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Accounting Problems on the Dissolution of a Partnership Firm

Dissolution of a Partnership Firm: Problem and Solution # 1.
A, B and C carry on business in partnership sharing profits and losses in the proportions of 1/2, 3/8 and 1/8 respectively. On 31st March, 2012, they
agreed to sell their business to a limited company.

Their position on that date was as follows:

Their position on that date was as follows:

Dissolution of a Partnership Firm: Problem and Solution # 2.

Mr. B and Mr. E are partners sharing profit and losses in the ratio of 3 : 2 respectively. On 30th September, 2010 they admit Mr. C as a partner, and
the new profit sharing ratio is 2 : 2 : 1. C brought in fixtures Rs 3,000 and cash Rs 10,000, the goodwill being (i) B and E Rs 20,000 and (ii) C Rs
10,000, but neither figure is to be brought into the books.

On 31st March, 2011, the partnership is dissolved, B retiring and the other two partners forming a company called EC (Pvt.) Ltd. with equal capitals,
taking over all remaining assets and liabilities, goodwill being agreed at Rs 40,000 and brought into books of the company. B agrees to take over the
Scooter at Rs 3,700. A machine of book value of Rs 4,000 was sold for Rs 3,000, being in excess of requirements.

The profit of the two preceding years were Rs 17,200 and Rs 19,000 respectively and it was agreed that for the half year ended 30th September,
2010 the net profit was to be taken as equal to the average of the two preceding years and the current year.
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No entries had been made when C entered, except for cash received. No new book being opened by EC (Pvt.,) Company Ltd., B agreed to have Rs
50,000 as loan to the company, secured by 10% Debentures.

The following is the trial balance as on 31st March. 2011:

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Alternatively, realisation account may be opened to which profit on take-over of scooter and loss on sale of machine will be transferred. Realisation
account will show no profit or loss and hence there will be no transfer to capital accounts.
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Dissolution of a Partnership Firm: Problem and Solution # 3.

W, S and T carried on business in partnership, sharing profits and losses in the ratio of 3 : 2 : 1 respectively. They decided to form a private
company, T & Co., Ltd., with an authorised share capital of Rs 6,00.000 divided into 45,000 equity shares of Rs 10 each and 15,000, 10 per cent
cumulative preference shares of Rs 10 each.

The company was incorporated and took over business, goodwill and certain of the assets of the partnership on March 31, 2012 on which date firm’s
balance sheet was as follows:

T owned the freehold premises which he had let to the partnership and which he agreed to sell to the company for Rs 1,00,000, the consideration
being the issue to him at par of 10,000, 10% cumulative preference shares of Rs 10 each.

W, who retired, was presented by his partners with one of the scooters, valued in the books at Rs 6,000; the remaining scooter was taken over by
the company for Rs 10,000. W also received certain furniture for which he was charged Rs 1,500. The debtors, which were all considered good,
were taken over by W who agreed to pay off the creditors.

The company took over the remainder of the furniture and fittings at a price of Rs 3,000, the machinery at its book value, the stock at an agreed
value of Rs 1,66,000 and the bank balance. The value of the goodwill of the partnership was agreed at Rs 40,000 for take-over purposes.

The company agreed to discharge W’s Loan by the issue to him at par of 3,000, 10% cumulative preference shares of Rs 10 each and a cash
payment of Rs 10,000.

The balance of the consideration was to be discharged by the company by the issue at par to the partners of 30,000 equity shares of Rs 10 each in
proportion to the final balances on their combined capital and current accounts, any balance being paid to them in cash. Compute the consideration
and show how it will be discharged. Prepare necessary accounts to close the books of the firm.
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Dissolution of a Partnership Firm: Problem and Solution # 4.

A and M who are equal partners sheet on 31st March, 2011 was as follows:

The business is carried on until September 30, 2011, by which time a net profit of Rs 12,300 has been made for the half year, after depreciation @
10 per cent per annum has been written off Leasehold Property. Meanwhile, Sundry Creditors have been reduced by Rs 12,000, Bills Payable by Rs
2,925 and Bank Overdraft by Rs 3,000. Partners’ drawings for six months amounted to Rs 3,000 each. Stock-in-trade stood at Rs 45,300 and Book
Debts at Rs 46,200 on 30th September, other assets subject to any necessary adjustment, stood at the figures as on March 31, 2011.

