Closing the Business

Correct answer: A. Loss of ₹4,000

In the Realisation Account, machinery is debited at its book value of ₹50,000 and the sale proceeds of ₹46,000 are credited. Thus, the debit exceeds the credit by ₹4,000, resulting in a realisation loss of ₹4,000, which is transferred to the partners’ capital accounts. A profit of ₹4,000 would arise only if the sale proceeds exceeded the book value. Exam tip: Compare the sale proceeds with the book value to determine the realisation profit or loss.

Correct answer: A. Profit of ₹1,000

The liability stood at ₹12,000 in the books, but only ₹11,000 was paid to settle it. The saving of ₹1,000 is a gain for the firm and is recorded as a profit in the Realisation Account. Therefore, option A is correct. Exam tip: settling a liability for less than its book value gives a gain, while settling it for more gives a loss.

Correct answer: A. ₹12,000

Realisation profit is distributed among the partners in their profit-sharing ratio. In the ratio 2:1, the total number of parts is 3; therefore, the first partner’s share = ₹18,000 × 2/3 = ₹12,000. ₹6,000 is the second partner’s share, so it is not correct. Exam tip: Always find the total parts in the profit-sharing ratio before distributing realisation profit or loss.

Correct answer: A. On the debit side

An unrecorded liability is not transferred from the books at the time of dissolution. When it is paid, the payment is treated as a realisation expense or loss and is debited to the Realisation Account, while Cash/Bank Account is credited. The credit side is incorrect because it is generally used when recorded liabilities are transferred to the Realisation Account. Exam tip: for payment of an unrecorded liability, remember the entry—Realisation Account Dr. To Cash/Bank.

Correct answer: A. ₹5,000

Profit on realisation = Sale proceeds − Book value = ₹27,000 − ₹22,000 = ₹5,000. Therefore, option A is correct. ₹27,000 represents the total sale proceeds, not the profit. Exam tip: subtract the book value from the realisation value; a positive difference is a profit, while a negative difference is a loss.

Correct answer: A. Partner’s Capital Account

When a partner pays dissolution expenses on behalf of the firm and the firm reimburses him, the entry is: Realisation Account Dr. ₹3,000 and Partner’s Capital Account Cr. ₹3,000. Therefore, the Partner’s Capital Account is credited. The Realisation Account is debited, not credited, so option B is incorrect. Exam tip: An expense paid personally by a partner on behalf of the firm is credited to the partner’s account when reimbursement is due.

Correct answer: A. ₹6000

A realisation loss is shared by the partners in their profit-sharing ratio. The total ratio is \(3+2=5\), so A’s share is \(3/5\). Therefore, A’s loss is \(₹10,000 \times 3/5 = ₹6,000\). ₹4,000 is B’s share, not A’s. Exam tip: Divide the total loss according to the partners’ profit-sharing ratio.

Correct answer: A. Book value

On dissolution, assets are generally debited to the Realisation Account at their book values. The difference between their book value and actual sale proceeds is then reflected in the profit or loss on realisation. Therefore, market value, sale value or replacement value is not used for the initial transfer. Exam tip: Cash and bank balances are generally not transferred to the Realisation Account.

Correct answer: A. ₹500

The amount due to creditors was ₹18,000, but the account was settled by paying only ₹17,500. Therefore, the firm gains ₹18,000 − ₹17,500 = ₹500, which is generally recorded as a gain in the Realisation Account. Exam tip: paying creditors less than the amount due creates a gain; paying more creates a loss.

Correct answer: A. विघटन से संबंधित सभी नकद और बैंक प्राप्तियों तथा भुगतानों को दर्ज करना

During dissolution, the Bank Account records all actual cash and bank transactions, such as receipts from the sale of assets, payments to liabilities, dissolution expenses and final payments to partners. Profit or loss on realisation is calculated in the Realisation Account, so option B is incorrect. Exam tip: the Realisation Account determines the realisation profit or loss, whereas the Bank Account shows the actual movement of funds.

Correct answer: A. Credit ₹7,000

The sale proceeds of an unrecorded asset are credited to the Realisation Account. The complete journal entry is: Bank Account Dr. ₹7,000; To Realisation Account ₹7,000. Therefore, Credit ₹7,000 is correct. Crediting ₹3,500 is incorrect because the entire sale proceeds must be recorded. Exam tip: Credit the Realisation Account with the sale proceeds of an unrecorded asset; do not record its transfer to Realisation Account.

Correct answer: A. Partners' Capital Accounts

The profit on the Realisation Account is distributed among the partners in their profit-sharing ratio and transferred to their capital accounts. The Bank or Cash Account records receipts and payments, while the Purchases Account is not used for this final adjustment. Exam tip: Both realisation profit and realisation loss are transferred to the partners' capital accounts.

Correct answer: A. Loss of ₹2,000

The machine has a book value of ₹30,000, but the partner takes it over at ₹28,000. Thus, the Realisation Account is debited with ₹30,000 and credited with ₹28,000, resulting in a loss of ₹2,000. A profit of ₹2,000 would arise only if the takeover value exceeded the book value. Exam tip: Loss on takeover = Book value − Takeover value.

