Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm

Key Concept: Asset Sale

c) Bank A/c Dr. To Realisation A/c

[Solution Description] When an asset like machinery is sold for cash, the journal entry records the inflow of cash and the reduction in the realisation account. The correct entry would be $$\text{Bank A/c Dr. To Realisation A/c}$$.

Key Concept: Loss Treatment

c) From accumulated profits

[Solution Description] Per Section 48(b) of the Partnership Act 1932, losses should be settled first out of profits, then out of capital, and lastly by partners in their profit-sharing ratio. The sequence ensures that available resources are used optimally before personal contributions are needed. Hence, losses are covered first by profits.

Key Concept: Contribution Calculation, Complex Scenario

c) Partner X contributes \$7,000; Y contributes \$10,500; Z contributes \$17,500

[Solution Description]

Total Liabilities = \$60,000

Available Assets = \$25,000

Deficiency = Total liabilities – Available assets = \$60,000 – \$25,000 = \$35,000

Considering the profit-sharing ratio among X, Y, and Z which stands at 2:3:5, we calculate the proportional liability each must shoulder:

Total Ratio sum = 2 + 3 + 5 = 10 parts

Contribution Calculation for each:

Partner X = $$\frac{2}{10}$$ x \$35,000 = \$7,000

Partner Y = $$\frac{3}{10}$$ x \$35,000 = \$10,500

Partner Z = $$\frac{5}{10}$$ x \$35,000 = \$17,500

Each partner assumes responsibility corresponding to their agreed proportionate risk-sharing measures within organizational structure.

Key Concept: Settlement of Accounts

c) Pay third-party debts, pay partners’ loans, settle capital accounts

[Solution Description] As per Section 48 of the Partnership Act, the first priority is to pay off third-party debts, followed by any loans or advances made by partners, and finally, settle the capital accounts of the partners with any remaining assets.

Key Concept: Partner’s Capital Account

c) Rs. 2,000

[Solution Description]

To find the balance in Anil’s capital account, we start with his initial debit balance and add his realized profit:

Initial Debit Balance = Rs. 3,000

Profit Share = Rs. 5,000

Balance in Capital Account = Profit Share – Initial Debit Balance

$$\text{Balance = Rs. } 5,000 – Rs. 3,000 = Rs. 2,000$$

Thus, the ending balance in Anil’s capital account is Rs. 2,000.

Key Concept: Real-World Application, Legal Implications

b) Settle secured creditors as per priority

[Solution Description]

In such cases, the partnership agreement might provide specific directions, but generally, legal obligations take precedence. During dissolution of a firm, the sequence of steps often involves settling external debts before internal adjustments. The loss resulting from the bad contract must be accounted for while realizing assets and discharging liabilities. Hence, focusing on fulfilling secured creditors’ claims would typically precede others:

$$\text{Priority order: Secured debts > Partner loans > Capital contributions}$$

Thus, addressing any secured debt related to the bad contract ensures compliance with legal priorities.

Key Concept: Realisation Account

b) Liabilities paid off

[Solution Description]

In the Realisation Account, the debit side records various expenses incurred during the process of dissolving the firm, including liabilities settled and any losses on the sale of assets. These entries ensure that all accounting treatments for dissolution are captured accurately.

Key Concept: Asset Sale

d) Bank A/c Dr. To Realisation A/c

[Solution Description] The sale of assets involves debiting the Bank Account and crediting the Realisation Account. Hence, the correct journal entry is:

$$\text{Bank A/c Dr. To Realisation A/c}$$

Key Concept: Legal and Economic Implications, Settlement of Accounts

b) Misconduct partner’s capital absorbs the residual debt disproportionately.

[Solution Description]

If profits are insufficient to settle debts, the usual procedure involves applying the available profits first. Afterward, the capital accounts of partners may need to absorb any remaining losses or debts. Persistent misconduct affecting dissolution suggests potential legal liability on the part of the culpable partner. This may alter the distribution of losses such that additional responsibility could fall upon the erring partner, possibly impacting their capital account more significantly than others.

Key Concept: Agreement Clause

c) According to conditions specified in a partner’s contract

[Solution Description] Dissolution by agreement can occur in accordance with specific conditions or events outlined in a contract between partners.

Key Concept: Liability Settlement

b) The liability is reduced by the asset’s market value.

[Solution Description] If a creditor accepts an asset as part payment, the liability is settled by debiting the Realisation Account with the agreed value of the asset given to the creditor.

Key Concept: Scenario Analysis

b) Compulsory Dissolution

[Solution Description] The situation described indicates a compulsory dissolution. According to the syllabus, one of the reasons for compulsory dissolution is when partners become alien enemies due to war or political events between countries.

Key Concept: Court Dissolution

b) Partner breaches the partnership agreement intentionally

[Solution Description] Court-ordered dissolution happens if one of the partners exhibits behavior such as insanity, incapability, misconduct, breach of agreement, interest transfer, continuous loss, or for just and equitable reasons.

Key Concept: Impact on Business

b) Firm needs to start liquidation process

[Solution Description] Dissolution by notice affects the business operations because it requires the settlement of accounts and distribution of assets. The firm’s normal business activities cease as the focus shifts to winding up affairs.

Key Concept: Garner vs. Murray Application, Realisation Account Analysis

b) \$4,800

[Solution Description]

To determine how the deficit of \$12,000 should be borne by the remaining partners (P and Q), we apply the Garner vs. Murray rule which states that the loss due to insolvency of a partner is to be borne by other partners in their capital ratio unless otherwise agreed.

Let’s assume partners’ capitals are in line with the profit-sharing ratio:

– P’s Capital = \$30,000

– Q’s Capital = \$20,000

Total capital = \$30,000 + \$20,000 = \$50,000

The share of capital for each partner is:

– P: $\frac{30,000}{50,000} = \frac{3}{5}$

– Q: $\frac{20,000}{50,000} = \frac{2}{5}$

Applying this proportion to R’s deficiency:

– P’s share of R’s deficiency = $\$12,000 \times \frac{3}{5} = \$7,200$

– Q’s share of R’s deficiency = $\$12,000 \times \frac{2}{5} = \$4,800$

Therefore, partner Q bears an additional burden of \$4,800.

Key Concept: Partner Status

a) A partner becomes an alien enemy due to war

[Solution Description] If any situation arises that makes it impossible for partners to lawfully carry on with the business, such as becoming an alien enemy due to war, then compulsory dissolution is necessary.

Key Concept: Excess Asset Value, Realisation Expenses by Partner

b) Realisation A/c Dr. with \$3,000; Partner’s Capital A/c Dr. with \$2,000 to Realisation A/c

[Solution Description]

First, analyze the scenario:

– The partner is paying \$3,000 as realisation expenses. According to the syllabus, this payment would credit the Partner’s Capital Account as follows:

$\text{Realisation A/c Dr. To Partner’s Capital A/c}$

For the equipment taken over:

– Equipment worth \$20,000 is accepted against a debt of \$18,000. The excess amount of \$2,000 (i.e., \$20,000 – \$18,000) needs an entry.

– Thus, the extra will go to the Partner’s Capital account:

$\text{Partner’s Capital A/c Dr. To Realisation A/c}$

– Therefore, the entries are:

1. Realisation A/c Dr. with \$3,000 for realisation expenses to Partner’s Capital A/c.

2. Partner’s Capital A/c Dr. \$2,000 to Realisation A/c for excess equipment value.

Key Concept: Application of Knowledge

c) Order dissolution of the firm

[Solution Description]

When a business can only be carried on at a loss, it is considered impractical to continue operations. Under these circumstances, the court has the discretion to dissolve the firm to prevent further losses and liabilities.

Key Concept: Surplus Distribution

a) Jack: \$9,000, Jill: \$6,000

[Solution Description] The surplus is distributed according to the agreed profit-sharing ratio of 3:2.

Total surplus = \$15,000. The distribution for Jack will be:

$$\frac{3}{5} \times 15000 = 9000$$

And for Jill:

$$\frac{2}{5} \times 15000 = 6000$$

Therefore, Jack receives \$9,000 and Jill receives \$6,000.