)
Partner’s Capital Account
(c)
Partner’s Loan Account
(d)
None of the above.
5.
Unrecorded assets when taken over by a partner are shown in :
(a)
Debit of Realisation Account
(b)
Debit of Bank Account
(c)
Credit of Realisation Account
(d)
Credit of Bank Account.
6.
Unrecorded liabilities when paid are shown in:
(a)
Debit of Realisation Account
(b)
Debit of Bank Account
(c)
Credit of Realisation Account
(d)
Credit of Bank Account.
7.
The accumulated profits and reserves are transferred to :
(a)
Realisation Account
(b)
Partners’ Capital Accounts
(c)
Bank Account
(d)
None of the above.
8
On dissolution of the firm, partner’s capital accounts are closed through:
(a)
Realisation Account
(b)
Drawings Account
(c)
Bank Account
(d)
Loan Account.

Test your Understanding – III
Fill in the Correct Word(s):
1.
All assets (except cash/bank and fictitious assets) are transferred to the (Debit/Credit) side of Account (Realisation/Capital). (Debit, Realisation)
2.
All (internal/external) liabilities are transferred to the (Debit/Credit) side of acccount (Bank/Realisation). (External, Credit, Realisation)
3.
Accumulated losses are transferred to (Realisation/Capital Accounts) in (equal ratio/profit sharing ratio). (Capital Accounts, Profit Sharing Ratio)
4.
If a liability is assumed by a partner, such Partner’s Capital Account is (debited/credited). (Credited)
5.
If a partner takes over an asset, such (Partner’s Capital Account) is (debited/credited). (Debited)
6.
No entry is required when a (partner/creditor) accepts a fixed asset in payment of his dues. (Creditor)
7.
When creditor accepts an asset whose value is much more than the amount due to him, he will (pay/not pay) the excess amount which will be credited Account. (Pay, Realisation)
8.
When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to (Realisation/Capital) Account and Credited to (Capital/Bank) Account. (Realisation, Capital)
9.
Partner’s loan is (transfered/not transfered) in the (Realisation Account). (Not transfered)
10.
Partner’s current accounts are transferred to respective Partners’ (Loan/Capital) Accounts. (Capital)

Do it Yourself
Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm.
1.
For closure of assets accounts.
2.
For closure of liabilities accounts.
3.
For sale of assets.
4.
For settlement of a creditor by transfer of fixed assets to him.
5.
For expenses of realisation when actual expenses are paid by the partner on behalf of the firm.
6.
When a partner discharges the liability of the firm.
7.
For payment of partner’s loan.
8.
For settlement of capital accounts.
1. For closure of assets accounts, the journal entry would be as follow:
Realisation A/c
Dr.
To Assets (Individually) A/c
With book value
All asset accounts (excluding cash, bank and fictious assets) are closed by ttransferring to the debit of Realisation Account at their book value. Assets like debtors or fixed assets are transferred at gross value. While any provisions like provision for doubtful debts or provision for depreciation etc are transferred to the credit side of the Realisation account along with their liabilities.
2. For closure of liabilities accounts, the journal entry would be as follows:
Liabilties (Individually) A/c
Dr.
To Realisation A/c
With book value
All external liability accouns (including provisions), if any, after transferred to the credit of Realisation account and then closed.
3. For sale of assets
Bank A/c
Dr.
To Realisation A/c
With the sale value realized
4. For settlement of a creditor by transfer of fixed assets to him.
The following cases are applicable for settlemnet of a creditor by transfer of fixed assets to him.
a. When the worth of the asset is same as the credit amount due to him: In this case no entry is required.
b. When the worth of the asset is less than the credit amount due to him: In this case the following journal entry should be made, considering only the excess cash/bank amount paid to him.
Realisation A/c
Dr.
To Bank A/c
With excess of credit amount due over the worth of asset
b. When the worth of the asset is more than the credit amount due to him and he accepts to pay the amount due to the firm through cash/bank: In this case the following journal entry should be made, considering only the excess cash/bank amount paid by him to the firm.
Bank A/c
Dr.
To Realisation A/c
With excess of worth of asset over the credit amount due to him.
5. For expenses of realisation when actual expenses are paid by the partner on behalf of the firm.
The following journal entries are made.
Realisation A/c
Dr.
To Partner’s Capital A/c
With Realisation Expenses Amount.
6. When a partner discharges the liability of the firm.
The following journal entry is made when a partner discharges the liability of the firm:
Realisation A/c
Dr.
To Partner’s Capital A/c
With Liability Amount.
7. For payment of partner’s loan.
The following journal entry is made to pay the partner’s loan amount.
Partner’s Loan A/c
Dr.
To Cash/Bank A/c
With Loan Amount due to partner.
7. For payment of partner’s loan.
The following journal entry is made to pay the partner’s loan amount.
Partner’s Loan A/c
Dr.
To Cash/Bank A/c
With Loan Amount due to partner.
8. For settlement of capital accounts.
The following journal entry is made to settle the partners’ capital accounts
Partners’ Capital (Individual) A/c
Dr.
To Cash/Bank A/c
With capital amount due to the partner.

