Closing the Business

Correct answer: A. Realisation Account

On dissolution, the book value of all non-cash assets, except cash and bank balances, is transferred to the Realisation Account. This account is used to determine the profit or loss arising from the sale or settlement of those assets. Partners’ Capital Accounts record partners’ capital adjustments, while cash and bank balances remain excluded from this transfer. Exam tip: remember the rule—transfer assets to Realisation Account, but exclude cash and bank balances.

Correct answer: A. Debit ₹3,000

Realisation expenses are costs incurred for settling or disposing of the firm’s assets, so ₹3,000 is debited to the Realisation Account. The journal entry is: Realisation Account Dr. ₹3,000; To Bank Account ₹3,000. Therefore, crediting ₹3,000 is incorrect. Exam tip: Expenses related to realisation are generally recorded on the debit side of the Realisation Account.

Correct answer: A. Profit of ₹2,000

The liability has a book value of ₹50,000 but is settled for only ₹48,000. In the Realisation Account, the liability is credited with ₹50,000 and the amount paid is debited as ₹48,000. Therefore, the net gain is ₹2,000, which is recorded as a profit in the Realisation Account. Exam tip: settling a liability below its book value creates a gain; settling it above book value creates a loss.

Correct answer: A. Partners’ capital

On dissolution, the usual order of payment is: external liabilities first, partners’ loans next, and partners’ capital last. Therefore, a partner’s loan is repaid before the partners’ capital. External liabilities and creditors are paid earlier, so options B and D are incorrect. Exam tip: remember the sequence—external liabilities → partner’s loan → partners’ capital.

Correct answer: A. ₹8,000

Profit = Sale value − Book value = ₹78,000 − ₹70,000 = ₹8,000. Therefore, the firm earns a profit of ₹8,000 on the sale. ₹78,000 is the total sale proceeds, not the profit. Exam tip: when sale value exceeds book value, the difference is profit; when it is lower, the difference is loss.

Correct answer: A. Debited

When an unrecorded liability is paid, the entry is: Realisation Account Dr. To Cash/Bank Account. Therefore, the Realisation Account is debited. It is not credited because the liability was not previously recorded in the books. Exam tip: For payment of an unrecorded liability, remember “Realisation A/c Dr. To Cash/Bank.”

Correct answer: A. ₹6000

A realisation loss is distributed among partners in their profit-sharing ratio. The total ratio is 3 + 2 = 5, so A’s share is \(\frac{3}{5} \times ₹10000 = ₹6000\). ₹4000 is B’s share. Exam tip: On dissolution, realisation profit or loss is shared in the old profit-sharing ratio.

Correct answer: A. Proceeds from assets realised and liabilities transferred

The credit side of the Realisation Account records the proceeds from assets sold and liabilities transferred to the account. The book value of assets and realisation expenses are debited; payment of liabilities is also debited. Exam tip: remember that assets transferred and expenses appear on the debit side, while liabilities transferred and proceeds from assets realised appear on the credit side.

Correct answer: A. Profit of ₹8,000

The credit side of the Realisation Account is ₹1,28,000, while the debit side is ₹1,20,000. Since credit exceeds debit by ₹8,000, the firm earns a profit of ₹8,000. 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 indicates profit, whereas excess of debit over credit indicates loss.

Correct answer: A. Old profit-sharing ratio

The reserve fund represents accumulated profits earned while the existing partnership agreement was in force. Therefore, on dissolution, it is transferred to the partners’ capital accounts in their old profit-sharing ratio. The new ratio applies only after a change in partnership, and the capital ratio is not used for this adjustment. Exam tip: accumulated profits and losses, such as reserves and the balance of the Profit and Loss Account, are generally distributed in the old profit-sharing ratio.

Correct answer: A. Credit ₹15,000

An unrecorded asset is generally not transferred to the Realisation Account. When it is sold, the sale proceeds of ₹15,000 are credited to the Realisation Account. Therefore, option A is correct. The debit side records the transfer of recorded assets and realisation expenses, not the sale proceeds. Exam tip: remember that proceeds from the sale of an asset are credited to the Realisation Account.

Correct answer: A. Loss of ₹3,000

The asset was recorded at ₹45,000, but its sale realised only ₹42,000. Therefore, loss = ₹45,000 − ₹42,000 = ₹3,000. On dissolution, this loss is debited to the Realisation Account and transferred to the partners’ capital accounts in their profit-sharing ratio. A profit of ₹3,000 would arise only if the sale value exceeded the book value. Exam tip: when the sale value is lower than the book value, subtract the sale value from the book value to find the loss.

