Closing the Business

Profit on the sale of machinery = ₹92,000 − ₹80,000 = ₹12,000. After deducting the realisation expense of ₹2,000, the net profit is ₹12,000 − ₹2,000 = ₹10,000. Therefore, option B is correct. Exam tip: deduct the relevant realisation expenses from the profit on asset realisation; ₹12,000 is only the gross profit before expenses.

A Realisation Account shows a profit when its credit side exceeds its debit side. Realisation profit = ₹2,01,000 − ₹1,85,000 = ₹16,000. This profit is transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: Credit exceeding debit indicates profit; debit exceeding credit indicates loss.

A realisation loss is borne by the partners in their profit-sharing ratio. A’s fraction is \(3/(3+2)=3/5\). Therefore, A’s share = ₹25,000 × \(3/5\) = ₹15,000, so option C is correct. Exam tip: Always use the sum of the ratio terms as the denominator when allocating a loss; do not use A’s ratio term alone.

Payment of an unrecorded liability is an actual payment made on dissolution, so ₹7,000 is debited to the Realisation Account. This debit reduces the realisation profit or increases the realisation loss. A credit is incorrect because credits generally arise when assets are transferred or liabilities are recorded in the Realisation Account. Exam tip: When an unrecorded liability is paid, debit the Realisation Account with the amount actually paid.

The total consideration given to the creditor is ₹28,000 + ₹1,500 = ₹29,500. Since the liability was ₹30,000, the gain is ₹30,000 − ₹29,500 = ₹500. ₹300 results from comparing the liability only with the cash paid and ignoring the stock transferred. Exam tip: Include the value of both cash and any asset transferred when calculating the gain or loss on settlement of a creditor.

The total profit-sharing parts are 5 + 4 + 3 = 12. The second partner is entitled to 4 parts, so the share is ₹36,000 × 4/12 = ₹12,000. ₹15,000 represents the first partner’s share for 5 parts, not the second partner’s share. Exam tip: Distribute realisation profit or loss among partners in their profit-sharing ratio.

When an asset is sold for less than its book value, the difference between the book value and the amount realized is recorded as a loss in the Realisation Account. In contrast, selling assets above book value or settling liabilities for less than their book value results in a gain. Cash received from the sale of an unrecorded asset is also generally treated as a gain. Exam tip: For assets, compare the realization value with the book value—realization below book value means a loss.

The asset is transferred to the partner at its agreed takeover value of ₹50000, while its book value is ₹45000. Therefore, realisation profit = ₹50000 − ₹45000 = ₹5000. The ₹4000 option does not represent the correct difference between the takeover value and book value. Exam tip: For an asset taken over by a partner, subtract its book value from the agreed takeover value.

Realisation expenses are costs incurred in closing the firm, so they are debited to the Realisation Account. The amount is ₹5,000. The usual entry is: Realisation Account Dr. ₹5,000 To Partner’s Capital/Current Account or Bank Account, depending on the settlement method. Crediting the Realisation Account would be incorrect because an expense increases its debit side. Exam tip: Debit the Realisation Account with actual expenses incurred for dissolution.

The creditors were payable ₹42,000, but only ₹40,000 was paid to settle them. Therefore, the amount saved is ₹42,000 − ₹40,000 = ₹2,000, which is a gain on realisation and is credited to the Realisation Account. ₹40,000 is the settlement amount, not the gain. Exam tip: settling creditors for less than the amount due creates a realisation gain; paying more creates a loss.

The final balance of the Realisation Account represents the profit or loss arising from realisation. This profit or loss is transferred to the partners’ Capital Accounts in their profit-sharing ratio. Therefore, the partners’ Capital Accounts are correct. The Cash Account records receipts and payments, not the allocation of realisation profit or loss. Exam tip: Transfer realisation profit or loss to the partners’ Capital Accounts in the profit-sharing ratio.

The total ratio is 7 + 3 = 10, so B’s share is 3/10. Therefore, B’s share of the realisation profit = ₹50,000 × 3/10 = ₹15,000. Realisation profit is generally distributed among partners in their old profit-sharing ratio, so ₹20,000 is not correct for B. Exam tip: Add the ratio terms first, then multiply the profit by the concerned partner’s fraction.