In December, the firm agrees to sell the business to G Ltd. on the basis that the stock shall be taken over at a discount of 5 per cent and book debts
at a discount of 2½% as on September 30. The company pays Rs 7,500 for profits in the interval up to December 31 subject to drawings of Rs 2,000
by A and Rs 1,000 by M during the three months to December 31; the company does not take over the Joint Life Policy. The company takes over all
other assets and liabilities, paying Rs 37,500 for goodwill. The consideration is discharged by payment of Rs 60,000 in cash and the balance in
preference shares of Rs 10 each. Prepare accounts closing the books of the firm.

Solution:
Before accounts can be given, it would be better to prepare the firm’s balance sheet as of September, 30, 2011.

The balance sheet is as follows:

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Note:
Loss up to March 31, 2011 was Rs 16,500; after that there has been a net profit of Rs 12,300, reducing the loss to Rs 4,200. This has been
deducted from the partners’ capital accounts in the profit-sharing ratio, i.e., equally.

G Ltd. will pay Rs 94,380, calculated as follows:

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Dissolution of a Partnership Firm: Problem and Solution # 5.

Exe and Wye formed a partnership some years ago, sharing profits and losses in the ratio of 3 : 2 respectively. On 1st April, 2010, their capitals were
Rs 6,00,000 and 5,00,000 respectively. On 1st October, 2010, they agreed to share profits and losses equally with effect from that date, goodwill of
the firm being valued at Rs 6,00.000. On 31st March, 2010, they found that the combined capital was Rs 12,50,000 and during the year their
drawings were A : Rs 1,50,500 and B Rs 1,19,500.

On 1st April, 2011, Zed was admitted as a partner with 1/4th share in the profits; he paid Rs 1,50,000 as goodwill and Rs 4,00,000 as capital. On the
30th September, 2011, the partnership was converted into a company. The company paid Rs 25,00,000 for the net assets as on that date; of this
amount Rs 5,00,000 was to be treated as for goodwill. The consideration was to be discharged in a manner so as to preserve the present mutual
rights of the partners.

Partnership agreements throughout provided for interest on capitals at 10% per annum as in the beginning of the year. Prepare the partners’ capital
accounts.
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Dissolution of a Partnership Firm: Problem and Solution # 6.

The following is the balance sheet of A, B and C. on March 31, 2012:

C is insolvent but his estate pays Rs 2,000. It is decided to wind up the partnership. The assets realised as follows sundry debtors, Rs 7,500; stock,
Rs 16,000 furniture, Rs 7,000; and machinery, Rs 14,000. The cost of winding up came to Rs 2,500.

Give accounts to close the books of the firm (1) if the capitals are fixed, and (2) if the capitals are fluctuating.

Dissolution of a Partnership Firm: Problem and Solution # 7.

A, B, C and D were partners sharing profits and losses in the ratio of 3 respectively. The following is their balance sheet as on March 31, 2012:
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On March 31, 2012, the firm was dissolved and B was appointed to realise the assets and pay off the liabilities. He was entitled to receive 5%
commission on the amounts finally paid to other partners as capital. He was to bear expenses of realisation.

The assets realised as follows:

Creditors were paid off in full; in addition, a contingent liability for bills receivable discounted materialised to the extent of Rs 2,500. Also, there was a
joint life policy for Rs 30,000. This was surrendered for Rs 3,000. Expenses of realisation amounted to Rs 500. C was insolvent but a sum of Rs
3,700 was recovered from his estate.

Write up the necessary accounts to close the books of the firm.

Notes:
(1) Since D has a debit balance in his capital account on the date of dissolution, he is not required to bear any proportion of the loss due to C’s
insolvency. Only A and B have to bear it is the ratio of their capitals, viz., 4:3. However, D brings his own deficiency as he is solvent.
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(2) The commission to B is five per cent on the amount paid to the partners as capital. Only A receives such an amount. It is opening balance as
reduced by loss on realisation and share of C’s deficiency not counting commission to B. That comes to 20,000 – Rs 3,600 – Rs 8,400) i.e. Rs 8,000,
not counting the commission payable to B. The commission is Rs 8,000 x 5/105 or Rs 381. It cannot be 5% on Rs 8,000 because in that case A
cannot get Rs 8,000.