Correct answer: A. ₹3,000

The total of the profit-sharing ratios is 2 + 2 + 1 = 5. C’s share is 1 out of these 5 parts. Therefore, C’s share = ₹15,000 × 1/5 = ₹3,000. Exam tip: First find the sum of all ratio terms, then multiply the total profit by the concerned partner’s ratio term divided by that sum.

Correct answer: A. Credit side

External liabilities are transferred to the credit side of the Realisation Account because the liability account is debited and the Realisation Account is credited. In contrast, assets are generally transferred to the debit side of the Realisation Account. A partner’s loan is not an external liability and is settled separately. Exam tip: remember that liabilities are credited and assets are debited when transferred to the Realisation Account.

Correct answer: A. Reimbursement of ₹2,500

When realisation expenses are to be borne by the firm but are paid personally by a partner, the partner is entitled to reimbursement of ₹2,500. The amount is credited to the partner’s capital account and is settled with him during the final settlement. ₹5,000 is incorrect because reimbursement cannot exceed the actual amount paid. Exam tip: Any firm expense paid personally by a partner creates an amount payable to that partner.

Correct answer: A. Amount available for distribution among partners

During dissolution, cash realized from assets is deposited into the Bank Account, while external liabilities, loans and dissolution expenses are paid from it. The amount left after these payments is generally available for the final settlement of the partners’ capital accounts. It is not additional capital or a reserve fund, and unsold stock is an asset rather than a bank balance. Exam tip: Treat the closing bank balance as distributable only after all outside liabilities and dissolution-related payments have been settled.

Correct answer: A. ₹800

The amount payable to the creditor was ₹30,000, but only ₹29,200 was paid. Therefore, the saving of ₹30,000 − ₹29,200 = ₹800 is a gain to the firm on settlement of the creditor’s claim and is recorded as a gain in the Realisation Account. Exam tip: When the amount payable exceeds the amount paid, the difference is a gain; if the payment is higher, the difference is a loss.

Correct answer: A. ₹7,500

The total ratio is 5 + 3 = 8, so the first partner’s share is 5/8. Therefore, his loss is ₹12,000 × 5/8 = ₹7,500. ₹4,500 represents the second partner’s 3/8 share. Exam tip: Distribute Realisation Loss among partners in their profit-sharing ratio.

Correct answer: A. Settlement

On dissolution, the firm’s assets are realized, its liabilities are paid, and the partners’ capital accounts are settled. This complete process is called settlement of accounts. Reconstitution changes the partnership relationship, but the business does not necessarily close. Exam tip: dissolution generally ends the firm’s business, whereas reconstitution may allow the business to continue.

Correct answer: A. Loss of ₹7,000

The debit side of the Realisation Account is ₹1,02,000, while the credit side is ₹95,000. Since debit exceeds credit by ₹7,000, the account shows a loss of ₹7,000. This loss is debited to the partners’ Capital Accounts in their profit-sharing ratio. Option B is incorrect because a profit arises only when credits exceed debits. Exam tip: In a Realisation Account, higher debits indicate a loss, while higher credits indicate a profit.

Correct answer: A. Debit of ₹7,000

When an unrecorded liability is paid, the Realisation Account is debited by ₹7,000 and the Bank/Cash Account is credited. Therefore, option A is correct. Option B is incorrect because payment reduces cash or bank balance, while the expense is recorded on the debit side of the Realisation Account. Exam tip: Payment of an unrecorded liability is debited to Realisation Account.

Correct answer: A. ₹5,000

The total ratio is 4 + 1 = 5, so B’s share is 1/5. Therefore, B’s realisation loss = ₹25,000 × 1/5 = ₹5,000. ₹20,000 is A’s share because A bears 4/5 of the loss. Exam tip: Divide the loss into the total ratio parts and then apply the concerned partner’s ratio.

Correct answer: A. Realisation Account

At dissolution, external liabilities are transferred to the Realisation Account at their book values. Their subsequent payment is also recorded through this account. The Capital Account is used for settling partners’ capital, while the Bank or Cash Account records the payment rather than the transfer of the liability. Exam tip: remember the sequence—first transfer the liability to Realisation Account, then record its payment.

Correct answer: A. ₹8,000

Realisation profit = Sale proceeds − Book value = ₹98,000 − ₹90,000 = ₹8,000. Therefore, the profit on realisation is ₹8,000. ₹98,000 represents the sale proceeds, not the profit. Exam tip: In dissolution questions, calculate the realisation profit or loss by comparing sale proceeds with the asset’s book value.

Correct answer: A. Debit side

A profit on realisation is shown on the debit side of the Realisation Account and transferred to the partners’ capital accounts. In contrast, a loss on realisation is shown on the credit side. Exam tip: Profit is debited to the Realisation Account, while the partners’ capital accounts are credited.