Steps in Accounting for Dissolution of Partnership Firm 1) Scrap the Balance Sheet: For this purpose we open one special Account Realisation Account

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1 14 Chapter Partnership Accounts Dissolution of Partnership A firm stands dissolved in the following cases: 1. The partners agree that the firm should be dissolved. 2. All partners except one become insolvent. 3. The business becomes illegal. 4. In case of partnership at will, a partner gives notice of dissolution. Problems on Dissolution of Partnership Firm Steps in Accounting for Dissolution of Partnership Firm 1) Scrap the Balance Sheet: For this purpose we open one special Account Realisation Account What is Realisation Account? It is Special Profit & Loss A/c, prepared to know Profit / Loss on dissolution. We open this account for two Purposes. 1. To know Profit or Loss on dissolution. 2. To Close our Books of Accounts. (a) Assets (b) Liabilities Transfer to Realization A/c Transfer to Realization A/c (c) Specific Reserves against Assets eg. RDD, Stock Reserve (d) Other Reserves (e) Partners Loan (f) Partners Current A/c Transfer to Realization A/c Transfer to Partners Capital A/c eg. General Reserve in Profit Sharing Ratio. Transfer to Partners Capital A/c Transfer to Partners Capital A/c (g) Cash A/c and Partners Capital A/c's are not closed 2) Sell All Assets Bank A/c... Dr. To Realisation A/c Some Assets may be taken over by one of the Partners Partners Capital A/c... Dr. To Realisation A/c

2 2 3) Liabilities are paid or taken over by Partners Realisation A/c...Dr. To Cash A/c Partners Capital A/c 4) Pay Dissolution Expenses if any - Realisation A/c...Dr. To Cash A/c 5) Close Realisation A/c Transfer Profit /Loss to Partners Capital A/c in PSR 6) Pay Partners Cash A/c and Capital. Capital A/c will be closed. Remarks: 1. Goodwill : From accounting point of view Goodwill is of 2 types (a) (b) Self-Generated Goodwill Since it has no Specific measurable acquisition cost, it shall not be recorded in the books of Accounts. Acquired (Purchased) Goodwill When one business is acquired, price is paid for the Goodwill. Such acquired Goodwill appears in the Balance Sheet & it is written off over the period of 5 years as per AS 14. In the Context of Dissolution of Partnership, no special accounting treatment is needed, if Goodwill appears in the Balance Sheet. Close this account like other assets by transferring to Realization A/c. 2. Joint Life Policy or Several Life Policies: This is the asset owned by Partnership firms. If such asset appears in the Balance Sheet, close such account like other assets by transferring to Realisation A/c Problem No.1 : Amit and Sumit are in Partnership. On 1 st April 2017, they decided to dissolve the Partnership. Their Balance Sheet as on 1 st April 2017 stood as under: Amit s Capital 20,00,000 Sundry Assets 50,00,000 Sumit s Capital 10,00,000 Sundry Liabilities 20,00,000 50,00,000 50,00,000 Profit Sharing Ratio is 2:1 All assets are sold for ` 72,00,000 All liabilities are paid at ` 19,00,000 in full settlement. Dissolution Expenses are ` 50,000 Close the books of Accounts. Problem No.2 : Following is the Balance Sheet of M/s. Fast and Quick as at 31st December, 2011 Liabilities Rs. Rs. Assets Rs. Rs. Sundry Creditors 20,000 Plant & Machinery 40,000 Fast's Loan 10,000 Patents 6,000 General reserve 10,000 Stock 25,000 Capitals: Sundry Debtors 19,000 Fast 30,000 (-) Prov. for Doubtful Debts (1,000) 18,000 Quick 25,000 55,000 Cash 6,000 95,000 95,000

