2nd PUC Accountancy Question Bank Chapter 5 Dissolution of Partnership Firm

Students can Download 2nd PUC Accountancy Chapter 5 Dissolution of Partnership Firm Questions and Answers, Notes Pdf, 2nd PUC Accountancy Question Bank with Answers helps you to revise the complete Karnataka State Board Syllabus and to clear all their doubts, score well in final exams.

Karnataka 2nd PUC Accountancy Question Bank Chapter 5 Dissolution of Partnership Firm

2nd PUC Accountancy Dissolution of Partnership Firm Text Book Questions and Answers

Short Questions and Answers

Question 1.
State the difference between dissolution of partnership and dissolution of partnership firm.
Answer:

Question 2.
State the accounting treatment for:
1. Unrecorded assets
2. Unrecorded liabilities
Answer:
1. Accounting Treatment for Unrecorded Assets:
Unrecorded asset is an asset, the value of which has been written off in the books of accounts but the asset is still in usable position. The accounting treatment for unrecorded asset is:
(a) When the unrecorded asset is sold for cash

(b) When the unrecorded asset is taken over by any partner

2. Accounting Treatment for Unrecorded Liabilities:
Unrecorded liabilities are those liabilities which are not recorded in the books of account. The accounting treatment for unrecorded liability is:

(a) When the unrecorded liability is paid off

(b) When the unrecorded liability is taken over by a partner

Question 3.
On dissolution, how you deal with partner’s loan if it appears on the
Answer:
(a) Assets side of the Balance Sheet:
If partner’s loan appears on the assets side of the Balance Sheet then it implies that the partner has taken loan from the business and is liable to pay back to the business. In such case, the loan amount is transferred to his capital account. Thus the accounting entry will be:

(b) Liabilities side of the Balance Sheet
If partner’s loan appears on the liabilities side of the Balance Sheet then it implies that the partner has forwarded loan to the firm and the firm is liable to pay back the amount to the partner. In such case, partner’s loan is paid off after paying all the external liabilities. The partner’s loan is not transferred to the Realisation Account, in fact, it is paid in cash. The following accounting entry is passed.

Question 4.
Distinguish between firm’s debts and partner’s private debts.
Answer:

Question 5.
State the order of settlement of accounts on dissolution.
Answer:
The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.
1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:
(a) First of all the external liabilities and expenses are to be paid.
(b) Then, all loans and advances forwarded by the partners should be paid.
(c) Then, the capital of each partner should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital this should be paid in the following order:
(a) First these should be adjusted against firm’s profits.
(b) Then, against the total capital of the firm.
(c) Even if there exists any loss and deficiencies then it should be borne by all the partners individually in their profit sharing ratio.

Question 6.
On What account realisation account differs from revaluation account.
Answer:

Long Questions and Answers

Question 1.
Explain the process of dissolution of a partnership firm?
Answer:
Dissolution of partnership firm implies discontinuation of the business of the partnership firm. According to the Section 39 of Partnership Act, dissolution of partnership between all the partners of a firm is called dissolution of partnership firm. Dissolution involves winding up of business,- disposal of assets and paying off the liabilities and distribution of any surplus or borne of loss by the partners of the firm. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners:

1. Dissolution by Agreement
A firm may be dissolved with:
(a) the consent of all the partners, or
(b) the contract between the partners

2. Compulsory Dissolution
A firm may be dissolved by:
(a) the adjudication of all the partners or of all partners but one as insolvent
(b) happening of an event or change in government policies that make the business unlawful.

3. Dissolution on the happening of Certain Contingencies Subject to the contract between the partners, a firm is dissolved
(a) if formed for a specific period then on the expiry of the period
(b) if formed for a specific purpose then on completion of the purpose
(c) on the death of partner/partners
(d) on insolvency of a partner/partners

4. Dissolution by Notice
If partnership is at will then the partnership firm is dissolved if any partner giving notice in writing to all the other partners expressing his/her intention to dissolve the firm.

5. Dissolution by Court
The court may order to dissolve a partnership firm when:
(a) a partner becomes insane or lunatic.
(b) a partner becomes permanently incapable of performing the duties.
(c) a partner is guilty of misconduct and affects the business activities.
(d) a partner repeatedly breaks the terms of agreement.
(e) a partner transfers his interest to a third party’ without the consent of other partners.
(f) a business persistently incurs losses.
Besides these above mentioned circumstances, a partnership firm may be dissolved if the court at any stage finds dissolution of the firm to be justified and inevitable.

