Question

Plant and Machinery (book value 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value. What journal entry will be passed in the books of the firm at the time of dissolution of the firm?

• A. Realisation A/c ...... Dr. 54,000
  To Machinery A/c 54,000
• B. No Entry will be passed
• C. Creditors A/c ...... Dr. 54,000
  To Machinery A/c 54,000
• D. Realisation A/c ...... Dr. 54,000
  To Cash A/c 54,000

Answer 1

The Correct Option is A

When plant and machinery are transferred to a creditor at a valuation 10% below book value, the following accounting treatment applies:

• Book Value of Plant and Machinery: ₹60,000
• Agreed Valuation Calculation: 10% discount on book value

Agreed Valuation = ₹60,000 × (1 - 0.10) = ₹60,000 × 0.90 = ₹54,000

Upon dissolution, the asset (Plant and Machinery) is recorded at its agreed valuation of ₹54,000. This involves transferring ₹54,000 to the Realisation Account. The Machinery account is credited with its full book value of ₹60,000. The difference of ₹6,000 (₹60,000 - ₹54,000) represents a loss on realisation.

The corresponding journal entry is:

Realisation A/c ...... Dr. 54,000 To Machinery A/c 54,000

This entry accurately reflects the asset's value as agreed upon with the creditor.

Therefore, the correct journal entry is:

Realisation A/c ...... Dr. 54,000
To Machinery A/c 54,000