(3) The actual expenses of realisation have been assured to have been met by B privately. If the firm pays the amount, the amount will be debited to
B’s Capital Account and credited to cash. In such a case, the amount finally paid to B will be Rs 8,581.

Dissolution of a Partnership Firm: Problem and Solution # 8.

The following was the balance sheet of M/s Ideal Works in which A. B and C were partners showing profits and losses in the ratio of 6 : 3 : 5
respectively:

It was decided to dissolve the partnership as on the date of the balance sheet.

The assets of the firm realised as under:

Land and Building Rs 600 thousand; Furniture Rs 200 thousand; Stock-in-trade Rs 1,500 thousand and Sundry Debtors Rs 2,000 thousand. The
expenses of realisation amounted to Rs 200 thousand. The Sundry Creditors agreed to receive 75 paise in a rupee in full satisfaction of their claims.
Loan on mortgage was paid. B had become insolvent. B’s estate contributed only 50 paise in a rupee.

Write up the Realisation Account, capital accounts and current accounts of the partners following the rule given in Garner Vs. Murray. Also prepare
cash book.

C’s share = Rs 455 thousand x 3/8 = Rs 170.6 thousand.

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Dissolution of a Partnership Firm: Problem and Solution # 9.

Ajay, Vijay, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of 4 : 1 : 2 : 3 respectively.

The following is their balance sheet as at 31st March, 2012:

On 31st March, 2012, the firm is dissolved and the following points are agreed upon:
– Ajay is to take over sundry debtors at 80% of the book value

– Shyam is to take over the stock at 95% of the book value and

– Ram is to discharge sundry creditors.

Fixed assets realise Rs 3,00,000 and the expenses of realisation come to Rs 30,000.

Vijay is found insolvent and Rs 21,000 is realised from his estate.

Prepare realisation account and capital accounts of the partners. Show also the cash account. The loss arising out of capital deficiency may be
distributed among the partners following the decision in Garner vs. Murray.
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Dissolution of a Partnership Firm: Problem and Solution # 10.

The balance sheet of a form having four partners as on 31st March, 2010 stood as follows:

(b) In the case of the loan, the lenders are to be paid at their insistence a prepayment premium of 1%.

(c) J. Vimal is insolvent and no amount is recoverable from him. His father, S. Vimal, however, agrees to bear 50% of his deficiency. The balance of
the deficiency is agreed to be apportioned according to law.

Assuming that the realisation of the assets at adjusted values and discharge of liabilities is carried out immediately, show Realisation Account and
the partners’ accounts. Also prepare cash book.
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Dissolution of a Partnership Firm: Problem and Solution # 11.

The following was the balance sheet of Exe, Wye. Zed and Ess as on April 1, 2012:

Ess was a minor partner with 1/5th share, the other partners sharing profits and losses equally. The capital account of Ess represented undrawn
profits; the profits drawn by Ess and lying intact in his bank account totalled Rs 7,500. The firm had taken out a policy on the life of Exe whose paid-
up value was Rs 15,000 and surrender value was Rs 10,000. The firm had to be dissolved owing to some serious legal action against it.

The assets realised as follows:

Sundry creditors allowed a discount averaging 8% and Exe took over his policy at its surrender value. Compensation to workers of various types
totalled Rs 24,000; expenses totalled Rs 4,600. Exe brought in the necessary cash to affect the payments. Zed is insolvent; his estate pays 40% of
what is due by him to the firm.

Prepare the capital accounts, Realisation Account and the cash book.
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Notes:
(1) Ess, being a minor, is liable only to the maximum extent of Rs 5,000; the “deficit” of Rs 1,000 in his capital account has to be borne by the other
partners in their profit- sharing ratio.

(2) The deficiency in Zed’s account will be borne by Exe and Wye in the ratio of their capitals, viz., 15,000: 10,000 respectively. Zed pays 40% of Rs
5,333 and the deficiency is Rs 3,200.