The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.
1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:
(a) First of all the external liabilities and expenses are to be paid.
(b) Then, all loans and advances forwarded by the partners should be paid.
(c) Then, the capital of each partners should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital, then this should be paid
in the following order:
(a) First these should be adjusted against firms profits.
(b) Then, against the total capital of the firm.
(c) If still there exists any loss and deficiencies, then it should be borne by all the partners individually in their profit sharing ratio.

Question 2.
What is a Realisation Account?
Answer:
On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named Realisation Account. The main purpose to open Realisation Account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the Partner’s Capital Account in their profit sharing ratio.
Concisely, following are the important objectives of preparing Realisation Account.

• To close all the books of account.
• To record transactions relating to the sale of assets and discharge of liabilities.
• To determine profit or loss due to the realisation of assets and liabilities.

Accounting treatment of items related to Realisation Account

Question 3.
Reproduce the format of Realisation Account.
Answer:

Question 4.
How deficiency of creditors is paid off?
Answer:
At the time of dissolution of a firm, the amount received from the sale of firm’s assets are utilised to pay the creditors. If the sale receipts fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of creditors. There are generally two procedures to be followed to treat the deficiency of creditors.
1. Transferring deficiency to the Deficiency Account
2. Transferring deficiency to the Partner’s Capital Account

In the former procedure, a separate account is prepared for the firm’s creditors. Then in order to ascertain the firm’s cash balance accruing from the sale of the firm’s assets and partners’ private assets, Cash Account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.

In the latter procedure, creditors are paid by the cash available with the firm including the partners individual contribution. The deficiency or unpaid creditors amount is transferred to the Partner’s Capital Account. Thus the deficiency of the creditors is borne by all the partners in their profit sharing ratio.

If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm. If the partnership deed is silent about such capital loss m the facet of insolvency of a partner, then according to the Garner v/s Murray case, such capital loss need to be borne by the solvent partners in their capital ratio.

2nd PUC Accountancy Dissolution of Partnership Firm Numerical Questions and Answers

Question 1.
Journalise the following transactions regarding Realisation expenses:
(a) Realisation expenses amounted to Rs 2,500.
(b) Realisation expenses amounting to Rs 3,000 were paid by Ashok, one of the partners.
(c) Realisation expenses Rs 2,300 borne by Tarun, personally.
(d) Amit, a partner was appointed to realise the assets, at a cost of Rs 4,000. The actual amount of Realisation amounted to Rs 3,000.
Answer:

Question 2.
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 Rs. 1,20,000 and paid cash to the firm Rs.30,000.
Answer:

Question 3.
There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. Journalise the transaction, supposing. That the firm has been dissolved.
Answer:

Question 4.
What journal entries will be recorded for the following transactions on the dissolution of a firm:
(a) Payment of unrecorded liabilities of Rs. 3,200,
(b) Stock worth Rs. 7,500 is taken by a partner Rohit.
(c) Profit on Realisation amounting to Rs. 18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7.
(d) An unrecorded asset fealised Rs. 5,500.
Answer:

Question 5.
Give journal entries for the following transactions :
1. To record the realisation of various assets and liabilities,
2. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount of 20%,
3. Remaining Stock was sold at a profit of 30% on cost,
4. Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through a bro¬ker who charged 2%, commission on the deal,
5. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value,
6. Investment whose face value was Rs. 4,000 was realised at 50%.
Answer:

Question 6.
How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases:
1. Realisation expenses amounts to Rs. 1,00,000,
2. Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner.
3. Realisation expenses are to be borne by Rashim for which he will be paid Rs. 70,000 as remuneration for completing the dissolution process. The actual expenses in¬curred by Rashim were Rs. 1,20,000.
Answer:

Question 7.
The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%, 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised 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 realisation of assets.
Answers:

Question 8.
Record necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya:
1. There was an old furniture in the firm which had been written-off completely in the books. This was sold for Rs. 3,000,
2. Ashish, an old customer whose account for Rs. 1,000 was written-off as bad in the previous year, paid 60%, of the amount,
3. Paras agreed to take over the firm’s goodwill (not recorded in the books of the firm), at a valuation of Rs. 30,000,
4. 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 Priva at an estimated price less 25%,
5. There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of Rs. 2,0000 which had been written-off completely from the books. These shares are valued @ Rs. 6 each and divided among the partners in their profit sharing ratio.
Answer:

Question 9.
All partners wishes to dissolve the firm. Yasmin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons.
Answer:
As per section 48 of Partnership Act 1932, at the time of dissolution, loans and advances from the partners must be paid off before the settlement of their capital accounts. Hence, Yastin’s argument is correct that her loan of Rs 2,00,000 must be paid off before the payment of partners’ capital.

