Question

Pass necessary journal entries for the following transactions on the dissolution of the partnership firm of Mansha and Rajiv after various assets (other than cash) and external liabilities have been transferred to Realisation Account: (i) Mansha’s loan of ₹ 18,000 was settled by giving her an unrecorded furniture of ₹ 20,000.
(ii) Machinery of the book value of ₹ 80,000 was sold at a loss of 10%.
(iii) A creditor of ₹ 40,000 accepted cash ₹ 21,000 and stock of the book value of ₹ 25,000 in full settlement of his claim.
(iv) Bank loan of ₹ 1,00,000 was paid along with interest of ₹ 10,000.
(v) Investments of the face value of ₹ 52,000 were sold in the open market for ₹ 63,000 for which a commission of ₹ 2,000 was paid to the broker.
(vi) Profit and Loss Account balance of ₹ 30,000 appeared on the asset side of the balance sheet.

Hint:

In dissolution, all assets and liabilities are transferred to the Realisation Account except cash, bank, fictitious assets, and partner-related accounts. Any gain/loss on settlement, sale, or unrecorded items are adjusted through the Realisation A/c.

Answer 1

Dissolution Adjustments & Journal Entries

(i) Settlement of Mansha’s loan with unrecorded furniture:

\[ \text{Mansha’s Loan A/c Dr.} \quad ₹18,000 \\ \text{Profit on settlement (Transferred to Realisation A/c) Dr.} \quad ₹2,000 \\ \text{To Realisation A/c (Unrecorded Furniture)} \quad ₹20,000 \] Explanation: Unrecorded furniture valued at ₹20,000 was used to settle Mansha's loan of ₹18,000, resulting in a ₹2,000 loss on settlement.

(ii) Sale of Machinery at 10% loss:

\[ \text{Bank A/c Dr.} \quad ₹72,000 \\ \text{Realisation A/c Dr.} \quad ₹8,000 \\ \text{To Machinery A/c / Realisation A/c} \quad ₹80,000 \] Explanation: Machinery with a book value of ₹80,000 was sold for ₹72,000, incurring a ₹8,000 loss.

(iii) Creditor settled by cash and stock:

\[ \text{Realisation A/c Dr.} \quad ₹6,000 \\ \text{To Bank A/c} \quad ₹21,000 \\ \text{To Stock A/c} \quad ₹25,000 \\ \text{To Creditors A/c} \quad ₹40,000 \] Explanation: ₹40,000 of creditors were settled by paying ₹21,000 in cash and stock worth ₹25,000, resulting in an excess payment of ₹6,000, which is a loss.

(iv) Payment of Bank Loan with Interest:

\[ \text{Bank Loan A/c Dr.} \quad ₹1,00,000 \\ \text{Interest A/c Dr.} \quad ₹10,000 \\ \text{To Bank A/c} \quad ₹1,10,000 \] OR \[ \text{Realisation A/c Dr. ₹10,000} \\ \text{Bank Loan A/c Dr. ₹1,00,000} \\ \text{To Bank A/c ₹1,10,000} \] Explanation: Interest of ₹10,000 on the bank loan at the time of dissolution is treated as a realization expense.

(v) Sale of Investments with brokerage:

\[ \text{Bank A/c Dr.} \quad ₹63,000 \\ \text{To Realisation A/c} \quad ₹63,000 \\ \text{Realisation A/c Dr.} \quad ₹2,000 \\ \text{To Bank A/c} \quad ₹2,000 \] Explanation: Brokerage paid on the sale of investments is an expense and is debited to the Realisation Account.

(vi) Profit and Loss A/c shown on Asset Side:

\[ \text{Partners’ Capital A/c Dr.} \quad ₹30,000 \\ \text{To Profit and Loss A/c} \quad ₹30,000 \] Explanation: The debit balance in the Profit and Loss Account, representing an accumulated loss, is written off by distributing it among the partners' capital accounts.