3 3 Fast and Quick share profits in the ratio of 3:2. On 1st January, 2012 the firm was dissolved Fast took over the patents at a valuation of Rs. 5,000. The other assets realised as under: Rs. Goodwill 15,000 Plant & Machinery 30,000 Stock 22,000 Sundry Debtors 18,500 Total 85,500 The Sundry Creditors were paid off at a discount of 5%. The expense amounted to Rs.3,500. Close the books of accounts. Problem No.3: A, B and C were partners sharing profits and losses in the ratio of 3:2:1 respectively. On account of difference amongst them, they agreed to dissolve the Partnership on 31st December, 2009 on which the date a balance sheet was prepared and it stood as under-. Capital Accounts Goodwill 30,420 - A 28,000 Plant and Machinery 40,900 - B 15,000 Furniture 4,310 - C 8,000 Stock 13,780 Loan from A's wife 10,000 Book debts 35,600 Sundry creditors 37,800 Joint life policy 17,700 Bank overdraft 40,430 Accrued agency commission 9,370 Life policy fund 17,700 Cash at Bank 4,850 1,56,930 1,56,930 a) The life policy was surrendered for ` 13,300. b) Interest on drawings to date of dissolution was A `.600, B `.400, C `. 2,00; c) A agreed to take Goodwill and plant and machinery for `.60,000 and agreed to discharge his wife's loan and bank overdraft. d) Furniture and stock were divided equally between A and B at an agreed valuation of ` 24,000. e) The book debts were assigned to the creditors of the firm in full satisfaction of their claim. f) The agency commission was recovered in time. g) A bill of ` 2,000 under discount was returned dishonored with noting charges ` 30 and subsequently it proved value less. h) The expenses of dissolution, viz. `. 1,200 were agreed to be borne by A. i) C agreed to the above arrangement on payment to him `.10,000 in full satisfaction of his right, title and interest in the firm. You are required to state realization, cash and final accounts of the partners on completion of the dissolution proceedings. (Journal entries are not required.) Key Points to Learn : (a) Dissolution of Partnership (b) Interest on Drawings (c) Book debts were assigned to Creditors (d) Discounted bill dishonored & valueless (d) Dissolution Expenses are borne by A (e) C's claim is satisfied with mutually decided amount.

4 4 Problem No.4: Ram Rahim and Anthony were in partnership sharing profits and losses in the ratio of ½, 1/3 and 1/6 respectively. They decided to dissolve the partnership firm on , when the Balance Sheet of the firm appeared as under: Balance Sheet of the firm as on Liabilities ` ` Assets `. Sundry Creditors Bank Overdraft Joint Life Policy Reserve Loan from Mr Ram Capital Accounts: Ram Rahim Anthony 4,20,000 2,25,000 1,20,000 5,67,000 6,06,450 2,65,500 1,50,000 Goodwill A/c Plant and Machinery Furniture Stock Sundry Debtors Joint Life Policy Commission Receivable Cash on Hand 4,56,300 6,07,500 64,650 2,36,700 5,34,000 2,65,500 1,40,550 48,750 7,65,000 23,53,950 23,53,950 The following details are relevant for dissolution: (i) The joint life policy was surrendered for ` 2,32,500. (ii) Ram took over goodwill and plant and machinery for ` 9,00,000 (iii) Ram also agreed to discharge bank overdraft and loan from Mr. Ram. (iv) Furniture and stocks were divided equally between Ram and Rahim at an agreed valuation of ` 3,60,000 (v) Sundry debtors were assigned to firm s creditors in full satisfaction of their claims. (vi) Commission receivable was received in to in time (vii) A bill discounted was subsequently returned dishonored and proved valueless `.30,750 (including ` 500 noting charges). (viii) Ram paid the expenses of dissolution amounting to `.18,000. (viii) Antony agreed to receive `.1,50,000 in full satisfaction of his rights, title and interest in the firm. You are required to show accounts relating to closing of books on dissolution of the firm. [Nov 1998, Marks 15] Insolvency of Partner Steps in Accounting for Insolvency of Partner 1. Follow all steps needed for dissolution. 2. Find out Realisation Profit / Loss - Transfer to all Partners in PSR. 3. Find out Insolvency Loss - It shall be borne by solvent partner in their Capital Ratio. How do you compute Capital Ratio- Situation No.1 : If partners are having fixed capitals ( i.e. Current Account are maintained ), capital ratio shall be computed on the basis of fixed capitals. Fixed Capitals ---- Fixed Capital Ratio. Situation No.2 : If Partners Capital are fluctuating ( i.e. No Current Accounts are maintained ), Capital Ratio shall be computed on the basis of amount standing to the credit of solvent partner just before dissolution. 4. If in the problem it is specifically given to follow Garner Vs Murry Case, pass entry for solvent Partners bringing cash, equal to their share in realization loss. 5. Close Cash Account and Other Parners Capital Accounts