Question 10.
What journal entries would be recorded for the following transactions on the disso¬lution of a firm after various assets (other than cash) on the third party liabilities have been transferred to Reliasation account.
1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000.
2. There was unrecorded Bike of Rs. 40,000 which was taken over By Mr. Karim.
3. The firm paid Rs. 40,000 as compensation to employees.
4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%.
5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.
Answer:

Question 11.
Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2014 was as follows:

Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivables) realised Rs 4,84,000. Bills Receivable were taken over by Rose at Rs 30,000. Creditors agreed to take Rs 38,000. Cost of Realisation was Rs 2,400. There was a Motor Cycle in the firm which was bought out of the firm’s money, was not shown in the books of the firm. It was now sold for Rs 10,000. There was a contingent liability in respect of outstanding electric bill of Rs 5,000, Bill Receivable taken over by Rose at Rs 33,000.
Answer:

Question 12.
Shilpa, Meena and Nanda decided to dissolve their partnership on March 31,2014. Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under:

The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 and debtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The remaining debtors realised 50% at their book value. Cost of realisation amounted to Rs. 1,200, There was a typewriter not recorded in the books worth Rs. 6,000 which were taken over by one of the Creditors at this value. Prepare Realisation Account.
Answer:

Question 13.
Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance Sheet as on March 31, 2014 is as follows:

The firm was dissolved on March 31, 2014 on the following terms:
1. Surjit agreed to take the investments at Rs. 8,000 and to pay Mrs. Surojit’s loan.
2. Other assets were realised as follows:
Stock Rs. 5,000, Debtors Rs. 18,500, Furniture Rs. 4,500, Plant Rs. 25,000
3. Expenses on realisation amounted to Rs. 1,600.
4. Creditors agreed to accept Rs. 37,000 as a final settlement.
You are required to prepare Realisation account, Partner’s Capital account and Bank account.
Answer:

Question 14.
Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the ratio of 3:2:1. On March 31, 2014 their balance sheet was as follows:

On the date of above mentioned date the firm was dissolved:
1. Rita was appointed to realise the assets. Rita was to receive 5% commission on the rate of assets (except cash) and was to bear all expenses of realisation,
2. Assets were realised as follows:

3. Investments were realised at 85% of the book value.
4. Expenses of realisation amounted to Rs. 4,100,
5. Firm had to pay Rs. 7,200 for outstanding salary not provided for earlier,
6. Contingent liability in respect of bills discounted with the bank was also materialised and paid off Rs. 9,800, Prepare Realisation account, Capital Accounts of Partner’s and Cash Account.
Answer:

Question 15.
Anup and Sumit are equal partners in a firm. They decided to dissolve the partnership on December 31, 2014. When the balance sheet is as under :

The Assets were realised as follows:

The Creditors were paid Rs 25,500 in full settlement. Expenses of Realisation amount to Rs 2,500.
Prepare Realisation Account, Bank Account, Partners Capital Accounts to close the books of the firm.
Answer:

Question 16.
Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on December 31, 2014. Their balance sheet on the above date was:

Ashu is to take over the building at Rs. 95,000 and Machinery and Furniture is take over by Harish at value of Rs. 80,000. Ashu agreed to pay Creditor and Harish agreed to meet Bank overdraft. Stock and Investments are taken by both partner in profit sharing ratio. Debtors realised for Rs. 46,000, expenses of realisation amounted to Rs. 3,000. Prepare necessary ledger account.
Answer:

Question 17.
Sanjay, Tarun and Vineet shared profit in the ratio of 3:2:1. On December 31, 2012 their balance sheet was as follows :

On this date the firm was dissolved. Sanjay was appointed to realise the assets. Sanjay was to receive 6% commission on the sale of assets (except cash) and was to bear all expenses of realisation.

Sanjay realised the assets as follows: Plant Rs. 72,000, Debtors Rs. 54,000,Furni¬ture Rs. 18,000, Stock 90% of the book value, Investments Rs. 76,000 and Bills receivable ks.31,000. Fetuses of realisation amounted to Rs.4,500. Prepare Realisation Account. Capital Accounts and Cash Account
Answer:

Question 18.
The following is the Balance Sheet of Gupta and Sharma as on December 31,2014:

The firm was dissolved on December 31, 2014 and asset realised and settlements of liabilities as follows:
(a) The realisation of the assets were as follows:

(b) Investment was taken over by Gupta at agreed value of Rs.36,000 and agreed to pay of Mrs. Gupta’s loan.
(c) The Sundry Creditors were paid off less 3% discount.
(d) The realisation expenses incurred amounted to Rs. 1,200.
Journalise the entries to be made on the dissolution and prepare Realisation Account, Bank Account and Partners Capital Accounts.
Answer:

Question 19.
Ashok, Babu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They dissolve the partnership of the December 31, 2014 when the balance sheet of the firm as under:

The Machinery was taken over by Babu for Rs.45,000, Ashok took over the Investment for Rs.40,000 and Freehold property took over by Chetan at Rs.55,000. The remaining Assets realised as follows: Sundry Debtors Rs.56,500 and Stock Rs.36,500. Sundry Creditors were settled at discount of 7%. A office computer, not shown in the books of accounts realised Rs.9,000. Realisation expenses amounted to Rs.3,000.
Answer:
Prepare Realisation Account, Partners Capital Account, Bank Account.

