Dissolution of Partnership Test - 4

Calculation of the amount payable to the creditors:

Total amount payable to the creditors ₹30,000

Asset taken over by creditors at market price ₹8,000.

Now amount due to the creditors is ₹22,000 (30,000 – 8,000)

Final payment to creditors in cash = 22,000 – 2,200 (discount) = 19,800

When all partners of the firm become insolvent, in such a case it is compulsory to dissolve the firm. It means, this is the end of the partnership firm and end of the partnership among the partners.

Any asset taken over by a liability at the time of dissolution of partnership firm, will not be shown separately or no separate entry will be recorded for the same.

Compulsory dissolution is when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership, e.g., when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India.

According to the Indian Partnership Act, 1932 dissolution of firm means dissolution of partnership between all the partners and end of the business. All accounts will be closed and all assets will be realized and liabilities will be paid off.

Contingency Reserves is a free reserve which is not transferred to the Realisation account at the time of dissolution of a partnership firm. Other reserves or funds (given in the above question) will be transferred to the Realisation account.

Any asset taken by a partner will be shown in the credit side of realization account and in partner’s capital account.

At the time of dissolution of a partnership firm, all assets available in the business will be realized (sold) and all liabilities will be paid off.

when all the partners agree to close down the business, partners can dissolve the firm without interference of the court that is mutual agreement.

Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved when a partner becomes insane.

Nature of realization account is of Nominal account. All incomes are credited and all losses are debited.

At the time of dissolution, a partner may take asset, liability or unrecorded assets/liability at the agreed price but cannot take capital of any other partner.

Any unrecorded liability (which is not given in the balance sheet or which was not recorded earlier) will be shown on the debit side of realization account. It will be paid by the firm at the time of dissolution or might be paid by a partner.

Money realized from the sale of an unrecorded asset at the time of dissolution of partnership firm, should be shown in the credit side of realization account and debit side of cash account.

All liabilities will be paid at the time of dissolution of a partnership firm. Whether some information is given or not about the payment of the same. In this case nothing is mentioned about the payment of creditors but it is mandatory to pay the full amount ₹20,000 to the creditors.

A firm is dissolved compulsorily in the following cases:

(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;

(b) When the business of the firm becomes illegal.

The correct order of the payment should be:

(a) Expense incurred on realization of assets such as commission, cartage, brokerage etc.

(b) All outside creditors

(c) Partner’s Loan accounts

(d) Balances in Capital Accounts of partners

First the outside liabilities are paid off then the amount due to partner are paid off.

realisation account is nominal account. assets sold are recorded on the credit side and liabilities paid off are recorded on the debit side. if credit side is more it is profit and if the debit side is more it is loss.

The main reason is that revaluation account is prepared at the time of reconstitution of partnership when the values of assets and liabilities change. in case of dissolution of  business assets are sold off and liabilities are paid off so revaluation account cannot be made.

If realized value of any asset is not given in the question, in such a case, realized value should be assumed as nil or Zero realized value