5 5 Problem No.5: P, Q and R were partners sharing profits and losses in the ratio of 3: 2: 1, no partnership salary or interest on capital being allowed. Their balance sheet on 30th June, 2012 is as follows: Liabilities Rs. Rs. Assets Rs. Rs. Fixed Capital Fixed Assets P 20,000 Goodwill 40,000 Q 20,000 Freehold Property 8,000 R 10,000 50,000 Plant & Equipment 12,800 Current Accounts: Motor Vehicle 700 P 500 Current Assets Q 9,000 9,500 Stock 3,900 Loan from P 8,000 Trade Debtors 2,000 Trade Creditors 12,400 (-) Provision (100) 1,900 Cash at Bank 200 R's Current Account 400 Profit & Loss 12,000 Account 79,900 79,900 On 1st July, 2012 the partnership was dissolved. Motor Vehicle was taken over by Q at a value of ` 500 but no cash passed specifically in respect of this transaction. Sale of other assets realised the following amounts: Rs. Goodwill Nil Freehold property 7,000 Plant & Equipment 5,000 Stock 3,000 Trade debtors 1,600 Trade Creditors were paid Rs.11,700 in full settlement of their debts. The costs of dissolution amounted to Rs.1,500. the loan from P was repaid, P and Q were both fully solvent and able to bring in any cash required but R was forced into bankruptcy and was only able to bring 1/3 of the amount due. You are required to show, following accounts by applying G Vs M (a) Cash and Bank Account, (b) Realisation Account, and (c) Partners Fixed Capital Accounts (after transferring Current Accounts balances). Problem No.6: A, B, C and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their balance sheet was as under: Liabilities Rs. Rs. Assets Rs. Rs. Creditors 15,700 Bank 535 Employees Provident 6,300 Debtors 15,850 Fund Capital Accounts Stock 25,200 A 40,000 Prepaid Expenses 800 B 20,000 60,000 Plant & Machinery 20,000 Patents 8,000 C's Capital A/c 3,200 D's Capital A/c 8,415 82,000 82,000

6 6 Following information is given to you: 1. One of the creditors took some of the patents whose book value was Rs.5,000 at a valuation of Rs.3,200. Balance of the creditors were paid at a discount of Rs There was a joint life policy of Rs.20,000 (not mentioned in the balance sheet) and this was surrendered for Rs.4,500. The remaining assets were realized the following values: Debtors Rs.10,800; stock Rs.15,600; Plant & Machinery Rs.12,000; and Patents at 60% of their book-values Expenses of realization amounted Rs.1,500. D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firms claim against his estate. Prepare necessary ledger accounts. Problem No.7: M/s. X, Y, Z were in partnership sharing profits and losses in the ratio of 2:2:1 respectively, had the following Balance Sheet as at December 31, 2012: Liabilities Rs. Rs. Assets Rs. Rs. Capital Fixed Assets 40,000 X 29,200 Stock 25,000 Y 10,800 Book Debts 25,000 Z 10,000 50,000 (-) Provision 5,000 20,000 Z's Loan 5,000 Cash 1,000 Loan from Mrs. X ` 10,000 Advance to Mr. Y 4,000 Sundry Trade Creditors 25,000 90,000 90,000 The firm was dissolved on the date mentioned above due to continued losses. After drawing up the balance sheet given above, it was discovered that goods amounting to ` 4,000 have been purchased in November, 2012 and had been received but the purchase was not recorded in books. Fixed assets realised ` 20,000; Stock ` 21,000 and Book Debt ` 20,500. Similarly, the creditors allowed a discount of 2% on the average. The expenses of realisation come to ` 1,080. X agreed to take over the loan of Mrs. X. Y is insolvent, and his estate is unable to contribute anything. Give accounts to close the books; work according to the decision in Garner vs. Murray. Problem No. 8: 'Thin', 'Short' and 'Fat' were in Partnership sharing profits and losses in the ratio of 2:2:1 on 30 th September, 2012 their Balance Sheet was as follows: Liabilities Rs. Rs. Assets Rs. Rs. Capital Accounts Premises 50,000 Thin 80,000 Fixtures 1,25,000 Short 50,000 Plant 32,500 Fat 20,000 1,50,000 Stock 43,200 Current Accounts Debtors 54,780 Thin 29,700 Short 11,300 Fact (Dr.) (14,500) 26,500 Sundry Creditors 84,650 Bank Overdraft 44,330 3,05,480 3,05,480