Question 20.
The following is the Balance sheet of Tanu and Manu, who shares profit and losses in the ratio of 5:3, On December 31,2014:

On the above date the firm is dissolved and the following agreement was made: Tanu agree to pay the bank loan and took away the sundry debtors. Sundry credi¬tors accepts stock and paid Rs.10,000 to the firm. Machinery is taken over by Manu for Rs.40,000 and agreed to pay of bills payable at a discount of 5%.. Motor car was taken over by Tanu for Rs.60,000. Investment realised Rs.76,000 and fix¬tures Rs.4,000. The expenses of dissolution amounted to Rs.2,200.
Prepare Realisation Account, Bank Account and Partners Capital Accounts.
Answer:

2nd PUC Accountancy Dissolution of Partnership Firm Additional Questions and Answers

Question 1.
Give the meaning of dissolution of partnership.
Answer:
Dissolution of partnership means the termination of the connections with the firm by one or few partners of the firm, and continuation of the firm under the same firm name or with a new name by an agreement by the remaining partners.

Question 2.
What is dissolution of a partnership firm?
Answer:
Dissolution of firm means closing down of the partnership business. In this case all the partners terminate their connections with the firm and the business of the firm is brought to an end.

Question 3.
State any two circumstances under which a partnership firm is dissolved.
Answer:
a. Dissolution by agreement: A firm is dissolved.

1. With the consent of all the partners.
2. In accordance with a contract between the partners.

b. Compulsory dissolution: A firm is dissolved compulsorily in the following case.

1. When all the partners or one partner become insolvent.
2. When the business of the firm becomes illegal.

c. Dissolution by notice: When partnership is at will, the firm may be dissolved at any time by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

Question 4.
State any two differences between dissolution of partnership and dissolution of partnership firm.
Answer:

Question 5.
What is realisation account?
Answer:
Realisation account is a nominal account prepared at the time of dissolution of partnership firm, to record the net assets realized, total liabilities paid and to find out the final profit or loss on realization of assets and payment of liabilities.

Question 6.
State the objective of preparing realisation account.
Answer:
Realisation account has two important objectives:

1. To close the accounts of various assets and various liabilities appearing in the books of the firm.
2. To find out the profit/ loss on the realisation of assets and payment of the liabilities of the firm.

Question 7.
State the accounting treatment for
Answer:
Unrecorded assets/liabilities It is a quite possible that on the dissolution date there may be some assets and liabilities which may not be appearing in the books. Such assets and liabilities have not been recorded in the books. So question of their transfer to realisation account does not arise. But entries are recorded when such assets or liabilities are realised or paid.

Journal Entry when unrecorded assets are realised

Journal Entry when unrecorded Liabilities are paid

Question 8.
Why is realisation account prepared?
Answer:
Realisation account is an account prepared to find out the profit or loss on realisation of assets and liabilities.

Question 9.
How do you close realisation account on dissolution of the firm?
Answer:
Realisation account is closed by transferring the balance (profit or loss) to the partners capital accounts after distributing the same in the profit sharing ratio.

Question 10.
How do you treat RBD on dissolution of the firm?
Answer:
Reserve for bad and doubtful debts is transferred to the credit side of the realisation account along with other liabilities.

Question 11.
Give the journal entry for an asset taken over by on dissolution of a firm.
Answer:

Question 12.
Give the journal entry for a liability taken over by a partner on dissolution of a firm.
Answer:

Question 13.
Give the journal entry for transfer of realisation profits to partners’ capital accounts.
Answer:

Question 14.
Give the journal entry for transfer of realisation loss to partners’ capital accounts.
Answer:

Question 15.
Give the journal entry to close partner’s loan account on dissolution of a firm.
Answer:

Question 16.
Write the journal entry for transferring the assets to realisation account.
Answer:

Question 17.
Write the journal entry for transferring the assets to realisation account.
Answer:

Question 18.
Give the journal entry for sale of assets on dissolution of a firm.
Answer:

Question 19.
Give the journal entry for realisation expenses paid on dissolution of a firm.
Answer:

Question 20.
Give the journal entry for the payment of a liability on dissolution of a firm.
Answer: