B.A. (SOL)



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Partnership Firm for Dissolution

Q.1. Anu. Binu and Chinu were partners in a firm sharing profits and losses in the ration of 3:2:1. They were not entitled to any interest on capital, but their loan accounts were to carry interest @ 10% p.a. Due to persistent losses and the continued illness of Binu, the partners decided to dissolve the firm on 31 March. 2007. 

The accounts were closed for the last time on 31 December 2006 on which date the Balance sheet of the firm was as under:

During the period of three months ended 31 March, 2007, goods to the value of Rs. 32,000 were purchased and sales amounted to Rs. 50,000. In addition to payment to trade creditors. payments made were for salaries and wages Rs. 10,000 and for general and office expenses Rs. 8.000. Drawings of each partner were Rs. 800 p.m. On 31 March, 2007, debtors, creditors and stock-in-trade were Rs. 56,000 Rs. 60,000 and Rs. 40,000 respectively.
The partners sold the entire business (with all assets and liabilities including partner's loan) as a going concern to Minu for a consideration of Rs. 84,000. Costs of dissolution amounted to Rs. 2.400 which were met by Anu.
Show the necessary entries for the dissolution of the firm and also the capital accounts of the partners, assuming that all of them are solvent.

Q.2. X, Y and Z are partners sharing profits and losses as 2 : 1 : 1. Their Balance Sheet as on 31st March 1992 is as below::

Repairs Rs. 20,000 incurred three years ago was treated as capital expenditure and debited to machinery account. Stocks are overvalued by Rs. 10,000.
Depreciation at 10% p.a. was charged on machinery on diminishing balance. Rs. 10,000 collected from debtors was not recorded in books but taken by Z. The A/cs are rectified and then XY Ltd. is formed to take over the business. Y is to take the investments at Rs. 3,000. X will pay the creditors. Bills payable would be paid by X and Y in their profit sharing ratio.
Goodwill and stocks are value at Rs. 12,000 and Rs. 42,580 respectively. Debtors are taken at 10% below book value, whereas other assets except cash at bank to be considered at their book values. XY Ltd. to pay the p. c. in equity shares of Rs. 10 each Y is to take 6000 shares and balance taken over by X. Show profit and loss adjustment account, realization account, and partners capital A/cs in the books of the firm Z become insolvent.

Q.3. If the business carried on by a Partnership Firm becomes illegal, it stands dissolved.

Ans. True: A partnership firm is compulsorily dissolved when its business becomes illegal as per Section 41 of the Partnership Act

Q.4. On dissolution of the firm, the cash realised from the sale of the assets of the firm is first distributed between the partners.

Ans. False : Cash realised from the sale of assets on dissolution of the firm is distributed in the following order :
(i) Payment of expenses;
(ii) Payment of outside liabilities;
(iii) Repayment of loans from partner;
(iv) Repayment of capital contributions of the partners;
(v) If there is still any surplus, it will be shared by the partners in their profit sharing ratio.

Q.5. The Garner vs. Murray rule is applied to settle the claims of the creditors.

Ans. False: Garner vs. Murray Rule is applied to settle the deficiency in the capital account of the insolvent partners by the solvent partners in the absence of any agreement in this respect.

Q.6. When the firm is sold to an existing limited company, the partners automatically become its equity shareholders.

Ans. False : Partners become shareholders only when the purchase consideration is received in shares also.

Q.7. Goodwill account is transferred to Realisation Account on dissolution of the firm when goodwill is sold whether it is a recorded asset or unrecorded asset.

Ans. False : Goodwill account is transferred to Realisation Account only when it is recorded asset in the balance sheet on the date of dissolution.

Q.8. Realisation account and Revaluation account are the same.

Ans. False: Realisation account is prepared on dissolution of the firm for recording sale of assets and payment of liabilities. But the revaluation account is made at the time of admission, death or retirement of a partner to update the value of assets and liabilities,

Q.9. Employees provident fund is an outside liability.

Ans. True : Employees provident is meant exclusively for employees and hence it is an outside liability.

Q.10. Only firm assets are available to pay liabilities of the firm.

Ans. False : Normally firm assets are used to pay firm liabilities. But if the liabilities cannot be paid in full from firm assets, the surplus from the private estate of the partner can be used for the same,

Q.11. The loan from the spouse of a partner is treated like a loan from a partner himself/herself.

Ans. False : The loan from the spouse of a partner is an outside liability provided it is in the nature of Stridhan or private fund.

Q.12. Any amount realised from the sale of unrecorded asset is transferred to realisation account.

Ans. True : In case of unrecorded assets, only the cash realised from the sale of such assets is credited to realisation account.

Q.13. Any solvent partner with even a debit balance on the date of dissolution has to bear the deficiency of the insolvent partner.

Ans. False : According to Garner vs. Murray Rule, the deficiency in the capital account of an insolvent partner shall be borne by the solvent partners in the ratio of their capitals on the date of dissolution. Debit balance in the capital account means non-existence of capital.

Q.14. In the event of dissolution, a partner's private estate is first used for payment of firm's debts.

Ans. False : Partner's private estate is used to pay first partner's private liability.

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