Closing the Business

An unrecorded asset has no book value in the firm’s books. When it is realised, the entire amount received is credited to the Realisation Account, thereby increasing realisation profit. In contrast, paying a liability above its book value, selling an asset below book value, or incurring higher realisation expenses reduces profit. Exam tip: proceeds from an unrecorded asset are treated as a gain, while payment of an unrecorded liability is treated as a gain only in the relevant settlement situation.

When the firm reimburses a partner for realisation expenses, the amount becomes an expense of the firm and ₹8,000 is debited to the Realisation Account. The usual entry is: Realisation Account Dr. ₹8,000, To Partner’s Capital/Current Account ₹8,000. Therefore, it is not credited, and there is no basis for doubling the amount to ₹16,000. Exam tip: Realisation expenses borne by the firm are recorded on the debit side of the Realisation Account.

When an unrecorded liability is paid, ₹5,200 is debited to the Realisation Account and cash is credited. This increases the expenses of realisation and therefore increases the realisation loss by ₹5,200. Hence, option B is correct. Exam tip: An unrecorded liability discovered and paid during dissolution is debited to the Realisation Account, not directly to the partners’ capital accounts.

The total ratio is \(6+1=7\), and the smaller partner’s share is \(1/7\). Therefore, the share is \(₹42,000 \times 1/7 = ₹6,000\). Exam tip: For the smaller partner, use the smaller component of the given ratio—in this case, 1 rather than 6.

Goodwill recorded in the books is a non-cash asset. On dissolution, all book assets, including goodwill, are transferred to the Realisation Account at their book value by debiting Realisation Account and crediting Goodwill Account. It is not transferred to the Capital Account, which is used for the partners’ final settlement. Exam tip: For a book asset transferred on dissolution, remember the entry—Realisation Account Dr. to Asset Account.

The liability was recorded at ₹26,000, but only ₹25,200 was paid. Therefore, gain = ₹26,000 − ₹25,200 = ₹800. This gain is recorded in the Realisation Account. Exam tip: settling a liability for less than its book value creates a gain; settling it for more creates a loss.

The Realisation Account is a nominal account used to record the transfer and disposal of non-cash assets and the settlement of external liabilities. Its balance represents the profit or loss arising from realisation of assets and settlement of liabilities. The final balances of partners’ capital accounts are determined separately through the capital accounts, so option B is not the purpose of this account. Exam tip: Cash and bank balances are generally not transferred to the Realisation Account.

Gross profit on the sale of the asset = ₹78000 − ₹72000 = ₹6000. After deducting the selling expenses of ₹1500, the net profit is ₹6000 − ₹1500 = ₹4500. Therefore, option C is correct. Option B results from deducting the expenses incorrectly. Exam tip: In dissolution, profit on an asset is calculated as sale proceeds − book value − related expenses.

The total ratio is 2 + 5 = 7. The partner with the larger ratio is entitled to \(\frac{5}{7}\) of the profit. Therefore, the share is \(₹21,000 \times \frac{5}{7} = ₹15,000\). Exam tip: always divide by the sum of the ratio terms before multiplying by the relevant partner’s term.

On dissolution, the usual order of settlement is external liabilities, partners’ loans, and then partners’ capital. Therefore, partners’ loans have the next priority after external liabilities. Partners’ capital is repaid only after the loans, while the reserve fund and profit are generally transferred or adjusted through the partners’ capital accounts rather than treated as a separate payment priority. Exam tip: remember the sequence—External Liabilities → Loans → Capitals.

A profit on the Realisation Account is distributed among the partners in their profit-sharing ratio. Total parts = 2 + 2 + 5 = 9, and the third partner's share is 5 parts. Therefore, his share = ₹27000 × 5/9 = ₹15000. An amount such as ₹16000 results from applying the ratio incorrectly. Exam tip: Always add the total ratio parts before calculating an individual partner's share.

A profit arises when the credit side of the Realisation Account exceeds its debit side. Profit = Total Credit − Total Debit = ₹1,04,000 − ₹99,000 = ₹5,000. ₹4,000 is incorrect because it is not the difference between the two totals. Exam tip: Higher credit indicates profit, whereas higher debit indicates loss.