Short Answer Questions
1. State the difference between dissolution of partnership and dissolution of partnership firm.
The following are the differencecs between dissolution of partnership and dissolution of partnership firm
Basis
Dissolution of Partnership
Dissolution of Firm
1. Termination of business
The business is not terminated.
The business is terminated
2. Settlement of assets and liabilities
Assets and liabilities are revalued and new balance sheet is drawn.
Assets are sold and liabilities are paid-off.
3. Court’s intervention
Court does not intervene because partnership is dissolved by mutual agreement
A firm can be dissolved by the court’s order.
4. Economic relationship
Economic relationship between the partners continues. However, the form of the economic relation is changed.
Econoic relationship between the partners ceases to exist.
5. Closure of books
Does not require the closure of the books as the business is not terminated.
The books of account are closed.

2. State the accounting treatment at the time of dissolution of a firm for:
i. Unrecorded assets ii. Unrecorded liabilities
i. Accounting treatment of Unrecorded assets at the time of dissolution of a firm:
By definition the Unrecorded assts are written-off in the books of account but they still physically exist and working/usable condition. At the time of dissolution of a firm, these assets can be sold to a third party or taken by a partner or taken by a creditor in settle of their account partly or fully. The accounting treatment of the unrecorded assets will be as follows:
a.
When the unrecorded asset is sold to a third party:
Cash/Bank A/c
Dr.
To Realisation A/c
(Being unrecorded assets sold for cash)
b.
When the unrecorded asset is taken over by a partner:
Partner’s Capital A/c
Dr.
To Realisation A/c
(Being unrecorded assets taken over by the partner)
c.
When the unrecorded asset is taken over by a creditor in full settlement of his account:
No entry is required.
ii. Accounting treatment of Unrecorded liabilities at the time of dissolution of a firm:
By definition the Unrecorded liabilties are the liabilties which do not exist in the books of account but they need to be settled at the time of dissolution. At the time of dissolution of a firm, these liabilties can be paid of directly by the firm or taken over by a partner to be paid off by him. The accounting treatment of the unrecorded liabilties will be as follows:
a.
When the unrecorded liabilities are paid off by the firm:
Realisation A/c
Dr.
To Cash/Bank A/c
(Being unrecorded liabilties paid off)
b.
When the unrecorded liability is taken over by a partner:
Realisation A/c
Dr.
To Partner’s Capital A/c
(Being unrecorded liabilties taken over by the partner)

3. On dissolution, how will you deal with partner’s loan if it appears on the
(a) assets side of the balance sheet, (b) liabilities side of balance sheet.
(a) Accounting treatment of the partner’s loan appearing on the assets side of the balance sheet:
This means that the partner has taken a loan from the firm and to recover this loan from the partner, it is debited from the partner’s capital account. The corresponding journal entry will be as follows:
Partner’s Capital A/c
Dr.
To Partner’s Loan A/c
(Being partner’s loan amount transferred to his/her capital account)
(b) Accounting treatment of the partner’s loan appearing ont eh liabilities side of the balance sheet:
This means that the firm has taken a loan from the partner and it need to be cleared off during the dissolution of the firm. The partner’s loan is settled by paying the partner in cash or through bank cheque. The corresponding journal entry will be as follows:
Partner’s Loan A/c
Dr.
To Cash/Bank A/c
(Being partner’s loan cleard off by paying in cash or through bank)