7 7 'Thin decides to retire on 30th September, 2012 and as Fat appears to be short of private assets, Short decides that he does not wish to take over Thin s share of partnership, so all three partners decide to dissolve the partnership with effect from 30th September, It then transpires that Fat has no private assets whatsoever. The premises are sold for ` 60,000 and the plant for ` 1,07,500. The fixtures realize ` 20,000 and the stock is acquired by another firm at book value less 5%. Debtors realise ` 45,900. Realisation expenses amount to ` 4,500. The bank overdraft is discharged and the creditors are also paid in full. You are required to write up the following ledger accounts in the partnership books following the rules in Garner vs. Murray: (i) Realisation Account; (ii) Partners Current Accounts; (iii) Partners Capital Accounts showing the closing of the firm s books. Problem No.9: A, B, C and D are sharing profits and losses in the ratio 5:5:4:2. Frauds committed by C during the year were found out and it was decided to dissolve the partnership on 31 st March, 2010 when their Balance Sheet was as under: Capital Building 1,20,000 - A 90,000 Stock 85,500 - B 90,000 Investments 29,000 - C --- Debtors 42,000 - D 36,000 Cash 14,500 General reserve 24,000 C 15,000 Trade creditors 46,000 Bills payable 20,000 3,06,000 3,06,000 Following information is given to you: (i) A cheque for ` 4,300 received from debtor was not recorded in the books and was misappropriated by C. (ii) Investments costing ` 5,400 were sold by C at ` 7,900 and the funds transferred to his personal account. this sale was omitted from the firm s books. (iii) A creditor agreed to take over investments of the book value of `5,400 at ` 8,400. The rest of the creditors were paid off at a discount of 2%. (iv) The other assets realised as follows: Building 105% of book value. Stock `78,000 Investments The rest of investments were sold at a profit of `4,800 Debtors The rest of the debtors were realised at a discount of 12%. (v) The bills payable were settled at a discount of `400 (vi) The expenses of dissolution amounted to `4,900. (vii) It was found out that realization from C s private assets would only be ` 4,000. Prepare the necessary Ledger Accounts. [Nov 2010, Marks 16]

8 8 On the above 1) Problem, Examiner commented on students Performance as under : 2) 3) Dissolution of Partnership Firm: Many candidates failed to give correct 4) working notes as a result of which they were not able to prepare correct realisation account and capital accounts. Ref : ICAI Website Problem No.10: Hope, Faith, Wisdom and Courage had been carrying on business in partnership sharing profits and losses in the ratio of 3:2: 1:1. They decided to dissolve the partnership on the basis of the following Balance Sheet as on 30 April, Capital Accounts : Premises 60,000 Hope 50,000 Furniture. 20,000 Faith 30,000 80,000 Stock 50,000 General Reserve 28,000 Debtors 20,000 Capital Reserve 7,000 Cash 4,000 Sundry Creditors 10,000 Capital Overdrawn : Mortgage Loan 40,000 Wisdom 5,000 Courage 6,000 11,000 1,65,000 1,65, The assets were realised as under: ` Debtors 12,000 Stock 20,000 Furniture 8,000 Premises 45, Expenses of dissolution amounted to ` 2, Additional Creditors of `.6,000 had to be met. 4. General Reserve unlike Capital Reserve was built up by appropriation of profits. You are required to draw up the Realisation account, Partner's Capital accounts and the Cash account assuming that Wisdom became insolvent and nothing «as realised from his private estate, apply the principles laid down in Garner vs. Murray. Key Points to Learn : (a) Insolvency of a Partner (b) Fluctuating Capitals

9 9 Problem No.11: P, Q, R and S had been carrying on business in partnership sharing profit and losses in the ratio of 4:3:2:1. They decide to dissolve the partnership on the basis of following Balance Sheet as on 30 th April, 2011: Capital Accounts Land & Building 2,46,000 P 1,68,000 Furniture & Fixtures 65,000 Q 1,08,000 2,76,000 Stock 1,00,000 General reserve 95,000 Debtors 72,500 Capital reserve 25,000 Cash in hand 15,500 Sundry creditors 36,000 Capital Overdrawn: Mortgage Loan 1,10,000 R 25,000 S 18,000 43,000 5,42,000 5,42, The assets were realized as under: ` Land & Building 2,30,000 Furniture & Fixture 42,000 Stock 72,000 Debtors 65, Expenses of dissolution amounted to ` 7, Further creditors of `18,000 had to be met. 4. R became insolvent and nothing was realized from his private estate. Applying the principles laid down in garner Vs. Murray prepare the Realization Account, Partner s Capital Accounts and cash Account. [Nov 2011, Marks 16] On the above 5) Problem, Examiner commented on students Performance as under : 6) 7) Some candidates did not pass the entry of bringing cash by the solvent partners to 8) make realization loss good. Many candidates also erred in calculating capital ratio 9) of solvent partners to share the deficiency of R. 10) Ref : ICAI Website All Partners are Insolvent All Partners are Insolvent: Just close the books of Accounts Collect cash from all possible Resources Sale of Assets realisation from private assets of Insolvent Partners if any. Pay in the following order - - Realisation Expenses - External liability to the extent possible - Close Cash Book Find out realisation Profit / Loss. Since all Partners are Insolvent, just close Partners Capital Accounts by adjusting the position amongst themselves for this purpose one may open Deficiency Account for convenience.

