Dissolution of Partnership Firm

Dissolution of a partnership changes the relationship among partners, but dissolution of the partnership firm ends the business altogether, as its assets are sold, liabilities are paid and the partners' accounts are finally settled. In this chapter you will distinguish between the dissolution of partnership and the dissolution of a firm, and study the modes of dissolution under the Indian Partnership Act, 1932: by agreement, compulsory dissolution, on the happening of certain contingencies, by notice in a partnership at will, and by order of the court. You will learn the order of settlement of accounts under Section 48, in which outside liabilities are paid first, then partners' loans, then partners' capitals, and any surplus is shared in the profit sharing ratio. The core skill is preparing the Realisation Account, along with partners' Capital Accounts and the Bank or Cash Account. You will record the transfer of assets and liabilities, sale of assets, payment of liabilities, assets taken over by partners or creditors, unrecorded assets and liabilities, realisation expenses and the profit or loss on realisation.

Detailed Worksheet: Dissolution of Partnership Firm Section A - Definitions (10 marks) 1. Distinguish between dissolution of partnership and dissolution of a partnership firm on any two bases. (2 marks) 2. State any two circumstances in which a firm is compulsorily dissolved under the Indian Partnership Act, 1932. (2 marks) 3. State any four grounds on which the court may order the dissolution of a firm. (2 marks) 4. What is a Realisation Account? Why is it prepared at the time of dissolution? (2 marks) 5. State the order of settlement of accounts under Section 48 of the Indian Partnership Act, 1932. (2 marks) Section B - Calculations and Applications (15 marks) 6. On dissolution of a firm, the book values were: machinery Rs 1,00,000, inventory Rs 50,000, trade receivables Rs 40,000 and trade creditors Rs 30,000. Machinery realised Rs 90,000, inventory Rs 45,000 and receivables Rs 36,000. Creditors were paid Rs 29,000 in full settlement, and realisation expenses were Rs 2,000. Calculate the profit or loss on realisation. (3 marks) 7. Pass journal entries (prose lines) for the following on dissolution: (i) Partner A took over inventory of book value Rs 20,000 at Rs 18,000 (ii) realisation expenses of Rs 3,000 were paid by partner B on behalf of the firm (iii) an unrecorded computer was sold for Rs 6,000. (3 marks) 8. A creditor of Rs 50,000 accepted machinery of book value Rs 45,000 in full settlement. Another creditor of Rs 30,000 accepted furniture of book value Rs 20,000 and was paid Rs 8,000 in cash. Pass journal entries where necessary and explain why no entry is passed in one case. (3 marks) 9. X and Y share profits in the ratio 3:2. After realisation of assets and payment of liabilities, the loss on realisation is Rs 25,000. Their capitals are X Rs 80,000 and Y Rs 60,000, with a balance of Rs 15,000 in General Reserve. Calculate the amount finally paid to each partner. (3 marks) 10. Pass journal entries for: (i) payment of a partner's loan of Rs 40,000 (ii) a contingent liability of Rs 10,000 for a bill discounted that had to be paid (iii) X agreed to pay an outstanding liability of Rs 7,000 personally. (3 marks) Section C - Diagrams (10 marks) 11. Draw a labelled format of the Realisation Account in prose form, showing the items that appear on its debit side and credit side. (4 marks) 12. Draw a flowchart showing the modes of dissolution of a firm: by agreement, compulsory, on happening of contingencies, by notice and by court. (3 marks) 13. Draw a flowchart showing the order of payment out of the proceeds of assets under Section 48. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Prepare the Realisation Account in prose form from the data in Question 6, and state the share of each partner in the profit or loss if partners P and Q share profits in the ratio 1:1. (5 marks) 15. A, B and C were partners in a firm that was dissolved. A was appointed to look after the dissolution and was allowed a remuneration of Rs 5,000, agreeing to bear all realisation expenses. Actual expenses of Rs 3,500 were paid by the firm. Pass the necessary journal entries and explain why the firm records only the remuneration. (5 marks) 16. A firm's books show a balance of Rs 12,000 in Deferred Revenue Expenditure (Advertisement Suspense) and a Workmen Compensation Reserve of Rs 20,000 against which a claim of Rs 8,000 is admitted on dissolution. Explain the treatment of both items on dissolution, pass the journal entries, and analyse why accumulated profits and losses are not transferred to the Realisation Account. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Present ledger accounts in prose line form with debit and credit items listed separately, and show all working notes.