Worked Solution
✓ VerifiedDissolution of Partnership Firm — Read, Write and Add
Preliminary Notes:
Profit-sharing ratio is Read : Write : Add = 4/9 : 2/9 : 3/9 (i.e., 4 : 2 : 3). The JLP Reserve (₹12,400) is transferred directly to Partners' Capital Accounts in PSR — it does not pass through the Realization Account. Read's Loan (₹15,000) is a partner's loan and is paid off directly from the Bank Account. Cash at Bank (₹8,000) does not pass through the Realization Account.
Key treatments:
(a) Joint Life Policy: The firm surrenders JLP; the insurer deducts Add's personal loan (₹5,000) + interest (₹300) = ₹5,300. Cash received by firm = ₹10,200. Since the firm's JLP proceeds were used to discharge Add's personal liability, Add's Capital Account is debited ₹5,300 and credited to Realization. Effective JLP realisation = ₹15,500 (profit of ₹500 over BV of ₹15,000).
(b) Patents to Creditor: Patents (BV ₹6,000) transferred to a Sundry Creditor at ₹4,500. Loss of ₹1,500 absorbed in Realization. Remaining patents (BV ₹4,000) realised at 50% = ₹2,000. Sundry Creditors Account reduced by ₹4,500 (non-cash settlement).
(c) Unrecorded Shares: Shares previously written off now worth ₹3,000. Loan creditor (Loan on Hypothecation) accepts them at ₹3,000. This is credited to Realization as an unrecorded asset realised (profit of ₹3,000). Cash balance of loan = ₹6,200 − ₹3,000 = ₹3,200 paid in cash.
(d) Remaining assets realised as stated. Total realisation = ₹69,000 (credit side).
(e) Discount of ₹500 allowed by Sundry Creditors — credited to Realization Account.
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REALIZATION ACCOUNT
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Plant & Machinery | 30,000 | Bank A/c — Plant & Machinery | 17,000 |
| Fixtures & Fittings | 2,000 | Bank A/c — Fixtures & Fittings | 1,000 |
| Stock | 10,400 | Bank A/c — Stock | 9,000 |
| Sundry Debtors (net) | 18,000 | Bank A/c — Debtors | 16,500 |
| Joint Life Policy | 15,000 | Bank A/c — JLP (net cash) | 10,200 |
| Patents & Trademarks | 10,000 | Add's Capital A/c (personal loan + interest) | 5,300 |
| Bank A/c (Expenses) | 2,300 | Sundry Creditors A/c (Patents at valuation) | 4,500 |
| Loan on Hypothecation A/c (Shares) | 3,000 | ||
| Bank A/c — Patents (50% of ₹4,000) | 2,000 | ||
| Sundry Creditors A/c (Discount) | 500 | ||
| Partners' Capital A/cs (Loss on Realisation): | |||
| — Read (4/9 × 18,700) | 8,311 | ||
| — Write (2/9 × 18,700) | 4,156 | ||
| — Add (3/9 × 18,700) | 6,233 | ||
| Total | 87,700 | Total | 87,700 |
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BANK ACCOUNT
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Balance b/d | 8,000 | Realization A/c (Expenses) | 2,300 |
| Realization A/c (P&M) | 17,000 | Sundry Creditors A/c | 12,800 |
| Realization A/c (Fixtures) | 1,000 | Loan on Hypothecation A/c | 3,200 |
| Realization A/c (Stock) | 9,000 | Read's Loan A/c | 15,000 |
| Realization A/c (Debtors) | 16,500 | Read's Capital A/c | 27,200 |
| Realization A/c (JLP) | 10,200 | Write's Capital A/c | 8,600 |
| Realization A/c (Patents) | 2,000 | ||
| Add's Capital A/c (Deficit) | 5,400 | ||
| Total | 69,100 | Total | 69,100 |
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PARTNERS' CAPITAL ACCOUNTS (Columnar)
| Dr | Read (₹) | Write (₹) | Add (₹) | Cr | Read (₹) | Write (₹) | Add (₹) |
|---|---|---|---|---|---|---|---|
| Realization (Loss) | 8,311 | 4,156 | 6,233 | Balance b/d | 30,000 | 10,000 | 2,000 |
| Realization (JLP Loan+Int.) | — | — | 5,300 | JLP Reserve A/c | 5,511 | 2,756 | 4,133 |
| Bank A/c (Final payment) | 27,200 | 8,600 | — | Bank A/c (Deficit paid) | — | — | 5,400 |
| Total | 35,511 | 12,756 | 11,533 | Total | 35,511 | 12,756 | 11,533 |
Add's deficit = ₹5,400 is contributed by Add to the firm (paid to Bank).
Final Settlement: Read receives ₹27,200; Write receives ₹8,600; Add pays ₹5,400.
Write it like this
1The skeleton
- Start with a working note on PSR and key treatments — verify 4:2:3, flag that JLP Reserve bypasses Realization and hits Capital Accounts directly, and note Read's Loan is a creditor not capital; examiners award marks for preliminary clarity and it stops you making cascade errors.
- Open Realization Account by debiting every asset at book value (including net debtors ₹18,000, not gross) — use the balance sheet figures verbatim; if you use gross debtors or forget patents you lose both the debit and the corresponding credit entry.
- Handle the three non-cash / tricky credits in Realization before touching Bank — JLP net cash ₹10,200 + Add's Capital debit ₹5,300; patent to creditor at ₹4,500 (credit Sundry Creditors, not Bank); unrecorded shares ₹3,000 (credit Realization as unrecorded asset, not capital); each of these is a guaranteed step-mark and most candidates blank on at least one.
- Write the columnar Capital Accounts and credit JLP Reserve (₹12,400) in 4:2:3 on the Cr side — this is the single most visible distinguishing move; students who show this transfer correctly signal they understand dissolution procedure, not just arithmetic.
- Let Bank Account be your proof — open with Cash b/d ₹8,000, plug in every Realization receipt, pay out in order (expenses → creditors → hypothecation loan → Read's Loan → partners), and confirm Add's deficit ₹5,400 appears as a Bank debit (receipt from Add); a balanced Bank Account tells the examiner your Realization loss figure is correct without them even checking your workings.
2Examiner-rewarded phrases
3Common trap
The single killer mistake here is routing JLP Reserve through Realization Account — it does NOT go there; it is transferred directly to Partners' Capital Accounts in PSR. If you debit Realization with JLP Reserve, your loss figure is wrong, your capital accounts are wrong, and your bank won't balance — that's a four-mark wipeout from one wrong entry.