Dissolution of a Partnership Firm: Problem and Solution # 12.

The following is the trial balance as on March 31, 2012 of M/S A, B and C who had branches at different places and who shared profits and losses in
the ratio of 2 : 1 : 2 respectively:
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The firm was dissolved on the above date. A took over the Delhi Branch, and B took over the Patna Branch; the assets being taken at 10% less than
the book values. Patents and Trade-marks were found valueless. The business at Kanpur was sold to a limited company which allotted 6,000 equity
shares of Rs 10 each credited as fully paid. To pay the liabilities, A and B introduced cash in the profit-sharing ratio. The cost of winding up came to
Rs 4,000 for which A advanced cash. C is insolvent and can pay nothing. B received all the shares.

Give the necessary accounts to close the books of the firm; partners give effect to the correct position without having to make up losses in cash.
Assume the capitals to be fluctuating. A and B settle accounts between themselves.
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Dissolution of a Partnership Firm: Problem and Solution # 13.

Below is the balance sheet of M/s. A, B and C as on March 31, 2012:

Due to the inability to pay the creditors, the firm is dissolved. B and C cannot pay anything. A can contribute only Rs 10,500 from his private estate.
Stock realises Rs 1,05,000. Debtors realise Rs 1,12,000, and Furniture is sold for Rs 7,000. Expenses amount to Rs 21,000. Prepare accounts to
close the books of the firm.

Dissolution of a Partnership Firm: Problem and Solution # 14.

Following is the balance sheet as on 31st March, 2012 of a firm having three equal partners P, Q and R:
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The firm was dissolved due to insolvency of all the partners. Machinery was sold for Rs 15,000 while furniture fetched Rs 12,200. Stock realised Rs
30,800. Realisation expenses totalled Rs 1,660. Nothing could be recovered from Q and R, but Rs 3,800 could be collected from P’s private estate.

Close the books of account of the firm.

Dissolution of a Partnership Firm: Problem and Solution # 15.

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X, Y and Z were partners in a business. Their balance sheet as on 31st March, 2012 was as follows:

Due to bad financial position of the partners, the firm was dissolved and all the partners were declared bankrupt.

The assets realised are as follows:

Book Debts 45% less, Building Rs 1,60,000, Stock Rs 1,00,000, Machinery Rs 2,00,000 and Furniture & Fixtures Rs 40,000. Realisation expenses
were Rs 10,000.

The private financial position of partners was as follows:

Prepare:
Realisation Account, Bank Account, Creditors Account, Deficiency Account and Partners’ Capital Accounts.
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Dissolution of a Partnership Firm: Problem and Solution # 16.

Red, Zed and Ted shared profits and losses in the ratio of 5 31st March, 2012, their balance sheet was as follows:

The bank had a charge on all the assets these realised Rs 29,000 in all. Zed’s private estate realised Rs 6,000; his private creditors were Rs 5,000.
Ted was unable to contribute anything. Red paid 1/3 of what was finally due from him (taking the payment also into account) except on account of
other partners. Prepare ledger accounts, passing all matters relating to realisation of assets and payment of liabilities through the Realisation
Account.

The amount brought in by Red has been calculated as follows:

Suppose, the amount brought in by Red is x, i.e., 1/3 of amount due from Red. The amount then payable to trade creditors will be Rs 20,000 + x, Rs
20,000 being available without the amount to be brought in by Red. The loss on realisation will be: Rs (60,000 + 10,000 + 20,000 + x-69,000) or Rs
21,000 + x.
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Red’s share will be Rs 5/10 (21,000 + x) or Rs 10,500 + 1/2x, making the debit balance in his capital account to be Rs 20,000 + 10,500 + x/2-30,000
or Rs 500 + x/2.

Then, 3x = 500 + x/2

or 6x = 1,000 + x

or 5x = 1,000

x = 200

Dissolution of a Partnership Firm: Problem and Solution # 17.

The following is the balance sheet of A. B and C, who are equal partners, as at March 31, 2012:

For the assets, the company allotted to the partners in due proportion fully paid shares of Rs 2,80,000; the balance was to be left by the partners with
the company as a temporary loan.