Correct answer: A. Realisation Account

At dissolution, external liabilities are transferred at their book values to the credit side of the Realisation Account because this account records the settlement of liabilities and the realisation of assets. The Capital Account is used for adjusting partners’ capital balances, so it is not the correct account. Exam tip: external liabilities are credited to the Realisation Account, while assets are generally debited to it. A partner’s loan is generally not transferred to the Realisation Account.

Correct answer: A. Profit of ₹6,000

The credit side of the Realisation Account is ₹90,000, while the debit side is ₹84,000. Since the credit side exceeds the debit side by ₹6,000, the account shows a profit of ₹6,000. This profit is transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: In a Realisation Account, excess of credit over debit means profit, whereas excess of debit over credit means loss.

Correct answer: A. After paying external liabilities but before returning capital

At dissolution, the usual order of payment is: external liabilities first, partners’ loans next, and partners’ capital last. Therefore, a partner’s loan is repaid after external liabilities but before the return of capital. Option B is incorrect because capital is paid after the partner’s loan. Exam tip: remember the sequence—external liabilities → partner’s loan → partners’ capital.

Correct answer: A. Profit of ₹1,000

The gain on the sale of assets is ₹26,000 − ₹24,000 = ₹2,000. Realisation expenses of ₹1,000 reduce this gain, so the net profit of the Realisation Account is ₹2,000 − ₹1,000 = ₹1,000. ₹2,000 is only the gain before expenses, so option C is incorrect. In an exam, calculate the asset-sale gain or loss first and then adjust realisation expenses.

Correct answer: A. ₹10,000

The total ratio is 5 + 3 = 8. A’s share = \(\frac{5}{8} \times ₹16,000 = ₹10,000\), so option A is correct. ₹6,000 represents B’s 3/8 share, not A’s share. Exam tip: Divide the partner’s ratio by the total ratio and multiply by the total realisation profit.

Correct answer: A. Debit ₹2,500

An unrecorded liability is not already shown in the books, so when it is paid, the Realisation Account is debited and the Cash/Bank Account is credited: Realisation Account Dr. ₹2,500 to Cash/Bank Account ₹2,500. Therefore, the Realisation Account has a debit effect of ₹2,500. A credit effect is incorrect because the payment is treated as a realisation expense. Exam tip: Payment of an unrecorded liability is debited to the Realisation Account.

Correct answer: A. Partners’ Capital Accounts

A loss on the Realisation Account is a loss of the firm and is transferred to the partners’ Capital Accounts in their profit-sharing ratio by debiting those accounts. The Bank, Debtors and Stock Accounts record assets or their realisation, so they are not debited for the final transfer of the loss. Exam tip: Realisation profit is credited to partners’ Capital Accounts, whereas realisation loss is debited to them.

Correct answer: A. Loss of ₹200

The creditor was paid ₹200 more than the amount of the liability. Therefore, the difference, ₹10,200 − ₹10,000 = ₹200, is a loss to the firm and is recorded in the Realisation Account. A ₹200 profit would arise only if the creditor were settled for less than the amount due. Exam tip: payment above the liability creates a loss, whereas settlement below the liability creates a profit.

Correct answer: A. Zero

At the end of dissolution, the cash realized from assets is used to pay realization expenses and external liabilities, and the remaining amount is distributed among the partners according to their settlements. Once all payments are made, the bank account is closed; therefore, its final balance is generally zero. It need not equal the profit or the partners’ capital because the final amount depends on the actual realization of assets and settlement of liabilities. Exam tip: A closed bank account after dissolution normally has a nil balance.

Correct answer: A. ₹8,000

The total of the loss-sharing ratio is 1 + 2 = 3. The second partner’s share is 2/3. Therefore, the loss borne by the second partner is ₹12,000 × 2/3 = ₹8,000. ₹4,000 is the first partner’s share, corresponding to 1/3 of the total loss. Exam tip: A Realisation Account loss is distributed among partners in their profit-sharing ratio, so use the concerned partner’s ratio over the total ratio.

Correct answer: A. After payment of external liabilities and partners’ loans

On dissolution, the available proceeds are first used to pay external liabilities, such as creditors, and then the loans advanced by partners. The remaining amount is subsequently used to settle the partners’ capital accounts, making option A correct. Option D is incorrect because declaring profit is not a necessary stage before settling capital accounts during dissolution. Exam tip: remember the order—external liabilities, partners’ loans, partners’ capitals, and finally distribution of any surplus.

Correct answer: A. Loss of ₹1,500

The loss on sale of the asset is ₹15,000 − ₹14,000 = ₹1,000. Adding the realization expenses of ₹500 gives a total net loss of ₹1,500. Therefore, option A is correct. Exam tip: Include both the loss on sale below book value and the realization expenses while calculating the loss on realization.