Closing the Business

Correct answer: A. Profit of ₹7,000

The credit side exceeds the debit side by ₹1,05,000 − ₹98,000 = ₹7,000. Therefore, the Realisation Account shows a profit of ₹7,000, which is transferred to the partners’ capital accounts in their profit-sharing ratio. Option B is incorrect because a loss arises only when the debit side exceeds the credit side. Exam tip: In a Realisation Account, a credit balance indicates profit, while a debit balance indicates loss.

Correct answer: A. Credit ₹9,000

When a partner takes over an unrecorded asset, the partner’s Capital Account is debited by ₹9,000 and the Realisation Account is credited by ₹9,000: Partner’s Capital Account Dr. ₹9,000; To Realisation Account ₹9,000. Therefore, the Realisation Account receives a credit of ₹9,000. The debit option is incorrect because the agreed value of an asset taken over by a partner is credited to the Realisation Account. Exam tip: For an unrecorded asset taken over by a partner, credit Realisation Account with the agreed value.

Correct answer: A. ₹20,000

The realisation profit of ₹25,000 is distributed in the partners’ profit-sharing ratio of 4:1. A’s share is \(\frac{4}{4+1}=\frac{4}{5}\), so A receives \(₹25,000 \times \frac{4}{5}=₹20,000\). Option B, ₹5,000, is B’s share. Exam tip: Distribute Realisation Account profit or loss among partners in their profit-sharing ratio.

Correct answer: A. Profit of ₹500

The creditor’s liability was ₹15,000, but it was settled for only ₹14,500. In the Realisation Account, the liability is credited by ₹15,000 and the settlement payment is debited by ₹14,500. The resulting credit difference of ₹500 is a profit on realisation. Therefore, option A is correct. Exam tip: Settling a liability for less than its book value gives a gain; settling it for more gives a loss.

Correct answer: A. Debit side

Non-cash assets are transferred at their book values to the debit side of the Realisation Account. External liabilities, in contrast, are transferred to the credit side, so the credit-side option is incorrect. Exam tip: remember the basic rule—assets are debited and liabilities are credited on transfer. Cash or bank balances are generally not transferred to the Realisation Account.

Correct answer: A. ₹7,000

Realisation profit = Sale proceeds − Book value = ₹47,000 − ₹40,000 = ₹7,000. Therefore, option A is correct. ₹47,000 is the sale proceeds and ₹40,000 is the book value, not the profit. In an exam, remember that selling an asset above its book value creates a realisation profit, while selling it below book value creates a realisation loss.

Correct answer: A. ₹3,600

A realisation loss is shared among partners in their profit-sharing ratio. The total ratio is 2+2+1 = 5, and the third partner’s share is 1. Therefore, his share of loss is ₹18,000 × 1/5 = ₹3,600. ₹7,200 represents the 2/5 share of either of the first two partners. Exam tip: Share realisation profit or loss in the profit-sharing ratio unless the question specifies otherwise.

Correct answer: A. Debit ₹6000

Payment of an unrecorded liability is treated as a realisation-related loss or expense of the firm. Therefore, the Realisation Account is debited by ₹6000, while the Cash Account is credited. This should not be confused with merely recording the liability; the question specifies that it has been paid. Exam tip: payment of an unrecorded liability is debited to the Realisation Account.

Correct answer: A. Because a loan is a liability of the firm, whereas capital is the partner’s ownership claim

On dissolution, the usual order of settlement is outside liabilities, partners’ loans, and then partners’ capital. A loan advanced by a partner is a liability of the firm, whereas capital represents the partner’s ownership claim; therefore, the loan is repaid before capital. It is not a profit, reserve, or dissolution expense. Exam tip: remember that a partner’s loan is distinct from capital and is settled before capital repayment.

Correct answer: A. Loss of ₹4,000

In the Realisation Account, the assets are debited at their book value of ₹80,000, while the sale proceeds of ₹76,000 are credited. Therefore, the realisation loss is ₹80,000 − ₹76,000 = ₹4,000. A profit of ₹4,000 would arise only if the sale proceeds exceeded the book value. In exams, compare the actual sale proceeds with the assets’ book value to determine the result.

Correct answer: A. In the old profit-sharing ratio

At dissolution, the reserve fund represents accumulated profits earned before the firm was dissolved. Therefore, it is transferred to the partners’ capital accounts in the old profit-sharing ratio, the ratio in which those profits were earned. The new ratio applies only after a reconstitution of the partnership. Exam tip: Distribute general reserves and accumulated profits in the old profit-sharing ratio unless the question specifies otherwise.

Correct answer: A. Debit side

Realisation expenses are incurred while disposing of assets and settling liabilities. They represent a loss or sacrifice for the firm, so they are recorded on the debit side of the Realisation Account. Recording them on the credit side is incorrect because that side generally records liabilities transferred and proceeds from the realisation of assets. Exam tip: remember that assets and realisation expenses usually appear on the debit side, while liabilities and asset realisation proceeds appear on the credit side.