4. Distinguish between firm’s debts and partner’s private debts.
Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.
(a)
The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall be divided among the partners as per their claims. This can be utilised for payment of their private liabilities.
(b)
The private property of any partner shall be applied first in payment of his private debts and the surplus, if any, may be utilised for payment of the firm’s debts, in case the firm’s liabilities exceed the firm’s assets.
Thus, if the assets of the firm are not adequate enough to pay off firm’s liabilities, the partners have to contribute out of their net private assets (private assets minus private liabilities).
The following are the differences between the firm’s debts and partner’s private debts.
Basis
Firm’s Debts
Partner’s private debts
1. Definition
Refers to the debts borrowed in the name of the firm.
Refers to the debtors borrowed by the individual partners for their household purposes.
2. Liability
All the partners in the firm both jointly and individually.
Only the concerned partner.
3. Clearing of debts using firm’s propery
Firm’s debts should be cleared first
After clearning the firm’s debts, if there any excess, it can used to clear private debts.
4. clearning of debts using private property
After clearing private debts, if there is any excess, it can be used to clear firm’s debts.
Private debts should be cleared first.
5. Representation in the books
On the liabilties side of firm’s balance sheet.
On the liabilities side of the concerned partner’s balance sheet

5. State the order of settlement of accounts on dissolution.
In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all of its assets to clear off all the claims against it. As per Section 48 of the Partnership Act 1932, the following rules are applicable subject to the agreement among the partners.
(a)
Treatment of Losses: Losses, including deficiencies of capital, shall be paid
(i)
first out of profits
(ii)
next out of capital of partners, and
(iii)
lastly, if necessary, by the partners individually in their profit sharing ratio
(b)
Application of Assets: The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i)
In paying the debts of the firm to the third parties
(ii)
In paying each partner proportionately what is due to him/her from the firm for advances. Note that this refers to the partner’s capital and is different from capital.
(iii)
In paying to each pertner proportionately what is due to him on account of capital
(iv)
If there are any assets remaining, they should be divided among the partners in their profit sharing ratio.
Thus, the amount realised from assets along with contribution from partners, if requred, shall be utilised in the following order:
i.
To pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bills payable etc. While doing so, the secured loans should be given precedence over the unsecured loans.
ii.
The balance left should be used to repay loans made by the partners to the firm. In case this balance is not enough to pay off such loans and advances, they should be paid proportionately.
iii.
The remaining amount should be used to settle capital account balances in the partners’ profit sharing ratio.

6. On what account realisation account differs from revaluation account.
The realisation account differs from revaluation account on the following basis:
Basis
Realisation Account
Revaluation Account
1. Definition
The account used to record the sale of various assets and payment of the liabilities during dissolution of the firm.
The account used to record the effect of revaluation of various assets and liabilities during the admission, retirement or death of a partner and also when the partners decide to change the profit sharing ratio.
2. Time
At the time of dissolution of the firm.
When any of the following incidents occur.
a.
Admission of a new partner
b.
Retirement of a partner
c.
Death of a partner
d.
When partners decide to change their profit sharing ratios.
3. Frequency of occurrencec
Only once while dissolving the firm.
May occur a number of times during the life time of the firm.
4. Objective
To evaluate the profit/loss on realisation of assets and settlement of liabilities.
To evaluate the profit/loss on revaluation of assets and liabilities.
5. Scope
Deals with all the assets and liabilities
Deals with only those assets and liabilties whose value is changed.
6. Transfer of profit/loss
To all the partners.
Only to the old partners
7. Recorded value
Book value
Book value and value after revaluation.
8. Closure of accounts
Accounts are closed.
Accounts are not closed.



Long Answer Questions
1. Explain the process dissolution of partnership firm?
Dissolution of a partnership firm may take place by the order of a court or witout the intervention of the court. As per Section 39 of the Indian Partnership Act, 1932, the dissolution implies that the firm ceases to exist and consequently the partnership also dissolved. In case of dissolution of the firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, the business disposes off all of its assets for settling the liabilities and other claims against it. A firm can be dissolved in any of the following manners as per the Indian Partnership Act, 1932
Dissolution of Firm
 
