Dissolution of Partnership Test - 5

A company can sell its shares only through stock exchange. Company should be listed in the stock exchange to sell its shares.

Cash received from the sale of assets will be shown in the credit side of realization account. Following items will be shown in the debit side:

•Cash Payments of Liabilities

•If any partner has taken over any liability

•Realization Expenses

When a partner agreed to pay any unrecorded liability since payment has to be made it is recorded on the debit side because of nominal nature of realization account and partner's liability on the business is increased so partners capital is credited.

Profit and Loss (Dr. balance) given in the balance sheet will be transferred to the debit side of partners capital account in their respective profit sharing ratio. It should not be transferred to the realization account as it is free reserve.

Repayment of bank loan will take place in debit side of realization account. This transaction will effect only two accounts i.e. Realisation Account and Bank Account.

When full amount is paid back to the partner for his loan, liability is decreasing so it is debited and asset is decreasing so it is credited.

At the time of dissolution, investment fluctuation reserve should be transferred to the credit side of revaluation account. It should not be distributed as free reserve.it is transferred only if investments are there in the question.

Unrecorded assets are directly realized i e sold off so it is recorded on credit side of realization account

At the time of dissolution of a partnership firm, if any realized value of goodwill is given in the question, it shows that goodwill is sold with other assets of the firm.Goodwill can be sold only at the time of dissolution.

Calculation of the amount paid to the creditors in full settlement:

Total amount due to the creditors = 30,000

Amount waived by the creditors = 5,000

Amount due after deducting the amount waived by creditors = 30,000 – 5,000 = 25,000

Final Payment = 25,000 – 10% Discount = 22,500

Realization Account is prepared only once in the life time of the firm i.e. at the time of dissolution. Revaluation account is prepared at the time of reconstitution of partnership firm i.e. change in existing profit sharing ratio, admission of a partner, retirement of a partner, death of a partner etc.

If any asset is taken over by the external liabilities for the full settlement of their due amount, in such a case no need to record any journal entry.

When liability is paid off it is debited in the realization account and since partner is paying it partner is credited.

Following journal entry will take place:

Workmen Compensation Reserve A/c Dr.

To Realisation A/c

To Partner’s Capital A/c

Note: Amount equal to the liability should be transferred to the Realization Account and the balance amount is credited to the capital accounts of the partners in their profit sharing ratio.

Unrecorded asset (if any) given in the additional information, which is realized (sold) at the time of dissolution, should be shown in the credit side of Realization Account because it is income and according to nominal account rule all incomes are credited.

Amount received from debtors:

Total amount due ₹17,000

Bad debts ₹2,000

Final amount received = 17,000 – 2,000 = 15,000 – 10% = 13,500

 Market price Rs.24,000 and taken by Mohan @ 50% i.e. 12,000 Do not record market price of the asset in any account.since asset is taken over by partner, partner's capital account is debited and realization account is credited.

At the time of dissolution of partnership firm, investment fluctuation fund should be credited (transferred) to the realization account and Investment should be transferred to the debit side of realization account.

At the time of dissolution, loan of partner is not transferred to the realization account. For this a separate account is prepared i.e. Partner’s Loan A/c and final payment is made to the partner.

At the time of dissolution all accumulated profits and losses should be transferred to the partners capital account in their profit sharing ratio as they are treated as free reserves. so free reserves are distributed among partners.

If any unrecorded asset is taken over by the partner (any partner), it should be not be recorded at its actual value, instead, it should be recorded at the price at which asset is taken over. In this case B’s Capital Account should be debited and realization account should be credited by ₹1,200 and not by ₹1,600.

Situation 1 : When assets are sold for cash (Bank A/c Dr. and Realisation A/c Cr.)

Situation 2 : When asset is taken over by a partner (Partner’s Capital A/c Dr. and Realisation A/c Cr.)

Situation 3 : When the assets are given to any of the creditors towards the payment of his dues (No Entry in such case).

If a partner is agreed to pay off any liability at the time of dissolution of a partnership firm, in such a case following entry should be recorded in the books: Journal Entry:

Realization A/c Dr.

To Partner’s Capital A/c

At the time of dissolution of partnership firm, goodwill given in the balance sheet should be transferred to the debit side of realization account at its book value and not at the market value as it is a part of fixed assets of the business.

since liability is decreasing it is debited. Asset is also decreasing(bank) so it is credited.