The partners collected the debts (which realised Rs 2,90,000) and paid the liabilities in full. The cost of registering the company and preparing the
agreement with the company came to Rs 8,400. This was paid by the partnership firm.

It was found that the liability in respect of excise duty was Rs 23,000 This was paid. Income-tax amounting to Rs 30,000 was also paid, (A, Rs
15,000; B, Rs 10,000 and C, Rs 5,000).

C is insolvent and can pay only Rs 10,300. Write up the accounts to show how the books of M/s. A, B and C are closed.
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Note:
Shares in IV. Ltd., Cash and Temporary Loan in W. Ltd. have all been divided among A and B in the ratio of A, Rs 1,77,800 and B, Rs 2,22,700, the
balances due after transferring C’s deficiency to A and B in the ratio of their fixed capitals, viz., 4 : 5 respectively.

Dissolution of a Partnership Firm: Problem and Solution # 18.

The following is the balance sheet of M/s. A, B and C who share profits and losses in the ratio of 2 : 2 : 1 respectively:

The firm was dissolved and the assets were realised gradually; Rs 70,000 were received once, Rs 1,05,000 another time and Rs 63,000 finally.
Show how each instalment is to be distributed.

Solution:
The ratio is 2 : 2 : 1 among A, B and C. C’s capital is Rs 28,000, hence the proportionate capitals of A and B are Rs 56,000 each. This means C
receives nothing until the capitals of A and B each are brought down to Rs 56,000. Now A and B being equal partners, their capitals ought to be
equal. A’s capital is Rs 21,000 more than B’s and hence before B receives anything, A should be paid Rs 21,000. The following statement shows the
distribution.
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Dissolution of a Partnership Firm: Problem and Solution # 19.

A, B, and C were in partnership sharing profits and losses in the ratio of 2 : 1 : 1 respectively. On 31st March, 2012 they decided to dissolve the
partnership when their balance sheet stood as follows:

The assets were realised in piecemeal as follows:

April, 2012:
Premises: Rs 5,000 (received after meeting in full the liability on the mortgage loan) ; sundry debtors: Rs 6,000 ; and stock: Rs 7,000.

May, 2012:
Sundry debtors: Rs 7,500; and stock: Rs 8.500.

June, 2012: Sundry debtors: Rs 20,000; and stock: Rs 23,000.

July, 2012: Sundry debtors : Rs 15,000; stock : Rs 25,000 ; and furniture: Rs 8,000.

The remaining stock was taken over by B at an agreed amount of Rs 3,000. The trade creditors were settled for Rs 4,000. The partners distributed
cash at the end of every month beginning on 30th April, 2012.

You are required to show the distribution of cash in the form of a statement applying the ‘proportionate capitals method’. Show your working notes
clearly.
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Thus, first of all, B will receive Rs 15,000. Then, A and B will receive cash in the ratio of 2 : 1 respectively till A has received Rs 4,000 and B has
received Rs 2,000 more. At this stage, the capitals of A, B and C will be in their profit sharing ratio. Hence, thereafter, cash will be distributed among
A, B and C in the profit sharing ratio.

(ii) In the statement, loan on mortgage of premises has been ignored as the firm has received Rs 5,000 after meeting in full the liability on the loan.

Dissolution of a Partnership Firm: Problem and Solution # 20.

The firm of IMS was dissolved on 31.3.2011 at which date its balance sheet stood a follows:
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Partners share profits equally. A firm of chartered accountants is retained to realise the assets and distribute the cash after discharge of liabilities.
Their fees which are to include all expenses is fixed at Rs 1,00,000. No loss is expected on realisation since assets include valuable land and
building.

The chartered accountants firm decided to pay off the partners under ‘Higher Relative Capital Method’. You are required to prepare a statement
showing distribution of cash with necessary workings.
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So Mr. L should get Rs 5,00,000 first which will bring down his capital account balance from Rs 15,00,000 to Rs 10,00,000. Accordingly, surplus
amounting to Rs 2,00,000 will be paid to Mr. L towards higher relative capital.

(ii) Scheme of payment of Rs 15,00,000 realised as 3rd instalment:

— Payment of Rs 3,00,000 will be made to Mr. L to discharge higher relative capital. This makes the higher capital of both Mr. L and Mr. M Rs
5,00,000 as compared to capital of Mr. S.