An unrecorded asset is not transferred to the Realisation Account through the usual asset-transfer entry. When it is sold or otherwise realised, the receipt is debited to Cash/Bank and credited to the Realisation Account. Therefore, it is a credit item in the Realisation Account. Realisation expenses and payments for unrecorded liabilities, in contrast, are generally debited. Exam tip: receipt from an unrecorded asset is credited, whereas payment of an unrecorded liability is debited to Realisation Account.

The total number of ratio parts is \(5+3=8\). The second partner bears 3 parts, so the share of loss is \(₹32,000 \times \frac{3}{8}=₹12,000\). An option such as ₹14,000 results from using an incorrect fraction instead of 3/8. Exam tip: add the ratio terms first, then multiply the total loss by the relevant partner’s fraction.

The liability to the creditor was ₹50,000, but only ₹48,000 was paid. Therefore, the saving of ₹50,000 − ₹48,000 = ₹2,000 is recorded as a gain in the Realisation Account. An amount such as ₹1,000 results from calculating the difference incorrectly. Exam tip: when a creditor is settled for less than the amount due, the difference is a realisation gain; if settled for more, it is a loss.

Once dissolution is complete, the assets have been realised, liabilities have been settled, and the partners’ capital accounts have been finally adjusted. Consequently, the Cash Account, Realisation Account and Capital Accounts are all closed. Therefore, ‘All of the above’ is correct. Exam tip: At the completion of dissolution, no account should retain an unsettled balance.

Profit on sale of the asset = Sale proceeds − Book value = ₹102000 − ₹95000 = ₹7000. Therefore, ₹7000 is correct. Exam tip: a sale price above book value results in a profit, while a sale price below book value results in a loss.

Realisation expenses are debited to the Realisation Account. Since there are no other realisation items or adjustments, the account will have a debit balance of ₹3,500, representing a realisation loss transferred to the partners’ Capital Accounts in their profit-sharing ratio. Therefore, the correct result is a loss of ₹3,500. Exam tip: When only realisation expense is given, the entire expense is treated as realisation loss.

The total profit-sharing ratio is 3 + 4 + 5 = 12 parts. C’s share is 5 parts, so C’s profit = ₹24000 × 5/12 = ₹10000. On dissolution, realisation profit is distributed among the partners in their profit-sharing ratio. In the exam, first find the total ratio and then multiply the profit by the concerned partner’s ratio.

The gain on settlement of liabilities is ₹4500, while the loss on the sale of assets is ₹2500. Therefore, the net result is ₹4500 − ₹2500 = ₹2000 profit. A ₹2000 loss would arise only if the loss exceeded the gain. In the exam, offset the realization gains and losses to determine the final net result.

On dissolution, cash is first used to settle outside liabilities and then partners’ loans. The balance remaining is returned according to the amounts due in the partners’ final capital accounts. Total sales, purchases, and expenses do not determine the distribution; they merely reflect business activity. Exam tip: remember the payment order—outside liabilities, partners’ loans, and finally partners’ capital.

The loss on realisation is distributed among the partners in their profit-sharing ratio. The total ratio is \(5+4+3=12\). The second partner’s share is \(\frac{4}{12}\times ₹54,000=₹18,000\). Therefore, option B is correct. Exam tip: Divide the total loss by the sum of the ratio terms first, then multiply by the concerned partner’s ratio.

The sale of the unrecorded asset credits the Realisation Account by ₹14,000, while payment of the unrecorded liability debits it by ₹5,000. Thus, the net credit is ₹14,000 − ₹5,000 = ₹9,000, representing a profit on realisation of ₹9,000. Exam tip: proceeds from an unrecorded asset are credited to Realisation, whereas payment of an unrecorded liability is debited to it.

The asset causes a loss of ₹6,000 because its book value of ₹75,000 exceeds its takeover value of ₹69,000. The ₹1,000 realisation expense borne by the firm is also debited to the Realisation Account. Therefore, the total loss is ₹6,000 + ₹1,000 = ₹7,000, which is transferred to the partners’ capital accounts. Exam tip: Include both the difference between book value and takeover value and the realisation expenses while calculating the final realisation loss.

The total consideration paid to the creditor is ₹34,000 in cash + goods worth ₹1,000 = ₹35,000. Since the liability was ₹36,000, the gain is ₹36,000 − ₹35,000 = ₹1,000. Therefore, option C is correct. Exam tip: For a creditor settlement, subtract the total consideration actually given from the amount of the liability to determine the gain or loss.