Correct answer: A. ₹3,500

A realisation loss is shared by the partners in their profit-sharing ratio. A’s fraction is \(\frac{7}{7+3}=\frac{7}{10}\). Therefore, A’s share of the loss is \(₹5,000\times\frac{7}{10}=₹3,500\). ₹1,500 is B’s share. Exam tip: Add the ratio terms, divide the concerned partner’s ratio by the total, and multiply by the total loss.

Correct answer: A. Bringing liabilities into the settlement process

At dissolution, the firm’s liabilities are transferred to the credit side of the Realisation Account so that their settlement can be recorded through this account. This transfer only brings the liabilities into the settlement process; it does not represent distribution of profit, an increase in partners’ capital, or collection of cash from debtors. Exam tip: Assets are transferred to the debit side and liabilities to the credit side of the Realisation Account.

Correct answer: A. Loss of ₹500

The amount payable to the creditor was ₹22,000, but the firm paid ₹22,500. Therefore, the excess payment of ₹500 is a loss to the firm and is recorded as a loss in the Realisation Account. It cannot be treated as a profit because the firm paid the additional amount instead of receiving it. Exam tip: When a creditor is paid more than the amount recorded in the books, the difference is treated as a loss.

Correct answer: A. Realisation Account

When a partner takes over an asset, the partner’s Capital Account (or Current Account) is debited with the agreed value, while the Realisation Account is credited by the same amount. Therefore, Realisation Account is correct. The partner’s Capital Account is not credited in this transaction; it is debited. Exam tip: Remember the entry as—Partner’s Capital Account Dr. to Realisation Account.

Correct answer: A. Profit of ₹2,000

The gross profit on sale is ₹63,000 − ₹60,000 = ₹3,000. After deducting the selling expenses of ₹1,000, the net profit is ₹3,000 − ₹1,000 = ₹2,000. Therefore, option A is correct. Option B ignores the selling expenses. Exam tip: For an asset realised during dissolution, subtract both its book value and related realisation expenses from the sale proceeds.

Correct answer: A. Credit

A profit on the Realisation Account is distributed among the partners in their profit-sharing ratio and credited to each partner’s capital account. Therefore, Credit is correct. In contrast, a realisation loss is debited to the partners’ capital accounts. Exam tip: Realisation profit means credit to capital accounts, while realisation loss means debit to capital accounts.

Correct answer: A. After all receipts and payments are completed

During dissolution, amounts received from the realization of assets are deposited, while liabilities, dissolution expenses, and final amounts due to partners are paid. The bank account is closed only after all such receipts and payments have been completed and no further bank transaction remains. Therefore, option A is correct; the account cannot normally be closed before liabilities are settled. Exam tip: remember that the bank account is closed after the final cash or bank transaction.

Correct answer: A. ₹3,000

A Realisation Account loss is distributed among the partners in their profit-sharing ratio. Since the ratio is equal, each partner’s share is ₹9,000 ÷ 3 = ₹3,000. Therefore, option A is correct. ₹4,500 would result from dividing the loss between only two partners, not three. Exam tip: Transfer realisation loss to partners in their profit-sharing ratio.

Correct answer: A. Credit side

An unrecorded asset is not transferred to the Realisation Account, but its sale proceeds are recorded when received. The Cash/Bank Account is debited and the Realisation Account is credited with ₹12,000. Therefore, the amount appears on the credit side. Exam tip: Sale proceeds of assets are credited to the Realisation Account, whether the assets were recorded or unrecorded.

Correct answer: A. ₹3,750

The total ratio is 3 + 1 = 4. The second partner is entitled to 1 part, so the share is ₹15,000 × 1/4 = ₹3,750. ₹11,250 is the first partner’s share because that partner has 3 parts. Exam tip: Calculate a partner’s share by multiplying the total profit by that partner’s ratio and dividing by the total ratio.

Correct answer: A. Profit or loss on realisation

During dissolution, the profit or loss on realisation is determined from the sale of assets and settlement of liabilities. This profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio, making option A correct. Sales tax, purchase of goods and salary payment are individual transactions, not the final adjustment of capital accounts. Exam tip: Remember that the realisation account’s profit or loss is ultimately transferred to the partners’ capital accounts.

Correct answer: A. Loss of ₹5,000

The loss on the sale of assets is ₹1,00,000 − ₹97,000 = ₹3,000. Adding the realisation expenses of ₹2,000 gives a total loss of ₹5,000. Therefore, the Realisation Account shows a loss of ₹5,000. The ₹3,000 option considers only the loss on sale and ignores the expenses. Exam tip: Include both the difference between book value and sale proceeds and all realisation expenses while calculating the overall result.

Correct answer: A. Because the partnership among all partners ends and the business is wound up

Dissolution of a firm ends the partnership relationship among all the partners and initiates the winding-up of the business. Therefore, the firm is considered to have ceased to exist as a going concern. However, certain activities continue until assets are realised and liabilities are discharged; liabilities do not disappear immediately on dissolution. Exam tip: retirement of one partner generally results in reconstitution of the firm, not its dissolution.