10 10 Problem No.12 : Amal and Bimal are in equal partnership. Their balance sheet as at 31st March, 2017 was as under. Sundry Creditors 4,800 Sundry Assets 4,800 Amal's Capital 750 Cash in hand 200 All assets are realised for ` 2,300 Realisation Expenses amounted to ` 175 Bimal's Capital Account 550 5,550 5,550 Bimal's Private Estate contributed ` 200 only where as nothing could be recovered from Amal. Close the books of Accounts. Piecemeal Distribution Statement 1. It is not an Account. It is just working note in the form of a statement showing date wise payments. 2. Order of payment to be followed Realisation Expenses Date wise External Liabilities Loan from Partners Payment towards Partners Capitals a) Proportionate Capital Method b) Maximum Loss Method 3. Following are noteworthy points for payment of Partner s Capital - If loan (advance) is given to Partners adjust such loan against Capital. If Partner s Current Accounts are existing transfer such balances to capitals. If some items relating to partners are present in the balance sheet (eg. Drawings, Profit & Loss Account Balance, General Reserve) transfer such item to capitals. For Distribution amongst Partners, either of the following methods shall be followed : a) Proportionate Capital Method (Highest Relative Capital Method) b) Maximum Loss Method Problem No.13 : Ajay Enterprise, a Partnership firm in which A, B and C are thee partners sharing profits and losses in the ratio of 4 : 3 : 3. The balance sheet of the firm as on 31 st December, 2011 is as below : A s Capital 15,000 Factory Building 24,160 B s Capital 7,500 Plant & Machinery 16,275 C s Capital 15,000 Debtors 5,400 B s Loan A/c 4,500 Stock 12,390 Sundry Creditors 16,500 Cash at Bank ,500 58,500 On balance sheet date all the three partners have decided to dissolve their partnership. Since the realization of assets was protracted, they decided to distribute amounts as and when feasible and for this

11 purpose they appoint C who was to get as his remuneration 1% of the value of the assets realized other than cash at Bank and 10 % of the amount distributed to the partner Assets were realized

creditors were settled finally for 15,900 Prepare a statement showing distribution of cash amongst the partners by Highest Relative capital method.

11 11 purpose they appoint C who was to get as his remuneration 1% of the value of the assets realized other than cash at Bank and 10 % of the amount distributed to the partner Assets were realized piece-meal as under : ` First installment 18,650 Second Installment 17,320 Third installment 10,000 Last installment 7,000 Dissolution expenses were provided for estimated amount of 3,000 The creditors were settled finally for 15,900 Prepare a statement showing distribution of cash amongst the partners by Highest Relative capital method. [May 2012, Marks 16] Key Points to Learn : Piece Meal Distribution by Highest Relative Capital Method On the above 1) Problem, Examiner commented on students Performance as under : 2) 3) Candidates have shown poor understanding of Highest Relative Capital method in 4) case of piecemeal distribution to partners at the time of dissolution of the firm. 5) 6) Ref : ICAI Website Problem No.14: X, Y and Z are in partnership sharing profits and losses in the ration of 5:4:4. The Balance Sheet of the firm as on 31st March, 2016 is as below: Liabilities Rs. Assets Rs. X's Capital 60,000 Factory Building 96,640 Y's Capital 40,000 Plant & Machinery 65,100 Z's Capital 50,000 Trade Receivable 21,600 Y's Loan 18,000 Inventories 49,560 Trade Payable 66,000 Cash at Bank 1,100 2,34,000 2,34,000 On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since the realization of assets was protracted, they decided to distribute amounts as and when feasible and for this purpose they appoint Z who was to get as his remuneration 1% of the value of the assets realized other than cash at bank and 10% of the amount distributed to the partners. Assets were realized piecemeal as under: Rs. First Installment 74,600 Second Installment 69,301 Third Installment 40,000 Last Installment 28,000 Dissolution expenses were provided for estimated amount of Rs.12,000 The Creditors were settled finally for Rs.63,600 You are required to Prepare a statement showing distribution of cash amongst the partners by "Highest Relative Capital Method". [ Nov 2016, Marks 16]

PARTNERSHIP ACCOUNTS

PARTNERSHIP ACCOUNTS CHAPTER-2 Q. 1. Thin, Short and Fat were in partnership sharing profits and losses in the ratio of 2 : 2 : 1. On 30th September, 2012 their Balance Sheet was as follows : Capital Accounts : Premises 50,000