— Payment of Rs 5,00,000 each of Mr. L and Mr. M to discharge the higher capitals.

— Balance Rs 2,00,000 equally to L, M and S, i.e. Rs 66,667, Rs 66,667 and Rs 66,666 respectively.

Dissolution of a Partnership Firm: Problem and Solution # 21.

X, Y and Z were in partnership with a capital of Rs 90,000 originally contributed in the proportions of 1/2, 1/3 and 1/6 respectively and sharing profits
and losses in the same proportions.

The partnership was dissolved on March 31, the balance sheet on which date was as follows:
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Alternative Method—Maximum Loss Method:

The other method to deal with the problem is to calculate the maximum possible loss after outside creditors and partners’ loans have been paid off.
This loss is transferred to the capitals and thus the amount payable to a partner would be known. If a partner’s share of the loss is more than the
capital, he should be treated as “insolvent” and, in accordance with Garner vs. Murray, the loss should be transferred to the other partners in the
ratio of capitals just before dissolution.

The amount to the credit of partners will be equal exactly to the cash in hand and the cash will be distributed among the partners according to the
figures now resulting. Such calculation of maximum loss, whenever an instalment of cash is received, will show how much is to be paid to various
partners.

Below is the statement of distribution of cash in illustration 25 according to this method:

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Dissolution of a Partnership Firm: Problem and Solution # 22.

A, B and C were partners sharing profits and losses in the ratio of 4 : 3 : 1 respectively. Their balance sheet as on 31st March, 2011 was as follows:
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Under proportionate capitals method:

Distribution of cash till Loan from A is paid off is the same as under the maximum loss method.

Return of capital to partners is different and it can be worked out as under:

Hence, first of all Rs 32,500 will be paid to C. Then, A and C will receive, in the ratio of 4 : 1 amounts totalling Rs 30,000 and Rs 7,500 respectively.
After that, the balances of the capital accounts of all the partners will be paid in the profit-sharing ratio. All subsequent payments will be made to A, B
and C in the ratio of 4 : 3 : 1 respectively.

Dissolution of a Partnership Firm: Problem and Solution # 23.

Tom, Dick and Harry have capitals of Rs 96,000, Rs 60,000 and Rs 84,000 and share profits and losses as to one-half, one-third and one-sixth
respectively.

After paying creditors, the following sums become available and it was agreed that they shall be distributed as and when determined:

No further assets remain to be realised and Dick is insolvent. Show the sums to be paid to the partners out of the amounts available.
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Entries in Books:
Piecemeal distribution of cash does not introduce really any new complication so far as recording the sale of assets, payment of liabilities, etc., are
concerned.

The points of departure from the practice already outlined earlier will be as follows:
(a) Assets will be realised gradually and hence whenever cash is received, cash will be debited and Realisation Account credited (instead of there
being only one such entry).

(b) The statement of piecemeal distribution will show how cash is be utilized. For expenses, Realisation Account will be debited and Cash Account
credited. For payment to creditors, the account concerned will be debited and Cash Account credited. After this, if anything is paid to partner, his
loan or capital account (as the case may be) will be debited and cash credited.

After all assets are realised, the Realisation Account will be closed in the usual way, i.e., by transfer of the balance to the capital accounts in the
profit sharing ratio.

Dissolution of a Partnership Firm: Problem and Solution # 24.

A. B and C were partners sharing profits and losses in the ratio of 5 : 3 : 2 respectively. On March 31, 2009 their balance sheet was as follows:

The firm was dissolved on the 1st April, 2012. The assets were realised as follows:
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Dissolution of a Partnership Firm: Problem and Solution # 25.

T, D, N, B and C were partners sharing profits and losses in the ratio of 3:3:2:1:1 respectively after allowing interest @ 12% p.a. on the capital
account balances but not the current accounts. The Deed excluded the rule in Garner vs. Murray. Due to the failure of a big customer, the firm was
dissolved on 31st March 2012. It was agreed that the available cash at the end of each month should be distributed suitably.

The Trial Balance as on 31st March 2012 was as follows:

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