 
Dissolution By Agreement
(Section 40)
Compulsory Dissolution
(Section 41)
Dissolution on the Happening of Certain Contingencies
(Section 42)
Dissolution By Notice of Partnership at Will
(Section 43)
Dissolution By Court
(Section 44)
1. Dissolution by Agreement: As per this, a firm can be dissolved
(a)
with the consent of all the partners or
(b)
in accordance with a contract between the partners.
2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a)
when all the partners or all but one partner becomes insolvent, rendering them incompetent to sign a contract.
(b)
When the business of the firm becomes illegal
(c)
When some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership. For instance, when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and the country in which the business is established/registered.
3. On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved:
(a)
if constituted for a fixed term and when that term is expired.
(b)
if contrituted to carry out one or more ventures and once these ventures are completed.
(c)
by the death of a partner
(d)
by the adjudication of a partner as insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, exhibiting his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds:
(a)
When a partner becomes insane
(b)
When a partner becomes permanently incapable of performing his duties as a partner
(c)
When a partner is guilty of misconduct which is likely to adversely affect the business of the firm.
(d)
When a partner persistently commits breach of partnership agreement.
(e)
When a partner has transferred the whole of his interest in the firm to a third party
(f)
When the business of the firm cannot be carried on except at a loss
(g)
When, on any ground, the court regards dissolution to be just and equitable.
2. What is Realisation Account?
After dissolving the firm, its books of account should be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a nominal account called as realisation account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities. This net effect (profit or loss) may be transferred to partners’ capital accounts in their profit sharing ratio. So, all assets (other than cash in hand, bank balance and fictious assets, if any), and all external liabilities are transferred to the realisation. The sale of assets and payment of liabilities and realisation expenses are also recorded in the realisation account. The balance after preparing the realisation accounts gives us the profit or loss.
Preparation of realisation account serves the following purposes:
a.
Closure of all the books of accounts.
b.
Recording the transactions related to the sale of asstets and discharge of liabilities.
c.
Ascertain the profit or loss arising after realisation of assets and settlement of liabilities.
Salient Features:
1.
Sale of assets is recorded at their realised value.
2.
Settlement of liabilities is recorded a their settlement value.
3.
The balance ascertained gives the net effect (profit or loss).
4
The ascertained profit or loss is transferred to the partners’ capital accounts in their profit sharing ratio.
The following is the format of realisation account
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
Intangible Assets
…..
Bank Loan Mortgage
…..
Land and Building
…..
Sundry Creditors
…..
Plant and Machinery
…..
Bills Payables
…..
Furniture and Fittings
…..
Bank Overdraft
…..
Loan to other parties
…..
Outstanding Expenses
…..
Bills Receivables
…..
Provision for doubtful debts
…..
Sundry Debtors
…..
Cash/Bank (sale of assets)
…..
Cash/Bank (Payment of liabilities)
…..
Partner’s Capital Account (assets taken by the partner)
…..
Cash/Bank (Payment of Unrecorded liabilities)
…..
Loss (transferred to partners’ capital accounts)
…..
Partner’s capital account
…..
Investment Fluctuation Fund
…..
Investments (liability assumed by the partner)
…..
Profit (transferred to partners’ capital accounts in their profit sharing ratio)
…..
Total
…..
Total
…..
Accounting Treatment: The accounting treatment for the preparation of the revaluation account will be as follows:
1.
For Transfer of Assets: All assets accounts (excluding cash, bank and the fictious assets) are closed by transferring them to the debit of realisation account at their book values.
Realisation A/c
Dr.
To Assets (Individually) A/c
With book value
2.
For Transfer of Liabilities: All external liabilities accounts including provisions, if any, are closed by transferring them to the credit of realisation account.
Liabilities (Individual) A/c
Dr.
To Realisation A/c
With book value
3.
For Sale of assets:
Bank A/c
Dr.
To Realisation A/c
With the amount for which assets are sold
4.
For assets taken over by a partner:
Partner’s Capital A/c
Dr.
To Realisation A/c
With the amount assets are taken over
5.
For payment of liabilities:
Realisation A/c
Dr.
To Bank A/c
With the amount at which liabilities are settled
6.
For a liability which a partner takes responsibility to discharge:
Realisation A/c
Dr.
To Partner’s Capital A/c
With the liability amount for which the partner becomes responsible