An unrecorded asset has no book value in the firm’s books, so no debit is made in the Realisation Account for the asset itself. The entry for the sale proceeds is: Bank/Cash Account Dr. ₹9,000, To Realisation Account ₹9,000. Therefore, ₹9,000 appears on the credit side of the Realisation Account. Exam tip: Sale proceeds of an unrecorded asset are credited to the Realisation Account.

The liability has a book value of ₹18,000, but ₹19,000 is paid to settle it. The excess payment of ₹1,000 is debited to the Realisation Account as a loss. Therefore, the correct effect is a loss of ₹1,000, not ₹2,000 and not no effect. Exam tip: When a liability is settled for more than its book value, the excess is treated as a loss on realisation.

The loss on sale of the asset is ₹60,000 − ₹54,000 = ₹6,000. The realisation expense of ₹1,000 is also debited to the Realisation Account. Therefore, the net loss is ₹6,000 + ₹1,000 = ₹7,000. Exam tip: add realisation expenses to the loss arising from the sale when calculating the net realisation loss.

A realisation profit is distributed among the partners in their profit-sharing ratio. The total parts are \(2+1+1=4\), so the first partner’s share is \(₹18,000 \times \frac{2}{4}=₹9,000\). This amount is credited to the first partner’s capital account. The amounts ₹8,000 and ₹10,000 do not satisfy the given ratio. Exam tip: Divide realisation profit or loss using the partners’ old profit-sharing ratio.

The credit side of the Realisation Account records proceeds from the sale of assets and liabilities transferred to the account. In contrast, realisation expenses and payments made to settle liabilities are recorded on the debit side. Partners’ capital and final payments to partners are not normal credit items of this account. Exam tip: remember that assets transferred are debited, while proceeds from their realisation are credited.

When A takes over the asset, A’s Capital Account is debited by ₹24,000. When A assumes the liability, the Capital Account is credited by ₹6,000. Therefore, the net effect is ₹24,000 debit − ₹6,000 credit = a debit of ₹18,000. Exam tip: An asset taken over by a partner is debited to the partner’s Capital Account, while a liability assumed is credited.

The total parts in the profit-sharing ratio are 4 + 3 + 1 = 8. The third partner has 1 part, so the share is ₹24,000 × 1/8 = ₹3,000. ₹4,000 results from using an incorrect fraction rather than the third partner’s 1 out of 8 parts. Exam tip: Distribute the realisation profit or loss among partners in their profit-sharing ratio.

During dissolution, cash realised from assets is first used to pay realization expenses and external liabilities. The cash left after these payments, immediately before settlement with partners, is available for distribution among the partners according to their capital balances. Option B concerns non-cash assets, not the balance of the Cash Account. Exam tip: the cash balance available just before final distribution is distributable among partners; after distribution is completed, the Cash Account is closed with a nil balance.

Loss on realisation = Book value of debtors − Amount realised = ₹50,000 − ₹47,000 = ₹3,000. Therefore, option C is correct. Since the amount realised is lower than the book value, the difference is recorded as a loss in the Realisation Account. In an exam, subtract the realised amount from the book value when realisation is below book value.

The total settlement value is ₹17,000 in cash + ₹500 worth of materials = ₹17,500. Since the liability was ₹18,000, the gain is ₹18,000 − ₹17,500 = ₹500. Therefore, option C is correct. Exam tip: add the cash paid and the agreed value of assets transferred before comparing the total settlement with the creditors’ liability.

In the Realisation Account, assets transferred and liabilities paid are generally recorded on the debit side, while liabilities transferred and proceeds from assets are recorded on the credit side. If the debit total exceeds the credit total, the account shows a loss. The difference is therefore placed on the credit side as the balancing figure, and it is subsequently transferred to the partners’ capital accounts as a loss. Exam tip: A realisation profit is balanced on the debit side, whereas a realisation loss is balanced on the credit side.

The total ratio is 1 + 1 + 2 = 4. The third partner’s share is \(2/4\), or \(1/2\). Therefore, the share of loss is ₹16,000 × \(1/2\) = ₹8,000. ₹6,000 is incorrect because the third partner does not have a \(3/8\) share. Exam tip: Divide the total loss by the sum of ratio parts, then multiply by the concerned partner’s ratio part.

In the Realisation Account, the debit side is ₹1,34,000 and the credit side is ₹1,28,000. Since the debit side exceeds the credit side, there is a loss of ₹1,34,000 − ₹1,28,000 = ₹6,000. This loss is transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: A higher credit total indicates a realisation profit, while a higher debit total indicates a realisation loss.