7.
Settlement of liability through transfer of assets:
i.
When the asset value is same as liability:
No entry is needed
ii.
When the asset value is less than liability and the creditor accepts the remaining amount in cash:
Realisation A/c
Dr.
To Bank A/c
With the amount the asset is deficit over the liability
iii.
When the asset value is more than liability and the remaining amount is paid by the creditor in cash:
Realisation A/c
Dr.
To Bank A/c
With the amount the asset in excess of the liability
8.
For payment of realisation expenses:
i.
When the expenses are borne by the firm:
Realisation A/c
Dr.
To Bank A/c
With the expenses amount
ii.
When expenses are paid by a partner on behalf of the firm:
Realisation A/c
Dr.
To Partner’s Capital A/c
With the expenses amount
iii.
When the partner has agreed to bear the realisation expenses:
(a)
When the realisation expenses are paid by the firm
Partner’s Capital A/c
Dr.
To Bank A/c
With the epenses amount
(a)
When the realisation expenses are paid by the partner himself
No entry is required.
Note: In no information is available regarding who is paying the expenses (whether it is the partner or the firm), then we can consider that the expenses are paid by that partner who has agreed to bear the expenses.
9.
For Remuneration to the partner who took the responsibility of realisation work:
Realisation A/c
Dr.
To Partner’s Capital A/c
With the remuneration amount
10.
For realisation of any recorded assets including goodwill, if any:
Bank A/c
Dr.
To Realisation A/c
With the realisation amount
11.
For settlement of any unrecorded liabilities:
Realisation A/c
Dr.
To Bank A/c
With the realisation amount
12.
For transferring any profit or loss on realisation:
(a)
When there is profit on realisation i.e. Cr. Balance
Realisation A/c
Dr.
To Partners’ (Individual) Capital A/c
With profit share in the profit sharing ratio
(b)
When there is loss on realisation i.e. Dr. Balance
To Partners’ (Individual) Capital A/c
Dr.
Realisation A/c
With profit share in the profit sharing ratio
3. Reproduce the format of Realisation Account.
The following is the format of realisation account
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
Intangible Assets
…..
Bank Loan Mortgage
…..
Land and Building
…..
Sundry Creditors
…..
Plant and Machinery
…..
Bills Payables
…..
Furniture and Fittings
…..
Bank Overdraft
…..
Loan to other parties
…..
Outstanding Expenses
…..
Bills Receivables
…..
Provision for doubtful debts
…..
Sundry Debtors
…..
Cash/Bank (sale of assets)
…..
Cash/Bank (Payment of liabilities)
…..
Partner’s Capital Account (assets taken by the partner)
…..
Cash/Bank (Payment of Unrecorded liabilities)
…..
Loss (transferred to partners’ capital accounts)
…..
Partner’s capital account
…..
Investment Fluctuation Fund
…..
Investments (liability assumed by the partner)
…..
Profit (transferred to partners’ capital accounts in their profit sharing ratio)
…..
Total
…..
Total
…..
4. How deficiency of creditors is paid off at the time of dissolution of firm.
Deficiency of creditors is paid off at the time of dissolution of firm in the following manner.
Every attempt is made to settle the creditors liabilities by using the sales proceeds of the assets. In some cases, the assets are swapped with the creditors to settle the liabilities. Sometimes, the sales proceeds from the sale of assets will not be sufficient to settle the creditors liabilities. In such instances, the partners private assets are used to settle the liabilities of the creditors. When there are still some unsettled liabilities they are termed as deficiency of creditors.
The accounting treatment to deal with such a scenario is through any of the following two methods:
1.
Creating a Deficiency account and transferring the deficiencies into that account: Deficiency account is prepared when the company becomes bankrupt due to high losses, decrease in the value of the assets or any other reason. Contrary to the double entry system, deficiency account is not prepared in the double entry format. It rather consists of a list of items that contribute or increase the deficiency. It usually accompanies the Statement of Affairs. It also includes the amount that remained unsettled with the creditors.
2.
Transferring the deficiencies to Partners’ capital accounts: The unsettled deficienes are transferred to partners’ capital accounts. The purpose of transferring the deficiencies into the partners’ capital accounts is to enable the partners to contribute towards the deficiency. If the partner is unable to bear the deficiency, then such a partner is said to be insolvent. In such cases, the sum not recoverable from the partner is regarded as capital loss to the firm. In the absence of any agreement, to the contrary, such a capital loss is to be borne by the remaining solvent partners in accordance with the principle laid down in Garner vs. Murray case, which states that the solvent partners have to bear such loss in the ratio of their capitals as on the date of dissolution.